Earnings Call: Q2 2021

Aug 25, 2021

Good morning, everyone, and welcome to this presentation of ScandiStandards Quarter 2 Results. I'm Otto Breckenberg, I'm the Acting CEO of ScandiStandard. With me today, I have Julia Loggqvist, our CFO. Welcome, Julia. Thank you. First, a few words about myself as this is my first quarterly presentation for ScandiStandard. I took on this role in June because I think this is a fantastic opportunity. With my background within blue chip, fast moving consumer goods companies and my experience from a number of turnaround situations, I'm very much looking forward to the journey that lies ahead of us. Moving on to the next slide, please. Overall, ScandiStandard delivered a growing top line in the quarter during with a 7% increase in local currency driven by recovery in foodservice and in the ready to eat business. During the quarter, we have faced several challenges currently impacting our results negatively, which I will revert to in detail in this call. We firmly believe that the challenges are manageable, and we will be dealing with them with the new leadership in force in Scandi Standards. A number of the items are being addressed in the short term, but it will take some time for some of these measures to impact the P and L. More structural items will be dealt with through a comprehensive improvement program, which will be communicated by me later this year. Moving on to the next slide, please. Scandis Standard has a history of strong top line growth and stable EBIT margin around 4% over the last couple of years. Profitability is currently deviating materially from historic earnings for the following reasons. Firstly, a negative result of SEK 35,000,000 in the Danish ready to cook business due to a combination of imbalance between supply and demand of high end products and low export prices. Secondly, Low export prices are also impacting other parts of the business, driven by bird flu related export restrictions and low global demand from foodservice. Thirdly, there is also a lag effect in passing through historically high increases in feed prices that we are experiencing. And fourthly and finally, we have also had and cost related to recent management changes. Next slide, please. This is an overview here of our segment contribution in the quarter. Most of our current challenges are tied to ready to cook, representing 3 quarter of our total net sales. Although we saw a strong rebound for the ready to eat business, driven by recent foodservice recovery. This could not offset the disappointing performance in our ready to cook business. Other business, including our Ingredients business and corporate overhead, contributed negatively. Ingredients was weak and corporate overhead was impacted by the cost for the recent CO change. Next slide, please. Taking a closer look at our ready to cook business, we faced a number of challenges, leading to moderate growth and unsatisfactory margin of 3.3% during the second quarter. EBIT amounted to SEK 65,000,000 compared to SEK 98,000,000 in the same quarter of last year, mainly due to the losses in Denmark, bird flu effect and time lag effect in passing through the large raw material cost increases that I mentioned recently. We experienced issues in Sweden in the quarter, which I will come back to. And those caused a 7% drop in sales during June. Next slide, please. Looking at sales per channel and starting with Ready to Cook, we conclude that there has been a clear channel shift towards foodservice in the quarter, and we're now back to a more normalized situation as was the case pre COVID. Looking at sales development by country, we can see that there was strong growth in Norway in Finland. Sweden's growth was 3%, impacted by negative public attention in June, and we saw a decline in Denmark. Next slide, please. On this slide, you see the EBIT development for the 2nd quarter for the ready to cook business. As you can see, the development was mainly driven by higher raw material prices being partly offset by price increases. Next slide. To summarize, our key focus for Ready to Cook during the quarter has been twofold. Firstly, to address the challenges in the Danish operations where the main issues are the poor execution of the slow growing bird strategy that was introduced some time ago secondly, low flexibility in bird intake thirdly, high plant complexity and finally, we are experiencing cost structure challenges in our Danish business. Those are the first set of challenges. Secondly, we have also been working hard to close the deviations of standards in our Swedish operations. The current status is that the majority of the deviations have now been closed. A few remain, and we aim to have full focus on this until we have resolved them fully. Animal health and food safety are business critical factors for us, and our goal is for deviations from the company's standards, if they arise, shall be at the lowest possible level. And this is a central part of our continuous improvement work. And this is important to note that after having thoroughly investigated the deviations, I'm confident that consumers' health and safety in Sweden was never jeopardized due to our backup