Artoparto's Blog

Tuesday, May 7, 2013

HKScan’s Q1 2013 was a clear disappointment

Alarmingly HKScan Finland did not meet expectations. Also HKScan Sweden was a big disappointment, although it achieved a better result compared to the last year's exceptionally bad Q1. HKScan Denmark was in the red again, though only mildly. HKScan Baltics performed in line with expectations. HKScan Poland’s quarter was a great success once again, über good in fact. We will look at the results later this month.

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

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Friday, April 26, 2013

HKScan’s Q1 2013 - Analysts’ expectations are fairly high

HKScan’s Q1 2013 Interim Report will be released on early May and now is the right time to look at analysts’ expectations. Reuters brings together analysts' forecasts and other company information and some HKScan’s forecasts are also available. Q1 2013 EPS estimates range from €0,04 to €0,07.

At the first sight expectations look modest but it appears that even EPS of €0,04 requires a good or even an excellent result. It is true that in 2010 Q1 was as much as €0,06 but net financial costs were only €2,6 million and taxes close to zero. Last year’s Q1 result instead was €-0,09, net financial costs €8,0 million and taxes €2,5 million.

In order to reach EPS of €0,04, the entire Group's Q1 EBIT should perhaps be approximately €11 million. First adding the share of associates' results perhaps some €0,5 million, then subtracting net financial expenses perhaps about €7 million, then continuing guesswork and subtracting taxes about €1 million and finally subtracting profit attributable to non-controlling interests, perhaps about €1 million, we end up with the sum of €2,5 million. The number of shares is approximately 55 million. Then, Q1 EPS would be just above €0,04, reaching the analysts’ range, namely EPS from €0,04 to €0,07. Clearly, analysts are expecting a fine quarter. Let's look briefly at HKScan’s market areas.

HKScan Finland needs to reach a good Q1 result, preferably better than those achieved in recent years. Last years’ Q1 EBIT was only about €3 million and the company said that the quarter went according to the plan. Now this kind of result is not enough. What is needed is a result comparable to 2009 Q1, which the company said to be a strong quarter. But the analysts, so it seems, perhaps think that EBIT of €5 million is achievable.

HKScan Sweden is surely not expected to show anything like last years’ catastrophic Q1. It may be reasonable to wait for something like in previous years. Then Q1 EBIT of €2 million does not sound impossible. In the 2012 Annual Report there is a great deal of talk about the launch of rapeseed pork products. Unfortunately there is nothing much about actual results but only talk about a couple of prizes, talk about many positive comments and even talk about how the launch resulted in a lot of talk in social media. It looks that the whole concept is not a marked success, at least not yet.

HKScan Denmark’s Q1 2013 result (possible non-recurring income excluded) should be mildly positive. Production in Vinderup has been restarted in early December. Then Q1 EBIT of €1 million is within the realms of possibility.

HKScan Baltics is, as noted many times also here, in a good shape and one can expect a good Q1 result, something similar to those in recent years. Then Q1 EBIT of €1 million is undoubtedly possible. However, one should recall, that last year’s Q4 quarter was in fact weak. It was due to increased costs, energy prices for instance, not particularly due to reduced sales. The ongoing energy saving program perhaps helps.

HKScan Poland needs a result close to its Q1 in 2010, which the company said to be its best Q1 result ever. However, one must repeat here what Boguslaw Miszczuk, president of Sokołów, has said. In a recent journal article he points out a rather pessimistic view something like this: The deteriorating economic situation in Poland may limit the consumption of foods, including meat and dairy products – it may be expected that consumers are increasingly interested in lower-priced products. Hard speech. So 2013 Q1 EBIT of €4 million may be slightly optimistic.

The sum of those country-specific figures is €13 million. Subtracting Group administration costs, perhaps some €2 million, we end up with the needed figure of €11 million. Overall, analysts’ Q1 EPS estimates ranging from €0,04 to €0,07 are modest but even this kind of result looks hard to achieve and one decisive fact is that HKScan is burdened by enormous financial expenses.

We will discuss HKScan later but on Friday, May 10^th, we are going to look at Atria’s businesses. Summer is not coming in a hurry. I’m afraid it means that it will go away in a hurry. Sad.

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

Atria’s Q1 2013 was below expectations

Atria Russia failed badly again. Atria Scandinavia didn’t improve and missed expectations. Atria Finland improved but, non-recurring income excluded, the result however was somewhat under expectations. Atria Baltic improved mildly and exceeded expectations. We will look at the results later next month.

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

Friday, April 12, 2013

Atria Plc expectations - FY 2013 very high, Q1 relatively low

Atria's Q1-2013 Interim Report will be published on April 26^th and now is the right time to look at the results from recent years. The chart below illustrates Atria's quarterly EBITs starting from 2009. The readings are highly unofficial. Large write-offs (Atria Baltic 2009-Q4 about € 7 million and Atria Russia 2010-Q3, about € 10,5 million) are excluded.

