HKScan Group’s interim report 1 January — 31 March 2013: Restructuring continued – financial performance remained flat

HKScan Corporation               INTERIM REPORT                                         7 May 2013, at 08:00 am

HKScan Group’s interim report 1 January — 31 March 2013: Restructuring continued – financial performance remained flat

* Net sales were EUR 590.8 (596.2) million.

* Reported EBIT was EUR -1.1 (-0.2) million. Comparable EBIT excluding non-recurring items came in at EUR 2.0 (-0.2) million. The corresponding comparable EBIT margin was 0.3 (-0.0) per cent.

* Cash flow before debt service was EUR -20.9 (-20.2) million.

* Profit/loss for the period was EUR -5.9 (-7.3) million.

* EPS was EUR -0.08 (-0.09).

* Net financial expenses were EUR -5.8 (-7.9) million.

* Net debt was EUR 472.2 (489.6) million, and net gearing 118.0 (124.8) per cent.

* Outlook for 2013 (unchanged): EBIT is estimated to improve from 2012.

*) The 2012 figures have been restated in accordance with the revised IAS 19 standard for employment benefit plans and the changed reporting principle for marketing support expenses.

GROUP OVERVIEW JANUARY – MARCH

Hannu Kottonen, HKScan’s CEO, comments on the first quarter:

- Net sales decreased slightly during the first quarter of 2013 compared to the corresponding period in 2012 due to lower sales volumes. Even though the comparable EBIT improved somewhat, the performance can be considered to be flat during the quarter. The best performing of the market areas was Poland.

- Due to the uncertainty in the overall economy, the market demand for higher-value meat products is developing more slowly than the trend over the long term. Demand in the first quarter was even lower than usually. As a result, the competition was tough in all the market areas. In addition, Russia closed its borders for some imports, which decreased alternatives for exports and created price pressure in other markets.

- The continued high costs of feed and grain put pressure on the quarter, and further sales price increases were made. Related to raw materials, there was a seasonal oversupply in pork and a continuing structural shortage of beef. In this view, poultry had the best balance. During the quarter, the European meat and food business in general was challenged in many ways related to horsemeat, food origin and labelling.

- The group-wide development programme launched last year targeting to improve annual profit by over EUR 20 million is being carried out, and several projects related to it are under way. The restructuring actions taken in Sweden and Finland are proceeding well, and the changes are to be implemented by the middle and end of 2013 delivering an annual profit improvement of approximately EUR 15 million.

- The Away from Home business started to optimise by-product sales. Cross-border knowledge is also being utilised, e.g. by sharing the best product concepts and preparing for group-wide product launches later this year. The export organisation was centralised under one management to deliver better customer service and find new market potential.

- In Finland, a model for cooperation with producers was developed during 2012 and its implementation started in the first quarter. The goal is to get cost advantage for primary production and to implement the best production practice. Specific development groups for pork, beef and poultry were set up, with representatives of both the producers and the Group. The groups are focusing on developing, maintaining and metering animal production and its competitiveness, following up the results and comparing them from an international perspective.

- This year, HKScan Group and the company’s biggest owner, LSO Osuuskunta, are celebrating their 100th anniversary. The anniversary is visible in Group communications, marketing and product communication.

 *) Restated in accordance with the changed reporting principle for marketing support expenses.

For Finland, net sales in January-March amounted to EUR 194.2 (191.2) million. Comparable EBIT for the period excluding non-recurring items was EUR 1.8 (2.7) million. Non-recurring items in the first quarter of 2013 consist of restructuring expenses related to agreed redundancies and production setup changes amounting to EUR 3.1 million.

The total market volume decreased during the quarter. Profit was affected negatively by the oversupply in pork and undersupply in beef, as well as by decreased volumes in some categories. Sales price increases were made but they did not cover the higher costs in all segments. 

The restructuring and reorganising of the Finnish organisation continued. As a result, the organisations and responsibility distribution of different functions were clarified to match the Group's new operating model. The roles of production units were clarified further, and the number of personnel was adjusted. These actions aim to develop the productivity and efficiency of the business to improve profit by approximately EUR 5 million annually.

During the labour negotiations, some illegal strikes broke out in Finland. The strikes hampered the whole slaughtering and deboning chain decreasing production efficiency and increasing direct and indirect costs. The labour negotiations were taken into account by reducing the campaign activities. The estimated negative impact on profit due to the strikes was EUR 1-2 million (included in the figures). The impact of the strike on pork supply was evened out by using the Group’s plants in Estonia and Sweden.

In January, HKScan’s spot “100 years of Finnish favourites” was chosen as the best TV commercial.

