Scandi Standard AB (publ)

Good morning, everyone, and welcome to this presentation of Scandi Standard's result for Q2 2024. My name is Jonas Thunestad, and I'm the CEO and Managing Director of Scandi Standard. With me, I have Fredrik Sylvan, our CFO, and I'm pleased to have him by my side today. I'm also glad to report a strong volume of profit growth in the quarter. Next slide, please. We see a strong demand at slightly lower prices. We have increased volumes with 3% in the quarter. We've increased ABIT with 5% to 127 million SEK compared to 121 last year. And we've also improved the margin from 3.5% to 3.8 in the quarter. The improvement was driven by a strong progress in ready-to-cook. We also see improved sequential performance in ready-to-eat. And in the ingredients business, we have a continued downwards normalization in the rendering prices. We have a strong balance sheet and a positive operating cash flow. Net cash flow is, however, impacted by the acquisition of Jären and the dividend payout. The second and final part of the dividend will be paid in 1.15 SEK per share, and will be paid in September. Next slide, please. This slide displays the financial history of Scandi Standard, with strong organic growth and stable margins, only broken by the disruption of COVID-19 and the inflation. We are proud to have carried out a successful turnaround process and recovered our earnings after these disruptions. We are now well positioned to deliver on our financial targets to continue the strong growth and increase EBIT margin that we have set to above 6% by 2027. Next slide, please. And here we can see stable feed prices. So after a long period of increase in feed prices, we now see a normalized market. There are still uncertainties, and we need to be prepared for further volatility. Our model has most of the input costs linked to our top line. That's also why we can see a correction in our top line when the feed prices fall back. But there is also a short production cycle compared to other proteins, and that enables us to be more agile in our supply chain. And when we look at the packaging side, we see that both packaging and energy, they are more stable level, and we're hedging the majority part of our electricity exposure. So moving to the next slide, please. And here we can see that price has always been important for consumers and the focus has increased even more in the current environment of high food prices. Chicken is affordable in all segments from high-end to low-end segments and fillets is our high-end cut and that is even competitive versus the low-end segments. And this gives us further opportunities to drive long-term volume value creation. And we see future opportunities to drive more value out of the chicken due to its affordability. So next slide, please. And this slide reminds us on our strong market position in all our five home markets and the countries are highly consolidated. These markets have large hurdles for new entrants. 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 the market balance, which has helped us in the recovery process from inflation. So next slide, please. And on this slide, you can see we're expecting strong growth in consumption. We have had 44% growth in poultry since 2010, and Rabobank is expecting 30% growth until 2030. And next slide, please. And here we explain in detail during the capital market day, the drivers for growth, and it is to these three areas. And it's important for us because this is the basics for growth in poultry. And it is that it's responsible, safe and nutritious. It's convenient, versatile and tasteful. And it is affordable because it's sustainable. So moving to next slide, please. And this table shows the reconciliation of our segments. We see a strong positive contribution in RTC. We also see a decline in RTE and others, but that is as expected. And it is compared to Q2 2023. And we want to remind you that the category other includes ingredients, business and our corporate costs. So other is ingredients and corporate costs together. So next slide, please. And then we look into our RTC segment. We have an increase in net sales of 2% and a volume growth of 3%. And the difference is driven by lower input costs and change in breed mix in Denmark. And we present an EBIT of 98 million compared to 48 million last year. It is a strong improvement driven by turnaround measures and increasing demand in several markets. We also see improvement in our animal welfare metrics, and that is mainly driven by Ireland, and mainly improved footpath scores and the lower antibiotic use. We see negative development in personal injuries in the