Artoparto's Blog

Friday, November 23, 2012

Atria Plc back on track?

Atria’s Q3 result was fine, and especially Atria Russia's good performance was the one that made the audience go wild. But let’s look first at the number of employees in Atria’s different business areas. Admittedly it is not much of an indicator to anything. Nonetheless, since Atria Plc has in recent years repeatedly announced personnel reductions as a part of austerity measures, we will now shortly look at the number of employees by business area over the last five years.

Figure: Atria’s number of employees by business area over the last five years*

*The data is taken from Atria’s quarterly reports, but possible errors and misunderstandings are mine. If I have got it right, quarter specific readings, at least in most cases, refer to the average number of employees from the beginning of the year up to the end of the quarter.

The trend is downward in all business areas. However, during the last two years, the decline has been minimal in Scandinavia and Baltic, and Finland shows actually only seasonal variation. In Atria Scandinavia, the acquisition of Sardus AB in 2007 increased the personnel by about 1000 and the largest layoffs were made during the year 2009. In the Baltics, the acquisitions of AS Wõro and AS Vastse-Kuuste in 2009 increased the number of employees, but after rapid and heavy layoffs the current number is below the 2008 level. In Russia the acquisition of OOO Campomos in the second half of 2008 increased the number of employees by some 800 and no less than two years the number remained unchanged. But finally it began to happen. Last year's and this year's reductions in Russia are even tougher than 2009 reductions in Scandinavia and in the Baltics. Consequently the number of employees in Atria Russia is nearly the same as it was during the pre-Campomos years.

All in all, Atria Plc may well be back on track. Staff costs have been cut harshly. In a way, these savings are permanent, costs don’t return in the short term. But it does not mean that Atria would not be able to come up with new costs, which completely destroy these savings.

Atria's outlook by business area

Atria Finland - The relatively good Q3 result was reported to be due to improved meat market conditions, improved sales structure and higher sales prices and - surprisingly mentioned only after those three - efficiency measures. Cattle slaughter rationalization and Nurmo plant development program, are creating annual savings of € 10 million. Completion of the new bovine slaughterhouse at Kauhajoki early next year should bring even more of these cost savings. Ongoing extension of Atria’s incubation facilities indicates strengthening in demand for chicken products and may suggest also Atria’s rising market share. It seems that Atria Finland’s machine is running just fine.

But there are doubts. Farmers have reduced meat production and Atria’s all main raw materials, pork, beef and poultry are more and more expensive. Unavoidable weakening of general economic conditions in Finland will worsen the situation in the very near future. Is there overcapacity, after all? The new Kauhajoki cattle slaughterhouse will be one of the largest in Europe. Even more overcapacity?

A Finnish newspaper, Maaseudun Tulevaisuus, paints the darkest colors. According to its recent article, meat production is in crisis. Empty pig farms, half-empty cattle farms. Meat industry is running inefficiently and with poor profitability. Also there is expressed quite an extreme opinion according to which, provided that the crisis continues, there will eventually enter a foreign player and take the possession of major Finnish meat processing companies.

Atria Russia - Few people could expect a positive Q3 result. But at the same time, I think only few people are sure that the result will remain positive in the near future. Improved cost structure was said to be one reason for the good result. The chart above also shows it clearly. Layoffs have been made in part due to an increased automation and in part due to closing of units and reductions in product mix. In fact, Atria’s profitability improvement programme 2010-2011 it is now fully carried out in Russia (annual savings target € 7,5 million, see Annual Report 2011, page 7). It seems to have been successful.

What’s more, in the Q3 report it was announced, that Atria Russia has launched a new programme in order to improve production efficiency at the Sinyavino and Gorelovo plants. Annual savings are estimated to be about € 2 million. Therefore the results should still improve.

However, the Q3 report does not say a word about Dan-Kub farm’s huge African Swine Fever problems. Furthermore, Atria still not confirmed its plans to discontinue the primary production in Russia. Most importantly, Atria completely failed to tell anything about the success of new product launches in Russia. Some positive words in the report would have been nice.

Atria Scandinavia - Small changes, more centralization and automation, that's Atria Scandinavia's recipe, "lite bättre". All surprises would be ... surprises. Lönneberga campaign has been helpful, market share is said to be strengthened. The brand uses only domestic meat and it is entitled to use the “Svensk kött” symbol, which was introduced last year. Currently Lönneberga is a valuable brand for Atria Scandinavia, and so is the Danish brand 3-Stjernet, which also was reported to be successful. Both of these brands came with Sardus AB in 2007. Then, if we just forget the Lätta Måltider brand, could it be that the acquisition was not at all as bad as commonly thought?

