HKScan’s comparable EBIT strengthened in the second quarter

HKScan Corporation, Half Year Financial Report 2022, 20 July 2022 at 8.30 a.m. EET

HKScan’s Half Year Financial Report 1 January - 30 June 2022 

HKScan’s comparable EBIT strengthened in the second quarter

April-June 2022

• HKScan’s net sales increased by 13 per cent to EUR 505.7 (449.3) million. Net sales increased in all sales channels and categories and in all HKScan’s home markets. Costs increased as a result of strong inflation and the company was able to increasingly pass on the costs to sales prices during the review period. Food service sales increased clearly. 
• The Group’s EBIT totalled EUR -14.3 (3.7) million. Goodwill in the Baltic business unit was written down by EUR -15.6 million following an impairment test. In the comparison period, Finland’s EBIT included a positive item of EUR 3.0 million affecting comparability.
• The Group’s comparable EBIT was EUR 1.5 (0.7) million. In the review period, HKScan gradually improved the balance between high cost inflation and sales prices. Comparable EBIT improved as a result of better sales mix and production efficiency.
• Cash flow from operating activities was EUR 22.4 (24.9) million. 

January-June 2022

• HKScan’s net sales increased by nearly 8 per cent amounting to EUR 942.9 (876.8) million.
• The Group’s EBIT totalled EUR -23.2 (2.6) million. The goodwill write-down of the Baltic business was EUR -15.6 million.
• The Group’s comparable EBIT was EUR -7.0 (-0.5) million. Negative performance in the Baltics caused the biggest deviation in the Group's EBIT.
• Strong cost inflation has pushed up the prices of energy, grain and other production inputs to record high levels in all of HKScan’s home markets. To secure the availability of domestic meat raw material central for the business, the company has increased producer prices.
• Due to a structural delay in pricing, HKScan’s sales price increases and operational efficiency improvements did not yet compensate for the strong cost increases in production inputs, but the situation began to balance out gradually towards the end of the review period.
• Cash flow from operating activities was EUR -12.0 (28.1) million. Cash flow was weakened by a lower EBIT than in the comparison period and a strong increase in working capital particularly in the first quarter.
• Interest-bearing net debt was EUR 346.3 (298.5) million and net gearing 109.6 (92.8) per cent.

The figures in parentheses refer to the same period in the previous year, unless otherwise mentioned. The figures are unaudited. 

Outlook for 2022

HKScan's guidance for 2022 remains unchanged.

HKScan estimates that the Group’s comparable EBIT in 2022 will improve compared to 2021. Early 2022 comparable EBIT is expected to be weaker than the comparison period due to inflation, which strongly affects the company's profit development, and significant imbalances in the international meat and grain market. The full-year profit development will be significantly affected by the development of the international meat and grain market.
 

KEY FIGURES, NET SALES

KEY FIGURES, EBIT

KEY FIGURES, OTHER

* Includes a goodwill write-down of EUR -15.6 million for the Baltic Business Unit.
** Includes the sale of Vantaa property (land and buildings) with EUR 76.1 million.

HKScan’s CEO Tero Hemmilä 

HKScan strengthened its comparable EBIT in the second quarter in a very difficult operating environment marked by strong cost inflation. In April-June, the company’s comparable EBIT improved by 0.8 million euros to 1.5 million euros positive. The EBIT improvement started in the second half of the quarter. Finland, Sweden and Denmark reported positive comparable EBIT, while the Baltics continued to be negative. The goodwill write-down of the Baltic business unit led to a clear loss in the Group’s EBIT.

In April-June, HKScan’s net sales increased by 13 per cent, mainly due to sales price increases, but also to better sales mix. Food service sales grew strongly following the removal of pandemic restrictions. Successful sales price increases covered partly the sharp rise in production costs. The EBIT improvement was driven by commercial added value in line with the strategy, better sales mix, production efficiency and overall cost management. 

Exceptionally high increases in sales prices have been necessary as the prices of meat raw material and other production inputs have risen sharply. We have had constructive discussions with customers about the situation and the measures required. Prices paid to farmers have increased clearly from the comparison period, but the sales price increases made are not yet sufficient to ensure the continuity of domestic meat production and the availability of meat raw material at current cost levels. 

