Orkla ASA
Q2 2016 Earnings Call Transcript

Published: 15 Jul 2016

[Executives:]

Peter Ruzicka - President & CEO Jens Staff - CFO & EVP

[Analysts:]

Martin Stenshall - Danske Bank Kenneth Sivertsen - Skandinaviska Enskilda Banken Kolbjørn Giskeødegård - Nordea Markets Preben Olsen - Carnegie Investment Bank

[Presentation:]

[Peter Ruzicka:]

Everyone and welcome to Orkla's presentation of Second Quarter Results and First Half Year 2016. I am pleased to see that the second quarter showed continued growth for our branded consumer goods business both through organic growth and cost improvements, but also significant contribution from acquired companies as we continue to reallocate capital to strengthen our core business. Further, I'm also very glad to see a significant contribution from associated companies, especially Sapa continues to improve the underlying business, but also Jotun delivered very strong figures. In my presentation today, I will focus on the half-year results, but first let's have a quick look at the performance in the second quarter. As mentioned, there is a continued growth in branded consumer goods. Organic growth ended at 3.8% where we believe the timing of Easter versus the first quarter had a positive effect of roughly 1.5 percentage points. Adjusted EBIT in branded consumer goods increased with 20% in the second quarter. This is due to a mix of organic growth, cost reduction programs, M&A, and positive currency translation effects. Our associated companies continue to report solid growth in the quarter. Sapa continued the progress and delivered a strong performance. Positive market developments, cost improvements, and increased share of higher margin business contributed positively. Jotun also reported another quarter with sales and profit growth. Jotun will, however, face tougher comparisons ahead and a more challenging market, especially in Marine Coatings. This resulted in an increase in earnings per share of 21% so far this year. In Q2, we're comparing with a substantial gain from the sales of Granges last year. Adjusted for this, we see continued strong EPS growth. In line with our strategy, we continue to reallocate capital into the branded consumer goods business. With Harris acquisition, we are strengthening our painting tools business significantly. This acquisition is still under review by competition authorities and we expect closing during Q3 2016. We are also working on integrating several acquisitions carried out in the last years. These are large and complex processes and it will take time before we see the full positive effects from the integration programs, but they're all going according or better than planned. As mentioned, the timing of Easter impacted sales negatively in Q1 and positively in Q2 with an estimated effect of 1.5 percentage points. Looking at the first half year, branded consumer goods delivered 2.8% organic growth somewhat helped by expanded distribution agreement with PepsiCo. The distribution agreement is mainly visible in foods, which had an organic growth of 3.6% in the first half of 2016. Adjusted for this, we still see improvement although the second quarter was somewhat negative -- negatively affected by delivery problems in some of our -- of the larger categories. These problems will be solved quite soon, but we will -- but we estimate some negative effect also in Q3 for Orkla Foods. Confectionery & Snacks had a very good first half year. Pick-and-mix sales and the distribution of Lay's and Doritos boosted sales growth. It is, however, not only new business that drives growth in Confectionery/Snacks. We are gaining market share with strong growth in most categories and markets. Growth in Care has been weaker so far this year. A weaker growth rate was expected as we are in the middle of a larger integration process, but I'm not satisfied with the negative organic growth, especially homecare in Norway and the weight management have struggled so far this year. However, I am confident that Care will get back to growth which we already saw signs of in the second quarter. Food Ingredients continue to grow and experience a strong competitive position in its core markets. Overall, we estimate that we're growing in line with our markets as we -- is one of our important targets that we communicated last year, but naturally with varying development between the different categories. I'd like to show you some examples where we’ve seen good growth in 2016. With the acquisition of Cederroth last year, Wound Care was added as a new category in Orkla. In 2015 this category represented NOK370 million of sales. So far this year Orkla Wound Care has had revenue growth of 8% compared to the same period in 2015 in constant currency. Growth in the quarter has mainly been driven by new listings, campaigns, and growth in the pharmacy channel. Also contributing to the growth is the next generation of mobile First Aid Kits relaunched in 2016, which you can see here on the screen. With improved content and packaging communication, it is so easy to use that everyone can give first aid anywhere. Let's hope you don’t need it. In addition, the new Salvequick’s design for the plaster range is currently being rolled out in stores across Europe. The new design has clear on pack symbols to support consumers to quickly and easily find what they need. Families with kids are an important target group for plasters and Salvequick. We work regularly with updates