Orkla ASA
Q3 2019 Earnings Call Transcript

Published: 25 Oct 2019

[Thomas Ljungqvist:]

Good morning, everyone, and welcome to our third quarter presentation. This is the first earnings presentation for our new CEO, Jaan Ivar Semlitsch, who joined us in the mid-August. And Jaan Ivar will start this session by sharing some of his initial observations. This will take approximately 10 minutes. Our CFO, Jens Staff, will then take you through the main points of the third quarter results as announced earlier this morning. And before we move to Q&A, Jaan Ivar will come back and give you a summary of his immediate priorities. Now let's get started. Please welcome our President and CEO, Jaan Ivar Semlitsch.

[Jaan Ivar Semlitsch:]

Thank you, Thomas. And this first 10 weeks have been an intensive but valuable learning process for me. And I'd like to share with you some of my reflections and observations about our business. What I think we're doing right but more importantly, what I think we can do better. Let me start by sharing what I think my experience brings to this role, coming most recently from CEO of Elkjop Nordic and Dixons' International business for the last seven years. As you know the margins and pressure from online and digital have really challenged the retail electronics business. There has been no easy ride for any of us. It's not meant that we had to focus on getting as many efficiencies as possible out of the business, and to keep in the right thing, to stay ahead of the competitors. So many close parallels to Orkla, but coming back to today's agenda, you may ask what have I been doing for the last two months. Well, I've been asking a lot of questions and in some cases quite tougher questions. I've been traveling here in the Nordic to Central Europe and as far as India to see our important markets. I've toured our factories, spoken to all business unit leaders, at here at Orkla house, and a lot of employees, also met a lot of customers across our portfolio. And in summary, I'll come to three broad conclusions about the state of our business, Orkla. First, that the strength of our core brands should not be underestimated, but also that alongside those number one brands, we have some real hidden jewels in our portfolio. You saw some of them in the commercial, which we need to be better at developing and scaling up. Secondly, just like online change the electronics retail industry. Over the last 8 to 10 years, our industry is also changing faster than ever before. Having strong brands will for sure we know sometime, but can never be used as an excuse not to change. We are good as understanding the local consumers. That's my clear impression, but we need to get even better at converting these insights faster into attractive products and services. And my third conclusion is that we have much greater potential for organic growth. M&A will still have an important role to play in our development, but the emphasis must be on growing our portfolio organically. So, let's dive into these topics a bit more in detail. Firstly, on the strength of our brand, as a child and teenager in Norway, I grew up eating Toro tomato soup. Grandiosa pizza and always, of course, topping the hot dog with Eden ketchup and the Eden ketchup, it sticks on the hot dog. Come Saturday and I had sweets from Nidar and KiMs potato chips. The point is I could go on and on. Orkla has a unique portfolio of strong household brands. On a normal day, the average Norwegian would also have used probably more of than 10 of our products before leaving the house in the morning and maybe another 5 to 10 before going to bed. We are top of consumers mind with strong number one and two brands across Foods, Confectionery & Snacks as well as Home & Personal Care. And we have over time, made similar awareness in other Nordic markets and the Baltics and Central Europe and India. As I said earlier, we have some hidden jewels in our portfolio many which come out of successful innovation strategy. One example of this, as you saw in the commercial, is Naturli' and another one, Anamma, our Nordic plant-based brands, which have been rapidly increasing sales. Naturli' is currently sold in 16 markets and expanding, and Anamma supplies vegan burgers to McDonald's outlets both in Sweden and Finland. Same with our MTR brand in Indian where we have a number one position, within spices in South India, a region with 250 million people, with a growing population and increased purchasing power. Linked to this through our brand strength is undoubtedly our genuine passion for the sustainability agenda. This passion comes from the executive board right across the line organization and into the support units. We manufacture locally and even more so with product supporting the sustainability agenda. These KiMs potato chips bags which you have in front of you are a good example of that. To be honest, I have seen so many companies, both from a time as a McKinsey consultant, but in other companies as well, where the sustainability agenda is just something to tick off. In Orkla, this agenda is the real. I would like us to continue this journey, perhaps even taking an activist role, I think it will be a key differentiating factor towards our employees, consumers and customers and as responsibility we have to work for future generations. We have more work to do, but we have set out a clear path. Moving then on how we make decisions and operate. In this last week, I met highly competent and very impressive people throughout the Orkla organization. Orkla clearly attracts talent and has a strong culture of developing people. I've also seen many examples of inspiring and bold decisions, but we need to be even more brave. You will have seen from the press release this morning that, I'm looking at how best to organize the group and support functions so that we can continue delivering on our strategic priorities. I want to strengthen our execution capabilities around organic growth, operational efficiency and more active portfolio management. It's about simplifying our current structure and empowering teams to increase product time to market. We need to encourage our colleagues to make bold decisions, become more responsive by trying and perfecting small scale. Before looking at how we will continue to grow, I want to first address the issuer cost. We have a clear agenda to continue driving cost-efficiency throughout our supply chain. At the same time, I want to stress that one size and one solution does not necessarily fit everywhere in Orkla. It's still early days for me, but I recognize that one of our key strengths is to retain the flexibility required to be more local than our global competitors, and at the same time having more resource, more talent, scale and best practice sharing than our smaller local competitors. But let's now turn back to growth. We clearly as I mentioned have untapped potential to see that organic growth. I believe we should push our number one entry position in core markets even harder, and at the same time, we need to deliver on our margin and cost ambitions. Even though we are a market leader, we will go for more market share by being brave and thinking as a challenger. Simply put, we will have the big focus on improving and innovating around our core. I also want to stress the potential we have in bringing existing products with unique selling propositions into new markets. And you in this audience know a lot about them, for example Molisch, Jordan toothbrushes, Smash!, P20 just to mention a few. In fact, and this is something to be proud of, two weeks ago we launched Jordan toothbrushes in over 4,000 stores in South India, and I saw for myself when I was in Bengaluru, a city with 12 million people just how much visibility and space we had in all the stores. I know several of you have questions why organic growth was we moved at a KPI criteria from Orkla's incentive team. This was only meant to be temporary. So together with the board, I have already agreed that top management incentives for 2020, will be much closer linked to achieving profitable organic growth. So where does that lead M&A in our growth plan? Well, we will focus M&A on markets where we have a solid position already and into areas related to our core and adjacent core. As you can see from today's Q3, we have made some write-offs related to recently acquired businesses and brands primarily in Orkla care. Although, our overall M&A strategy and execution have been highly valued creating, there is still room to improve. That is why I have decided to strengthen the top management team, creating a new M&A and strategy business function, and I will personally be actively involved here. So to sum up, we have a unique portfolio of strong local brands. We need to step up growth in our core and scale up jewels, and we need to simplify and empower the organization to be faster to market and drive further cost improvement. Now, I'd like to hand over to Jens Staff to take us through the quarterly results.

