Orkla ASA
Q3 2014 Earnings Call Transcript

Published: 2 Nov 2014

[Executives:]

Peter Ruzicka – President and CEO Jens Bjorn Staff – EVP and CFO

[Analysts:]

Petter Nystrom – ABG

[Peter Ruzicka:]

Okay. Good morning everybody and welcome to Orkla’s Third Quarter Results Presentation. Overall I am satisfied with the financial performance in Q3. We have favorable profit development in the quarter, Group EBITA improved by 5% to NOK860 million compared to Q3 last year. The improvement was mainly driven by improved operations in branded consumer goods. We had positive organic growth of 0.4% in BCG driven by good performance in Orkla Home & Personal, Orkla Confectionery & Snacks and Orkla Food Ingredients. Organic growth is still challenging in Orkla Foods and the result for this business area this quarter is somewhat disappointing, 0.3 percentage point improvement in EBITA margin, primarily driven by Orkla Confectionery & Snacks. In addition to improving operations, Orkla continues to deliver on this strategy in the third quarter. We had a successful IPO of Granges. Orkla Confectionery & Snacks acquired NP Foods, which will significantly strengthen its size in the Baltic markets. We are still waiting for approval from the competition authorities. Further, the sale of Delecta in Poland was completed, Orkla sold 100% of the shares for NOK199 million. This sales process of Orkla brand Russia is ongoing and we are in discussions with several interested parties. Orkla’s earnings per share in Q3 was NOK0.51, an improvement from NOK0.43 in Q3 2013. Our main challenge ahead is still organic growth as was announced in Q1 and Q2, a number of improvement projects are underway to improve operations and to increase profitability in the future. As communicated earlier, it takes time before the improvements from the transformation materialized but we see some positive signs this quarter both on top-line and bottom-line. EBITDA margin in branded consumer goods improved by 0.3 percentage points, Orkla Confectionery & Snacks in Norway was the main driver for the improvement. Further EBITDA margin improvement in Orkla food ingredients was broad-based in almost all parts of the company. The development in Orkla Foods continues to be challenging. And as you know, we are still in the transition phase with foods emerging the EBIT operations, Food operations Norway and Orkla Foods Norway. I will comment on the development in both Confectionery & Snacks and Foods in further detail later. For the last two quarters, organic growth has been positive for branded consumer goods. In Q3, organic growth was 0.4% driven by three out of five business areas. Orkla Confectionery & Snacks delivered a strong quarter and within Orkla Home & Personal, especially Peer Group has showed very strong sales growth. Growth was driven by new and re-launched textile products and successful promotions. Orkla Food ingredients, continues to deliver strong organic growth across its companies. Orkla Foods with negative 3.4 top-line organic growth for the quarter is disappointing and we are as, you understand being lot of actions to improve that. My focus going forward will be to continue activities to improve organic growth and to improve margins. As mentioned, we had a solid quarter for Confectionery & Snacks and somewhat challenges in Foods. In Confectionery & Snacks, we have the top-line EBITDA margin improvement from several factors. We had strong development in Norway after very demanding integration between the companies both in Norway and Sweden. Improved field sales force performance after challenging restructuring process, and synergies gradually realized as found and as announced earlier. Positive development also driven by volume growth from strong innovations, for instance we had the Polly and Smorbukk Storplate chocolate tablets, launched and Polly Naturligvis, all three launched at the beginning of the year and with great success. Key activities to increase sales and improve margins going forward is continued strong innovation programs, and delivering on the cost initiatives already started. As mentioned, Orkla Foods has had challenges in the quarter, reduction in EBITDA margin was mainly driven by negative top-line due to fewer innovation promotions, some impact of currency and fixed cost increases. To improve growth on operations going forward, several activities are being implemented. We are looking into stronger innovations and promotion programs continued strong initiatives versus several restructure projects currently being analyzed, including a re-design project in R9, the Rieber & Son factory in Bergen; estimated savings of approximately NOK60 million per year. The integration process and synergy realization related to Rieber & Son is according to plan in all companies. In addition in Q3, the field sales forces in ultra-food survey have been merged together in one sales force. And that is also influencing the negative sales development in Q3. As previously communicated, we have started the process to optimize our production structure, starting at the start of the year, we have 97 factories. So far in 2014, five plants are closed during