Earnings Call: Q4 2018

Feb 20, 2019

Ladies and gentlemen, thank you for joining us on the Scandi Standard Fourth Quarter and Year End Report 2018. My name is Chatch, and I'll be the coordinator for this conference. I'd now like to hand over to Life Virgil Hansen to begin the presentation. Life, please go ahead. Thank you. Good morning, everybody. Hope you have a good start to the day. Just to give you some highlights on Q4. The quarter with 5% revenue growth, where we are now, as a group, approaching 9,000,000,000 worth of sales. We saw strong growth in Sweden. Growth rates in other places were positively impacted by some currency effects. EBIT came in at 102,000,000 which is up from 116,000,000 in the same quarter of 2017. Quarter with good performance in Norway, very good performance in Ireland and also in Finland. We saw some market pressure coming through in Sweden and in Denmark. In the quarter, we managed to reduce net interest bearing debt to 180,000,000, mainly driven by working capital release but also by a relatively low CapEx in that quarter. Earnings per share came in 24% up, and the Board has decided to recommend a dividend of two per share, which is up from INR 1.8 the year before. Flipping page looking at Page four, looking at the quality development for the group. We've seen some quite large movement in terms of price and cost, stable volume development across the group. We have seen our ability to implement price increases to our clients to cover for the significant raw material increases that we have seen coming through from the drought in the second half of last year. We have reached the relatively high acceptance of those price increases, but also that there are still a bit that we are in the process of implementing, and I'm going to come back to that. Just for comparison, in Q4 twenty seventeen, we had some third party compensation. You can see that in the bridge. And also in this quarter, we have implemented an adjustment to asset lifetime that have an impact. You also see that in the bridge, and we're going to come back to that also later. Going on to Page five, looking at the quality development by country. Sweden came in a bit better than the year before. We've seen normal market dynamics being reinstated. We had a negative impact from clearance of stock that we have built earlier that we also have communicated that is not sold. Denmark came in soft as a consequence of some low price realization on exports, but also a continued market investment sales and marketing investment in building a new brand. Norway came in very strong with all time high margins. Ireland came in also with a very strong quarter. And Finland delivered a good strong underlying development also in this quarter. We have some of the last one off compensations that we had in Q4 twenty seventeen that also impact the comparison, as you can see from this bridge. Flipping page to Page six, looking at product categories and sales channels. We are seeing strong growth coming through, both in chilled and in ready to eat categories. The ready to eat category now accounts for 18% of group revenue, which is represents it has doubled its share over the last four years. And it's positive to see that we continue to have very strong order intake in this area. So this new dedicated plant that we invested in, in Denmark to enable us to produce even more of these products, we already see strong order take care for that. We have seen a decline in the less profitable frozen segment and also in the less profitable export segments. We've seen growth in both retail and in foodservice. We see strong momentum in chill within retail, and then we see strong momentum within foodservice, in particular, within the ready to eat categories. Going on to Page seven, talking about Sweden. The quarter was, as we have indicated, negatively impacted by quite significant stock clearances, but also that we have seen a continued solid market coming through. Revenue went up with 6% in the quarter, and the underlying tilt market is now fully recovered and grew 8% in this quarter. Continued strong growth in the Racevi segment. Consumers continuing to substitute from red meat products into chicken, particularly sausages, meatballs and other similar categories. We have seen margins being impacted negatively by the inventory clearance that we implemented in this quarter and that we have now managed to get inventory down to more normal levels. The quarter was impacted by 8,000,000 of noncurrent items that relates to a restructuring of our Siemensburg operations in Sweden. Just to summarize, we see a solid market outlook for 2019, now where markets are back to normal, and we have clearance overhang of stock that you have with us. Going on to Page eight, to Denmark. The market the quarter was impacted by continued significant market investments and also cost pressure. We delivered a 4% revenue growth with a relatively weak quarterly earnings performance following investments in new sales force and the marketing of the new concept. We have