Orkla ASA
Q4 2015 Earnings Call Transcript

Published: 11 Feb 2016

[Executives:]

Peter Ruzicka - CEO Jens Bjørn Staff - CFO

[Analysts:]

[Peter Ruzicka:]

Welcome to Orkla's Presentation of Q4 '15 and full year '15. Overall I'm quite pleased with strong fourth quarter. It was supported by successful innovations as well as very healthy sales ahead of the Christmas season. For the quarter, we report an organic growth above 4%, and a strong EBIT growth exceeding our announced targets for the 2016 to 2018 period. In the quarter we believe we are growing more than the market but progress is partly boasted by campaigns ahead of Christmas. Adjusted for this we consider our overall growth to be roughly in line with the markets where we operate. Full year's earnings per share doubled in 2015 to 3.24. I believe we are continuing to move in the right direction in the fourth quarter. The adjusted EBIT for the group increased by 9% driven by growth in branded consumer goods. I'm also pleased to see the 7th consecutive quarter with organic growth, with a top line of 4.1% and adjusted EBITDA growth in the branded consumer goods area of 17%. We also continue to see strong performance from our associated companies. Software reported improved operations in the fourth quarter. There are 1 billion synergy program has now been completed one year ahead of plan. [Indiscernible] too delivered all time high sales and operating profit in 2015. During the quarter we have announced acquisition of Hamé which will double our turnover in Central Europe. I will come back to this acquisition later. We have also expanded our business in the ice cream [Technical Difficulty]. The integration of Cederroth is going according to plan. A high M&A restructuring activity lead to higher restructuring costs in the quarter and costs related to structural processes are expected also going forward. The Board has decided to propose a dividend for the year of NOK2.5 per share, this will revert to the capital allocation later. As I mentioned organic growth trend continued in the fourth quarter with 4.1% increase and I'm also very pleased to see that we also continue to see increased volume and mixed growth. All business areas reported growth and especially Orkla foods and confectionery snacks benefited from very strong sales ahead of the Christmas season. Orkla Care had a challenging start of the year but we're happy to see organic growth on the positive sides, also in this business segment in the fourth quarter. However, we still face demanding markets in certain categories. Our market share performance in the fourth quarter was mixed. Overall market shares in grocery trade was slightly lower than the same quarter last year but the trend has been more positive in the last few periods. Overall the picture is somewhat more positive as we see above market growth of sales in other channels. As communicated during our Capital Markets Day in September our focus remain on top line growth and margin expansion through cost improvements in the value chain. And I would like to give you some examples of how we are working during 2015 in order to increase topline growth. First, we have launched more innovations across country borders as an example of dry roasted nuts was launched across several markets in Denmark, Finland and Sweden they were introduced under the brand name Anyday, nuts and - we already have well established poly-brand. All products are produced at the same factory. And I think this is a really exciting example how we work to launch a healthier more enjoyable innovation across business units and country borders. Big Cut potato chips is another one that was also successfully launched in Q1 2015. In both Norway, Sweden and Finland but under local brands and in all markets this launch has achieved sales in line with or exceeding our plans and other top line growth initiative is close to cooperation with our customers. I have said that before that we have more common goals with our customers than we have disagreements. And our common goals is to grow, grow categories and grow the market. And we are spending too much time on negotiation, we should rather spend time on collaboration. In our highly concentrated markets we experience demand from retailers to make unique products for them. The purpose is of course to help the customers differentiate in the competition. These initiatives increase the sales and as important they contribute to strengthen our customer relationship. We see an increasing number of such initiatives and so far we have very good success with several of these launches. Working together as one Orkla, one team for growth is also a key initiative to support growth to utilize the strength that lies within all our businesses across geographies. This photo shows a very happy and proud project team at the launch of the new cake concept called Toro [ph] bakery which is introduced and launched in the B2B segment. This new launch is a result of the teamwork between Orkla foods and Orkla food ingredients. The teams have leveraged on each other's strengths and competence within ingredients, packaging, marketing and distribution. And the outcome is a tasteful product successfully developed across Orkla company's business areas and countries. One of the most important growth drivers is of course always will always be to strength that was strong existing brands in large categories like frozen pizzas in Norway. In Q3 2015 we relaunched Grandiosa homemade pizza with three new toppings. And this relaunch increased sales of 66% after relaunch so that’s a very good example. Then moving to top line to EBIT growth, during 2015 we have managed to increase underlying EBIT margin by 60 basis points. Despite higher raw material prices for several of our categories and weakening of Norwegian currency we have managed to improve underlying EBIT margin through top line initiatives and tough cost improvement programs. The weakening of the Norwegian currency had also positive currency translation effects of approximately 5% as you can see on the graph on the right side. Regarding supply chain a large potential is also increasing productivity in our existing facilities. In 2015 we have made several dedicated factory improvement projects. Further we are moving towards a more centralized setup for procurement going from a degree of centralization of 54% in 2014 to 70% in 2015. This has resulted in several projects or we gather our volumes and achieving lower prices. In addition to reducing our factory footprint, we also work with reducing SG&A costs. As an example we have emerged sales forces within business areas, move the accounting services to Tallinn and launched several cost reduction programs throughout the organization. With our on-going integration programs for Cederroth and NP Foods we also see great potential for improving operations in our newly acquired businesses. And speaking about acquisitions, during 2015 we have made several strategic acquisitions. We have freed up approximately 1.5 billion through exits and sales of non-core assets and reallocated approximately 5 billion to the branded consumer goods business area. Through acquisitions like Cederroth and NP Foods we have strengthened our food hold in existing geographies and categories. We have also increased our exposure in the ice cream segment and in segment of vegan and organic food. Most recently we have entered into an agreement to Kavli's Danish operations and also Hamé which I will revert to later. We’re still waiting for approval of relevant competition authorities regarding these two acquisitions. With these acquisitions we have gained critical mass in the Baltics and Central Europe making our portfolio more diversified and less dependent on single markets. For example we have reduced our exposure to Norwegian market from 37% to 31% of revenues. And then a few words about how Hamé, in December 2015 we enter into an agreement to acquire Hamé, a leading food company in Czech Republic and Slovakia. Hamé has very strong market positions in categories that are well known to Orkla. In fact 85% of Hamé's products are in our current categories. The acquisition of Hamé which doubles Orkla's turnover in Central Europe will also compliment and strengthen our existing categories in these areas. For example Orkla will be market leader in tomato ketchup in eight European countries. With the acquisition of Hamé, Orkla will become one of the leading fast moving consumer goods players in attracting markets in Central Europe and we will gain critical mass for profitable growth in these markets. To sum up the quarter, this is the slide I've shown several times before also during Capital Markets Day. We are on the right track as is visible from our results and we have solid plans and actions in order to reach our goals for 2016 to 2018. And as we stated during Capital Markets Day in September we will continue to focus on improving operations in brand consumer goods area by operating more as one Orkla. Sharing ideas and products between business areas and markets and taking out synergies throughout the value chain. However, we still have a way to go and I see a large potential going forward and we will continue to focus on accelerating our performance in the coming period. I would then like to hand over to Jens Staff who will go through the financials more in detail.

