Earnings Call: Q2 2018

Aug 22, 2018

Good morning all, and welcome to Scandi Standard Second Quarter twenty eighteen Results Call. My name is Seb, and I'll be coordinating your call today. I'm now going to hand over to Leif Bergwel Hansen to begin. Good morning, everybody, and welcome to our quarterly presentation. If you look at Page one, I just want to sort of focus on Viluve 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. And if you include the Mana Farm, the growth over the period has been close to 16%, so relatively stable. In terms of the exact quarter, we will 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, another one I suppose, with 10% growth and with 5% in local currency. And it was all by geographies that contributed to this growth. EBIT were largely unchanged from the same quarter last year, coming in at CHF 90,000,000. We saw improvements coming through in Norway, in Ireland and in Finland. And 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 €100,000,000 driven by three factors in the main. One was the dividend payment of 118,000,000 unusually high CapEx, as we have talked about, euros 138,000,000 and a €72,000,000 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. Volume strong volume increase across the group. In terms of pricemix, 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 have been a system of raw material cost increases, mainly on packaging and so forth, and that has been offset by efficiencies in operations. As mentioned, some cost increases, we 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 or cost in Energy 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 you a little bit of a flavor by product categories and sales channels across the group. You see the sales mix changes to higher value categories, both good growth in chilled, driven by volume and also by higher value preferred, 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. And we have seen yet another quarter with very strong demand and successful development within the Ready to Eat category, And that has also been supported in addition to successful launches also by investments we have done over the last couple of years in Sweden and Norway. And 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 to 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. Will be from the press of general, we'll talking more about these group breakdowns. Going on to Page six about Sweden. It was a quarter where we are delighted to see a market a clear market recovery but also a profit improvement sorry, 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 chill part of the retail market with 11%. We have seen a soft build during the period where demand has been low in Sweden. And that inventory, we have sold part of during this quarter at low prices, and that is impacting margin negatively. There's still some growth in 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 and that deliver a nonrecurring item in this quarter of twenty three million euros that is related to the plant closure. And we do anticipate to see positive margin effects of this initiative from 2019. Also positive to see that all trade restrictions linked to the first flu incident has now been lifted. We saw a quarterly impact of 6,000,000 and we do not expect any further financial impact or any significance in this 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, and that was delivered in the main by growth in retail and also in the ready to eat segment. And that was the same picture as what we saw in Q1. Through the quarter, we reduced margins coming from investment in supporting this new launch, both sales and marketing costs relating to that, and 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 have we are about to finish this investment in expanding capacity of our ready to eat manufacturing in Denmark. And from that, there was €67,000,000 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. But we also want to remind everybody that Q2 is usually the strongest quarter in Norway. It's the most profitable geographical 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. And we've also seen clear strengthening of our product offering in Norway as part of the positive market development. And 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 plans, We saw a percent revenue growth, 9% in local currency, combination of a strong domestic market and also that we have strengthened our position within the Irish market. Sea margin improvements coming through this quarter, driven by two main factors. One is increased price realized preferred 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 based 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's 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 could have around 6% in this quarter. Another clear step towards breakeven, 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 a continued strong focus on improved product mix and yield and also the cost of the Danish operation. And we do expect a gradual margin improvement to continue for the Danish operation. And for the income statement, I'd like to hand over to Thomas. Thank you, Lev. Well, here we are looking at the reported numbers and comparing Q2 versus last year, obviously, lot of the numbers are affected by the Manor Farm acquisition. That is also the case for depreciation and amortization. We also have a nonrecurring item of €23,000,000 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 continued liabilities for the Manapharma acquisition. And also last year, we had a positive currency effect in the quarter. Looking at tax, the difference between last year's again relating more to Q2 last year where we had a revaluation of tax in Finland. Adjusted EPS growth driven by Manapharm