Artoparto's Blog

Friday, October 26, 2012

A sketchy review of Atria's business areas' earnings in recent years

Atria's Q3 interim report will be released on November 1^st and now it 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.

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

All in all, the figures tell, that the current year so far has been neither good nor bad. When compared to the last year, the result is much better in Finland and in Russia but worse in Scandinavia and in the Baltics. Largest dispersion between the last few years (if quarters are pooled) can be seen in Finland and to a lesser extent in Russia and largest dispersion between quarters (if years are pooled) is recorded in Finland and to a lesser extent in Scandinavia. At present, Finland and Russia undoubtedly are the key areas, when evaluating the success of Atria Plc.

In parallel with the chart, it may be interesting to look at what analysts think of Atria's immediate future. Reuters brings together analysts' forecasts and other company information. Atria's forecasts are available through this link. If I get it right, which by the way, is not at all a sure thing, estimated 2012-Q3 earnings per share are in the range of 0.13 - 0.20 euros. However, when browsing on the pages, one can find that the Q4 estimates look just the same. Consequently, I am not sure what to think about these estimates but let’s play with them 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. Now let’s see what we can discover in the charts above and what analysts may have thought.

Atria Finland

Quite neatly, the annual lines illustrating Atria Finland’s quarterly EBITs do not intersect. They follow roughly the same pattern. But what is more important to note, is that the trend from 2009 to 20111 has been uniformly downwards. Thanks to the moderate H1, this year’s result overall will most likely be better when compared to the last year, which was really bad. But whether the trend has reversed, is a different matter. As we noted four weeks ago, Atria Finland’s near-term problems are huge. General economic conditions in Finland are getting worse and farming costs are on the rise. Moreover, rainy summer didn't favor barbecuing at all, and it certainly has had a negative effect on Atria's net sales and earnings, when compared to a normal season. The case is that third quarter has always been a terribly important quarter for Atria. If the usual good result does not come, it will be a small disaster. Soon we shall see, but Q3 EBIT about € 10 million could now be close to what analysts have predicted for Atria Finland.

Atria Scandinavia

Atria Scadinavia’s this year’s performance has been weak. It has brands in all product categories and price ranges. It has, for instance Lithells’ sausages for everyone, Ridderheims’ delicatessen products for those who value luxury food and it also governs the popular fast-food chain Sibylla. In addition, Atria Scandinavia does not have the burden of primary production, but uses mainly imported meat. Then, one could expect, that it will show proper results quarter after quarter and especially now when the Swedish krona is strong. This has not happened. However, during the recent years, H2 has been almost satisfactory and much better than H1, and Q3 EBIT of about € 4 million has been routine. It is possible that some or many analysts have ended up with it.

Atria Russia

Atria Russia's H1 went fine. Now Campomos has launched a new family of minced meat products and has been and still is running a major campaign. In the near-term it means extra costs and it is quite likely that Atria Russia will stay in red at least for some time. Personnel cuts have been made and other cost reductions have been implemented to the extent that Atria itself estimates annual savings of € 7.5 million, so nearly € 2 million per quarter. Then, just looking at the recent years’ Q3 figures, analysts may have come to the conclusion that the current year’s Q3 EBIT could be something around € -2 million.

Atria Baltic

It seems that it is not difficult to predict the result of Atria Baltic, but one never knows. Anyway, it is likely that Olle Horm, the new Executive Vice President of Atria Baltic, has not yet had time to change anything. If that is the case, then a similar EBIT result as before, about € -1 million, might be expected by analysts.

So what?

Total of these guesses about what the analysts might have thought, is € 11 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 € 3,5 million and taxes (tax rate 24,5%) roughly € 1,5 million, we get the final reading of around € 5 million. The number of shares is about 28,3 million. Consequently the earnings per share would be about € 0,18.

Hence it turns out, that our guess falls in the analyst’s range of € 0,13 - € 0,20. Practically speaking it means simply that analysts really are neither expecting a splendid nor a miserable quarter. If Atria’s result does not surprise, positively or negatively, the greatest interest in the interim report relates to future prospects. In particular, the situation in Russia is of interest. It is reasonable to expect some information on the plans to abandon the primary production in Russia and views of how well the sale of new products has taken off in Moscow would be greatly appreciated.

