Ladies and gentlemen, welcome to the Scandi Standard Interim Report for the second quarter 2020 webcast. My name is Ruby, and I will be your moderator for today's webcast. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand over to your host, Leif Bergvall Hansen, to begin. Leif, please go ahead.
Thank you. Good morning, everybody. Welcome back from your holiday. On the front page, see how that we deliver strong organic growth over several years. In this quarter, we have got a more stable development due to the COVID-19 impact. You also here see a stable EBITDA margin over time, and in this quarter, we deliver a very strong margin. All in all, due to the COVID-19, we see a strong shift from food service to retail. Retail share is up about 10 percentage points to representing about 70% of business. Food service is down about 6 percentage points of the total business, representing about 15%. Good to see that we are, during the end of this quarter and into Q4 2023, see a clear sign of the overall growth pattern reverting.
With that, I'd like to go to page three, where we, in this quarter, deliver record margin and a strong cash flow. As mentioned, we deliver stable sales in this quarter and a record 5% EBIT margin, up from 4.6% in the corresponding quarter last year. Strong operating cash flow, it's overall showing the business is resilient to COVID-19 effects. Going on to page four, we see the retail growth offset the COVID-19 effects on food service. We deliver 5% growth in overall retail sales, now representing 7% of revenue. We have all in all seen a very strong demand in all our domestic markets. We also, generally speaking, have less campaign activity. 20% drop in food service, now representing 15% of revenue, basically reflecting the reduced activity level that we have seen within this channel during this period.
All in all, we have a positive mix effect of higher retail sales, driven in the main by the chilled Ready-to-cook products. Going on to the next page five. We see the retail demand remains strong despite normalizing food service activity during the latter part of the period. We've seen strong increase in retail sales, positive food service momentum through the quarter and into Q3. We do anticipate that food service demand remain volatile for some time, basically, as these restrictions are being gradually lifted or changed. We are seeing the industry are adapting to these changed restrictions. Far in August, we have seen a 15% drop in sales versus the same period last year, just underlining the volatility we anticipated. Retail remains strong in August. You can see this on the chart, in August we record a 7% increase in revenue.
All in all, in Q3, we anticipate about 4% growth in net sales. Going on to page six, showing net sales by product category and country. We report a 9% growth in ready-to-cook chill, being primarily sold through retail and being a significant margin driver. We've seen 11% drop in ready-to-cook frozen, reflecting the partly reduced campaign activity. We've seen a 17% drop in ready-to-eat, basically reflecting the high food service exposure of this product category. By country, you have a bit of a mixed development. We've seen Sweden, Norway, and Ireland and Finland having a large retail exposure. In Sweden, we have a drop in sales due to limited campaign activity in this quarter, and in Norway, we have a 6% increase in local currency versus the 6% decline when it's converted into SEK. Denmark is the country with clearly the highest food service exposure.
Going on to page seven. This is the quarter where we have the five-year record EBIT margin of 5%. As part of the uplift in margin comes from volume. That's positive volume, particularly in Ready-to-cook. We also have a net positive effect of price mix and COGS, with positive mix effects and some price decreases that we implemented during the latter part of last year to pass through lower feed prices that affected the COGS effect. We have overall a good cost control, and there are some currency effects driven by the weakened NOK. This on page eight is just to remind you that the Ready-to-eat category is a very important one for us. Strong growth over a long time, and once things normalize within food service, we anticipate the growth will pick up again here. It is a platform that we believe is very important for the future.
Based on a lot of our experiences within Ready-to-eat and the key clients we have in here. We are looking actively into evaluate some non-meat or plant-based concepts that we believe might fit well into the offering within this category. Going to the countries, page 9, Sweden delivers strong margins. We have an increased proportion of high-margin business, continue to be strong retail demand. We have implemented reduced campaign activity in retail, particularly on frozen products, and we have seen a soft foodservice demand in this quarter, although picking up towards the end. Good cost control overall. We report 6.8% adjusted EBIT margin, which is up from 6.1 in the corresponding quarter of last year. Going on to Denmark, that's where we have a strong negative impact from COVID-19. A 3% decrease in net sales.
