Earnings Call: Q4 2020

Feb 11, 2021

Good morning, everybody, and welcome to the Standard Interim Report Presentation. If you look on Page 1, you can see our historic annual growth of around 7% per year. We See this in 2020 that revenue growth have been flat, but you also see a stable market development over time. Going more, flipping Page into Page 3, looking a bit more into Q4. It's a result that So our resilience in an challenging environment, 3% net sales growth in local currency and 1% drop in Czech due to currency. The retail business proved resilient to COVID-nineteen effect but also challenges within Foodservice and Export segment. We did a 4.8% adjusted EBIT margin that can be compared to SEK 4.3 in the same quarter of last year. Happy to say that our plant based product launch is well underway and also that SEK 2.5 dividend is anticipated during 2021, and we will revert to that a bit later. Going on to Page 4, looking at the Q4 demand, that shows a on retail demand with 8% growth, representing 67% of total revenue. Also aligning what I mentioned before that COVID-nineteen has been very resilient in terms of the demand within our domestic market. Whereas we, in Q4, We experienced an 18% drop in foodservice sales, representing 17% of total revenue. And that is the effect is a result of a certain new round of COVID-nineteen lockdown vessels that were taking in various markets during the course of the latter part of last year, and that also caused some inventory buildup that we have had to deal with. We've seen a 23% drop in export, representing now 8% of total revenues. There is a significant over supply at very low prices, which have led to a mark to market reevaluation of our inventory. Going on to Page 5, you see retail growth offsetting the drop in foodservice. If you look at the chart To the right, you'll see that foodservice have been retail, sorry, on the top one have delivered sort of a stable growth during the year, whereas foodservice in Q4 was a drop of 18%, as mentioned, which is more or less in line with the drop we saw in Q2 of 20 But again, retail shows that showing the resilience and foodservice being down. We do feel that, that is a large foodservice potential once consumers are more free to move around. But as long as these lockdowns continue into Q1, we're going to have kind of an uncertain outlook when it comes to food service for the beginning of 2021. Going into Page 6, we see successful mitigating actions to deal with COVID-nineteen and bird flu. As mentioned, there is a significant reduction in global commodity prices. And the chart to the right is just showing one of the chicken and the leg, how market prices have developed, has basically been halved due to this oversupply that has been sort of accelerated as further lockdowns have been imposed across basically all markets. And as this development have been accelerated to some degree by the breakthrough outlook outbreak, but it's mainly COVID-nineteen triggering this development. Happy to mention some of the mitigating actions that we are taking To reduce our exposure to factors like this, our export share, and the volatility usually comes, so have been reduced from 15% in 2016 to 8% of revenue today. We've also that relates to the purchase situation, been able to have an increased adoption of regional restrictions. That means that the impact will be clearly reduced. And also through increased cooking capacity, we've also been able to reduce the impact. The negative effect from COVID-nineteen and breakthrough in this Quarter is totally impacting our sector business with €31,000,000 what we take as nonrecurring. And also, we'd like to draw your attention to the negative effect from bird flu. We have estimated that to be around up to SEK 20,000,000, and that is more than half of the impact we saw last time when Wirtl was around, and that's thanks to the mitigating actions I just referred to. Going on to Page 7, showing net sales by product category and country, 11% growth in ready to cook, chilled, primarily sold for retail, whereas we have a 10% drop in ready to eat, where a lot of the products go through traditional foodservice channels and also quick service restaurants. We saw a drop in the low margin ready to cook categories, both on export and also on some frozen categories. If you look at the geographies, So very strong growth in Norway, in Ireland and in Finland. Whereas in Sweden, we have had less campaign activity, impacting margins positively. And Denmark, where we have got by far the largest exposure to food, service and export, we have seen a negative net sales development. Going on to Q4, looking at EBIT and improved adjusted EBIT, where there's a volume effect driven by higher margin segments or growth in higher margin segments. We have seen an increased share of leg deboning, which is driving mix, pricemix positively. It allows us to sell a bigger proportion of legs in our domestic market. It does at least add additional processing costs, but it's clearly margin accretive to the group. Then other price mix impacts mainly coming from a for less campaign activity and also a reduced relative share of frozen and export sales. OpEx being in line with previous quarters, and there's a negative currency effect of CHF 6,000,000 Going on to Page 9, Looking at the quite impressive growth we have developed over several years, organically within Ready to Eat, That is taking a little bit of a dip last year due to foodservice, as we