Orkla ASA
Q4 2014 Earnings Call Transcript

Published: 7 Feb 2015

[Executives:]

Peter Ruzicka - President and CEO Jens Bjorn Staff - CFO

[Analysts:]

Preben Rasch - Olsen Carnegie Kolbjorn Giskeodegard - Nordea

[Peter Ruzicka:]

Good morning everyone and welcome to Orkla’s Fourth Quarter Results Presentation. Overall, I am satisfied with the financial performance in Q4. Group EBITA improved by 6% to over 1 billion compared to Q4 2013. The improvement was mainly driven by positive development in the branded consumer goods area. The improvement in branded consumer goods was broad based and I am pleased to report positive organic growth all business areas. The BCG margin improvement was driven by both top line development and cost savings achieved through recently implemented restructuring projects. In addition to improving operation Orkla continue to deliver on our strategy. We have now acquisition of Cederroth in Sweden in January. Furthermore, we completed the IPO of Gränges and the sale of Orkla Brands Russia. We will come back to this issue. Divestment of Orkla Brands Russia including the real estate in Yekaterinburg was completed on January 19th. Proceeds to Orkla totaled NOK373 million. Full year 2014 EBITDA for the Russian business was minus 127 million. Ongoing sales process for the retail stays in St. Petersburg is has started so that will be sold short term. We are still awaiting approval from competition sources for the acquisition of NP Foods in the Baltics and we expect this to come during Q1 2015. Following the sale of Orkla Brands Russia, we have reduced the complexity in the Group structure to four instead of five business units. The remaining businesses in Orkla International have been consolidated into Orkla Foods that is MTR in India, Felix Austria and Vitana in Czech Republic, so that is all part of the Orkla Foods area. Chaka is under Orkla Confectionery & Snacks. The Board has proposed a dividend of NOK250 for year per share. The EBITDA margin in brand consumer goods improved by 0.7 percentage points, development was driven by both top line growth and positive effects of several structuring and integration projects. The improvement in Orkla Foods was driven both by positive organic growth and cost improvements. The positive margin development of Orkla Foods is partly affected by timing effects we will come back to those effects. Confectionery & Snacks continued the positive development from Q3 and hence the second half of the year offsets the poor performance during the first six months. Orkla Food Ingredients delivered all time high EBITDA in Q4. For the third consecutive quarter in role I am pleased to say that organic growth has been positive for brand consumer goods. In Q4 organic growth was 1.8% and all four business areas contributed positively. Still I would like to emphasize that it is somewhat affected by timing effects and some normal effects we will come back to that but even adjusted for that there is positive development in all business areas. In my first quarterly presentation May last year which was Q1 2014, I emphasized that there would be no change in the strategy and that my focus would be electivity improving operations and most importantly drive organic growth. During 2014, we have initiated several actions which are now starting to see positive results from. We have reported positive organic growth over the last three quarters. The categories of Orkla is present in the region of Swedish retail have increased over the last 12 months whereas we see a slight decrease in the categories. Orkla’s market share varies significantly depending on each category but in total the market shares weakened slightly in Q4. We still have a lot of way to go and we will continue to focus on activities driving organic growth and improving margins. On the following cases I will show you some of the innovations and new launches that have contributed to the positive development this last year. Frozen pizza is one of Orkla’s main categories. Grandiosa Helmax was launches in Norway in Q1, a pizza with cheese baked into its base it was the biggest concept launch in the regional retail in 2014 according to AC Nielsen. Pierre Robert's Sports Collection was re-launched in Q1 2014 with improved fit and moisture transport as well as the fresh and new design. The re-launch was a success and Pierre Robert's Sports bra is today Norway’s most sold training top. For the second year in a row, Pauluns in Sweden won first prize in a poll conducted by the Swedish health magazine MåBra which is a feel good magazine. The prize for the most healthy ready meal was awarded to Pauluns Superlunch Soups. Polly chocolate tablet launched in Q1 and the Polly bar launched in Q3 are good examples of how we utilize our brands successfully across the categories by launching chocolates under a traditional strong snack brands in Norway. One of the strong trends we see in the food categories is focused on health that means reduction of salt separated fat and palm oil and also sustainable sourcing. During 2014, Orkla has managed to reduce both salt content and palm oil from lot of our products and of course this work will continue going forward. These were some examples on top line initiatives that we also have the strong focus on model improvements through the cost saving programs. The dilution effect of the acquisition we’ve seen in the EBITDA margin for branded consumer goods in 2013 and rolling 12 months Q1 2014 as you see here on the chart. Compared to 2013 the full year EBITDA margin improves by 0.2 percentage points in 2014. Orkla has a strong track record delivering continues improvement and cost synergies. Bigger project such as the restructuring Orkla Confectionery & Snacks and integration of Rieber contribute considerably but also some of several smaller continuous improvements also make a significant impact. As mentioned earlier we are in the process of optimizing our production structure, this work takes time but as I will show you on the next slide we are progressing steadily. We were continuously to optimize footprint as well as redesign projects within the current factors. During 2014, seven plans were closed or in the process of closer. Additionally, two plants are undergoing a pre-study to be finalized during Q1 2015 and I can promise you that more will come. We continue to deliver on strategy to become our focused branded consumer goods company. The acquisition of Cederroth, which I will elaborate shortly is a good example of this. During 2014, we have seen the financial resources to the sale of non-core assets as promised earlier. Also we have branded consumer goods businesses to strengthen our branded consumer goods platform in the Nordics and in the Baltics. On January 15th, it was announced that Orkla Home & Personal has entered into an agreement to acquire 100% of the shares in the Swedish consumer goods company Cederroth. The acquisition will strengthen our position as one of the leading Nordics empire of personal care health and household cleaning products. In addition Orkla Home & Personal will get access in an exciting category wound care as well as strengthen the Nordic pharmacy position. Cederroth as a product portfolio well established brand such as Asan, Bliw, Salvequick, LongoVital, Allevo and Grumme. Financial statements for Cederroth for 2014 have not yet been published so showing here on this slide I show you the 2013 figures. The reported turnover in 2013 was approximately SEK2 billion. Due to exit from a distribution contract in the beginning of 2014 and some technical accounting effects to be consolidated in Orkla’s books will be approximately SEK1.7 billion. However the effect of these adjustments in total will have a very limited effect on EBITDA. Significant cost on top line synergies have been identified on Orkla’s Investor Day in September. Synergies related to the acquisition will be described in further detail. The agreement is subject to approval from relevant competition authorities and we expect the transaction to be completed in Q3 2015. These are the financial targets that we communicated during our Investor Day in September 2013 and also we did financial targets for Orkla Food ingredients. We’ve maintained our targets for organic growth from 2016 despite challenging market conditions in Europe. We are starting to see some improvement in organic growth and this is our most important target and our most important goal to deliver on. The EBITDA margin target also remains unchanged but the timeframe for achieving the margin targets for Orkla Foods and Orkla Confectionery & Snacks will be slightly adjusted. Also the reorganization of Orkla International into Orkla Foods and into Orkla Confectionery & Snacks and the acquisitions we have done will have diluting effect on the EBITDA margins. We will provide more details about the financial targets on our Investor Day in September this year. Before handling over CFO Jens Bjorn Staff, who will take you through the financials I would like to confirm that my main operation focus will be to continue activities that drive organic growth and improve margins. For 2015, we have already implemented several new initiatives in order to reach our targets. For example, from January this year Orkla Health will be responsible for or Lilleborg’s product portfolio in the pharmacy channel. We believe this is a win-win situation, where we coordinate our efforts and expertise and at the same time offer the customer a more specialized and efficient partner for growth. Furthermore, the decision has made to start a construction process for the procurement function we did in all of Orkla. The aim is to create a more centralized organization to further leverage on Orkla's size. A final example is the decision to establish a centralized IT function to ensure more coherent strategic approach to IT investments in the group. So with these examples I give the floor to CFO Jens Bjorn Staff who will present Orkla's financial performance for Q4, 2014.