 In the Baltics, net sales in January-March were EUR 41.9 (40.5) million. EBIT was EUR 0.8 (0.7) million.

Net sales improved slightly. EBIT was somewhat better than in the same period in 2012 in spite of the increased costs of feed, grain, personnel, energy and transportation.  Efficiency improvement projects and the implementation of Group’s operating model continued in the market area neutralising the cost impact.

Domestic demand in the market area was stable but exports struggled. The Latvian subsidiaries Rīgas Miesnieks and Jelgavas Gaļas Kombināts were merged to form Rīgas Miesnieks as of 1 March, 2013. Both the Jelgava and Rīgas Miesnieks brands will be maintained and developed further. In addition, Lithuanian logistics were integrated into the Latvian logistics operations in Riga.

*) Restated in accordance with the revised IAS 19 standard for employment benefit plans and the changed reporting principle for marketing support expenses.

In Sweden, net sales in January-March were EUR 228.9 (243.5) million. EBIT was EUR -2.6 (-5.1) million. Net sales declined due to a severe shortage of Swedish beef raw material. As for pork, there was seasonal oversupply vs. demand and purchase prices were still high. In addition, import volumes put pressure on sales prices. Actions within the development programme have taken effect, and can be seen in the improved results. Nevertheless, EBIT still remained in the red. The development programme measures and actions continue.

Branded products were being developed further, e.g. the Svensk Rapsgris^® (Swedish rapeseed pork) business developed well and delivered encouraging results.  The strategic review is also continuing in Sweden.

For Denmark, net sales in January-March were EUR 56.3 (57.8) million. EBIT was EUR -0.1 (0.3) million. Profit stayed below the corresponding period in 2012 as a consequence of heavier cost structure in both raw materials and production, as well as lower volumes in sales. The sales price pressure continued to be tough and the increases in sales prices did not cover all cost increases.

The Vinderup plant could be operated after the fire last year but not yet at full production levels. The last production lines were taken into use during the quarter. The rebuild is planned to be fully completed during the second quarter.

Preparations for the re-launch and sales of fresh poultry products on the Swedish market under the Pärsons brand were made with good initial listings.

The insurance is estimated to cover both the property damage and the loss of profit, as well as the additional costs caused by the interruption to the business. The rebuilt part of the plant started production in December. The rebuild is planned to be completed for the authorities’ approval with regard to the construction work no later than the end of the second quarter. The accumulated posted capital expenditure related to the fire did not change materially in the first quarter from the amount at the end of 2012. The insurance cases are not yet closed.

In Poland, net sales for January-March totalled EUR 85.5 (80.4) million. EBIT for the period was EUR 5.4 (3.4) million. The EBIT margin increased significantly, being 6.3 (4.3) per cent. The performance improvement was attributable to successful product-mix management, active meat sourcing and production cost control.

The high recognition of the Sokolów brand and increased sales of processed products secured the good development. Export volumes stayed at a low level. The weakening European economic activity will also have an impact on Poland as well as on the demand and purchase volumes. During the quarter, new packaging and processing lines were taken into use in the Sokolów Podlaski, Jaroslaw and Robakowo plants.

INVESTMENTS

The Group’s investments in January-March totalled EUR 9.1 (19.8) million. They were divided by market area as follows:

During the first quarter 2013 the investments remained at a low level as planned. In Finland, Sweden and Denmark, the investments were normal repair and maintenance of production lines. In the Baltics, the investments involved the programme for restructuring of poultry production and primary production in Estonia. In Poland, the investments focused on packaging and processing lines in several units.

FINANCING AND TAXES

Group interest-bearing debt at the end of March 2013 stood at EUR 500.4 (527.9) million. At the year end, gross interest bearing debts were EUR 499.7 million. Compared to the previous year, the gross debt decreased clearly, although the strong Swedish krona increased debt by EUR 9.5 million. Net debt decreased compared to previous year by EUR 17.4 million, but increased from the year end by EUR 31.3 million.

The Group’s liquidity was good. Undrawn committed credit facilities at 31 March 2013 were EUR 175.7 (200.2) million. In addition, the Group had other undrawn overdraft and other facilities of EUR 33.2 (26.4) million. The EUR 200 million commercial paper programme had been drawn to the amount of EUR 125.5 (130.5) million.

Net financial expenses were at EUR -5.8 (-7.9) million due to the decreased lower loan amount and lower interest level. Group taxes were EUR 1.8 (2.4) million positive in the first quarter.

