Scandi Standard AB (publ)

Good morning, everyone, and welcome to this presentation of Scandi Standards Results for Q1 2024. Can we move to the next slide, please? My name is Jonas Stunestad, and I'm the CEO and Managing Director of Scandi Standards. With me, I have Fredrik Sylvain, our CFO, and I'm pleased to have him by my side today. I'm also glad to report a significant volume of profit growth within the quarter. Next slide, please. While the first quarter of 2023 was dominated by substantial price hikes for input goods, energy and transportation costs, market conditions have now returned to more normal levels. The situation has enabled price reductions that has benefited consumers in parallel with stimulated demand for our products. So overall, this has resulted in a significant volume and earning growth, even though net sales were lower for the group. So we have increased the volumes with 8% in the quarter. We have increased our EBIT with 32%, and that is 122 million sick compared to 93 last year, and that is margin improved from 2.9 to 3.9 in the quarter. The improvement was driven by a strong quarter in ready to cook and ready to eat, and ingredients was, however, weaker as expected. We have a strong balance sheet. However, the cash flow was impacted by timing effects, as explained in the last quarter, and we have provided a dividend of 2.30 compared to 1.15 last year, and the dividend will be paid in two equal installments. So next slide, please. And we are proud to have passed a successful turnaround process and recovered our earnings after a tough period for Scandi Standard, and we have taken action as forceful volume contractions to support required price increases, a new course implemented in ready to cook Denmark, and our balance sheet strengthened through capital discipline and divestment. And with recovered earnings and a stronger balance sheet, we have now entered the next stage in our journey, and we see a strong demand and has recently allowed us to ramp up a volume of 8%. Next slide, please. And we have seen a long period of a sharp increase in input costs, which has necessitated radical price increases to consumers. Market conditions have now started to be more normalized, key input costs are trending downwards, and as presented on the first page, input costs have a link to our top line. But although we seek on the waters now, we have, however, need to be prepared for further volatility and uncertainty. But the short production cycle compared to other proteins enable us to be more agile in our supply chain. And when we look at other costs as packaging and energy, we see that those costs are at a more stable level, and we are hedging a major part of our electricity exposure. So next slide, please. And price has always been important for customers, and that focus has increased even more in the present inflationary environment. And chicken is affordable in all segments, from high-end to low-end segments, and fillet, which is our high-end cut, is even competitive in the lower-end segments. So we see further opportunities to drive more value out of the chicken due to its affordability. So next slide, please. And this slide, I've shown it a couple of times, reminds you on our strong market positions in all our five home markets and the countries that are highly consolidated. And these markets have large entry barriers, and they can individually be regarded as semi-closed markets. Due to the strong consumer preference for domestic produce, and due to our strong market position, our own supply decisions have a meaningful impact on market balance. And that has helped us in the recovery process from inflation. Next slide, please. And as you can see in this slide, we're expecting strong growth in consumption. We have had 44% growth in poultry in the period from 2010 to 2023. And Rabobank, they're expecting 13% growth until 2030. So next slide, please. And as we have explained in detail during the Capital Market Day, drivers of the growth are these three areas. It is responsible, safe and nutritious, is convenient, versatile and tasteful, and it is affordable because it's sustainable. It's three important areas to drive our growth. So next slide, please. And then we look into -to-cook, and this table shows the reconciliation of our segments. We see strong positive contribution in -to-cook and a decline in -to-eat and others, as expected in Q1 2023. And we also want to remind you that the category other includes our ingredients business and our corporate costs. So next slide, please. And here we look into our -to-cook segment. We have an increase in net sales of 3% and a volume growth of 8%. And the difference is driven by lower input costs and change in breed in Denmark. And we present an EBIT of 96 million sick compared to 31 million sick last year, first quarter last year. And it is a strong improvement driven by turnaround measures and increasing demand in several markets. We also see improvement in our animal welfare metrics, mainly driven by