the process of closure, four plants are considered for closure and this will continue. The effects from our production structure of optimization will be the sum of many small, small things, some big factories, some small factories but some of a lot of small things. We also do a redesign project within the factories and continue efficiency programs within the factories that are not closed down. In the following, I will highlight some examples of the innovations that we have done during the quarter. One from each business area. First, in Norway Pierre Robert has launched a collection of soft seamless base layer for active youngsters. Pierre Robert sport collection was first launched in 2010 and has been a great success. The sports underwear, are colorful, functional and comfortable and available at prices all consumers can afford and you can buy them both in the retail store and in the – in our online store. With a new innovation in Q3, we have to win the battle of the future sports-stars by launching base layer for active children in the age 7-14 years. The second example is Abba Middagsklart from Orkla Foods Sweden that has to be in the success, that’s a fish sauce and it’s not the one on the picture. And that has been a success and it is not sold for Nordic companies under local brands, but with the same product. In the third quarter Abba has also launched a few, a new fish soup, Abba Fisk Soppa is a healthy and convenient meal with only natural ingredients. As mentioned earlier, the positive top-line development in Orkla Confectionery & Snacks is to a large extent driven by strong innovations. Polly Storplate, big chocolate tablet, was launched in Q1 and that’s an example of one of those successful innovations during this year. In Q3, a Polly bar filled with Polly peanuts and soft caramel was also launched. This is an example of how we need to utilize our strong brands across categories by launching a chocolate bar under the brand Polly which is more known for nuts. And by the way, I recommend you all to buy this and try it, it’s great. Our fourth example is from Orkla International, our food company in Czech Republic Vitana, launched several new innovations and re-launches in Q3. This is one example, it’s a new tasty chicken soup with noodles sold in the trade in Czech Republic. And last but not least, from Orkla Food Ingredients, launched in Q3 and ready-to-use fillings from Idun Mors Hjemmebakte, sold in retail stores. The fillings are ambient spread-able and bake stable and comes in three flavors, cinnamon, chocolate and apple. I will of course also recommend you to try this, for the baking. As mentioned, Orkla, we continue to deliver on the strategy that we announced. The IPO of Granges and the acquisition of NP Foods are two examples of this. Granges was well received by investor’s community, and success listed on, on Stockholm, October 10, despite very challenging markets. Granges has experienced strong operational improvement from Q1 2013 to Q2 2014, the EBITDA margin increased by 3 percentage points to 11%. The improved operational performance led to strong cash generation during the year of approximately SEK700 million during the period from Q1 ‘13 to Q2 ‘14. The offering price was set within initial range at SEK42.50 per share, and market capitalization on a 100% basis, it was approximately SEK3.2 billion. Our Orkla’s ownership after completion of (technical difficulty) per share and market capitalization was NOK3.2 billion approximately for on 100% basis. Orkla’s ownership after completion of the offering is depending on the Green Shoe (ph) utilization but it will be somewhere between 31% and 40%. The remaining Orkla stake is subject to a lock-up provision for 180 days post offering date. As mentioned, we also announced acquisition of NP in the Baltics and that will significantly strengthen our position in those markets. Total Orkla turnaround in the Baltics will increase by almost 65% to NOK1.4 billion – close to NOK1.4 billion after the acquisition. NP Foods is a leading Baltic confectionery and business player based in Riga, Latvia, annual turnover is approximately NOK600 million. It will particularly strengthen our position within chocolate and confectionery in addition to our positioning Kalev in Estonia. Laima is an iconic confectionery brand with 99% brand recognition in Latvia. Other key brands and product categories include Selga in biscuits, Staburadze, cakes, Gutta, juice and water, Pedro, convenience food. And as mentioned, acquisition is presently under consideration by the local competition authorities in the Baltic countries. Expected closing is Q1 2015. And with the acquisition of NP Foods, we will – Orkla continues to build on its successful strategy in the Baltic region. Today Orkla Foods, Confectionery & Snacks, Home & Personal and food ingredients are all companies present in the Baltic States. The figures presented show the strong development in top-line and margin, EBITDA margin, historically for Orkla companies located in the Baltic region. I will now give the floor to our CFO Jens Bjorn Staff to give you some more details on the financial in the quarter. Thank you.

