Hügli maintains profitability in demanding market environment

Market changes and macroeconomics put brakes on growth

22-Aug-2016 - Switzerland

While Hügli had generated an average annual organic growth of +3.1% in the preceding three financial years, the first half of 2016 was marked by macroeconomic uncertainties, heightened competition and changes to distribution structures. Organic sales dropped by -1.6% in the first half of 2016, while this includes the handicap inherited from the previous year’s high growth level (+5.6% in 2015). Based on a positive currency translation effect the sales increased from CHF 187.0 million last year to CHF 190.1 million in the first half year 2016. The segment Eastern Europe (Czech Republic, Slovakia, Poland, Hungary) achieved a notably pleasant sales increase of +9.1%, allotted to all divisions. An actual sales boost in the two-digit range was achieved by the country organisation in Italy, based on the strong demand for liquid sauces and soups. At the same time, orders of key account customers slumped in the UK, mainly in the area of Health & Nutrition, making it impossible to attain the previous year’s sales level. In addition, the strong Swiss Franc still affected the gastronomy sector and caused sales to drop further in Switzerland. Owing to the considerable Italian contribution, the Switzerland / Rest of Western Europe segment nevertheless saw positive results with a sales plus of +3.5% in local currencies.

The largest segment Germany registered an unexpectedly severe sales slump of -5.3%. This is even more surprising because Germany had in the past three years been a growth driver with an average annual sales increase of above +6%. There are numerous reasons for this. On the one hand, fewer tenders from key accounts were won due to the heightened competition, and on the other hand, a number of production orders were actively discontinued because of their unsatisfactory margin. The significant slowdown of sales in German health food stores, owed to the expansion of the organic product line in the retail food trade at the expense of the specialist trade distribution channels, as well as the tightened competition had a depressing effect on this financial year.

Private Label Retail / Consumer Brands declined, Food Industry achieved turnaround

The Private Label Retail division (brands of the retail food trade) lost and actively cut back part of the sizeable sales volume it had built up in the previous two years (+14.5% in 2015 and +10.7% in 2014) in the course of optimising its product line. The sales decline of -4.0% in local currencies in the first half of 2016 resulted from the negative results in Germany, whereas the regions EAST and UK achieved pleasing growth figures.

Selling Hügli’s own organic brands, the Consumer Brands division was affected by the significant reduction of market shares of the health food market and by the steepened pressure from the competition among vegetarian/vegan meat replacement products. The resulting adverse effects could not be compensated by our brands “Erntesegen” and “Natur Compagnie” despite their positive development. The division registered a total drop in sales of -10.9% in the first half of 2016. Corresponding measures have been implemented.

The Food Industry division very favourably increased sales by +4.9% in the foodstuffs industry in 2016. Thanks to a well filled innovative project pipeline, new orders were won in all countries served by this division. With +2.8%, the Food Service division developed according to plan and positively influenced by the very good progress of the EAST countries, despite the considerable currency based slowdown of Switzerland’s gastronomy market.

Profitability maintained thanks to good cost control

Stable raw materials prices laid the foundation for an increase of the gross margin resulting from the production of former trade goods (insourcing). This includes products of the EDEN and granoVita brands acquired in 2015 as well as the increase in our own production of meat replacements. The Group’s staff decreased slightly by 8 to a total of 1’428 full-time positions in the first half of 2016. Personnel expenses in local currencies stood at the previous year’s level. Costs were mainly accumulated for strategic projects only, above all the further build-up of the production plant for meat replacement alternatives, and the expansion of the production site Radolfzell (Germany) to one of Europe’s most state-of-the-art and most efficient production plants for high quality dry blend products. Owing to these measures, EBIT was maintained at the previous year’s level with CHF 16.4 million, just like the EBIT margin with 8.7%. Group net profit also remained constant at CHF 12.0 million, which corresponds to a profit margin from sales (ROS) of 6.3%.

Strong balance sheet

The balance sheet presents itself unchanged and very solid with an equity ratio of 53.7%. The only remarkable balance sheet item is the under construction position of CHF 28 million that reflects the ongoing expansion of the Radolfzell production plant. The plant is expected to be put into service at the beginning of 2017. With CHF 67.3 million, net debt remained almost unchanged in the first half of 2016 due to the good internal financing and despite high investment expenses of CHF 17.8 million and the dividend payout of CHF 7.7 million effected in the first half of the year. The financial key figure net debt to EBITDA remained constant with a factor of 1.5x when compared to 2015.

Outlook 2016: Sales at previous year’s level, EBIT slightly below level of 2015

For the second half of 2016 we anticipate a sales development in local currencies comparable to that of the first half of the year. Nevertheless, the macroeconomic and political uncertainties may depress customer demand. Correspondingly we expect sales 2016 to attain the previous year's level. In order to safeguard long-term growth and optimize business processes, we will continue all projects in spite of the dent in growth and start several new projects. Accordingly, we anticipate costs to rise slightly in the second half and EBIT 2016 to drop slightly below the previous year's level.

Vote of thanks

In a demanding environment, our employees support Hügli every day in the Group’s achievement of its ambitious goals with great commitment, flexibility and loyalty. We sincerely thank our staff for their engagement, all our business partners for the good and constructive cooperation, and our shareholders for the trust they put in us.

https://www.yumda.com/en/news/1148969/huegli-maintains-profitability-in-demanding-market-environment.html