Good morning all, and welcome to Scandi Standard second quarter 2018 results call. My name is Seb, and I'll be coordinating your call today. I'm now going to hand over to Leif Bergvall Hansen to begin.
Good morning, everybody, and welcome to our call and presentation. If you look at page one, I just want to focus on [inaudible] over the last four years, the way we in the group have developed. We've seen an organic average annual growth rate of more than 7%, and we have seen EBITDA margins being relatively stable over the period. If you include the Manor Farm, the growth over the period has been close to 16%. Relatively stable. In terms of the exact quarter, we'll obviously be talking a lot more about that later in the presentation. If you go on to page three and look at the highlights for the quarter, it was a quarter with strong top-line growth. Yet another one, I suppose. With 10% growth, and with 5% in local currency. It was all five geographies that contributed to this growth.
EBIT were largely unchanged from the same quarter last year, coming in at SEK 9 million. We saw improvements coming through in Norway, in Ireland, and in Finland. We have seen margin pressure coming from Sweden and from Denmark, all of which we're going to talk more about later in the presentation. The net debt in the quarter increased to SEK 100 million, driven by three factors in the main. One was the dividend payment of SEK 118, unusually high CapEx, as we have talked about, SEK 138 million, and a SEK 72 million working capital release also achieved in this quarter. Altogether, that delivered an improvement in adjusted EPS of 26%. Going on to page four and give a little bit more flavor about how the group has developed in the quarter. We have seen higher volume and prices coming through, and also some increased costs. Strong volume increase across the group.
In terms of price mix, we have seen an adverse development mainly in Sweden and also to a degree in Denmark, and that has partly been offset by positive developments in Ireland and in Finland. COGS, we've seen some raw material cost increases, mainly on packaging and so forth, and that has been offset by efficiency gains in operations. As mentioned, some cost increases. You have seen that coming through mainly in Denmark. In terms of the country performance, we have a mixed picture. We have seen Sweden have a large impact from stock clearance during this quarter. Denmark has been impacted by large investments, so cost in contract. Norway, we have seen best-in-class margins. Strong performance in Ireland, and Finland took another significant step towards breakeven also in this quarter.
Going on to page five, I'll give you a little bit of a flavor about product categories and sales channels across the group. You see the sales mix changes towards higher-value categories. Both good growth in chilled, driven by volume and also by higher value per bird, mainly coming from Finland and from Ireland. We have sold out some frozen inventory in Sweden. I'll come back to that a bit later. We have seen yet another quarter with very strong demand and successful development within the Ready-to-Eat category. That has also been supported, in addition to successful launches, also by investment we have done over the last couple of years in Sweden and Norway. As we speak, the investment we do in expanding capacity in Denmark in this area is also to build the platform for further growth we see in this category.
In terms of sales channels, retail increased with 7% and foodservice with 12%, also reflecting the fact that people are increasingly eating out, but also underlining that people are eating more and more chicken. We will, from the president, generally be talking more about these group breakdowns. Going on to page six, about Sweden. It was a quarter where we delighted to see a clear market recovery, but also a profit development that was impacted by some stock clearance. We saw a 4% increase in net sales. The retail market grew with 5% and the chilled part of the retail market with 11%. We have seen a stock build during the period where demand has been low in Sweden, that inventory we have sold a part of during this quarter at low prices, and that is impacting margin negatively.
There's still some frozen inventory to be cleared during the second half of the year, but that doesn't change the fact that we are confident that we will return to the historical margin levels in Sweden once this is clear. We have decided to outsource the processing of specialty birds, that deliver a non-recurring item in this quarter of SEK 23 million that is related to the plant closure. We do anticipate to see positive margin effects of this initiative from 2019. Also positive to see that all trade restrictions linked to the bird flu incident have now been lifted. We saw a quarterly impact of SEK 6 million, and we do not expect any further financial impact of any significance with this regard. Going on to Denmark. A quarter with a strong focus on further differentiation and also on the expansion project.
10% revenue growth, 4% in local currency, that was delivered in the main by growth in retail and also in the Ready-to-Eat segment. That was the same picture as what we saw in Q1. It was a quarter with reduced margins, coming from investment in supporting this new launch, both sales and marketing costs relating to that. We also see somewhat higher raw material costs coming through in this quarter. Continue to see positive development for the new brand, Danish Family Farms, where we are gradually strengthening our market position, and we do anticipate to see positive contribution from this range from 2019. We are about to finish this investment in expanding capacity of our Ready-to-Eat manufacturing in Denmark. From that, there was SEK 67 million of CapEx coming through this quarter, and we expect to start production within the next month or two.
