Earnings Call: Q1 2019

May 9, 2019

Ladies and gentlemen, welcome to today's Scandi Standard interim report for the 2019. My name is Jake, and I'll be today's coordinator. And I would like to hand over to today's host, Leif Bergvill Hansen, to begin. Leif, please go ahead. Thank you. Good morning, everybody. So welcome. So on the front page, I just want you to have a brief look on to the left on the table there, where you can see that over the last five years, we have shown a strong stable annual growth of around 7% and relatively stable margins. If you go on to Page three and go further into Q1, the quarter where we delivered strong growth in both sales and earnings, exceptionally strong growth in revenues of 16%, and there will be a further breakdown on the following page. EBIT is up with 28,000,000 which is equivalent to 34% in the size of around SEK10 million. And then there has been change in depreciation that amounts to approximately SEK9 million. EPS is up 72% in this quarter. And there's a dividend proposal of SEK2 compared to SEK1.80 per share of last year. And just to remind you that the IFRS 16 changes have been implemented fully retrospectively. Going on to Page four, you see the breakdown of this exceptionally strong top line growth in the quarter. The important part is really that we deliver a 9% underlying revenue growth, coming from strong performance within the chilled ready to cook segment and also within the ready to eat segment. In addition to those 9%, we saw we delivered a contingency order to a European ready to eat client that represents about 2% of additional sales, which can demonstrate our capability of this expanded Phar plant that we just expanded towards the end of last year. And then it's also a way to enforce our relationship with this client. It's also the top line is also driven by the consolidation of organic foods, represented by three percentage points and then three percentage points of currency. Going on to Page five, see that the raw material cost increases more than offset by price increases is positive. There's some volume growth, representing $26,000,000 and that volume growth is achieved across the group. The price increases and mix effect have already more than offset the significant raw material increases that we saw during the second half of last year. However, in Ireland, we're still lacking the implementation of these price increases. We have also experienced an increase in OpEx. We decided to spend about 10,000,000 more on marketing. So OpEx is dragging down with about 14,000,000. And in addition, the reduced depreciation have an impact of 9,000,000 coming from this alignment of economic life of our asset base that we carried out towards the end of last year. Going on to page six, we see earnings improvement in all countries except Ireland Sweden, positive development after a challenging period Denmark, earnings driven very much by a very strong top line growth Norway, best in class margins continued And in Ireland, a soft performance due to temporary open exposure to the raw material price increases. And Finland is another step in the right direction. Going on to page seven, giving you a breakdown of product categories and sales channels. You've seen a very strong growth within the chilled ready to cook category and Rin Ready to Eat. The chilled ready to cook segment delivered very strong growth across the group, altogether coming in. And we saw an underlying growth within the ready to eat category of 25%. So the difference to the 36% you see in the chart to the right is this contingency order I just talked about. You've seen a decline in the less profitable frozen and export segments, and we have seen an impressive growth in both retail and in foodservice. On page eight, we have made a breakdown of this Ready to Eat segment that is increasing in importance for the group. And you can see that in 2,005, it represented about 9% of revenue and it's now approaching 20%. Going on to Sweden on Page nine, we see a positive development after a challenging period. We delivered a 7% increase in net sales in a retail market that grew with a bit less than that. We lifted EBIT with 35%, and that has been the significant price increases we have implemented to compensate for the higher raw material cost. We've seen strong growth in the ready to eat segment, could be shortages, meatballs and similar products. And we have increased marketing investment to the size of about 4 to $5,000,000 in this quarter. Margins have been affected positively by the reduction in depreciation, and we do expect some incremental improvements in the second half of the year. Denmark on Page 10, exceptionally strong growth with a 35 revenue growth in a market that is growing the chilled market in Denmark, retail market grew with about 4% in the same period. Very strong underlying growth of 16%. And the other components, making the balance up to the 35%, is the consolidation of Rugged Ale Foods, the discontinuity order within the Ready to Eat segment, and then the five percentage point of currency. We've improved the underlying profitability. However, this contingency order is margin dilutive. We have seen a continued positive development for the new brand, the Danish Family Farms. And we continue to see relatively low price realization. On export markets, we also want to guide on a lower quarter on quarter growth in coming quarters compared to what we have achieved in Q1. Going on to page 11 for Norway, another quarter with strong performance. We had 11% revenue growth, seven percent in local currency, which is more or less in line with market, but it is extraordinarily strong quarter, quality growth. We have seen very solid margins achieved through improved product mix and also increased efficiency within production. It's our most profitable geographical segment and mainly the result of very successful investments. It's a lot of best practice transfer, and we have over the last few years really strengthened our product offering in Norway quite significantly. Going on to Ireland on page 12. 7% revenue growth, 2% in local currency, which is more or less in line with the market. There is a delay in implementing the price increases we have talked about, the price increases that are relevant to mitigate the increased raw material costs. We just want to remind you of these rather significant investments that we have planned for 2019, and those are to improve cost efficiency, animal welfare and food safety, and there's also some debottlenecking in certain part of the operation that will come out of that. Finland on Page 13, we have seen a quarter with further improvements. 