to find the most popular characters suitable for the brand. Disney's Frozen is the latest launch with strong demand both from our consumers and customers. Wound Care has become an increasingly important category for Orkla and it is also strengthened our presence in the pharmacy channel. One of our key drivers of growth is to have more cross-country innovations, taking successes from one market and launching it in other markets, as you can see an example here. This recent example is from Confectionery & Snacks and that's the launch of the new Waffle Cut Crisps, launched more or less the same product but under the different local brands in the different countries. This innovation has been launched in five different countries and total sales have already exceeded our internal targets. In our business we are influenced by global health and sustainability trends and we meet increasing demand from our customers and consumers for safe traceable and healthy food. Many consumers want organic alternatives as part of their everyday diet. In Orkla Foods Sweden, sales of organic products have increased by 52% so far 2016, and that is above the market growth for organic food. Today Orkla has a turnover from organic products of more than NOK300 million and with a strong growth. So far the majority comes from the Swedish and Danish markets, but within Orkla we are sharing competence and experience in order to introduce more organic products in other markets where we see the same consumer and customer demand. Another consumer trend is the increased demand for healthier food with more natural ingredients. In our Czech company Vitana, we have launched Farmer's Soup, which is a new range of premium natural soups. It is rich in fiber and protein and has no added MSG or preservatives, very well received in the market. I hope this figure is getting familiar to you, black over red, and I’m also very glad that we continue to see black over red, meaning a higher growth rate in sales than in fixed cost. Despite the continuous push from inflation and volume increase, we have been able to keep underlying costs roughly on par due to several cost action throughout the value chain. Although the integration process of Cederroth is resulting in somewhat lower sales growth in Care, the cost synergies have so far exceeded what we had in our business case. With acquisitions, new opportunities also arise for optimizing our production structure. This quarter we have decided to consolidate production of personal care products in our Swedish factory and production of detergents in our Norwegian factory in Ski. As a result, we will close one HPC factory in Norway. In Denmark, production of HUSK fiber products will be moved, which means that one production site will be closed. As I’ve said before, these processes take time on average 18 months. We won't see full effect in our P&L from these actions until well into 2018. And as I mentioned in the first quarter presentation, we are also consolidating our production of drinkables in Norway and Sweden and restructuring parts of our Baltic food production. In the second quarter, rolling 12 months adjusted EBIT in branded consumer goods has for the first time exceeded NOK4 billion. The growth over the last years is a combination of organic growth and acquisitions as we continue to reallocate capital to branded consumer goods. We have also seen significant positive currency translation effects as a result of a weaker Norwegian currency. For the first half year of 2016, EBIT growth was 16% or 11% adjusted for currency translation effects. In addition to FX, the growth is a balanced mix of sales growth, acquisitions, and cost improvements in our supply chain. I’d also like to take the opportunity to review the continued progress in Sapa. Looking at Sapa's performance in a longer perspective, it is fair to say that the strategic foundation for establishing Sapa has turned out to be successful. I am pleased to see that the rolling 12 months underlying EBITDA has improved steadily since JV was established. In fact it has tripled from NOK1.1 billion when the JV was established to NOK3.3 billion in this period. With a restructuring program delivered ahead of plan, there were no restructuring charges in the first half of 2016. But fortunately we still see a lot of improvement potential also going forward in Sapa. Before I hand the floor over to Jens, we will go through the details in the quarter and the first half year results. I would like to mention a project I'm really happy, it's becoming a reality. And that's Orkla House our new office building. This autumn we will start the construction of our new headquarters at Ski and in Oslo. In line with our one Orkla approach, this office building will house not only the corporate center, but also the management of the five business areas and most of Orkla's Norwegian companies. Co-locating our operations is important to make it easy for us to exchange experience and expertise and to extract synergies to become a leading brand consumer goods company in the Nordic. In addition, premises will be built for product development with test kitchens and labs. The Oslo City Council has approved the zoning plan, which implies that construction can start in October 2016 and be completed over the course of 2018. With that, I would like to take you through -- Jens, will like to take you through the details of the financial performance for the second quarter.

