Earnings Call: Q1 2020

May 12, 2020

Good morning, everyone, and welcome to the Scandi Standard interim report for the first quarter twenty twenty. My name is Seb, and I'll be the operator on your call today. I will now hand over to Lief Burgweil 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 standard long track record of very stable results, which continue into this quarter. So if you go on to Page three, on behalf of everybody in Scandinavia, I'm very happy to report that the stability continued into Q1 in spite of COVID-nineteen. The quarter with a strong operating performance, a 1% revenue growth and 6% increase in adjusted EBIT. Solid operating cash flow. And all in all, I'll say that the business is resilient to the COVID-nineteen effects, to which I will talk a bit more about further into the presentation. We reported noncomparable items altogether of SEK 42,000,000 in this quarter. Going on to Page four. We saw a stable top line development in the quarter, a growth of 1%, as mentioned, particularly growth in retail, helped by people staying more at home and are shopping more in traditional retail outlets. And all in all, in the quarter, we've seen a 3% growth in our retail sales, and foodservice have been negatively impacted. I'll talk a bit more about that. But all in all, they even out here, which I'll look at the data in the quarter. We've seen strong growth in four out of our five countries. Denmark has negatively impacted some short term gap in listings and some COVID-nineteen effects. Going on to Page five, the 6% growth in adjusted EBIT, driven mainly by strong volume growth, driven by rate 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 has been this replacement of a retail client in Denmark that has given us a gap in February through April, but that's now revised. So adjusting for that, we would have we have had an underlying growth in children 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-nineteen effects. Go on to Page seven and trying to dive a little bit into the COVID-nineteen effects on Retail and Foodservice. Basically, sales wise, these two channels that cancel out each other, twothree of sales of Scanner Standard normally goes through a retail channel and where we have seen a 7% increase in April. If you look at foodservice, it usually represent around 20% of sales and where we have seen around a 30% drop in sales in April. And these two, as mentioned, take after each other. There's been some operational adjustments required in 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 product ready to eat products, basically targeting food service in Maine. We are reporting €27,000,000 of nonrecurring costs relating to COVID-nineteen in the quarter, and it's split down with €9,000,000 that relates to potential inventory write downs, dollars 11,000,000 provision for potential bad debt. And there is 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 EUR 8,000,000 for plant closure costs in April. And 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 foodservice, 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 foodservice sales have gone down. And just bearing in mind that the March numbers is basically the COVID effect is basically from the March, roughly speaking. So 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 the way to eat product areas in spite of the foodservice channel currently having some challenges. And here on, you can see how we have developed sales within 4x. Those now represent about 20% of the group total revenue. And we will continue to focus in here as we see in spite of any short term lag of sales, we see a clear potential for the future to continue to focus there. So I'm going to talk a little bit about the countries. On Page 10, we talk about Sweden. Delivery was a quarter here with solid growth and improved margins. Net sales is up 5%, driven by retail sales. We increased EBIT adjusted EBIT was 7%, and that's basically down to a good efficiency through the entire value chain. There's some limited COVID-nineteen 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 have seen progress in the depreciation strategy going forward. But this gap in connection with the shift of retail client impact us with February and March in this quarter and will impact us in April as well. We have achieved additional listings from May as I talked from one of May, as I talked about, which means that we will also anticipate that there will be desk to sell on export markets where prices might be under pressure for the future. On in Denmark, we post COVID-nineteen related nonrecurring items of EUR 11,000,000 relating to production lines that have been closed down and also some provisions for inventory and a little bit about that. Going on to Page 12. Norway, another quarter of strong growth and solid margins. Strong revenue development with 5% growth, 9% in local currency, and we continue to deliver best in class margins in Norway with some limited COVID-nineteen 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-nineteen nonrecurring items of EUR 9,000,000 with provisions for bad debt and also some provisions for write down of inventory. On Finland, we delivered strong growth and good operational results, 9% revenue growth, 16% in local and 4.9% EBITDA margin and limited COVID-nineteen effect. And we are some we have some investments underway 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 benches. So 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 a new segment with the idea to focus on sharing best practice within these areas and refine the skill sets across the organization. So we will be looking at ready to cook as one segment. We will be looking at ready to eat as one segment, looking at ingredients as one smaller segment. With that, I would like to hand over to you, Julia, for the income statement. Thank you, Leith. So we turn to Page 16. I'll go back to the income statement. As we said now 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 $42,000,000 out of which $27,000,000 is related to COVID-nineteen and $16,000,000 is related to the strategic review process that Leif was just talking about. We have net financial items of 33,000,000. 