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Interview | Meat
HKScan CEO Tero Hemmilä on turnaround and growth
Finland-based meat group HKScan is looking to bounce back after pressure on sales and profits. CEO Tero Hemmilä tells Dean Best about HKScan's turnaround plan and its new strategy to grow.
When Tero Hemmilä took the helm at Nordic meat group HKScan in February 2019, he wasn't just joining a business that had seen sales fall for five consecutive years and operating profits for two.
"The first job to be done was to mitigate the risk of the company breaching financial covenants,” Hemmilä tells us. “We had one covenant, which is on net gearing, and we did foresee that there was a big risk that we could breach the covenant some time during the latter part of this year. We had to fix that, so we decided to strengthen our balance sheet, strengthen the equity by executing a share issue."
In June last year, HKScan issued almost 45 million more shares in the business, amounting to more than 45% of the company and raising gross proceeds of €71.9m. A month later, the Finland-based group confirmed it had reached agreement on new bank facilities worth more than €174m. "We got, in practice, a bit more time to execute the profitability improvement programme without having an immediate risk of breaching the financial covenant," Hemmilä explains.
Hemmilä's appointment as HKScan president and CEO marked the executive's return to the business. He worked for HKScan from 1997 to 2009, including as senior vice president for strategy and development, before leaving the company for Norwegian fertiliser giant Yara.
"I know HKScan pretty well as I've been working here [from] 1997 until the end of 2009, so I felt that, in a way, even though the company was in a very, very challenging situation financially, it was also a big challenge to join and try to turn the company back to a healthy level from a financial perspective," Hemmilä says. "And, of course, food is always an interesting topic, especially nowadays. The whole food market, consumers' consumption habits and behaviours, as well as the market channels, are developing very quickly."
Since the start of the year, HKScan has embarked on fresh efforts to improve profits and, Hemmilä notes, the moves are starting to bear fruit.
HKScan is a supplier of meat products and meal solutions, its main "home" markets being Sweden, Finland, the Baltic states and Denmark (which also house its factories), as well as exporting to roughly 50 more countries. The company's portfolio of brands include HK, Scan and Kariniemen.
Earlier in the decade, under Hemmilä's predecessor-but-one, Hannu Kottonen, HKScan embarked on moves to streamline and simplify its operations amid rising raw materials costs and high overheads, as well as declining consumer sentiment.
After four years in the hot seat, Kottonen was replaced in 2016 by Jari Latvanen who joined from packaging group Stora Enso but was, like Hemmilä, a former HKScan executive. In 2017 and 2018, HKScan's sales declined, while EBIT and net losses grew. Hemmilä's appointment was announced in November last year, with the executive taking up the reins in February.
Since the start of the year, HKScan has embarked on fresh efforts to improve profits and, Hemmilä notes, the moves are starting to bear fruit. In the third quarter of 2019, HKScan reported a positive EBIT, with net sales up more than 5%. The company saw profitability improve across the business amid "improved commercial performance and operational efficiency, as well as good cost control", it said in November. A better showing from HKScan's domestic poultry business also boosted profits.
"We have been executing the profitability improvement programme since the very beginning of this year. We've been able to proceed in a goal-oriented and systematic way and now the result is seen in our EBIT growth," Hemmilä says.
The HKScan chief expects the company's net sales and EBIT to improve in 2019 versus 2018 but he has a note of caution and says more needs to be done in the company's efforts to turn itself around, a programme set to be completed at the end of 2021. "We are happy with the progress and the direction is the right one but of course the level of the profitability and EBIT is naturally far too low," he says. "We are far from our target of where we should be at the end of the turnaround programme."
The new operating model is key to increase internal productivity and be closer to the customers and consumers in every market where we are present.
Another move HKScan has introduced is to change the way it is organised, in part to save costs but also to speed up decision-making, Hemmilä explains. In 2019, the company cut 183 white-collar jobs.
"The new operating model is key to increase internal productivity and be closer to the customers and consumers in every market where we are present – and increase decision-making speed," he says. "Having certain functions on group level will capture the key synergies what we have within the group."
Asked if more job cuts are on the cards, Hemmilä replies: "No, not at the moment. They are not on the agenda."
The HKScan CEO has also been busy plotting out the future of the company. Alongside the publication of HKScan's third-quarter and nine-month results in November, the group also set out a new strategy, encapsulated by a vision to be "a versatile food company".
Put simply, facing changing consumption habits, Hemmilä wants to broaden HKScan's product portfolio and expand where in the market it does business. "HKScan has been and still is, in a way, a retail-driven meat company," he acknowledges.
Pork, beef and processed meats represent 60% of HKScan's annual net sales, which stood at €1.7bn ($1.87bn) in 2018. Slicing sales another way, three quarters of HKScan's net sales are made through retail customers.
At present, retail accounts for 75% of HKScan's net sales, with 15% from foodservice and the remaining 10% from a combination of export markets.
"The new operating model is [the] key to increase internal productivity and be closer to the customers and consumers in every market where we are present.”
