Orkla ASA
Q2 2015 Earnings Call Transcript

Published: 17 Jul 2015

[Executives:]

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

[Analysts:]

Preben Rasch-Olsen - Carnegie

[Peter Ruzicka:]

Good morning everyone, and welcome to Orkla’s Second Quarter and First Half Year Results. I must say I’m quite satisfied with the results and underlying development in operation so far this year. Adjusted EBIT for the Group improved by 18% to NOK 789 million compared with Q2 2014. The improvement was driven by both positive development in branded consumer goods and property gains in Orkla investments. In branded consumer goods the improved adjusted EBIT margin was a result of both top line development and cost savings achieved through continuous improvements and restructuring projects. I’m also pleased to report the fifth consecutive quarter with organic growth. Year-to-date the organic growth is now 2.3%. Several of the Norwegian business units have particularly strong sales towards the end of the quarter. This is expected to have an opposite effect in Q3. Furthermore, we continue to deliver on strategy. During the quarter, we have reduced the ownership in Gränges from 31% to 16% and this transaction resulted in a profit of NOK 425 million in Q2. The acquisition of Cederroth is currently being considered by Norwegian and Swedish competition authorities. The transaction has already been approved by the authorities in Finland, Poland, Austria and Germany. Norwegian and Swedish competition authorities have objections regarding a few of the brands included in transactions. We are currently engaged in a constructive dialogue with authorities in both countries. The brands affected by the competition authorities’ concerns account for less than 10% of Cederroth’s turnover. We have communicated as the transaction is expected to be completed no later than within Q3 2015. However, given the latest development, we must be prepared that the process may take somewhat longer time. Earnings per share increased by 45% to NOK 1.71, up from NOK 1.18 in first half of 2014. Looking at the first half of the year in total, organic growth for branded consumer goods reached 2.3%. The increase was largely driven by positive volume mix development. In Orkla Foods, the revenue increase was broad based. While in Orkla Confectionary & Snacks, the improvement was to a large extend driven by Norway. Also Orkla Food Ingredients continue to report positive organic growth. Orkla Home & Personal, the development was mixed. Lilleborg and Pierre Robert Group reported volume driven revenue increase, whereas the decline in total organic growth mainly relates to Orkla House Care and Orkla Health. The situation in Orkla Health is still challenging with declining sales due to negative growth in some categories. However, part of the decrease was explained by the strategic choice to close down the production site Denomega in Leknes, in Norway. The graph on the left illustrates the rolling 12 month adjusted EBIT margin development. Compared to the full-year 2014, the margin improved by 0.2 percentage points to 12% at the end of Q2. Looking at the short-term trend, we’ve seen improvement in recent quarters, but in a longer term perspective we see that there is still a way to go and so we will continue our operational focus to improve margins further. Three out of four business areas delivered improved adjusted EBIT margin in the first of the year despite challenging markets and a very challenging currency situation. Internal restructuring and cost improvements were the main drivers behind the growth. Pizza is one of Orkla Foods key categories. In Q2 a new Grandiosa variant the four-times cheese was launched. In addition, the original variants were relaunched with improved quality and taste without palm oil and with Norwegian ingredients such as meat and cheese. In Q2, we also launched a new range by Big One California style. These pizzas deliver on the consumer demand for a thinner [ph] American type of [indiscernible] with more taste. Both the relaunch of Grandiosa and the launch of the new variants have been well received by the consumers. FUN Light SQUEEZE iT was launched in Sweden during Q2. It is a small and convenient pouch. Just squeeze one to two times into a bottle or a glass of water and you get thirst quenching FUN Light squash. This small pouch gives you six liters of FUN Light. The launch expands FUN Light into new marriage occasions, easy to use at home or on the go, and it is also a great example of packaging innovation. Like in many other categories, the trend with within nuts is towards healthier products. As a result, Orkla Confectionary & Snacks has launched four types of oven-roasted nuts with less salt. The nuts are roasted for better taste and more crunch. The products are roasted completely without added oil, thus you can enjoy them with a clear conscience [ph] both weekdays and weekends. The product series is planned to be launched under the brand [indiscernible] nuts in Denmark, Finland and Sweden during Q3. In Sweden, two types of ecological nuts are also planned. All the products are produced at the same factory. This is an exciting example of how we work to launch healthier and more enjoyable innovations across business units and across borders. This is the same product launched in all countries, but with somewhat different names in Norway versus the other countries. Under the Jordan brand, Lilleborg has launched a dispenser with wet wipes for convenient and hygienic cleaning. The wipes are disposable and biodegradable of course. The dispenser has contributed to significant category growth after six weeks of sale and we also have started to see sales of refill wipes. I already use this at home and I think it's a great substitute for the traditional smelly and hygienic kitchen cloth. I suffer from a severe condition that we Norwegian call gluten allergy [ph]. These innovations have contributed to [indiscernible] growth in the quarter and now Jens will present further details on the financial results.

