Second quarter report 2018

• Net sales increased by 39 percent to MSEK 2,252 (1,622). The increase refers mainly to the Irish company Manor Farm, which was acquired as of 28 August 2017. Net sales increased by 4 percent in Sweden, 10 percent in Denmark, 5 percent in Norway and 31 percent in Finland.
• Adjusted operating income[1] rose by 29 percent to MSEK 90 (70), corresponding to a margin of 4.0 (4.3) percent. Except for Ireland, which accounted for the major part of the increase, Norway and Finland also achieved improvements. Income was negatively affected by a less favourable price/mix, primarily in Sweden where income declined. Denmark also reported lower income.
• A decision was taken during the quarter to restructure production within organic chicken in Sweden resulting in a charge of MSEK 22 against operating income.
• Income for the period was unchanged and amounted to MSEK 33 (33), corresponding to earnings per share of SEK 0.51 (0.56).
• Operating cash flow was MSEK 70 (-5), positively impacted by the higher income and an improvement in working capital. Net capital expenditure increased to MSEK 138 (52), mainly due to the ongoing expansion of the facility in Farre, Denmark.
• Net interest-bearing debt increased by MSEK 100 from 31 March 2018 to MSEK 2,039 (1,619), largely as a result of the acquisition of the Irish operation. 
  Pro forma including the newly acquired Irish operation[2]
• Including Manor Farm on a pro forma basis, net sales increased by 10 percent. 
• Adjusted operating income1) amounted to MSEK 90 (91), corresponding to a margin of 4.0 (4.4) percent.
      
  

[1]Adjusted for non-comparable items, see page 12.
[2]The pro forma figures are presented for illustrative purpose in order to show how the segment would have contributed to the Group’s net sales and operating income if it had been part of the Group during the whole of 2017. The pro forma figures have not been audited. See page 4-5.

The CEO comments on the second quarter 

The Group’s net sales increased strongly in the second quarter as a result of the acquisition of Manor Farm, strong organic growth and exchange rate effects. Net sales increased by 10 percent pro forma to MSEK 2,252 compared to the second quarter 2017, and by 5 percent adjusted for exchange rate effects. All countries contributed to the increase.

Adjusted operating profit amounted to MSEK 90 compared to MSEK 91 pro forma in the second quarter 2017, corresponding to a margin of 4.0 (4.4 pro forma) percent. Although both Norway and Ireland performed well, and Finland reported a continued improvement, the margin was negatively affected by a less favourable price/mix, primarily in Sweden as well as by higher raw material costs and marketing investments in Denmark.

The share of value-added products of total net sales increased significantly compared to the second quarter 2017 pro forma. Chilled products grew by 4 percent pro forma and ready-to-eat products by 16 percent pro forma. Sales in the retail channel increased by 7 percent pro forma and net sales in the food-service channel rose by 12 percent pro forma.

Net sales in Sweden rose by 4 percent to MSEK 661. The market showed a recovery, but income for the Swedish operation was adversely affected by stock clearance as well as lower production volumes during the summer in order to achieve a more balanced inventory situation. The adjusted operating margin was 4.2 percent compared to 5.2 percent in the second quarter 2017. I am convinced that we, on the basis of our business model and strong brand, have good opportunities to regain our historic margins in Sweden in the medium term. During the quarter we took a decision to restructure our production of specialty birds involving the closure of the slaughtering facility in Åsljunga, Sweden, and this will have a positive effect on earnings from 2019. The trade restrictions due to the bird flu had a negative impact of approximately MSEK 6 on adjusted operating income in the quarter. I am pleased to report that we expect the outbreak of bird flu to have no further negative impact going forward.

Net sales in Denmark increased by 10 percent, or by 3 percent in local currency, to MSEK 688. The increase was mainly achieved through higher sales in the retail channel and of ready-to-eat products. The adjusted operating margin was 3.2 percent compared to 4.5 percent in the second quarter 2017. The decline in margin was due to both higher raw material costs and operative costs in combination with the market investments related to the new product range under De Danske Familiegårde brand. The brand has been very well received in the market and I am convinced that these investments will strengthen our position in Denmark.

