Earnings Call: Q2 2020

Aug 26, 2020

Ladies and gentlemen, welcome to the Scandi Standard Interim Report for the Second Quarter twenty twenty Webcast. My name is Ruby, and I will be your moderator for today's webcast. Will now hand over to your host, Valhamsson, to begin. Lyf, please go ahead. Thank you. Good morning, everybody. Welcome back from the holiday. On the front page, you see how we deliver strong organic growth over several years. And this quarter, we have got a more stable development due to the COVID-nineteen impact. You also here see a stable EBITDA margin over time. And in this quarter, we delivered a very strong margin. All in all, due to the COVID-nineteen, we see a strong shift from foodservice to retail. Retail share is up about 10 percentage points to representing about 70% of business. Foodservice is down about six percentage points of the total business, representing about 15%. Also good to see that we are during the end of this quarter, and it's clear Q3, you see a clear sign of the overall growth pattern reverting. And with that, I'd like to go to Page three, where we, in this quarter, delivered record margin and a strong cash flow. As mentioned, we delivered 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, and it's overall showing the business is resilient to COVID-nineteen effects. Going on to Page four. You see the retail growth offset the COVID-nineteen effects on foodservice. We delivered 5% growth in overall retail sales, now representing 70% 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 foodservice, 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 product. Going on to the next page, Page five, We see the retail demand remained strong despite normalizing foodservice activity during the latter part of the period. We've seen strong increase in retail sales, positive foodservice momentum through the quarter and into Q3. We have seen we do anticipate that foodservice 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 change restrictions. In August so far, in August, we have seen a 15% drop in sales versus the same period last year, just underlining the volatility we anticipate. Retail remained 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 various group deals, 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 have seen a 17% drop in B2E, basically reflecting the high foodservice exposure of this product category. By country, it's you have a bit of a mixed development. You see in 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 foodservice exposure. Going on to Page seven. This is the quarter where we have the five year record EBIT margin of 5%. We as part of the uplift in margin comes from volume, plus positive volume, particularly in Ready to Cook. We also have a net positive effect of price mix and COGS with positive mix effects, and there are 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. Based on Page eight, just to remind you that the ready to eat category is a very important one for us, so it's strong growth over a long time. And once things normalize within foodservice, we anticipate the growth will pick up again here. It is a platform that we believe is very important for the future. And 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 nine. Sweden delivered 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, and 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-nineteen, a 3% decrease in net sales. We reported 2.2% adjusted EBIT margin to be compared with 3% in the same quarter last year. 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 nonrecurring items covering the we have closed the number of lines producing foodservice products in April and part of May. They're now reopened. And there are some provisions for inventory write downs that also taken here. Peronta 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. And 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 environment. 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, continues to see a strong domestic growth. And 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 margin to be compared with 4.4% in the same quarter last year. There are some investments underway to enable us to continue to grow in the Finnish market. With that, I'd like to hand over to Julia, please. Thank you. Let me move on to Page 14 for the group income statement. As said, net sales was minus 1% in the quarter, but flat in local currency. And the adjusted EBIT is 7% up versus last year, which then leads us to an EBIT margin of 5% in the quarter, which is a five year record. We have posted some COVID-nineteen related nonrecurring items. They are mainly related to the closure of production line focusing on wholesale products as late as mentioned, total of SEK 13,000,000. The rest is a shift of provisions. We will release some of the provisions we made quarter one for bad debt related to Food First customers. At the same time, we increased the provision for inventory write down. The net effect is €4,000,000 The net financial items in the quarter was €90,000,000,000 which is less than last year, driven by the fact that had a positive currency impact this year with a strong SEK, although a negative share of SEK 1.19, which is 53% up from last year. The adjusted earnings per share is at SEK 1.46, which is 49% up versus 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. And 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. But also in this quarter, worth mentioning that we have received some COVID-nineteen related state aid that has allowed us to postpone VAT payments and also other tax payments. So that's an impact, overall leading us to a low working capital to sales ratio of 1%. Our target level, if you would adjust it for financing items, still at 7%. And then as a comment, if we were to have adjusted the Q2 results for the received, it would have been a 2% working capital to sales ratio. And 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 thing happened, we also have a significant working capital release. We've had low quarterly capital expenditure in line with the reduced yearly estimate we had, and we had an overall low quarterly paid tax, which is then to a positive net cash flow. The net cash flow per share is at GBP 1.63. Finally, some comments on our cash flow guidance on Page 18. As I have referred to, the CapEx for the year is estimated to be at around 300,000,000 versus NOK $4.19 last year, and the paid interest is estimated to be at 3% to 3.5%. The blended effective tax rate long term is still at 20.1%. We have a lower one this year driven by the country mix, and we'll review the long term estimates. Just like to remind you that we have our contingent liabilities in the shape of the Manor Farm position, where there are three tranches to be paid. One, paid last year of 133,000,000 