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 nonrecurring items, that's NOK 0.51. But if you look at the adjusted EPS, it's at NOK 1.16, which is still increasing versus last year. Moving to Slide 17. The overall financial position, we continue to improve our returns. The return on capital equity employees is now at 10.8%, and the return on equity is at 14.6%. And overall, the equity ratio is close to 29% now versus previous 27%. Looking at our working capital, we see a continuous reduction in working capital, mainly driven by factoring and vendor financing overall. So 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, we our target level is to be around 7%. And if I look at the adjusted looking capital related to save adjusted financing on the Giroir at 7.1% in the first quarter of this year. Last year, we were at 8.4%. So there is still a reduction. Moving on to looking at the cash flow on Page 19. As we said, we do see the EBITDA dropping due to the COVID-nineteen effects and the nonrecurring items that we have. However, worth noting is that the noncash provisions relating to bad debt in inventories is here listed under the change in working capital. We also have a significant working capital release, as we said, but at the same time, this is still impacted by fairly high capital expenditure in the quarter. And overall, the net cash flow is at 1.02. Just looking at our overall We have a fairly strong balance sheet with good liquidity position, and we had a fairly large headroom in terms of our covenants. However, these are uncertain times, so we have taken some precautionary cash preservation measures in this quarter. As you already said in our trading statement, the dividend proposal has been withdrawn. That was worth approximately SEK 147,000,000. We have reduced our capital expenditure for the year from previously estimated SEK $420,000,000 to targeting SEK 300,000,000. In addition, we have also renewed credit facilities of SEK 200,000,000. And in addition, we have obtained from our lenders additional credit lines of SEK 200,000,000. In terms of our order guidance, the paid interest rate is still estimated to be at three to 3.5% of average new bids, and the blended effective tax rate is still target to be around 20% to 21%. We still have our contingent liability in the shape of the NanoForm acquisition. As you know, there is earn out in three tranches. The first one we paid last year, that was $133,000,000 This year, we'll pay the second one. And next year, 2021, we'll pay the third and final one. And with that, I would like to hand back to Leif. Thank you, Erinn. Going on to Page 21, just to give you the framework of the all the work change we have within sustainability under the heading of the Scandi Wave. And 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. And I think the way we see it is that the COVID-nineteen outbreak just exposes the risk and the consequences of the global antibiotic resistant bacteria. So preventing antibiotic resistance is more important than ever. We have a lot of work streams to ensure that we stay at a very, very low level, 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 are at we have a target of less than one percent of flux treated. In 2019, we delivered zero point one percent, which is, I suppose, as close to zero as you can get. There's really no industry statistics globally that are kind of reliable, but it is, without a doubt, very high numbers. And we see, in some cases, up to 100% of flux treated in a number of international markets. So but it's very important for us to keep this non zero as our target basically. Trying to summing up this quarter. Overall, stable business, resilient to the COVID-nineteen effects. We delivered solid results in the quarter, and we have taken a number of contingency plans just in case that we see sort of 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. And I will also refer to that we have even though that we have some uncertain times around us, we have had a good start to the second quarter. And with that, I'll just like to take any questions. Thank you. Our first question comes from Daniel Schmidt from Danske Bank. Please go ahead. Yes. Good morning, Leith and Julia. A couple of questions for me then and starting with the sort of the current trading that you gave an update on when it came to April versus March and so on. And we also had your statement at the April, where you basically stated that foodservice was down sort of 5060% at the start of the month and on the other hand, retail being up 10% to 15%. They've seemed to sort of halved in both directions, so to speak, at the same sort of rate in the second for the full quarter for the full month, sorry. 