In the second quarter, Denmark continued to show strong performance and clearly improved its EBIT. The good performance is the result of the determined strategy implementation and strong demand for poultry meat in the current market situation. Denmark has also been able to clearly decrease its dependence on exports to non-EU countries. This has been a significant strategic change in the Danish business. Finland clearly improved its comparable EBIT, with a particularly good performance towards the end of the quarter. Sweden also showed strong profit development towards the end of the quarter. The early spring was challenging in Sweden, and as a result the EBIT was at the comparison period level. In the Baltics, comparable EBIT weakened and was negative. The challenges in the Baltics were related to very strong overall cost inflation and our business model in an exceptional market situation. Our determined measures have paid off and in June the comparable EBIT for the Baltics was already at the comparison period level. 

The continued unstable geopolitical situation is increasing business challenges and changing the market in a way that strengthens the role of domestic raw materials and familiar products in consumer demand. Consumer food prices have already risen clearly and the rise will continue, affecting both retail offering and consumer demand. Consumer demand will become increasingly polarised over the rest of the year. At the same time, the market is evolving. For their international supply chains, major food players are seeking increased cooperation with local players to ensure reliability and security of supply. In this context, HKScan has a very good position in its home markets and the situation creates new opportunities for the company. 

A major short-term risk in our home markets is related to the availability of meat raw material in the coming years as the value chain for primary production is long also in terms of time. It is expected that the volatility of commodity prices on world markets will continue to be higher also in the coming years. Food chain players, especially industry and trade, will be required to react to cost changes, as their speed and magnitude could threaten the operation of the whole food chain and domestic food production through their negative impact. This transformation has been well understood and the scale of the financial changes required has already been exceptional. 

There is still a long way to go to reach a producer price level at which farm profitability is sustainable with current cost developments. For the rest of the year, price developments for grain and other inputs will have a significant impact on the situation. For this reason, active discussion with customers about the situation and the measures required will continue to play an important role also over the rest of the year. This will create continuity in the production of domestic meat raw material and food, as well as in the availability of raw material. I am confident that all food chain players understand the seriousness of the situation and are ready to take decisions that will not break the basis for domestic food production but strengthen it in all our home markets. This is also in the interests of consumers who value domesticity in the unstable geopolitical situation.

In the second half of the year, strong cost inflation will continue to create uncertainty in the operating environment. This also applies to production inputs to the food industry. As a company, we are prepared for the risks related to energy availability and we have drawn up plans that are well underway. Cyber risk preparedness has been high on our agenda for quite some time. With the war in Ukraine and the unstable geopolitical situation, HKScan’s business focus has been shifted to short-term measures to minimise the negative impact on performance and to ensure profit development in a rapidly changing operating environment. This includes determined efforts to pass costs up the chain to sales prices, while emphasising systematic cost management.

In 2022, the focus of the business management is on sales pricing and cost management. Ensuring positive profit development requires an immediate response to changes in order to manage their potential negative impact. Our business is based on HKScan's strategy to become a versatile food company with the focus on well-managed renewal. An example of this is Kasviskonttori Oy, which started operations in Finland in April. The company will focus on the growing trend of vegetable consumption by introducing new vegetable products to the market this year.

The Finnish poultry business conducted statutory change negotiations, which will improve the cost efficiency of the poultry business by some 3 million euros per year. The Finnish poultry business has significantly higher profit potential through the commercial and production measures that will be implemented over the next years. HKScan is one of the largest players in the poultry market in the Baltic Sea region, and the market growth creates possibilities for good profit development in the company’s home markets. 

In the current situation, it is difficult to accurately predict changes in the operating environment. Nevertheless, we are confident in our ability to strengthen our profit development over the rest of the year. The second quarter of 2022 already demonstrated our ability as a company to meet the exceptionally tough challenge of the operating environment. Food always matters, especially in unstable times. Our strategic target is to grow into a versatile food company that creates strong shareholder value.