We will talk about Atria’s businesses again later but on Friday, November 9^th we are going to focus on HKScan. But before that, on Thursday, November 1^st and on Tuesday, November 6^th we will take a brief look at just then released third quarter interim reports of Atria and HKScan respectively.

Summer-time (Directive 2000/84/EC of the European Parliament and of the Council of 19 January 2001 on summer-time arrangements) will soon be over. Days are darkening gradually.

Not funny, just d a r k -

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

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Friday, October 12, 2012

HKScan’s new management and strategy plan

There have been many changes this year in HKScan’s top management. The HKScan Group's new CEO Hannu Kottonen started in February. He has previously worked in the field of consumer packaging, Huhtamäki Plc, and most recently in the business of consumer papers, Metsä Tissue Plc, where he got, this kind of guidance when starting as CEO: ..."besides running the daily operations Hannu Kottonen's responsibility is to ensure the implementation of company's efficiency programme".

Implementation! That sounds very good. Unfortunately there is no such determination in HKScan, see page 26. Chairman of the Board Juha Kylämäki is hoping for consolidation, harmonizing, development and integration and Kottonen himself has stated that it is time to take the advantage of synergies to improve productivity and cash flow.

So, synergies and a more efficient package are hoped for in unison. However, everyone can see where the problems are. They are in Finland and in Sweden and they are huge. Synergies is not the word, efficient package will not help. Implementation would be the correct word. Of course Kottonen first needs a plan but it should not be a big problem. Namely HKScan has done convincing efficiency plans during every quartal, but apparently they have worked on paper only.

These most simple and basic figures above illustrate, in my opinion, the situation very clearly. Such large problems cannot be solved by creating some synergies. (Please note, that non-recurring items are included and Denmark is not shown.)

HKScan’s target, 5% of net sales, those dashed lines, tell that also Poland and Baltics have increased their sales steadily and still they have achieved good EBIT results. One could of course deny their success by saying that it is easy to do well with small net sales. However, one must first note, that Poland’s figures show only the part consolidated to HKScan (50%). Sokolow’s actual figures are twice as high. Secondly and more importantly, in the same way, as HK Ruokatalo in Finland and Scan in Sweden, also Sokolow, Rakvere Lihakombinaat and Tallegg operate nationwide, and the have products for all consumer groups in all price ranges. They are not skimming the cream but simply their market is smaller or their market share is lower due to tighter competition, when compared to Finland and Sweden.

Wishing for implementation of some specific plans? Not a hope? In August we got a release about HKScan’s strategy update. The aim is to increase profits. Fine, but the means include mostly some double Dutch, like “actively managing the dynamics of future business”. Perhaps these releases are not even meant to mean anything. What may matter is that HKScsan has been tinkering with a group-wide operating model. But is it just a mess?

HKScan will introduce the operating model gradually by the end of 2013. No wonder that it takes some time. Core businesses are divided into four sectors which are: Consumer Finland and the Baltics, Consumer Sweden and Denmark, Away from Home, and the fourth is Sokolów and other joint ventures. Originally Consumer sector was one entity as such, but now it is split into two country blocks, only reflecting the current management situation. Otherwise the split is artificial and it may weaken the company’s performance. AFH sector is just a mixture of businesses from food service to export. The best part of the model plan is that Sokolow has been left alone. It really does not need the HKScan Group at all.

Hannu Kottonen, the new CEO did not come alone. He brought with him a bit of forestry and a couple of his old workmates. AFH business will be headed by Jukka Nikkinen. He has experience in international and export tasks, few year periods around the millenium for instance in Leaf Group at the time when Kottonen worked in Huhtamäki Plc, which suggests, that they were already familiar with each other.

Tuomo Valkonen has been appointed Chief Financial Officer of HKScan and member of the management team. Like CEO Kottonen himself, also Valkonen has been working in forest sector, Kyrö, Metsäliitto and Savcor. The former CFO Irma Kiilunen, HKScan’s long-time executive, will continue as Group Treasurer but she is now out of the management team.

