Artoparto's Blog: March 2013

Thursday, March 28, 2013

HKScan – long way to 5% profit

Hannu Kottonen, CEO HKScan, aims to reach 5% profit within three years. This was made public in last August. Realistically, it would be fine if the result remained at its current level, and thanks to the implemented closures, layoffs and other cost saving measures, it is possible. Layoffs are of course the very last way but they are now made up to the extent that even Finnish workers have been on strike, illegally in fact. Hopefully layoffs were made in a way that productivity actually improves. It may be a vain hope. More managers but less workers appears to be HKScan’s way of doing things today.

Not only in Finland but also in rich Sweden workers have firmly objected to layoffs. The reason is that Scan has replaced permanent workers by temporary agency workers. Fair or not but something is happening also in HKScan Sweden. Like in Finland, HKScan has now also in Sweden begun to streamline purchases by buying meat raw material just as much as it needs and only when it needs. Producers seem to be – at least officially – quite happy with the company. “HKScan is going in the right direction”, says Gunilla Aschan, Swedish animal farmers’ representative in HKScan Group Board of Directors.

So, Kottonen’s program for savings, streamlining and productivity improvement is strongly under implementation. However, only an optimist expects profits to improve significantly this year only due to these steps. Kottonen’s other means of improving HKScan’s performance are enhancing the brand value, driving consumer demand, innovation and synergies. One may see, what this all will mean in terms of practical implementations. According to the strategy update last August, HKScan will introduce the operating model gradually by the end of this year.

Raising the brand value may be troublesome. Well-known and recognized local brands already are HKScan strength. For instance Scan in Sweden is a respected brand. But so are for example Saab and Volvo as well! Brand is not a panacea and consumers are very price-conscious. It is so easy for everyone to make savings in the grocery store and the result is shown immediately in the wallet. Private label brands will inevitably increase their share especially because the general economic situation is what it is.

What about innovation and synergies? It seems that the Kottonen wants to combine them. In a large interview in just-food.com, he says:

"Here we have potential as well given our strong local brands, but very local innovation processes and relatively small intercompany business. We can here find further internal synergies as well."

Without a doubt, HKScan is planning to invest in product innovation but requires that they benefit the entire group. It remains to be seen really, what these all – raising brand value, driving consumer demand, innovation and synergies - will mean in practice. I would guess … costs.

We will discuss HKScan later but on Friday, April 12^th we will look at Atria’s businesses. Summertime is coming and summer will follow, 99% sure about that!

This is Artoparto and here is my Disclaimer. Please read it.

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Friday, March 15, 2013

Atria’s near future does not look good

As noted previously, Atria’s Q4-2012 was really bad. Both Scandinavia and Russia failed. Atria Finland and Atria Baltic were somewhat above expectations but Atria Scandinavia and Atria Russia indeed were monumentally below expectations.

Atria Finland is still doing well but all other business areas are in troubles. The matter is nicely illustrated by the fact, announced in the financial statement release, that Atria’s targets for the proportion of international operations is removed. The target used to be 50% of the revenues. Last year’s actual proportion was about 38%.

Atria Finland’s Q4 sales increased by 7% but large part is explained by the price increases. It can be assumed that the volumes hardly rose at all. Also, meat raw material was more expensive. However, operating profit increased. That’s positive of course but more important point is that Atria Finland’s market share in retail market rose in many product groups, namely in cold cuts, poultry, convenience food and cooking sausages. Even more encouraging is that the new bovine slaughterhouse already started and cost savings are estimated to be €6 million annually. Also the new hatchery will be in full swing this spring. In addition, savings will be achieved by centralizing production.

Atria Scandinavia is not really showing any good now. Net sales in krona remained virtually unchanged, and operating profit was lower than for many years. The usual story was told in the financial statement release: “The decrease in EBIT was due to increasing meat raw material prices. Atria Scandinavia has not been able to pass on increased raw material costs in full to sales prices.”