SHARES

At the end of March, the HKScan Group's share capital stood at EUR 66 820 528. The Group's total number of shares issued, 55 026 522, was divided into two share series as follows: A Shares, 49 626 522 (90.19% of the total number of shares) and K Shares 5 400 000 (9.81%). The A Shares are quoted on the NASDAQ OMX Helsinki. The K Shares are held by LSO Osuuskunta (4 735 000 shares) and Sveriges Djurbönder ek.för. (665 000 shares) and are not listed. The company held 1 053 734 A Shares as treasury shares.

HKScan’s market capitalization at the end of March stood at EUR 206.9 (293.8) million. It breaks down as follows: Series A shares had a market value of EUR 186.6 (265.0) million and the unlisted Series K shares a calculational market value of EUR 20.3 (28.8) million.

In January-March, a total of 2 149 111 (2 390 022) of the company’s shares with a total value of EUR 8 590 899 (14 003 005) were traded. The highest price quoted in the period under review was EUR 4.28 (6.40) and the lowest EUR 3.67 (5.23). The middle price was EUR 3.99 (5.90). At the end of March, the closing price was EUR 3.76 (5.34).

HKScan has in place a market making agreement with FIM Pankkiiriliike Oy which meets the requirements of NASDAQ OMX’s Liquidity Providing (LP) operation.

BOARD OF DIRECTORS’ AUTHORISATIONS

During January-March 2013, the Board did not exercise the authorisations received from the Annual General Meeting (AGM) on 25 April 2012. The new authorisations granted to the Board by the AGM 2013 are described in the section “Events after the review period”.

PERSONNEL

In the first quarter, HKScan, excluding Sokolów in Poland, had an average of 7 332 (7 913) personnel.

The number of personnel decreased in Finland, the Baltics and Sweden due to the on-going efficiency programmes. In Denmark the personnel increased temporarily due to the rebuild and production restart after the fire at the Vinderup plant the previous year.

The average number of personnel in each market area was as follows:

In addition, the Sokolów Group employed during the period an average of 6 343 (6 142) persons and in 2012 the average number of personnel was 6 310.

Division of personnel by market area at the end of March was as follows:

Additionally, the Sokolów Group had 6 354 (6 332) employees at the end of March and 6 491 employees at the end of 2012.

CLAIM BY OY PRIMULA AB’S BANKCRUPTY ESTATE

According to a stock exchange release of 7 September 2012, HKScan Corporation and HK Ruokatalo Oy were notified that Oy Primula Ab's bankruptcy estate has submitted an action for damages to the District Court of Finland Proper concerning the companies. The claim amounts to about EUR 16.3 million plus claims related to interest and legal process costs.

HKScan and HK Ruokatalo find the action to be unjustified, and the companies are going to dispute the claim in its entirety. Therefore, the action did not give raise to any provisions in the consolidated financial statements.

SHORT-TERM RISKS AND UNCERTAINTY FACTORS

The most significant uncertainty factors in the HKScan Group’s business are connected — through price increases for feed raw material in particular and other production inputs related to primary production — to the price development and availability of local meat raw material, as well as to the adequacy of increases in the sales prices for the products in relation to cost development.

The risks of animal diseases in the food industry’s raw meat supplies or eventual international or regional food scandals impacting the overall consumption outlook can never be fully excluded.

EVENTS AFTER THE REPORTING PERIOD

The Annual General Meeting of HKScan Corporation held on 24 April 2013 in Turku adopted the parent company’s and consolidated financial statements and discharged the members of the Board of Directors and the CEO from liability for the year 2012. The AGM resolved that a dividend of EUR 0.10 per share be paid for 2012.

The AGM resolved on amending the  Articles 8 and 9 in the company’s Articles of Association so that the Board of Directors may include one to three deputy members when necessary, and that the number of Board members can be increased to a maximum of eight.

In addition, concerning Article 12 of the Articles of Association, the AGM resolved to amend the number of auditors, so that the company has at least one and a maximum of two auditors who must be auditors accepted by the Central Chamber of Commerce (CPA) or auditing firms. If only one auditor is appointed for the Company, and it is not an auditing firm approved by the Central Chamber of Commerce, one deputy auditor must be appointed.

The AGM also resolved on the annual remuneration of the Board’s members, deputy members and the chairs of the committees. In addition, compensation per meeting will be paid for each Board and Board committee meeting attended.

The current Board members, Juha Kylämäki, Niels Borup, Teija Andersen, Gunilla Aschan, Tero Hemmilä and Henrik Treschow, were re-elected for a further term of office. Mikko Nikula and Per Nilsson were elected as deputy members. At the organisational meeting after the AGM, the Board re-elected Juha Kylämäki as Chairman and Niels Borup as Vice Chairman.

