Morning everyone, and Welcome to the Scandi Standard Interim Report for the first quarter of 2022. My name is Seb, and I'll be the operator for your call today. There will be an opportunity for Q&A, and if you wish to ask a question, please press star one on your telephone keypad, and please note the speakers will respond to one question at a time. I will now hand the floor over to Jonas Tunestål to begin. Please go ahead, Jonas.
Thank you very much. Good morning, everyone, and Welcome to this presentation of Scandi Standard's results for Q1 2022. I'm Jonas Tunestål, the new CEO and managing director of Scandi Standard since the first of April. With me today, I have Julia Lagerqvist, our CFO, and I'm extra pleased to have her by my side since I joined Scandi Standard after the quarter that will be presented today. As some of you might know, I spent all my career in the meat industry, having been with KLS Ugglarps and Danish Crown for 23 years, the latest eigth years in group management in Danish Crown and responsible for the Swedish business, KLS Ugglarps. The Danish Crown is one of the largest meat industries in the world.
Before we get into the numbers of the quarter, I would just like to add that, through these turbulent times, I'm very happy to have joined Scandi Standard, and I think there's a great potential in this sustainable white protein and also in Scandi Standard as a company. I will get back to you in more detail with my take on the next development step of the companies during the year. Now let's focus on Q1. Next slide, please. As expected, the first quarter was challenging. Further, the uncertain geopolitical development in Europe magnified the ongoing cost inflation. Though Scandi Standard had a top line growth of 10% in fixed currency, the company experienced a sharp decline in adjusted EBIT compared to last year. As you can see in the chart, it's SEK 37 million compared to SEK 88 million last year.
During the quarter, price increases were implemented on all markets in order to balance the significant cost increases on input goods during the second half of 2021, which continued into 2022. The losses in Ready-to-Cook Denmark continues. A number of measures are under implementation, which I will get back to later in the presentation. In addition, we also see improved export prices in the quarter. The war in Ukraine drives further cost increases. It has an impact on most of the business all around the world. For us, it's a major impact due to the high feed prices, which is directly related to the grain prices. Ukraine and Russia are major exporters of grain into the world market. New round of price negotiations with our customers are ongoing, and our customers have shown that they understand the situation requires additional significant price increases.
At last, through our new five-year sustainability-linked bank financing agreement, we have secured a stable but at the same time flexible financial basis for the next leg of our journey. Given that we're in the middle of a challenging phase, we appreciate our bank's trust in our ability to regain momentum in our business. Next slide, please. Scandi Standard has been a stable business with around 4% margin and continuous growth throughout the years. In 2021 and Q1 2022, we have seen a significant margin drop in earnings due to macro and operational challenges. The cost inflation that I mentioned in the previous slide has had an effect on the results, even though we have worked hard to cut the lead time through an agile pricing strategy in the latest quarters.
Our action is now aiming to address both the macro and operational challenges to get back on historical earnings. The Ukraine war and the uncertainties created by the volatile market will impact the timing, though. Pricing is the most important thing in our short term, and I'm confident that Scandi Standard has the ability to make these price increases happen. I will elaborate in the slides to come about that. We can jump to the next slide, please. In this slide, on the right-hand side, we see examples of cost inflation. We see a steep increase in feed prices, which has a major impact, since it accounts for a significant part of our cost base. The first round of cost increases are largely mitigated by price increases during the previous quarter.
The war in Ukraine is certainly creating further cost inflation, driven mainly by feed prices, and as I mentioned before, and we aim for further substantial price increases in the market. We also push for faster implementation. In general, price adjustments have historically only been made once or a few times per year, but we see now that the healthy customer dialogues during recent quarters have paved the way for more flexible approach toward price adjustments, which is crucial during these circumstances. Our customers also have shown that they understand the situation requires additional significant price increases in order to ensure long-term domestic food production and a sufficient supply of chicken products in our home markets going forward.