Ireland, and that is mainly improved in footpaths scores and lower antibiotic use. We also see strong focus. We also have a strong focus on our LTI performance and our continuous improvement in that area. Next slide, please. And here we can see it over time. We see a solid recovery in our -to-cook with an EBIT per kilo of 1.37 compared to 0.47 kronor per kilo last year. And net sales per kilo is slightly down due to its link to input cost. And lower input costs converts into more attractive consumer pricing, and we see a volume growth in this quarter of 8%. However, Sweden is still operating at 85% of historical volume level. And although we see great improvement, we have a long way to go, which is reflected in our ambitious financial targets. The next slide, please. And here we move into export. We have seen a 4% decrease in export prices versus Q1 2023. We focus on building more solid export business with strategic international retail and food service customers. And the aim is to be less exposed to the commodity market, which has and will have a positive impact on our export business. We're also focusing on broadening our export permits to the most attractive export markets in order to get more value out of every bird. And one achievement in the quarter is that Ireland has granted export permission to South Africa. And when we look at the export prices, we see this stabilization in the export prices, even though the uncertainty is still high due to macro factors. So next slide, please. And on this slide, you can see the channel development in more detail. Through these details, you can notice the increase in all channels in the quarter, which is driven mainly by volume. And we have seen a strong demand growth in several of our markets in the quarter, and particularly Finland. Also fantastic growth at the moment. Next slide, please. And now we move into ready to eat. And as explained the last quarter and quarter before, we have a temporary reduced activity level. The net sales are down 22 percent and we present an A bit of 25 million sick compared to 45 million last year. And that is due to loss of contract in Central Europe. And the margin drop is driven by plant utilization as communicated last quarter. And volume growth compared to Q4 is up when we hit the bottom in Q4. We do see adverse development in lost time injuries and we make corrective actions to take into prevent recurrence and continuous work to ensure prevented measures. Moving to the next slide, please. But we continue to rebuild our ready to eat order book after the loss of bread and contract. The high volume and low margin business is phased out now and volume and A bit has bottomed out in Q4 2023. The lost business have made room for new opportunities with a more long term diversified and profitable portfolio. And we have a good traction in replacing lost business. Retail sales is the main contributor in the quarter and we have historically seen a strong but uneven demand and we expect continuous growth over time. And growth in this segment, it is important to say that that comes in sequences and we have a lot of potential customers in the pipeline. And now we're using this period of lower utilization to upgrade and maintenance to meet high standards and prepare for the future expansion. So ready to eat is an important cornerstone in our strategy to reach our financial target. And we're expecting gradual A bit improvement quarter by quarter. Next slide, please. And here you can see it in figures and it is of course very encouraging to see that the continuous growth in retail. However, the development in the food service channel is declining due to the reasons mentioned in the former slide. Growth in this segment is and will be a priority for me the coming years. We are confident that we will replace the lost volumes with other more profitable volumes in the coming year. And we've already slowly started to fill up with new orders and will continue to do that in the coming periods. So ready to eat will be an important long term tool in our aim to develop in our every per kilo that is I have increasing the value of our protein. So next slide, please. So I'm not very concerned about recovering the recent lost volumes in the coming period. We have historically seen a strong but uneven demand and we expect to continue growth over time. And growth in this segment as I stated on the last slide comes in sequences. And the trends are particularly strong for convenience products. And we have these two main type of businesses. It is the international breaded business where we have our fatter factory. And then we have our integrated local business in Sweden, Norway and now also Finland. And our ready to eat business yields a significantly higher return on capital employed compared to ready to cook. And I also want to highlight the strong organic growth in this segment over the years. And that is included in the 40% growth in 2022. And with that I hand over to Fredrik for more deep dive in the financials.