Going on to Norway. It's a quarter with strong performance, 5% revenue growth and strong margins, 1% growth in local currency, which is in line with the market. We also want to remind everybody that Q2 is usually the strongest quarter in Norway. It's the most profitable geographic segment within the group. We have seen the effect of some very successful investments that we have done in Norway over the last three, four years. They are really paying off, and that's driven by a lot of best practice being transferred into Norway, particularly in the operations area. We've also seen clear strengthening of our product offering in Norway as part of the positive market development. It's a good illustration of the potential within the business model. Going on to Ireland. Very strong performance, and the integration is going very well. Even better than planned.
We saw a 17% revenue growth, 9% in local currency. Combination of a strong domestic market, and also that we have strengthened our position within the Irish market. See margin improvements coming through this quarter, driven by two main factors. One is increased price realized per bird, and also increased operations efficiency, better yields, and better efficiency in the production. Basically, it's been delivered through a lot of initiatives to share best practice within the group that has built the platform for this development. There's a number of investments defined for the Irish business. One, to deliver more cost efficiency over the years to come. There's also some debottlenecking coming from the strong growth and the growth potential we look at, and we see those projects to be gradually phased over the coming years. Going on to Finland, page 10.
It was good to see a quarter with further improvements and also another quarter where we are cash generative. 31% revenue growth, 14% in local, and that is a 7% higher revenue compared to Q1, and that's clearly ahead of the market that grew around 6% in this quarter. Another clear step towards break-even, driven by better product mix and also better yields achieved in the production. Positive operational cash flow coming out of this quarter again, and we see continued strong focus on improving product mix and yield and also the cost of the Finnish operation. We do expect a gradual margin improvement to continue for the Finnish operation. For the income statement, I'd like to hand over to Anders.
Thank you, Leif. Here we are looking at the reported numbers and comparing Q2 versus last year. Obviously, a lot of the numbers are affected by the Manor Farm acquisition. That is also the case for depreciation and amortization. We also have a non-recurring item of SEK 23 million, which Leif talked a bit about, which relates to the closure of a plant slaughtering specialty birds. We have higher net financial items in the quarter, and that is mainly related to adjustment relating to contingent liabilities for the Manor Farm acquisition. Last year, we had a positive currency effect in the quarter. Looking at tax, the difference between last year, again, relating more to Q2 last year, where we had a revaluation of tax in Finland. Adjusted EPS growth driven by Manor Farm acquisition. Flipping page to page number 12, statement of financial position.
Similar story to the one we had last quarter, where this quarter is improving both versus the same period last year and also versus full year 2017. Also, equity to asset ratio improved from 25% to close to 28%. Moving on to next page, working capital. We had a good working capital release in the quarter, contributing with SEK 72 million in cash flow. That is pretty much coming from all countries. Having said that, we still have too high inventory in Sweden. We should expect further release in the second half of the year. Working capital as a percentage of sales is going down compared to the first quarter of this year. It is now at 7.5%. We are driving to get that down further to 7% towards year-end.
As you can see there, when we consolidate Ireland from Q3, that increased the percentage of the total working capital. Ireland has a higher working capital intensity. Okay. Moving on to next page 14, where we see the development in cash flow and in net debt. As Leif mentioned already, net debt has increased by SEK 100 million. That is in the quarter where we have had the working capital release. Quite heavy CapEx, SEK 138 million, which is 250-plus percentage of depreciation. We also paid a dividend of SEK 118 million in the quarter. Flipping page to page 15, cash flow guidance, no change versus what we said last time. Dividend policy, still 60% of net income over time. The cash flow estimates, we still expect the CapEx to come in on SEK 350 million for the full year.
Having done SEK 228 million year to date, we would expect the second half to be somewhere around SEK 120 million-SEK 125 million. Paid interest, one should expect to be around 3%-3.5% of average net interest-bearing debt. The effective tax rate should be somewhere between 20%-21%. Again, we are just reminding you about the contingent liabilities relating to the Manor Farm acquisitions with the three earn-out tranches, which are payable in 2019, 2020, and 2021. There are more details for that in the appendix. With that, back to you, Leif.
Thank you. Just turn the next page, just to remind you on our sustainability template, a lot of initiatives are taking place across the group, structured in the way you see here. I will just draw your attention to one important area, which is a strong focus on improving the feed conversion. In other words, that the birds eat relatively less feed. We can just see over the last 12 months, we have improved that with 0.01, that ratio. That alone had an impact that it basically used 100 truckloads less feed to produce the same amount of meat, which kind of just underlines the importance of working on such a parameter. Going on to page 17 for the summary and outlook for this quarter. Quarter with very strong performance, both in Norway and also in Ireland.
