Scandinavian meat-to-convenience foods group HKScan has downgraded its operating profit forecast for 2013. While the company has delivered on the turnaround plan it unveiled last year, it said export pressures and a shift in its product mix would hit EBIT. Nevertheless, CEO Hannu Kottonen insists HKScan will continue to drive operational improvements in the coming 12 months.
HKScan lowered its operating profit forecast this morning. The Finland-based company said it now anticipates full-year operating profit to come in below the level in 2012. Previously, it had forecast an improvement in EBIT.
Operating profit has been hit by an imbalance between supply and demand. Reporting its first-half results last month, HKScan said consumer and customer demand in Europe was lower than pig and poultry production – which stock levels high and sales prices low, especially in export markets.
The company has now conceded these “longer-than-foreseen” export challenges would hit the group’s full-year operational performance.
HKScan is also feeling the negative impact of falling demand for higher-quality meat products and shifting European buying patterns. Consumption of lower-priced mean products has “increased significantly” in all markets, especially Finland, HKScan said.
In the face of all these challenges, HKScan CEO Hannu Kottonen is a man with a plan. Kottonen tells just-food “low performance” is the “main issue” the northern European food giant is grappling with.
Since Kottonen took the helm at HKScan 18 months ago, the company has embarked on a major restructuring programme.
Just one month after Kottonen joined the group from Metsä Tissue Corporation, the company “redefined its strategy” when it revealed plans to achieve annual performance improvements of EUR20m (US$26.1m) by 2013. HKScan today said it would exceed this cost-cutting target.
The group has lowered its cost base across the markets in which it operates, starting with the problem market of Sweden. The firm was being hit by increasing volumes sold under private label and higher sales of imports due to falling supplies of Swedish raw meat as well as favourable exchange rates.
HKScan moved to boost its operating performance in Sweden by merging the firm’s local subsidiaries, Scan and Pärsons, into one business unit, HKScan Sweden. The group also overhauled its Swedish production.
Echoes of these initiatives can be seen in HKScan’s cost-cutting drive in other markets. The company has rationalised its production base in Finland, Denmark and the Baltics.
HKScan has also moved to simplify its complex corporate structure, a legacy of its drive to expand through M&A. HK Ruokatalo Oy has become a wholly owned subsidiary of HKScan Corp., HKScan Finland Oy and Ruokatalo Oy have merged, and Järvi-Suomen Portti Oy and Helanderin Teurastamo Oy have been integrated into the Ruokatalo business.
While significant progress has been made, Kottonen tells just-food there is still more fat to trim. “Cost cutting, complexity reduction and productivity improvement will stay in focus,” he insists.
Indeed, HKScan has set itself an ambitious new target to match the savings achieved in 2013 in 2014. HKScan launched a group-wide “development programme” that will run until the end of 2014, targeting an annual profit improvement exceeding EUR20m and a reduction of over EUR50m in net debt.
Based on the previous cost-cutting drive, Kottonen is confident that the group can deliver.
“We have a relatively long list of carry overs from the first programme. For example, plenty of ideas which did not fit to the first programme. Additionally group resources are better in place and as is facts are better known versus the first program. [Looking at] facility closures, we are likely to focus more on logistics and warehousing.”
While the company has indicated it intends to reduce its debt levels, with leverage at around 115%, Kottonen says the primary drive is to get HKScan on a more sound operational footing. “Leverage is not the main issue; low performance is.”
By reducing the complexity of its operating units, HKScan is generating significant savings and this should boost the bottom line. But, for Kottonen, the company’s mission must look beyond this to brand building.
In order to build its brand equity, HKScan said it will launch a company-wide project to utilise its top-performing local product, packaging and recipe innovations in a “more efficient way”.
“On group level we will focus more on consumer insight based R&D and NPD, building up concept and nurturing existing recipes and offerings in wider markets,” Kottonen says.
HKScan will step up the use of production capacity across borders and will look to drive sales through “through innovative branded products and concepts”. The project will be overseen by a new group-level marketing organisation, which was established last month.
While HKScan is attempting to draw the disparate parts of its business together, Kottonen insists local brands will remain key to its strategy and plays down the likelihood of a significant SKU pruning programme.
“Strong local brands are important for us including product brands. We’ll review the brand promises in greater detail rather than building regional master brands,” he insists.