Price increases have the highest priority in our organization right now. Compared to the price level of last year, we estimate that the end consumer might be facing a price increase of approximately 30%, and this might of course affect the consumer demand. We also know that chicken is well positioned compared to other animal proteins and will continue to have long-term competitive relative price points. Actually, this is one of the things that attracted me to the poultry industry in the first place, the efficiency of this protein and the health part. Due to the short lead time in the poultry value chain, we will be first movers on price, and it may in some markets have short-term effect on volumes. In the medium term, as mentioned before, I'm convinced that chicken will come out very well.
You can see the resource efficiency and price point in chicken in the lower table on the right-hand side. Next slide, please. As you can see in this slide, we see recovery in export prices. The export business continued to have negative effect on earnings during the first quarter of 2022. The background is that we have been in a period with low export prices due to both global oversupply and in specific European oversupply on proteins. That's impacted by the COVID-19 restrictions that has affected the whole European protein sector a lot. There have also been import restrictions related to outbreaks of bird flu to a number of Asian markets, and that had a great impact as well. However, export prices are now increasing, driven by reduced chicken production in Europe.
This is a part related to the war in Ukraine and the rapidly increased feed prices. At the same time, we see an increased demand from restaurant sector around the world as a consequence of the release of the COVID restrictions. Personally, I'm also convinced that it's a result of increased consumer interest for poultry. Back to that again, we see a healthy and sustainable product and really efficient product. We still see that we have significant earnings shortfall, when the cost inflation is taken into account. Even though it's a small share of total sales, the export business is important to us, especially when it comes to improving the anatomical balance, meaning how we utilize the full bird, legs, wings and feet and breasts and so on.
We need to reduce our exposure to bulk export and focus more on, for instance, Ready-to-Eat to benefit the full potential of an integrated company. With that, next slide, please. As you can see in this slide, RTC Denmark remains the largest challenge for Scandi Standard. Export prices is important for the Ready-to-Cook Denmark. We are in addition handling the negative impact of the implementation for the former strategy for slow grown birds and the previously mentioned cost increases. Despite the challenges, we see a positive tendency, even though it's not largely reflected in the numbers in Q1. We have number of measures under implementation to improve the situation. They include a significant decrease in slaughter volume in Q1 to balance supply and demand better. This is staff reductions in production and updated product assortment to increase carcass balance.
Work is also ongoing to implement a new strategy for slow growing birds in order to meet the customer demand, which is expected to increase within both Danish retail and restaurants as well as the public sector. The positive effect of these efforts are expected to show primarily during the second half of 2022. In the coming period, I will spend my time together with the Danish team to carefully follow and continuously update and review their recovery plans in order to turn the business around as quickly as possible. With that, next slide, please. As you can see in this slide, it's clear that Ready-to-Eat that drives the result during Q1, bringing us back to the top line growth in the quarter. The results within Ready-to-Cook are far from satisfactory. There has been a significant drop in Q1.
That will be my clear focus to get the base business back on track. As mentioned before, some of our markets relying on bulk export, and an important focus will be to increase anatomical balance, and an important part of that is growing our RTE business. I will come back to that later this year when I'm presenting our next steps in development. The next slide, please. Ready-to-Cook, weak quarterly results as expected with falling profit. The headwinds I have talked about primarily relates to our Ready-to-Cook business. We see an increase in revenues driven by price increases to mitigate the cost inflation. However, this has also resulted in temporary retail demand pushback will affect the price realization negatively. We have at the same time lowered slaughter volumes in Sweden, Ireland, and Denmark, and that's affecting EBIT.
All in all, negative EBIT of SEK 2 million compared to SEK 70 million in the same quarter last year. From a sustainability point of view, we are at a good level with our main animal welfare and food safety parameters. During 2021, we had an adverse development regarding worker safety, mainly driven by higher staff turnover during the pandemic. This trend has now been turned by forceful measures at all levels during Q1. Next slide, please. On this slide, you can see the channel development in more detail. Through these details, you can notice the strong increase in food service and the export channel in the quarter, and the flat development in retail. That illustrates the pushback that I talked about in the previous slide. Next slide, please.
Looking at our Ready-to-Eat business, we delivered a good performance in the quarter with net sales of SEK 643 million. That's an increase of 7.40% for the quarter in fixed currency and an operating income increase by 34% to SEK 35 million during the quarter. Price increases executed on long-term customers in food service, retail, QSR, and in export, and cost inflation was to a large extent mitigated and the EBIT margin landed at 5.5% for the quarter. We can jump to the next slide. It's of course, very encouraging, to see the Ready-to-Eat are growing and outperforming the pandemic sales. The development is driven by increased sales in food service.