We saw a situation where both segments demonstrate the combination of a strong market position and also improved processing efficiency in a number of areas. Interesting improvements continuing in Finland across a number of areas. We are confident that we will continue a stepwise path towards breakeven. Happy to see a promising market recovery coming through in Sweden. However, we have some stock builds that we need to clear that are impacting profitability in the short term. We are confident in the medium term, the re-attainment of the historical margins in the Swedish market. The brand new initiative in Denmark is received well to try and transfer the Danish business to a bit more differentiation compared to the commodity structure it historically had. We see that strengthening our market position and deliver a margin potential over time.
I think everybody have noticed that we have had a pretty warm summer. That's likely to impact our raw material prices, and we aim to cover these costs through cost increases over the coming periods. We expect a strong cash flow in the second half of the year, driven by working capital release, by also some lower CapEx. Not least, based on the fact that we have seen a very successful development of the Irish acquisition, we are continuing to follow some profitable opportunities across Europe closely. With that, we're lucky to take any kind of questions. Thank you.
If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind and wish to withdraw your question, it's star two. Please ensure that your line is not muted locally when you're asking your question. Today's first question comes from [Knut-Ivar Bakken] from DNB Markets. [Tona] please go ahead.
Okay. I have a couple of questions. First, you were saying that the Swedish market is impacted by stock clearance and that there are still large frozen inventories to be cleared in the second half of the year. Could you give some more comments on how this will impact your result and cash flow in the third and the fourth quarter? That's the first question. The second question is, if you could give some more comments on how the effects of warm summer will impact the raw material prices of feed and by how much. Thank you.
All right. Thank you. Sorry, the line was absolutely clear. I think if I heard it correct, the first question relates to the stock clearing situation in Sweden. We have cleared a portion of this stock build that we have had. As you are aware, we have had a period where the demand in Sweden has been soft. That has led to a build of frozen inventory. We have now started, as market is coming back, to sell this excess frozen inventory. That has given us a loss in Q2. We anticipate that will also have an impact in the coming couple of quarters. We should have cleared that stock build. That will, of course, have a positive working capital component to release this stock during the second half of the year.
In terms of feed, we are not sort of coming out with exactly what magnitude of price increase that will be required. We're obviously following this situation very closely. We are not directly impacted by this as it is our farmers who are impacted. We are obviously committed to implementing the price increases necessary to reflect the fact that the harvest has been historically poor in this part of the world. One has to keep in mind that chickens are the most efficient animal in terms of transferring meat or sort of feed into meat, which means that when feed prices are going up, relatively, the increases in chicken prices are likely to be lower than other meats over time.
Okay. Can I follow up to that?
The next question comes from Aleksandra Wojtylak from Nordea. Aleksandra, please go ahead.
Yes. Hello. I have a question on your Finnish and Irish regions. If you look a little bit more long term, what sort of margins can we expect from those two regions, particularly perhaps from Finland, since you're still sort of on a journey to become profitable there, but also in Ireland, since you're expecting some improvement in that region? Thank you.
Yeah. If we start with Ireland, we've seen strong growth coming through. I think that is unusually high growth. We have done well in terms of improving the product mix and through that, delivering higher value per bird. You saw a margin increase in this quarter. We do see a number of further initiatives that will improve margins in Ireland. We have not given any sort of specific guidance in terms of what we see as future margin levels apart from when you look over time, around a 6% EBIT is an area that has been sort of achievable in an Irish context. We see a lot of solid initiatives taking place in Ireland. We do anticipate to be able to take further steps to improve the position further.
In terms of Finland, we are now very close to black EBIT. We're not giving an exact timing forward, but that shouldn't be too far away. In terms of the ambition for Finland, we have said that we anticipate to improve average margins in Finland over time. That is unchanged. That's still what we believe we'll be able to achieve. The Finnish market remains an attractive market, growth-wise, margin-wise, product mix-wise, and so forth. We are confident that we will get to that level, but obviously it will take some time.
Thank you. I also have a question on the sort of potential acquisitions that you're looking at. Are there any particular markets that you're looking at that you see are familiar to the ones that you're already in, or are you targeting very different markets? Say, is it more like Benelux countries, or is it more Eastern Europe?
We are looking at a number of alternatives. One has to bear in mind that there doesn't need to be an adjacent border to any other of our domestic markets, so to speak. The synergies of being part of the group is more related to the transfer of best practice. We are much more focused on the relative market position of these companies, the strength they have in the market, the product offering, the client positions, and the potential to improve through the transfer of best practice rather than a specific geography or a specific country. We are looking at a number. We have got nothing more specific to say at this stage.
