Earnings Call: Q3 2019

Nov 6, 2019

Good morning, good afternoon, and welcome to the Scandi Standard Q3 Results Call. I would now like to hand over to Leif Bourghu Hansen to begin. Good morning, everybody. So our Q3 report, another quarter with solid development, 12% growth in net sales and 23% increase in EBIT. We saw a 13% increase in adjusted EBIT, and a strong operational cash flow and also a 16% return on equity. Going on to Page four, we have just some breakdown on our strong top line growth of 12%, 10% of which is underlying revenue growth, driven by strong demand for our ready to cook products with very solid growth. I'm to show you a little about that later. We have seen the new capacity in ready to eat is boosting sales. And we also have a positive impact from the price increases that we have implemented following the raw material increases earlier in the year. So those are the 10%. In addition to that, there is a consolidation of organized food, this specialty chicken operator we acquired partly in Denmark, and also there's a currency effect of 1%. So what are kind of the drivers behind this very strong organic growth? So if you clear on to Page five, we see an increased consumer focus on sustainability. This chart just shows the CO2 impact of different kinds of proteins, while chicken's impact is about oneten of beef, and is in fact similar to farm fish, and even some plant based alternatives. And these metrics are increasingly becoming important for consumers' choice. On to page six, just see one example of how we are trying to leverage this attention and fuel it even more. It's a campaign from Sweden where we're focusing on the CO2 impact of various choices. And when we need to do some analysis on this, it's clear that consumers would want to live more climate friendly, but it's also uncertain how could I actually do that. So that's why we are helping with facts on educating the consumer in making more climate friendly choices. And we see that have a positive spin on both on sales, but also on our brand preference. Going on to the next page, you see just examples of all the efforts we do within the ScandiWay, our sustainability workshop. And there is a lot of different KPIs in many of these different fields that we follow and are communicating internally and externally to an increased extent, really to develop and to deliver on our leading position within this field within the voltage base across Europe. Going back to the numbers on Page eight. So, another quarter with a strong product mix, 4% volume growth in the quarter, deliver $22,000,000 of the uplift in earnings, driven by Ready to Cook and also by Ready to Eat. We saw a strong contribution from improved product mix, driven mainly by an increased proportion of branded sales. You also see from this chart that the price increases have driven by raw material inflation have been matched by the price increases. Really coming back to this relationship that we are working with our clients that the raw material inflation are to a large degree cost through. We saw in this quarter some OpEx increases and also a bit of impact On Page nine, solid development in our most profitable product categories with 13% growth in chilled ready to cook, main drivers being volume, improved product mix, but also some price impact, as I just mentioned. 31% growth within Ready to Eat. We have increased capacity, and we also see that that capacity is largely being used. You've seen volume increases both within the braided and also within un braided categories. We see a lot of benefits coming through from a lot of innovation activities taking place within this product category. And that the less profitable segments, I. E. Frozen sales and export, reduced relative importance for the group also in this quarter. Going on to page 10, you just have some input on how we see the rates of eat category increasingly becoming an important part of what we do. The relative share of revenue have increased from 9% in 2015 to now about 20%. It's a segment that we see strong growth. People are really demanding more and more convenient products, and we see these as very attractive platforms for future revenue and profit delivery. Going on to Seniors channels, we see a strong growth in both retail and foodservice. Retail growth of 10%, a good mix between more off market and discounters driving that, but also a very impressive continued growth in our foodservice presence, where sales are up with 30% in this quarter, driven by quick service restaurants as an important category, but also with a lot of innovations and also that we have strengthened the organization in most of our markets to really try and capture increasingly the fact that people are eating more and more out and are more putting more attention to chicken. We see the less profitable export segment also on this chart reduced its relatively importance. Turning on to Page 12, here for Sweden, a continued significant improvement also in this quarter. Denmark delivering exceptional top line growth, but also with some growth pains that imply some margin delay as we talked about in the last quarter. Norway continues to deliver very strong performance also in this quarter. Ireland, stable underlying performance. And Finland coming in with an EBITDA margin of now 5.5, a clear increase from before. Sweden, on Page 13, strong earnings improvement, 11% revenue growth driven by retail as the main, but also driven by some price increases following the raw material