During the quarter, we also see that RTE is growing in the retail sales channels, indicating a more permanent setup in the retail demand, showing an increase of 90% in the quarter. To address the demand, Scandi Standard will invest to further increase the capacity at the company's largest production plant in Ready-to-Eat products in Farre in Denmark. The Ready-to-Eat, we have a really good growth, and looking forward to continue that growth. With that, I will hand over to Julia for a more deep dive in the financials. Welcome in, Julia.
Thank you, Jonas. With that, we move to the overall P&L on slide 13. As you've seen, the quarterly performance was weak. However, EBITDA is still at SEK 136 million during the quarter. There were no non-comparable items in the quarter, nor was it in the same quarter last year, meaning that EBIT was at SEK 37 million, versus last year at SEK 8 million. We had somewhat higher financing cost in the quarter impacted by Forex, and the income for the quarter has landed at SEK 10 million, leading to an EPS of 0.1 million, 0.1 SEK. Looking at the return measures at page 14, the declining results, of course, led to a large drop in return on capital employed from 8.4% last year to 4% this year.
However, given our cash preservation measures, our equity ratio remains stable at around 30%. On page 15, we continue to see a low level of working capital. Inventory has decreased versus the year-end. However, this is more than offset by increased receivables with the increased sales and the negative timing factors. Our target level for working capital adjusted for financing items remains to be around 6% of sales. At the moment, we are currently somewhat above this. Looking at the cash flow on page 16, we do see that operating cash flow during quarter was negatively impacted by the low EBITDA and the increased working capital. This was partly offset by the low CapEx spend in the quarter as part of our cash preservation measures. I will talk more about this in the coming page.
We had high taxes paid in the quarter due to local regulatory timings of yearly payments. This was the same last year. All in all, leading to a closing EBITDA of just above SEK 2 billion, which is SEK 54 million higher than the previous quarter. On page 17, you have our cash flow guidance. CapEx for 2022 is estimated to be around SEK 330 million, same as in previous estimate. This is quite low, particularly in light of the large portion being reserved for the new ERP system. In addition, as Jonas already said, we have a clear focus on facilitating further growth in Ready-to-Eat, meeting the demand we see in that segment. Paid interest level is estimated to be at 4%-4.5%.
This is somewhat increased due to slightly higher margin and increased base rates. The blended tax rate is estimated to be around 21%. As mentioned, we have our new financing, new five-year financing in place. It is a sustainability-linked facility that also has increased leverage ratio covenant headroom in the first quarters. We are very pleased that we have this secured, which is a solid and flexible financial basis, specifically in these turbulent times. As previously communicated and as a result of cash preservation measures, the board has resolved not to propose a dividend for 2021 to the AGM, which will be held later today. However, the dividend policy remains unchanged. Coming to page 18, we look at our sustainability KPIs, and we are in general pleased with the development.
Our main animal welfare KPI is in line with expectations. It's higher than previous quarter, but this is because Q1 is normally higher than average due to the cold and wet weather. CO2 is developing and improving in line with targets. Antibiotic use is unacceptably high. This is driven by use in Ireland as the Nordic countries are close to zero. The main reason is poor quality in day-old chicks. We have our Scandi Standard expert on site now in Ireland to identify and solve root causes for this with utmost urgency. On the other hand, what is pleasing to see is that we have improved results on LTI, as Jonas mentioned. This is lost time related to injuries.
Here the action plan that was put in place to mitigate previous poor results is delivering, and we see an improvement of 31%, which is the pre-2021 average. Sustainability is high on the agenda for Scandi Standard, and we are pleased that we have been able to incorporate our main targets in our new sustainability-linked financing. The targets included are related to CO2, LTI, and the use of antibiotics. With that, I hand back over to Jonas to take you through the final slide.