Atria Baltic - Will Atria Baltic be a chronic loss-maker? In August, the management has been changed once again. The new managing director, Executive Vice President of Atria Baltic, Olle Horm has previously worked for many Estonian meat processing companies, Atria's toughest competitor included.

In his search for savings, Horm evidently had ended up with their factory outlet in the city of Valga. A regional newspaper Valgamaalane became interested in the case, and asked whether or not the outlet will be closed. Not to be closed – this year, Horm replied, but apparently he was hovering between different options and just could not or did not want to rule out any of them. Shortened service hours currently, but anyway the shop is running, which is truly a good thing. There are image benefits which may well overcome all the direct financial losses. Perhaps the outlet should even be renovated and re-branded. Atria Baltic’s headquarters are situated in Valga, and the home ground is important. And this leads us to news which tells, that Horm has signed a sponsorship agreement with the local basketball club. I’m not trying to argue, that factory outlet money would have been needed for this, but who knows. Sponsoring too is a good thing and incidentally the partners form a perfect couple. The team, Max & Moorits, named after Atria Baltic’s precious brand, has not yet achieved great success and Atria Baltic of course, has quite much the same problem. Let’s hope that Horm has a brilliant playbook and thumbs up for the team too.

We will take a look at Atria again later but on Friday, December 7^th we are going to study HKScan. To my disappointment the sun has been traveling a low path in recent weeks. I hope that it will take a little more height when the summer comes again.

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

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Friday, November 9, 2012

HKScan Sweden’s absurdly bad H1 and recovery during Q3

Future is important, history not so much. So let’s first look at HKscan’s own future prospects. This is what HKScan Group tells about them in the Q3 interim report:

Prices of meat raw material are difficult to predict under cost pressure in primary production. The Group will improve its profitability through its development programmes, and passing raw material price increases to sales prices. Rectifying the performance level of the business in Sweden will have a significant impact on the Group during the end of the year.

HKScan maintains the outlook for 2012 which stated that due to the weak development of business in Sweden, there is a risk that the Group’s EBIT will come out below the level of 2011. However, including the estimated non-recurring income of fire insurance compensation is very likely to improve the reported EBIT compared to 2011.

Last year was not a good year for HKScan and it is obvious that the company aims to do better now. The company reckons that the result in Sweden is crucial. In addition, the company anticipates that fire insurance compensation – the fire took place in Vinderup’s plant in Denmark last June - will help HKScan to improve the result when compared to the last year.

The figures below support the company's views. Finland, Baltics and Poland all are on their way to a good annual result, Sweden evidently has passed the rock bottom and Denmark may avoid losses this year. Please note that the chart shows the cumulative EBITs.

Figure: Cumulative earnings before interest and taxes by quarter and year in HKScan’s five market areas and the whole HKScan Group.

Now a bit of history - but only for a couple of quarters back

There is no way to assess the company's fire insurance issues in Denmark but we are able to recall the stated reasons for the exceedingly weak H1 in Sweden. The motive for this ultra-unscientific excursion to interim report piles and files is that HKScan Sweden's massive losses during Q1 and Q2 seemed to come unexpectedly, almost out of nowhere and today the troubles seem to be cured without actually doing much of anything. Let’s look first at HKScan’s Q1 interim report.

According to it, one of the reasons was decline in primary production partly due to changes in state’s subsidy policy. As a consequence, prices of domestic beef and pork rose. This in turn increased import, which was further intensified due to strengthening currency. In addition to these, increased share of private label products was mentioned as one reason for bad results.

Citation #1: In the area of primary production, the changes in subsidy policy for beef production have weakened the profitability of production. This has further weakened the availability of Swedish beef, thus making room for exports. Consumer demand in beef has increased as a whole.

Citation #2: “Performance in the quarter was particularly affected by the decline in pork and beef primary production in Sweden, as well as by the high procurement price of Swedish beef and lower beef slaughter volumes. The strong Swedish krona has significantly increased meat imports and made it difficult to raise the price of products based on Swedish meat raw material, especially in retail. Price increases and cost adjustment have been made in Sweden, but the measures have been inadequate so far both in terms of timing and scope. A further challenge in retail is the growing share of private labels.”