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 uncertainty we've seen around COVID-nineteen. And 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-nineteen 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 roads across the business. And we're also introducing an enhanced clean label policy, meeting growing demand for transparency for product content and labeling. With that, I would like to go 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-nineteen 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 so further precautionary measures taken during this quarter. We continue to follow structural opportunities closely. And I'm also very proud to report a strong start through the third quarter. With that, we'd like to take any questions you may have. Thank you. Thank We have a question from Daniel Schmidt of Danske Bank. Leif and Julia, I hope you can hear me. A couple of questions from me then. And starting with price reductions that you referred 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. So that's when you then look at the overall price achievement, they are then impacted by those lower prices. It was in a number of markets, particularly in Sweden. And any sort of percentage number that you think that you, on average, lower them by? Yes. Well, not really we're not really going to that. I think it's better to leave that. Okay. But it's still sort of meaningful to mention it, so I guess a percent. It is part of the reason why we report lower net sales increases this period compared to what we have seen over several years. So it is meaningful. And hence, we could come to the conclusion that volumes should be or volumes are up a little bit than in the quarter. Is that correct? Yes, that is correct. We actually quantified on Page seven, where the volume effect is 6% €6,000,000 sorry, of the increase. So that's okay. So okay, a little bit. Okay. Good. And then coming back to sort of COVID-nineteen related extra costs that you had in the quarter of DKK 17,000,000, and I think you said that mostly refers to April and May and plant closure and so on. But at the same time, you're also saying that you still see volatility in the foodservice market with sort of improving trend in June, but although or seem to be coming down again in August, meaning minus 15%, if I read you correctly. Do you still believe that sort of these resetting costs are behind us? Or 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. It is the majority of these nonrecurring items relates to the closure of a number of production lines. And those lines, we put they are now fully in operation, and they were have been fully operational for some sort of the midsummer or late summer onwards. Okay. So just one And I think maybe your comment the 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 foodservice pound back. It is clearly improved activity within foodservice across all our domestic markets, but 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. So we are in a normalization fraction, but it is likely 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. And what is so it is we remain this we anticipate this to remain a bit up and down in the coming months, clearly, a lot more activity than what we have seen earlier on. Yes. And just to sort of on the adding the parts together that you give us numbers on when it comes to the trend in August, and you're saying that foodservice is down 15%, but retail is up by 7%. 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? Yes. And 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 foodservice between July and August. So some stock building in July, you see foodservice were actually flat or even up a bit, and that impacted August. So 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. Yes. All right. And then just moving on to the fact that you have been sort of despite the COVID-nineteen, you have been able to grow earnings. If you look at underlying earnings, then 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 it's we we are clear that it is suspended for now. Yeah. And on the file, you you mentioned that you have projects ongoing to evaluate non meat concepts. Could you shed some more light on that? Yeah. Could do that. It's it's basically that we have seen a lot of success within us going heavily into ready to eat concepts, different kind of concepts in all our markets. And and, you know, some of our production lines can do products with chicken, or they can do them with, you know, plant based alternatives. And we are basically evaluating the feasibility of us launching some plant based products. And 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? Yes. No, no. That is reasonable. Okay. And you have that sort of in house knowledge to make that happen? Or is that something that you need to invest into? No. We do. That's that's what we have added. Okay. K. Interesting. Okay. Thanks a lot, Leif. That's all for me. You're welcome. Yeah. Thank you. Thank you, Daniel. We have a question from Michael Loftahl of Carnegie. Your line is now open. Please go ahead. Yes. Hi, good morning. So a few questions First, on your sales guidance for Q3, up 4% for net sales. If I do the math correctly, there should be negative FX impact here of around 3%, 3.5% or so, which would then take it to an organic growth of seven seven and a half percent or so. And on top of that, you you still have a a price headwind from the from the price reduction last year, probably around 3% or so down, which would imply an an an a volume growth all else equal of of some 10% or so up. And that seems very, very strong. Is there anything I'm I'm missing here? Julie, do you wanna take that one? Yes. So some of the pricing decreases we did last year were already happening in q three. You don't get all of that effects for example coming in. I don't see the Forex effect that you're seeing, maybe not as high as we were calculating. But then we also have some mixed effects. We can hear that there's not only volume 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 mix effect in some of the countries when you move from food service to retail, for example. Okay. But how how can the FX be be be lower than I I know that you have a Maybe maybe it's in the area that were saying, but it's I mean, we don't see a volume effect of of 10%. It's more in the area what we're seeing what we're seeing this this quarter, I would say. And it's more the cost of mix effect. Okay. Okay. And and on on that mix, just just a question on on the ready to eat segment. I know that it's it's heavy in in the foodservice sales channel, and and that has been negatively affected. But can you say anything about how how much are you selling here to to the retail segment? What is the the 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 as opposite to lower margins when