Good morning, everyone, and welcome to the Scandi Standard Interim Report for the first quarter 2020. My name is Seb, and I'll be the operator on your call today. You will have an opportunity to ask questions, and you can do so by pressing star one on your telephone keypad. I will now hand over to Leif Bergvall to begin the call. Please go ahead.
Good morning, everybody. Hope you had a good start to the day. Starting on page one, just to remind you of the Scandi Standard long track record of very stable results which continue into this quarter. If you go on to page three, on behalf of everybody in Scandi, I'm very happy to report that the stability continued into Q1 in spite of COVID-19. The quarter was a strong operating performance, 1% revenue growth, and 6% increase in adjusted EBIT. A solid operating cash flow and all in all, I'll say that the business is resilient to the COVID-19 effects, to which I will talk a bit more about further into the presentation. We report non-comparable items all together of SEK 42 million in this quarter. Going on to page four, you saw a stable top-line development in the quarter.
A growth of 1% as mentioned, we particularly growth in retail, helped by people are staying more at home and are shopping more in traditional retail outlets. All in all, in the quarter, we've seen a 3% growth in our retail sales, and food service have been negatively impacted. I'll talk a bit more about that. All in all, they even out each other when you look at the data in the quarter. We've seen strong growth in four out of our five countries. Denmark is negatively impacted by some short-term gap in listings and some COVID-19 effects. Going on to page five, the 6% growth in adjusted EBIT, driven mainly by a strong volume growth driven by Ready-to-cook sales.
We have had some price decreases to pass through lower feed prices, some smaller OPEX increases, mainly in marketing and some general cost inflation, and a small increase in depreciation. Going on to page six, looking at the product categories, we have seen a stable development in the chilled Ready -to -cook, impacted by the reduced prices I talked about before, and also that there's been this replacement of a retail client in Denmark that has given us a gap in February through to April, but that's now revised. Adjusting for that, we have had an underlying growth in chilled Ready -to -cook of 7% in this quarter. We have stable quality development in Ready- to -eat. However, we saw a 7% growth in the first two months of the quarter and a 14% drop in March due to COVID-19 effects.
Go on to page seven, trying to dive a little bit into the COVID-19 effects on retail and food service. Basically, sales-wise, these two channels cancel out each other. Two-thirds of sales of Scandi Standard normally goes through a retail channel, where we have seen a 7% increase in April. If you look at food service, it usually represent around 20% of sales, where we have seen around a 30% drop in sales in April. These two, as mentioned, take out each other. There's been some operational adjustments required within operation, basically to increase the throughput in production lines producing products for retail and a temporary shutdown of some lines and operating fewer hours that are producing Ready-to-eat products, basically targeting food service in the main.
We are reporting SEK 27 million of non-recurring costs relating to COVID-19 in the quarter. It's split down with SEK 9 million that relates to potential inventory write-downs, SEK 11 million provision for potential bad debt, and there's some additional operating costs in the quarter linked to these swaps between lines producing for retail and lines producing for food service, basically. In our trading update, we included SEK 8 million for plant closure costs in April. Those we have decided to take in Q2 rather than Q1. Going on to page eight, you will see a breakdown on a monthly basis between sales to retail and sales to food service, just to give a little more flavor about this swap as I talked about.
You see on the first graph how the retail sales have gone up, and you see on the graph to the right how food service sales have gone down. Just bearing in mind, that the March numbers is basically the COVID-19 effect from the second half of March, roughly speaking. Altogether, these two things take out each other, more or less. Just on page nine, we just want to remind you the way we focus on Ready-to-eat product areas in spite of the food service channel currently having some challenges. Here on, you can see how we have developed sales to be four times those now represent about 20% of the group total revenue.
We will continue to focus in here as we see in spite of any short-term lack of sales, we see a clear potential for the future to continue to focus there. I'm going to talk a little bit about each of the countries. On page 10, we talk about Sweden. Delivered with a quarter here with solid growth and improved margins. Net sales is up at 5%, driven by retail sales. We increased adjusted EBIT with 7% and that's basically down to good efficiency through the entire value chain. There's some limited COVID-19 effects, basically relating to higher sick leave and some bad debt provisions. Going on to Denmark. Denmark, we have a weak quarter. We have, however, received the new listings from May, and we are seeing progress in the duplication strategy going forward.
