Earnings Call: Q1 2018

May 3, 2018

Good morning, ladies and gentlemen. Welcome to the Scandi Standard Quarter one Results Call. My name is Nandaja, and I will be coordinating your call today. I will now hand over to your host, Mr. Leif Bergvill Hansen to begin. Mr. Hansen, please go ahead. Thank you, and good morning, everybody. I will initially give you the highlights of the Q1 report. We saw on a pro form a basis a 5% growth in revenues. We saw strong growth in Denmark, in Ireland and in Finland, a quarter with stable sales in Sweden and a moderate drop in revenue in Norway. On EBIT, we delivered a 7% growth in adjusted EBIT on a pro form a basis, so delivered by improvements in Norway, Ireland and in Finland. We delivered weaker margins in Sweden, stable in Denmark and also stable for the group, coming in with a pro form a EBIT margin of 3.8% versus 3.7% last year. The investment in Ara in our ready to eat plant is going according to plan. It was the quarter where our debt increased mainly driven by currency and a little bit by extraordinary high investments in this quarter, driven by this investment I just referred. We if we go on to Page four, we are bringing in a bit of new information in this report, a couple of new bridges and a couple of pie charts. And we're going to spend a little bit more time with what we intend to do going forward just to make sure that it is clear, the information we are trying to provide here. If you look at the first page on Page four, it gives a little flavor of how our margin performance, profit performance are being delivered. Sweden, still struggling with some price pressure. Denmark, impacted by large market investments. I'll come back to that. Norway delivered a quarter with best in class margins, but will reduce revenues, as mentioned. Ireland, strong improvement in a number of different areas. Finland, another significant step towards breakeven. And as we play all additional costs mainly driven by an upgraded sustainability effort and also more investment in the business. Looking at the second bridge on the Page four, you see what are the drivers between the margin improvement or the profit improvement volume as one component mainly delivered from Ireland and from Finland, positive mix development coming from a number of different areas, cost of goods sold going up slightly and the fixed costs, as mentioned before, are also up slightly in the quarter, but that's the breakdown. Going on to Page five. This is to give you a little bit of an explanation to a product and channel breakdown that we're going to look at the actual numbers on the following page. But if you look at our actual product offering, you can split it into a number of categories. One is ready to cook or raw chicken that can either be chilled or frozen, and that can obviously be sold in a number of different formats. Another category is ready to eat, where the product is cooked, and that we sell either frozen or chilled, and then there's another category. So that's the product, the group breakdown that we're going to give you some more information on, on the following page. Sales channel, I think that's pretty straightforward. Retail, food service, export, we define as what we sell outside of our five domestic markets and then some and yes, that's export. And ingredients, that's industrial sales and some pet food sales as well, other being in the main, day old chips and some hatching eggs. And if you then look at the actual numbers, that's the first that's the most interesting part. Looking at the top one on Page six, sales mix is changing towards higher value categories. We saw a strong growth in the chilled category growing 9%. Chilled, all in all, represented 56% of sales for the group. The less profitable frozen segment continued to decline in this quarter, going down with 11% and representing now 19% of group revenue. We saw a continued strong growth in the various e categories. You will recall that we have put a lot of effort into growing over a number of years. And in this quarter, we grew with 21% versus the same quarter last year. Going into the sales channels, the second pie on the same page. Retail increased to 4%. Food service clearly outperforming other channels with a growth of 20%. And ingredients with smaller bit, smaller volumes increased by 3%. Next quarter, a bit of decline. Then going into the market on Page seven, starting with Sweden. Sweden are still facing some challenging market conditions in this quarter. We have adjusted throughput to meet the sort of temporary challenges, some oversupply in the market from on the producer side, leading to an inventory overhang, and we have seen an adverse sales mix more skewed towards gross sales. The first two effects is becoming marginal. We report £6,000,000 of the impact in the quarter and anticipate that into Q2, there will be an impact of 1 to £3,000,000 per month. We see some encouraging signs of improving market, some growth now coming into the market after a number of quarters where we haven't seen that, and we also see some signs of better market balance. And with that, we will anticipate the market gradually to normalize during the second half of the year. In other words, Q2 will anticipate to be a bit more of the same. The adjusted EBIT margin in the quarter was 4.8% versus 5.4% in the same quarter last year. Going on to Page eight, talking about Denmark. It was a quarter with strong focus on differentiation and also on our capacity expansion project. We delivered a 9% revenue growth, driven both by retail sales, but also from this ready to eat category. Margins came in slightly below Q1 'seventeen at 3.5% versus 3.6% the same quarter last year. And then the main driver behind that was some significant market investments that's impacting our costs in the quarter. Investment in both marketing, but also in additional sales force to drive this premium concept that we call Danish Family Farms that we are now working hard to establish further in the market. Probably, call this is a concept with a slow growing breed. It's hatched at the barn, and it's a race completely and periodic trade. And we want to fuel that further, hence the additional costs that we are taking here initially. And the whole point of that is to decommoditize and drive profitability of the Danish business over time. And we anticipate this investment to impact margins in a similar way also in Q2, but will an impact positive impact in the medium term. We the investment in the ready to eat plant in Denmark of about SEK150 million is on time and is developing according to plan. And we will be in operation just after the summer break. Going on to Page nine, you can see