In December, Marja-Leena Dahlskog will start as HKScan’s new Director of Communications. She comes straight from Kottonen’s latest employer, Metsä Tissue.

Anne Mere, the upcoming CEO of the whole HKScan Group?

Overall, the management team has changed a lot. There is one new person, full of promise, fully proven to achieve results. Anne Mere, HKScan’s only hope, an Estonian. She has been employed with the company since 2004, and the last four years as the CEO of Rakvere Lihakombinaat, Estonia, where despite the recession, the entire Baltic Group's profit was higher than HKScan’s target level.

What did she do?

"Consumers were moving to less expensive products, therefore cost reductions and product mix adjustments were needed. Costs were monitored very closely, among other things we cut the salaries. In addition, we reduced marketing support and negotiated firmly with all suppliers. The focus was on the basic assortment" Mere recalls, see page 27. Absolute management!

Unfortunately, now as the CEO of HKScan Finland, her job is defined as something like “to intensify cooperation between market areas and to allow for more ways such as cost savings and better use of knowledge” and so on. Rubbish.

But we will see Mere’s practical implementation of market areas’ closer cooperation, and especially such cooperation, which will lead to cost savings. Is it about primary production or what? What does it mean that Mere has also been appointed a member of HK Agri’s Board of Directors? We will be talking about Anne Mere later and at the latest after only a couple of years, when she, like I assume, is the CEO of the whole HKScan group.

Teet Soorm - Meat King of Estonia

The new CEO of Rakvere Lihakombinaat, following Mere, is Teet Soorm, 42 year old, Estonian, who started in the company as early as 1994, before privatization. He will also continue as the CEO of Tallegg and Ekseko. So, he is a man of primary production, even cited as Estonian Meat King, plays in a punk band. And there is much more about him in Eesti Päevaleht’s interview.

Some citations and interpretations of the interview: Teet Soorm, a true Mr. Meat, 100% involved and committed, knows the meat industry in detail. But he appears to be quite reluctant or sour, when the interviewer asks very simple questions, those that consumers are interested in, questions something like these: when will Rakvere or Tallegg have a family of organic products and why there is less meat and more brine in meat products today. His answers are something like these: organic food is a niche, nothing for us, not possible, no organic feed available, brine adds value, our products are of good quality. These kind of answers are simply unnecessary, especially since he says, that when reaching retirement, he himself will be an organic farmer. A great plan, indeed.

But there is still something else in the interview. Soorm talks generally about management and emphasizes that the companies are run by people, not by any written strategies. So, this suggests that in the end he really does not worry too much about HKScan's new strategy plans. Which is a good thing. Currently Soorm is only a member of HScan’s extended managing group, but I suppose that one day he will join the managing group, no doubt in fact. There is an urgent need for a primary production professional.

We will be viewing HKScan’s businesses again later but on Friday, October 26^th we are going to look at Atria Plc. I am waiting for summer, but does it mean that first I have to wait for winter? Yes. I have to wait also for these. My sad life.

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

Friday, September 28, 2012

Atria’s near-term concerns in Finland and new products in Russia

Atria’s costs are rising and general economic conditions in Finland are worsening

Atria Finland’s near-term concerns are not small. Producer prices are too low to cover the feed price increases that already have taken place. Prices should be raised immediately and after a while most likely even more because rise in feed prices threatens to continue. USA's poor soybean harvest due to record drought is one factor and Russia is expected to impose restrictions on grain exports for the similar reasons. Moreover, all cost increases have not yet been added even to the feed prices, so they will rise in any case.

Summer was bad, weather did not favor barbecuing but much worse can be expected in the future. General economic uncertainty turns consumers sparing, the most valuable cuts do not sell. A vitally important retail customer Kesko anticipates increasingly gloomy winter and is indeed preparing for it by extensive layoffs. Atria's ever a poor negotiating position will hardly be now any better. In fact, Kesko bluntly calls for innovation and better productization. It just wants products that add value to the whole production chain.