[Jens Staff:]

Thank you, Peter. Let's look at to the financial performance in the second quarter of 2016. Starting with the group P&L organic growth contribution from M&A and positive currency translation effects resulted in strong growth in revenues and adjusted EBIT both in the quarter and year-to-date. Other income and expenses were primarily related to high M&A activity, unrelated integration costs. Continued M&A and restructuring activity will carry further cost on this line item going forward, but the level will vary from quarter to quarter. Continued progress in Sapa and growth in sales and profits in Jotun resulted in strong profit from associates and JVs in Q2. Still the profit dropped compared with Q2, '15 and that's due to last year's sale of Granges which gave a positive gain of NOK425 million. In addition, our shareholding in Rygge Airport was impaired by approximately 70 million this quarter also affecting the comparables. We also made an impairment of NOK100 million related to a shareholding loan to the airport. This resulted in increased net financial costs in the quarter, despite lower interest costs. In some this gave a profit before tax of NOK1.3 billion in the quarter slightly down compared with the same period in 2015. This equals earnings per share of one krone in the second quarter, adjusted for the gain related to the sale of Granges shares in Q2 '15, we have strong underlying performance both in the quarter and year-to-date on EPS. Let's look closer at the branded consumer goods. In Q2 of 2016, branded consumer goods enjoyed an increase of NOK1.7 billion in revenues, which equals 24% year-on-year. This rise was driven by a significant contribution from several acquisitions. The largest of which are Cederroth and Hame. In addition, positive translation effects from a weaker Norwegian krone and an organic growth of 3.8% in the quarter added to the progress. As mentioned, organic growth in the second quarter was positively influenced. They roughly with 1.5 percentage points due to the timing of Easter. Branded consumer goods saw a bit growth of 20% in Q2 and 16% for the first half year. The growth was supported by all the business areas and also combination of organic growth, contribution from acquisitions and currency translation effects. As Peter mentioned earlier, FX adjusted growth was 11% for the first six months of 2016. Reported EBIT margin was 10.7% in the quarter and that's down from 11.1% in the same period last year. And as we’ve said before acquisitions and distribution agreements have a dilutive effect on margins. These actions are profitable and in line with our strategy and targeted EBIT growth. Let's review the performance of each business area and starting with Orkla Foods. Orkla Foods saw the significant growth in reported figures in the quarter and this improvement is to a large extent caused by contribution from the newly acquired Hame and positive currency translation effects. Organic sales growth was 3.9% in the quarter, partly driven by the distribution of Tropicana and Quaker and positive Easter effects. The Figures in the quarter were somewhat influenced by temporary delivery of challenges. This is of course unfortunate, but not unexpected in a period of major restructuring within than manufacturing .We are working on solving this that's expect some further negative effects in the third quarter both in sales growth in sales and a bit. Despite positive contribution from sales and cost reductions margin decreased in Q2. This was expected as we continue to see dilutive effects from acquisitions and increased sales from distribution agreements. In addition, input costs continued to increase which puts pressure on margins. Then moving onto Confectionary & Snacks. Confectionary and Snacks had strong volume driven organic growth in the quarter, all companies delivered or delivered organic growth with Norway and Sweden as the main contributors. The sales growth was positively impacted by more sales days because of the timing of Easter. In addition distribution of Lay's on Doritos innovations pick-and 7 mix and campaigns activity contributed positively. The growth in EBIT was broad-based driven by strong sales. Denmark was the main contributor to the profit growth. In addition ' cost saving initiatives led to improved performance in the Latvian company .The new pick and mix agreement, distribution of Lay's products and the weakening of the Norwegian krone had a dilutive effect on margins. Let's turn to Orkla Care. Orkla Care had a significant growth driven by the Cederroth acquisition and the positive translation effects. Organic sales growth was positive in the quarter mainly related to Easter effects. For the first half year, organic sales growth was slightly negative. The integration of Cederroth requires some internal focus and the vehicle growth rates what's expected for 2016. Still as Peter mentioned, the integration of Cederroth has so far been successful on both revenues and synergies, which are running ahead of plan. We still see challenging markets with price competition in HPC in Norway, as well as challenging market conditions in the weight management