We report a 2.2% adjusted EBIT margin to be compared with 3% in the same quarter last year. We have a significant shift from higher margin foodservice categories into other channels, basically leaving where it's very much a buyer's market for these products that needs to be placed elsewhere. We have some non-recurring items covering where we have closed a number of lines producing foodservice products in April and part of May. They're now reopened, and there's some provisions for inventory write-downs that are also taken here. Going on to Norway. Record margin, 6% increase in net sales in local currency versus a 6% drop in SEK. We have continued strong demand from retail clients, particularly impacting the demand for Ready-to-cook products.
We continue to see a very solid operational performance through the entire value chain in Norway. The 10.7% adjusted EBIT margin is the highest we have recorded, to be compared with 9.8% in the same quarter of 2019. Going on to Ireland. Also here, record margin, 6% increase in net sales. Strong demand from Ready-to-cook products being the main driver, and we continue to see operational improvements as more and more best practices are being shared and implemented within the supply chain in Ireland. The adjusted EBIT margin come in at a record 7.7%, which is up from 6.3% in the same quarter of last year. Finland take another step in the right direction. 12% growth in net sales. We continue to see a strong domestic growth. In Finland we have a limited exposure to foodservice.
We have continued margin improvements to deliver 5.3% in adjusted EBITDA and 1.4% of EBIT and the EBITDA margins to be compared with 4.4% in the same quarter last year. There are some investments on the way to enable us to continue to grow in the Finnish market. With that, I'd like to hand over to you, Julia, please.
Thank you. Let me move on to page 14 for the grouping component. As said, net sales were at minus 1% in the quarter, flat in local currency. The adjusted EBIT is 7% up from last year, which then leads us to an EBIT margin of 5.0% in the quarter, which is the five-year record. We have posted some COVID-19 related non-recurring items. They are mainly related to the closure of production lines focusing on foods ervice products as Leif has mentioned, total of SEK 13 million. The rest is a shift of provisions. We will release some of the provisions we made in quarter one for bad debt related to food service customers. At the same time, we increase the provision for inventory write-downs . The net effect is SEK four million.
The net financial items in the quarter was SEK 9 million, which is less than last year, driven by the fact we have a positive currency impact this year with a strong SEK, while we had a negative share of SEK 1.19, which is 53% up from last year. The adjusted earnings per share is at SEK 1.40, which is 49% up from last year. Moving on to page 15, looking at the statement of our financial position. We see continued improved returns. The adjusted return on capital employed is now at 11.1% versus 10.4% last year. The adjusted return on equity is at 16.6%, which is down as last year, but that is purely driven by the increase in equity. The overall equity ratio is at 28.1% versus 26.7% last year.
Looking at our working capital situation on page 16, it has been further reduced, and it's mainly driven by the increased factoring and vendor financing solutions we have in place. Also in this quarter, worth mentioning that we have received some COVID-19 related state aid that has allowed us to postpone our VAT payments and also other tax payments. It doesn't impact overall leading us to a low working capital to sales ratio of 1%. Our target level, if you would adjust it for refinancing items, still at 7%. Which is a comment, if we were to have adjusted the Q2 results for the COVID state aid received, we would have been at 2% working capital to sales ratio. Also, if we would have adjusted it for the finance element, as mentioned, we would have been at 7% versus 8.1% in the same quarter last year.
Moving on to page 17. We have a strong operating cash flow, mainly driven by the increased EBITDA. The same to having we also have a significant working capital release. We've had low quarterly capital expenditure in line with the reduced yearly estimate we had. We've had an overall low quarterly paid tax, which gives then to a positive net cash flow. The net cash flow per share is at SEK 1.16. Finally, some comments on our cash flow guidance on page 18. As I yesterday referred to, the CapEx for the year is estimated to be at around SEK 300 million versus SEK 419 last year, and the paid interest is estimated to be at 3%-3.5%. The blended effective tax rate long-term is still between 20% and 21%. We have a lower one this year driven by the country mix, and we'll review the long-term estimate.
Just like to remind you that we have our contingent liabilities in the shape of the Manor Farm acquisition, where there are three tranches still to be paid. One we paid last year of SEK 133 million, and the next one to be paid this quarter three, and the final one in 2021. Finally, on our dividend policy, the policy is that we should be paying around 60% of net earnings over time. However, the 2020 dividend has been suspended as a precautionary capital measure in light of the uncertainties we've seen around COVID-19. With that, I hand back to you, Leif.