[Jens Bjorn Staff:]

Thank you, Peter. I will now guide you through the details of the financial performance for Q4. Let's first have a look at group P&L. The group had operating revenues of 8.1 billion in the first quarter of 2014 roughly in line with the same quarter in 2013. First let me remind you that after the sale of Orkla brand Russia this is now stated in the line for discontinued operations both for this year and for 2013. EBITDA ended at 1.015 billion and that's up 6% from last year. A stronger result in the branded consumer goods business was the main driver behind this increase. Total EBITDA for branded consumer goods was 1.030 billion I will revert to the details on the branded consumer goods Orkla Investments and HQ in a moment. Other income and expenses amounted to a negative minus 102 million mainly related to costs from restructuring activities within branded consumer goods. Profits from associates totaled a negative minus 352 million. And impairment related Soppa's Chinese operation is the main reason for the negative results. The group's net financial costs increased in the quarter compared to the same quarter in 2013. This is mainly related to through the recognition in the P&L or with negative fair value changes on interest rate swaps. These swaps were previously held as a negative hedging reserve in equity. As I mentioned earlier the figures from the divested company Orkla brand Russia is presented on the discontinued operations and totaled a negative minus 387 million in the fourth quarter. The three main contributing factors to this negative result is our loss on sale its historical currency translation effect and the negative Q4 2014 result, so three factors influencing it. The full year EBITDA for Orkla brand Russia was negative minus 177 million in 2014. The proceeds from the sale of Orkla brand Russia was positive 373 million. And the sales process related to the real-estate in Saint Petersburg is ongoing. The earnings per share for 2014 more than doubled compared to 2013 from NOK0.7 to NOK1.6. Let's look at the EBITDA bridge from Q4 2013 to the Q4 2014. The group's EBITDA growth was 6% or 57 million. Branded consumer goods had an EBITDA of 7% or 69 million in the fourth quarter supported by growth from most segments. As commented in earlier quarters, Home & Personal and Confectionary & Snacks was negatively impacted by fewer sales days in the fourth quarter and adjusted for this. All business areas in the branded consumer goods delivered growth. The EBITDA for Orkla Investments was negatively impacted by one-off items while Headquarter cost was below last year and that was largely due to the reduce of external consultants. Branded consumer goods had an increase of 1.5% in operating revenues in Q4 2014 compared to the same quarter in 2013. This increase was driven by an organic growth of 1.8% and positive currency translation effect of 1.8%. As mentioned timing of sales days had a negative effect in the quarter and there was a negative effect from divestments. The organic growth of 1.8% was as Peter earlier mentioned somewhat boosted by positive one-off effects and timing of a larger campaign in Orkla Foods. This campaign effect will have a corresponding negative impact in the first quarter of 2015 and the top-line effect is approximately NOK30 million to NOK40 million. Despite these adjustments, branded consumer goods showed positive organic growth in the quarter, so that’s growth for the third quarter in a row. The contribution from currency translation effect is a result of a weaker Norwegian krone and this will more and most likely have an even stronger effect going forward. On the opposite side the weakened Norwegian and Swedish currency against especially the euro and the U.S. dollar will result in higher purchase prices for our Norwegian and Swedish companies. This has had effect throughout 2014 and will have an increased effect going into 2015 with the current currency exchange rates. Let me now walk you through different parts of the BCG area. In Orkla Foods we saw fourth quarter increase in revenues to NOK3.37 billion it’s an organic growth of 2.2% and then increase in EBITDA of 7.8% to 470 million. The EBITDA margin increased by 0.8 percentage points to 13.9% and the main driver for this development were sales improvements in the Nordic companies continued positive development in the Baltics and international companies and the realized cost synergies from the Rieber acquisition. And again what’s important to note is the part of the uplift in sales development in the fourth quarter was a result of sales linked to campaigns in the beginning of 2015 in Norway. So this is back in December we’ll have adverse effect in Q1 2015. The inclusion of the international companies into Orkla Foods as Peter mentioned has somewhat diluted the EBITDA margin and the contribution to small positive top line effects. Orkla Confectionery & Snacks continued the positive trend seen in Q3 and delivered improved performance in Q4. It’s important to note that reported revenue and EBITDA figures in Q4 were negative affected by the timing of sales days. The underlying development showed organic growth of 4.8% which was primarily driven by strong growth in Norway and Denmark. All the Nordic companies showed EBITDA growth in the quarter. In addition to sales growth in Norway and Denmark significant cost improvement programs have contributed. The Russian nuts company Chaka was included in this business area from Q4 and have somewhat diluted the margin. Organic revenues in Orkla Home & Personal in the fourth