This gap in connection with the shift of retail client impacts us with February and March in this quarter and will impact us in April as well. We have achieved additional listings from 1st of May, as I talked about, which means that we will also anticipate that there will be this to sell on export markets where prices might be under pressure for the future. In Denmark, we post COVID-19 related non-recurring items of SEK 11 million, relating to production lines that have been closed down, and also some provisions for inventory and a little bit of bad debt. Going on to page 12, Norway. It's another quarter of strong growth and solid margins. A strong revenue development with 5% growth and 9% in local currency. We continue to deliver best-in-class margins in Norway with some limited COVID-19 effects. Going on to Ireland. Very strong quarter.
Strong growth and improved margins. 8% revenue growth, 6% in local. Basically a good operational performance across the business. Higher efficiencies, good yields. There's some COVID-19 non-recurring items of SEK 9 million. It would be provision for bad debts and also some provisions for write-down of inventory. On Finland, deliver a strong growth and good operational results, a 9% revenue growth, 16% in local and 4.9% EBITDA margin and limited COVID-19 effects. We have some investments on the way in Finland to debottleneck some of the capacity constraints that we have had previously. Going on to page 15. We have been going through a very thorough strategic review that we conducted in the latter part of last year, and that was concluded in this quarter. Basically focusing on trying to extract the best ideas across the entire organization and with some assistance from outside. Some benchmarks to two.
One is the future strategic direction, basically where to play, and the other question is how to operate or how to play. There's been a number of decisions following this study, and one of the decision is that we will form new segments with the idea to focus on sharing best practice within these areas, and refine the skill sets across the organization. We will be looking at Ready-to-cook as one segment. We'll be looking at Ready-to-eat as one segment, and we'll be looking at ingredients as one smaller segment. With that, I would like to hand over to you, Julia, for the income statement.
Thank you, Leif. As we turn to page 16, go back to the income statement. As you said a few times, a stable top line, 1% growth in the quarter. We have somewhat increased depreciation levels. This is driven by the fact that we have investment levels above depreciation now. As already mentioned, total non-recurring items of SEK 42 million, out of which SEK 27 is related to COVID-19 and SEK 16 million is related to this strategic review process that Leif was just talking about. We have net financial items of SEK 33 million. The increase since last year is mainly driven by currency. We also see a fairly low quarterly tax in this quarter. The tax is 15%. This is driven by a mix change between our countries. Overall, the EPS is lower than last year, obviously driven by these extra non-recurring items. That's SEK 0.51.
If you look at the adjusted EPS, it's at SEK 1.16, which is the increase versus last year. Moving to slide 17, the overall financial position. We continue to improve our returns. The return on capital equity employed is now at 10.8%, and the return on equity is at 14.6%. Overall, the equity ratio is at close to 29% now, versus previous 37%. Looking at our working capital, we see a continuous reduction in working capital, mainly driven by factoring and vendor financing as well. By now, the working capital to sales ratio is at 1.8%, so it's a fairly low level. If we exclude our financing items, our target level is to be around 7%. If I look at the working capital related to sales, adjusted financing and inventory were at 7.1% in the first quarter this year.
Last year, we were at 8.4%. There is still a reduction. Moving on to looking at the cash flow on page 19. As you said, we do see the debt dropping due to the COVID-19 effects and the non-recurring items that we have. Worth noting is that the non-cash provisions relating to bad debt and inventory is here listed under the change in working capital. We also have a significant, well, we have to release, as we said. At the same time, this is still impacted by fairly high capital expenditure in the quarter. Overall, the net cash flow is at SEK 1.02. Just looking at our overall cash position, we have a fairly strong balance sheet with good liquidity positions, and we have a fairly large headroom in terms towards our covenant.
These are uncertain times. We have taken some precautionary cash preservation measures in this quarter. As you already said in our statement, the dividend proposal has been withdrawn. That was worth approximately SEK 147 million. We have reduced our CapEx for the year from previously estimated SEK 420 million to targeting SEK 300 million. We have also renewed credit facilities of SEK 200 million, and we have seen from our lenders additional credit lines of SEK 200 million. In terms of overall guidance, the paid interest rate is still estimated to be at 3%-3.5% of average NIBD. The blended effective tax rate we still target to be around 20%-21%. We still have our contingent liability in the shape of the Manor Farm acquisition. As you know, there is an earn-out in three tranches.
The first one we paid last year, that was SEK 133 million. This year, we paid the second one, and next year, 2021, we'll pay the third and final one. With that, I would like to hand back to Leif.
