Huegli, the Swiss food group that makes products from soups to sauces and ready meals to desserts, reported its "best-ever" profits in 2010. The company, however, kicked off 2011 with falling sales, with a marked decline in Germany its biggest international market. In this month's just the answer, Dean Best discussed Huegli's performance in 2010 - and its prospects this year - with CFO Andreas Seibold.

just-food: Germany accounts for 47% of Huegli's total sales. What were the factors behind Huegli's softer sales there in the first quarter of the year?

Andreas Seibold: I think the main thing to say is the first quarter of 2010 was very good. It was the best sales quarter that we ever had. We had growth of 9.5% overall [as a company], which was a real jump. In the rest of 2010 we had growth of something over 1% only. The comparison with the first quarter of 2010 is quite difficult. We were not so bad in the first quarter of 2011, also not so good, but we are mainly negative [in Germany] because the 2010 first quarter was too good.

just-food: Are there any particular challenges in Germany at the moment?

Seibold: We always have challenges because we have to convince our customers that we are the right partner, especially in private label and industrial food. Normally, you don't have contracts that last several years. If things are good, maybe you have a contract over one year, where you are listed, for example, in Tesco or Aldi. However, maybe you only have some sales on promotion, which companies like Tesco or Aldi sell over only one or two weeks, so you have to convince the customer every time that you are the right partner.

just-food: Have you lost any listings in Germany or in any markets that you have?

Seibold: You always lose listings and you always gain; it's the net result that is important. In the net result, we have always gained listings and we will this year in 2011.

just-food: What are your thoughts on Huegli's outlook for the rest of the year?

Seibold: For the first quarter, organic sales were down 2.6%. For the whole year, we estimate organic sales growth of 3-5%. We are quite convinced that Q2, Q3, and Q4 will be quite better than Q1. One of the reasons is we have some listings that we know that we can deliver from Q2, Q3 onwards. You know normally about these listings six months in advance so we have a certain visibility on these sales. In other divisions, we are confident that we have more sales in 2011 than 2010.

just-food: And you are expecting to see an improvement in Germany as well as the whole business?

Seibold: Yes, sure. Also in Germany, 2010 was a perfect year. Profitability was quite good, sales were very good, so I think a comparison with 2010 in Germany is a difficult one.

just-food: 2010 was Huegli's "best-ever" in terms of profitability. Why?

Seibold: Cost efficiency, product mix were the main reasons. We had a lot more sales in own products and less sales in traded goods. The own products are mainly stocks, soups, sauces, ready meals - also everything in the savoury category, spices for snacks and so on. We also focused on own products with a better margin. We cut some sales that had very small turnover per year.

just-food: How long can the cost management continue? It is difficult to continually improve efficiency.

Seibold: I think this is something that can just go on and on. How far you can go, I cannot tell you that but at least we work on it and we are confident that there are still some parts where we can be more efficient.

just-food: Did commodity costs have big impact in Huegli in the fourth quarter of 2010?

Seibold: No, the raw material costs for us will be an issue in the second half of this year. We still have some stocks and contracts with lower raw material prices.

just-food: So, the pressure will increase throughout the year because you will be changing contracts?

Seibold: Yes. We estimate like all companies in our business that the raw material impact will be in the high one-digit percentage, so let's say a 7-9% increase overall, which is quite a lot.

just-food: Do you think that private-label manufacturers feel more pressure from commodity costs than brand-owners?

Seibold: In the long run, no. Every competitor of Huegli has to deal with the same problem. We have world prices for certain commodities so every company has the same cost. What you can do is to be efficient, to have your cost under control. Raw materials - for Nestle, for Unilever or for smaller companies - is the same.

just-food: With brand-owners facing marketing costs, for instance, perhaps private label can absorb commodity costs for a longer period?

Seibold: No, I don't think so. Surely the brands have a bigger margin and maybe they can bear the rising costs for a longer time. In private label, normally you have very low margins. As a producer, you cannot absorb the cost increase for a very long time. Brands have a longer time but, normally, they want to keep the higher margin, so they try to increase their prices as well.

just-food: Is Huegli able to ask retailers to increase prices?

Seibold: Sure. We have to do that. It's not possible to bear commodity increases of 7-9%, not at all. Our margins are not so big to bear that and say 'no problem'. On the contrary. If we cannot increase prices, it's not our policy to produce something that we lose money on.

just-food: Looking at Huegli's four divisions, is private label the biggest?

Seibold: Foodservice is about 40%. Private label and industrial foods are about 20% each of the group. The health and natural foods division is about 15%.

just-food: In terms of the industrial part of the business, where you make savoury products, snack seasonings and sports nutrition products, have you had the same discussions on commodities with the manufacturing customers you have?

Seibold: The problem is the same. But with those customers being food manufacturers themselves they have transparency about the development in the markets. However, because they are under pressure from supermarkets to take cost out, it is as difficult as in other divisions to raise prices. But, like in the other divisions, we have no choice but to do it. 

just-food: After the best-ever year for earnings, will it be difficult to follow that performance in 2011?

Seibold: We will try to hold our EBIT in absolute terms. Our sales in Swiss francs will go back a little bit because of the currency fluctuation.

just-food: Will it be a year of focus or a year when Huegli tries to expand perhaps through acquisitions?

Seibold: Acquisitions are always an issue for us. We've already checked quite a few acquistions but normally we only acquire if we see some added value for us. Huegli would not normally buy a company to continue the same business as we had before. It's not our policy to buy a company just to have more sales or just to be bigger.

just-food: Huegli's last major acquisition was in 2008 with the purchase of UK firm Contract Foods. Is there a big desire to make another acquisition?

Seibold: If it matches well and matches in terms of product portfolio, the price and management capacity. Our management capacity is limited. Our business plan should also include the possibility to integrate the acquisition very quickly, with quite a high level of possibility to make it profitable in a very short time.

just-food: Is there an ambition to grow in foodservice or private label? Pressure from commodity costs could mean a lot of consolidation in private label.

Seibold: We want to grow in all of our four divisions. There is not a particular divison in which we want to acquire but it's surely not private label. A small private-label company we could buy maybe has ten customers. We can gain those ten customers anyway if the company doesn't exist anymore. It depends on the specific conditions but private-label is a special business, with a small amount of customers.

just-food: Would acquisitions come in the foodservice or health foods segments?

Seibold: Foodservice, health and natural foods, industrial foods and maybe at the bottom of the list, private label. We still have enough places for organic growth. What we are always looking to do is explore other countries. In 2007, we went to Italy. In 2008, we went to the UK. In Europe, there are still some a few spots we can go to. For example, we are not in foodservice in the UK. We only have industrial foods and private label. We are also not in foodservice, for example, in Romania or Bulgaria.