Earnings Call: Q3 2018

Nov 5, 2018

Good morning, everyone, and welcome to the Scandi Standard Q3 twenty eighteen Results Call. My name is Seb, and I'll be coordinating the call for you today. I will now hand you over to Leif Bergvall Hansen to begin. Good morning, everybody. If you start on Page one, just to paint a picture of a very solid growth story, where the company have over the last four years have grown 7% to 8% per year. So that continues into this quarter and also have shown very stable EBITDA margins of 7% to 8% over the same kind of period. Going more into the details of the quarter, going on to Page three. We saw a 9% growth in revenue pro form a in the quarter, while all geographical segments contributed. In local currency, the growth was 3%. Adjusted EBIT came in at 4.4 or 100,000,000, which is compared with SEK 94,000,000 in the quarter last year and 4.5%. We saw improvements coming clearly through in Norway, in Ireland and in Finland. And we had a quarter with some margin pressure in Sweden and also in Denmark. In the quarter, net interest bank debt increased with CHF54 million and that was explained by a positive net cash flow before consolidation effect from the Rocketdyne merger. I'll talk a little bit about a little bit more about this merger later on in the presentation. EPS went up with 33%, driven in the main by the acquisition of Manapharm. It's a quarter where we have seen full recovery of demand in Sweden during the course of this quarter. Going on to Page four, a quarter where we have seen some raw material inflation that we have managed to cover through price increases and some mix improvements on top, otherwise a relatively stable picture. When you look across the countries, we have seen Sweden being impacted by some stock clearance Denmark impacted by some investment and some costs in establishing the new brand Norway, best in class margins and clearly an uplift from last year. Ireland also a good quarter with an uplift from last year. And Finland, another step towards breakeven and had quite a significant uplift from the result of last year. Going on to Page five, giving you a picture of product categories and sales channels. On a pro form a basis, we've seen the quality growth being spread quite evenly across all the main product categories. The Ready to Eat segment that has been doubled over the last four years, representing now 18% of revenue. And that's the area where this investment that we are conducting in Denmark is to give us additional capacity to continue that growth in the future. The revenue development within frozen have been impacted by some inventory clearance in Sweden. And all in all, also impacted by sales was generally impacted by the weakened Swedish krona. In terms of the sales channel, we have seen strong growth in both retail and in foodservice. And as mentioned, all countries contributed to the growth. Going a little bit deeper into Sweden on Page six, a quarter where we have seen clearly the market being recovered, the demand being back both in frozen and in chilled. But where we our performance were impacted by some stock clearance, frozen stocking that has been built during the course of the period where we have had soft demand in the market. We delivered a 5% revenue increase in the quarter, which is more or less in line with retail market. You've seen a strong improvement in demand for fresh products and also solid growth in the ready to eat category. Margins EBIT margins came in at 5.1%, which can be compared with 6.3% in the same quarter last year and are clearly up from 4.2% in Q2 of this year. Stock clearance is the main factor that have been tracking down margins versus last year in the quarter. And there's still some stock clearance to take place during the course of Q4. But once we are through Q4, we do anticipate that, that stock builds have been cleared. There's some nonrecurring items in the quarter of DKK 11,000,000 that relates to a discontinuation of a pilot plant with the hatching that was where measures were taken during the quarter. As mentioned, the underlying price market is currently fully recovered. And we do anticipate once the stock is clear that we will get into more normalized margins from 2019. Going on to Denmark on Page seven. Some market investment and some cost pressure, 12% revenue growth, 3% in local currency and that continues to be driven in the main by retail and also by the ready to eat categories. We have seen reduced margins versus last year coming in at 3.9%, but increased margins versus Q2 when we delivered 3.2%. Results have been impacted by investment in sales and marketing for the new brand. And also, we have still some open exposures to raw material increases for the Danish business. We have seen a positive development for the Danish family farms that is now already representing 14% of domestic sales. And we do anticipate that this new brand and a new category will be will deliver positive contribution from 2019. We have completed successfully the investment in a new line in our ready to eat factory in Denmark, and we are now ready to produce from there going forward. In this quarter, we merged our high end range of organic and free range with another player in Denmark with a dedicated smaller scale manufacturing operation dedicated for this kind of product. We made that merger. That will where the combined business will be better situated to grow that market going forward in a profitable manner. Going on to Page eight, the quarter where we in Norway saw another strong performance, 7% revenue increase. It was flat in local currency, driven by the fact that we have rationalized our foodservice range quite significantly. We saw strong margins coming in at 7.8 versus 6.5% the same quarter last year. It's the most profitable geographical segment within the group, a result of very successful investments that we have made over a number of years, mainly to drive efficiency and also to deliver better yields in operation. A lot of best practices have been transferred into the Norwegian operation, and we see the impact of that. In addition to improvements in that field, we have also seen a clearly strengthened product offering. And a good example of that is what is the feature you have on this page, which is the flame grilled chicken fillet that is a ready to eat another ready to eat product that we have launched and is very well received in Norway. It's a good illustration of our business potential where all best practices come