Orkla ASA
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Executives:]

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

[Analysts:]

Martin Stenshall - Danske Bank Preben Rasch-Olsen - Carnegie

[Peter Ruzicka:]

Okay. Good morning, everybody. I hope you noticed this [indiscernible] commercial we just played. It has won the silver film prize and is thereby candidate to win the gold film prize 2015 in Norway. The jury emphasized that the film has a lot of feelings as well as a clear brand strategy. I think commercials like this are great and I am convinced that they promote sales for us. With this I would like to welcome you to the presentation of Orkla's first quarter results 2015. I must admit that I have been anxious to see whether the positive trends from Q4 would continue into 2015. We have initiated several actions to mitigate strong headwind from demanding market conditions and the weakening of Norwegian currency. I am therefore happy to be able to say that overall I am satisfied with the financial performance in the first quarter. Adjusted EBITs for the Group improved by 10% to NOK725 million compared to Q1 2014. The improvement was driven by positive development in all business areas. In branded consumer goods the adjusted EBIT margin improvement was driven by both top line development and cost savings achieved through recently implemented restructuring projects. Furthermore, I am pleased to report organic growth for all the business areas. The top line development was mainly volume driven. The positive Easter effects accounted for about half of the reported growth. We'll come back to that. Associated companies also had a very strong start to the year, driven both by volume increase in Jotun and synergies from Sapa ahead of plan. Granges benefits from strong Asian demand and favorable FX exposure and both analysts following the company as well as the company itself report a positive outlook for Granges. In addition to improving operations Orkla continues to deliver on its strategy. The acquisition of Cederroth in Sweden which was announced in January is currently being assessed by relevant competition authorities and we expect the transaction to be completed during Q3 2015. In the first quarter we completed the sale of Orkla Brands Russia and acquisition of NP Foods in Russia. Additionally, we made some strategic add-on investments in Orkla food ingredients during the first quarter and we signed an agreement with PepsiCo to become their primary go-to-market partner for juice, cereals and snacks in the Nordics. Earnings per share for Q1 increased by 32% to NOK0.62 compared with NOK0.47 in Q1 2014. This graph illustrates our 12 month rolling adjusted EBIT margin. Compared to Q4 2014 the margin improved by 0.1 percentage point to 11.9%. Looking at the short-term trend, we have seen improvement in last quarters but in the longer term perspective we see that there is still a way to go and so we will continue our operational focus to improve margins, but we're on the right way. Adjusted EBIT for branded consumer goods in the first quarter was NOK769 million and this represents an increase of 11% from Q1 last year. All four business areas reported growth in adjusted EBIT. The margin improvement in Orkla confectionery and snacks was mainly driven by reduced fix costs from costs improvement programs initiated last year, as well as sales growth in Norway and Denmark. In Orkla food ingredients the adjusted EBIT margin increased by 26% to 3.5% in the first quarter. The improvement was broad-based. A weaker adjusted EBIT margin in Orkla home and personal was caused by higher input costs due to weakened NOK. Orkla home and personal had a high foreign currency exposure due to higher share of traded goods in the portfolio. Furthermore Orkla home and personal have made higher marketing investments to support the strong launch program in Lilleborg during first quarter. We continue to optimize our factory footprint. It will take time to realize the full potential in our P&L but we continue to progress steadily. On this matter it is important to emphasize that we're not only closing down factories but rather optimizing our footprint, meaning that we also maintain and invest in our remaining production facilities. Additionally, we continuously work with improvement and redesign projects