Hemmilä points to ways the market in which HKScan does business is changing. "In our home markets, we do foresee that red meat consumption is going to decline slightly at the same point as there are many meat replacements coming to the market," he says. "At the same time, we do see consumers buying their food more and more through the foodservice channels and retail declining slightly every year. We want to grow in consumers' food moments. We have two angles – the category perspective and the channel perspective."
At present, retail accounts for 75% of HKScan's net sales, with 15% from foodservice and the remaining 10% from a combination of export markets – countries outside HKScan's "home markets" – and sales to industrial customers.
Hemmilä talks of wanting HKScan to achieve "a more balanced presence between retail and foodservice" but declines to predict how the company's sales could be divided up in future. "It depends a bit on what time span we think about," he says. "Of course, we want to grow on absolute terms as well, so the percentages could even stay where they are but I would foresee a clear improvement in foodservice."
How would that be achieved? "[By] building a position with our customers by developing our portfolio. If you think about the public sector, the private sector, they are more for plant-based products at the same time as domestic meat being important for them. It's all about being able to be a supplier, having a wider portfolio and, in that way, be able to create more value for them and build stronger customer relationships in that channel."
Meat will be the core of the business but, expanding into new categories, plant-based products are one opportunity, of course.
The rise in demand for plant-based alternatives to meat – driven in the main by flexitarians, meat-eating consumers that want to vary their diet – is a trend meat processors around the world are grappling with. Some have acquired plant-based businesses outright. Some have invested in meat-alternative suppliers. Others have launched their own products.
What is HKScan's strategy? "From the category perspective, we could say that we are looking into actively entering new categories and new raw materials. It can be that we go to plant-based products a bit stronger," Hemmilä says. "I also want to emphasise that, of course, meat will be the core of the business but, expanding into new categories, plant-based products are one opportunity, of course."
He describes how HKScan may look to expand in the plant-based sector. "One of the key angles of our strategy is to build partnerships with smaller companies, for example, who are already in these categories. We have a pretty wide presence around the Baltic Sea. We can help them to grow faster. What we then get is a position in a new category without having to invest a lot into that."
Given the work HKScan still needs to do to further improve its profitability, the company is not at present able to make larger acquisitions, Hemmilä admits, but would consider making minority investments in smaller businesses. HKScan already has stakes in two smaller meat companies in Finland offering "local" products, he notes.
"We are now moving ahead with the resources we have. We do evaluate, of course, every case but I think we don't have, at the moment, capabilities to do big acquisitions," Hemmilä says. "Therefore, we are investigating building partnerships, where, of course, ownership changes can take place but purely commercial agreements can be done as well."
Some meat companies have come under investor scrutiny for their response to consumer demand for alternative proteins. Hemmilä says HKScan's investors welcome the company's strategy of becoming a "versatile food company".
However, he adds: "At the same time, they say we need to expand into new categories in a controlled way, keeping in mind that meat and meat products are the core. But, step by step, expanding into new categories like plant-based products to become a diversified company, having also a more balanced presence in retail and foodservice, I think they welcome this development."
HKScan's pork operations have benefited from the African swine fever outbreak that has decimated China's own production.
As well as growing HKScan's foodservice business, the company's new strategy includes efforts to grow exports, especially to Asia. The group started exports from Finland to China in 2018 and also set up a joint venture in the country.
Japan and Hong Kong are other export markets opened up in Asia but Hemmilä describes China as "the clear number one market at the moment" in the region.
Like other processors, HKScan's pork operations have benefited from the African swine fever outbreak that has decimated China's own production. "We have, due to African swine fever, been able to sell a bit more. We are exporting this year around six million kilos of pork into China. Last year it was around three million kilos. This is to go to the level of nine million next year," Hemmilä says. "The total volume, of course, is limited, if we think [of] our total volume, so the direct impact on our EBIT is still small." He reveals HKScan is "cooperating with the authorities" to secure export permits to ship poultry and beef to China to build on the pork licence activated last year.
A year since being appointed HKScan chief executive, Hemmilä has identified opportunities for the company to grow. He is, though, keen to underline how the immediate priority for the company is continuing its efforts to improve profitability.
"There are more possibilities than we can afford at the moment. The turnaround is the key now, so we need to be patient," he says. "The successful turnaround programme is the first thing we need to do in order to have a bit more solid and strong basis financially to start executing our strategy more actively."
It's important to open small doors and enter into new channels, markets and categories.
That's not to say HKScan will not embark on early elements of its new strategy. "It will start now. We need to take actions according to our strategy next year and the year after," he insists. "But I should say the more active phase will follow in the years to come.
"The turnaround, the profitability improvement, is the number one focus during the next couple of years but we are not waiting for the year 2022 before we execute the strategy. It will start but our capabilities and resources, financially, are limited at the moment and that's why we want to execute the turnaround first."
Is Hemmilä not concerned HKScan could lose ground to competitors? "No, no, no. We believe we can make the turnaround happen [but] we are not totally powerless. I do believe we can build new positions such as through partnerships and we can capitalise on them later. It's important to open small doors and enter into new channels, markets and categories."