[Jens Bjørn Staff:]

Thank you, Peter. I will now take you through some more of the details regarding the financials in the quarter. Let's first start with the group P&L. We see a broadly positive development in income this quarter, Orkla had operating revenues of 9.6 billion in the fourth quarter and that's an increase of 18% supported by organic growth, contribution from M&A and positive currency translation effects. For the full year 2015 operating revenues amounted to 33.2 billion and that's a 12.2% from 2014. Adjusted EBIT came to 1.1 billion up 9.4% from last year. The growth was related to improve results for the branded consumer goods both from underlying improvements as well as structural growth and positive currency translation effects. I'll come back to more details on the development in the branded consumer goods area later on. Adjusted EBIT for the entire year was 3.6 billion, up 12.3% from the year before. This is solid progress. Other income and expenses amounted to a negative 234 million. This was mainly related to M&A activities and the restructuring activities connected to several internal restructuring initiatives. For the full year 2015 other income and expenses came to a negative 502 million. It's important to note that we are continuing to restructure our supply chain and acquire companies therefore there will be further cost on this line item going forward. Profit from associates totaled 89 million in the quarter mainly driven by contribution from the Sapa JV and NuTone [ph]. The group's net financial costs were reduced in the quarter mainly due to a lower interest rate level and positive effects from interest rate swaps compared to 2014. This gave a profit before tax of 946 million in the quarter, almost twice as strong performance up from 505 million in the same period in 2014. Earnings per share increased from minus NOK0.06 to NOK0.73 in the fourth quarter. Let's now look closer at the branded consumer goods. In Q4 2015 branded consumer goods had an increase of 19% in revenues year-on-year. This increase was driven by a significant contribution from several acquisitions, positive currency translation effects from a weak Norwegian krone as well as organic growth of 4.1% in the quarter. This is as we already know the 7th quarter in a row with organic growth and as Peter mentioned all business areas contributed to organic revenue growth in the quarter. Looking at the adjusted EBIT margin and to keep it simple, I will from now on use the term EBIT when referring to this adjusted EBIT. Reported EBIT margin was 12.8% in the quarter down from 13% in the same period in 2014. The decline is caused by dilution effect from acquisitions and adjusted for this we achieved an underlying margin improvement of approximately 0.6 percentage points in Q4 and for the full year 2015. Contribution from cost improvements and strong sales more than offset the negative effect from a weakening Norwegian currency. Let's now review the performance of each business area and then starting with Orkla Foods. In Orkla Foods we saw an organic growth of 5.2% and an increase in EBIT of 20% to 561 million. The main drivers for the periods in revenue increase were price and volume driven growth through new launches, campaign activity and distribution of Tropicana Juice. Sales were increased or sales were boasted by increased sales ahead of the Christmas season in Norway. The EBIT margin improved by 0.9 percentage points and had 14.7% for the quarter. The main drivers for EBIT growth rate was sales increase and overall positive effects from cost improvement programs throughout the value chain. Higher raw material prices and the weakening Norwegian currency put pressure on margins. Moving on to confectionary and snacks, this was strong positive growth of 7.2% in the fourth quarter, an increase in EBIT of 28% to 314 million. Confectionery and snacks saw strong organic growth primarily in Norway, Sweden, Denmark and Estonia. Part of this growth relates to timing and one off effects and is to some extent expected to have opposite effect in Q1 2016 and these effects are of course hard to quantify precisely. But we believe they would be in the area of around 2%. The EBIT margin improved by 0.4 percentage points and ended 17.3 for the quarter. This margin was positively influenced by strong sales which counteracted the dilutive effect of around 1 percentage points from the NP Foods acquisition. Orkla had an organic growth of 0.6% in the fourth quarter. This was driven by Orkla Home and Personal Care, [indiscernible] group. The growth was mainly driven by campaigns and new product launches. The acquisition of Cederroth was approved by the competition authorities in all relevant countries in