Orkla ASA
Q3 2015 Earnings Call Transcript

Published: 31 Oct 2015

[Executives:]

Peter Ruzicka - President and CEO Jens Bjørn Staff - Executive Vice President and CFO

[Analysts:]

[Peter Ruzicka:]

Good morning everyone and welcome to the Presentation of Orkla's Q3 Results. It's early in the morning and I guess that not all of you had time to have breakfast, so I'm happy to offer you this breakfast bar from Nutrilett, it's a great product, high on fiber, high on protein, low on sugar. Please try it. But I’d say, this is also very good example of what we talked about cross company initiatives. This is launched in Norway and Finland and it will be launched in Sweden and Denmark in the beginning of next year. But this is also a good example of closer customer cooperation. This is launched exclusively in consumer cooperative in Norway but of course it will be available for the rest of the market next year. Overall, I'm quite satisfied with the results in Q3. As we communicated at Capital Markets Day, we will have focus on operations, focus on growing top line, and margin improvement, meaning taking out cost especially in supply chain. This is the sixth quarter in a row with increased organic growth, growth of approximately 2.3%. Also our EBIT growth is according to the targets we communicated in London, some weeks ago, of 6% to 9% increase. EBIT adjusted for the Group increased by 13%, branded consumer goods increased EBIT adjusted by 15%, despite a weak Norwegian currency which really challenging for us. We had some substantial negative transaction effects due to currency but we also of course had positive translation effects. Jens will come back to the details later in his presentation. I'm also very happy to see that the largest associated companies Jotun and Sapa also delivered very nice profits development. Actually Jotun, they had record high, both top and bottom line results in the first eight months of the year. And also Sapa had significant underlying improvement in EBIT, more than doubling from Q3 last year. During the quarter, the Cederroth acquisition was approved by competition authorities and the integration has started. And we'll of course report on that in the coming quarters. In the Baltics, the integration of NP Foods is at full speed. And in Baltics, we have also reorganized our operations, moved some parts into Confectionery & Snacks; sold food parts from Confectionery & Snacks into the foods business to have more clean and focused business areas in the Baltics. And this is of course to improve our competitiveness in the market. As mentioned, we report now for the sixth time organic growth of 2.3%. And what is also nice to see, as this is not only price; it's also volume and mixed improvement which we also see now for the last quarters. However, as you can see from the right side, there is some mixed picture. Orkla Foods has very nice improvement of 4.2% but I have to remind you that we are comparing with a relatively weak quarter last year. And actually the opposite is the case for Confectionery & Snacks, we're comparing with a very strong quarter last year but despite that Confectionery & Snacks adds volume on top of that. In Home & Personal, we see a mixed picture. It is specially homecare, Lilleborg and Pierre Robert Group that has had seen some decline in the quarter and that is due to very tough situation with the currency because both Lilleborg and Pierre Robert, they have a lot of traded goods, imported traded goods. But we also saw a very strong pricing effect in Q2 that we also announced in July. And Orkla Food Ingredients, as usual, they are in line with their targets and they report 4% organic growth in the quarter. When it comes to market share development, we also see a mixed picture. Overall, in the food retail chain, we still see a slight decline in market shares. However, we see a better trend than we have seen the last years and the last quarters. So, it is a slow improvement. However, we see a growth in other channels and especially Orkla Food Ingredients gained market shares in their markets. So, overall, we believe market share is quite stable but in the food channel, food retail channel, slightly declining. So, that is not satisfactory but more positive. So, now let's look at some of the exciting new products that we have launched this autumn. Pizza, as you know, is an important category for Orkla, especially Orkla Foods Norway. We have approximately 70% market share in the frozen pizza segment in Norwegian food retail. So we launched this quarter, we launched an Italian inspired pizza from Orkla Foods Norway. This is high quality tipo 0 flour that gives a better base with more crust. And this is also a very good example of closer cooperation with our customers. This is launched -- developed and launched together with a large Norwegian customer and it's launched exclusively in their stores for a limited period, and you will find it in the stores. And I hope you have time to taste it, it’s a great product. Another example is from Confectionary & Snacks. We have launched also hand cooked Naturchips, all natural potatoes that is launched. It's produced in Latvia in one factory and it's launched in Sweden, Denmark, Finland and Latvia. And this is a good example how we share best practice and we share production facilities to reduce cost in supply chain and also to increase speed to market. And as all you might think why didn't you launch this in Norway? Well, first of all, we already have this in Republican Norway, but the most important thing is that Norway is not member of EU. So unfortunately, we have an import duty of 26 krones per kilo of potatoes, so that will not be competitive. Here in Scandinavia, the winter is coming closer and we can feel it's getting colder outside. And Pierre Robert, they continue to build on their unmatched market position in retail stores, food retail stores in the Nordics. They have extended their public range with super soft merino wool with some new products, hats, gloves and also Wool Collection T-shirts that’s released nice for this time of the year and the winter. And this is launched in Norway and Sweden. The graph on the left side shows the rolling 12-month adjusted EBIT margin. Compared with the full-year 2014, the EBIT margin improved by 0.2 percentage points to 12% at the end of Q3. So, overall, I am pleased with this performance which is achieved despite negative currency effects and dilutive effects from acquisitions. And we mentioned that I think also in Capital Markets Day in London that acquisition of NP Foods and Cederroth will have a substantial dilution effects on our margins. Orkla Confectionary & Snacks see quite strong dilutive effects in the Baltics and altogether and also Home & Personal with Cederroth. I think Q3, only one month of Cederroth is in the figures, it's only September. So, we'll get the full effect in Q4 from the dilution of Cederroth. However, our aim is of course to raise the margin to the old levels we had before those acquisitions. But this is also a reminder why we decided to move away from margin targets to have EBIT growth targets. In the quarter, we also had substantial negative impact from the weak Norwegian currency. Another aspect of weakened Norwegian currency is positive currency translation effects. Adjusted for the positive currency translation effects, EBIT growth in Branded Consumer Goods was about 9% and that is in line with the announced targets in London some weeks ago. In general, we see three currency effects. We have one positive translation effect, but we see increased input prices in raw material. However I believe in the long run that we the weakened Norwegian currency will strengthen our relative competitiveness in the markets. Since we have local production, we are not exposed 100% to the currency; in some areas, we are like Pierre Robert, but in general, roughly 50%. Our international competitors, they have a 100% exposure to the weak Norwegian currency. We also continue to optimize our factory footprint and whole supply chain. Since 2014, we have announced closure of 14 factories. And this quarter, we announced closure of two small factories, one in Home & Personal and one in Orkla Food Ingredients, so year-to-date, six factories being announced closing. So overall, I think we delivered quite solid EBIT growth, also adjusted for the currency translation effects. We see a continued positive organic growth, even though I'm still not happy, I think it should be somewhat higher because it's slightly below the growth rates in our largest markets. We see successful innovations launched, larger innovations launched across markets, across countries that really contribute to the growth and to the margin. We also see in the quarter strong contribution from associated companies from Jotun and Sapa. I also have to mention that a big part of the improvement in both Jotun and Sapa is related to currency but also the underlying business is improving, both in volume and especially in cost. And going forward, we will of course work hard to improve profitability in a difficult market. Organic growth is important to improve margin and improve top line and of course also cost initiatives to take out cost into supply chain and at the same time work as one Orkla and utilize the strength and the knowledge within the whole of Orkla. So then, Jens will give you some more detail about the financials.