Net sales in Norway increased by 5 percent, or by 1 percent in local currency, to MSEK 393. The adjusted operating margin improved to 8.4 percent compared to 8.0 percent in the second quarter 2017. The operation in Norway is today the most profitable in the Group. The positive trend has been achieved primarily through successful investments in production based on transfer of best practice within the Group. The product offering has also been significantly strengthened.

Net sales in Ireland increased by 17 percent pro forma, or by 9 percent in local currency, to MSEK 499. The adjusted operating margin improved to 5.4 percent from 5.0 percent pro forma in the second quarter 2017. I am very pleased with both the performance and the integration of this operation into the Group. The sharing of best practice between responsible managers and their peers in other parts of the Group has paid off. We have also identified a number of capital expenditure projects to reduce bottle necks in production and increase efficiency, which will be implemented over the coming years. We expect that we will be able to include the investments in Ireland this year in the previously communicated amount for total capital expenditure in 2018, see below.

The operation in Finland showed continued strong growth and net sales increased by 31 percent, or by 14 percent in local currency, to MSEK 114. The strong increase was achieved as a result of higher efficiency in production as well as a more favourable product mix. We have achieved a sequential improvement in earnings in the last quarters. Operating cash flow was positive both in the first and second quarter. The adjusted operating income was still negative in the quarter, however, and amounted to MSEK -4 compared to MSEK -9 in the second quarter 2017. We continue to implement the measures necessary to reach our first goal of break-even and expect to see further improvements in the coming quarters.

The exceptionally warm and dry summer in Northern Europe has negatively affected grain harvests. As our contracted growers are largely dependent on locally produced feed, we expect raw material costs to increase in the coming quarters. Our aim is to recover these costs through price increases.

Net interest-bearing debt increased by MSEK 100 in the quarter to MSEK 2,039. Adjusted for the dividend payment to shareholders of MSEK 118, cash flow was positive despite an increase in capital expenditure to MSEK 138 corresponding to 251 percent of depreciation. This was possible thanks to the higher income and an improvement in working capital of MSEK 72. We expect a further release of working capital during the year. We estimate capital expenditure in 2018 to amount to approximately MSEK 350, including Ireland, of which MSEK 150 refers to the capacity expansion in Farre in Denmark. The investment in Farre amounted to MSEK 67 in the quarter.

Although I am pleased that we continued to strengthen our position in our home markets, I see a further potential for converting the top line growth into margin. We are working intensively to optimise our performance under the current market circumstances in Sweden and expect the market investments in Denmark to gradually start to pay off. It was also satisfying to see the positive development for Ireland and to be able to report a continued improvement in earnings in Finland. The performance of the operation in Norway is a good example of the potential in our business.

We are carefully following the structural changes in our sector and believe that we are ideally positioned to take part of the consolidation of the European poultry market. We believe the acquisition of Manor Farm is a good illustration of how we can create value and stability for our shareholders. Our geographic diversification is a strength for the Group as most of our margin drivers are country specific.  

Leif Bergvall Hansen
Managing Director and CEO

Conference call

A conference call for investors, analysts and media will be held on 22 August 2018 at 8.30 AM CET.

Dial-in numbers:
UK: 020 3936 2999
Sweden: 010 884 80 16
US: 1 845 709 8568
Other countries: +44 20 3936 2999

Participant code: 458913

Slides used in the conference call can be downloaded at www.scandistandard.com under Investor Relations. A replay of the conference call will be available on the web site afterwards.
 

Further information

Financial calendar

• Interim report for the third quarter 2018:                   5 November 2018
• Interim report for the fourth quarter and
  full year 2018:                                                                     20 February 2019
     
  

This interim report comprises information which Scandi Standard is required to disclose under the Securities Markets Act and/or the Financial Instruments Trading Act. It was released for publication at 07:30 CET on 22 August 2018.

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