[Jens Bjorn Staff:]

Thank you, Peter. Can you hear me? Good. I’ll now walk you through the numbers starting with BCG and then I’ll walk you through Orkla Investments and then finally I’ll comment on Orkla’s capital structure as of Q3. So, first, let’s have a look at the group level performance. The group’s operating revenues was NOK7.48 billion in the quarter, compared to Q3 last year, the development in operating revenues were stable. EBITDA increased by 5% and ended at NOK860 million. EBITDA for branded consumer goods was NOK903 million in the quarter, while EBITDA for hydropower, Orkla Financial Investment and HQ totaled a negative NOK42 million. I’ll revert to the EBITDA bridge shortly. Other income and expenses amounted to a negative NOK47 million, mainly related to restructuring costs within branded consumer goods. Profits from associates, was mainly related to Jotun and Sapa joint venture. And the net profit from Sapa joint venture was NOK54 million in the third quarter. The market value of financial assets was approximately NOK826 at the end of the quarter. Profits before tax improved by NOK240 million to NOK871 million while earnings per share improved from NOK0.43 in Q3 2013 to NOK0.51 in Q3 this year. At last Q3 report, Granges is classified as discontinued operations. The write-down of the book value in Granges resulted in a negative profit from discontinued operations in Q3. I’ll comment on this further in detail later on in the presentation. Let’s look at the EBITDA bridge Q-on-Q. Branded consumer goods had a 1% underlying EBITDA growth in the quarter. All business areas had improved EBITDA in Q3 except for Orkla Foods. In line with Peter’s comments, I’ll revert back to this in more detail later. Orkla Investments had a total EBITDA on par with last year, in total, a positive change of NOK41 million. This slide show the branded consumer goods had 1.2% increase in revenues Q-on-Q. This growth was mainly down to a positive currency translation effects. The organic growth was 0.4% largely driven by satisfactory top-line development in Orkla Food ingredients, Orkla Home & Personal and Orkla Confectionery & Snacks. And now, let’s look close at each business area. First, Orkla Foods, overall, Orkla Foods posted a third quarter sales of NOK2.6 which represented an underlying decline of 3.4%. The top-line is still challenging in Norway and Denmark. Domestic performance in Norway is still influenced by the integration of Rieber & Son and the focus on synergy realization. And this has adversely affected the top-line revenue performance. Sweden, Finland and the Baltics have delivered satisfactory growth through the quarter. Q3 EBITDA declined by 6% and EBITDA margin weakened by 0.4 percentage points. The main contributor to the weakened EBITDA was declined in top-line. This combines with the weakening of the Norwegian and Swedish Krona, led to increased raw material costs. In addition, production costs increased in Sweden. The realized cost synergies from integration of EBIT and from the merger of Abba and Procordia last year still contributes positively and will continue to do so both in Q4 and in 2015. In Q3, realized synergies was NOK60 million to NOK70 million and compared to Q3 2013, this was an increase of NOK40 million to NOK50 million. Orkla Confectionery & Snacks has achieved growth this quarter following a challenging restructuring process of this business unit over the last year and half. We are now able to solve top-line revenue growth and improve EBITDA margin in Q3. This positive development was primarily driven by the Norwegian market with strong sales growth in all main categories. In addition, the Baltics, Kalev in Estonia and Latfood in Latvia delivered strong sales growth. KiMs in Denmark also improved its EBITDA in the quarter. The Swedish companies still experiences top-line and EBITDA decline mainly due to a highly competitive market environment and internal organizational changes. As you know, we are merged OLW and Goteborgs Kex into one new strong Swedish entity and in parallel we have merged Nidar, KiMs and Saetre in Norway to create a strong and unified single unit. The process in Sweden has proven to be more challenging and it’s taking longer than anticipated. Organizational changes was implemented in Sweden during the quarter, a new CEO Henrik Julin, was appointed and started with us July 1. Further a new Factory Director at the biscuits (technical difficulty). The walkthrough of Confectionery & Snacks, I think it’s worth mentioning that it’s important to note that part of the reported revenue and EBITDA figures in Q3 and year-to-date were positively affected by timing of selling days and that this effect will have the opposite effect in Q4, with revenue effect of approximately NOK40 million. And now let’s look at Orkla Home & Personal. The business area has delivered top-line growth in four out of the five units in the third quarter. Axellus, which was renamed Orkla Health in October to more accurately reflect the profile and identity of this business unit, the quarter somewhat behind Q3 last year, mainly due to weak development in Finland and Poland. Lilleborg experienced sales growth both internationally and in Norway. It’s important to note that for several of this, business units the year-to-date figures are positively affected by extra selling days in Q1 and also have the facing of campaign pressure which has given an additional boost for the Q3 sales. Also those effects will have an opposite effect on revenues in Q4 of approximately NOK50 million. Reported EBITDA was NOK257 million and all business units except Axellus showed growth in the third