The market shares are changing. Many smaller food companies fare well and meat imports inevitably continues to expand. Atria is strongly committed to domestic meat whose superiority is no longer recognized among consumers. No wonder.

Namely once again it was revealed that food is not anywhere near what it is said to be. This time is was minced beef, which was made of lower-value cuts than stated on the label. Business as usual was the explanation of all the companies, we just follow other companies’ practices, they said. And to the question about its true content, Atria’s executive Matti Perälä said (in Maaseudun Tulevaisuus, Sep 21^st, printed version) only that it is our recipe and we don’t want to make it public. The problem is that in this kind of cases consumers’ critique will be directed mainly to large companies, such as Atria. It is clear that in Finland the rejection will not happen straight away en masse but there is a risk, that it takes place here and there, one by one.

There is yet another thing that angers many: Atria is burning money in Russia.

New products and campaign in Russia - Time for yourself

Pit-Product’s new plant in Gorelovo, Lenoblast, company owned by Atria, is currently running at a 60% capacity utilization rate, CEO Atria Plc Juha Gröhn has noted in public last July. Company's market share is high and perhaps it will be hard to get them higher. So, under their KampoMos brand, Atria Russia has now launched a family of minced meat products in convenience food category: ready-to-eat meatballs, steaks and kebabs. They believe that chilled products, no thawing, suitable as snacks also, will displace frozen products in Russia, as they have done elsewhere in Europe.

The products are targeted especially to Moscow market where Atria already has one popular product, pizza Royal Fresca. It seems that these new products are marketed by using Fresca’s high awareness among consumers.

Atria’s ads are never soft and this campaign, “Time for yourself”, in June, planned by Leo Burnett Moscow, did not make an exception. TV ad, the pizza version embedded above, is not exactly a happy family stuff. Clearly it says and shows boldly, that cooking belongs only to some babushkas, but every young, independent woman instead will take time for herself.

African swine fever (ASF) indeed has hit Atria’s farm in Krasnodar. The case was speculated in this blog on Aug 31^st but as a matter of fact it has been reported widely in newspapers as early as mid-August although Atria itself has not officially informed about it.

But now I asked Hanne Kortesoja, Atria Corporate Communications and IR Manager, if the news, also covered on Aug 31^st, about abandoning primary production in Russia is true. In her kind reply she first of all wrote that when announcing Atria’s Q2-report, they told that in Russia pig farming is not their core business and that their current plan is to abandon it. About the reasons she mentioned Russia’s WTO membership and state’s investment subsidies for new pig farms. She concluded that competition between farms will intensify, and Atria’s farms are too small to be competitive. She further noted that availability of pork improves and for Atria it is not essential to keep their own pig farms. Lastly she reminded that concrete decisions are not yet done. She didn’t mention the ASF incident at all.

This current plan of abandoning pig farming in Russia surely is totally unexpected, but thinking it over, perhaps it is not a terribly bad idea. Total dependence on imported meat would not be wise but if the supply of domestic pork truly can be ensured, the plan looks little better. If I get it right, the plan is also consistent with Atria Russia’s aim to narrow its product range. Atria has of course done its homework. Last December they presented a set of estimates which tell, that the domestic pork production in Russia grows steadily and nearly reaches the pork consumption by the year 2020, Ruohola’s 2011 presentation, page (3/8).

There are still two tables presented on Atria’s pages which I have been wondering quite a lot, Lindholm’s 2011presentation, pages (17/27) and (19/27). There are shown ratings of Russian meat product manufacturers by product categories, ratings based on consumers’ opinions. In St. Petersburg, the table tells, Atria’s brand Pit-Product is on top position in most categories. KampoMos fares quite well in St. Petersburg and in Moscow it is near the top in some categories. Not bad at all. But Atria Russia’s earnings have been in the red over and over again. When will the popularity of its products be shown on the bottom line? Interim report Q3 should show some signs of turnaround and the launch of new products should be reflected, if not otherwise, at least in Atria Russia's net sales.

We will delve into Atria’s businesses again later but on Friday, October 12^th we are going to explore HKScan Plc. According to Vivaldi, there are four seasons at least. Summer is the best and it will come soon. Presto.