Thank you. Going on to the next page. This is just to remind you of the framework we have for all our sustainability work across the entire business. Going on to the next page. We have continued focus on the COVID-19 prevention. We do take a lot of health and safety measures across all our sites and all our offices, something that we are ongoingly updating and strengthening. We continue with a very solid dialogue with local authorities, and we actually also have a number of sharing of best practice with other food businesses. We have taken important steps to strengthen and secure the overall sustainability governance in this first part of the year. Our sustainability target is even further integrated in the planning and the activities within the different business units to ensure that we have even more local ownership.
We have introduced that sustainability KPIs is integrated in incentive programs for management and also for a number of other key roles across the business. We are also introducing an enhanced clean label policy, meeting a growing demand for transparency and product content and labeling. With that, I would like to go on to try and sum and give a little bit of outlook for the business. Overall, I'm very happy to show the business resilience to COVID-19 effects across the entire business. We are very happy to show you record margins in this quarter, 5% EBIT. We have a number of contingency plans in case of business disruptions, plans that we continue to update and strengthen, and all the time trying to do what's recommended and a bit more. We have a solid balance sheet and a strong liquidity situation.
We have enhanced both as further precautionary measures taken during this quarter. We continue to follow structural opportunities closely. I'm also very proud to report a strong start through the third quarter. With that, we would like to take any questions you may have. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. We have a question from Daniel Schmidt of Danske Bank. Your line is now open. Please go ahead.
Yes. Good morning, Leif and Julia. Hope you can hear me.
Yes.
A couple of questions from me then. Starting with price reductions that you refer to in Q2 on the back of lower feed prices. Could you quantify them, or maybe you did, or I missed it?
No. It was price reductions we did last year, when we saw feed prices coming down. That's when you then look at the overall price achievements, they are then impacted by those lower prices. It was in a number of markets, particularly in Sweden.
any sort of percentage number that you think that you on average lowered them by?
Yeah. Not really. We're not really going into that. I think it's better to leave that.
Okay. It's still sort of meaningful to mention it, so I guess a couple of percentage or.
It is.
Yeah.
It is part of the reason why we report lower net sales increases this period compared to what we have seen over several years. It is meaningful.
Hence, we could come to the conclusion that volume should be or volumes are up a little bit then in the quarter. Is that correct?
That is correct.
Yeah.
We actually quantify it on page seven where the volume effect is 6% or SEK 6 million, sorry, of the increase.
Okay, a little bit. Good. Coming back to the COVID-19 related extra cost that you had in the quarter of SEK 17 million, I think you said that mostly refers to April and May and plant closure and so on. At the same time, you're also saying that you still see volatility in the food service market, with sort of improving trend in June, although seems to be coming down again in August, -15%, if I read you correctly. Do you still believe that sort of these resetting costs are behind us? Would that be something that you think could occur in Q3?
I do believe that it is mainly behind us unless we get some setback that we can't see at the moment. The majority of these non-recurring items relates to the closure of a number of production lines. Those lines, they are now fully in operation, and they have been fully in operation for some sort of the mid-summer or late summer onwards.
Okay.
I think your comment on the volatility is very right. We just give you the actual numbers here, because it is very hard for us to kind of predict how we see food service come back. It is clearly improved activity within food service across all our domestic markets. It's also coming on the back of kind of a meltdown when all the restrictions were imposed back in early March across all the markets. We are in a normalization fraction, but our opinion is likely to be volatile for some time as different sectors are opening up. Some are opening up and maybe have to close down a bit. We anticipate this to remain a bit up and down in the coming months, but clearly a lot more activity than what we have seen earlier on.
Yeah. Just to sort of adding the parts together that you give us numbers on when it comes to the trend in August, and you're saying that food service is down 15%, but retail is up by seven and just sort of doing the math, it still looks like you're growing in August, if you assume that the rest of the segments are flat, basically. Is that a fair statement?
That's also why we have been trying to guide a little bit when you look at all of Q3, we anticipate about 4% growth in all of net sales. There was some phasing on a couple of the key clients in food service between July and August, so some stock building. In July, you see food service were actually flat or even up a bit, and that impacted August. That's part of the explanation, but it also shows that this is unlikely to be a straight line, but much closer to index 100 compared to what we have seen before.