quarter. The EBITDA margin was somewhat reduced partly due to negative currency effects. Moving on to Orkla International, in Q3, the business area, reported revenues were NOK661 million, a decrease of 10% compared to Q3 last year and that is mainly as results of the performance in Orkla brands Russia. Organic revenue growth ended at negative 3.4%. MTR had strong revenue growth driven by growth in core categories, instant mixes and spice mixes and the organic growth in MTR totaled 19%. EBITDA for Orkla International was flat compared to Q3 2013, and amounted to negative NOK5 million. EBITDA improved for both Vitana and Felix Austria. Despite the negative top-line development, EBITDA for Orkla brands Russia was flat in the quarter, driven by restructuring programs and other cost improvements. However, the EBITDA level for Orkla brands in Russia is still weak. Finally on to Orkla Food ingredients. Orkla Food ingredients posted revenue of NOK1.6 billion in the quarter and revenue growth was almost 7% while organic revenue growth was strong at 4%. Revenue growth was driven by increased volume and more favorable product mix and compared to Q3 last year, EBITDA improved by 21% to NOK93 million, EBITDA margin improved by 0.6 percentage points to 5.7%. And the rise in EBITDA was broad-based and mainly driven by a sound blend of price management effect, a volume mix increase and internal improvement projects that also contributed to this growth. I’ll now go through Orkla Investments. Let’s first look at Granges, in Q3 as Peter mentioned Granges is presented as net figure on one single line as this continued operations in the profit and loss. The historical P&L figures are restated in the balance sheet. Granges is presented in two lines, on two lines, asset and liabilities. Cash flow has been restated for 2014 and not for historical figures. The result from Granges in Q3 was a minus NOK119 million, NOK37 million positive year-to-date. The loss in Q3 includes a write-down of net assets, and Orkla’s carrying value was lower than the stock value that’s the reason. There will be no material effect in Q4 related to Granges, as discontinued operations. Orkla sells 60% to 69% of Granges and the exact percentage will be known at 11 November. The remaining 31% to 40% will be reported as an associate and accounted for in accordance with equity method from Q4 2014. Opening carrying value will be stock market capitalization as of the 10 October 2014. The cash flow effect from Granges IPO in Q4 will equal net proceeds from the sale of shares and net interest bearing debt of NOK392 million. And this is different from the SEK939 million in net debt that Granges is reporting and this is due to differences in definition of interesting bearing debts. Moving ahead to the Sapa joint venture. Sapa experienced increased demand compared to the same period last year, demand for extruded products in North America increased by 7% compared to the same quarter previous year, supported by higher activity in both automotive and building and construction segments. Demand for extruded products were continued to be weak in Brazil. In Europe demand for extruded products improved 1% compared to the third quarter in 2013. And this is the third consecutive quarter on market growth in Europe after several quarters with decline. Global demand for precision tubing continued to be driven by increased demand from the automotive sector, demand for extruded products is expected to decline in the fourth quarter mainly due to seasonality. Underlying EBIT was NOK201 million, a significant improvement compared to the pro forma result from the same period last year. Positive contribution from restructuring programs contributed to the increase. The restructuring programs within Sapa is progressing according to plan and restructuring charges will continue to have a negative impact on the profits in Q4. In the third quarter, Orkla’s share of the profit was a positive NOK54 million. Jotun has had a good overall growth in Q3 2014. All segments were growing with improved decorative sales in Scandinavia and continued positive development for the marine new building markets. The increase in costs is primarily tied to market development activities in Gulf markets as Jotun is continuing to invest and build new factories. And finally, hydropower. Production volumes in hydropower continue on the same trends this quarter and with somewhat higher than the corresponding quarter last year. Power prices in the third quarter were lower than the third quarter last year, however EBITDA improved slightly to NOK46 million in the period. The reservoir levels were somewhat lower at the end of the quarter. This last part will be on the capital structure, starting with changes in net debt year-to-date. The net debt at the end of the quarter was NOK8.3 billion and the main deviation from the end of last year has paid dividend of NOK2.5 billion. Net sales from shares and financial assets contributed NOK0.2 billion year-to-date, cash flow from operations was NOK0.6 billion in the third quarter and NOK1.3 billion in the first nine months of 2014. The seasonal build-up of underlying working capital in branded consumer goods was somewhat lower compared to 2013. Orkla’s net interest bearing debt had an average interest cost of 3% in the third quarter of 2014, with an average maturity of 3.6 years. As mentioned, the group’s net interest bearing debt was NOK8.3 billion at the end of the quarter with a net gearing of NOK0.28 billion. The net gearing is expected to be lower at the year end. So, in summary, Orkla’s financial position is robust. Then I’ll give the floor back to Peter.