Thank you. Going on to page 21, just to give you the framework of all the work streams we have within sustainability under the heading of The Scandi Way. In this quarter, we just want to focus a little bit to one of the very important components here is the importance of lowering the antibiotic use. The antibiotic resistance is considered to be a global threat. It's often referred to as the silent pandemic. I think the way we see it is that the COVID-19 outbreak just exposes the risk and the consequences of a global antibiotic resistant bacteria. Preventing antibiotic resistance is more important than ever. We have a lot of work streams to ensure that we stay at very, very low levels, reducing the use. We have a very systematic approach here, and we see the Nordic level as the benchmark.
It's the lowest level globally. We have a target of less than 1% of flocks treated. In 2019, we delivered 0.1%, which is, I suppose, as close as zero as you can get. There's really no industry statistics globally that are reliable. It is without a doubt, very high numbers, and we see in some cases up to 100% of flocks treated in a number of international markets. It's very important for us to keep this zero as our target, basically. Time to summing up this quarter. Overall stable business resilience with the COVID-19 effects. We deliver solid results in the quarter, and we have taken a number of contingency plans, just in case we see business disruptions going forward. We as a group have a solid balance sheet and a good liquidity situation. We continue to follow structural opportunities closely.
I will also refer to that even though that we have some uncertain times around us, that we have had a good start to the second quarter. With that, I would just like to take any questions. Thank you.
If you'd like to ask a question, please press star one on your telephone keypad. To remove your question, please press star two. Our first question comes from Daniel Schmidt from Danske Bank. Please go ahead.
Yes, good morning, Leif and Julia. First, a couple of questions from me then, starting with the current trading that you gave an update on when it came to April versus March and so on. We also had your statement at the beginning of April where you basically stated that foodservice was down 50%, 60% at the start of the month. On the other hand, retail being up 10%-15%. They seem to sort of halved in both directions, so to speak, at the same sort of rate for the full month. Looking into the rest of this quarter, do you see that they continue to cancel each other out, or do you see any trend change as of late?
We will anticipate that this will continue to cancel each other out. It is of course difficult to predict this as these sort of opening measures that's being taken, where restrictions are being opened, how quickly would they transform into people eating more out. It's very clear that people continue to eat a lot of chickens, whether they eat out or they eat at home. We feel confident now having a couple of months of dealing with this demand under these virus circumstances that it basically equals each other out. It might not do so on a weekly basis, but all in all, it equals each other out. That's our fair view.
Yeah. If you sort of stack that up against the bad debt provisions that you've done, do you feel sort of equally confident on that, compared to where you were a couple of weeks ago in that assessment, has that changed in any way?
No. We have seen so far very little of actually clients are basically going bust. It's also an area where there's a lot of packages from different governments that are trying to assist and help out and so forth. We just feel that there are a number of food service outlets out there that are having a very difficult time, and we just want to make sure that we cover ourselves, that we have sort of flagged that there might be some losses there.
Yeah.
For the future, and we haven't changed our view. We do anticipate that there will be some impact here, and we have taken some provisions that we do believe represent the risk well.
Okay, good. Secondly, sort of the strategic review that you have conducted, and you gave us a slide on that. Is that one of the reasons it sounds like that you're a little bit more forward-leaning when it comes to consolidation, being a bigger part of that strategy? Is it the situation in the market in general when it comes to the crisis that is accelerating that thinking? Could you shed some more light on that?
On the acquisition opportunities?
Yeah.
Yeah.
It sounds like it has to do with your strategic review.
Yeah. No, of course, doing a strategic review, we obviously wanted to make sure that we addressed our capacity and our structure in terms of once we would be able to or be successful in an improved matter. That has been part of the reason, but I wouldn't say it's been the main reason for the strategic study in any way. It was mainly looking at the existing business, looking at the strategies we currently have, the focus areas we currently have, and basically with a lot of inputs from a big group within the organization, looking at how can we refocus, how can we adjust things currently to continue to grow in a profitable manner, other ways by which we can increase our margins going forward.
That has been a very interesting process, bringing a lot of people together across the group, sharing ideas and best practice, and we are taking a number of steps to ensure that we will get those benefits delivered in spite of a lot of focus, of course, being directed to the virus outbreak.
Yeah. On that subject, and especially the Danish market, which has been trailing the group average last year, and you took some measures when it came to debottlenecking and so on. Of course, nobody had any idea that COVID-19 would show up at the start of this year. Looking into sort of the full year 2020, do you still believe it's reasonable to get Denmark back closer to the average for the group as we get to the end of this year?
That's certainly our idea. I would say that if you look at the proportion or the breakdown of the Danish business, we have a lot more food service, as you are aware of.
Yeah.