acquisition. Flipping page then 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, 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 €72,000,000 in cash flow, and that is pretty much coming from all countries. Having said that, we still have too high inventory in Sweden, so 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 this year, 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. And Ireland has a different Ireland has a higher working capital intensity. Okay. Moving on to next page, then Page 14, where we see the development in cash flow and in net debt. Leif mentioned already, net debt has increased by €100,000,000 and that is in the quarter where we have had the working capital release then, but then quite heavy CapEx, 138,000,000, which is two fifty plus percentage of percent of depreciation. And we also paid a dividend of €118,000,000 in the quarter. Then, flipping to Page 15, cash flow guidance, no change versus what we said last time. Dividend policy is still 60% of net income over time. The cash flow estimates, we still expect the CapEx to come in on €50,000,000 for the full year. So having done $228,000,000 year to date, we would expect second half to be somewhere around 120,000,125 million euros Paid interest, one should expect to be around 3% to 3.5% of average net interest bearing debt, and the effective tax rate should be somewhere between 2021%. Again, we're just reminding you about the continuing liabilities relating to the Manapharma acquisitions with the three earn out tranches, which are payable in 2019, 2020 and 2021. And then more details for that in the appendix. So with that, back to you, Leith. Thank you. Just to turn the next page, just to remind you on our sustainability template, a lot of initiatives that take place across the group, structured in the way you see here. And I will just draw your attention to one important area, which is a strong focus on improving the fee conversion, In other words, that the birds eat relatively less feed. And we can just see over the last twelve months, we have improved that with 0.01, that ratio. And that alone had an impact that is basically used 100 truckloads less feed to produce the same amount of meat, which kind of just underlines the importance of such working on such a parameter. Going on to Page 17 for the summary and outlook for this quarter. So far, we had a very strong performance both in Nordic and also in Ireland. We saw a situation where both quarters both segments demonstrate the combination of a strong market position and also improved processing efficiency in a number of areas. So improvements continuing in Finland across a number of areas, and we are confident that we will continue as that light 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. But we are confident in the medium term reinstatement of the historical margins in the Swedish market. The bank initiative in Denmark has received well to transfer the Danish business to a bit more differentiation compared to the commodity stock taking strike now have. And 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, and 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, but also some lower CapEx. And not least, based on the fact that we have seen a very successful development in the ARES acquisition, we are continuing to follow some profitable opportunities across Europe closely. With that, we'd like to take any final questions. Thank you. And today's first question comes from Toner Hatad from DNB Markets. Toner, please go ahead. Yes. I have a couple of questions. First, you're saying that the Swedish market is impacted by the clearance and that there are still large processing inventories to be clear in the second half of the year. And could you give some more comments on how this will impact your results and cash flow in the third and the fourth quarter? That's the first question. And 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. So the line was absolutely clear, but I think if I'm really correct, the first question relates to the stock clearance situation in Sweden. And 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, and that has led to a build of frozen inventory. And we have now started as market is coming back to sell this excess frozen inventory. That have given us a loss in Q2, and we anticipate that, that will also have an impact in the coming couple of quarters. But then we should have cleared that stock in. And that will have, of course, have a positive working capital component to release the 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, but 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 a lot 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 Alexandra Verginofsky from Nordea. Alexandra, please go ahead. Yes. Hello. I have a question on your Finnish and the Irish regions. Just if you look a little bit more long term, what sort of margins can we expect from those two regions, particularly perhaps from Finland to Switzerland sort of on the journey to become profitable there, but also in Ireland since you're expecting some improvement in that region? Thank you. Yes. 