you sell to the deferred foodservice segment. Can you say anything about that mix? You take that, Julia? Are you saying in how much we sell in the foodservice? So how much you sell in retail out of our retail I mean, yeah, this is I mean, this is part of this part of the structural growth, you know, the positive growth outlook for for Standard is that we eat more and more convenient food and also buy them in in retail chains and so on. And I guess that has has gotten a a boost now from from COVID nineteen that we buy chicken salad and and what have you in the retail stores. And that is, I guess, included in the ready to eat segment in in that distribution. So of the of the 7% 17% that you have in in ready to eat, how much of that is sold to the retail segment compared to foodservice, and how has that changed on a year on year basis? I don't have the numbers right in front of me. Need to look them up. Can I come back to this question at the end of the call? My end Yes. Of the Sure. Sure. Thank you. Another question on on earnings. You you mentioned some government support in terms of paid taxes and the postponed taxes and so on. But was there any government grants in the earnings in the P and L? Yes. It was as well. So we have received certain amount specifically ready to sick leave in in Sweden and then for short term layoff in some countries and then also some reduction social social fees. So, basically, having part of the increased cost that we have in these areas. And could you specify how how big they were? They were in the area between 10 to 15,000,000. 10,000,000 to 15,000,000. Okay. And and but you're saying that the costs were were bigger than that. Does that include also then if we we we don't mix this up with the the the nonrecurring items that you are Exactly. So they they always exclude it from the from the nonrecurring items. So it's next. And and 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 in in q three and in August now, I guess they are diminishing. And, also, the costs for the the more direct costs for for COVID nineteen should also be diminished. Are they diminishing in the same pace? Or Yes. I would say so. I mean, maybe what I forgot. Mean, the cash the cash interest on the safe date is basically being reversed in in q three because it's just performance of payment. And the state data that affects the P and L is very limited, what we've seen so far at least in the Q3. Yes. And it was mainly related to the time when we had basically one one entire factory, food service factory closed. That was all relating to the to the April and May period where we where we had some significant losses, and that was they were partly covered by some of these brands. Final question on Norway. Obviously, extremely strong margin in the quarter. And we know that Norway has obviously a good leverage in this business, and it's very well driven. But it's a mixed effect bigger in Norway when it comes to retail versus foodservice. I I guess that could be the case, but you you you have much of your food service in Denmark. So so maybe it it doesn't impact Norway that much. No. But I I would say Norway is probably close to the average for the group in terms of the split between retail and foodservice. So that is a relatively significant foodservice business in Norway also, but a very strong development all in all. But what's the mix effect bigger in Norway? What was No. That that that is that that that positive mix mainly coming from from more ready to cook products being sold, particularly in retail. So so that is clearly positive. But but but but the other part of your question, I understood it correctly, was the is is the is the balance between retail and food service different in Norway than it is in the group? And I would say Norway is close to the group average. Okay. Final question from me. On the balance sheet and M and A opportunities here, you have two tranches left in your Manufarm earn out payments. And and as we look, you know, 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 nineteen, discussions have probably become a bit harder to to have, at least to meet people. But can you update us anything on on that progress? Yeah. You're right that the COVID nineteen hasn't made made it easier to travel, but still, conversation go goes on. And 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 then the way the results are coming through also proves that if we find an attractive candidate, the business is ready to move. Okay. Okay. Thanks. That's all for me. Maybe, Michael, if I can go back to your question that you were saying before about the share of the relative parts in retail. So, I mean, we have quite a large large part of our realty business goes to to QSR customers as well. So the the share that we sell in retail used to be around twelve twelve to 14%. And then now if I look in the last quarter, it's more in the area of 20. It has increased for sure, like you say, but it's still at a fairly fairly low level. Does that answer your question? Yeah. That's helpful. Thanks. Thanks. Thank you, Michael. We currently have no further questions, but I will reiterate. If you would like to ask one, may do so by pressing star followed by one on your telephone keypad. We have a follow-up question from Daniel Schmidt of Danske Bank. Can I just I think I didn't hear you, you guys, especially, it was quite hard to hear? But can you just clarify what you government grants? I think you said 10 to 15,000,000 in the quarter. Is that also included in sort of what you regard as an extra, ordinary in the quarter, the 17 or or is how should we view that? Can you give some clarification? They are basically offsetting costs that we had for so they they are netted out. The the non comp, you could take it a if you clear that it's on sort of on top. Sorry. I I you you have a bad bad line. Can you just repeat? Sorry. No. No. So so if you had the the the state that we received, that is obviously affecting somewhat increased cost we've had. And then 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. You. Thank you, Daniel. We have a question from Florent Seitane of MidCap Partners. Your line is now open. Please go ahead. Hi, good morning. Just a follow-up question on the non mint concept. Do we have to expect some M and A on that segment? Or are you able to develop this project by your own? And will you be able to sell non mint product on all your countries or not? Initially, it's it will be products we will be producing ourselves. So we don't foresee initially any M and A activity here. And in terms of where to sell the product, we see demand and opportunities both in our domestic markets but also on export markets. Thank you. Thank you, Flora. We currently have no further questions. All right. Thank you, everybody. Thank you for your time, and have a great