Food service sales. Of course, the longer this food service market being under pressure, the more challenging that will be. I'm happy to say, when you look at it from a group perspective, these things take out each other. We also do see a gradual returning to more normal patterns. All our five domestic markets have entered into a path now of reopening gradually and a number of steps. I'm sure there's a lot of consumers out there who are very eager, once it's possible, once it feels safe, to go out and eat more out, spend more time out, so to speak. We do certainly anticipate that food service sales will pick up relatively quickly in line.
Yeah.
With these restrictions being lifted.
All right. Just a final from me, which was abandoned in connection with the Q4 report. If you look at the bird flu outbreak in Eastern Europe and now also Germany, is that causing any concerns, or what's your view on that? How are you looking at that, basically?
It seems that it is relatively stable. We are doing, of course, a lot of measures to ensure it doesn't get into our supply chain, and we feel that we are well-positioned to prevent that from happening. We don't see any larger risk relating to this.
All right. Thank you, [Leif].
Thank you. You're welcome.
Our next question comes from [Mikael Löfdah l] from Carnegie. Please go ahead.
Yes. Hi, good morning. Regarding your costs that you took in Q1 and also looking at what you did not take in Q1, I assume it was roughly SEK 8 million that you had guided for, which now, I guess, have been then postponed and are related to what you anticipated for April, which now has come in April. First, could you say something about SEK 8 million? Is that a good proxy for how much the COVID-19 situation for you is costing, given what you have seen in April anyway, in terms of demand and the shift from food service to retail?
Yeah, you're right. I think SEK 8 million is a good proxy for how April ended up. It is, of course, difficult to predict exactly how these things develop. So far, I think we have managed this very well. We have seen a lot of stability in the business in spite of a lot of instability out there, so to speak. I'm very happy of how we have managed this so far, but I'm also sufficiently prudent to be careful of ruling out that there could be any sort of disruption going forward. I would be surprised. I'll be very surprised, but we are obviously doing a lot to prevent, to secure a continuous stable development. We just want to be careful just to rule out that things might deteriorate. It is a new situation for all of us.
I think these eight weeks, we have learned a lot, and we have got into a mode where a lot of efficient processes have come into play on how to mitigate potential risks through the entire value chain.
If we just play with that number, SEK 8 million, then that is for the closing down, basically, of the Ready-to-eat plant in Denmark and the cost for that, I guess. Have you also, in that number, is there anything for the extra cost for adding hours to where you have capacity restraint in terms of the retail channel and the production lines related to that? Is that included as well, or?
This is mainly relating to the Farre factory, the food processing. That's also where we have seen the majority of the cost. The sort of additional cost we particularly saw in the beginning of the outbreak, where there was a lot of hamstering going on. We have seen a bit more, I would say, return to normal, so to speak, about a bit more, let's say, stable development within our retail sales. A lot of overtime that we had initially have been lower as we've been going more into the process. I'll also say, if you look at the Farre plant altogether, we've got four production lines there. One were closed down very quickly. We were closed for two weeks. We are gradually seeing the lines being put more back into operation.
We will currently be operating on something like 60%-70% of normal capacity. Things are, let's say, gradually normalizing. It is just very difficult to say how quickly that will happen.
If we, or I don't know what you are sort of planning for when you're looking also at you reduce your CapEx outlook for this year. If we assume that food service will be down by, let's say, 10% for the remaining of the year on a year-on-year basis, whereas you see some increase in the retail side, that shift is, call it permanent for at least another year, as we could may as well move into new lockdowns and so on. Would that require you to do anything more significant in terms of more permanently shut down certain areas, or is there an increased CapEx need in other areas to meet the demand from the retail side? Do you feel confident that you can handle a more long, sort of prolonged situation with this shift in demand?
I think if you There can be many scenarios, but if you are, let's say, thinking that let's say food service will from now on be at a 10% reduce the demand, and it will be replaced by retail. That will be a sufficient small shift, but that wouldn't have a significant impact, negative impact on performance going forward. There wouldn't be any additional CapEx relating to that. We would also anticipate that food service will come back within that timeframe. As you rightly say, there might be a second wave and what have you. All in all, we have seen these costs primarily be linked to periods where we really saw, we had also, as we made in the trading update, we had a couple of weeks there where food service was down 50%, 60%.
Of course, that is a very different situation than if food service were to be down 10%.
Yeah.
We saw a couple of weeks there where retail was up 30%, 40%, but we had some very challenging days there. That's also normalized, if we can say normalized now. We have got a much more stable flow, still with some uncertainties, but a much more stable situation than what we had.