PricewaterhouseCoopers Oy, an audit firm chartered by the Central Chamber of Commerce, with APA Johan Kronberg as the main auditor, was appointed as the auditor until the end of the next AGM.

The AGM authorised the Board to decide on an issue of shares, option rights as well as other special rights entitling to shares, on acquiring and/or accepting as pledge treasury A Shares and on the transfer of treasury acquired for the company. The authorisations will be effective until 30 June 2014, replacing the authorisations given by the AGM 2012.

The resolutions of the AGM have been published in full in the stock exchange release of 24 April 2013, and they are also available on the company’s website at www.hkscan.com.

OUTLOOK FOR 2013

The Group keeps unchanged the outlook given in the financial statements bulletin on 15 February 2013:

HKScan expects the business environment to remain tough as both animal supply and consumer purchasing power are estimated to tighten further. At the same time, demand for meat in general is expected to develop steadily. The Group focuses on managing future business dynamics by tight control on costs and capital spending, balancing demand and supply, and being more proactive in sales pricing.

The revised strategy, new operating model and organisation will contribute to profit improvement.  The financial benefits of the development and the profitability improvement programmes are estimated to accelerate the profit aggregation towards the latter part of the year 2013 and onwards. Group EBIT for the entire year is estimated to improve from 2012.

CONSOLIDATED INTERIM REPORT 1 JANUARY – 31 MARCH 2013

NOTES TO THE CONSOLIDATED INTERIM REPORT

ACCOUNTING POLICIES

HKScan Corporation’s interim report for 1 January – 31 March 2013 has been prepared in compliance with IAS 34 Interim Financial Reporting standards. The same accounting principles have been applied in the interim report as in the annual financial statements for 2012, with the exception of the revised IAS 19 Employee Benefits standard (effective as of 1 January 2013). In addition, the Group has changed the accounting principles for marketing support. The Group’s financial reporting in 2013 will be in line with these changes. The quarterly Group and market area information for 2012 has been restated accordingly. Due to the rounding of the figures to the nearest million euros in the interim report, some totals may not agree with the sum of their constituent parts. These accounting principles are explained in the financial statements for 2012.

NOTES TO THE INCOME STATEMENT

THE FAIR VALUE DETERMINATION PRINCIPLES APPLIED BY THE GROUP ON FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE

Derivatives
The fair values of currency derivatives are determined by using the market prices for contracts of equal duration at the reporting date. The fair values of interest rate swaps are determined using the net present value method supported by the market interest rates at the reporting date. The fair value of commodity derivatives are determined by using publicly quoted market prices.

FAIR VALUE HIERARCHY FOR FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

RESTATED CONSOLIDATED FINANCIAL STATEMENT 2012 BY QUARTER

As of 1 January 2013, HKScan has adopted the revised IAS 19 Employee Benefits standard and the accounting principles for marketing support have been changed. Quarterly Group and market area information for 2012 has been restated accordingly.  

The adoption of the revised IAS 19 Employee Benefits standard concerns only the market area Sweden, and it results in higher EBIT, higher EPS and reduced equity in the financial figures for 2012. The Group’s EBIT grew by EUR 1.7 million and EPS by EUR 0.02 due to adjustment of employee benefit expenses. The Group equity for 2012 decreased by EUR 29.5 million as a result of recognising actuarial gains and losses in other comprehensive income.

The changes in the accounting principles for marketing support concern the market areas of Finland and Sweden, and they reduced net sales by EUR 43.7 million in 2012. Previously, marketing support was reported as an operating expense, and according to the new principle, it is reported as a deduction of sales.

NEXT FINANCIAL REPORT

The HKScan Group’s interim report for January−June 2013 will be published on 9 August 2013.

Vantaa, 7 May 2013

HKScan Corporation
Board of Directors

Further information is available from HKScan Corporation's CEO, Hannu Kottonen and CFO, Tuomo Valkonen. Please leave any messages for them to call with Communications Manager Elina Hollo, tel. +358 40 570 4030 or +358 10 570 2133.

HKScan is one of the leading food companies in northern Europe, with home markets in Finland, Sweden, Denmark, the Baltic countries and Poland. HKScan manufactures, sells and markets pork and beef, poultry products, processed meats and convenience foods under strong brand names. Its customers are the retail, food service, industrial and export sectors. In 2012, it had net sales of EUR 2.5 billion and some 11 000 employees.

DISTRIBUTION:
NASDAQ OMX Helsinki,
Main media,
www.hkscan.com