Great. Many thanks Jonas. Good morning everyone. Next slide, please. As Jonas has mentioned, Q1 was strong. It was actually our strongest first quarter ever with improved profitability and strength and margin. Sales was lower than previous year, which was expected. And the main drivers are the RTE contract phased out during last year. Ingredients had high prices previous year and they are now more normalized. And lower input costs that has benefited our consumers. And this was partly offset by the very strong RTC performance. EBIT increased with 32% to 122 million SEK and EBIT margin strengthened with 100 basis points to 3.9%. Our finance costs have increased compared to previous year. And that increase is mainly attributed to higher interest rates, partly offset by reduced net interest bearing debt. Our net income was 70 million SEK in the first quarter, which is an increase of 59%. Despite some challenges in sales, our feed efficiency remained stable at a strong level. Feed efficiency is measured as kilos needed for one kilo live weight. Where chicken is one of the lowest levels for animal proteins. We're focusing heavily on employee safety and are making progress rolling 12. But Q1 is higher than previous year. There are several ongoing initiatives to keep accidents to minimum. Next slide please. Our return on capital employed and return on equity continued the positive trend. And we have significantly improved versus previous year. We're now back to historic levels and main drivers are increased profitability and more equity. At the same time, our equity ratio has improved both versus the fourth quarter and previous year. And is now just south of 37%. Next slide please. Here we have our cash flow overview. As we said in the fourth quarter, net interest bearing debt was impacted by exceptionally low working capital at year end. In Q1, we had strong sales the week before Easter, resulting in higher accounts receivables. Capex is significantly higher than previous year, supporting our journey for higher effectiveness and efficiency. And in the quarter, paid tax was positively impacted by a refund of preliminary corporate tax in Sweden. Overall, our net interest bearing debt increased with 138 million SEK in the quarter. And leverage is now at 1.9, which is significantly lower than previous year and also a target of 2.5. It's the net interest bearing debt was reduced with almost 300 million SEK versus Q1 last year, which is very positive. All in all, our financials are stable, which is giving us improved strategic flexibility going forward. Next slide please. Our working capital is close to flat in the quarter, impacted mainly by accounts receivable, inventory slightly higher and accounts are payable together with other are in line with year end. As previously announced, target level of working capital to sales, excluding financing items, remains around 6% and we're currently in line with target. Focus going forward is to closely monitor development and optimize it. Next slide please. This slide shows our inventory development, and you can see that it's under control. This of course remains a clear focus area going forward and we, for example, are working on optimizing the sales and operations planning to make sure we produce the right products and we use the export channel for surplus sales, not to interfere with domestic pricing. Next slide please. Capex for 2024 is expected to be around 500 million SEK, which is a substantial increase versus last year. This aims to support the journey to reach the recently revised targets and the priorities are the expansion of the RTI business in Norway to meet the increased demand with approximately 30% capacity enhancement. Also to increase the de-boning capacity in Ireland and Denmark, as well as Finland, to climb the value ladder. We also invest in product differentiation in Ireland, as well as increase efficiency with the new packaging line, for instance. And we also have our ERP implementation where we successfully went live with the first country now just a couple of weeks ago. Also in the beginning of this second quarter, we successfully concluded the acquisition of a leased production and packaging facility located in Norway. The asset was procured with the dual objective of safeguarding a critical strategic resource and enhancing our EBIT margin. The transaction was executed at the valuation of 190 million NOK. The interest rate on bank financing is approximately .5% per year, but if we add the IFRS interest components of leasing and factoring in vendor financing, paid financing cost is estimated to be around 8% of net interest bearing debt. And we proposed to divide the dividend into two installments with separate X-dates to balance our cash flow between the second and the third quarter. Next slide please, and back to you, Jonas.