Regarding the food service and the provision of inventory that you took in Q1, has that played out as you have assumed so far? Maybe that's not completed, but I guess you made provisions related to what you thought you could sell in other channels, and at what price. Has that played out as you thought? I guess now, as you have reduced production already in April, the level of inventory to the food service line is not a problem anymore or?
No, inventory for the food service market is not really a big issue anymore. I think we have dealt with that very well. There might be some losses on inventory. We've taken provisions for it. Well, there will be a bit more. It's a bit hard to say. If you look at sort of across Europe, there is pressure on prices by a number of producers, particularly producers who are much more linked to food service and particularly with kind of raw products or Ready-to-eat or Ready-to-cook products. There is some surplus and pressure on prices in Europe. If we were to want to do or have to do a lot of, let's say, commodity exports, the current situation will be pretty low prices. We have been, I think, the provisions we have taken in Q1 reflect well, this is the way we view the situation.
We of course cannot rule out that there will be a bit more to come. The big risk in the food service industry has been dealt with well.
Okay. Sorry for so many questions. I have two more actually. First, on the raw material price, is that as you have guided for before as we enter 2020, that there will be less room for price increases on your side because of lower raw material costs? I guess that's something that you still expect compared to 2019 at least, yeah.
Yeah. It basically relates to price adjustments that we did.
Yeah.
In the latter part of last year. Correct.
Yeah. Okay. Final question, just on the countries, I know that you will report other segments going forward, but in terms of Norway and Ireland, if you look at those two countries this quarter, I mean, Norway, yes, they are at very good margins, but the margin declined quite significantly year-on-year and also a bit quarter-on-quarter, whereas Ireland was very strong. There's nothing really explaining that, at least not in the report itself. Is there anything to do with mix? How come that you saw that development in Norway and Ireland?
I'll say in Norway, it is just normal fluctuations. Nothing significant to report on that. It is very stable, very solid performance, relatively limited COVID-19's effects. Ireland, as you said, a very strong quarter, a bit higher revenue than what we had anticipated all in all. Probably also, when you look at the Irish business, there's not so much food service in that business, mainly a retail business. Not so much Ready-to-eat, it's more Ready-to-cook. A very, very, very solid result.
In Norway, was there any mix in that number? Because sales was very strong in Norway as well, but still the margin declined.
Yeah, there was nothing sort of significant. Some improved product mix, a bit more branded sales, but it's relatively small moves. That's also why we haven't lifted out any explanation, because there isn't really any one, so to speak. It is more down to normal fluctuations, but on a very stable.
I guess there's no FX effect here. It's a quite closed market, so what you buy and what you sell stays in Norway. There's only translation.
Yeah.
In the reporting, yeah.
Yes.
Okay.
Yeah.
Okay. Thank you.
Thank you, Welcome.
For any further questions, it's star one on your telephone keypad. We have no further questions. Sorry, we had a follow-up from Daniel Schmidt at Danske Bank. Please go ahead, Daniel.
Yes. Hello, Leif. Daniel Schmidt from Danske again. Just on Ireland, would you say that, just coming back to the margin improvement, would you say that you had some tailwind when it comes to raw material compared to what you don't really get in the Nordics?
No, I wouldn't say that is the main driver. No. This is more relating to operational efficiency. A number of the initiatives that we are taking there to improve efficiency, we see them paying off, and then some operational leverage from the top line growth. Those are the two main ones.
Right. This is a second question on the last writing in your wording on page two in the report. If I can understand, I will reconsider the current cash preservation measures. You end up by saying if nothing materially adversely changes in the coming months, is that foremost relating to CapEx and maybe not so much the dividend?
We are prudent in a way that we do believe that things have, touch wood, we have handled this very well. We have taken a number of initiatives on CapEx, on available lines. Basically just if things, for whatever reason, really worsen, then we don't want to be taken by surprise, so to speak. We want to make sure that we have prepared ourselves, even for a scenario that might be difficult for us to predict at this stage. That's the reason why we have been so cautious in spite of looking at the numbers. It doesn't seem that that was basically justified. Still, the board decided not to do any dividend, to postpone the decision. We will be, once we know more about how things develop, we will look at this again. We have taken CapEx down from a bit more than SEK 400 to SEK 300.
It is attractive projects that we have decided to push a little bit ahead of us. Still SEK 300 is a high number. It's higher than depreciation. It's not like we are putting the development and the improvement business on hold in any way. We just want to review the situation on an ongoing basis.
All right. Thank you.
You're welcome. Have a great day, everybody, if there's no more questions.
We have no further questions on the call.
All right. Thank you. Thanks for your time.
Okay. Thank you.