systems. Also, we can conclude that no increase in consumer complaints has been recorded during the period. Further, we have initiated an investigation to identify and handle deviations from standards in other plants in the group with the intention of developing an action plan to prevent and handle any deficiencies in our production and quality process in all our markets. And even if some of these measures may have a short term impact on results, I am confident that this will put us in a better position for profitable growth in the longer term. Next slide, please. Looking at our business in ready to eat, I'm pleased to announce that we delivered a strong performance in the quarter. The business was well prepared and able to lever off a rebound in foodservice demand. This resulted in a strong top line growth of 26% and a substantial margin improvement. It's also pleasing to note that the injury rate and level of complaints remained low in the quarter in spite of much higher level of activity in our Ready to Eat business. Next slide, please. There was a strong growth in Foodservice. As was to be expected, we could see 25% growth versus same period last year. We could also see a strong performance in retail, which is a sign of lasting demand increase for our ready to eat product in the retail channel following COVID-nineteen. Ready to Eat saw a strong performance in all the 3 major markets where we operate. Next slide, please. Looking at EBIT in ready to eat, it was mainly driven by higher volumes, normalized pricing and lower fixed costs and raw material prices, resulting in a substantial improvement of our EBIT to SEK 35,000,000 in the quarter. Next slide, please. For us at ScandiStandards, sustainability as the core of our business is also a key driver why many consumers prefer our brands. We're committed to reporting key sustainability data demonstrating our progress in core areas. This quarter, we had good performance in all areas except injuries, affected by a higher level of injuries in our plant in Ireland, and we're now addressing those vigorously. Next slide, please. So let's remember why this is such an exciting business and industry to be in. There are strong underlying drivers for chicken as a climate smart protein, having only a tenth of the carbon footprint compared to red meat. Also and currently, Nordic Shipping consumption is only at the 35% to 40% level of the same market or consumption in the UK. And the shipping consumption in Sweden or in the Nordic countries is only half of that of the U. S. Consumption, representing a sizable opportunity for ScandiStandard. And I think most important to us all, it's all very tasty. And with that, I hand over to Julia. Thank you, Otto. If we move on to Page 15, coming back to the overall group P and L. As also shared previously, we have had positive top line development, but for a number of reasons, we did not see the same development in EBITDA. And on top, we've had increasing depreciation due to the high investment in recent years. We have also had increased finance costs this quarter, driven mainly by revaluation of share in pension funds. The quarterly tax rate was 20%, All this leading us to a net income of SEK 41,000,000 versus SEK 73,000,000 last year and a low earnings per share of only SEK 0.6 versus 1.19 last year. Going to Page 16 and looking at our 2 main return measurements. We see declining returns versus last year, driven then mainly by the poor results in the first half of twenty twenty one and also the high non comparable post in the last half of twenty twenty, in total SEK 59,000,000 mainly related to the adjustment of the earnout debt attributable to the acquisition of Mannerfarm. Still worth noticing that when looking at the adjusted return, we were in line or better than the same period last year. And the equity ratio is improving to 29% versus 28% last year. Coming to Page 17 and looking at our working capital. Working capital is similar at a similar low level as in the last quarter. We see a positive contribution from COVID-nineteen state related state aid, allowing for postpone tax payments. I'm very pleased to see the reduced inventory also in this quarter. At the same time, the fee was up mainly driven by increased sales. Looking at the working capital at sales ratio, we have a Long term target level adjusted for financing to be around 6%. Adjusting for COVID-nineteen state aid and our financing elements, We are currently above this and we are working continuously with this. Coming to Page 18 and the cash flow. And operating cash flow is obviously affected by the reduced EBITA. Working capital is, as we have saw, stable compared to the previous quarter, while capital expenditure is slightly up versus lower than average as of last year. All this leading us to an operating cash flow far below quarter 2 last year. Taxes were also higher versus last year, and we have in the quarter 2 of this year paid dividends of SEK 81,000,000. So in total, the NIBD is increasing somewhat in the period, but it is in line with the rolling last 12 months. Finally, for me, I will comment a bit on our cash flow guidance. The CapEx for 2021 is still estimated to be around SEK100 1,000,000 