quarter ended slightly above 2013. As early communicated the growth was negatively affected by few sales days for several of the business units and phasing or campaign pressure between the third and the fourth quarter. Orkla Health showed good growth in the quarter. This was mainly driven by positive development in Denmark and Sweden and the export business. We reported EBITDA in the fourth quarter was 191 million and the EBITDA margin was on par with last year. The profitability in Home & Personal was negatively affected by weakened Norwegian krone against central purchasing currencies and in addition unfavorable product and market mix. For the last part of the Branded Consumer Goods area Orkla Food Ingredients posted revenue of 1.8 billion in the quarter along with strong EBITDA of 124 million. The Q4 was at all-time record high and this is the ninth consecutive quarter with EBITDA improvement year-on-year from this business area. The revenue growth was almost 6% while organic revenue growth was 2.5%. And this growth was driven by increased volume and the more favorable product mix. Compared to Q4 last year EBITDA margin improved by 1.2 percentage points to 6.8% this EBITDA improvement was driven by good performance in most of the segments combined with the strong performance from Dragsbaek and the Credin Group. I’ll now comment on the results from our businesses outside the branded consumer goods and I'll concentrate on Sapa, Jotun and the hydro power business. In addition to these businesses we have 31% shareholding in Granges and our remaining share portfolio in combination represents the market value of approximately NOK2 billion. Orkla investments also manages real estate portfolio with EBIT value of approximately 1.9 billion. In Q4 Sapa experienced continued strong demand for exclusive products with the 9% volume growth in North America. Extrusion demand in Europe was flat, while building system still suffers from weak market. Overall volume was up 2% and operating revenues increased by 17% in the quarter. Turnover was positively impacted by currency translation effects and increase the metal costs. In terms of underlying EBIT Q4 is the seasonally weaker quarter for Sapa and underlying EBIT improved by approximately NOK300 million and this was mainly driven by positive effect from the restructuring program that is ongoing and the strong North American market and further, a global, a stronger global automotive market supported the precision achieving results. As you recall a key element to the joint venture was to execute on the restructuring program targeting annual synergies of around NOK1 billion by the end of 2016. And this program is ahead of plan and approximately NOK500 million is reflected in the full year underlying results. In the quarter Sapa booked an impairment of fixed assets in China of approximately slightly below NOK500 million and that’s the main explanation for that profit in the quarter. Jotun has not yet released full year figures but in general they have the strong finish to the year with revenue growth across all four segments. It was improved sales in the marine coatings and driven by gradual improvement of the new building markets and maintenance sales. It was growth in the decorative and protective which was supported by higher activity in key markets. After eight months EBIT was still somewhat defined last year but following strong sales development and also improved cost position Jotun pick up in profitability towards the end of the year. Jotun continues to invest in new capacity and maintains its organic growth strategy. Now looking at hydropower, the profit contribution from hydropower was somewhat lower than last year and that’s mainly explained by extraordinary income in the Q4 last year and due to lower spot prices. For the full year hydropower is in line with last year somewhat higher than normal volume has been offset by long spot prices. And as we leave the 2014 the [indiscernible] levels Saudefaldene are at the 69%, which is at normal levels. The last part of my presentation is about the capital structure and starting with net debt for the year. Net debt for the fourth quarter was 5.7 billion. During 2014 Orkla has received 2.7 billion from sale of assets outside the core area where the IPO Granges was the largest transaction. Cash flow from operations was 1.3 billion in the fourth quarter and 2.8 billion for the full year. Working capital in the branded consumer goods area was somewhat higher compared to 2013 and this is largely related to compensation from Unilever agreement which will be paid in 2015. Net sales from shares and financial assets contributed 0.4 billion while paid dividend in 2014 was 2.5 billion. This slide highlights Orkla's strong balance sheet and financial flexibility. Orkla's net interest bearing debt had an average interest cost of 2% in the fourth quarter 2014 in average maturity of 3.7 years and as mentioned the group’s net interest paying debt was 5.7 billion as of the end of quarter within that gearing 0.18. So in summary Orkla’s financial position is robust with cash returns and committed credit lines that we cover non-capital expenditures in 2015. Orkla has paid a steady dividend of NOK2.5 over the last years. The board proposes to keep the nominal ordinary dividend level at NOK3.50 per share for the financial year 2014. This slide shows the financial calendar for 2015. I would like to remind you that Soppa will be holding a company presentation Ultimo May, Orkla's Investor Day will be held in September. So let me hand the floor back to Peter.