category in Norway and Sweden is Peter mentioned. We’ve responded to this by increasing campaign activity in the second half year and by relaunching Nutrela [indiscernible]. In addition, we are happy to see that we -- with a recent Dr Graham launch have taken back to the number one position in skincare after the loss of the Unilever distribution. As mentioned earlier, both the inclusion of Cederroth and the loss of Unilever distribution dilutes margins. Care is also the business area within Orkla with the highest relative exposure to the weakening in Norwegian krone, resulting in higher input costs. Let's look at the final area within branded consumer goods namely food ingredients. Strong competitiveness in the local markets resulted in broad-based volume driven sales growth within Orkla Food ingredients. Increased profitability was driven by top line growth, but also by positive translation effects and acquisitions. The ice cream ingredients business unit is performing well with both underlying profit growth and acquired profit growth. Profitability from margarine and butter blends has fallen sharply due to surplus of milk in the European markets. This was partly compensated for by successful performance in the Icelandic markets and vegetarian products through the not too [indiscernible]Denmark. Let's now look at the results from Orkla Investments. Orkla has in line with our strategy, free the approximately NOK1.3 billion in the first half of 2016. Through sales of share portfolio and real estate assets. As mentioned with glass made a total impairment of approximately fortunately NOK171 million related to the airport. This means that the value of Rygge Airport has been written down to zero, as a consequence of the decision to discontinue the civil aviation at the airport. In sum, sales and impairment gave a positive P&L effect of NOK63 million in the first half of 2016. Our remaining share portfolio at the end of June represents the market value approximately 288 million while a real estate portfolio had a book value of approximately NOK1.5 billion. The real estate portfolio will increase in value as we start the building of a new headquarters this autumn as Peter mentioned. Let's look closer at the lodges assets within Orkla Investments, Sapa and Jotun. As Peter mentioned Sapa has achieved the great improvement over many quarters. In the second quarter underlying a bit increased significantly from last year with improved profits in all business areas, specially the European business experienced strong growth. FX from improvement, the improvement programs and increased share of value-added products contributed positively to the positive progress. Personal thing is that the second quarter of last year included negative effects from sharply falling metal premiums. Demand for extruded products increased in both Europe and North America. In Europe, the demand from growth has increased and continued moderate growth is expected the growth rate in North America is expected to flatten out in certain market segments. Jotun reports, financial results on the four monthly basis, as a result we cannot present official figures for Jotun for the second quarter, but the slide illustrates the performance in the period January to April 2016. Jotun as delivered all-time high sales and operating profit year-to-date supported by volume growth across all segments of [indiscernible] and longer raw material prices. The sales growth is mainly driven by decorative paint segments in the Middle East and the Southeast Asia, but sales in Scandinavia also developed positively during the second quarter. Demand related to offshore activity continues to be depressed while deliveries to the Marine segment is still at the high level. Significantly longer new building activity will however, have a impact on sales from second half of 2016 and onwards. Raw material prices have been falling for a long period but there is sign in the market that they’re now starting to rise. Let's look at the performance in hydropower. Hydropower had high production volumes in 2015 and compared with last year production volumes were slightly down in Q2 this year. Power prices on the other hand were compared to the historically low price level that we saw last year. So in some this led to an increase in EBIT's from 27 million to 53 million in the quarter. Before I hand the floor back to Peter, I will briefly take you through the changes in the net debt. Net debt at the end of June was NOK10 billion, the main driver behind the increase in net depth that Q1 is the payment of dividend to shareholders of NOK2.6 billion there. Partly offsets by cash flow from operations because floor in branded consumer goods is seasonally low in the first half of the year. In addition, we have higher investments due to factory restructuring. Through [indiscernible] adjusted net interest-bearing debt to EBITDA is close 2 and that's well within our communicated range. Orkla's net interest-bearing debt had an average maturity of 3.4 years at the end of June with an average interest costs of 1.8% for the quarter. So with that, I gave you the floor back to Peter, for his concluding remarks.