[Jens Bjorn Staff:]

Thank you, Peter. I'll now take you through the potential performance in the second quarter. Orkla had operating revenues of NOK7.7 billion in the second quarter, an increase of 7%. As Peter mentioned, we saw positive organic growth in the branded consumer goods area in the quarter, despite negative Easter effects. Good sales volumes at the end of the quarter contributed positively to operating revenues. Adjusted EBIT ended at NOK789 million and that’s up 18% from last year. The growth was related to improved results for both the branded consumer goods business as well as good performance in Orkla Investments. I'll come back to the details regarding these areas later. Other income and expenses amounted to a negative NOK55 million, mainly related to acquisition and integration costs from structural changes. Profit from associates totaled NOK545 million, of which Gränges shares gave a profit of NOK425 million. In addition, good performance in Jotun contributed positively. Sapa had underlying growth, but restructuring costs dragged the results down leading to limited profit contribution in the quarter. The Group’s net financial costs decreased in the quarter mainly related to lower interest rates and lower debt level. In addition, value increases of interest rate swaps contributed positively. This resulted in a profit before tax of NOK1.3 billion in the second quarter and that’s up from NOK881 million in the same period last year. Earnings per share increased by 54% to NOK1.09 in the second quarter. Let's look at the adjusted EBIT bridge from Q2 2014 to Q2 2015. To keep it simple, I will from now on use the term EBIT throughout my presentation when referring to adjusted EBIT. As I mentioned, the Group's growth in EBIT was 18% or NOK120 million in the quarter. Branded consumer goods had a growth of 11% or NOK79 million. The positive development was supported by growth in all segments, especially Foods and Orkla Food Ingredients. In addition, EBIT in Orkla Investments improved by NOK45 million and that's mainly related to the sale of two land blocks in Switzerland. Orkla HQ increased slightly due to incentive programs linked to the Group's positive development. Let's now look here closer at branded consumer goods. In Q2, 2015 branded consumer goods had an increase of 6% in revenues year-on-year. This increase was driven by positive currency translation effect from a weaker Norwegian Krone and contribution from acquisitions. The organic growth was 0.2% in the quarter. The positive Easter effects that is described in Q1 had an adverse effect on the organic growth in Q2 and when we [indiscernible] the growth was still approximately 2.7%. The organic revenue growth in the quarter was supported by strong sales towards the end of June. We usually see higher sales in the end of June prior to the holiday period and price adjustments. This year the subject was somewhat higher than normal. It's hard to estimate exactly, but we expect an adverse effect of approximately 0.5% on organic growth in Q3. All in all, I'm pleased to report the fifth consecutive quarter with organic growth and a growth of 2.3% for the first half year as Peter mentioned. In Orkla Foods we saw second quarter increase in revenues to NOK3.1 billion, and that’s an organic growth of 1.9% and that increased in EBIT of 9% to NOK389 million despite negative Easter effect. Orkla Foods had broad based sales growth among the business units. In Orkla Foods Norway, the sales increase was driven by launches within key categories and especially strong end of the quarter. In Orkla Foods Sweden and Orkla Foods Finland, the distribution agreement of Tropicana juice on new launches had a positive effect. The EBIT margin improved by 0.8 percentage points and ended at 12.5% for the quarter. The main drivers for the EBIT growth was -- were sales increases and overall positive effect of cost improvements throughout the value chain. Orkla Confectionery & Snacks reported operating revenues of NOK1.3 billion in the quarter. The inclusion of NP Foods resulted in considerable structural growth. Organic growth was 0.4% in the quarter. The quarter was negatively affected by the timing of Easter in all Nordic countries. For the first half year, Confectionery & Snacks had 2.3% organic growth. The improvement in both the quarter and for the first half year was mainly driven by Norway. EBIT ended at NOK132 million, resulting in an EBIT margin of 9.8%. Sales growth and cost improvements had a positive effect on the margin development in the Nordic companies and in Kalev, in Estonia. However, margin was diluted due to the inclusion of NP Foods that has a seasonally weak quarter in Q2. Revenues in Orkla Home and Personal in the second quarter ended at NOK1.2 billion, which implies an organic decline of 2.8% driven by mainly Orkla House Care and Personal. Orkla House Care sales was negatively affected by the loss of a larger customer in U.K. In addition, wet weather has hampered the sales of outdoor painting tools compared to a very warm and sunny spring in 2014. Lilleborg personal had a strong second quarter last year with several new contracts in the industry sector and has not been able to fully compensate this in the second quarter of 2015. The situation in Orkla Health is still challenging with the declining revenues due to negative market development