Thank you, Fredrik. Next I will talk a little bit about one of our cornerstone and our license to operate. And there are three key areas when it comes to creating trust for what we do. It is responsible animal welfare. It is safety for our customers and consumers. And it is nutritious products. And this has a close link to our sustainability scorecard. If we move to the next slide, please. And here I am proud of the progress that we have made during 2023, including meaningful improvement in lost time injury frequency rates, antibiotic use and our main animal welfare indicators like food score. We see slightly higher LTIs in the first quarter compared to the first quarter last year. But we are putting a lot of efforts to reach our long-term target for 2024. And during 2024, we will continue to refine our roadmap towards 2030, including development of our climate transition plan, as well as implementing the EU corporate sustainability reporting directive. And that is called CSRD. The implementation of CSRD will further strengthen the integration of sustainability in our strategy, value chain and operations and facilitate comparability and further transparency. So it is important for us to reach the standards and follow a structured way of working with sustainability. And if we move into next slide, please. And here on this slide, you can see that our structured efforts is resulting in recognition in form of improved ESG ratings. So we have an A- in the CDP rating, an A- rating that only a few companies within the food industry have obtained. It's actually only two companies in the Swedish food industry that have achieved that, and we are one of them. We also score high on other ESG ratings, for example, in Sustainalytics, where we are top 10 out of 360 companies in packaged goods, packaged food globally. And we are in our ESG work focusing on the whole value chain from farm to fork with data collection, target setting and reduction initiatives. So moving to next slide, please. And for the ones of you that have followed us for a while, you have seen these pillars before, and these are four strategic pillars that will support us in achieving our goals. And it is increase the value of our protein, ramp up efficiency, and all of this we need to do with sustainable means in every step of the way as one company making us constantly better together. And better together, that is the belief and practice we strive for, to make us more effective, successful and impactful when we collaborate, work as a team and leverage each other's strength. And it's empathize the collective effort, shared goals and team cooperation, and that lead to improve performance and outcomes. So if we move into next slide. And here we can see our financial goals, and we want to create a standard to be proud of, trusted by everyone and where people can develop. And with this comes earnings, and with earnings you earn your right to grow. And at the right hand side you can see our financial targets for 2027 and our sustainability targets for 2030. And we are expecting strong growth over the coming years, and we set the target for 2027 of 5 to 7% net sales growth. But as we presented before, we need to be aware of that we're coming from a high inflation with high feed cost, and that will affect the net sales for 2024. And as I mentioned before, our business has typically high exposure to cyclical raw material prices as feed, but due to our dynamic pricing model, with more than 80% of our sales linked, we have the ability to pass through feed costs. So in 2024 we expect feed to come down, which will affect our 2024 sales number, but that will not affect our volume and EBIT per kilo expansions in 2024. In addition to this, we have the important supporting target of 3 sec EBIT per kilo, real weight, and that we consider as one of the most valuable targets for us. We can move to the next slide please. And on this slide you can see the essence of our clear roadmap to achieve 3 sec per kilo. We see a large potential to climb the value ladder, and we also see a large potential to set up a better efficiency in our value chain. And that's why we have stated these two headlines, climb the value ladder, where it is about to balance supply and demand in our fillets. It is about value creation and move more into convenience. It is about differentiation and our branding opportunities. And it is to utilize all part of the bird, including ingredients. Then we also see large efficiency potential in the value chain, and that is optimized utilization of our sustainability metrics. It is better organizational performance and scalable platform and a structured collaboration between our different markets. We see product standardization and optimization, and we see a supply chain standardization and digitalization, because we see a more fragmented value chain today that we want to make more streamlined and take more efficiency out of it. And if we move into the next slide please. And to achieve our goals, we're building a robust vehicle to serve our home markets and beyond. And we're launching this 2 billion investment program in the period. And the investment program aim is to support ready to cook investment, support the 2% increase in throughput in our plants, and to support better utilization of facilities. It is to support ramp up of our ingredients business. And it's also preparing for significant growth in our ready to eat segment. And we have also earmarked investment of more than 200 million for meeting our sustainability goals. And as you all know, sustainability and efficiency is linked together. It's only different measures of how you can use resources in a more efficient way. So if we move into the last slide and summary and outlook. In the quarter, we have seen a significant profit and margin expansion. We see an encouraging demand. We're expecting continued profitable growth and ready to cook. We have a strong and disciplined focus on replacement of new orders in ready to eat. We have a clear strategy to reach our long term goals. And we see the large potential in climbing the value ladder. And then we have our dividend proposal of 2.3 compared to 1.15 last year. And the dividend will be paid in two equal installments. So with that, I want to say thank you and open up for questions.