realized availability below price realization on exports, bringing our frozen products, continue to see a positive development for the new brand, Danish Family Farms, also while we have continued to support it. And we are now this new brand already has a market share in the entire Danish market of 8%. And we do expect that from this year, we will see a positive contribution to this investment in this new contract. We continue to see strong growth during the Grade three segment, but we also do continue to see export markets remain relatively challenging. Norway, very strong performance, 3% revenue growth on this environment market. We have seen strong margins coming through, all time high. Probably following the combination of improved product mix, We have roughly rationalized our foodservice range that has had a negative impact on top line and a positive impact on profitability. We have it's clearly coming through as our most profitable geographical segment, coming from a combination of very successful investments in various part of operations in Norway, following the transfer of best practice from other parts of the group into a relatively isolated market. Also having the benefit of a strengthened product offering, a strong innovation effort that has taken place in Norway over the later years as you see those contributing positively to the profitability in the Norwegian segment. Going to Ireland, strong quarter. I'm happy to say that the integration is going according to plan. The 5% revenue growth, strong quarterly margin, seen significant investments that we have announced that we have planned for 2019, mainly to take out costs as the component rates that are deemed to improve annual welfare and food safety, and there's also some capacity constraints that some of that's all these investments we'll we'll deal with. We want to make you aware that we anticipate a delay in Ireland in obtaining the compensation for the cost increases. We are working hard to get that through, but we do anticipate that the beginning of the year, there will be a negative impact coming from that. Going to Finland, a quarter where we have seen further improvements, continues to be cash generative, 6% top line growth and a good underlying quarterly performance coming mainly from better product mix commercially but also by better yields being achieved in the operation. The quarter was negatively impacted by 4,000,000 of exceptional costs that we took in this quarter, but it's filed as a positive EBITDA and positive operational cash flow. We continue a strong focus on improving product mix, yields and costs, and we do anticipate 2019 to be EBIT positive. I would now like to hand over to Anders for the income statement. Thank you, Leif. Starting then with the depreciation and amortization. As Leif mentioned, we've had low quarterly depreciation due to this review and alignment we have done across the group of the estimated lifetime of our assets. Going forward, one should assume depreciation per quarter of around 45,000,000. We also had some nonrecurring items in the quarter of SEK 13,000,000 relating to reduction of premium bird processing in Sweden, transaction costs in Denmark relating to the Rocketdal acquisition, partly offset by depreciation effects that I referred to above, which relate to previous quarters that have been taken as a non comparable. The lower net financial items relates to a positive swing on currency, and the very low tax in the quarter is due to deferred tax liabilities have been revalued for lower corporate tax rates in Sweden and in Norway. Moving on to the next page, looking at our financial position. We now see that return on capital employed and return on equity is largely in line with Q4 twenty seventeen, and we also see a slight improvement in equity to assets ratio. And we also see the quarterly return on equity is now at 13.3%. We have a section in the report and in the presentation on the IFRS effects that will now from IFRS 16 effects that will now start from Q1. But in summary, net debt will increase by EUR $470,000,000, EBITDA will increase by EUR 99,000,000, EBIT will increase by EUR 12,000,000 and net profit will decrease by EUR 5,000,000. As I said, there's more details about that in the appendix. Moving on to the next page, talking about working capital, where we've seen a very good working capital release in Q4, primarily driven by a reduction in trade receivables and an increase in trade payables. We have seen an increased inventory in the quarter despite the reduction of inventory in Sweden that we've been talking about. But in Q4, we had an increase, which is primarily related to the increase of stocks in Denmark. But overall, we can see that we've been about 7% for the last five quarters in terms of working capital as percentage of sales, but we are now below 6% in Q4. Moving on to the next page, looking at the cash flow. As Leif already mentioned, we reduced net debt by €180,000,000 in the quarter, and that is primarily related to the working capital release we just