Orkla ASA
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Kari Lindtvedt:]

Good morning, and welcome to this presentation of Orkla's First Quarter Results. My name is Kari Lindtvedt, I'm Head of Investor Relations at Orkla. I'm joined today by President and CEO, Jaan Ivar Semlitsch, who will sum up the main points of this quarter. Then, CFO, Harald Ullevoldsæter, will give you more details on the financials. Before moving on to Q&A, Jaan Ivar will sum up and share some reflections on the outlook. Throughout this presentation today, you're welcome to post questions on the web, and we will address them at the end of this session. With that, I leave the floor to you, Jaan Ivar.

[Jaan Ivar Semlitsch:]

Thank you, Kari, and good morning, and welcome to this presentation of Orkla's first quarter results, on this sunny morning, here in Oslo. Overall, I am pleased that we delivered organic growth and margin improvement in Q1, on the back of a strong quarter last year. The coronavirus pandemic still, of course, has significant impact on our operations. Number of infected employees at Orkla since the pandemic broke out is 1,975, but most of our employees are back to work. Therefore, we have, during the whole pandemic, delivered a service level of 95%, in many ways best practice as I see it. All our 112 factories have been running during the pandemic with some very short-term exceptions.

[Harald Ullevoldsæter:]

Thank you, Jaan Ivar, and good morning everyone. Let's have a look at the financial performance in the quarter 1. As you can see, revenues in Branded Consumer Goods were broadly in line with last year. In the same period, earnings for Branded Consumer Goods, including headquarter, improved by 9.5%. Industrial & Financial Investment had a profit increase of NOK49 million this year as a result of higher power prices in Hydro Power. We had nonrecurring items totaling minus NOK143 million in the quarter, mainly from costs associated with our ongoing ERP project, as we mentioned in quarter 4 last year. Profit from associated ended at NOK331 million, an improvement of 55% from last year. And this increase was mainly driven by strong profit and margin growth in . And as Jaan Ivar said, adjusted earnings per share grew by 21%. Look at the cash flow. Cash flow from operation was NOK447 million in quarter 1, and decrease from quarter 1 last year was primarily driven by negative timing effects on net working capital. Underlying improvement in average net working capital in percent of net sales value is still positive by 20 basis points this quarter, but with a lower rate of improvement compared with the performance over the last two years. Replacement investments were somewhat higher in quarter 1 compared to corresponding quarter last year, mainly related to the building of the new biscuit factory in Latvia. Net debt including leasing increased by NOK1.5 billion to NOK7.8 billion at the end of quarter 1. The main cash out was related to the acquisition of 67.8% of Eastern, which was closed at the end of March, this year.

[Jaan Ivar Semlitsch:]

In my opinion, the first quarter of 2021 is positive. We delivered strong results and positive organic growth on tough comparables from the stockpiling effects we saw last year. The ongoing pandemic, of course, still has significant impact on the results. We continue to see good growth in the grocery channel, but still at lower activity level in the out-of-home sector. Also, I'm pleased to see the strong performance of Jotun. Furthermore, we have completed several M&A transactions, this quarter, with Eastern, and also the announcement of NutraQ. I'm very excited about this transaction which represents an opportunity for us to strengthen our presence in a new channel. Before moving on to Q&A, I would like to share some reflections on the outlook. Although there is a lot of uncertainty related to the development in the short-term, we see some very positive signs. Our markets are starting to open up. I am optimistic, and believe that the ongoing vaccination programs will gradually result in further easing of restrictions, and enable society to return to a normal life. And with this new normal, I see even more opportunities for Orkla to both ensure profitable organic growth and continue our ambitious M&A agenda. This concludes our presentation, and thank you so much for listening. And we'll now open up for Q&A.

[A - Kari Lindtvedt:]

Thank you, Jaan Ivar and Harald. We have got some questions on the web. Let me start by one from . Will Orkla grow further in vegan products, and will that be through new product launches or new markets?

[Jaan Ivar Semlitsch:]

Yes, well, I guess that's the question to plant-based and vegan, and what we also call as alternative proteins. And the answer is, yes. We see good growth momentum for plant-based, and we are well on track to reach our goal of NOK1 billion this year. And as I pointed to in my presentation, we have set a goal for 2025. We'll come back on that on the Capital Markets Day, but the initial ambition is NOK3 billion. And yes, we see good growth. And to just illustrate that, Anamma, in Sweden, is our top four brands within all brands in Sweden.