in our factories which also contributes significantly to our cost base. I have said repeatedly that top line development is a main driver for profit growth. Therefore I am pleased to report 4.3% organic growth in Q1. Approximately half of this growth is related to campaign and Easter effects which will have the same of course but opposite effect in Q2. On the other hand, the main part of the remaining equity was driven by volume which is a positive development compared to previous periods. In Orkla foods and Orkla food ingredients improvement in organic growth was broad-based. In Orkla confectionery and snacks the growth was mainly driven by Norway and Denmark. In Orkla home and personal Lilleborg in particular contributed to broad-based sales growth, whereas Orkla health had a weaker start to the year. Adjusted for Easter effects, all four business areas delivered positive organic growth in the quarter. And now I want to show you some of the new launches in the quarter that have contributed to this improvement. Based on the insight that the average person worries that he or she does not eat enough vegetables Orkla foods have entered into a new segment and have launched chilled vegetable pasta in Denmark and Sweden during Q1. You can all eat this pasta and you get all the vegetables you need. The product will also be launched in Finland during Q2 and it is actually exported to the Netherlands and Iceland. According to AC Nielsen data the chilled pasta category has grown by 8% in volume in 11% in value year-to-date. Pastella has increased its market share by eight percentage points from December of 2014. Another innovation is the Big Cut potato chips, that's a new kind of potato chips with extra-deep ridges. The deep ridges capture the spice and give maximum taste. Big Cut was launched in Norway and Sweden during Q1 and contributed positively to the sales growth in the quarter and it has just recently been launched in Finland. A version of the product and concept is to be launched in Denmark later this year. So this is another example of making an innovation bigger by launching the same product in several countries and several markets where we're present. We're doing more of this now and we will continue to urge our business areas to focus on close cooperation going forward. Lilleborg has launched Omo [indiscernible] detergents in new packaging. The new series consists of six different SKUs and the units are 60% smaller in size, but with a more efficient formula. That means the number of washes is the same. In addition to consumer advantages this is more environmentally friendly and it is of course also tougher on the stains. Odense has added to its marzipan product portfolio following the trend of convenient but homemade. A range of marzipan-based products for homemade ice-cream, cakes and desserts were launched in Q1. These are products for the consumer markets. In addition to our innovation program in Q1 we have also signed an agreement with PepsiCo to -- that will contribute to organic growth going forward. Orkla has distributed Tropicana juice for PepsiCo in Sweden and Denmark since January 1 and in Finland since April 1 this year. On April 27 it was agreed to expand the distribution agreement with PepsiCo. The agreement now includes Tropicana in all the Nordic markets, it includes Quaker in all the Nordic markets and snacks in Norway, Sweden and Finland. The retail sales [indiscernible] to consumer of the PepsiCo portfolio in scope for this agreement is about NOK1 billion according to data from AC Nielsen for 2014. All markets are to be implemented January 1, 2016 and Orkla takes over negotiations toward retailers from the fall of 2015. Orkla will be responsible for sales and distribution, while PepsiCo is responsible for production and marketing. Before handing over to CFO, Jens Bjorn Staff, who will take you through the financials, I would like to confirm that our main operational focus will continue to be on activities that drive organic growth and improve margins. For 2015 we have already implemented several new initiatives in order to reach our targets. I have shown you some of them here today, furthermore we want to continue to work with our cost base going forward. CFO Jens Bjorn Staff will now present Orkla's financial performance for Q1 2015. Jens, the floor is yours.