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? So we will anticipate that this will continue to cancel this further out. It is, of course, you know, difficult to predict this as 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. But it it it it's very clear that people continue to eat a lot of chickens, whether they eat out or they eat at home. So we feel confident now having a couple of months of dealing with this with this demand under these virus circumstances that it basically equals each other. They might not do so on a weekly basis, but all in all, it equals each other out. That's our fair view. Yes. And then 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, or has that changed in any way? No. We we have seen so far very little of, you know, actually, actually, you you know, know, clients, clients, you you know, know, are basically going bust. But but it's also an area where, you know, there's a lot of, you know, packages from different governments that are trying to, you know, assist and help out and so forth. But we we just feel that there are a number of food service outlets out there that are having a very, very difficult time. And and we just want to make sure that we we call ourselves or that we have sort of flagged that there might be some losses there 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. And then 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 part bigger part of that strategy? Or is it situation in the market in general when it comes to the crisis that is that is accelerating that thinking? Or could you give us shed some more light on that? On the acquisition opportunities? Yeah. Yeah. And if if we You know, it it sounds like it has to do with your strategic review. Maybe I'm wrong, but Yes. But no, it's of course, doing a strategic review, we obviously wanted to make sure that we address our capacity and our structure in terms of once we would be able to or be successful in a prudent manner. So that has been part of the reason, but I wouldn't say it's been the main reason for 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. So that has been a very interesting process, bringing a lot of people together across the group, sharing ideas and best practice, and we have taken 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. Yes. And 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. And of course, nobody had any idea that COVID-nineteen will show up at the start of this year. But 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 this if you look at the proportion or the breakdown of the Danish business, we have a lot more foodservice, as you are aware and foodservice sales. And of course, the longer this foodservice market being under pressure, the more challenging that will be. But I'm happy to say, when you look at it from a group perspective, these things take out each other. But we also do see a gradual returning to more normal patterns. I mean, all our five domestic markets have have entered into a path now of reopening gradually and, you know, a number of steps. But 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 you spend more time out, so to speak. So so we do certainly anticipate that foodservice stage will pick up relatively quickly in line with these restrictions and lifted. All right. And just a final for me. We talked about it in connection with the Q4 report. If you look at the bird flu breakout outbreak in Eastern Europe and now also Germany. Is that causing any concerns? Or what's your view on that? And how are you sort of how are you looking at that, basically? It it it seems that it is relatively stable. We are doing, of course, a lot of measures to to ensure it doesn't get into our supply chain, and we feel that we are well positioned to prevent that from happening. So we see any larger risk relating to this. All right. Thank you, Lee. Thank you. You're welcome. Our next question comes from Michael Loftel from Carnegie. Please go ahead. Yes. Hi, good morning. So regarding your costs that you took in Q1 and also looking what you did not take in Q1, I assume it was roughly SEK 8,000,000 that you had guided for, which now, I guess, have been then postponed and are related to what you anticipated for April, which now maybe then will has come in April. So first, could you say something about 8,000,000? Is that a good proxy for how much the COVID-nineteen situation for you is is costing given given what you have seen in in April anyway in terms of demand and the shift from from foodservice to to retail? Yeah. You're right, mate. I mean, I I think 8,000,000,000 is is good proxy for for how how April ended up. It is, of course, you know, 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 unstability out there, so to speak. So 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 I'm we're obviously doing a lot to prevent to secure a continuous stable development, but we just want to be careful just to rule out that things might deteriorate. It is a new situation for all of us. But 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. And if we just play with that number, 8,000,000, then that is for the closing down, basically, of the ready to eat plant in Denmark and the cost for that, I guess? Or 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? This is mainly relating to the far factory deferred processing, but that's also where we have seen the majority of the costs. These sort of additional costs, we particularly saw in the beginning of the outbreak where there was a lot of hamstring going on. And we have seen a bit more, I would say, return to normal, to speak about a bit more, let's say, stable development within our retail sales. So a lot of overtime that we had initially have been lower as we've been going in more into the process. But I also say, if you look at the fire plant altogether, we've got four production lines there. One more closed down very quickly, then we were closed for two weeks, and then we are gradually seeing the lines being put more back into operation. And we'll currently be operating on something like 60% to 70% of normal capacity. If things are, let's say, gradually normalizing, it's just very difficult to say how quickly that will happen. So But if we or I don't know what you are sort of planning for when you're