together. Going on to Ireland, a quarter with strong performance and where the integration is going according to plan. We have seen a 13% revenue growth, 4% in local currency, Still a strong domestic market and also Amana Pharma, the clear market leader, has strengthened its position. Another example of a lot of successful best practice exchange, both within operation, within the live operation side, but also within realizing better value per VERT that has clearly been achieved in the Irish market. We have some significant investment plans for 2019 to make the plan to increase capacity, but also to increase efficiency and also some measures to improve animal welfare and food safety. We delivered a margin in the quarter of 4.8% versus 4.7% in the corresponding quarter of last year. Going on to Finland, from a quarter where we delivered further improvements and also cash, we have seen a 24% revenue growth, 13% in local currency, and where we took another step towards breakeven and a clear improvement from last year, where where we delivered a negative EBIT margin of 3.3 positive EBITDA margin of 2.6%, which is a clear improvement from where we were last year, driven by better product mix and also better yields. It's another quarter where we have positive EBITDA and also operational cash flow. And also when you look the total of 2018, we have seen positive EBITDA and also positive cash flow. Having said that, we have a continuous strong focus on improved product mix, yields and costs to get to our next milestone of positive EBIT, and we do expect a sequential improvement towards that goal. With that, I'd like to hand over to Anders for the income statement. Thank you. Thank you, Leif. To then look at the income statement and we compare this quarter versus reported numbers last year, we see that we have grown net sales by 24%, and we have grown adjusted EBIT by 19%. We also see an increase in depreciation, which relates both to the high investments and the acquisition of Manapharm. And we also see an increase in amortization, which is related to the acquisition of Manapharm. As Leif already mentioned, we had nonrecurring items in the quarter, mainly related to the discontinuation of the pilot hatching facility. We also see improved net financial items, which is mainly related to that we don't have the big negative currency effects that we had in the quarter last year. The effective tax rate in the quarter is 21.7%. And as Leib already mentioned, the EPS growth is driven to a large extent by the Manor Farm acquisition. Also, if we look at the margin, EBIT margin for the quarter of 4.4%, which is slightly below last year, but it's ahead of the 4% we reported in Q2 this year. Then moving to page 12, where we see that the returns on both capital employed and equity has improved in this quarter compared to the same quarter last year, and we also see the equity to asset ratio improving from 26.3% to 28.1%. Then moving on to next page 13 and working capital. We see basically a flat working capital compared to the Q2 despite a very good inventory release in Sweden, which was then partly offset by an increase in receivables. We still have a bit too high inventories in Sweden, so we should expect some further release in Q2. Working capital as a percentage of sales is flat, still at 7.5%, and we still expect that to come down to close to 7%. Okay. Moving on to Page 14 and cash flow. We had a positive operating cash flow in the quarter of 50,000,000 despite the high investments in finalizing the Ready to Eat expansion in Denmark. We've also done in the quarter, as mentioned by late, we have assumed €95,000,000 of debt as part of the Rocketdoll merger. And due to that, net cash flow is minus CHF 54,000,000, which brings the net debt to just below CHF 2,100,000,000.0. On the next page then, cash flow guidance, Page 15. No changes versus what we have talked about in previous quarters, except for the fact that we also now talk about 2019 capital expenditure, which we expect to be another year of significant investments, we talk about €380,000,000 and a big chunk of that is going to go into Ireland. Okay. And then moving on to the next page, where we talk about sustainability, which is at the core of everything we do at Scandi Standard, and which is labeled under the Scandi Way, which is the way we work every day to make a difference promoting health and well-being for people, the chickens, and our planet. And the intention is that we do sort of a snapshot or highlight in each quarterly report. And in this quarterly report, we talk a lot about transportation, where we talked about the fact that we moved to biofuels in Sweden, where we basically all the transports to and from our factory in Vala, then using biofuel, which has a significant positive impact on lower CO2 emissions. Thank you. Going on to summarizing the Q3 report, 9% organic growth. So an underlying market in Sweden now being fully recovered. And we do have a solid outlook for 2019 once this remaining stock clearance have been taking place during the course of the remainder of this year. We have seen strength in margins coming through in both Norway, in Ireland and also in Finland. We are confident of a stepwise path towards breakeven in Finland. Coming to the Danish market, we have a bit of a mixed outlook. This brand initiative to decommoditize part of the Danish business is continuing to progress well and will drive some costs. And we do have some still some open exposures when it comes to raw material increases. We have continued strong growth expectations within the Ready to Eat segment, and that's clearly supported by the investment in VAR in additional manufacturing capacity. We do anticipate strong cash flow in Q4 of this year, and we continue to follow structural opportunities closely to see if anything relevant comes about. With that, we'd like to take questions. Thank you. We have a question today from Toni Hanstib from DNB. Toni, please go ahead. Hi. I have a question regarding the cost inflation. You are mentioning, could you give some more flavors to that? And also, you say more normalized margin expected in Sweden. And what do you view as a more normalized margin in short term and longer term? Thank you. Well, it is clear that there is some cost inflation relating to the fact that there has been a drought in this part of the world. We have been in negotiations with our clients and are still in negotiations with our clients in our domestic markets. We have landed