Together with the chart, it may be interesting to look at what analysts might think Atria's immediate future. Bloomberg summarizes analysts' forecasts and other company information. Analysts’ FY-2013 EPS (pre-exceptional) consensus for Atria is €0,68 (individual estimates ranging from 0,41 to 0,80 euros). Their corresponding Q1 consensus is €0,00 (from -0,05 to 0.04 euros). Let’s play with these for a while. We obviously do not know the arguments of the analysts, but we can speculate on what kind of business area specific results these estimates could be based on.

In the chart below, actual EBITs are indicated by solid lines. Dashed circles show a set of reasonable country-specific Q1 EBIT figures, which could lead to EPS of €0,00 which in turn is the same as analysts’ Q1-2013 EPS (pre-exceptional) consensus.

Figure: Quarterly earnings before interest and taxes by year in Atria's business areas, large write-offs excluded.

Overall, the first impression is that the analysts’ full financial year 2013 consensus EPS of €0,68 looks difficult to achieve. We must recall that in 2012 EPS was €0,35. On the contrary, Q1 consensus EPS of €0,00 does not look challenging at all. Let’s go now very briefly through the country-specific figures presented on the chart, just to find out what kind of results analysts’ consensus of Q1-2013 EPS €0,00 might be based on.

Atria Finland – Q1 2013 EBIT of €6 million could be a reasonable guess although it is even better than last year’s corresponding EBIT of €5 million which was considered a good result. When times are good, this kind of results are chicken feed, but general economic conditions in Finland are worsening. Food in general has low elasticity of demand but there are substitutes in the sense that consumers are prone to switch to cheaper imported products and lower priced product groups. It is more than possible that Atria’s success in Finland will later this year be worse than in recent years. That could even ruin the whole Group’s result.

Atria Scandinavia – Q1 2013 EBIT of €1 million is a pure guess. The latest result, last year’s Q4, was such a horrible letdown that now the result is not at all easy to predict. The guess may be overly optimistic although there were spending cuts which are fully realized as of the beginning of the year, centralizing ham and cold cut production to Malmö is mentioned in the Financial Statement Release 2012. Ridderheims is considered an important part of Atria Scanidanvia. However, Ridderheims’ key figure trends are partly worrisome. It seems that net sales have fallen a lot. To be a significant part of the Group, Ridderheims should increase net sales, mainly export I suppose, and still stay profitable. My guess is that the company will try to do it in Russia.

Atria Russia - Q1 2013 EBIT of €-2 million may be a reasonable guess. EUR 2 million improvement to the latest result, namely last year’s Q4, could be achieved due to decrease in marketing expenses. The latest Q4 was really a huge disappointment. The company launched a new product group – minced meat ready meals - and evidently the launch was a failure. Campaigning was strong and expectations were certainly high. Quite unexpectedly, to say the least, the Board of Directors only mention the launch in the 2012 Financial Statement but deny that it would have been the most significant.

An entirely new product category – pre-cooked minced meat products – was introduced in Russia. Skinless frankfurters in resealable packages were last year’s most significant launch.

The only interpretation is that the minced meat ready meal campaign was a total failure. Overall, it seems that Atria Russia’s potential is fading away, leaving only up to some €150 million turnover and consequently only some €6 million to €8 million yearly EBIT at most.

Atria Baltic – Q1 2013 EBIT of €-1 million is a pure guess. In the 2012 Financial Statement Olle Horm, head of Atria Baltic, says that they are seeking rapid growth in fresh and marinated meat. On the other hand, somewhat contradictory in relation to that, they intend to focus on further processed products. Meat sales are going well already but boosting the sales of processed products under their most valuable brand Maks & Moorits may be troublesome. Anyway, the Group rather stubbornly wants to succeed in higher-end products also in the Baltics. It may mean just marketing costs.

Some more guesses – Total of those guesses about what the analysts might have thought, makes €4 million. We must now make a few subtractions using the past few quarters’ readings as guidelines. Some minor subtractions or additions are ignored. Subtracting unallocated costs about €1 million, finance cost about €2 million and taxes roughly €1 million, we get the final reading of around €0 million. Then of course also earnings per share would be about €0,00, which is the same as the analysts’ consensus.

We will look at Atria later but on Friday, April 26th, we are going to look at HKScan’s businesses. But just before that, also on Friday April 26th, we will take a very brief look at just then released Atria's first quarter interim report.

Summer will come one day, so sure about that! In the meantime it may be helpful to take a short pop-punk introduction to the subject matter.

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

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.

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.