[Jens Bjørn Staff:]

I will now take you through the details around the financial performance in the third quarter. Let's start with the Group P&L. We see a broadly positive development in income this quarter. Orkla had operating revenues of NOK 8.4 billion in the third quarter, an increase of 15%. As Peter mentioned, we saw a continued positive organic growth in the Branded Consumer Goods area in the quarter and also benefited from positive currency translation effects to Norwegian kroner and the contributions from acquisitions. Adjusted EBIT almost touched NOK 1 billion and that's up 13% from last year. The growth was related to improved results for the Branded Consumer Goods, both from underlying improvements as well as structural growth and currency translation effects. I'll come back to more details on the development in the Branded Consumer Goods area later on. Other income and expenses amounted to a negative NOK 96 million, this was mainly related to acquisitions and integration costs and the write-downs. Profit from associates totaled NOK 239 million, mainly driven by strong performance in Jotun. The Groups' net financial costs increased in the quarter and that's mainly due to a negative effect on interest rate swaps which hedging account is not applied. The underlying funding cost is however reduced. This resulted in the profit before tax of NOK 1.1 billion in the quarter and that's up from NOK 907 million in the same period last year. Earnings per share increased by 57% to NOK 0.80 in the third quarter. Now, let's look at the breakdown of the EBIT. Here you can see, the adjusted EBIT bridge from Q3 2014 to Q3 2015. And to keep it simple, I will, from now on, in my presentation, use the term EBIT when referring to adjusted EBIT. As I mentioned, the Group's EBIT was 13% or NOK 114 million in the quarter. Branded Consumer Goods experienced a growth of 15% or NOK 135 million. The positive development was supported by growth in all segments and especially in Orkla Foods and Orkla Food Ingredients. Approximately one-third of the growth in EBIT was driven by currency translation effects. EBIT in Orkla Investments which comprise the hydropower and real estate operations, decreased by NOK 5 million, that’s mainly related to fifteen-year along electricity prices. Orkla HQ costs increased partly due to periodical effects as well as incentive programs linked to the Group's positive development. Let's look closer at the Branded Consumer Goods area. In Q3 2015, Branded Consumer Goods saw an increase of 15% in revenues year-on-year. This increase was driven by positive currency translation effects from the weaker Norwegian krone and contribution from acquisitions. The organic growth was, as Peter mentioned, 2.3% in the quarter. All business areas, except Orkla Home & Personal contributed to this positive organic growth. Let's now review the performance of each business area and then starting with Orkla Foods. Year on year comparison for Q3 saw that Orkla Foods delivered organic growth of 4.2% and increase in EBIT of 20%. It's important to keep in mind however that Q3 last year was a weak quarter. The sales growth was broad-based among the business units. In Orkla Foods Sweden and Orkla Foods Finland, the distribution agreement of Tropicana juice and new launches had positive effect. Orkla Foods Norway had sales increase driven by launches and within key categories and higher campaign activities. In general, there was a high level of campaign activity in this quarter which is expected to be at the lower level in the fourth quarter. Last year, the campaign program had the opposite profile with a higher level of activity in the fourth quarter. The EBIT margin improved by 0.9 percentage points and ended up 13.2% for the quarter, and the main drivers for the EBIT growth our sales increased and overall positive effects from cost improvements throughout the value chain. And now on to Confectionary & Snacks. Orkla Confectionary & Snacks reported organic growth of 1.2% in the quarter. The sales improvement was mainly driven by the Danish company but also the Norwegian and Swedish companies. The inclusion of NP Foods resulted in considerable structural expansion. The EBIT growth was primarily driven by strong sales and improved profitability in Denmark. Following the acquisitions of NP Foods, Orkla has decided to restructure its operations in Latvia. This work is expensive and somewhat dampened the EBIT growth. Overall EBIT margin was pulled back in the quarter due to the dilutive effect from the inclusion of NP Foods, and we also were comparing, as Peter mentioned, performance which was strong in half of 2014. Nevertheless, underlying margin growth was positive despite increased raw material prices, especially in Norway. Moving on to Home & Personal. Orkla Home & Personal suffered an organic revenue decline of 2.6% in the third quarter. And this was mainly down to Lilleborg and the Pierre Robert Group. The decline for Lilleborg was to a certain