quite a significant part of those negotiations successfully, so that we can compensate the farmers fully for clearly the same to ensure a full recovery of this cost inflation, and we anticipate to land that. Thank you. And the margins in Okay. About the Sweden, the Sweden margin, we do anticipate that the margins from the 2019 will be much more normalized compared to what we have seen over the last year, year and a half, as we by then would have cleared this excess stock that has been built during the period with soft demand. Could you give some more flavor on the level you expect? On the margin expected? In Sweden, no. We are we're saying that we're getting more into more normalized margins. And of course, we don't anticipate that to happen on day one, but we are pretty confident that we will see a relatively quick return to normalized margins once this stock overhang is cleared. Okay. Thank you very much. Thank you. The next question comes from Alexandra Vaganovsky from Nordea. Alexandra, please go ahead. Yes. Hello. I have a question regarding the Danish margin as we are seeing some weakening because of your investments in sales and marketing and because of the launch of the new product. And I just wondered whether you had somewhat of an outlook of how long we're going to see somewhat of a weaker margin in Denmark. Well, we have the Danish business is more exposed to competition than our other units. We have sort of communicated that one should anticipate a market in Denmark over time to be in the region of 4% to 5%. The initiatives that we are taking to build this premium brand, the Danish Family Farms, are going well. And of course, that is aimed at stabilizing the margins in Denmark in the higher end of that range and also to make it more stable over time. And but we are all investing at this point in time, and we will anticipate to invest for some few quarters more. But we do anticipate that in next year, this new range will be contributing margin wise to the group. Thank you. And we have a question from Michael Lofdahl from Carnegie. Michael, please go ahead. Yes. Thanks. First of all, in Sweden, is it possible to sort of strip out the effect from the inventory reduction to get a sense of how the underlying fresh meat business is developing year on year in this quarter? Yes. We can give some flavor to it. Of course, it's always when you try and do these estimations, you compare to what is normal. But I would say that if you say it is sort of around the SEK 10,000,000 plus minus impact in this quarter, the effect of stock clearance, then you're probably not way off. But as I said, it is you need to be taken with a pinch of salt. Okay. And in Q4 then, one would assume at least that this effect is diminishing, so it should be smaller in Q4 relative to Q3. Would that be fair to assume? Well, we are not saying that. We do see that we are actually having when we came from Q3 into Q4, we still have a clear overhang of excess inventory that we are clearing as we speak. And that will have a negative effect also in Q4. But we do also anticipate that once we come into next year, we would have put this issue behind us. Okay. On the CapEx guidance, could you say more about the underlying CapEx excluding that matter from what you're doing there? That's the first question. Second is, will all of these investments related to Manapharm coming in 2019? Or should we expect it to continue to be a bit higher than normally in 2020 also for the group? We would the kind of normalized CapEx will probably be in the region of a bit more than 200,000,000 you would say, But we do see an additional CapEx to come through in Ireland in 2019. There might be some coming into 2020 also. But it is quite solid projects that we have been working with the Irish team since the acquisition of planning, some with some margin impact and some is more to establish capacity for future growth. And do you think this will boost growth or margins or both in Ireland? Over time, it should impact both. Final question from me, I think, given the I don't know exactly what you said in the previous quarterly report actually, but you are speaking again about the consolidation or the potential to further consolidate the European market. Could you say something about that when you expect to get ready to do more? I mean given that you are losing CapEx now for instance in Ireland, what can your balance sheet bear? I know that you could always bring new shares. I guess that it's likely that you will do so in case of an M and A. But when do you think you could be ready? And what is the pipeline like out there? I mean, one would say that the if you look across Europe, the industry are quite consolidated within the market as what we see here. The acquisition in Ireland, I think, is a very good illustration of what could be a good match for the group. Strong management, strong market positions, an eagerness to exchange good ideas cross border and also an acquisition that has not been over. So there has been a lot of strong management that has come into the group through such a move. And if we could find a similar one, we will be open to, let's say, go into more discussions. But we of course, we haven't we cannot be any more specific than that. Okay. Sorry, one final. On the bird flu, now that we can sort of leave that behind us for at least for now, I guess eventually it will, I guess, come back at some point again. And how would you say today that you are more prepared in case of another virtual epidemic in Northern Europe? I guess you did change and sort of steered over your export to other markets than China, for instance, would that mean that you are better prepared to do so in case of new birth to it and thereby limit the earnings impact in future events? Yes. I would say that we have we do have taken a number of measures in terms of client base, in terms of product range, in terms of how we handle the product, so that if a breakthrough outbreak will come again, we do anticipate that the impact on us will be lower than what it was last time. That's correct. Okay. Thanks. Thank you. And the next question is from Alex Oxner of DNB. Alex, please go ahead. Yes. Sorry, my answer was my question was actually answered. So no questions for me. Thanks. Okay. It looks like there are no further questions on the call. So I'll hand back to you, Leif. All right. Thank you, everybody, and have a great day. Bye bye. Ladies and gentlemen, this concludes today's call. Thank you all for dialing