versus the SEK355 1,000,000 that was spent last year. It is a combination of efficiency, capacity and ESG investments on top of the ongoing maintenance. Given the current quarter subs, we are doing a thorough review of the investment process at the moment. The paid interest is estimated to still be around 3% to 3.5% and the tax rate is to be around 20%. We also still have our continued liability in the shape of the Manner Pharma acquisition. It consists of the 3 earnout charges and the final charges due in 2021. Looking at our dividend, we did pay, as we previously said, a dividend of SEK 1.25 per share now in quarter 2. And the board will come back to the question of a second dividend that was announced in the report for the Q1. Just as a reminder, the dividend policy for us is to be around 60% of the net earnings over time. And with that, I would like to hand back to Ulf. Thank you, Julia. So to conclude, quarter 2 was impacted by headwind and operational challenges. In the short term, we are focused on operational improvement in Denmark, and we're closing outstanding deviations in Sweden in our production. We have initiated a group wide investigation to identify and handle any deviation from standards in other funds. Even if some of those measures may have a short term impact on results, I'm confident that this will put us in a better position for profitable growth in the longer term. With respect to the Q3, we have unfortunately experienced plant downtime in two areas: an increasing number of cases of COVID-nineteen in the production site in Ireland, which have a significant impact on production and the heat wave in Sweden during July, causing disruptions in production and delivery. In parallel, we're on developing a group wide improvement program that I will come back to during the second half of twenty twenty one. With the strong competence inherent in our organization, coupled with clear leadership, I'm confident that we'll tackle the current challenges and the improvement program that is now taking shape will enable us to capitalize on the dynamic opportunities in our markets and create shareholder value in line with our potential over time. And with that, I will open up for question and We have a question from Daniel Schmidt of Danske Bank. Daniel, the line is yours. Yes. Good morning, Otto and Julia. I hope you can hear me. Yes. A couple of questions from me then. And Starting with what you mentioned in terms of phasing of feed prices, you saw some compensation in the quarter, but Not fully. Would you expect full compensation when it comes to higher raw material costs in the coming quarters or will it coming quarter Or will it take longer? Hi, this is Julia. We still expect there to be a certain lag going forward as Prices keep on moving. But over time, as you alluded to, our principle is always that input price increases shall over time be passed on to customers and consumers. And does it take is it your opinion that this is an extraordinary situation that Sort of the catch up is taking longer than in a normal case? Yes, that's my observation. Although I'm new to the industry, I think we're experiencing and that's what my people are telling me also that the raw material and especially feed prices are the increases are exceptionally high. So yes, this is an extraordinary situation that we're dealing with. We will deal with it the right way. And I think also, It's a matter of us raising up to the challenge and be as good and strong as possible in our interaction with our customers. And is it in any way sort of an extreme situation also for you, in particular, given the Production irregularities and the media scandal during the spring, is that making it harder for you to compensate for raw material and feed prices in the Swedish market? The deviations from production standards that were discovered and published in quarter 2 are to a majority dealt with, and we have closed the most of them. We could see in consumer demand a drop of 7% of sales in June. And already in July, we could see that the consumer demand was bouncing back. So that is not a material explanation for any changes after quarter 2. And the customer relationships have been virtually untarnished because we've been in very close contact with all our major Swedish customers throughout this process. Okay. There were some discussions during that phase where municipalities were out saying that they were Stopping sort of imports from Kirungfogel, is that no longer an issue? That is no longer a significant issue, no. Okay. And Just on your sort of response when it came to the Swedish consumer, and it seems like the Scandalous fading, as you say. But how can you sort of make sure that that's the case? Because you also have this production problem that you mentioned in Q3. Is it very sort of obvious for you that the drop of, I think, it was 12% in July is related to that and not to the consumer response on the back of the production irregularities during the spring? Two answers to your questions there. First of all, as I said, consumer demand bounced back in July after the public attention. We also during that period, We have backup systems in our production facilities so that