[Peter Ruzicka:]

Thank you. Okay, to recap I must say I’m very pleased to see strong growth from our consumer goods business in the first half of 2016 and we’ve now delivered the ninth consecutive quarter with organic growth. We see continued organic growth, add FX from [indiscernible] cost improvements, but also a significant contribution from the acquired companies. ’m also very pleased to see very strong contribution from associates of companies and especially Sapa. We continue to reallocate capital to strengthen our core business through acquisitions in the recent year. We’ve entered new markets and channels within well-known core categories such as HPC in Sweden and confectionary in [indiscernible]. We have also strengthened our position in existing markets through the acquisition of Homa in Czech Republic and Harris in U.K. In addition, we’re taking bold moves through organically and bring new category in existing markets like the introduction of chocolate in Denmark this year. Going forward, we will explore and utilize opportunities that arise from integrating the newly acquired companies. Although there are a lot of synergies from acquisitions, I believe the greatest potential lies in improving our existing operations by working closer together as one Orkla and utilizing the synergies and the know-how within the whole of Orkla. We’ve already developed whether it's still a lot potential for further improvements and especially by increasing the supply chain efficiency, but as I’ve mentioned many times those projects' take long time. So with that, we’re open for questions.

[A - Peter Ruzicka:]

No questions from the audience.

[Unidentified Analyst:]

Yes, thank you. [Indiscernible]. I ask about Brexit. Is England still market for Orkla after Brexit? And you said that Rygge Airport was down right to zero. I think the possibilities on Rygge, if you can use this area to other things? It's very big, so I'm curious what you will do with that ownership on Rygge? And do you do any action to the currency [neutral] [ph], it is lot of -- lot on the currency situation, but this will change. But what do you think about the future to do the company more neutral for currency -- yes, changings.

[Peter Ruzicka:]

To the -- to your second question regarding Rygge, if you have [indiscernible] is what we can use the airport for -- very happy to get [indiscernible]. Of course, we -- when it comes to Rygge we hope that it will be an alternative use for the airport, our shares are for sale if anybody likes to buy. But as we see the situation right now, we see it is impossible to continue the civil aviation without Ryanair as a big airliner there. When it comes to Brexit, we’ve operation in U.K. through both house care, painting tools, and Orkla Foods ingredients. And as mentioned we’ve announced acquisition of Harris that will be hopefully concluded in Q3. We don't think that Brexit will have any major impact on our business in U.K. rather if any probably possibly impact. When it comes to currency, I think that we are exposed to currency changes. However, we are also -- we are present in a lot of markets and compared to or opposing to the big multinational companies we have mainly we have local value chains with local production and a lot of our sourcing is locally in each different country and in local currency. So we are less exposed to currency changes than most of our international competitors. But that being said of course currency at least the short-term is challenging but that's part of our business.

[Martin Stenshall:]

Good morning, Martin Stenshall, Danske. Got a question regarding Sapa. Naturally it’s very encouraging to see such a solid performance from Sapa. Would you be able to put any comments on your views on Sapa and then a potential change in your ownership?

[Peter Ruzicka:]

We have as you have stated several times, we -- our intention is to sell our shares in Sapa. However, we have also stated very clearly that for us it's more important to realize what we believe is a fair value than speed. We said that two years ago, we said that one year ago and we said that six months ago and I think if you look at the results I think we so far proven to be right in being patient regarding exit of Sapa. So I cannot comment, anything else than that we -- our long-term ambition is to sell our shares in Sapa when the timing is right.

[Martin Stenshall:]

Thank you.

[Kenneth Sivertsen:]

Good morning. Kenneth Sivertsen from SEB. The restructuring process is proceeding as planned, but have you got any new target I think you last time stated you [will last] [ph] until [at least] [ph] 2017 with a closure or streamlining of your factory structure. Have you any new thoughts of that? And secondly if you look at organic growth, if you exclude the PepsiCo, how would organic growth have being for foods and confectionary?

[Peter Ruzicka:]

When it comes to restructuring and factory for print, we’ve not stated any specific targets for a number of factories or specific number for cost reduction. Just make it very clear, there is no targets to have as low number of factories as possible. The main objective is to have factories that have high utilization rates. And in general we say that we want to have one factory per category or one factory per technology in a certain geographic area. So the final number of factories is difficult to say. It’s a moving target also because we do acquisitions, we do innovations, and we sell off businesses. But today we’ve far too low utilization in our current -- in a majority of our factories and we will continue to work and that is a long-term work going forward. I think Jens will answer the organic growth question.

[Jens Staff:]

As you know we don’t disclose the PepsiCo sales, but adjusted for this quarter or adjusted for Easter effects on the PepsiCo. I think some confectionaries likes to have a growth that is in line in markets that are somewhat stronger. And then this pick and mix of course represents a part of that growth. But in line we are stronger than the market and then foods, if you had just what is I will call temporary delivery problems that you’ve had if you adjust for that I think inside that foods are also growing in line with market, on this delivery problems as a temporary character.