If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We'll pause here briefly as questions are being registered. As a reminder, that's star one to ask a question. Our first question today comes from Daniel Schmidt from Danske Bank. Please go ahead.

Yes, good morning guys. Hope you can hear me. Just a couple of questions for me then. Starting with maybe the food service business. I think it's quite clear that you're mentioning that you should see a gradual recovery. And that you are hopeful that you will be able to replace the lost contract. But could you give us any sort of timeline of what you should, what we should expect?

What we have said is that we will gradually get back to it. It will take a couple of quarts and a time into next year until the vector is filled up. But it's more important for us to focus on getting the right orders and getting, have a low complexity and drive better margins out of the business in total. So it's the importance for us is to find the right orders to fill up for building a long-term diversified portfolio in that business. So that is more important for us than actually achieve a certain volume in a port. But we see really good progress in it. We have a lot of good discussions, a lot of orders that we are already achieved. And we have a clear plan on filling up our RRT business. And as you see, as we said in the last quarter, we put them out in Q4.

Yeah. The fact that the reported number is lower for Q1 versus Q4, is that price or is that seasonality or when you look at food service in ready to eat?

Yeah, in ready to eat food service. It's more about that we have seen and growth in our retail segment where we have taken in new business in ready to eat. When you see food service in general, we see actually a pretty okay strong demand in the food service sectors as well. So the numbers that you see there and if you take away the big food service customer lost contract before, it is more seasonal when it changes. So we see a pretty strong food service market in the period and in the coming period.

Okay. But if you look back, it doesn't look like it's a lot of seasonality between Q1 and Q4, but maybe it has developed in that way.

When you look into the historical volumes, the food service has been on, as we presented before, on a few really big customers with a more even flow. Now we are filling up with a different kind of customers, but we don't see this big seasonality around, but there will be changes throughout the quarters and especially now when we are filling up the factory.

Okay. But what you are saying is that the bottom was in Q4 and although the number for Q1 is lower than in Q4, the underlying trend is positive.

Yes.

Yes. All right. And then just moving on to Ready to Cook. You don't mention any sort of a specific number for the Danish business. You've done that before. Could you provide that or could you say anything if it's now making profits or where are we?

What we did before, we are reporting on total segments and when we had this crisis in the low numbers in Ready to Cook Denmark, we presented that as a special note in our presentation. Now when we have come back to break even, we are not reporting on country for country, but the progress is heading the way that we want and as we have predicted before.

Okay. And do you see sort of that business medium term being on average with the rest of the group or is that still something that's going to be slightly less profitable although you've done quite a lot of improvements in the past year?

I think that if we look into different countries, there will be different margins, but we will see an improvement in Denmark. We don't expect Denmark to reach the highest margins in our group, but we're expecting the normalized margins. And we also, as we presented in the strategy plan, we see a strong integration between our Ready to Eat factor and Ready to Cook factor and actually utilize the best of the most value of our bird. And when we are utilizing that, we can create a market in Denmark that is interested to be in for us, can understand that. So it is a journey that we will move on. We don't have expectation that it will reach the highest levels in margins in the standard, but a good profitable business.

Good. Just a question on export prices. Are export prices in general impacted by input costs or is that just more sort of supply demand driven pricing? It

is impacted in a logical way in feed costs, but at the moment we see some constraints when it comes to broiler capacity and that has also an impact on the sales prices. So we have seen them come down, but we are actually predicting a stable level in export prices going forward. But with that said, I also mentioned out on the export slide, the big uncertainty due to the macro factors that is hard to predict at the moment due to war and what will happen with raw material and inflation and so on. But when we look into the supply and demand, we actually see that is stabilizing in the European market. It is also impacting wherever there will be import restrictions or the level of import from Brazil, Thailand and Ukraine into the European market.

Just maybe a final question on the input costs and feed prices have clearly come down over the past year and you sound like you think that it is going to continue to stay low or go even lower. And most of that is pass through for you guys, but you do have the Irish business, right? Is that benefiting from lower feed prices?

It has, as mentioned before, when we have this increase of feed pricing, we are hedged in that one. So we have a more flat curve than what we see on the spot prices. And of course, when the feed prices comes down, we see a more flat curve, a more slightly decline there as well. But of course, it's beneficial for us when the gap increases between the sales prices and our biggest input costs. But we have, as presented before, we have 80% of our businesses is linked to a model where it's linked to the feed price. So of course, that lowers our risk, but it also creates less headroom for driving margins when the feed price falls.

I didn't hear the last part there, but you still have 20% that's not linked. So doesn't that mean that the feed prices come down? That's a positive.

Yeah, that's a positive. That's actually what I'm saying. Most of it is linked, but of course, that's an effect when we see lower prices. And then we have the hedge that we also always do. So there are also a slightly delay on the effect compared to spot prices.

Yeah. Okay. Thank you,

guys. Thank you.

For any further questions, please press star 4 by 1 on your telephone keypad now. It appears we have no further questions. I'll hand back to the management team.

Thank you very much. Then if there's no further question, I would thank everyone for listening to this session and I welcome to present our Q1 results. So thank you, everyone.