in some categories. However, a large part of the decrease we see in Orkla Health was also explained by the strategic choice that we made to close down the production site Denomega Leknes, which delivered non profitable fish oil to the corporate market. Lilleborg showed growth in the quarter by continued rise in the international business. The revenue increase in Pierre Robert Group was related to successful innovations and increased distribution both in Norway and Sweden. Reported EBIT in the second quarter ended at NOK178 million for Home and Personal. The EBIT margin improved by 0.4 percentage points in spite of significantly higher input costs due to a weaker Norwegian and Swedish Krona. Orkla Food Ingredients reported operating revenues of NOK1.8 billion in the quarter. The quarter was negatively affected by the timing of Easter, but adjusted for this Orkla Food Ingredients showed organic growth. For the first half year, Food Ingredients added 3.3% organic growth, driven by broad based improvements and good contribution from the sale of ice cream ingredients. EBIT ended at NOK121 million, resulting in an EBIT margin of 6.7%. In addition to underlying improvements broad based with the newly acquired company EISUNION contributed significantly to the EBIT growth due to seasonally high sales. Let's look at results from Orkla Investments. During the second quarter the shareholding in Gränges was reduced from 31% to 16%. The remaining shareholding is included in financial investments. Orkla also had positive results impact from the sale of two land blocks in Switzerland related to the legacy Borregaard industrial site. The shareholding in Gränges and our remaining share portfolio represents a combined market value of roughly NOK1.3 billion. Orkla Investments also manages the real estate portfolio with a book value of approximately NOK1.75 billion. Let's look at some further details regarding the Gränges sale. On 22nd of May 2015, Orkla sold 15% stake in Gränges at a price per share of SEK66. That’s NOK425 million gain also recognized in Q2 and the cash effect from the sale was NOK660 million. Orkla’s remaining 16% stake has been reclassified as available for sale. The book value of the remaining shareholding was NOK672 million at the 30th of June. Yesterday the market value of Orkla’s Holding was NOK690 million. The Sapa joint venture continues to make good progress with solid growth in underlying results in Q2 and year-to-date compared to last year. Strong North American markets and effects from synergy and restructuring initiatives contribute positively. Currency translation effects had a positive impact on results both in the quarter and year-to-date. The sharply falling metal premiums, the Midwest premium in North America had a negative effect on underlying EBIT. The Sapa Synergy and Restructuring program continues to deliver ahead of plan. Sapa underlying results reflects the operating performance of the business. Unrealized derivative effects booked through the P&L and the non-recurring items, such as restructuring charges are treated as excluded items. Excluded items totaled a negative NOK418 million in the quarter. Although which a minus NOK158 million was related to unrealized derivative effects. The remaining minus NOK260 million was mostly related to restructuring activities in Southern Europe and the China. Orkla's share of net profit after tax was NOK7 million for the quarter. Jotun only reports financial results on a four monthly basis. As a result we cannot present official figures for Jotun for the second quarter, but the slide you see here illustrates the development for the period January to April, 2015. Jotun reported all time high sales and operating profit for the first four months of 2015, a good performance in all four segments, in addition to positive currency translation effects. Underlying sales growth when we adjust for the currency effect is 12% with growth across all segments and regions. The most significant drivers for the growth are increased sales in both decorative paints and protected coatings in the Middle East and the South East Asia. As well as high pre-season sales of decorative paints in Scandinavia. Also the marine coating segment’s continues to develop positively. EBIT in hydropower was slightly lower than last year and that’s mainly explained by lower production volumes and lower prices. As of the end of the second quarter, estimated snow reserve levels at Sauda are significantly above normal levels. I’ll now take you through the capital structure. Starting with changes in net debt, net debt at the end of the first quarter was NOK6.2 billion. During the quarter, the same of Gränges shares reduced net debt by NOK0.5 billion and cash flow from operations ended at NOK1.1 billion. Due to paid dividend in the quarter, net debt for Orkla increased to NOK7.4 billion with a net gearing of NOK0.24. Orkla's net interest bearing debt had an average maturity of 3.7 years. Orkla’s financial position is robust with cash reserves and credit lines that exceeds known capital expenditures in the next 12 months. Finally I’d like to remind you that we will arrange an Investor Day at London Stock Exchange on Friday, September 11. You are welcome to register for this event on our website. And with that, I would like to leave the floor back to Peter for some final remarks.