can all imagine, but still areas where we see a great potential. And we don't By any means, any negative effect by Kona once these restrictions are lifted. And this is also the reasons why we are confident of building a plant base. The business unit that due to the fact that we have had a very successful development within this field, and it's largely same outlet, same manufacturing lines and so forth that is relevant when it comes to plant based. Just talking a little bit more about plant based. Some of the products we have developed, we see this as an avenue for profitable growth, very similar and strong secular trend as we see for poultry products. The development here that's basically based on existing skill set, use the basically same plants, utilizing the relationships we have with both on the retail and the foodservice side, both in our domestic markets but also on export markets in Europe. I'm happy to say that the first retail listings have been achieved, and we'll be start rolling those out in the beginning of Q2. Also, the investment in Begop Lund, an example of our commitment and also long term commitment to developing a plant based business within Scanner. Talk a little bit about the segments. Sweden, we've seen successful timing of cautious volume strategy that has positive impact on margins, 2% drop in net sales and a margin growth from going from 8.2% EBIT versus the 7.1% the same quarter of last year, driven by, as I said, less campaigns, higher proportion of chilled products, coupled with a very good cost control that delivered a strong result in Sweden for this quarter. Going on to Denmark, that's the business where we are very exposed to COVID-nineteen. It's 57% of net sales goes into foodservice and export versus that share for the group is 25. So that has also caused a 10% drop in net sales, both a volume drop and also a drop in price realization, giving us this the breakeven result we report in this quarter. There's been a language we build up due to these factors, and we have to do a mark to market reevaluation that have a negative impact, as we speak. We also Once these restrictions are lifted, we certainly have the ability to scale up the business at short notice. Talking about Norway, another strong quarter, 17% increase in local, 6% in SAC, strong demand from the retail market, where Cook products, in particular, have been the driver. Some of the products some of the examples of our premium range, you see that you see those fixes. So the bottom of this page, where we have been able to take EBIT up to nearly 10% compared to 8.2 in the same quarter of last year, thanks to strong operational performance, both in terms of Production yields efficiency but also a very good commercial execution by the team at Norway. Going on to Ireland, Very exceptionally strong quarter with a 14% growth in local currency, 10% in SEK And a record EBIT margin of 9.4% compared to 5.9% in the same quarter of last year. Here's a quarter where, basically, everything went right. And when we're sort of looking ahead, we do see some increased raw material prices that will have an adverse effect that we are dealing with in the market. Finland, another quarter of strong growth. 11% growth in local currency, 15% sorry, in SEG and 15% growth in local currency. Strong growth in ready to cook, tilt and then also market where we've got limited exposure to service. It's an encouraging margin growth that we now have delivered 5.2% EBITDA margin in 2020, also bearing in mind that the Q4 is only a relatively weak quarter, I think. We have now concluded the investment to facilitate further growth that we have been going through daily. With that, I'd like to hand over to you, Julia. Thank you, Leit. Then we turn to Page 16, Going back to the Total Group P and L. As you said, we had a top line growth of minus 1%, but in local currency, plus 3%, giving us an adjusted EBIT, which is up 10%, CHF260,000,000 However, as said, we've had some quite large Hosting some nonrecurring items in the quarter. The biggest one is for CHF 21,000,000 related to the earn out provision for Mannerfarm. This is then driven by the strong Q4 results that we've had. Secondly, as you already talked, we have the COVID second wave, This led to the negative effect, totaling to CHF16,000,000 here. It is mainly driven by inventory write down, But also to a temporary closure of our main ready to eat plant in Faroe, to turn some lines there. Thirdly, we have Berdsu, as Ursula mentioned, where we have some inventory write downs coming to CHF 15,000,000 Finally, we have a post ready to our respective Swedish subsidiaries where we have discontinued rental agreement And also written down some associated assets, total cost of CHF 7,000,000. And that also brings us to the CHF 59,000,000 in total. Looking at the net financial items, they are a little bit up versus the same quarter last year at 23%. But looking at the full year, We are significantly down. We have a high quarter tax rate of 35%. This is driven by adjustments to deferred tax assets. But again, for the full year, we are at 20 percentage in Talend versus the previous year. This all leads us So an earnings per share of SEK0.32 is down versus last year. However, if you look then at the adjusted earnings per share, It's SEK1.22 billion, which is up versus the previous year of SEK0.84 billion. Going to Page 17, we look at the Statements of our financial position. Again, here, you can see that both the return on