talked about and also the low quarterly investment that we also had been talking about during the last quarterly report. Moving forward to cash flow guidance. The proposal is to have a dividend of two per share, which is 11% up on the DKK 1.8 last year. And this will equate to just about DKK 130,000,000 in terms of dividend payment if approved at the AGM. But we reiterate the dividend policy of 60% of net income over time. Fed interest estimate to be three to 3.5% of net debt. The effective tax rate somewhere between 2021%. And as we said before, we estimate to invest around SEK $380,000,000 CapEx in 2019, and the biggest chunk of that will go to the projects in Ireland that Leif mentioned before. We also, in this in 2019, have the first tranche of the earn out payment related to the Manapharma acquisition, and that is estimated to EUR 125,000,000. Again, there are more details for that in the appendix. Moving to Page 10, talking about our efforts in the whole sustainability area and Scandi Way. And in this report, we are highlighting what we are working on in terms of sustainable packaging, where we are targeting to have 100% renewable packaging by 2023 or, to be more specific, 100% from renewable source or from recycled plastic. Thank you, Blake. Thank you. Just to try to summarize. We have seen obviously a solid outlook coming through in 2019 in Sweden as the market is now fully recovered, and we have covered the overhang of inventory. The strength in margins demonstrated in Norway, in Ireland and in Finland. We do expect positive results coming through in Finland in this year. Finland with a bit of a mixed outlook, positive contributions from the brand initiative that's progressing well, but still with an export market that remain challenging. We expect continued strong growth from the ready to eat segment. That's supported by the investment in additional capacity, as we talked about. We do continue to follow structural opportunities very closely, and the Board recommend a dividend of DKK 2 per share for this year. With that, we'd like to take any kind of questions. Thank you. Thank you, gentlemen. Our first question today, gentlemen, comes from the line of Alex Okner of BME. Alex, please go ahead. Yes, hi. Two questions. In terms of your changed depreciation rates for useful life, what's now the useful life of your assets? Which segments have you changed? Secondly, also for the cost increase and the price increase, I think you mentioned in Ireland, you're still struggling to get compensation. But if I understand correctly, that Sweden and Norway is working fine, but Ireland is a challenge. Is that correct? Shall I take then the first question relating to depreciation? I mean, is part of our, let's say, overall ambition, getting the basics right and aligning things across the group when it comes to some of these basics. This is something we've done now in the 2018, where we have basically gone through all the assets in the group and aligned across the countries, but also then reviewed what is the actual estimated lifetime of our assets. And we've gone from, I would say, just below seven years average depreciation to just below ten years. So it's an increase of around three years in terms of depreciation. I think I would say that we have been a bit too aggressive in the past in terms of depreciation rate. If I just follow-up on the cost recovery. We have as we're all aware, there was a kind of serious drought during last summer that impacted grain prices in the second half of the year, and we have been working very dedicated in getting those price increases implemented in the market. And I think we have so far so good. We have managed also, I suppose, a reflection of the way we work with our clients, we have managed to get compensation in Finland, in Norway, in Sweden. We have got part conversation in Denmark, and we are working very hard in getting full compensation also in Ireland. In Ireland, as we are producing the feed there ourselves in our own feed mill, means that we get the negative impact a bit earlier than what we manage or have been able to manage to implement this with our clients. So you're right in picking up that we do anticipate a delay in getting full compensation in Ireland, and we do anticipate a negative impact from that in the first quarter and sort of a gradual implementation in the following quarter. That's how we see it today. Okay. Good. Just a follow-up on the depreciation again. I mean in your 2017 report, you have buildings depreciated over twenty five to thirty years, property fixtures from ten to twenty five years, down the machinery from five to twenty years. Which of these have you made the biggest changes? I mean it seems to be quite normal depreciation levels that you're quoting here. So I'm just wondering kind of what where did you where were you too aggressive in the past? I would say we have since these are not being done aligned across countries, it's you can't answer that question with one answer for the group. But I would say we have been