consumer health was never in jeopardy. And we also had no increase in consumer claims throughout the whole period. So that's one thing and item of reassurance. The events that you're referring to that we published in our report here for quarter 2, supply issues caused by the heat wave. They are this heat wave that came all over Europe that was very much dominating the situation for our plants outside Castanon is a completely isolated event and had nothing to do with production deviation or consumer sentiment, so completely isolated event. All right. And does did that affect your competitors as well in the Swedish markets when it comes to supply? I have not heard of those kind of supply issues caused by the heat wave that I think we all experienced this summer in some ways. So I haven't heard of the same size of issues for our competitors, but I guess that's rather a question for them. Okay. So would you say that your supply chain is more fragile? No, I wouldn't say that. I just say that we had an extraordinary situation, and we had production in several European countries And in no other region where we are operating and producing, we experienced the extreme heat that we did in our Swedish plant. And during the 30 years, and I talked to people who've been involved in the operations there for the last 30 years, they have never experienced anything like it. Now we all know that with climate change, the unlikely and the extreme is becoming less extreme. So we are doing now a full review of all our plans to make sure that we have the right resilience and the right contingency plans for this and other extreme effects that could happen in our production. So that's something that's taking place during the fall to make sure that we to the meaningful extent can handle extreme events for our production going forward. All right. You mentioned July and clearly sort of the weather has normalized now during August. Does that mean that your production and supply chain is back to normal in Sweden? It's absolutely been normalizing since the heat wave. I guess everybody who deals with production have challenges here and there. And now we are we have since some time dealt with that with the lead wave in July and things are getting back to normal. Okay. And on that topic, Joscha mentioned Ireland when it came to COVID. Where are you in that sort Where are we in that situation? Well, the situation exists as of today. And The outburst the greater outburst of COVID cases came in August, and it's burdening our production and disturbing our production at this very moment. And I guess we have all learned the last one and a half years It is difficult to predict COVID, the spread of it, etcetera. We are in close cooperation with the authorities. We have taken extraordinary measures so that we can still have the plant running at highest possible capacity. But it is absolutely a disturbance. And to the best of our knowledge and assessment, is going to continue to be a disturbance for us throughout the quarter. Okay. But can you in any way quantify the impact when it comes to Ireland? Well, we don't do numerical projections and forecast, at least we don't share them. So that's not something that I think would be the right thing to do here. So I will just refer back to what I said initially that it's absolutely something that is disturbing our operations today, and we expect it to be continually so throughout the quarter. Okay. And on There's a lot of things that you need to look into, of course, and it's been a hectic period. But on the matter of sort of declaring a plan, an action plan for the group, and you will be back during the second half of this year. Could you say anything about sort of the ready to cook business in Denmark and if that's a possible divestment in the coming 12 months. I will start I will give you a few answers on our ready to cook business in Denmark. But let me first say that we are poised to turn the Danish business around, and that's our only focus within ScandiStandard. The Danish business in Ready to Cook is struggling with profitability, as we all know, due to poor execution of the slow growing bird strategy, low flexibility in bird intake and also we are we have a high plant complexity. We're currently taking a number of measures to deal with these issues to restore profitability in the short term. The long term plan for Ready to Cook in Denmark is an important part of the improvement program that you just alluded to in your question. Yes. Okay. So it's undecided yet, I guess. But you said SEK 35,000,000 in operating loss in Q2. What is The sort of the last 12 months loss in that business? The loss between the 12 months last 12 months leading up to June 2021. Is that the loss you had? Yes. I will sorry, let me have a look into numbers. But Obviously, for the first half year, which has been extreme for us, the loss has been SEK 85,000,000. So obviously, a large room for improvement. So the first half of your question was EUR 85,000,000,000. Yes. And do you have any number on the full year 20 Maybe that's easier. We haven't shared those numbers specifically. But was it what is It was a negative number. Is that fair to say? Yes, that is fair