inflation earlier in the year. Adjusted EBIT is up with $13,000,000 or 37 percent and partly driven by some fixed cost dilution coming from the growth. We do continue to have a positive market outlook for Sweden also in 2020. Going on to Denmark, exceptional growth, but also in the growth coming with some pain, 20% revenue growth. You see a continued positive development for the new brand, the Danish Family Farms. You see strong demand in foodservice, of course, Europe driving sales. And also that this additional capacity of evasive heat products, we are using that to a larger degree. The earnings potential of this new volume is still lacking. There is some ramp up costs that we are dealing with. And there are some measures that we are taking in Q4 that are likely to impact results adversely in that quarter. We see the situation to gradually improve or normalize in 2020 when it comes to profit. In terms of Norway, we see a continued very strong performance, 8% revenue growth, both coming from an increased volume and in particular to within the retail segment. Strong margins with a solid product portfolio that continue to deliver. We've seen high efficiency within operation. And we have had a quarter with some exceptional supply of X driving revenue. Just want to remind you that Q4 is the seasonally weak quarter. Norway is our most profitable geographical segment, coming from some very successful investment that we have carried out in Norway over a number of years, transferring best practice from other parts of the business. And we see a continued very solid work on strengthening the product offering with some good results coming through. Going on to Page 16 on Ireland. My quarter was so much for the margin improvement, 3% top line development, stable underlying earnings. That's been some positive evaluation of inventory, So the underlying EBIT is similar to that of last year's quarter. The investment in Ireland are largely completed with some cost efficiencies, some animal welfare and food safety improvements, and also some additional capacity. Here we just want to remind you that Q4 is normally a seasonally weak quarter in Pilsen. Going out to Finland. Some further improvement also in this quarter, 33% revenue growth, combination of better price realization and improved product mix. A 5.5% EBITDA margin, driven largely by improved production efficiency apart from the other factors I just mentioned. There's a strong focus on further improvements, both in terms of mix, in terms of product innovation. We also see further opportunities within improving operation yields and also further efficiency measures within operations. With that, I'd like to hand over to you, Julian. Thank you. So we come back to the income statement. As previously stated, we have a 12% revenue growth driven by all countries, and it's also in line with the year to date numbers. The EBITDA is growing by 6%. It was to an 8.2% margin. Also, this margin is to be also same as in line with the year to date numbers. As you please talk about, we do have a reduced depreciation driven by the fact that we have aligned the asset light across the different segments that was running for the 2018. We also see an increasing trend in the depreciation due to the fact that the CapEx is above the depreciation now. Overall, the adjusted EBIT is growing by 23% or 4.9% margin. If you have the financial items which are impacted by currency, that are going to be at about last year. The tax rate is at 21%, so in line with where we want to be, and this gives us an adjusted EPS increase of 13%. Looking at the financial position, we do have the Singapore quarter. The improved returns to the return on capital employed is now at 10.5%, and the return on equity is 16.1%. It's a it's a reminder. That the new business has been impacted by the IFRS 16 related to leasing by 08/2006. This is affecting these numbers in 02/2018. It's a reminder also the equity ratio is now at 28% of the previous 26. Moving on to page 20, looking at the working capital. There is reduction in working capital by about 100,000,000 in this quarter versus last year. That is mainly driven by payables. Overall, net working capital for sales is 5.6%. This is still at a very low level, and we expect to be in the area under 6%, 7% area. Moving on to Page 21, looking at the cash flow. As you've seen, we have the EBITDA improvement, which is driving this versus last quarter, working capital is increasing slightly, coming from a low level. At the same time, we also have a reduced capital expenditure, which is leading us to some improvement in the operating cash flow. We have the earn up payment for the Manu Pharma acquisition of EUR 133,000,000 in this quarter, obviously driving down the net cash flow. But overall, the net cash flow per share is at 0.74. Coming to the cash flow guidance, there is no change to the previous statements. The dividend policy is still to be 60% of net income over time. As a reminder, did pay SEK2 in the quarter two. Overall, the paid interest estimate is to be at 3% to 3.5% of the average net debt. As we talked, the blended tax rate should be about 20 to 21%. Looking at the capital expenditures, we estimate this year to land at $380,000,000 the Pacific. The main focus has been especially for policy in Ireland. For next year, we're still working on overall plan. We do also have our continued liabilities related to the Mannopharm acquisition. As we have stated, we did pay the first earn out tranche this year and