Okay. Thank you.
The next question comes from Michael Lodahl from Carnegie. Michael, please go ahead.
Yes. Hi. A couple of questions from me. First, in Sweden or potentially in Denmark as well, where you hope to push your increased cost over in terms of price increases, how confident are you that you're able to do so? How price competitive are you and how confident are you in that?
You could say that this poor harvest or/and the effect of the warm summer is something that is well accepted by everybody in the market. Which also why we do anticipate that this will be possible to transfer this raw material inflation to the consumer, also in the two markets that you mentioned, because it is pretty obvious that there is a need to do so. Also, one has to keep in mind, as mentioned, that the feed conversion ratio of chickens is very good, so that the relative increase we here need is relatively lower to what you would expect over time for competing types of meat.
Yeah, sure. You don't really control the end market here, the consumers. Also given that there's probably going to be an oversupply of red meat in the market from local producers in the next couple of quarters. Also the fact that you're reducing inventory of frozen chicken, which implies that the price of frozen chickens for consumers are still rather low. I'm just curious on that equation, to be able to raise prices on chilled products while there is a price decrease on frozen and potentially on red meat as well as an alternative to chicken.
Yeah. In terms of the price developing on the red meat, there are some people talking about that additional cattle being slaughtered over the coming period. We're not sure that will have a significant impact and particularly not longer term have an impact. You're right in saying that there is still a frozen inventory to be clear, and that will have an impact on our performance in Sweden for a couple of quarters. Coming through that, we do anticipate that stock clearance will take place and will be short term in terms of impact on earnings. You're right in saying that there's always an uncertainty, whether our clients will accept the feed implication on what will be the cost for the birds going forward.
We will do as much as we can to ensure that there is an alignment between the level of price increase and the timing of the price increase. You're right in saying there could be some short-term phasing relating to that. We do anticipate that there is good acceptance of the need to adjust certain prices because of this drought.
Okay. Another thing, the outsourcing of the processing of specialty birds and the closure of the plant. What is the margin impact? Can you more quantify that? Also you say that it's expected from 2019, you take the charge now, what about the second half of 2018?
Well, that might be a small impact towards the end of the year, we haven't given any specific number for what will be the saving. There's a good return on this position. We are confident that we will see an improvement from the beginning of the year next year, there might even be a little bit of an upside towards the end of the year. That is clearly positive.
You can't quantify the margin impact?
No, we haven't done so. Of course, we have a number that we anticipate, we have not communicated that in the report, I can't really give it to you either.
Okay. Another margin impact then from the Ready-to-Eat plant in Denmark, and which will then be up and running now soon. Can you quantify that effect on your profitability?
Well, it is a significant capacity expansion. We are working on getting additional clients to sell these products that we now have capacity to serve. That we anticipate to develop over the next couple of years. We'll be filling this additional production line. It is soon going to be up and running. We do have talks to a number of clients to include sales. We haven't given any information about exactly when do we see these clients coming on board. It is clearly so that this Ready-to-Eat area is relatively more profitable compared to, let's say, the raw meat production we have in Denmark. We do anticipate that this one, over time, will have a positive impact to the margin and also will imply more stable margin development over time.
In terms of the profitability that one should expect for the Danish business, what we are giving input about historically is that one should expect over time to see EBIT margins in the level of 4%-5%. In this quarter, we are lower at 3.2% relating to the investment in the new concept that we are putting through at the moment.
Okay. Final question from me on the net financials. Could you perhaps strip out the different components here and give us some sort of guidance going forward? It's quite high and doesn't really add up if you just look at the interest rates that you are paying. Could you strip out the contingent liabilities, for instance, here?
Yeah. The effect of the adjustment relating to the contingent liabilities is SEK 11 million in this quarter. The effect of that going forward should rather be somewhere between SEK 3 million and SEK 4 million. That will take you back to the 3%-3.5% of net interest-bearing debt guidance that we have. If you adjust for those SEK 11 million.
Okay. You mean as of Q3, it should be around SEK 3 million-SEK 4 million, rather?
Yeah.
Okay. Thank you.
Okay. Thank you.
As a reminder, for any further questions, please press star one on your telephone keypad. We have no further questions. I'll hand the call back to Leif.
All right. Thank you, everybody. Thanks for all the good questions, and have a good day. Bye-bye.
This concludes today's call. Thank you all for dialing in, and we hope you enjoy the rest of your day.