[Peter Ruzicka:]

Okay. Thank you. Sorry for the technical problems here. At least I can promise you that we will have substantial saving in rent of this premises that will be visible in Q4. Just a few words on the outlook. Our strategy remains firm and there is no change in the future growth and value creation will come from a focused Nordic branded consumer goods company. Orkla Investments is still a large part of our value and we will focus on getting the fair values and that is more important than time. In Q3, Orkla Foods signed a distribution agreement with PepsiCo for sale and distribution of Tropicana juice in Sweden, Denmark and Finland. This corporation will start first quarter 2015. In terms of strengthening relations with our customers, we believe that Coop’s potential acquisition of the Norwegian part of Ica, resulting in three relatively equally strong customers is better in the long-term for the suppliers. As mentioned, my main operational focus is on activities that drive organic growth and improve margins. In addition, we will deliver on started and the ongoing structural process and to realize synergies and increase efficiency throughout the company. This is not finished yet, and it will take time. But I think we showed this quarter, that we delivered on our strategy and on our plans. We see an result from an increased focus and on operations but still we have a large operational job ahead of us and the company is still not streamlined to the extent that we would like. But it’s also important that we in Orkla we can really make a difference. What you see here is the number of products produced and sold from all Orkla companies today, the top figure is today and the bottom figure is year-to-date, 2.8 billion to 2.9 billion units, consumer units year-to-date. And we estimate for 2014 that we will sell approximately 3.2 billion units in our markets. And you ca imagine just minor changes to these large volume will significantly impact both margin and volume. And just to give you some examples, cost reduction of NOK0.1 per unit that constitutes approximately NOK320 million in cost savings, 5% price increase contribute with NOK640 million. And 0.1 gram less salt in our food products constitute approximately 200 tons of less salt making, a healthier living for our customers which is important for us. Thank you all for coming. And we’re now open for questions.

[Petter Nystrom – ABG:]

Yes, thanks. Petter Nystrom from ABG. Can you elaborate a little bit about the development in Foods? Is it broad based, is it tougher competition, is it margin pressure? Secondly is your gearing and your leverage, it’s fairly low going out of Q4. Can you say something about your cash flow priorities going forward, both in terms of cash flow distribution to shareholders or investing in more growth initiatives? Thanks.

[Peter Ruzicka:]

Okay, I will answer to your question on the Foods business and Jens will take the second part of your question. As mentioned in the presentation, we are still in the process of merging together the parts of our EBID and Orkla Foods and especially in Norway this is and has been a very big operation merging Toro and Stabburet. We are still not finished and we see that the new organization or the process to go into the – getting into the new organization is taking focus away from the markets, away from customers. And it’s more internally focused. However we see this is coming to an end, and we believe that when we’re finished with the reorganization we will have a healthier, a better platform to develop. Also during Q3, we merged the sales forces of those two companies, and that is also made disturbances in the sales force in the Norwegian market. And then to the capital?

[Jens Bjorn Staff:]

Yes. So, the first priority is to acquire good BCG assets in Nordic at a fair price. And if you’re not able to find a good quality asset for a fair price, then you’ll most likely allocate the excess capital back to our shareholders, and we have a history of getting back capital, a special dividend or we will also consider to buyback old shares.

[Peter Ruzicka:]

No other questions? Okay. Then, just thank you all for being here. And have a nice day. Thank you.