this quarter, and we expect another one in 2020 and 2021. You can see more details in the appendix. Can I hand over Thank you, Julian? Trying to sum up Q3. It's the quarter with a continued very strong revenue growth of 12%. Year to date, it is 13 and improved results being up with 23%. We continue to see a very solid demand for our products, and that goes on in all our markets. The current growth rate is well above the high CAGR of 6% to 7%, all of that being organic. Part of the drivers behind that is we see an increasingly strong consumer response to sustainability metrics of why chicken is a very attractive alternative to other proteins. We continue to gain market share, driven by a lot of solid innovations in our different markets that are targeting how consumers want to live their lives going forward. And we also see continued strengthening on our brands as part of the driver behind these group results. We continue to have a positive market outlook. However, we just want to remind you that Q4 is seasonally a weak quarter for us due to Christmas. Revenue growth, we have seen, as mentioned, a very strong growth this year, exceptionally strong compared to the trend with 6% to 7% organic growth over time. For 2020, we do anticipate the growth to come down, the growth level to come down, driven by these exceptional group growth drivers that we have had in 2019. It's not going to give the impact in 2020. And there are some raw material prices that are coming down, but I also like to have some input some impact on the top line growth for 2020. We do continue to follow structural opportunities very closely in different areas. With that, we'd like to take any questions. Thank you. Thank you. Your first question today comes from Daniel Schmidt of Danske Bank. Daniel, please go ahead. Yes. Good morning, Leif and Julian. A couple of questions from me. And starting with what you ended commenting on the sustainability sort of marketing campaign that you're conducting and have been conducting in Sweden for a couple of months now. Is there any plans to roll that out given the response that you received to roll it out also in Norway and Denmark or some of the other countries? Yes, absolutely. Some of it we're already doing, but we're really being encouraged by the response. It clearly underlines that the climate impact of choices we do as consumers is really something that we tend to somewhat used to talk about, but not to act upon, we really see consumers increasingly acting upon these metrics. And where we had an important role in communicating facts on why chicken is a very attractive alternative to others. So we continue to roll that out and see an increasing impact of those activities. Okay. Good. And the flip side of that is, of course, the higher marketing spend that you also saw in Q3, and I think we saw in Q2 as well. Is that going to stay then elevated if you look into the coming quarters? Or do you see any sort of change to that? Or how should we view it? We would say that the current spend is something that we will anticipate to see going forward as well. The importance of getting consumers to eat more than to eat, the importance of getting consumers increasingly to choose our brands versus alternatives is important levers in terms of delivering improved results going forward. And that does require some investment in marketing. So we would anticipate to continue those efforts. Yes. Okay, good. And then and jumping on to what you said in terms of the Danish business, and of course, clearly, we see that the operating leverage hasn't been there given the growth that you've had now for a couple of quarters and sort of unchanged EBIT in Q3. And you're saying that they will you'll take some measures that it will have adverse effect on earnings in Q4 in Denmark. Do you want to or can you, in any way, shed some more light in terms of details? How much are we talking about? And what are you planning more exactly to do? You're right in saying that we have seen a very exceptional growth this year, a growth that has been clearly higher than what we had planned for. So we could have planned that better. And that have had a negative impact on our operations in Denmark, where we have had to hire in more people, run more over time, with some negative impact. And it's some of those negative impacts that we are dealing with. So we do anticipate that we will see an improved margin situation coming through next year. But we're just warning that Q4, there will be some measures taken to clear this situation going forward. And but you you don't wanna give us any numbers in terms of what this is gonna cost, so to speak? No. It is something that is still work in progress, and we haven't got the exact number for it. We are just communicating that we do see that we are confident that margins will pick up next year, but that we see Q4 being a quarter where there will be some expenses. So it's basically isolated to the sort of the ending of this year, and then you should see some positive Yes, effects from that in '20 exactly. Yes. And then thirdly, material costs coming down and implicitly that, of course, will have an impact on top line growth and you have difficult comps, of course, going into 2020 given the growth that you've seen in 2019. Just mechanically, if you would look at the raw material pricing, put cost that you have today, how much impact does that have on top line in terms of percentage, all else equal, going into 2020? It's still a work in progress