looking also at you reduced your CapEx outlook for this year. But if we assume that foodservice 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 which 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 barriers? Or is there an increased CapEx need in other areas meet the demand from the retail side? Or do you feel confident that you can handle a more long sort of prolonged situation with this shift in demand? I think if if if you and and there can be many scenarios. But if if you are, let's say, thinking that, you know, let's say, food service will move from now on, we need, you know, at a 10% able to or at a 10% reduce 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. And there wouldn't be any additional CapEx relating to that. So but but we would not be we would also anticipate that foodservice will come back within that time frame. But as you rightly say, there might be a second wave and what have you. But all in all, we have seen these costs primarily be linked to periods where we really we had also, as we made in the trading update, we had a couple of weeks there where foodservice was down 5060%. Of course, that is a very different situation than if foodservice were to be down 10%. We saw a couple of weeks there where retail was up 40%, but that that that was also we have some very challenging days there. That's also normalized, if we can say normalized now, so we have got a much more stable flow still with some uncertainties, but a much more stable situation than what we had in March. And regarding the foodservice and the provision of inventory that you took in Q1, is has that played out as you have assumed so far? Or 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? And I guess now as you have reduced production already in April, the level of inventory of to the foodservice line is not a problem anymore? Or No, it is inventory for the foodservice market is not really a big issue anymore. Think I we have dealt with that very well. But there's still there might be some inventory losses on inventory. We've taken provisions for it. Whether that 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 foodservice and particularly with kind of raw products or ready to eat or ready to cook products. So there is some surplus and pressure on prices in Europe. So if we were to want to do or have to do a lot of, let's say, commodity export, the current situation will be pretty low prices. So we have been, I think, taking the provisions we have taken in Q1 reflect well the way we view the situation. But we, of course, kind of rule out that there will be a bit more to come. But we have 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 lower less room for price increases for your on your side because of lower raw material costs? I guess that's something that you still expect compared to 2019 Yes. At And it's basically relates to price adjustments that we did in the latter part of last year. So correct. 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, and whereas Ireland was very strong. But there's no nothing really explaining that. It's at least nothing in the report itself. But is there anything to do with mix? Or how come that you saw that development in Norway and Ireland? I would say in Norway, it is just normal fluctuations, nothing significant to report on that. It is very stable, very solid performance and relatively limited COVID-nineteen'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. So that impacted top line positively to some degree, but a very, very, very solid result. But in Norway, was there any mix in that number? Because sales was very strong in Norway as well, but still the margin declined. Yes. I mean, that was nothing so significant. I mean, some improved product mix, a bit more branded sales, but it's relatively small move. That's also why we haven't listed out any explanation because there isn't really any one, so to speak. It is more down to normal fluctuations. But but on a with a very And I I guess there's there's no FX FX effects here. I mean, it's it's a quite close market. So so what you buy and what you sell stays in in Norway. So there's only translation Yeah. In the reporting. But yeah. Yes. Okay. Yeah. Okay. Thank you. Thank you, 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, 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 that is the main driver. No. This is this is more of relation to your operational efficiency. A number of the initiatives that we have taken there to improve efficiency, we see them paying off, and then some operational leverage from the top convert. Those are the two main points. Right. And this is a second question on the last writing in your wording Page two in the report. If you can understand, I will reconsider this current cash preservation measures. You end up by saying if nothing sort of 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 touched wood. This we have handled this very well. We have taken a number of initiatives on CapEx, on available lines. And 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. So 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. But still, the Board decided to not to do any dividend or to postpone the decision or so we will be once we know more about how things develop, we will look at this again. On we have taken CapEx down from a bit more than 400,000,000 to 300 It is attractive projects, but we have decided to push a little bit ahead of us. Still 300 is a high number. I mean, it's higher than depreciation, so it's not like we are putting the development and the improvement business on hold by any in any way. But 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. Alright. Thank you. Thanks for your time. K. Bye bye. Thank you.