extent expected as sales in Norway were higher than normal in the latter part of Q2, prior to the holiday season and the price adjustments. Nevertheless Lilleborg's strong performance over time was also challenged by increasing competition in some home care categories in the Norwegian markets. Pierre Robert Group saw decline after two strong quarters. The setback is caused by placing of campaigns between the third and the fourth quarter, limited success with summer campaigns and changes in the retail markets. Orkla Health saw improvement after a weak first half of the year. However the market is still challenging. The acquisition of Cederroth has been approved by the competition authorities in all relevant countries on the condition that the two brands Asan and Allévo are sold. The sales forces are ongoing. Cederroth results are included in Home & Personal results from September. The EBIT margin ended up 19.1% in the quarter. And the decrease versus last year was caused by dilution from the inclusion of Cederroth as the main item. Several business units also experienced significantly higher input costs due to weakened the Norwegian kroner. As we look ahead to Orkla Food Ingredients, we see stronger performance. Orkla Food Ingredients delivered organic growth of 4% in the third quarter and reported an increased EBIT of 32%. The improvement is caused by broad-based sales growth benefiting from stronger market positions, stable raw material prices, and an improved product mix. The EBIT margin increased by 0.5 percentage points and ended up 6% in this quarter. The main driver for this EBIT improvement was organic revenue growth. In addition, the weak Norwegian kroner impacted EBIT positively due to translation effects. Strong organic growth and acquisitions has made the ice cream ingredients business an increasingly important part of the food ingredients. Ice cream ingredients normally has a strong season in both Q2 and Q3 and contributed strongly to the EBIT growth in this quarter. This is a very seasonal business and therefore we expect weaker contribution in Q4 and in Q1. Let's now look at the results from Orkla Investments. During the third quarter, there were no major changes to our assets in Orkla Investments. The shareholding in Gränges and our remaining share portfolio represents a combined market value of roughly NOK 1.2 billion. Orkla Investments also manages a real estate portfolio with a book value of approximately NOK 1.7 billion. The Sapa joint ventures continue to make good progress with solid growth in underlying results in Q3 and year-to-date compared to last year. Strong North American markets, the effects from synergy and restructuring initiatives contributed positively. And as Peter mentioned, the currency translation effects have additional positive impact on results, both in the quarter and year-to-date. Orkla's share on net profit from Sapa was 54 million. In the quarter, there were some restructuring costs as well as unrealized derivative effects, over NOK 135 million and NOK 95 million respectively. Jotun only reports financial figures on a four monthly basis. As a result, we cannot present official figures for Jotun for the third quarter but this slide illustrates the development for the period January to August 2015. Jotun delivered all-time higher sales and operating profit year-to-date. Reported growth in revenue is highly affected by positive currency translation effects but adjusted for these currency effects organic revenue 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 segment. In addition, decorative paints in the Middle East and Southeast Asia contributed positively. Increased sales volumes, better margins combined with good cost control contributed to the underlying growth in profits. In Hydro Power, all time high production volume in Q3 is explained by cold spring, late snow melting of substantial snow reservoirs and the rainy summer. This resulted in extremely low power prices, the lowest in 15 years, which is in turn resulted in a drop in EBIT from NOK 46 million to NOK 22 million. I will now take you through the changes in the net debt. The net debt at the end of 2014 was NOK 5.7 billion. Net expansion payments year-to-date totaled NOK 2.2 billion, primarily related to the Cederroth acquisition. Cash flow from operations amounted to NOK 2.2 billion. The net sale of shares on other financial items was opened NOK 0.2 billion in the period. Due to the weakening Norwegian kroner, debt dominated in other currencies increased by NOK 0.4 billion year-to-date, resulting in total net debt of NOK 8.9 billion at quarter end. This is well under the target of net interest bearing debt to EBITDA below 2.5 to 3 times. Orkla’s net interest bearing debt had an average maturity of 3.6 years and average interest rates of 2.9% year-to-date. Orkla’s financial position is robust with cash reserves and credit lines that exceed known cash outlays over the next 12 months. I'll now hand the floor back to Peter.