quarter, and it's only driven by ammonia leak incident in Denmark. And thankfully to our routines, it worked out well, and nobody was severely injured. So moving to the next slide, please. And here we see a solid recovery and ready to cook with an EBIT per kilo of 1.41 compared to 0.72 kronor per kilo last year. And net sales per kilo is slightly down in the quarter due to the link in the input cost. that we have explained before, and lower input costs converts into more attractive consumer prices, and we see a volume growth of 3% in the quarter. Sweden is still operating at 85% of historic volume, and it's pending on improved demand. But I'm pleased to see strong improvement. I'm also confident that our ability to extract additional potential, which is required to reach our financial targets. Next slide, please. Our realized export prices, they were flat in Q2 compared to the same period last year. We are focused 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. And this is an ongoing work and continuous work that we work on every day, to make a more solid export business. And I think that we are working out well. And I think that we are getting more and more control and a focus on our export business and actually taking more into strategic customers. And we're really glad for that. So let's move into next slide, please. And on this slide, you can see the channel development more in detail. And through this detail, you can notice the increase in most channels in the quarter, which is mainly driven by volume. Retail is impacted by the change of breed mix in Denmark. And that is due to that change of breed mix, but also due to the mix in sales in Denmark. And we have been seeing a strong demand growth in several of our markets in the quarter. Next slide, please. And then when we move into ready to eat, we are still impacted by lower plant utilization and net sales is down 11%. And we present an EBIT of 38 million compared to 59 million last year. And that is due to the loss of contract in Central Europe. But it's also Q2 2023 is positively impacted by an insurance settlement of 11 million SEK. So if we compare to last quarter, we see a strong improvement, though, versus Q1. And that improvement is 30 million SEK. So we said that we're going to bottom out in Q4 and build from there. And I think that we are improving from every quarter since then. We see adverse development in lost time injuries though. Corrective action is taken to prevent recurrence and continuous work to ensure the preventive measures. So let's move into next slide. And on this slide, you can see that we continue to rebuild our RT order book after the loss of the breaded contract. The high volume and low margin business phased out, and the volume and EBIT has bottomed out in Q4 2023. And the lost business have made room for new opportunities with more long-term diversified portfolio. We have a good traction in replacing lost business. Retail sales is the main contributor, where we start with seeing a strong but uneven demand, and we expect continuous growth over time. And growth in this segment comes in sequences, and we have a lot of potential in the customer's pipeline. And we are using this period of low utilization to upgrade the maintenance to meet the highest standard and prepare for future expansion. And just to mention again, ready-to-eat journey is a cornerstone in our strategy to reach our financial targets. And we expect gradually a bit improvement quarter by quarter. Moving to next slide. And here you can see it in figures. It's of course very encouraging to see continuous growth in retail. Ready-to-eat, however, the development in foods of the channel is declining due to the regions mentioned in the former slide. And growth in this segment will be a priority for me in the coming years. We are confident that we'll replace the last volumes with other more profitable volumes in the coming year, and we're already slowly starting to fill up with new orders, and it will continue in the coming periods. Next slide, please. So I'm not very concerned about recovering the recent lost volumes in the coming periods. We have seen historically strong but uneven demand, and we expect continuous growth over time. And there are two main types of business. There are the international-bred business that we see in our plant in Farre, and then we have the integrated local business in Sweden, Norway, and now also Finland since a couple of quarters. 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. And you can see that includes a 40% growth in 2022. So with that, I'll hand over to Fredrik for more deep dive in the financials.