[Jens Staff:]

Thank you, Jaan Ivar. Let's look at the highlights from Q3. I'm pleased to report that Orkla continued to increase its sales growth and profits in the third quarter. This progress comes on top of relatively strong earnings improvements that we saw in Q3 last year. All four business areas delivered organic sales growth in the quarter, with especially strong performance in Confectionery & Snacks. Orkla Foods and Food Ingredients business both reported good progress in earnings and profitability. The challenges that we've seen in House Care UK, the Harris business and Health recently have resulted in write-downs this quarter. This is mainly related to goodwill in House Care UK and two grounds in Orkla Health. Although, this is disappointing to us, we see opportunities for these two positions in the future. The strong performance in Jotun continued in Q3 and share of profits from associates, which is mainly related to Jotun, was up 43% in the quarter. In sum, this contributed to the improvement in the adjusted earnings per share of 11%. As mentioned, all business areas delivered organic growth in the quarter, adding up to 1.5% for the Branded Consumer Goods. We saw strongest progress in Confectionery & Snacks driven by successful innovations and continued positive market growth. Positive development on Orkla Home and Personal Care contributed to revenue growth for the Orkla Care business area, but then they are comparing to a fairly weak Q3 last year. The progress includes on the other hand was slower than it has been recent and that is partly due to timing of campaigns. Orkla food ingredients continued its strength from previous quarters with moderate organic sales growth, however skewed towards more profitable sales. Overall revenues from Branded Consumer Goods grew close to 60% in Q3. On top of the organic growth, we have positive currency translation effects of another 1.5%. Structurally growth added 2.7% driven by acquisitions in Foods and Food Ingredients, and some of these acquisitions that we have recently done that contribute is Easyfood and Liquida in Foods. It's several transactions in the Food Ingredients area, most recent one is Vamo, Confectionery by Design, Risberg and Zeelandia. Next, let's look at the profits and margin performance for the Branded Consumer Goods including HQ. Branded Consumer Goods including the HQ grew earnings by just over 6% in the quarter, off which close to 3% was underlying improvements. This progress was mainly driven by top-line growth and improved revenue management and positive mix effects in the branded consumer goods area. Profit declined in Care and high bonus related goods partly offset these improvements. HQ cost is still at a relatively low level in the quarter, but it's higher than last year. In Q3 '18, reverse bonus provisions related to the group's long-term incentive program gave a positive effect of $15 million for HQ and $20 million for the total Branded Consumer Goods area. On a rolling 12 month basis, this resulted in modest improvement in underlying margin of 10 basis points. Revenue management and positive mix effects are the key drivers of this progress and it's partly offset by higher purchasing cost and bonus related costs. Let's now have a look at each business area and then as always to start with Foods. Top-line growth in Food was mainly driven by the structural growth that I mentioned and only moderate organic sales progress. Strong demand for plant-based products in Sweden and good progress in India are amongst the drivers of growth. This was partly offset by lower campaign activity in Norway versus last year and the sales decline in Denmark from the lost lower margin contracts. We saw nice improvements in earnings mainly from increased revenues, but also from the cost improvement projects and structural initiatives. These are the all positive impact on the profit. Better revenue management and more active portfolio management compensated from the negative effect that we have seen from weaken Swedish and Norwegian krona as well as high raw material prices and in some of the improved profitability with 70 basis points. Let's move to Confectionery & Snacks. Our Confectionery & Snacks continue to deliver strong organic growth. We saw most progress in chocolate and snacks and the growth was mainly volume driven. We continue to see good market growth especially for Snacks in Sweden, Finland and in the Baltics as well as for Confectionery in Norway. Profits continued to grow, mainly from higher revenues, but we also see positive effects from cost improvement projects. Price increases compensated for higher prices of raw materials