6% revenue growth, 2% in local, which is more or less in line with market. We saw an EBITDA margin of around 6%, coming out of an improved product mix and higher sales of branded and value added products. There's a strong focus on further improvements, both in terms of mix and innovations, on manufacturing yields and also on our cost base. With that, I'd like to hand over to Anders for the income statement. Thank you, Leif. Maybe just stop a bit on this IFRS 16 implementation, where we have used the full retrospective method, which means that all the prior year data has been restated, I. E, all the numbers on this income statement are comparable. You see the effect from IFRS 16 was 22,000,000 on EBITDA, 2,000,000 on EBIT, and 2,000,000 lower net income. And it's the same effect in both 2018 and 2019. For more details on IFRS 16, you are welcome to look up our note 31 in our latest annual report for 2018. Looking at depreciation, as Leith already mentioned, the net is down by million due to the alignment of asset lifetime we did last year. So all in all, summarizing the income statement, EBIT is up by 34% compared to last year, and net income is up by 71%. Moving on to page 15, statement of our financial position, where you can see that return on capital employed remains largely flat, whereas return on equity improves compared to quarter one last year. Equity to asset ratio improved slightly, and again, a few more IFRS 16 effects, where capital employed has increased by $421,000,000 due to IFRS 16, and our net debt has increased by $461,000,000. Moving on then to page 16, working capital, where we see a small working capital increase in quarter one this year, compared to where we landed the year, that is driven by this strong revenue growth in the quarter, but we are up from an exceptionally low working capital year end 2018, and the 6.2% working capital as a percentage of sales is still low historically, and also when you compare it to the same quarter last year, when it was 7.8%. Moving on to the cash flow, where we report an improved OCF, primarily driven by higher EBITDA and lower CapEx, And that CapEx over 72,000,000 in the quarter represents just below 20% of our full year estimate for 2019, which is the $380,000,000 we've talked about before. We had a bit of a higher paid financial expenses in the quarter, and that is driven by expenses for the extension of loan facilities that we have paid in the quarter. All in all, net debt is increasing by 42,000,000, and a big chunk of that is coming from currency. Flipping page to page 18, cash flow guidance, this is the same as the previous quarters, so I won't go into details on all of them, but a few things worth highlighting. The first one is the dividend, which we proposed to be SEK2 per share, up from SEK180 last year, and which we believe allows a reasonable balance between investing in growth opportunities, and direct yield to our shareholders. Also reminding everyone about the continued liabilities relating to the Manapharm acquisition, where the first out of three are now tranches payable now later in Q2, and that first charge is estimated to 125,000,000 SEK. Then, a flipping page where we talk about our sustainability work labeled under the Scandi way, And in this quarterly report, you can read more about our antibiotics vision, and how we work towards our 0% antibiotic vision. And in The Nordics, we are almost there already, where we have been below 0.5 the last couple of years. And with that, over to you, Leif. Thank you. Just summarizing this Q1, very strong growth in the quarter, both in revenue and also in earnings. You see market being driven by secular trends supporting poultry products, both in terms of tasty convenience, also a very attractive nutritional and health profile compared to alternatives, a very solid sustainability profile that are increasing in importance. And we also see very attractive, convenient innovative products. And also, thanks to a lot of brand developments across the group. We do see a positive outlook going forward, and we do continue to follow structural opportunities very closely. And as I'm sure you have picked up, the dividend proposal is SEK2 per share. With that, we would like to take any kind of questions. Thank The first question today comes from Michael Luftwaffe from Carnegie. Michael, please go ahead. Yes, hi, good morning. A few questions from me. First, in Sweden, could you is it possible to quantify two things? First of all, the increased marketing investments, could you quantify them in Krona here, what it did year on year quarter on quarter? And whether or not these are sort of recurring higher levels of marketing spend? And secondly, on Sweden also, what do you mean by incremental improvements expected in the 2019? How should we look at that? Is it sequential year on year? Or and what would it come from? Thanks. All right. Thank you. Have seen marketing investment, we have increased versus the same quarter last year with about 4,000,000 to $5,000,000 in this quarter. And that's to facilitate further growth opportunities. And then also a reflection that we over the last one years, point we have had some issues that we have coped within. In the Swedish market, we have cut back on our marketing investment. And with the Kronenfogrel as the absolutely strongest A brand in the market, we want to cement that position and further develop it. And that's why we decided to, let's say, spend a bit more than what we have done in this one point five year prior. So about $4,500,000 up versus same quarter last year. In terms of the other part of the question about the improvements going forward, we do anticipate further improvements in Sweden to take place. We do particularly see them to be picking up in the second half of the year. So that being said, I get Q2 that are similar, but we see an uplift in the second half of the year. Okay. And regarding the marketing, is it only in Sweden or would that get on the group level? Well, we increased the total marketing investment for the group in this quarter with CHF 10,000,000 versus the same quarter last year. And nearly half of that were in Sweden, and then the other components were in Denmark and in Norway. Okay. And you are expected to remain at these sort of levels going forward on a quarterly basis in the