[Peter Ruzicka:]

Thank you, Jens. Well, the second quarter results show that we continue to deliver on our strategy and our plans. We have managed to take our synergies from structural changes and hence we have improved our margin. Three out of four business areas achieved positive growth in very demanding markets and with a very difficult currency situation as mentioned and with tough international competition. And year-to-date we have 2.3% organic revenue growth in branded consumer goods. During the quarter we have made some add-on acquisitions in Orkla Foods and Orkla Food Ingredients. We acquired Anamma Food a Swedish producer of vegan food and Bioquelle. Bioquelle holds strong positions in Austria in categories such as muesli, nuts, dried fruits, health and organic foods as well as distribution of soy-based products. In addition the agreement to acquire EISUNION was completed in the quarter. I’m very glad to see that the increased focus in operations is reflected in improved financial results. Furthermore it has recently been announced that Executive Vice President of Operations, Johan Clarin has become part of the Group Executive Board. The work that Johan and his team have embarked upon has been and it will continue to be central in achieving margin improvements going forward. I still see a lot more potential for growth and operational improvement and I hope to see some of you on our Capital Markets Day in London in September. Where we will elaborate further on our plans and actions to achieve continued organic growth and improved margins going forward. But before we move on to the Q&A session, I want to deliver on the promise that I made last quarter. I know you remember. I’ve got some questions about AquaDerma and I promised to come back to that this -- on the second quarter. So I’ll just give you an update on our major launched this year, the Skin Care range AquaDerma. Well AquaDerma was launched in early 2015, it was Lilleborgs largest product launch since defined in 2002. As many of you know, I’m personally a big fan of this product, it’s a great product line and I have been excited to see if the market agrees with me. We recently received updated sales figures from Nielsen which show that after four months AquaDerma is the fourth biggest facial cream brand in the grocery trade with a market share in value of 12%. I think that’s quite good in such a short time. And in fact the launch of AquaDerma has turned a declining trend into growth in the skin care category for the first time in many, many years. Although it is still early days and too soon to conclude whether or not this will be a success, it is great to see that these products have been well received by customers and consumers. With this, I wish you all a great summer and please don’t forget to enjoy more of your favorite Orkla brands during your vacation and have of course analysis. Thank you very much, and now we’ll move on to Q&A.