such as wheat and cocoa as well as currency effects from a weaker Swedish kroner and overall our profit margin and bid at the same level as last year. Let's look at Care. Care achieved positive organic growth of 1.7% with progress in all the Personal Care categories despite a continued challenging market trend. HSNG and Wound Care had good organic growth driven by successful campaigns and market growth. Traditional grocery in Retail in Norway continued to experience channel leakage. In addition, the main retail chains are increasing their share over private label in core care categories mainly impacting Home and Personal Care and Health. In House Care UK, the House business the ongoing restructuring of the business is on track and has resulted in EBIT growth in Q3 and the year-to-date. In Poland, EBIT has bottomed out and has gradually improved throughout the quarter, but there's uncertainty associated with the future development of these areas. The challenge that we've seen in House Care UK and in the Health business has resulted in write-downs this quarter. The write-downs are built underline of income and expenses, and I'll elaborate a little bit more on that item later on. In sum, EBIT growth was negative by 2.5% and the decline is mainly related to investments in A&P in the quarter. Lastly, let's look at Food Ingredients. Food Ingredients reported strong revenue and profit growth mainly driven by M&A. We saw good sales progress for the bakery ingredients category, but we saw weaker sales from ice cream ingredients that this is compared to a very strong Q3 last year. So, it's an extremely good ice cream season last year as I remember so tough comps. Our plant-based brand Naturli' continued to grow strongly in this business area. For the total business area, earnings were up 16% and that's primarily driven by M&A and is driven by positive results from improved pricing in food ingredients and positive mix effects. In sum, this resulted in the profitability increase of 40 basis points. Let’s have a look at Kotipizza. The sale stores in Kotipizza continued in Q3 with increased sane sales and growth into the wholesale business that we have food stock. Continued same sales growth of 14% year to date and 7% the like-for-like is solid, but the rate is decreasing somewhat as the Kotipizza are now facing tougher comps from expansion that they did last year. We see a normalization of overhead costs including marketing spend in the Kotipizza and combined with the solid growth, which is translated into an improved EBIT both in absolute and relative terms. The restaurant expansion continues in Kotipizza, and during this quarter, we opened up four new restaurants. Let's look at the Jotun, and Jotun continuous to grow sales in the third quarter driven by continued strong markets in protective coatings and improved sales on marine coatings, and price increases previously implemented in all segments to offset the rising in raw material cost that they are seeing. Operating profit improved further in Jotun, explained by this solid sales growth and higher gross margins. Last year's implemented price increases combined with a more favorable raw material cost situation this year have gradually improved the gross margins throughout 2019. In addition, persistent costs controlled in Jotun have resulted in loan growth in operating costs year-to-date. Let me sum up the Q3 financials and go into some detail in our investments division and other material items. Earnings growth of 14% from Orkla investments includes both Hydro Power and Financial Investments. In Hydro Power profits were down with 24% due to lower power prices. Finance investments reported an adjusted EBIT of 29 million compared to minus 8 million Q3 last year and the delta is mainly explained by the inclusion of Kotipizza from February. We have non-recurring items of minus 267 million in the quarter and the largest items as I mentioned is related to write-downs of the goodwill in Harris, House Care UK and parts of the trademark of Gerimax and Colon C in Orkla Health. These costs were partly offset by the net gain of selling real estate property in Oslo, Treschows gate 16, and the gain was booked in the quarter. The effective tax rate was high and higher than last year and this is primarily due to the write-down of goodwill in Harris, which is non-deductible from tax perspective. Good progress in our consolidated business and Jotun contributed to an increase in the adjusted earnings per share of 11% in Q3 reported earnings per share came in line percent lower than last year. I'll now leave the floor back to Jaan Ivar for the final remarks and then open up for Q&A.

