Finland-Meat giant expands into Eastern Europe.

FINLAND – MEAT PROCESSOR EXPANDING INTOO EASTERN EUROPE..

Finnish meat processor HKScan Group’s net sales increased by 8.9 per cent over the last year reaching € 2 294.6 million (€ 2 107.3 million in 2007).

The largest increase in absolute terms was seen in the Finnish and Swedish markets while in relative terms, net sales grew the most in Poland.

No mergers or acquisitions impacting on net sales were concluded in the year under review.

A breakdown of Group net sales by market area in 2008 shows Sweden 50.0 per cent, Finland 31.4 per cent, the Baltics 7.1 per cent and Poland 11.5 per cent.

Group EBIT at € 38.1 million was down 31..1 per cent from the previous year’s figure of € 55.3 million.

This decline in EBIT was underpinned by a number of factors. Operations were hampered by the difficulties in the international meat market, which first arose in autumn 2007, persisting well into the summer of 2008.

The intense rise in production costs seen in the early part of the year was also a contributing factor. The high final costs of the industrial restructuring in Finland and substantial expenses arising from frozen meat destocking recognised in the second quarter along with the writedowns taken by the pork primary production unit in Poland dragged performance in the entire early part of the year into the red.

Performance picked up in the third quarter, and the ongoing improvement resulted in fourth quarter turning out to be the best of the year.

Fourth-quarter EBIT at € 15.3 million equalled 40 per cent of the entire year’s EBIT.

Performance in Finland, Sweden and Poland improved from the previous quarter while in the Baltics, the fourth quarter was the weakest of the year.

The final part of the year 2008 at HKScan was much as planned. Fourth-quarter EBIT outperformed the third quarter as the company had projected, yet full-year EBIT fell short of the level seen in 2007, as expected, and was clearly inadequate.

CEO MAtti Perkonoja said: "At € 38.1 million, EBIT for 2008 failed, as anticipated, to reach the previous year’s level. The modest EBIT figure is largely attributable to the narrowing in sales margins seen in 2008. The costs of primary meat production and manufacturing furthermore rose sharply during the year and could only be negotiated to sales prices at a lag extending until 2009 in respect of certain products.

"Profitability in the early part of the year was eroded by the difficult situation in the international pork market persisting in all of HKScan’s market areas. The lingering oversupply only started to level out towards the end of 2008.

"HKScan’s performance was inadequate: instead of the company’s target of five percent, an EBIT margin of only 1.7 per cent was achieved. The ongoing rise in the cost of financing eroded net earnings to the point that earnings per share only came to € 0.12.. Nonetheless, the foundation for more robust development has been laid.

"In Finland, the largest industrial restructuring programme in the company’s history was successfully completed. However, the implementation stage gave rise to disruptions in supply and additional overlap expenditure in the early part of the year. It was only in the latter half of the year that the investments made and the revised industrial structure along with the fine-tuned procedures could be leveraged in full. The steps taken were reflected in the favourable development in the performance of the Finnish business towards the end of the year, a trend we expect to continue in 2009.

"Now that restructuring is complete in Finland, resources will be shifted to the overall development of the Swedish business.

"The decline in the Baltic economies was the swiftest and sharpest seen in all of HKScan’s market areas.

"The decline in consumer purchasing power manifested as lower consumption and a shift towards more economically priced basic products. Thanks to its solid market standing, HKScan is well positioned to weather the current economic downturn.

"Unlike the company’s other market areas, Poland retained a mood of relative optimism throughout the year. GDP growth slowed down but stood at a fairly healthy four percent in November. The sharp fluctuation in the value of the zloty was an issue particular to the Polish business.

"Of the Group’s central currencies, both the Swedish krona and the Polish zloty fell exceptionally low against the €o towards the end of the year, in the wake of the international financial crisis. This decline will in future tax both net sales and earnings for the Group and its effects are already evident in the form of the lower balance sheet values reported in the financial statements.