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. And we do see a number of further initiatives that will improve margins in Ireland, but we have not given any sort of specific guidance in terms of what we see as future market levels at half. But when you look over time, around a 6% EBIT is an area that has been sort of achievable in an Irish context. So we see a lot of solid initiatives taking place in Ireland, and 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 flat EBIT. And we are not giving an exact timing for it, but that shouldn't be too far away. In terms of the ambition for Finland, we have said that we anticipate to deliver improved average margins in Finland over time, and that has 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. So 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, you know, very different markets? Say, is it more like Benelux countries, or is it more Eastern Europe? Well, 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 domestic market, so to speak. The synergies of being part of the group is more related to the transfer of best practice. So 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 science of our best practice rather than a specific geography or specific country. So we are looking at a number. We've got nothing sort of more specific to say at this stage. Okay. Thank you. The next question comes from Michael Lodow 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 are able to do so? How price competitive are you and what is yes, how confident are you in that? You could say that this poor harvest or the effect of the once a month is something that is well accepted by everybody in the market. And 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 we it is pretty obvious that there is a need to do so. And also, one has to keep in mind, as mentioned, that the feed conversion ratio of chickens is very, very good. So that the relatively increase we hear meat is relatively lower to what you will expect over time for competing meat types of meat. Yes, sure. But you don't really control the end market here, consumers. And 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 and also the fact that you are reducing inventory of frozen chicken, which implies that the price of frozen chickens for consumers are still rather low. So 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. Yes. That's in terms of the price developing on the red meat, I mean, are some people talking about that additional cattle being slaughtered over the coming period. I'm not sure that will have a significant impact on particularly not longer term have an impact. You're right in saying that there is still a growth in inventory to be clear, and that will have an impact on our performance in Sweden for a couple of quarters. But coming through that, we do anticipate that, that stock clearance is will take place and will be short term in terms of impact on earnings. You're right in saying that, that is there's always an uncertainty, Well, our clients will accept the fee implication on what will be the cost of the birds going forward. But we will do as much as we can to ensure that, that is an alignment between the level of price increase and the timing of the price increase. But you're right in saying that there could be some short term phasing relating to that. But we do anticipate that there is good acceptance of the need to adjust selling prices because of this drought. Okay. Another thing then, the outsourcing of the processing of specialty birds and the closure of the plant. What is the margin impact? Can you more quantify that? And also, you said that it's expected from 2019, but you take the charge now. So what about the 2018? Well, that might be a small impact towards the end of the year. But we haven't given any specific number for what will be the savings, but this is there's a good return on this decision. So we would we and we do we are confident that we will see an improvement from the beginning of the year next year, and there might even be a little bit of an upside towards the end of the year. But that is clearly positive. But you can't quantify the margin impact? No, we haven't done so. Of course, we have a number that we anticipate, but we have not communicated that in the report. So I can't really give it here either. Okay. And 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. And it's we are working on getting additional clients to sell these products that we now have capacity to serve. And that we anticipate to develop over the next couple of years. So we'll be filling this additional production line. It's assumed that it be up and run. We do have talks to a number of clients to improve sales, But we haven't been giving any information about exactly when do we see these clients coming on board. But it is clearly so that this very sweet area is relatively more profitable compared to, let's say, the raw meat production we have in Denmark. So we do anticipate that this will, over time, will have a positive impact to the margin and also have will imply more stable margin development over time. In terms of the profitability that one should expect for the Danish business, what we are sort of giving sort of input about historically is one should sort of expect over time to see EBIT margins in the level of 4% to 5%. In this quarter, we are lower at 3.2% relating to these investments in the new concept that we are putting through at the moment. Okay. And 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? I mean it's quite high and doesn't really add up if you just look at the interest rates that you are paying. So could you strip out the contingent liabilities, for instance, here? Yes. The effect of the adjustments related to the contingent liabilities is EUR 11,000,000 in this quarter. The effect of that going forward should rather be somewhere between 3,000,000 and €4,000,000 That will take you back to the 3% to 3.5% of net interest bearing debt guidance that we have. So if you adjust for those EUR 11,000,000. Okay. So you mean as of Q3, it should be around EUR 3,000,000 to 4,000,000 rather? Yes. Okay. Thank you. So we have no further questions. I'll hand the call back to Leif. All right. Thank you, everybody. Thanks for all the good questions, have a good day. This concludes today's call. Thank you all for dialing in, and we hope you enjoy the rest of your