[Jaan Ivar Semlitsch:]

Thank you, Jens. Pleased to see our quarter with an uptick in organic growth and okay earnings development in our Branded Consumer goods business. The goodwill and brand write-downs we have done in care in the quarter is clearly disappointing and reflects the challenges we have seen, both in the UK House Care business and in the Orkla Health business. Having said that, it's encouraging to see the turnaround in UK progressing according to plan with growth earnings compared to last year, the situation in health remained challenging, and we have initiated actions to turn the trend. Maintaining a strong capital discipline is a key priority for us and I will be closely involved with our M&A agenda going forward. Let me then just summarize. What my priorities will be over the coming months. Turning the negative trend in Care continues to be our top priority. As announced, a couple of weeks ago, we will move the Care development portfolio for new business area Consumer Enactment, progressing our initiatives on how to best organize the Group. In addition to empowering the organization, to increase it, we foresee meaningful cost savings in the range of NOK150 million to NOK200 million. Continue delivering on our cost agenda through a combination of structural efforts and continuous improvement throughout our supply chain and gearing for profitable growth, taking a challenging role, where we already have these imperfections and finding ways to scale up our jewels, changing bonus metrics for incentivised profitable growth. I'm commitment to deliver on the 2021 target that was set one year ago. I will come back with more defects around our priority and progress towards our target when we present Q4 results in February next year. I thank you all for listening. We will now open up for Q&A from the audience here and Oslo and from those following up on webcast.