capital employed and The adjusted returns for equity are up. However, again, if we these are also, of course, impacted by our nonrecurring items, So the return on equity is at 11.5%, which is down than the year before of 14.2 Nevertheless, the equity is still up, and we have improved our equity ratio to now be at 29.3% versus 27.8% the year before. Turning to Page 18, looking at our working capital. We're a little bit up versus the Q3, but we're still at low levels With a total working capital of SEK 64,000,000. This has been positively impacted by some continuous state aid related to Payment of tax payments, roughly SEK 31,000,000. And of course, versus last year, we also have some increased factoring in vendor financing. I'm not taking up any new contracts for this quarter, but it's up versus last year. There's a little bit of reduced inventory as well, And we have lower receivables than the year before due to less export shipments. So all in all, this leads us to our working capital of net Sales of 0.6%, very low numbers. However, if I would adjust this for the state aid received, it would have been at 1%. And also if we adjusted for both late aid and financing elements in the shape of factoring and vendor financing, it would have been at 5.8% versus 6% the year before. So overall, our target level for adjusted refining is to be around 6%. Going to Page 19, looking at our cash flow and our net interest bearing debt. This year, we have a slightly negative operating cash flow in the quarter, which is related to the fact that in previous quarters, we had higher state performance of taxes and now we have paid some some netback, is impacting the working capital. But looking at the full year, we do have a solid cash flow, and we have reduced our net interest bearing debt. Now it's down to CHF 1,900,000 Going on to my final page, the Page 20, Some comments on our cash flow guidance. Our capital expenditure for 2020 landed at SEK 355,000,000. We expect that the capital expenditure 2021 should be around CHF 400,000,000 The paid interest estimate is still to be around 3% to 3.5% of average NIBD. And the blended effective tax rate is around 19% to 20%. Looking at our continuing liabilities, still have the Nano Form acquisitions. As we talked several times, it's the 3 different earnout tranches we paid in 2019, 2020 2021. The final tranche will be paid now in 2021. Looking at our dividend. The board anticipates The dividend proposal of a total of SEK 2.6 per share for the financial year in 2020, which the Board proposed for the AGM It's then feasibility to be at SEK1.25 per share. And then the board intends to propose a second dividend of SEK1.25 per share again for an AGM in the second half of twenty twenty one. Solenor, SEK 2.5, which is a yield of roughly 3.6%. And with that, I'd like to hand back to Leif. Thank you. So going into a very important part of Our ScandiStandard is the way we work on sustainability under the heading of the Scandi way, fitting our efforts into people, chickens Standard, I would like to give you a bit more extensive updates on what we're doing and where we are compared to what we usually do. Going on to the next page, you see what we some inputs on the people side. And of course, a very big focus this time around have been how to protect our people from the pandemic. And I'm very happy to say that this has been managed very well so far. We have had little prevalence of people being SIG, we've been able to operate all plants at all times, very extensive testing and a lot of measures being taken to ensure that We have been able to avoid the disruptions that you otherwise see in parts of society. We do an ongoing employee satisfaction survey called the Scandi Tools that we did in the latter part of last You're getting through for our industry, very high index of 72, improved from 69 delivered from the last result. Also, we have adopted an even stricter clean label policy here, affecting the way we develop new products, which is another sign to our commitment within that field. Going on to the next page, talking about a little bit about the chickens and the use of antibiotics and use the way we have been able to export best practice within this field. If you see in the top right corner on that page, The historic development in the use of antibiotics within our Nordic markets, which has been basically 0 all the way through, where only sick animals are treated and only after vegetarian decisions. We have a very good and rigid contractual agreement with our farmers and strong incentive systems to ensure that we keep these levels at this sort of world standard, very unique, small standards. If you go to ManaPharm, when we acquired the business, they were at the European average. And I'm actually very proud on this. And that chart in the middle of this page to the right but we've been able to reduce the use of antibiotics with nearly 80% over a relatively short period of time. That's very unique. And it is the result of a long, long list of initiatives all the way through the value chain that's been able to get us to that It's that level. It's also when you then add the Nordic business with Ireland, you see that on the bottom chart. You see the way where we from 2017, there was an increase with the amount of PharmCom we can but also the way we've been able to take it down. So as more Acquisitions are likely to come. And from markets where the use of antibiotics historically are very different to the levels