to say. A meaningful negative number. All right. And we haven't what I've seen at least, seen any and more bird flu cases in Denmark or Sweden during July August. Correct me if I'm wrong. Does that give you any hope that sort of the worst is behind us when it comes to that particular issue? We did see one case in Denmark in the early July. But we do expect to have a similar effect also now into Q3, but then gradually improving. And what's the lead time? If we don't see any more cases since early July, what's the lead time for sort of the export market to normalize? It's hard to say because it's not only this one impacting the export market, of course. But normally, we say that it's and then there will also be a difference in different markets, but 3 to 6 months, I would say. Okay. Okay. I'll leave the floor open to others. Thank you. Thank you. We have no further questions. We've just received a follow-up from Daniel Schmidt of Danske Bank. Daniel, please go ahead. Okay. So if there's no others, I can continue then. You're welcome. Thank you. So sort of what's your opinion So coming into this company, when you look at sort of the CapEx need, and I think you guided for EUR 400,000,000 also this year, I. E, close to 4% or above 4% of sales. Is that a necessary level to be at medium term, you think? Let me comment on what we have stated. And for 2021, you're very correct, we expect to spend around SEK 400,000,000 in CapEx for the group in a combination of maintenance, efficiency, capacity and ESG investments. I expect that we would that we will keep to that level throughout 2021 despite the extra investments that we are now doing to handle production deviations. Looking ahead, I think that's very much a question for our group wide program. So we are looking over not only how we can become a much better player in terms of P and L, but also on the return side of things where I see potential that's exactly what type of potential and the ranges I would like to come back to. But I think it's fair to say that we have significant opportunities on both profit and loss and the balance sheet in this company. Yes. And coming back to Denmark then, which is a significant soft spot in the business and has been so for some time. And although this will be part of your communication at a later stage, but could you answer if there's any sort of is In any way, if you look at Ready TO Cook Denmark, is that production intertwined in any way with the rest of the company? Or is it freestanding? The ready to cook business is freestanding and focused on the Danish market. Our ready to eat business and plant in Denmark supplies several countries. But the answer is yes, ready to cook plant in Denmark is aimed for the Danish market. There is a small part of the fleet going into Sweden, but the majority is local. So that means that sort of the production setup is it has its own production setup simply? Yes. So throughout ScandiStandard, the plant predominantly produced for the home market. And has there been any thoughts historically, maybe you can't answer that, but Yuliya, to divest This business before COVID? No, there has not been. Like also said, The main focus has been to try to turn around the business. Of course, we never close any doors. We'll leave any options. But for the moment and also for the last year, the focus has been to turn around the business. And is there any sort of door opening effects So keeping this business running or what will sort of would there be any other implications of just closing the business than what I can think about here now? I mean, at the moment, you're still sticking to the plan and focusing on turning the business around. That's taking up all the time that we spend on Denmark to improve Denmark. I'm confident that we'll be able to make significant inroads and improvements with the Danish business, some of it shorter term, some of it structurally longer term. And it's a challenging market there, Marc. And I think with the right people, not only investments, but the right people and right strategies in place, I'm convinced we can improve significantly. All right. And when you say short term effects, is it Sort of fair to assume that the EUR 50,000,000 and the EUR 35,000,000 in losses that you had in Q1 and Q2, is that really Hopefully, the trough in sort of the impact for the group, even though it will be tough Also in the second half of this year, are we leaving the worst behind in terms of losses? I will not comment on whether the Frotter has been passed or not. But then I speak with confidence and I where I say that the approach we have to the root causes of the Danish situation, this slow growing bird strategy that wasn't executed in the right way, the low flexibility in the bird intake from farmers and also the high plant complexity. We're working hard on all those areas. So without commenting on the or comparing with the previous quarters, I'm convinced we'll see gradual improvement. All right. Okay, good. I think That's all for me. We have no further questions on the phone lines, so I'll hand back. So thank you. Thank you all for attending this quarterly call. And until we talk next time, I wish you a great day. Thank you.