[Kari Lindtvedt:]

Thank you. And then we have a question from . And I think you could answer that together with a question from Markus Heiberg, Kepler Cheuvreux. You make no comments on previous guidance. I suppose you mean the financial targets that we have set. Is this no longer valid? And Markus is also asking about if you can elaborate or gross profit and margin development in Q1, assuming a like-for-like product mix. So, I guess, they want a comment on the margin target.

[Harald Ullevoldsæter:]

Yes, I guess so. Of course, we are trying every day to reach our targets for the three-year period. So, nothing has changed about that, so -- and as I said, there are some positive effects affecting our result in the quarter 1, that the underlying growth in operating margin in the quarter is not representative for the year as a whole. And the most important is that we have a phasing of the E&P. We said in quarter 4 that we will increase our E&P spending during 2021, but in quarter 1 we have a slight reduction in our E&P spending, and that will not be the case for the total of the year.

[Kari Lindtvedt:]

Thank you. And Markus has a follow-up question. The margin in Consumer Investments has fluctuated significantly in recent quarters. What do you consider to be a normalized level of profitability in this segment?

[Harald Ullevoldsæter:]

I'm not sure if we want to go into those details, it's a very complex question. But of course it has to do with the extreme demand for our painting tools in our House Care business which has fluctuated a lot fewer in the last 12 months.

[Jaan Ivar Semlitsch:]

And I could probably add that, of course, there are positive house care effects for House Care, but they had really delivered on a very good service level during the whole pandemic. And we think that, especially Norwegians will continue to refurbish their houses or their gardens during Q2 as well. But of course there are some positive House Care effects here during the staycation and people spending a lot of money in their homes.

[Kari Lindtvedt:]

Good. Next question from Ole Martin Westgaard, DNB. How should we think about the underlying growth from your India operation following the acquisition of Eastern?

[Jaan Ivar Semlitsch:]

Yes, we are again, as Harald said, we are not giving any guidance. But bear in mind that MTR, we have -- we are five times bigger with MTR, since 2007. And what we also said when we announced Eastern, that the underlying growth within this category is 13% per year in India. So, we see a growing market in India, both in general, but also taking Eastern in the same journey we've had with MTR. But again, we're not giving any guidance on specific growth numbers for India.

[Kari Lindtvedt:]

Thank you. And another question from Ole Martin. What was the share of revenue from Anamma and in Q1? What is current share of plant-based revenue today, and what is the growth in Q1 this year?

[Jaan Ivar Semlitsch:]

Yes, so I could start, and Harald can take some of the details as well. First of all, the growth for 2020 was 30% reported, 20% underlying. And Anamma and Naturelle accounting for around NOK870 million last year. So, we think we are on track or strongly believe we are on track for the NOK1 billion goal. And that gives a sort of perspective on the 2021. For Q1 isolated, would you give some input on that, Harald.

[Harald Ullevoldsæter:]

I could say that it's more a flat top line development in Q1, which we don't think is super sensitive for the year as a whole, and approximately 50% from Anamma, 50% from Naturelle, the split between those two brands.

[Kari Lindtvedt:]

Thank you. A question from Petter Nyström, ABG Sundal Collier. In Brands and the new ERP system, is it possible to give some more detail on the expected higher short-term higher costs?

[Harald Ullevoldsæter:]

Yes. First of all, I'd like to say that the implementation has been successful. The system is working, and we are introducing products every day and selling to our customers. But we have, as expected, some one-off cost in this quarter related to the training of our people to have this ramp up in our production. We are shutting down the production and starting a new system. So, we had said that it's approximately NOK50 million in one-off costs in the quarter related to this. And I guess so we will have some more one-off costs in quarter 2, but a much smaller portion. But we will have a more permanent cost increase related to depreciation coming through, approximately NOK80 million for a year as a whole 12-month period.

[Jaan Ivar Semlitsch:]

And I, if I could add to the introduction of Harald as well, at the service level now in Sweden, of Food Sweden is 95%, and the goal is to be at 97%-98% in June-July. So, the systems are really working. And this will be a very good system for the future. But, of course, there's been implementation challenges, but we see that now as resolved, and very good progress on that going forward.

[Kari Lindtvedt:]

Good. That concludes the questions from the web. Thank you both, Jaan Ivar and Harald. We will be back with the second quarter results on July 15. And I would also like to remind you to save the date for our Capital Markets Day on November 23, later this year. That wraps up today's session. Thank you all for joining.