[Peter Ruzicka:]

Okay. Thank you again. I would like to confirm that there is no change in our strategy. The future growth and value creation will come from a focused branded consumer goods in the Nordics and in the Baltics. However, Orkla Investment is a large share of our value today and we will focus on getting the fair value which is more important than speed. We will deliver on started and the ongoing structural processes to realize synergies and increase efficiency and this is not finished and it will take time but we're progressing as I showed you earlier. The fourth quarter results show that we continue to deliver on our strategy and our plans. I see results from an increased focus and operations, still we have a large operational job ahead of us but we're progressing and this is developing in the right direction. Going forward we will continue to seek opportunities to strength our branded consumer goods platform both through organic growth and through acquisition opportunities and the recently announced acquisition of Cederroth is an good example of this. Although I take great pride in Orkla's broad presence of strong positions in the Nordic markets I am also glad to see that we still have some white spots as you can see on the chart. This means that there are several opportunities for growth ahead in our home markets both organic and through acquisitions. In general I believe we have lots of exciting innovations planned for 2015. We're continuously working to improve our products from a consumer and health and sustainability perspective. We have more cross category and cross market initiatives planned and we will continue to establish good customer relationships. This is hard work but if we manage this and while at the same time focusing on delivering on ongoing structural processes to realize synergies and increase efficiency in our operations I believe we're well positioned for 2015. In more short-term, I look forward to the coming wave of product launches for Q1 which you will find in the stores a week or two from now. On the next slide I will show you one of our biggest launches for 2015 this is a great example of taking a bold step into new category. It's success of course remains to be proven but I am very enthusiastic about it and it has been well received by our customers in the retail trade. AquaDerma is a new fabric facial skin care series with high quality products that will be launched by mid-February. The product series Lilleborg’s largest innovation since Define hair care series was launched in 2002 and the products are to be found in grocery stores, in pharmacies as well as selected chains within specialized trade. Supported by local consumer insight, AquaDerma will compete against global cosmetic actors in one of the most competitive categories within fast moving consumer goods. The launch is in line with Orkla's strategy of offering local brands which are easy to choose and which our customers can be proud of displaying in their store shelves. So then we have a Q&A session.