[Peter Ruzicka:]

Okay, thank you Jens. To sum up, I will just revisit the slide that we communicated -- where we communicated the targets for the period going forward at Capital Markets Day. And I think we see that results indicate that we are on the right track. As I said at Capital Markets Day, our main focus will be on operation, improving operations. We have to utilize the strength, the knowledge, the capacities within Orkla and operate as one Orkla. We have to share ideas, products between business areas and countries. And of course we have to take out synergies throughout Orkla and especially in the supply chain to improve margins and to reduce costs. However, we also see, still see a lot of areas for improvement, a lot of challenges, but areas for improvement and challengers also means potential. So, we will continue to focus on accelerating our performance in the coming periods. But also I have to remind you that the competition out there is really tough and we see some very strong headwinds from weakening Norwegian currency and translational or the transaction effects related to the weak currency. So, that is a challenge for us. I'll then open up for Q&A.

[Q - Unidentified Analyst:]

Carnegie. There was a lot of talk about market shares and you are still bit disappointed on your market share in the retail channel. And it seems like also within Foods and it seems like Lilleborg is losing some market share. Could you go a bit more in detail on who is challenging you; is it new competitors; is it private labels and how do you think about this going forward?

[Peter Ruzicka:]

As I mentioned, in the retail channel, we still see a slight decline in market shares. However overall, if you look at the all the channels, market shares are relatively stable, somewhat different from category to category. But we see increased sale of a lot of our categories in new -- call it new channels, DIY stores, internet and so on. So when I'm talking about weakening market shares, this is in the universe [ph] and they're only maturing in the retail channel. So overall, also in Lilleborg, we maintain our market shares. Yes, we have a question from the web from Petter Nystrom from ABG. Regarding food, you say campaign activity was slightly higher in the third quarter which is expected to have opposite effect in the fourth quarter, can you quantify this? And also what's the like for like in foods excluding distribution of Tropicana juice? To the first question, I cannot quantify that like for like in foods, excluding to Tropicana.

[Jens Bjørn Staff:]

Well, [indiscernible] no disclosed I think that sales figures there so. But when you look at the foods organic growth of 4.2% in the quarter and adjust for the combination of the international business and the Tropicana business, then underlying growth in foods is around 2%. So, that's my answer. And then, we didn't say that the campaign had an specific effect; we said that the profile was somewhat different and that the campaign activity is higher in Q3 than -- and that this campaign activity happened more in Q4 last year, so different profile.

[Peter Ruzicka:]

No further questions? Okay. Thank you everyone for joining us this morning.