[Jens Bjorn Staff:]

Thank you, Peter. I will continue with the details of Orkla's financial performance and then starting with the Group P&L Orkla had operating revenues of NOK7.5 billion in the first quarter and that's an increase of 8%. As Peter mentioned, we saw organic growth in the branded consumer goods area this quarter. In addition, positive currency translation effects and company acquisitions helped the top line growth. As from 2015 Orkla will focus on adjusted EBIT instead of EBITDA. The adjusted EBIT is defined as operating profits before other income and expenses and this change will make it easier to compare Orkla with relevant peers as we're becoming a leading branded consumer goods company. For Orkla the difference between EBITDA and adjusted EBIT amounts to about NOK20 million for 2014 in total. Adjusted EBIT ended up some NOK725 million and that's up 10% from last year. The growth was mainly due to a stronger result for the branded consumer goods business. I'll come back to you with -- and revert to the details related to branded consumer goods and Orkla investments later. Other income and expenses amounted to a negative NOK117 million, largely as a result of costs from the restructuring activities within Orkla foods. Profit from associates totaled NOK283 million, mostly driven by good performance, both from Jotun and Sapa. The Group's net financial costs decreased in the quarter, mainly related to lower debts and lower interest rates. This resulted in a profit before tax of NOK795 million in the first quarter and that's up from NOK579 million in the same quarter last year. Earnings per share increased by 32% to over NOK0.62. Let's look at the adjusted EBIT bridge from Q1 2014 to Q1 2015. To keep it simple, 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 10% or NOK66 million in the quarter. Branded consumer goods had a growth of 11% or NOK74 million, supported by growth from all segments. Orkla confectionery and snacks and food ingredients saw especially strong growth rates. Orkla HQ costs have increased for the quarter. This increase is mainly related to a former management option program and other share-based incentive programs. These costs are directly linked to Orkla's share performance and fluctuate in line with the company's share price. This quarter's positive share price development has therefore led to higher costs. And it's important to note that the underlying cost base for HQ costs has in fact reduced. In Q1 2015 branded consumer goods had an increase of 6.7% in revenues year-on-year. This increase is due to an organic growth of 4.3% and positive currency translation effects of 2.1%. The organic growth was supported by an earlier Easter this year which will have an opposite negative effect in Q2. Timing effects from campaigns in Orkla foods had a negative effect on operating revenues in the quarter. This was expected and was communicated in the fourth quarter. Combined effects from Easter and timing of campaigns accounts for approximately half of the organic growth in the quarter. Despite effects from Easter and timing of campaigns, all business areas in branded consumer goods delivered organic growth. The contribution from currency translation effects results from a weaker Norwegian krone. However, the weakness in the Norwegian currency slipping back against the euro and U.S. dollar, we have experienced significant rise in the purchasing costs for Norwegian companies. Overall, strong top line revenues and focused cost reduction measures have mitigated negative currency effects. As Peter mentioned earlier, this is the fourth consecutive quarter with organic growth. I'll now run you through the details for the business areas in branded consumer goods. In Orkla foods we saw a first quarter increase in revenues to NOK3.045 billion and that's an organic growth of 4.1% and an increase in EBIT of 4% to NOK322 million. The EBIT margin was on par with last year and ended up 10.6%. The main drivers for development of broad-based sales growth and positive effects from cost improvements. The sales increase was affected by early timing of Easter in Scandinavia. In foods Sweden and foods Denmark new launches and Tropicana contributed positively. There was continued growth amongst the Fenno-Baltic and the international companies. The EBIT margin received an uplift from cost improvements, however it was partly countered by negative currency effects. In our communication in the fourth quarter, the timing of campaigns had negative effects on foods in Q1. Orkla confectionary and snacks delivered strong organic growth of 4.2% in the quarter. The quarter was positively affected by the timing of Easter in all Nordic countries. The improvement was primarily driven by Norway and Denmark, with continued strong growth from the previous quarter last year. EBIT ended at NOK159 