Great. Many thanks, Jonas. Good morning, everyone. As Jonas mentioned, the second quarter was strong. Actually, our strongest second quarter ever with improved profitability and strengthened margin. Sales was lower than previous year, which was expected. And the main drivers are the RTE contract that was phased out until the third quarter last year. Ingredients had... very high prices last year which are now being normalized and the lower input costs that benefit our consumers as Jonas also mentioned. This was partly offset by the strong ready-to-cook performance. EBIT increased 5% to 127 million SEK and the margin strengthened by more than 20 basis points to 3.8%. If removing the positive 11 million SEK one-timer last year EBIT was up 15%. Our finance costs have increased compared to previous year, and the increase is mainly attributed to negative FX effect and slightly higher other financial costs. Interest rates are up, but fully offset via lower net interest bearing debt. Tax expenses are also up, driven by Ireland and Sweden. So net income is down 3% to 71 million in the quarter, but looking at the first half of the year, we're up 20%. Our feed efficiency remains stable and at a strong level. And as a reminder, feed efficiency is measured as kilo feed needed for one kilo live weight, where chicken has one of the lowest levels of animal proteins. Employee safety is a key area and we had an ammonia leakage in Denmark in the quarter. 14 persons were taken to the hospital and luckily no one was severely injured. This incident in itself had a material negative impact on LTI. LTI was low during the quarter if excluding the ammonia incident and we're running ongoing initiatives to keep accidents to a minimum. Next slide, please. Our return on capital employed and return on equity continue the positive trend, and we have significantly improved versus last year. And we're now back to historic levels, and the main drivers are increased profitability and more equity. And also at the same time, our equity ratio has improved. Next slide, please. Cash flow was strong in the quarter, including the increased CAPEX to fuel higher efficiency and automation. We also acquired a cutting and packaging facility in Gärning in the beginning of the quarter. And that was previously leased. And during the quarter, we also paid half of the full year dividend and the remaining 50% will be paid in September. Overall, our net interest bearing debt increased with close to 90 million SEK in the quarter. and leverage is now at 2.0, which is significantly lower than previous year, and our target of 2.5. Our finances are stable, which is giving us improved strategic flexibility going forward. Next slide, please. Our working capital is negative 72 million in the quarter, and inventory is further decreased, and accounts receivable is slightly reduced versus the first quarter. but it's up versus year end driven by strong sales. Accounts payable together with other are in line with the year end. As previously announced, target level for working capital to sales suggested for financing items remain around 6% and we're currently slightly below target. Focus going forward is to closely monitor and optimize our working capital. Next slide, please. As you can see on this slide, our inventory development, it's full under control. But of course, it's a clear focus area, and we are working to optimize the sales and operations planning in order to drive inventory levels to an optimal level. Linked to this, we do have the export channel for surplus sales, not to interfere with the domestic pricing. Next slide, please. Capital expenditures for this year is estimated to be around 500 million SEK, which is a substantial increase versus last year's level. And they aim to support the journey to reach the recently revised targets. Example of priorities are the ready-to-eat expansion in Norway to meet the demand with an approximately 30% increase in capacity. Increase the deboning capacity in Ireland and Denmark, as well as Finland, to climb even further in the value ladder. Also to invest in product differentiation in Ireland, as well as an increase in efficiency. For example, value-added new packaging line, etc. And we also had our ERP implementation, where we successfully went live with the first country now during this second quarter. And I said in the beginning of the quarter, we also 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 188 million NOK. Interest rate on bank financing is approximately 5.5% per year. But if we add on the IFRS interest cost components of leasing and factoring in vendor financing, paid financing cost is estimated to be approximately 8% of the net interest bearing debt. Next slide, please. And back to you, Jonas.