[Q - Preben Rasch-Olsen:]

You were saying that Orkla Health has some problems in some categories. Could you elaborate a bit more on which categories, which part of Orkla Health and why that is weaker?

[Peter Ruzicka:]

I think in general, the categories Orkla Health is representing has a negative development in total in the trade, so it’s not only Orkla Health. Actually we are gaining -- somewhat gaining market shares, but the total categories are declining.

[Jens Bjorn Staff:]

And just to add on from my -- also my comment in the presentation that a huge part of the decline is related to the closure of Denomega Leknes also.

[Unidentified Analyst:]

[Indiscernible]. I have two questions, first about Cederroth. 10% of this -- of Cederroth’s products is -- the competition authorities have some questions about that, and can you tell exactly which products they have question about in -- you get the question? And the second question is about advertisements. I see on television that you Orkla is the main buyer of advertisements on television. But due to the currency situation is that some challenging to buy that advertisements abroad in Denmark and Finland and Sweden? You get this much more money using to buy these advertisements abroad now after the Norwegian Krona has lost their value.

[Jens Bjorn Staff:]

Well, maybe I can answer the later one first, and then maybe often pay --- have this -- the cost in the local currency. I think the overall FX situation with the weakening of the Norwegian Krona and Swedish Krona hasn’t really affected this cost at least in real terms.

[Peter Ruzicka:]

And to your first question, there are two products that are under the competition authorities concern. One is weight control in Sweden, a level and the other one is liquid soap in Norway.

[Unidentified Analyst:]

I’ll try one more. On Confectionary & Snacks, Norway is driving the organic growth. is that neither was taking back market share or is it the nuts that have, had such a success we can expect that to happen in the rest of the Nordics as well when you’re launching this is all the markets?

[Peter Ruzicka:]

I think in Confectionary & Snacks in Norway we have, as we like to say like a broad based improvement actually in all the categories more or less all the categories, so development is good but also of course the nuts has contributed to the growth.

[Unidentified Analyst:]

Hello, do you expect further Norwegian improvements? Do you have a target for that or where do you see the margins going forward?

[Peter Ruzicka:]

During Capital Markets Day 2013, September 2013 we communicated targets for the different business areas and we will on the Capital Markets Day in September this year we will revert to those targets and the future targets. But as we stated earlier that we are a little bit behind those plans, approximately one year for foods and for confectionary and snacks wide home and personal is more or less on the target. We don’t guide about the future, but as I said several times in my presentation and have said before that we expect improved margins from cost reductions and restructurings in the business. Okay, no further questions. Okay. Thank you everyone for joining us and I wish you all a nice summer holiday. And please make sure that you buy one of these in the stores and use it on your kitchen, that will help on the hygiene and helps on our margin.

[Unidentified Analyst:]

I almost got two -- one in [indiscernible] markets. You mentioned organic growth in Q3 of minus 0.5%. Can you please elaborate and what is your expectation for Q4?

[Peter Ruzicka:]

We didn’t say organic growth of minus 0.5% in Q3, but we said that we believe that the piping effect the end of Q2 might have that negative impact of 0.5% in Q3 -- of 0.5%.

[Unidentified Analyst:]

But do you expect organic growth into Q3?

[Peter Ruzicka:]

[Indiscernible] we don’t guide, but of course we hope to continue the positive development. We have delivered now the fifth quarter in row with positive organic growth and we hope that we will continue to deliver. That’s all, very clear -- clear goal. Okay. Thank you very much everyone.