that bit also. But I think that the best guidance we can give on revenue where we have had really exceptional growth this year was 12%, 13%, where there is a combination of some contingency orders we have had, the positive price inflation impact that are also clear. And we will see those things more, let's say, normalizing next year. So the best guidance we kind of can give here is to say we have seen a CAGR of 6% to 7% over five years, but we in this year have been clearly over. Next year, we will probably be more at that level and maybe somewhat under. Yeah, yeah. But still a continued growth. But there is a number of these activities that will sort of more normalize coming into next year. So in terms of the actual price effect, we don't know that as yet, but that is part of the reason why we have seen the strong growth this year and the lower growth for next year. Thank you, Leif. That was all for me. You're welcome. Alexander Barganelski from Nordea will be our next question. Alexander, please go ahead. Yes, thank you. I have a question regarding your Finnish division and sort of what your outlook looks like for that specific segment also coming into 2020. How do you sort of perceive the market demand and the development going forward? Yes, thank you. We've seen a market that continues to be with strong demand, continue with that quite significant revenue growth. We do anticipate that there is further growth to be achieved in Finland. And then we have also seen during basically quarter by quarter this year sort of a gradual improvement in performance. And we do anticipate further development into next year. It's a relatively small part of the entire business of the total group, so to speak, but we do see further opportunities for improvement in Finland, both in operation but also commercially. Okay. My next question relates more to your sort of M and A agenda. And now that you're saying that you're following the structural opportunities more closely, Are there any specific markets that you target more or or any particular divisions that you would like to look into more? And also, are you somewhat open to also other product categories? Yeah. They are we we are looking at a at a number of different fields. Generally, the space across Europe is that within the individual geographical markets, the industry is relatively consolidated. And so it can be a number of different markets. It's also down to that a lot of the synergies we talk about here is the transfer of best practice, not that we will transport chicken to our borders. So we are looking at a number of different markets, and there are a number of businesses, a lot of them family owned, that are, let's say, attracted by our listed position and the fact that a bit like what you see with the acquisition of Manapharm that the current owner can continue having some role in the group going forward, but still giving an uplift to performance by being part of a group, rather than being a strong number one or number two in the DPP market. So, the sum of it is that there are a number of markets, a number of candidates, But other than that, I cannot say any more. Fair enough. Thank you. Leif, your next question comes from Michael Loftel from Carnegie. Michael, please go ahead. Yes. Hi. Coming back to Denmark, I think or I would appreciate, I think, everyone a bit more on exactly the impact the negative impact in Q4 and more precise what you are planning to do? And perhaps related to that, also if you look at Denmark in the past three quarters now with very strong growth, what is I mean the mix in Denmark, one would have assumed that the mix would have been positive for your profitability with a lower share of revenues coming from the export business, for instance. So I think the explanations are a bit vague. If you could be a bit more specific on the margin so far and what you will do in Q4. And thirdly, also on the same topic, perhaps a bit more broader maybe, but the African swine flu, have you so far, do you expect to see any impact on either raw material prices coming down because of lower feed or input prices for the feed to the chickens? And or any impact on pricing power of poultry given that the price of pork of course, but other meat also will probably come up for consumers going forward? Yes. Thank you, Michael. Let me start with the last one and then come back to Denmark. If you you're right in pointing to some of the implication of the swine fever. One is that China has traditionally been importing a lot of grain and protein to feed their pigs. And of course, as these a lot of these pigs are put down, their import need is coming down, and that have an impact of the raw material part of the reason why the raw material cost is coming down globally of grain of protein. So that is an impact that we see as a reason why we are looking into cost of grain coming down. In terms of the relative price of pork versus chicken, that is an impact as well. But you will mainly see that the costs of pigs that are sold into China are, let's say, still a bit special. But all in all, positive impact we might see. But is, by far, the biggest driver is consumer increasingly making their choice based on climate implications and health implications of what they do. So people are going to chicken, are going to plant based alternatives rather than red meat for those reasons, less whether there is swine fever or not somewhere in some places in the world. So all in all, a positive effect, although there are