Key events in April-June 2022 

New bank facility to repay a bond maturing in September 2022

In September 2017, HKScan issued a EUR 135.0 million 2.625 per cent fixed-rate, unsecured and senior bond maturing on 21 September 2022 (FI4000278536) with a current outstanding amount of EUR 39,516,000. In June 2022, HKScan agreed on a new EUR 39.5 million unsecured bank facility to repay a bond maturing in September 2022.

Statutory negotiations

In May, HKScan started statutory negotiations in the Finnish poultry business at the Rauma and Eura units in accordance with the Act on Co-operation. The aim of the negotiations was to improve the profitability, competitiveness and cost efficiency of the poultry business by improving production efficiency, reorganising operations and renewing operating methods. The negotiations ended after the review period.

HKScan expanding into the growing market of value-added vegetable products

In April, HKScan and Vihannes-Laitila founded a joint venture to renew the supply of fresh vegetable products and meet growing consumer demand. During this year, Kasviskonttori Oy will launch ready-to-use and ready-to-cook fresh vegetable products with higher added value. The partnership provides an excellent platform to create added value for vegetable products, develop the selection and drive growth.

For HKScan, partnership with Finland's leading vegetable trading company Vihannes-Laitila is a natural part of the company’s strategy to expand into new raw materials and product categories. Fresh vegetable products made from trusted raw materials will complement HKScan’s product portfolio consisting of a wide variety of meat products, snacks and meals.

Events after the reporting period

Media release on 7 July 2022: HKScan to improve the profitability of its poultry business in Finland

The statutory negotiations started in HKScan’s Finnish poultry business at the Rauma and Eura production units in May have been concluded. As a result of the negotiations, 55 jobs will be reduced at HKScan's Rauma unit and substantial changes in the terms of employment will affect 105 jobs. The changes will be implemented after the summer holiday period in August-September 2022. With the measures, HKScan aims to achieve annual savings of more than EUR 3 million. The savings are expected to be realised during 2023.

The negotiations aimed at improving the profitability, competitiveness and cost-efficiency of HKScan's Finnish poultry business by improving production efficiency, reorganising operations and renewing operating methods at the Rauma and Eura units. The statutory negotiations concerned blue-collar employees as well as the white-collar employees in the maintenance organisation at the Rauma and Eura units. 600 employees were in the scope of the negotiations.

Turku, 20 July 2022

HKScan Corporation
Board of Directors

Webcast

In connection with its Half Year Financial Report 2022, HKScan will hold a webcast in Finnish for analysts, institutional investors and media on 20 July 2022 at 10 am EET. You can follow the Finnish webcast at https://hkscan.videosync.fi/2022-q2. HKScan’s CEO Tero Hemmilä and CFO Jyrki Paappa will present the Half Year Financial Report.

To arrange an investor call in English, please contact Heidi Hirvonen, SVP Communications, tel. +358 10 570 6072 or by email heidi.hirvonen@hkscan.com. 

For further information

Tero Hemmilä, CEO, tel. +358 10 570 2012
Jyrki Paappa, CFO, tel. +358 10 570 2512
Heidi Hirvonen, SVP Communications, tel. +358 10 570 6072

Financial reports

Interim Report for January-September 2022 will be published on Thursday 3 November 2022.

At HKScan, we make life tastier – today and tomorrow. Our strategic target is to grow into a versatile food company. Our responsibly produced, delicious products are part of consumers’ varied food moments – both every day and on special occasions. We have some 7,000 HKScan professionals applying more than 100 years of experience to make locally produced food. For us at HKScan, responsibility means continuous improvements and concrete actions throughout the food chain. As part of our Zero Carbon programme, we are targeting a carbon-neutral food chain from farms to consumers by the end of 2040. Our home markets cover Finland, Sweden, Denmark and the Baltics. Our strong product brands include HK®, Kariniemen®, Via®, Scan®, Pärsons®, Rose™, Rakvere® and Tallegg®. Through our strategic partnerships, we are also known for Kivikylän®, Tamminen® and Boltsi brands. HKScan is a publicly listed company, and in 2021, our net sales totalled over EUR 1.8 billion.

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