Thank you, Julia. Yes, to conclude, we are heavily affected by the development in the war in Ukraine. As an effect, we see large cost inflation in the market. For Scandi Standard, it's the feed cost increases that have the most significant effects, and our most important focus is to get the price increases through to recover our margins. We see a good momentum for rapid implementation of required price increases as our customers recognize the gravity of the situation and the importance of maintaining domestic supply. Short term, consumers may respond to the price increases in an era of uncertainty as chicken products are likely first movers on price. However, medium term, we are well positioned for successful implementation of price increases given the low price point and the lower absolute and relative price increases required.
As a new CEO, my immediate focus is to ensure that Scandi Standard navigates through the ongoing volatile situation on markets with least possible impact on our earnings. As market leaders in the Nordic region and Ireland, we are well positioned to succeed in this. Though our new bank finance agreement, we have secured the financial basis for the next leg of our journey. Given that we are in the middle of a challenging phase, we appreciate our bank's trust and our ability to regain momentum in our business. I really look forward to leading the work with the further development of Scandi Standard's potential together with my new colleagues. With that said, I will open up for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad or press star two to withdraw your question. The speakers will be able to answer one question at a time. Our first question comes from Daniel Schmidt from Danske Bank. Please go ahead.
Yes, good morning. Hope you can hear me. A couple of questions from me then, starting with the price increases that you mentioned, Jonas. Clearly, you're on top of this, it sounds like. Should we sort of read into what you did in Q1? Was that just the start of being much more aggressive entering the second quarter? You talk about sort of increased flexibility when you speak to your customers to do faster and higher price increases than in a sort of normal market. Is that what we're entering into now? Or did we see that already in Q1?
I would say if we go back to the fourth quarter, we saw these cost increases, and we pushed the prices through in Q1. Now, Q1, we're aiming for new price increases, but we're pushing for shorter lead times and bigger steps to mitigate the cost increases we see as an effect of the war in Ukraine and the high cost inflation.
There's some sort of change to the sort of pattern or behavior that you can exercise now compared to before the war, basically, which is more acceptable now than a couple of months ago. Is that correct?
Yes. We see in the Q1 that due to this high cost increases, we see a better acceptance for the customers to push the shorter lead times and mitigate the cost increases that we see in the market.
Okay, good. When you talk about positive effects in Ready-to-Cook Denmark in the second half of this year, and obviously sort of looking at the performance in Q1, it was the same level of loss as in Q1 last year. What do you mean in terms of positive effects? What magnitude are you looking for in terms of improving profitability in the second half versus where the run rate currently?
Yeah, my mission is to improve the profitability for the group. We cannot quantify the improvements, and I've been here for a month. My focus right now is to get grip on Denmark together with the team and see how we can proceed this forward. We cannot quantify the improvement, and I cannot do it right now.
You see meaningful improvements coming through. Is that fair?
Of course, we're looking into the business, and I'm looking into all the different segments, and all the different countries. Of course, the development in Denmark have increased my focus. The thing I'm really into now is that focus on doing the right things for the future. I think that we have a good team in place, and we are re-working really hard to get a grip on this. We see, as I mentioned in the report, an increased retail demand in Denmark for the slow-growing birds.
Just moving on to the export prices moving up, which of course is a good thing, and you mentioned sort of decreased production and improved demand from food service if I remember correctly. Did you see that kicking off in mid-February when the restrictions lifted, or did you see that before? Will we have sort of the full effect of that in Q2 and only a half of effect in Q1 in terms of sort of the demand coming through a bit better towards the end of Q1 into Q2?
I can't predict the future, but what I see and if I comment about the Q1 and what's happened in Q4, we see increase in export price. It is, as you say, an effect of the COVID-19 restrictions that have been taken away. We also see lower supply that increased the demand on the export market. As you can see in the graph, we are increasing the export pricing during this Q1. Now when the bird flu restrictions are taken away, we can access many more Asian markets. We can't guarantee, of course, what's happening with the bird flu. For now, we see better access to Asia.
Except for that, we also see an increased demand on the export business within the group as the graphs are showing.
All right. The bird flu thing, I don't think you mentioned, but that's been a theme of course for quite some time. What you're saying is that the restrictions, there hasn't been any new cases in the past three months, is that what you're saying? Now they were recently lifted when it comes to Asia?