Thank you, Fredrik. Next, I would like to talk about one of our cornerstones and license for us to operate. There are three key areas when it comes to creating trust for what we do. And that is responsible animal welfare. And it is safety for consumers and employees. And it is nutritious products. Those three things are super important to actually what says what Scandi standard is. And it is a license to play and our license to operate. So if we move into next slide, please. And here you can see the exceptional improvement in antibiotics results in Q2. So I'm proud of the progress that has been made during the year. including a meaningful improvement of lost time injury frequency rate, antibiotic use and main animal welfare indicator, the foot pad score. But we had, as Fredrik mentioned and I mentioned before, this ammonia leakage in Denmark that makes a bad result in Q2, but the long-term trend in lost time injury is very positive. And during 2024, we will continue to refine our roadmap towards 2030, including development of the Climate Transition Plan, as well as implementing the EU CSRD, the Corporate Sustainability Reporting Directive. And the implementation of CSRD will further strengthen the integration of sustainability in our strategy. And that includes the whole value chain from operations and facilitates comparability and further transparency. And that is an important thing with the CSRD, that includes the whole value chain and we create transparency so we can measure it from farm to farm. Next slide, please. And as a reminder, on this slide, you can see that our structured efforts is resulting in recognition in form of improved ESG ratings. And we have an A- in the CDP rating, an A rating that only a few companies within the food industry have obtained. So really proud of that. We also score high on other ESG ratings, for example, in Sustainalytics, where we are top 10 out of 360 companies in the packaging food globally. So we are focusing on this and we work in structure to actually improve our ESG ratings and be in forefront and on top on the sustainability agenda. Moving to next slide, please. And for the ones of you that has followed us for a while, have seen these pillars before. And this is mainly what it's all about for us. It is about increase the value of our protein. And what we are talking about climbing the value ladder. to take out the most value out of our protein using all parts. That's important for us in terms of our margin increase. It's important for us to our sustainability KPIs. And it's important for us in our whole DNA how we work. And this is super important part of our roadmap to reach our financial targets. Then we have ramp up our efficiency. And that pillar, it is about get the most efficiency out of the value chain. It is a long, complex value chain. But if we have this transparency and can be really expert on optimizing the whole value chain and make it as efficient as possible, this will create profitability, higher margin, but it will also make better KPIs when we look at sustainability and when we look at the understanding of how to drive the value chain going forward and future-proof it. Then in sustainability, that would be an integrated part of our whole business from the context decisions that we take we always measure the sustainability effect too that actually when we're talking to customers it's an integrated part that is super important for us and a license to play but it's also something that we want to focus on for for our future development and then we have the better together and better together means that we're strong in our local markets with strong P&L focus in every market, but we're better together as one Scandi standard and use the synergies that we have all across different countries. So if we move into next slide, please. And here at the right hand side, you can see our 2027 targets. And we want to create a Scandi 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. So we're expecting strong growth over the coming years. We set target for 2027 of 5% to 7% net sales growth. In short term, however, our top line remain impacted by the inflation reaction, which is stimulating demand. But we also target an EBIT margin in excess of 6% by 2027. And internally, we're measuring the progress of EBIT per kilo. and that is supporting that we want to get above three sec per kilo and the measure will also receive more attention in our external communication going forward the next slide please and in order to reach our target for our a bit margin we need to increase our every per kilo and as explained in the former slide You can see RAB per kilo at the moment, and it's 1.83. And we're aiming for get above three sec per kilo. You see a positive trend here, but it's a long way to go to three sec per kilo. But we are confident that we will achieve it. And we have building blocks to actually be able to achieve it to 2027. So really confident that we're on a good journey towards three sec per kilo. And that is once again, climb the value ladder. It's about... increase the value of our protein it is about large efficiency potential in the value chain and and it is to actually focus on better together and if we move into next slide please and to achieve our goals we're building a rubles vehicle to serve our whole markets and beyond and we're launching this 2 billion investment program in the period and the investment program aimed to support It is the ready-to-cook investment to increase 2% throughput in ready-to-cook. And it's supporting a ramp-up of our ingredients business, what we internally call Ingredients 2.0. And it's preparing for significant growth in ready-to-eat. And that we'll talk about in the formal slides. So read a little of the book, and then we're going to be on that. And we also have an earmarked investment of more than 200 million SEK for meeting our sustainability goals. And as you all know, sustainability and efficiency are linked together. It's only different measures in how you use your resources in a more efficient way. And to summarize it all, we see another quarter of solid improvements We see encouraging demand. We see volume and margin increase. And all these are supported by measures and investments. We also see clear progress progression towards long term targets. We expected continued profitable growth and ready to cook. We see strong focus on discipline replacement in ready to eat. We see a large potential in climbing the value ladder. And we see clear efficiency potential in the value chain. And at last, we have this 1.15 sex share dividend to be paid in quarter three. So with that said, I want to thank you all for listening in and open up for Q&A.