In HKScan’s Q2 interim report (See pages 1-4) the reasons for the bad Q2 were reported to be practically the same as those above, with the addition of lower demand due to rainy weather in June. However, in the report it was also stated, that the bottom was passed at the beginning of the second quarter.

Many of those reasons mentioned in both interim reports suggest substantial reductions in sales. However, Q1 net sales reduced only by € 5,4 million or 2,1% compared to Q1 in 2011, and it is amazing to note that Q2 net sales even increased by € 4,0 million, when compared to Q2 2011.

Perhaps the company stubbornly tried to keep its market share, and cost control failed to the full. But who knows, if there were some entirely other sudden events. Poor management, pressure from producers, bad luck, whatever the principal reason, the reduction in EBIT during H1, also illustrated in the chart above, was simply monumental. It may also indicate that the company is extremely prone to exogenous shocks.

Some of the reasons mentioned in the interim reports look just strange.

Reports' statement that the strong Swedish krona has significantly increased meat import is true as such but the fact is also – if I get it right – that the Swedish Krona has not been particularly strong during the first half of the year. It certainly strengthened in December 2011 but during H1 this year it has been at about the same level where it was for instance in the beginning of the year 2011 (one SEK about € 0,11 or slightly higher). Also, the private label growth has long been 100 percent clear to everyone and it cannot be the principal reason for suddenly deteriorated results. One can also quite safely assume that growth in meat imports was not any kind of a surprise to the company. The thing is, that HKScan Sweden had already taken steps to improve its competitiveness against private labels by introducing in November 2011 its new low or medium price brand Hansa based on imported meat. In addition, HKScan’s subsidiary Annerstedt Flodin AB has launched a new premium concept Chosen by Farmers, a brand using imported high quality beef and mutton.

What about Q3?

What does the latest Q3 interim report tell us in addition to the future prospects above? Pork production was reported to decrease further and rainy weather was reported to reduce sales. Interestingly no more mention of currency rate changes although during Q3 SEK really was strong – for instance throughout August it was as high as 0,12 or more. There is no more mention of private label products. Where did they go? There is one significant announcement, namely that the price of imported meat rose rapidly, supporting also HKScan’s sales price increases. Perhaps we still should not conclude that the mighty HKScan Sweden is just a price follower.

It is also interesting to note that now, despite the fact that prices were raised, net sales decreased by € 6,0 million compared to last year’s Q3. Also HKScan’s Q3 EBIT decreased to € 3,2 million from last year’s corresponding figure of € 5,4 million. Bad summer, of course, is part of the explanation but volumes decreased to the extent that also earnings went down.

Nevertheless, as illustrated in the chart above, situation turned better in the third quarter, and it is the main thing. However, the first half performance was exceptionally weak, and in my opinion it is not possible to know the real principal reasons. The recovery was rapid but one gets the feeling that the improvement came without doing almost anything but just following others by raising prices.

We will go into HKScan’s businesses again later but on Friday 23^rd November we are going to scope out Atria Plc’s topical matters. Some 200 long days to summer. I’m not sure but I think it is anyway less than a year.

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

Tuesday, November 6, 2012

HKScan’s Q3 was reasonably good

Overall, HKScan’s interim report raises hopes. Currently Sweden is the key area, and HKScan Sweden’s Q3 EBIT is not bad at all after the absurdly poor H1. On the other hand, HKScan Finland’s EBIT is only something like low average. EBIT in Baltics is as good as ever and also Poland performed well. HKScan Denmark is returning to normal after the fire in June. Earnings per share € 0,11 is reasonably good.

Figure: Quarterly earnings before interest and taxes by year in HKScan’s market areas.

Thursday, November 1, 2012

Atria’s Q3 result is good

Just a few lines here about Atria’s Q3 result. Overall, the result is good. At present, Finland and Russia undoubtedly are the key areas, when evaluating the success of Atria Plc, and they performed well. Atria Finland’s EBIT € 12,5 million is good and Atria Russia’s EBIT € 0,6 million really is an excellent result after years of losses. Atria Scandinavia’s EBIT € 4,4 million is a routine result, not bad and Atria Baltic’s EBIT € -0,4 million is a normal result, not good. Earnings per share € 0,31 is a great result indeed.

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

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.

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.