[A - Thomas Ljungqvist:]

Maybe we can start with some question from the webcast then. And we have a couple of questions from Bank of America Merrill Lynch. We can start with those and first one is. Could be please have some more color on the NOK150 million to NOK200 million annual cost savings identified in headquarters? Is this something we can expect to translate into the bottom line or will it be reinvested?

[Jaan Ivar Semlitsch:]

Yes. This project, Project Future, which we have announced this morning, will help us in delivering on the existing targets that we are committed to for 2021. And we will also perhaps use some of the opportunity to see how we can feed up organic growth on the basis of flexibility.

[Thomas Ljungqvist:]

Okay. Thank you. And second question. In the press release, it says that the vegan portfolio under the Naturli's brand showed good growth. Is it still is growing at the estimated 30% level as we experienced in 2018?

[Jens Staff:]

Yes, and the growth is continuing up to good levels and it’s growing approximately 30%.

[Thomas Ljungqvist:]

Thank you. And then we have a question from Preben Rasch-Olsen, can you please explain the reasoning for -- the question is, can you please explain the reason for moving Lilleborg out of the old Care and into a new area with Care and Home Care?

[Jaan Ivar Semlitsch:]

The key reason for that is to have extra focus on the Lilleborg with extra tension, and we see that that structure works very well in this current review and the feedback we have so far.

[Thomas Ljungqvist:]

Okay thank you. Second question also from Preben, DO you increase market shares in snacks and chocolates?

[Jens Staff:]

Yes, we are increasing the shares somewhat in chocolates and also in some markets when it comes to snacks.

[Thomas Ljungqvist:]

Okay, I'm going to continue. We have also couple of questions from Goldman Sachs, John Ennis. First question, can you run through the new corporate structure you were creating for some of the Orkla Care brands and Kotipizza? Which brands are going into this division? And how do you think this will help performance? Are the brands within this group that you do not believe also is the best owner of?

[Jaan Ivar Semlitsch:]

If I start with Kotipizza and Gorm's, that's established as an out-of Home area under Consumer and Financial Investments to give it extra focus and to develop and build that category. And so far as you can see, we’ll have good progress from Kotipizza, and we'll be follow it up very closely from that perspective. In terms of the other three components into the portfolio, we think that we are a good owner, but we will of course always look at opportunities, but it's good momentum and that the current strategy.

[Thomas Ljungqvist:]

Thank you. Okay, second question also from John Ennis. You discussed a greater potential for organic sales growth over M&A, do you think that the focus of recent years have been too skewed towards M&A? Is that the right way to interpret your opening remarks?

[Jaan Ivar Semlitsch:]

As I mentioned M&A is still very important for us, but I think as important is organic growth and I think it's sometimes difficult to calculate the exact organic growth but freeing up the resources in the organization, incentivizing people for organic profitable, organic growth, I think we have potential. So, I think in the world we are living in we have to do both, good M&A and a very clear and good organic growth strategy.

[Thomas Ljungqvist:]

Thank you, I can continue, there's no more. I'm not making them all up. So our next question is from UBS and Charles Eden. Do you see an acceleration in organic growth coming hand in hand with margin expansion? Or do you believe there is a need for reinvestment near term to drive this acceleration?

[Jaan Ivar Semlitsch:]

Well, first I want to say its early days for me, but the part of project future might see a potential to reinvest parts of that into advertising and thereby also have a positive effect on organic growth. And then I think it's a matter of just staying focused and work hard on the organic growth agenda.

[Thomas Ljungqvist:]

Thank you. That's all questions I have at this time. Anymore questions in the room?

[Jaan Ivar Semlitsch:]

No further question.

[Thomas Ljungqvist:]

Okay, thank you all for listening.