Thank you. If you'd like to ask a question, please press star four by one on your telephone keypad now. If you change your mind, please press star four by two. When preparing to ask your question, please ensure your device is unmuted locally. That's star one to ask a question. We have a question from Simon Roon of ABG Sundell Collier. Please go ahead.

Yes, thank you. Good morning, guys. Well done. Good quarter. Start off with a few questions on ready to cook. In Denmark, you've indicated previous quarters that you're basically break-even now. Is that still the case for Q2 or any changes there? And to follow up, how can you think of the next step up in terms of margin improvements towards a target of low single-digit margin in hard-to-see Denmark?

When it comes to Denmark, we're not reporting on single countries, but we are in the process. We got up to break even, and we're working to take the next step and improve it further. We have a strong... a strong idea of how to increase the margin in Denmark. And I think that it's working as planned. But we have started the journey and we are continuing that journey. And that is, of course, about optimizing our export business, is about optimizing our local export. retail business, but it's also about integrating our business even more with our plant in Fahre. And I think that we're taking steps every quarter. And I'm confident that we see a lot of steps in the future as well to be taken. And I think that's a good progress.

Thank you. And so just to understand sort of because And I will come back to the very strong recovery, at least sequentially, in R2E. But that hasn't done anything with the margin or break-even results in Denmark for Q2. Is that right? So the development in R2E still hasn't improved the margin in Denmark R2C. Is that correct?

Exactly. That's correct. We see further potential in R2E. an increase in the margin where we can link ready-to-eat in Denmark and ready-to-cook Denmark even stronger, and that was just in the beginning. If that was an answer to your question.

Yeah, thank you, Jonas. And on Sweden, minor signs of improvements in ready-to-cook, but you still note that low utilization hampers results somewhat. Are there any signs of relief in terms of demand in Sweden going forward, do you think?

I think that we see in all our markets a good demand and that the demand is coming back and encouraging demand in some markets. Some other markets have been a little bit slower, but we see a positive trend and strong momentum for chicken, even in Sweden. But we have, as we have presented, a 85% utilization, and we increased that slowly when we see that there is room for that. But we see improvement in Sweden as well.

Great, thank you. Just turning quickly to Ready2Eat. Very impressive sequential growth, as you've said, so well done to the team on that. Should we interpret the sequential growth from Q1 that you sort of have exploited the low-hanging fruit now and that the improvements going forward will not be as severe, or how should we think of that?

I think that we should think of it, it comes sequential. And I think that we have a good improvement from during the last quarter. And we will see the sequential come, the growth, but we will see a continuous growth. And now we did a big jump from quarter one to quarter two. And of course, we cannot expect that in every quarter.

Got it. And just a final question, just briefly on the process in Ready to Eat from here, is it just about sort of continuous dialogue with customers, increasing size, complexity of orders, or are there like some tenders with large clients, customers that you are working with that could sort of like make a material impact on the volumes ahead?

Yeah, we're working on both. The ready-to-eat strategy and when it comes to production and finance, it's about... Of course, there can be smaller tenders, and there are, and we have a growth out of that. But we want to have low complexity. And those minor tenders or the growth that we have in retail is mainly due to that we want to have the same recipes and so on. And then, of course, there are bigger tenders, and we are into a couple of them as well. But the difference between ready-to-cook business and ready-to-eat business is that there are longer lead times in ready-to-eat tenders. when it comes to taking on bigger customers and bigger orders compared to ready to cook, where it's more fresh flow and that you can adjust quicker. So we are working with big tenders as well, but there's a process of doing that that's not closed from one day to another.

Okay, thank you. That's all from me. So have a good holiday when you get there, guys. Well deserved.

Thank you very much. Thank you. Thank you for the question.

As a reminder, if you'd like to ask a question, please press star 4 by 1 on your telephone keypad now. We have a question from Florence Faden from TTI Capital. Please go ahead.

Just one question, my son, on follow-up on Denmark. Can we have an idea of the performance in food services excluding the loss of the contract? First question. And the second question is regarding prices effect in H2. What can we expect? And what do you expect regarding raw material prices? Thank you.

The second question about raw material prices and what we see. I see that we see more and more stabilized prices. We see an encouraging underlying demand in Europe where we see Prices of fresh chicken being strong and improving. And we see a stable on the raw material. What we define as raw material prices as the feed prices. The raw material prices in terms of fresh meat into ready-to-eat business, I think that we will see increasing prices there. but it's hard to predict, it's a volatile market, and it changes. The first question I didn't get, can you repeat that, please?

Yes, it was regarding Denmark in food services. Can we have an idea of the performance of the food services activity excluding the loss of the contract?

Yeah, I think that we have seen a little bit that there's been historically a strong growth in the QSR segment of the food service as the quick service restaurant segment. I think that we have seen a more stabilized growth there, but we have seen a strong underlying growth in the other food service segment. But we're expecting food service to grow in the future. So we see a strong growth in both food service and retail going forward. And that is mainly supported by transition from red meat into white meat. But we also see a surprisingly strong food service market in general, even though there has been an inflationary environment and high costs all around. So we are expecting a growth in the future in food service.

Okay, thank you.

As a final reminder, if you'd like to ask a question, please press star 4 by 1 on your telephone keypad now. It appears we have no further questions. So I'd like to hand back to the management team to conclude.

So thank you very much for listening in and thank you very much for the questions. And I really want to wish you all a good summer and nice weather and hopefully barbecue a lot of chicken. So thank you very much.