that we practice. In the Nordics, you are likely to see this curve going a little bit up and down, but I think we are very transparent here and very convincing, showing our commitment and our ability to stick to our vision within this field. Going on to another one that's very important is the food pet deletions, which is the leading indicator for animal welfare. You see on the top graph here the development in the Nordics. It is a score that's done by official veterinarians. If you sort of say what is this to be compared to, if you look at sort of there's no sort of European tracking of this, But we would estimate that the European average would be something between 6070 points, and we are here very, very low and even improving, as you can see, on the top right. This is another area where we have been able to improve and Transform Transfer Best Practices in Thailand, where we have seen a reduction of 72% over the same period of time. Having said that, you saw in 2019 that it that there was an increase, mainly driven by some issues with feed, but also but it just shows how quickly this can move, but also shows how it's how our determination to get it down again have paid out. Going on to the next page, talking a little bit about Planet and better how better Logistics within Scandi will be able to save quite significant CO2 emission. Just to bring you up to date that we are setting our goals in line with the Paris Agreement to half our emissions every 10th year with 16 as half 8. A couple of initiatives. 1 is a pilot project that we have done in Denmark with fossil free cooling trailers That's been evaluated. We also made a new agreement to have CO2 neutral cold storage. That will be implemented during the course of 2021. And also in Sweden, we will be moving to a logistics partner that will be saving a lot of kilometers driven, and that will also be implemented in 2021, just as a few examples. Going on to Page 26, talking a little bit about the EU taxonomy, just to give you a little bit of a heads up what is it. I'm sure A lot of you have heard about it, but there's also some might have not. It is a new framework that's been coming forward that's defining what and helping people to make sort of sustainable investments. It's basically a tool for investors and companies to navigate within this field on how to build a low carbon, resilient economy and also companies, of course, the classification system to help people navigate in this field. There will be a number of criteria and performance thresholds for the activity within the different key sectors and how we contribute to climate, environmental objectives, that we do know or very little harm to the environment around us. And there's also some social requirements built into this. And we and there will be companies that We start reporting these activities for the year of 2021. Just to give you an input of from the Scanner Standard perspective, We certainly welcome an acceleration of this policy framework to develop more and more clear standards for us and companies and industries to be able to track real improvements. We read it when it comes out. We are very committed as a sector leader to continue to be so and even move the target further going forward. When we look at our total value chain, the biggest impact we have is the feeding and growing of our chickens, where we have sort of very ambitious and long term policies on how to do that in an with an improved sort of environmental impact going forward. So we are confident that whatever target is going to be the final ones within this field that we will be well within. So we will not be happy with that later. We will continue to see how we can improve going forward. So very welcome to this initiative. Going on to the last page, summing up this quarter. It shows Scanner Standard being resilient in a challenging environment. We continue to have solid contingency plans in case of some business disruptions due to the pandemic. As I mentioned, We have a solid balance sheet and a strong liquidity situation. We have launched the 1st plant based products here in this year, and they will be hitting the market here in Q2. Even with the restrictions around us, we do continue to follow structural closely. And we have and as I hope that we'll this presentation also commit that we have a strong commitment to progress within a number of ESG parameters, and we are constantly moving in the right direction. We expect a strong foodservice rebound once consumers are more free to move around. And Board anticipates a dividend The portions of total is SEK2.5 per share, split in SEK1.25 per share at GAGM and another SEK1.25 per share anticipated or an EGM in the second half of the year. With that, we would like to take questions. Thank you. We have a question from Daniel Smith of Danske Bank. Daniel, please go ahead. Good morning, Leif and Julia. A couple of questions from me. And starting off with COVID maybe and the bird flu, could you and the charges that you took in Q4 and we're halfway through Q1. And of course, the COVID situation has not really improved versus what we saw during late autumn. Could you give some guidance on what you think that you would need to do in terms of write downs in the start of this year? Yes, you're right that these restrictions that we all having to accept are still around, and they are very similar to what we have seen in Q4. And so it is a bit We will estimate that the impact of about €30,000,000 that