Yes.
All right.
I will also comment on the oversupply in the European market that we talked about. There has been an oversupply of primarily pork in the European market due to the ASF, the African Swine Fever, and they had restrictions. Now we're seeing that the production of pork goes down in Europe as well, and that's a part of the increased demand for chicken as well.
All right. Good. Those were my questions. Thank you.
Thank you.
For any further questions, please press star one on your telephone keypad. We have no further questions on the call. Sorry, we do have a follow-up from Daniel Schmidt. If you'd like to go ahead, please.
I can continue if there's no others on the line asking questions. Just summarizing all the things that you're saying in terms of more flexibility on price increases and export prices moving up and demand coming back in food service. My understanding, at least looking at the market, that that is sort of a has been a gradual development through the quarter, given the lifted restrictions in most markets by early February. Is it fair to assume that sort of the start of Q2 has been better than the start of Q1?
We can't comment on Q2 at all. We are presenting the Q1 numbers, and there we have seen an increase in the export pricing.
Yeah. I was more sort of trying to look for the entire picture, given all the commentary that you had, if you summarize all that?
I won't comment on Q2. A thing that I can say about Scandi Standard in total, and the business and the industry in total is we mentioned it a couple of times in the report as well. I think it's really important that we are focusing on optimizing the anatomy or the carcass balance, as you call it, as well. A really important thing to gain profitability in the industry is to have a good utilization. We're focusing on improving our utilization all the time.
Yeah. I appreciate, of course, that you've only been in the company for a month, and you're right that you will be sort of returning with some sort of plan how to go forward, and it's still early days. When do you think that you will have a clear review that you can communicate to the market? Will that be in connection with Q2?
Yeah. I will later this year get back. I think that I will present it later this year. I can't be totally specific about that, but about when we come to the Q2, Q3, I will be able to present to the market how I see it. I'm looking really forward to spending time to actually dive into this business. I have this experience working with the industry my entire life, so I have my thoughts of what we're gonna do and how we're gonna progress this forward together with my colleagues. I need to have this time, and it's early, it's one month. Later this year, I will certainly present how we see the business going forward.
Yeah. Given your background, if I sort of got it right, you're Swedish of course, but you've been working in a Danish company in Denmark, and correct me if I'm wrong, and that's where you have your biggest challenge, and has been for some time. Do you feel that you're hitting the ground running when you came into this company, or is there sort of still a learning curve to be had?
If you mean for me personally?
Yeah.
Yeah. Of course, there's a learning curve. I have a lot of things to learn into the poultry business. I think, and I'm really confident on my background, spending my entire life in the meat industry, that I hopefully pretty fast can contribute into the company. As you mentioned, I've been a part of a Danish company and part of group management there, but my responsibility has been as a CEO in our Swedish subsidiary, as an example, but working both national and international, of course.
I think I can contribute, and of course, after 23 years in that company, and a company that I really like and admire a lot, it really needs to be something special for me to jump from that company into a new company. I really saw the potential in Scandi Standard and things that we can do together. Of course, I'm confident of what we can do together.
Yeah. Then maybe just another topic coming back to the price increases as a final question. Given the scandals that you were through in the Swedish market last year, do you feel that, or is it your impression speaking to others in the company that has hampered your capabilities to raise prices in any sense?
Yeah. We need to bear in mind that the thing about Kronfågel, of course, is just a part of Scandi Standard. We see some impact on demand, but it's not linked directly. It's hard to say, but we don't think it's linked directly to consequences of this scandal. It's more about we see huge or large price increases, and we will see a temporary pushback. We are really focused on rebuilding the confidence from the Swedish customers.
Actually, I think that we are gaining trust, and I think that we see that poultry will now in medium term actually be an efficient protein that can handle the price increases, both in terms of efficiency compared to other proteins, but as a protein itself.
Yeah. All right. Thanks, Jonas. That was all for me.
Thank you.
As one final reminder, please press star one if you have any questions you'd like to ask. We have no further questions on the call, so I will hand the floor back to Jonas.
Thank you very much, and thank you for listening in to this presentation and the Q&A. With that said, we say thank you very much. Bye.