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

Friday, September 14, 2012

A brief look at HKScan Plc in Sweden and Poland – Scan and Sokołów

Scan’s rapeseed oil pork in stores

Rapeseed oil pork is now in stores. Scan, in collaboration with farmers on selected farms, has begun to add Swedish rapeseed oil in pig feed, resulting in more tender and flavoursome meat with a higher proportion of unsaturated fat and especially omega-3 fatty acids. Scan estimates, that about 25 percent of their total sales of pork products in the Swedish market in the future will be rapeseed pork, estimate based on the situation in Finland, where the corresponding concept is already in full swing. This new concept is seen as a good way to raise the profile of domestic pork production and pork use. It is hoped to be the savior of the whole Swedish pig industry: farmers, Scan, consumers. Even pigs are doing better.

A win-win-win-win situation? Healthier and taste wealthier? The concept was piloted in high-class restaurants, and there was enthusiasm across the board. But the total demand will be decided quite soon, not by top chefs, but by those ordinary Swedish just wishing to prepare simple dishes or trying to choose a proper pack of sausage or meatballs. Rapeseed oil pork may eventually displace the current normal pork and become a good alternative to beef and poultry, but it cannot replace inexpensive imported meat. However, also Finnish experience suggests, that Scan’s rapeseed oil pork is more than just a fad.

Could Scan be for sale?

But if it does not sell, and if Swedish pork generally does not sell, perhaps the whole company Scan will be for sale. In HKScan’s world, the acquisition of Scan by any company would be news of eight on Richter scale. But Denis Mattsson, CEO of Scan, in Land Lantbruk’s interview on May, has something to say.

After having calmly noted, that Scan is ready to use imported meat also in the products under their most valuable brand Scan, this earnest Finn, no forced smile, does not rule out the sale of Scan. “It is the owners to decide and nothing that I can comment. What I can say, is that we assess all possibilities”. The interviewer concludes Danish Crown (DC) to be an interested buyer. Mattsson is planning to retire at the end of the year, so should we even expect some kind of a grand final?

Coincidentally, we will now look at DC’s report “It’s all about food”. We will look at it because of Sokołów, a Polish company owned jointly by DC (50%) and HKScan (50%).

Sokołów’s network of shops, companys’s prospects and specialization

In the report, Sokołów’s brand is praised. Indeed it is a precious brand, nobody doupts it, but there has been some concern about Sokołów’s network of own shops. However, the concept is being updated, and currently many of their outlets are of type shop-in-shop within supermarkets, Tesco and Kaufland for example. Jerzy Majohrzak from Sokołów is convinced that the network of shops will stay and expand. Earnings in own shops are higher that elsewhere, says Majohrzak in the report.

In the short term, there are some problems not considered in DC’s report. Price of pork in Poland has just reached a new record high, and there are no signs of turnaround, because pig farmers are still downsizing due to ever-rising feeding costs. Also domestic demand for pork products is decreasing.

In the long term, Sokolow’s prospects seem to be just fine. Certainly it is not for sale, on the contrary, Boguslaw Miszczuk, CEO Sokołów, is asked practically in every interview, if they soon will acquire some medium-sized or large Polish meat company. Miszczuk’s answer is not absolutely negative. Organic growth still is the main strategy, but Sokołów might be interested in financially sound, specialized Polish companies, said Miszczuk a year ago.

Sokołów indeed is even built on specialization. It has plants in seven locations around Poland, and many of them are highly specialized. Clearly the company has created a working logistic system, still having room for new locations. On the other hand, supermarkets are, according to Paweł Traczyk, Director, Sokolow Logistics, quite demanding. They want the whole range of ordered goods preferably within a single delivery and with down-to-the-minute accuracy, Traczyk says. Seems quite challenging but nonetheless, Sokołów’s products are available exceedingly widely in Polish supermarkets and grocery stores.

We will look at HKScan Plc again later but on Friday, September 28^th we are going to explore Atria Plc. Summer is gone. Law of nature. Summer-time will continue. Directive.

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