August 2015 on the condition that the two brands are sold on a level were sold. In the [indiscernible] agreements to sell both brands were entered into and the transaction were completed in January 2016. The sales condition from the competition authorities has just been met. EBIT in the fourth quarter ended up 204 million, and EBIT margin ended up 12.4% in the quarter and the decrease versus last year was mainly explained by dilution from the inclusion of Cederroth. In addition all business units experienced significantly higher input costs due to a weaker Norwegian Krone. Orkla Food Ingredients achieved fourth quarter organic growth of 3%, EBIT under 116 million and that's a slight decrease from an all-time high level of 120 million in Q4 '14 and in fact Q4 2015 is the second best quarter ever. The EBIT margin came to 5.5% for the quarter, a decline from 2014 which was expected as we have increased our exposure in the ice cream business and as you know ice cream sales during winter season has a negative impact. Let's look at the results from Orkla investments. During the fourth quarter we saw continued underlying value increase in our assets in Orkla investments but no major transactions were made. The shareholding in the [indiscernible] and the remaining share portfolio represents the combined market value of roughly 1.4 billion Norwegian Krone and Orkla Investments as you know also manages the real estate portfolio with the value of approximately 1.8 billion. The main assets are however Sapa JV and NuTone [ph]. The Sapa JV continues to make solid progress with growth in underlying results. Effects from synergy and restructuring initiatives and moderate growth in North American demand contributed positively. During 2015 Sapa has also managed to increase the share of value added products. The underlying results in the quarter were somewhat offset by costs related to Sapa's measures to address and sanction quality testing practices in North America. Orkla's share on net profit from Sapa amounted to 17 million and that's a substantial increase from 2014 a quarter than the results also were heavily affected by large impairments in China. Sapa reached it's 1 billion synergy target ahead of plan demonstrating strong execution capabilities. During the last two years Sapa has closed down and restructured 20 plants and reduced under [indiscernible] accordingly by 2000 of these. In addition Sapa has improved operational results to refocusing its portfolio towards higher value added products and exiting some lower margin business. Positive currency translation effect in the period were partly offset by metal premiums. Sapa has strengthened its business platform and will focus on both top line initiatives and further cost improvements going forward. NuTone delivered all-time highs sales and operating profit in 2015. Reported growth in revenues is highly affected by positive currency translation effects. Adjusted for this currency effect the growth is still at double digit level with growth across all segments and regions. The revenue growth is primarily driven by improved deliveries in the marine coatings segments. In addition the decorative paint segment in the Middle East and Southeast Asia continued to develop positively. For the last quarter of 2015 sales growth has been maintained at the high level where it's operating profit are negatively impacted by certain one off costs. For the full year operating profit increased by close to 60%. Hydropower had relatively high production volumes in Q4 and [indiscernible] achieved all time high production in 2015. However continued low power prices in the quarter led to a drop in EBIT from 73 million to 49 million. I will now take you to the changes in net debt. Net debt at the end of 2014 was 5.7 billion. Net expansion investments in 2015 totaled 2.4 billion primarily related to the acquisition of Cederroth and NP Foods. Cash flow from operations amounted to 3.7 billion. The net sale of shares and other financial items was 0.3 billion. Due to the weakening Norwegian Krone, debt denominated in other currencies increased by 0.6 billion during 2015. It's something in a total net debt of 7.8 billion at year end and this is well under our communicated targets on net interest bearing debt to EBITDA. Orkla's net interest bearing debt had an average maturity of 3.2 years at year-end, he average interest cost was 2.3% in the quarter and 2.8% for the full year 2015. Orkla has paid stable dividend of NOK2.15 over recent years. The Board proposes to keep the nominal ordinary dividend level up 2.50 per share for the financial year 2015. Finally I'd like to remind you the financial calendar for 2016 and with that let me hand the floor back to Peter.