million and the EBIT growth was broad-based. In addition to sales growth in Norway and Denmark, reduced fixed costs from improvement programs that was initiated last year contributed to profit growth and improved EBIT margin. The acquisition of NP Foods was completed in Q1 and will be included in the figures as from Q2. Revenues in Orkla home and personal in the first quarter ended at NOK1.3 billion, an organic growth of 1.4%. The growth was the result of good sales development in four out of five business units, especially Lilleborg. A strong launch program in Norway and continued growth in the international business drove the increase in Lilleborg. Orkla house care showed broad-based sales growth, while growth in Pierre Robert Group was due to successful campaigns in Norway. Orkla health had a weak start to the year and that's partly due to the strategic choice to close down the production site at Denomega Leknes. EBIT in the first quarter ended at NOK230 million, at the same level as 2014. A weaker EBIT margin was caused by significantly higher interest costs due to a weakened Norwegian krone, as well as marketing investments to support a strong launch program in Lilleborg. It is expected that the negative currency effects will be partly compensated by price increases during the rest of the year. Orkla food ingredients continued the positive development seen over the last quarters, with strong top and bottom line growth. The organic sales growth was 7.9% in the quarter. Easter effects contributed positively and food ingredients had a broad-based growth, both from new and existing customers. The EBIT margin increased by approximately 30% to 3.5% in the quarter and supported by strong top line growth and effects from improvement projects. EBIT ended at NOK58 million and that's an increase of almost 50% from Q1 2014. Let's look closer at Orkla investments. I'll concentrate on Sapa and Jotun and our hydropower business and in addition, we have a 31% shareholding in Granges and our remaining share portfolio and that represents a combined market value of roughly NOK2.2 billion. Orkla Investments also manages a real estate portfolio with a book value of approximately NOK1.9 billion. Looking at Sapa, Sapa experienced increased demands for excluded products in North America compared to the same quarter last year, driven by strong [indiscernible] demands and increased building and construction activity. In Europe, demand was stable year-on-year. Underlying EBIT for Sapa more than doubled from the first quarter last year. The improvement was mainly due to strong North American demand, the synergy program and positive currency effects. Sapa's NOK1 billion synergy program continues to be ahead of plan, with limited restructuring charges for this quarter. Let me also remind you that Sapa has announced an investor call to be held on May 18 at three o'clock. Jotun only reports financial results on a four monthly basis and a result of that is we cannot present official figures for Jotun for the first quarter, but this slide illustrates the development in 2014. Jotun had strong performance at the end of 2014 and this positive trend has continued into 2015. Jotun reported all time high sales and operating profit for the first quarter of 2015, with good performance in all four segments in addition to positive currency translation effects. Sale of the leading [indiscernible] have improved compared to the same period last year, following growth in the new building market and high maintenance activity. Decorative sales have increased in Scandinavia, the Middle East and Asia. EBIT in hydropower was slightly lower than last year, mainly explained to lower production volumes and lower power prices. As of the end of the first quarter, estimated [indiscernible] are significantly above normal levels. Now let's move onto the capital structure of Orkla. Starting with changes in net debts, net debts as of the fourth quarter was NOK5.7 billion. During Q1 Orkla followed through on the net expansion investments of NOK0.8 billion related to several acquisitions in the branded consumer goods area. Cash flow from operations ended at NOK0.3 billion at the end of Q1 and net debt for Orkla was NOK6.2 billion. This slide highlights Orkla's strong balance sheet and financial flexibility. Orkla's net interest bearing debt had an average maturity of 3.9 years. As I said earlier, the Group's net interest paying debt was NOK6.2 billion by the end of the quarter, with a net gearing of 0.19. Orkla [indiscernible] and credit lines, but will cover known capital expenditures for 2015. Finally I would like to remind that Orkla will arrange an investor day at the London Stock Exchange on Friday, September 11. You're welcome to this event and a formal invitation will be sent out in due time. So, let me hand the floor back to Peter.