Yeah. All right. Just moving on to the fact that despite COVID-19, you have been able to grow earnings. If you look at underlying earnings, at the same time, of course, you've suspended the dividend, and you have a stronger balance sheet now than you had six months ago. Is there any chance you think that you would come to the conclusion that you want to reinstate the dividend for this year?
It's of course a question for the board. I think the board would like to see a bit more of the year under the belt, but I don't know. They might reconsider later on, but we are clear that it is suspended for now.
Yeah. Then the final, you mentioned that you have projects ongoing to evaluate non-meat concepts. Could you shed some more light on that?
Yeah. To do that, it's basically, we have seen a lot of success within us going heavily into ready-to-eat concepts, different kind of concepts in all our markets. Some of our production lines can do products with chicken, or they can do them with plant-based alternatives. We are basically evaluating the feasibility of us launching some plant-based products. We will probably come back to this later on when we can put a bit more meat on the bone, so to speak, or plant on the bone.
Is it sort of reasonable to assume that you could have such a product in the market next year? Is that too early?
Yeah, no. That is reasonable.
Okay. You have that sort of in-house knowledge to make that happen, or is that something that you need to invest into?
No, we have that.
Okay. Interesting. Okay, thanks a lot, Leif. That's all for me.
You're welcome. Thank you.
Thank you, Daniel. We have a question from Mikael Löfdahl of Carnegie. Your line is now open. Please go ahead.
Yes. Hi, good morning.
Good morning.
A few questions from me. First, on your sales guidance for Q3, up 4% for net sales. If I do the math correctly, there should be negative effects, impacts here of around 3%-3.5% or so, which would then take it to an organic growth of 7.5% or so. On top of that, you still have a price headwind from the price reduction last year, probably around 2%-3% or so down, which would imply a volume growth or else equal of some 10% or so up. That seems very strong. Is there anything I'm missing here?
Julia, do you want to take that one? Okay.
Yeah. Some of the pricing decreases we did last year were already happening in Q3. We don't get all of that effect, for example, coming in. I don't see the Forex effect that you're seeing, and maybe not as high as you were calculating. We also have some mixed effects within here. There's not only volume driving this, but you also have the mixed effect that we talked about in this presentation as well. There is a positive mixed effect in some of the countries, mainly from food service to retails, for example.
Okay. How can the FX be lower? I know that you have a big exposure in Norway.
It's in the area that you were saying, but you don't see a volume effect of 10% more in the area what we're seeing this quarter, I would say. It's more the faster mixed effect.
Okay. On that mix, just a question on the Ready-to-eat segment. I know that it's heavy in the food service sales channel, and that has been negatively affected. Can you say anything about how much are you selling here to the retail segment? What is the mix within the Ready-to-eat segment? I guess people are buying more Ready-to-eat products in the retail stores, and that should be very good margins for you. That's opposite to lower margins when you sell to the food service segment. Can you say anything about that mix?
You take that, Julia?
Are you saying in how much we sell in the food service? How much we sell in retail out of our Ready-to-eat.
This is part of the structural growth. The positive growth outlook for Scandi Standard is that we eat more and more convenient food and also buy them in retail chains and so on. I guess that has gotten a boost now from COVID-19, that we buy chicken salad and what have you in the retail stores. That is, I guess, included in the ready-to-eat segment in that distribution. Of the 17% that you have in ready-to-eat, how much of that is sold to the retail segment compared to food service, and how has that changed on a year-on-year basis?
I don't have the numbers right in front of me. I need to look them up. Can I come back to this question at the end of the call?
Yeah.
Yes.
Sure.
Thank you.
Another question on earnings. You mentioned some government support in terms of paid taxes and postponed taxes and so on, was there any government grants in the earnings in the P&L?
Yes, it was as well. We have received a certain amount specifically related to sick leave in Sweden and then for short-term layoffs in some countries, and then also some reduction in social fees. Basically covering part of the increased costs that we've had in these areas.
Could you specify how big they were?
They were in the area between SEK 10 million- SEK 15 million.
10 million-SEK 15 million. Okay. You're saying that the costs were bigger than that. Does that include also then if we don't mix this up with the non-recurring items that you are-
No, exactly. They are also included in the non-recurring items.