[A -Peter Ruzicka:]

Okay, any questions?

[Preben Rasch-Olsen:]

Preben Rasch-Olsen, Carnegie. Two questions if I may. First what would be the organic growth in Orkla Foods if you exclude international business that came in this quarter or last quarter? And the other one on the 2016 targets, it seems like you are saying margins will be harder to reach. I am just wondering what are the reasons are you giving away on the margins to boost the top-line growth or is it just the things that taking a bit longer?

[Peter Ruzicka:]

Will you take the first question and then I can take the second one.

[Jens Bjorn Staff:]

So on Foods I think what's important is that adjusted for one-off items under this call it the restatement of international business it's positive growth in Foods so it's a good improvement. I think it’s somewhat 40 basis points of impact in the fourth quarter of this reorganization of the international business into Foods and this is restated both for 2014 and ’13.

[Peter Ruzicka:]

Regarding the margin targets we are not saying that we’ll not achieve them we’re saying that for the two business areas namely Foods and Confectionery and Snacks. We believe it will take some more time that what we announced on the capital markets day in 2013. That means that the structural changes footprints factory footprint and so on takes more time than anticipated 1.5 year ago. But the targets remain.

[Kolbjorn Giskeodegard:]

Kolbjorn Giskeodegard, representing Nordea Markets. Just a question on the growth on the Baltics. That's a very good area for you now, but do you see any impact in this region from the situation in Russia, any slowdown now into Q1 related to very strong ties between Russia and the Baltics in terms of trade and economic growth? Do you see any impact as we go?

[Peter Ruzicka:]

So far we don’t see any impact even we feared there would be an impact a couple of months ago but so far we don’t see any impact of that rather what we have seen is a flow of cash coming from Russia into the Baltics during this last months and which is probably also helping the Baltic economy. Any other questions?

[Unidentified Analyst:]

Just the question about Cederroth. My name is Segus and I am just a stock owner. But this company was not traded on stock market it was perhaps its ownership. Who was the owner of this company? Can you tell us?

[Peter Ruzicka:]

It was private equity owned company and I am not able to remember the name.

[Unidentified Analyst:]

Maybe specific question on next it seems it was both in first in Q1 2015 we can take it on the next session. Okay, thank you.

[Peter Ruzicka:]

Okay, no more questions. Couple of question from the Internet that’s from Markus Iwar Goldman Sachs. At the last Investor Day in September 2013 you stated that there was some room to improve working capital but those improvements would come a little later as other changes would take priority. Should we expect working capital efficiency to start to come through in 2015?

[Jens Bjorn Staff:]

I can briefly comment on that we’ve now this autumn project looking at what’s the improvement possibilities on the working capital area and there is certainly another certain room to our improvement there. So we will start implementing these actions going into 2015.

[Unidentified Company Representative:]

One more question from Markus Iwar. Will you look at take advantage of the attractively low cost of financing anyway? If so would you consider buybacks or is it more likely that you look for further acquisitions?

[Peter Ruzicka:]

As we have stated that as we sell our non-core assets and get proceeds from the divestments there our main priority is of course to fund attractive brand consumer goods company that fits into our current portfolio and where we can realize the synergies in the event that we don’t find such opportunities we will consider an extraordinary dividend for share buyback but most likely extraordinary dividend.

[Unidentified Company Representative:]

One more question from Goldman Sachs in 2014 you mentioned that Orkla will look to change its incentive programs to much more focus on growth. Has this change been implemented?

[Peter Ruzicka:]

That change has been implemented valid from 2014 organic growth has been a bonus parameter for the management team and also levels below.

[Unidentified Company Representative:]

No more questions. Just hope that you will find our new AquaDerma products nice in the stores in the couple of weeks’ time. So I expect to see all with nice skin next time we meet. Thank you.