[Peter Ruzicka:]

Thank you, Jens. Well to sum this up in the fourth quarter Orkla achieved sold EBIT growth especially in the brand consumer goods area also adjusted for currency effects. We are very pleased to report organic growth of 4.1%, innovations launched across markets and business areas contributed to the growth and actually this is one of the highest growth we have seen in many, many years. We also see a strong performance both in NuTone and Sapa as we have been showing you. Going forward we will continue to improve profitability by increasing operational efficiency throughout the value chain by working more closely as one Orkla the group will exploit synergies more effectively across its operations at the same time also cultivating Orkla's unique local customer and consumer insights. Before we move on to Q&A I would like to share with you a preview of some of the innovations that we are about to launch. Orkla Foods continuing to launch healthier products through the portfolio and dedicated brands. Since launch of our health concepts public [ph] in Sweden in 2010 the annual growth under this brand has been 50%. Going forward we continue to develop the public range by entering new categories and new geographies. We also continue to make people's favorite products healthier. As an example you see our new launch [indiscernible] which is a variant of the popular sweet spread [indiscernible]. It's completely without palm oil and with no added sugar. And in fact Orkla helped reduce Norwegian population's sugar intake by 120 tons in 2015 by developing low sugar content alternatives and sugar free alternatives. And we also reduced content of saturated fat by approximately 290 tons last year. One of our oldest leading personal hygiene brands Dr. Greve will relaunch and expand its range with 15 US SKUs within personal care segment. With this expansion Dr. Greve will provide Norwegian consumers with a complete personal care range for everyday use. And last but not least, I want to show you some great examples. We are about to launch milk chocolate in Denmark, Norway and Latvia and with this we will challenge the largest segments across all geographies in confectionary and snacks and that's the categories that are really highly competitive. The launch in Denmark is a really good example how we take the opportunity to fill a white spot, we are not present in chocolate in Denmark at all and here you see the great products I hope you will taste them. I think this is a really a brave move by the Danish Team. I have tasted these products, they are great and I'm very proud of this new launch. But as always it is now up to the consumer to be the judge of their success. I hope they'll try it and I hope you will like it. We will then move over to Q&A session. Thank you very much.

[Operator:]

[Operator Instructions].

[Unidentified Analyst:]

I’ve question about ketchup, you’ve maintain your products with fewer factories also in newspaper today, do you think you can run the whole ketchup market by one factory? The company's ketchup market?

[Peter Ruzicka:]

Well in general we have said that in a certain geographic area we want to go for having one factory for each category or each product or each technology. But I mentioned also in a certain geography and one side you have synergies of having fewer bigger factories, on the other hand this is outweighed by increased logistics cost. So this will always be a balance between big versus centralized versus cost logistics cost. So I cannot say in the example of ketchup whether it will have one factory, but it's quite sure that we have too many factories today also within the ketchup categories.

[Unidentified Analyst:]

Why are you not growing your dividend? From your Capital Markets Day I understood that 250 is kind of a minimal level but from your dividend policy it states that if your underlying business is satisfactory dividend should grow and you’re happy with the growth and you are happy with the margin expansion. Why is it not growing?

[Peter Ruzicka:]

Well if you look at the earnings that we have now is a dividend of 2.50 and if you see our - I think that is around 77% of the net result so I think it's - I'm not comparing that to the range from many of our peers what they pay out, I think that’s in order of 40% to 60% so I think in that context it's quite a good dividend and as we said on the Capital Markets Day we will review this going forward and look at the way the income and earnings are progressing and of course we get this every year but not for this year if you look at 2.50 it's very good dividend.

[Peter Ruzicka:]

Well no further questions. It's difficult to see her. Okay. Thank you everyone for coming and joining us for the Q4 presentation. I hope you have the opportunity to taste this new great products as we’re launching. Thank you.