we take in Q4 will be similar in Q1 As the challenges we have in this area is likely to continue With more or less the same level of restrictions also in Q1. That's our best guess, although it is a little bit of an uncertain time. That will be our best guide. Yes, yes. And implicitly, does that mean that when it comes to the Verkrum guidance that you gave in connection with, I think, in late November, where you said EUR 15,000,000 to EUR 30,000,000. Does that mean that the cost of the bird flu is going to be at the top end of that range? Hello? Okay. Do you hear me? Yes, it does. Yes, I hear you. Yes, I hear you again. I didn't hear the question. I apologize. No, no. Okay, okay. Something happened. All right. And as you see it right now, is there a risk that you will surpass that Cost for Virtu? Or is it contained to those €30,000,000? It is we believe that we will be able to stick to that guidance. But it is also we have seen a couple of new cases coming in. So it is sort of based on that we'll sort of we will not see many more cases coming in. But it is our estimate that we'll be able to keep the total effect within that 30,000,000 mark, which is also, as we hear, right, this is more than half of the impact we had last time around. So we expect that is still the best number we can give. Yes. Yes. You mean less than half, right? Less than half, I think you said. Yes. More than half, okay. Less than half. Okay. All right. And then a question on the dividend. Why 2 AGMs? Why not just go for 1 AGM and 2 installments? Well, there are different ways of handling it. The Board have been looking a little bit about What are other companies doing? We believe this time, it is sort of nice to be a bit careful and prudent, even though that we have a very resilient business due to the challenges. But still, that has been the reason why it has been done in this way. It's also a way for the board and for the company to kind of test the idea about having 2 payouts during the year. So that has been the thinking behind it. Okay. And then Just when you mentioned Ireland, you did say that they got some help from raw material implicitly In Q4, and that's reversing now, becoming a headwind in Q1. Could you quantify that tailwind and headwind in any way? It is a bit I would say the positive result we have in Q4 is not so much driven by FEED is more driven by a variety of other factors, very strong exceptionally strong growth with 14% growth in local brands. So of course, it's helpful. We have seen birds performing very well, weight coming in very well, weight giveaway. I mean, it's just when you look through the KPIs Ireland, you say, Wow, what a quarter. Also coming to a 9.4% EBIT margin. So we just want to communicate that, that is very exceptionally high. And you can also, when you compare it to previous quarters, that really, really stands out. There is some when you look at the commodity prices globally, there is sort of a situation where feed prices are expecting to increase later in the year. How much that is going to come through, there's also usually an element of speculation this time around. And And generally, in our markets, we are well protected through this pricing model we have, where there's an acceptance of fee driven raw material inflation to be passed through. But as in Ireland, we are producing the feed ourselves. So we are much closer to it and a bit more, let's say, both up and down, exposed to it. And we are with these, the feed prices moving up, we are very close in following that very closely to ensure that we are being fully compensated in the market. Yes. All right. And then maybe finally, just for clarification on underlying EBIT And you marked these charges well, I think, in the quarter. But Am I right in saying that the underlying EBIT does include government support even though it's not a lot? That is very limited. I haven't got the exact figure. Yuliya, have you got it? No, it's SEK 3,000,000, I think. Yes, it is. Not excluding No. But if you would look at the support, it is implicit. So it's part of the underlying Figures, because it's so small this time, right? So yes. Yes. But it's also important to say that this when you look at the COVID-nineteen impact, there's, of course, a lot of other impacts that's taken as part of ordinary business, so to speak, The whole impact on foodservice, the gross margin in that area is very, very much down. But of course, that's something we absorb. So it is sort of only the effect relating to actually having closed down lines relating to this and also some write downs. That's the kind of the only things we determined to be non recurring. Yes, yes. But I hear you. Where you can, of course, at the same time, say that you've had over demand on the retail side? Well, in some areas maybe, if you look here historically, we've seen a 6% increase in our retail sales. And if you look sort of years back, that's very much the growth rate that you have seen for chicken products over quite some time. So but I agree, it is a bit this is an area that is it is difficult to split what is what. Yes. Yes. Absolutely. It's a tricky environment right now. Okay. Thank you, We have no further questions on the phone line, so I'll hand back. All right. Thank you, everybody. Sorry, the presentation was a bit longer this time, but we thought we were going to give you a bit more in-depth insight into some of the work we do on the ESG area. So thank you for your time, and have a great day. Thank you.