[Peter Ruzicka:]

Thank you, Jens. Now I think that our first quarter results show that we continue deliver on our strategy and on our plans. I see results from an increased focus on operations throughout the organization. The adjusted EBIT for brand consumer goods is improving, but I think more importantly, the improvement is due to healthy development in the underlying operations. Q1 2015 is the fourth consecutive quarter with organic top line growth and in Q1 this is broad-based and it is volume driven. We have managed to take out synergies from structural changes and hence improved our margin. All four business areas achieved positive growth in demanding markets with strong international competition. I am also very pleased to see that the preparations involving Jotun and Sapa have resulted in a solid start to the year. I still see a lot more potential for operational improvements and going forward we will remain focused on activities that drive organic growth and that improve margins. Thank you very much and then we will open up for Q&A.

[Operator:]

[Operator Instructions

[Martin Stenshall:]

Martin Stenshall, Danske. Great to see such a solid performance this quarter, so congratulations. First question from me is regarding Sapa joint venture. We can see that the underlying EBIT has a strong jump year-over- year to NOK392 but Orkla's share of the net profit is only NOK45 million. Could you please bring us through the bridge where you end at NOK45 million, because it seems like there could be substantial amounts going from the underlying EBIT to Orkla's net share of only NOK45 million?

[Jens Bjorn Staff:]

I can be clear, briefly explain and then it was [indiscernible] restructuring activities in connection to the synergy program this quarter. However on the -- below the suggested EBIT, Sapa books market-to-market changes in commodity and [indiscernible] so that fluctuates from month to month. Then most of that was kind of unrealized market-to-market changes. So that's the main explanation. So synergy restructuring charges was really [indiscernible] this quarter. It was around NOK44 million.

[Martin Stenshall:]

Okay, thank you and then back to branded consumer goods, you report that you have seen a slight push back on the market shares in Q1. Could you please comment on which segments or categories we're talking about there?

[Peter Ruzicka:]

I think in general we see a slight decline, however we see an improvement compared to the previous quarters. We cannot reveal any details on the category segments, but I think the most important is actually that we see an improvement from earlier but we're still not happy with the overall performance.

[Martin Stenshall:]

Okay and then back to the overall question on M&A, there's been a lot of activity over the past 12 months, Russia and NP Foods [indiscernible] and so on. Could you please share -- give your comments on your view forward? I know it's difficult but in terms of maybe new segments, consistent segments? And of course, my main question relates to India. Are you still focusing on staying in India?

[Peter Ruzicka:]

We cannot comment of course on any specific M&A plans that we have but of course we're looking for healthy, well-positioned companies that fit well into our current portfolio in the markets where we operate and where we can devise synergies and of course where we can buy or acquire companies at reasonable prices. When it comes to India, the development area is really -- is very, very strong and it continues and we have no plans to exit India. We have plans to continue there and continue the strong development.

[Martin Stenshall:]

And then last question from me regarding PepsiCo, you're extending the deal with PepsiCo and you mentioned a number [indiscernible] about the value in the market. Would you be able to comment on the value for you in terms of revenue and EBIT on this deal with PepsiCo?

[Jens Bjorn Staff:]

I think deal will be [indiscernible] into our operations and part of the growth in foods for this quarter was due to this Tropicana sales. When it comes to specifics on the margins, we don't really comment on that but you know, it's slightly lower than the average of the foods portfolio.

[Preben Rasch-Olsen:]

Preben Rasch-Olsen, Carnegie. Two questions and the first one a follow up on the PepsiCo question. I'm a bit curious to understand how you're thinking about bringing Lays potato chips into KiMs' market, both from your side and also from PepsiCo's side. What is sort of the benefit and why are you doing such a stunt?

[Peter Ruzicka:]

First of all I think both parties are of course aware that we're in a way competitors, but we also fill different segments in that category. [indiscernible] is challenging due to high import duty on potatoes, but both parties are aware and we're competing side by side also today before the agreement. So we don't see any problem with that actually.

[Preben Rasch-Olsen:]

And lastly, there has been a lot of changes on the customer structure in Norway especially. Have you had any impact so far in anything that you expect going forward, going from four to three retailers?

[Peter Ruzicka:]

I would think that the customer, on the customer side, it will be probably more challenging going forward. On the other hand, I think also as a supplier, I think we like to have of course as many customers as possible, but also strong customers that are profitable and I think this makes it possible to have three strong profitable customers in the niche markets and that is probably better than having two strong and two quite weak.

[Unidentified Company Representative:]

We have a question from Haakon Aschehoug from DNB.

[Unidentified Analyst:]

You mention that AquaDerma drove growth at the home and personal, but can you please be a little bit more specific in terms of how this new product range has been received by the market?

[Peter Ruzicka:]

Well the listing for AquaDerma has been very good. The sales so far have been very good, but we hesitate a little bit to reveal any figures because we know that the real proof comes when customers come back to repurchase the products again. So we will reveal more details on AquaDerma in Q2 or Q3, but we're very happy with the start.

[Peter Ruzicka:]

No more questions? Okay, thank you all for coming and I hope that you will find this in the grocery store for the weekend. It's really great. Thank you very much for coming.