Okay. Could you then say something about the trend here on a month-to-month basis and where we are right now in terms of government grants in Q3 and in August now? I guess they are diminishing, also the more direct costs for COVID-19 should also be diminished. Are they diminishing in the same pace?
Yes. I would say so.
Okay.
Maybe what I forgotten, but so the cash income from the state aid is basically being reversed in Q3 because it's just postponement for payment. The state aid that affects the P&L is very limited, what we've seen so far at least in the Q3.
Yeah. It was mainly related to the time when we had basically one entire food service factory closed. That was all relating to the April and May period where we had some significant losses, and they were partly covered by some of these grants.
Okay, thanks. Final question on Norway, obviously extremely strong margin in the quarter. We know that Norway has obviously a good leverage in its business there, and it's very well driven.
Is the mixed effect bigger in Norway when it comes to retail versus food service? I guess that could be the case, but you have much of your food service in Denmark, so maybe it doesn't impact Norway that much.
I would say Norway is probably close to the average for the group in terms of the split between retail and food service. That is a relatively significant food service business in Norway also. A very strong development all in all.
Was the mix effect bigger in Norway?
There's positive mix mainly coming from more Ready-to-cook products being sold, particularly in retail. That is clearly positive. The other part of your question, if I understood it correctly, was is the balance between retail and food service different in Norway than it is in the group? I would say Norway is close to the group average.
Okay. Final question from me. On the balance sheet and M&A opportunities here, you have two tranches left in your Manor Farm earn out payments, and as we look beyond that, the balance sheet will strengthen quite rapidly, and you have been talking about acquisitions now for quite some time and the consolidation opportunities in Europe. I guess with COVID-19, discussions have probably become a bit harder to have, at least to meet people. Can you update us anything on that progress?
You're right that COVID-19 hasn't made it easier to travel. Still, the conversation goes on. I would even say that this strategic study that we did earlier in the year have done that we feel even more prepared, so to speak. I think also the way we have seen new businesses, Norway, Finland, Ireland, the way we have integrated those businesses, I think, and the way the results are coming through also prove that if we find an attractive candidate, the business is ready to move.
Okay. Okay, thanks. That's all from me.
Maybe, Mikael, if I could go back to your question that you were saying before about the share of ready meals in retail. We have quite a large part of our Ready-to-eat business goes to QSR customers as well. The share that we sell in retail used to be around 12%-14%. Now if you look in the last quarter, it is more in the area of 20%. It has increased for sure, like you say, but it is still at a fairly low level. Does that answer your question?
Okay, thanks. Yeah, that's helpful. Thanks.
Bye.
Thank you, Mikael. We currently have no further questions. I will reiterate, if you would like to ask one, you may do so by pressing star followed by one on your telephone keypad. When preparing to ask your question, please ensure you are unmuted locally. We have a follow-up question from Daniel Schmidt of Danske Bank. Your line is now open. Please go ahead.
Yes, hello again. Could I just I think I didn't hear you, Julia, especially. It was quite hard to hear.
Okay.
Could you just clarify what you said on government grants? I think you said SEK 10 million-SEK 15 million in the quarter. Is that also included in sort of what you regard as an extraordinary in the quarter, the SEK 17 million, or how should we view that? Can you give some clarification?
No, they are netted out. They're non-comp, you could say. It is clear that it's sort of on top.
Sorry, you have a bad line. Can you just repeat? Sorry.
No. If you had the state aid we received, that is obviously offsetting some of the increased costs we've had. On top of that, for example, the plant closure cost is more related to the overhead that we have not been able to get any state support for.
Okay. Thank you.
Yeah.
Thank you, Daniel. We have a question from Florent Thy-Tine of MidCap Partners. Your line is now open. Please go ahead.
Hi, good morning. Just a follow-up question on the non-meat concept. Do we have to expect some M&A on that segment, or are you able to develop this product by your own? Will you be able to sell non-meat product on all your countries or not? Thank you.
Initially, it will be products we will be producing ourselves. We don't foresee initially any M&A activity here. In terms of where to sell the product, we see demand and opportunities both in our domestic markets but also on export markets.
Okay, thank you.
Thank you, Florent. We currently have no further questions. Once more, ladies and gentlemen, if you'd like to ask one, it is star followed by one. We have no further questions.
All right. Thank you, everybody. Thank you for your time, and have a great day.