some pictures of that expansion. As you can see, it's quite a big capacity expansion that we are underway, still underway. Going on to Page 10, talking about Norway. Another quarter with strong performance, limited underlying growth, but still a bit. So a 5% decline in revenue in local currency. If you break that down, retail sales were in line with market, but the rationalization of our foodservice range that we have talked about as part of our factory efficiency program is the driver that have taken revenue down in this quarter. Best in class margins continues. We improved margin from 7% to 7.2 driven by strong product portfolio and some successful efficiency investments that are paying off also in this quarter. Looking a little bit ahead, we see limited scope of growth in the within the existing contract structure, and we anticipate to develop in line with the market revenue wise going forward. Moving to 11, talking a bit about Ireland, a quarter with a strong performance and where the integration is developing according to plan. 10% revenue growth, driven by volume, but also driven by currency, about half and half. Strong margins, up to 4.3% in the quarter versus 3.8% in the same quarter last year, driven by improved yields. We've seen a number of cost improvements in a number of areas. And we're also seeing the first impact of some of the integration projects that we are working on with the ISG. We have been running a separate integration governance structure since the acquisition August. And we are now so far advanced in that process that we are swapping to sort of a normal structure so that Vincent Cotton, the Managing Director for the Irish business is now part of group management and the businesses is now really integrated into the group. Going on to Page 12, talking about Finland. Another quarter with significant steps towards breakeven, not quite there yet, but coming close. Strong growth in revenues, revenue up 50% in the quarter versus the same quarter last year, 17% growth versus Q4 of last year. And it was mainly driven by increased sales in the main segment in Benel with the chill recently with some positive mix effect. Margins coming in at minus 4.8% versus minus 18% in the same quarter last year. Still see a solid market growth also in the first quarter of the year. We achieved the first milestone of a positive EBITDA, small but still there, driven by better product mix and improved yields. And looking ahead, we obviously continue strong focus on improved product mix, yield and cost to get to the next milestone of a positive EBIT. With that, I would like to hand over to Danlos for the income statement. Thank you, Leif. So then flipping Page 13. As Leif already alluded to, we have stable margins in the quarter compared to last year. And then if we compare versus the two quarters, the reported numbers for the two quarters, most of the increases are related to Manor Farm. That is the case for depreciation and amortization. And also, the higher net financial items is a result of a higher net debt, again, related to the acquisition of ManoFarm. And also, we see a positive development in EPS growth as well driven by the Manapharm acquisition. Taxes in the quarter of SEK 11,000,000 is 20% of earnings before tax. Moving on then to the next page, Page 14. A couple of return measures there. A pretty similar story on both return on capital employed and return on equity. Marginal improvement Q1 'eighteen versus full year 'seventeen and fairly significant improvement Q1 'eighteen versus Q1 'seventeen. We also see a strengthening of equity to asset ratio, improving almost two percentage points. Flipping Page then to working capital, Page 15. You will see that there is an increase in working capital But if you look at the underlying working capital, it's largely stable as most of the increase in the working capital is related to currency. We've had working capital release in Sweden, Ireland and a fairly substantial one in Finland. We see some increases then, and they are driven by seasonal inventory decrease sorry, increase in Norway and also inventory increase related to the fire expansion in Denmark. And we still have too high inventories in Sweden, which need to and which will come down further into the 2018. Moving page again to Page 16 then, cash flow. Maybe just starting with the fact that we did have a positive operating cash flow, and that improved compared to last year. But as you can see, the net debt has increased by €53,000,000 And that is, again, primarily related to currency. There's a 41,000,000 reported on the other items that relates to currency retranslation. Moving forward to the next page, ten seventeen. A couple of outlooks with regards to some cash flow parameters. Dividend policy. Our policy is, as you know, to have 60% of net income over time. We expect, as we said before, capital expenditure for 2018 to be €350,000,000 And just with the caveat that we are looking into an investment program for Ireland, but the $350,000,000 is equivalent to 143% of depreciation. We expect paid interest to be in the range of 3% to 3.5% of net debt and the blended tax rate somewhere in range of 20 to 21%. And also not to forget, when it comes to cash flow, we have continued liabilities related to the Manor Farm acquisition, which is the three earn out tranches, which are payable in the beginning of 2019, 2020 and 2021. And with that, over back to you, Lev. Okay. Thank you. And going on to Page 18, give you a flavor of some of the group wide priorities that we are working on. A lot of effort is going into developing our already leading position within the premium segment. And an example of that is the Danish Family Farms concept that we are fueling as much as we feel makes sense. We see some further innovations and a lot of focus to further deliver higher penetration of the ready to eat category. Just to give you a flavor, that's products that are un breaded, cooked skewers, meatballs, sausages and so forth. We work on strengthening our position within foodservice. That's both within our domestic market by sharing best practice, but is also working very closely with some international quick service restaurant chains to develop our position there further. We have taken a number of measures to improve profitability in Sweden and also in Finland. The integration process in Ireland is developing well. We have a number of work streams that run-in parallel, and there are a number of learnings that go both ways. It is a very encouraging decision. The investment program will be announced in the second half of the year. We have included to that before. A lot of projects are still continuing to improve yield within