[Kolbjørn Giskeødegård:]

Kolbjørn Giskeødegård, Nordea Markets. Two questions. One on the branded consumer good related, we’ve seen over the past quarters that you have been very successful in combining business areas and divisions and also cross-country projects. In terms of building sort of a Nordic -- brand Nordic business model, would you say that you’ve tapped the potential or are there still a lot of potential to go for in terms of doing cross-country Nordic projects in the various divisions, newer impressions, and that’s one question. And next one is the headquarter, you are saying that you will have a cash outlays of NOK800 million, is that Orkla’s cash share or is that the total costs or CapEx for the headquarters and how do you see that structured, you might have mentioned it, but I didn’t catch it and also when do you see it completed? Thanks.

[Jens Staff:]

One of our important changes in Orkla is the One Orkla approach that we call it internally. We’ve made a - started a program to utilize the strength and the competence and the knowledge that lies within the different parts of Orkla. We’ve seen some very good examples of cross-border initiatives regarding innovations, for instance, but we’ve just started this process and I expect a lot more to come out of working as one Orkla and utilizing the potential that lies with within working as one Orkla and both top line and on cost side.

[Peter Ruzicka:]

I think what we communicated in our [indiscernible] what the cash flow outlays is now for the coming two years for billing this new headquarter. As you know we’ve acquired real estate few years back and this is total for the calculation that we will have to revert to, because there is several things that we can do with the property that we’ve acquired [indiscernible] working after last revert.

[Preben Olsen:]

Preben Olsen, Carnegie. A few questions from myself. You’re talking about some delivery problems. Could you specify in what category and hopefully what kind of impact it has had sound sales and EBIT. And secondly you also mentioned some price pressure I believe in the home and personal segment. So more details on what’s going on, where is it Unilever that’s very aggressive or is it new players that are entering the market.

[Peter Ruzicka:]

When it comes to delivery problems, you said that is in food and it is in foods outside Norway. Its related to factories in Sweden [indiscernible] we’ve moved for the [indiscernible] from Finland, Denmark to Sweden consolidated and you [indiscernible] we’ve have encountered some delivery problems in some of the -- I said bigger categories, one of then is Ketchup, which is a big category, especially this time of the year with a barbeque season. But that’s Jens also mentioned that’s the causes are identified and we are working on the problem and those problems are temporary. I will not give you and if they gears on the impact on top liner bottom line, but it has been -- I would say a major setback here temporarily. And the second question was ….

[Preben Olsen:]

Last question on [indiscernible].

[Peter Ruzicka:]

Yes, sorry.

[Preben Olsen:]

We’ve seen -- actually over many years, quite tough price pressure on home and personal care. If you look at for instance dish washing tablets, Norway has the lowest price in Europe, that tells something about competitive scene out there. We don’t see new players coming in, but we see some competition from private label and an intensified competition from existing players.

[Martin Stenshall:]

It's a lot growth in the Company, but I’ve a question about traditional brands. Is it any growth in traditional brands like [indiscernible] companies or is it that the growth only a part of your [indiscernible] companies. And just curiosity, I -- which bank facility you will have for the new headquarter in Skøyen. Is it [indiscernible]?

[Peter Ruzicka:]

I will answer the first -- your first question on [indiscernible] answer the second regarding financing. Yes, we have growth in our existing brands and existing categories. And as I said, we believe we’re growing at approximately in line with the market, meaning that we’ve maintained market share and that was also one of the target we stated during capital markets day in London last year to grow in line with market. Unless we are estimating it's because we have accurate sales figures from Nielsen for approximately 45% of our turnover. That means that 55% is without outside Nielsen Universe, so we don’t have accurate figures. That means they can't be in other channels, but also in countries where one [indiscernible] don’t have any sales figures. So this is an estimate, but yes we are growing also in our existing brands of [indiscernible] from category to category.

[Jens Staff:]

We’ve a good relationship with many banks, so I think we will have to revert without position. I think we will communicate around this top and made a decision.

[Peter Ruzicka:]

Okay then don’t seem to be any further questions, so then I like to thank you so much for joining the second quarter presentation today, and I wish you of all nice summer holiday, summer vacation. Thank you very much for coming.