other drivers that are more important. Suppose that's the way I'd like to sum that. In terms of Denmark, the performance this year revenue wise have been very, very exceptional. The profit level have been disappointing. I'm not going to hide that at all. The positive side of that, I suppose, is that we are now an increasingly geographically diversified group. So in spite of a disappointing market development during the course of this year, Denmark, the group has still been able to deliver, I would say, strong performance quarter on quarter. But coming back to the margins in Denmark, we will see margins coming up during next year. We are confident about that. I will also be clear in saying that that very exceptional revenue growth has come with some additional costs in terms of staff, in terms of more overtime, in terms of sort of less efficient way of operating. And a lot of these, let's say, inefficiencies and quick solutions, so to speak, to deal with this surprisingly high revenue growth and a revenue growth that we did not plan properly for, those adjustments we are taking during the second half of the year. And that's what we are warning for. You're asking for a specific number for Q4? Unfortunately, I'm not able to give you that. We just want to, let's say, guide you that Q4 is going to be negatively impacted by this. But it's all measures where we are confident that it will have positive margin implications for next year. And a follow-up on that. When you say a negative impact and when we speak about some sort of guidance here, are you talking about quarter on quarter or are you talking about year on year here? Because last year in Q4 was a very weak quarter for Denmark in terms of margins. I'm more comparing to where we are today in this quarter. And speaking, Q4 is, for the group, a relatively weaker quarter. People eat less chicken over Christmas. And we just want to make aware that we are facing some there will be some additional effects in Denmark in this quarter. Okay. And then just a follow-up on the swine fever. Do you I mean, export business in Denmark, given that prices of chicken in poultry products in China is up by some 40% according to some statistics now because of this. Shouldn't that impact your export business positively? And given the impact that the Birdsoo had on your Danish operations a couple of years back, I mean this should have obviously, should have some sort of positive effect that the export prices goes up, even on your products that you sell to China? I mean, first of all, the import from Europe into China of poultry product is very small. So that additional for a number of reasons. The one thing is that there's very few of the European countries that are approved to export into Mainland China. So a lot of this is coming from other places. And really, the part of the chicken that we sell out in Asia are mainly chicken feed and chicken wings. And although it is attractive price level versus what we achieve elsewhere, it is something that are these movements are not something that are really impacting us that much. So it's more that the relative importance of export is going down. And not so much the fact what's happening in Mainland China. Okay. One more on Ireland. Is it possible to I mean, where are you in the investment phase or rather perhaps the effects from the investments that you have done in terms of debottlenecking? Have we or when will we see the full effect from this? I mean the margins have grown nicely and but have we seen most of it already in this quarter or will it come more in the coming quarters? And finally, also in terms of CapEx going forward, given the solid growth that you're having in several markets now, when will there be any additional sort of above the normal maintenance CapEx need in any of the countries like Sweden, for instance? If you could give some guidance of that, I guess, we're talking about 2021 or something like that. Yes. In terms of Ireland, a couple of things. One is that what we are aware that this sort of positive margin uplift that we saw in this quarter is partly driven by this revaluation that we talked about. We have seen some of the effects, but we will more see some of those effects of the investments going forward. We have finalized some part of it. There are still some pieces left, but that is to be finalized as we speak, basically, so during the first part of Q4, where we will see the impact of this more into next year. So and in terms of CapEx altogether, as you are rightly pointing to, we are growing quite nicely. We see we continue to see positive market growth, do see opportunities gain further market share. And that will come with some CapEx requirements. We haven't sort of finalized our plans exactly on CapEx. But we do anticipate to be above this depreciation for some time to deal with these opportunities that we see in the market to allow consumers an increasing choice when it comes to their chicken to replace some of their previous choices when it comes to protein. Okay, thanks. Mike. And your next question comes from Alex Auchner of DNB. Alex, please go ahead. Yes. All of my questions have been answered. So thank you. Okay. You're welcome. Leif and Julia, that was the final questions. I'll hand back for any closing remarks. All right. Thank you, everybody. Thanks for very good questions. Thank you for your time, and have a great day. Ladies and gentlemen, that does conclude today's call. Thank you for joining, and enjoy the rest of your day.