the group, efficiency and some cost cutting projects as well within Oceana and within procurement as the two main examples. We established a dedicated ingredient division in the second half of last year, dedicated to expand the value creation within a number of site screens, and we already see the first positive impact of the efforts within that group of people. And last but not least, we are working on strengthening our sustainability focus even further. And if you're going on to the next page, you can just give you a little bit of the headlines of what we are working on there, defining the Scandi way, not the Scandinavian way, but the Scandi way to focus and to align the way we work to make a difference, promoting health and well-being for people, whether it's consumers or employees, for the chickens and for our planet. And further into this page, you can see our nine dedicated focus areas, but I'm not going to go further into that at this call. Going on to the last page, Page 20, summarizing the Q1 outlook. All in all, satisfactory quarter given the weak situation in Sweden. So solid performance in Norway and in Ireland. We are very encouraged by the strong sequential improvements that we experienced in Finland also continuing into this quarter. We see the effects from bird flu in Sweden becoming insignificant, but still with an impact into Q2 of one million to three million per month. The market investments in Denmark that I have referred to, expected to have an impact on the result also in Q2 of this year. We anticipate the market to become into more of a balanced situation in Sweden during the second half of the year. In other words, Q2, we anticipate to be more the same as what we have seen in Q1. We are following a number of structural opportunities within Europe very closely. And so all in all, we have a general positive outlook for the second half of the year. Okay. With that, we would like to answer any questions you may have. Thank you. Our first question comes from Michael Lomdahl from Carnegie. Michael, your line is open now. Yes. Hi, good morning. A couple of questions, if you could. Bestify perhaps in Denmark, we know about the investment and the cost that you are taking. But is it possible to be a bit more specific on these and how long they will sort of linger before having a positive effect? And if we saw any positive effect in Q1 on sales from these initiatives? Yes. Thank you, Oren. Yes, we are definitely seeing a positive sales development since we launched the concept in the summer of last year, increased penetration, a number of new products being received well. And that's also the reason why we have decided to fuel it further with some additional marketing investments and also with an increase in the retail sales force working on the presentation and the penetration within the market. We are not giving an actual number for the investment, but it has a drag on margins in Q1. We do anticipate a drag also in Q2, but then we will anticipate that these initiatives will at least starting paying for themselves, so to speak. So we anticipate this to have a positive impact in the second half of the year. But we will continue those activities. Anticipate that the sales and market development delivering from this concept was paying for will start paying for the actual investment in the second half of the year. Okay. And also, could you comment on how we should think about Easter being in Q1 this year and I think Q2 last year and the impact on your sales and margin? Yes. We haven't really gone into the Easter breakdown because it is a little bit of a mixed bag. It has a negative impact on revenues in Norway. It has a little bit of a positive impact in Sweden. And so we have actually and it's always very difficult to estimate the Easter impact. And as Easter is just in the end of the quarter, so we have actually said that it's probably on balance not having a huge impact for the group, but it does impact Norway negatively revenue wise in the quarter. Okay. And this investment program in Manor Farm, do you have any ballpark of how much we should expect from this? No. That's exactly what we're working on. And also, know, first of all, also to sign is that is what should be Phase one, what should be Phase two. So we are not in a position to give a number right now. Okay. And final question from me then. Regarding Finland, you are now obviously close to cash flow breakeven at least. But it seems that it's very much up to the top line. Is there anything more to do on the cost side? You are mentioning that you are implementing further measures, nothing specific. Is there more to do on the cost side? Or is it a pure revenue base from here? No, it is a number of different initiatives. And also, as we are now coming closer, it is that's not sort of one big thing we need to fix. There's a number of work streams on a number of different areas. We are we were actually cash flow positive also in the quarter, but we're still with a negative EBIT margin, as mentioned. We will still anticipate to see some growth. That will be one component. But we also clearly see an opportunity of some further mix improvements, more branded sales, relatively more retail and foodservice and less export and less industrial sales will also have will also be a component in getting into Black EBIT numbers in Finland. And the Finnish market as such, I mean, we saw HK Scon reported this morning as well, and they are ramping up production on the poultry side. Where do you see this market in the coming years? I guess you've had an opportunity now to gain market share because of perhaps a bit of capacity constraints among competitors. But how do you see this developing in the coming years? If you look back a number of years and look sort of on the average growth rate in the Finnish market five years back, it has been between 78% per year. So it has been a market with very solid annual growth. And if you just look at the first three months of the year, market in Finland were actually up 12% in spite of any capacity issues that might have been in the quarter. Still 12% volume growth is a very healthy growth rate. So and we do we probably don't anticipate 12% growth going forward, but high single digit, we would anticipate. One still have to keep in mind that Finland is the country within Europe that are eating the least amount of chicken per capita. So that is still a huge opportunity in Finland to drive the white meat transformation. And so we are not concerned about the growth prospects in the Finnish market. Okay, thank you. Welcome. Gentlemen, we have no more further questions on the line. All right. Thank you, everybody. Have a great