through all our assets. And internally, we look at 27 different asset classes. And we basically, we've been through all of them and reviewed and updated the depreciation rates. So it's across the whole portfolio of assets. Okay. Final question for me, just on the CapEx. So including the earn outs, you're looking at $5.00 €5,000,000 in CapEx or cash outflow. Is that correct? Yes, that is correct. $380,000,000 CapEx 125,000,000 in the earn outs and then on top of that, of course, also the dividend. Yes. Okay. Thank you. Welcome. Our next question on the line comes from Alexandra Braganovski of Nordea. Alexandra, please go ahead. Yes. Hello. I have some question on margins, particularly maybe in Sweden and Denmark then. Maybe just what do you see the outlook for 2019 for Sweden as your margins have been a little bit lower there for a bit more than a year now as well as Denmark. Since you are increasing your marketing efforts, for how long are we supposed to see them, so to speak? You. If you talk about Sweden first. This quarter, we came in at an EBIT margin of 6.4%, last twelve months, point one percent and 2017, 5.9 If you go back, the previous year, I think, was 6,500,000 to 7,000,000 And then we see now the dynamics are back to the historic level. So we would anticipate that the market levels that we achieved back in twenty sixteen, seventeen that we should be able to get to that sort of 6%, 7%. So we see things are normalizing between. Good. And Denmark? Denmark is a bit we had a challenging quarter, as mentioned. But have decided on this investment that's a bit proactive to really put so much effort behind establishing a new brand. So we have seen very, very good consumer acceptance of it. We launched it about one years point ago, now having 8% market share. We anticipate that during the quarter this year, we will see positive earnings contribution from this investment. We still have positive margins coming through for the growth in the ready to eat segment, but also having some challenging export situation. So if you look at outlook going into this year, we see margins will be coming up. And if you would think about Q1 delivering a market EBIT profit similar to the year before, you are probably not way off. But we see a gradual improvement coming through in the amount of profitability below the level that we achieved towards the end of last year. Also a question on your M and A plans. I mean, I think you don't read accurate net the TBTA an updated one because I I think our leverage has come down a little bit since then. But, well, first of your thoughts on that given the coming year. I think you mentioned that you're still looking at at the sector and that you're following it. And given this sort of what are your thoughts on the M and A agenda for the coming year? Yes. We are looking. We are analyzing various cases. But it's because what you see is a market that across Europe is the individual countries are relatively concentrated. Three, four, five players are kind of usually about 80% of the total industry. And we do believe that there are number of synergies of having strong players in different countries aligning. We see this industry going from being very much a local play to become more of an international play with some state advantages. So and I think the acquisition in Ireland very clearly demonstrates that there are such benefits of joining a group. So we would like to do more similar activities and are looking at various cases, but we haven't got anything just to report on that. Okay. That's it for me. We have a third question lined up from Daniel Schmidt of Danske Bank. Daniel, please go ahead. Hello, good morning. I just wanted to ask you about the compensation You said it's going to be a bit delayed. Could you shed some more light on that in terms of the profile going into 2019? We do anticipate that we will get full compensation for this raw material inflation also in Ireland as we have managed to get it in other places. But as mentioned, as we are producing the feed there ourselves, we do get the negative impact already here from first of Jan, and we are working very sort of focused on getting the price increases implemented in the market. We do anticipate that this will or that will impact us negatively in Q1. We do anticipate that during the course of Q2, we will have those price increases implemented. But we are not fully there. That's the situation. But this is very well justified price increases. We have seen, in general, as I said, good acceptance with, by far, the majority of our clients across our geographies. And now we are we just want to get Ireland over the line, so to speak, fully. All right. Thank you. That was it for me. You're welcome. We have no further questions on the phone lines, gentlemen. So I'll hand back to you. All right. Thank you. Thank you, everybody. Thank you for your time. Have a great day. Have a good day. Ladies and gentlemen, thank you for joining us today. You may now disconnect your lines, and enjoy the rest of your day. Thank you.