other countries, alright? Yes. Moving to Norway, you didn't really specify in your sort of adjusted underlying growth numbers for any extraordinary volumes in Norway. But you say that it was an extraordinary strong quarter. Maybe we shouldn't extrapolate the organic growth in Norway going forward. But is it possible to say something what made it so exceptionally strong the growth? Well, we had a couple of very strong campaigns coming through in this quarter. And also, if you sort of look historically in Norway, this is a very exceptionally high growth in this quarter. So we just want to, let's say, let you be aware that we don't expect that high growth levels going forward. But it wasn't any extra deliveries on any contracts or something like that? No, there some additional campaign activity that uplifted revenue and were part of why we landed at 7% top line. Okay. Thanks. And in Ireland, could you say something about the price increases or the delayed price increases, how that process is progressing? You previously said that there would be a pressure on margins in the first half and then you would recover that hopefully in price increases. Where are you in that? We are working very, very hard on it. And we do we are fully committed to get these well justified raw material increases compensated. We are a few months delayed compared to what we had previously anticipated. So you're right in saying that there will be a lack of this compensation in the first half of the year. We do anticipate to close the gap later on in the year. But is your guidance unchanged here? Or because already in connection with the Q4 report, you said that there was delayed effects from price increase. So is that reiterated that from the second half, you should have better margins in Ireland? Because that was We do that we will have compensation, and we are working very hard in getting it. We would have anticipated to get some of the compensation in Q2, but it's probably more to relevant to look at it to be implemented for with effect from the second half of the year. Okay. Good. Just final from me also on Sweden, just to be clear. There were no I mean, the clearance of the inventory was completed in Q4. So there was nothing that was sort of lifted over and affected also Q1 in terms of margins in Sweden? Very minor. It's not a driving force. So you would say that the year on year margin decrease on an EBITDA level is more a matter of well, we have partially the IFRS effect maybe on that, but no, that's That is the increase in marketing investment. Yeah. And and the increased marketing investment is is also a factor. Okay. Thank you. Alright. You're welcome. The next question comes from Daniel Schmidt from Danske Bank. Daniel, please go ahead. Yes, good morning. This is Daniel Schmidt from Danske Bank. I missed the beginning of the call, so I assume that you touched upon it, but I just want to ask you then for me, at least for some clarification for me. The exceptional strong sort of top line growth, you're saying that it's partly due to large contingency order with ready to eat. Could you say how big that order was and what exactly relates to? And is there any chance that this is going to be a repeat order? Or is it one offs? Or could you shed some more light on that? Absolutely. If you missed the Page four, I think that's probably it's probably the best way of getting some breakdown of exactly that. So of the 16% of growth we achieved in this quarter, which is exceptionally high as you know, about 2% of that relates to this contingency order to one of our European Ready to Eat clients. And it is something that we did in Q1 and that we will not do in Q2. And is it sort of usually the case that profitability on those orders are a bit on the low side or what would you say? Yes. Absolutely. No. They are on the low side. And, you know, for for a number of reasons, one thing is that it's something that comes in, you you get basically no notice. So it is, you know, a lot of overtime and weekend shift and so forth. But we have also it's also been a way for us to, let's say, run this additional investment the additional capacity that we build in our power plant to see the full impact of that. So that has been margin dilutive this contingency order. And is it is that is the same true also when it comes to Rocketdoll Food when it comes to margin dilution? No, it is similar. All right. Okay. I think that was the only clarification that I needed. Thank you. Alright. Thank you. The next question comes from Florent Ty Thien from MidCap Fund. Please go ahead. Hi, good morning. Just two questions on my side. The first one in Finland. Can you give us some colors on the lower growth we see in the Q1? And what is your expectation for the Q2 and the H2? And my second question on raw material. Can you give us some color on the impact you expect for the next quarters? Thank you. Yes. Thank you. In terms of the revenue growth in Finland, we do anticipate similar growth rates as what you see here in the coming quarters. So more growing in line with market would be our anticipation, but then working on improving profitability gradually. So in terms of raw material, we have implemented quite successfully the raw material inflation our basically in four out of our five markets, in Sweden, in Denmark, in Finland, and in Norway. And we are still struggling or working hard on getting it through in Ireland. One also has to be aware that historically in the Nordic markets, we have developed models where we are adjusting prices quite openly when raw material is going up and it's going down. It is a system that that these things are working quite well, but it's a system that hasn't been practiced in Ireland to the same degree, and that is also why are working hard on getting the same or similar model introduced into Ireland. So that will have a bit of an impact on the profitability coming into Q2. So we do anticipate sort of incremental improvements during the year, but particularly in the second half of the year. So relatively in absolute terms, relatively similar profit coming into Q2, but then with a lower top line growth significantly lower top line growth compared to what we have this exceptionally high one we had in Q1 impacting margins. Okay. Thank you. Welcome. We have no further questions, so I'll hand it back over to you, Leif. Alright. Thank you, everybody. Thank you, and have a great day. Bye bye. Bye bye. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your