Still in the Capital Markets Day presentation from last December, Tomas Back praises Atria's own brands: “The market shares of the Lönneberga and 3-Stjernet cold cut products strengthened.” Back also tells about implemented rationalizations: “During the last four years we reduced the number of factories from 18 to 9, which have been important steps towards a more efficient supply chain.”

So, much seems to be done. Not been reflected in earnings. One can say that Atria Scandinavia is like a poor worker who always seems to be doing something, but cannot get anything done.

Atria Russia's net sales grew by a meager 2 percent. New products have not sold at all, one must conclude. The report tells that “Atria Russia also invested heavily in marketing to increase future sales volumes.” This means that campaigns were expensive and ineffective. It is quite shivery, that the new product line is not even mentioned in the release. Only loose talk of future sales volumes. The poor profitability of primary production was mentioned but on the other hand also Russia’s changing restrictions and import duties on meat and other regulations are characteristic to the market were complained. Nothing is good for Atria Russia, it seems.

On the pages of Kampomos and Pit-Product one can find Executive Vice President Jarmo Lindholm says something like this: The results of 2012 show that the development of the company is in line with the strategic plan. Measures aimed at improving the economic performance of all units of Atria Russia have led to a significant increase in return on sales. At the moment, our key objective is the systematic increase in the volume of sales, which will allow the company to reach break-even by the end of 2013 and start earning a steady income in future periods.

Many would like to believe.

Atria Baltic continued in the old style: slight losses from quarter to quarter. New managing director Olle Horm praises smaller losses, compared to reference period: "The turnover fell but it is important that we managed to reduce the loss remarkably – we have managed to considerably reorganize the company and the product portfolio, although a lot of work still has to be done.”

We will discuss Atria later but on Thursday, March 28^th we will look at HKScan’s businesses. The fact that snow has not gone away, does not change things. Summer is coming. I hope so.

This is Artoparto and here is my Disclaimer. Please read it.

Friday, March 1, 2013

HKScan's 2012 – nothing has changed

One would not believe that HKScan has made, for example in Sweden, all kinds of efficiency measures for several years. Yes it really has, but the money just is lost somewhere. Streamlining does not show up in the earnings. To me it seems as if the company had potential but the actual result is always a disappointment. I wonder if my logic goes like this: Tomorrow HKScan will be good because today it is bad.

HKScan’s quarterly EBITs starting from 2009. Q4-2012 non-recurring items are excluded. The readings are highly unofficial and possible errors are all mine.

In its 2012 financial statement report the HKScan once again tells about new efficiency measures, particularly in Sweden and Finland. The company talks about development, reorganization, restructuring, functions, operations, “actively managing the dynamics of future business”. Nonsense all the way, but it takes time and effort to write such text, no wonder that Group administration costs rose about 13% compared to 2011. In my opinion, managing group should make money, not take. Most worrying is if Anne Mere, new Managing Director of HKScan Finland, left her practicality to Estonia. Or perhaps the case is that the corporate culture maintained by cooperative owners prevents all real renovations.

In Estonia practicality is still honored. HKScan Baltics' several projects aimed at improving efficiency are truly carried out, for instance energy-saving projects.

In Denmark, the company earned due to fire only. HKScan’s organizational reform may go wrong especially in Rose Poultry, company’s sales director, having plenty of experience in the export trade, left the company. One person only but may be an indication of wider dissatisfaction with HKScan’s new Away from Home business sector, which really seems to be an artificial mixture of businesses from food service to export.

One big disappointment is that the new rapeseed pork product line in Sweden was mentioned in the report but no specific details of its success. Evidently it has not been a true success.

Sokołów goes well. Annual turnover increased by approximately 15%, EBIT by nearly 25%.

We will discuss HKScan later but on Friday, March 15^th we will look at Atria’s businesses. Go skiing if you wish but get back before the snow melts. Summer is coming.

This is Artoparto and here is my Disclaimer. Please read it.