Orkla ASA
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Kari Lindtvedt:]

Good morning, and welcome to this presentation of Orkla's Fourth Quarter Results. My name is Kari Lindtvedt, I'm Head of Investor Relations here at Orkla. With me today in the auditorium in our head offices in Oslo, I have CEO, Jaan Ivar Semlitsch; and CFO, Harald Ullevoldsæter. They will share some reflections on the quarter, and also give you some more details on the financials. During the presentation, 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, please.

[Jaan Ivar Semlitsch:]

Thank you, Kari. Good morning on this sunny but very cold day here in Oslo. And welcome to this presentation of the fourth quarter results. Q4 marks the end of a very special year for all of us, both on a personal level and for the world economy. Needless to say, COVID-19 has had a strong impact on our business and results in 2020.

[Harald Ullevoldsæter:]

Thank you, Jaan Ivar, and good morning, everyone. Let's have a look at the financial performance in quarter four. Revenues in Branded Consumer Goods increased by 6% in the quarter. In the same period, earnings for Branded Consumer Goods, including headquarter, improved by 7%. Industrial & Financial Investments, including Hydro Power, had a profit decline of NOK49 million from Q4 '19 as a result of lower power prices. We had nonrecurring items totaling minus NOK468 million in the quarter, mainly from the write-down of our ongoing ERP project, which I will revert to on my next slide. Profit from associated companies ended at NOK225 million, an improvement of 53% from last year. This increase was mainly driven by strong profit and margin growth for Jotun. Adjusted earnings per share grew by 13%.

[Jaan Ivar Semlitsch:]

Thank you, Harald. As Harald just described, our overall organic growth improved in 2020, and our margin progress continued. At the same time, we continue to support our brands and innovations with increased marketing and A&P spend. Even though this will be at the expense of margin improvement in the short term, I'm confident that this is positive for Orkla's medium- to long-term growth prospects. And as I said at the beginning of this presentation, I'm pleased that we have improved EBIT by 7% during the quarter for Branded Consumer Goods, including HQ. In this number, we see negative effect from COVID-related restrictions being reimposed in several of our markets and impacting our out-of-home businesses. On the other hand, we continue to see growth in the grocery channel from more in-home consumption and less border trade. Jotun continues to be a good investment for us, delivering strong results on the back of increased sales, favorable raw material prices and good cost control. I'm also pleased with the adjusted EPS improvement of 13% to NOK1.43 for Q4 and plus 19% improvement for the full year 2020 to NOK5.04. The Board intends to propose a dividend of NOK2.75 per share. When we move on to make a few comments on the outlook, we see both opportunities and continued uncertainty. We see rapid changes in consumer habits, some even stronger now during COVID-19. And it's paramount for us to spot and act on these changes early on. During these special times, it has been important for me to balance contingency work with our long-term growth plans. And our strategic M&A agenda will continue to play an important role. As mentioned at the start of this presentation, the acquisition of Eastern Condiments, which we announced in September, is a good example of that. The process of closing is unfortunately taking longer than expected, but we are diligently working towards closing. We will send an update as soon as we are ready. There are no changes to our expectations about closing this transaction. We are entering 2021 with a touch of optimism related to the ongoing COVID vaccination program and hope that we will, at some point, return to a more normal everyday life. Nevertheless, uncertainty related to COVID-19 remains high in all our markets, and we continue to navigate to deliver on our short- and long-term priorities for building the future Orkla. Regarding the latter, I look forward to welcoming you back for more details on our long-term growth plans during our Capital Markets Day on the 23rd of November. That's really exciting times ahead. This concludes our presentation. I know it was a bit longer than normal, but thank you so much for listening during these special times. And we'll now move on to Q&A.

[A - Kari Lindtvedt:]

Thank you, Jaan Ivar. We have received a couple of questions from the web. So I'll start from the top. First one is from Markus Heiberg. In 2019, you disclosed that the variable margin improved by 50 basis points. But fixed cost leverage was down by minus 20 basis points to the total improvement of 20 basis points. Can you please elaborate on the 2020 improvement of 50 basis points? How much did your variable margin improve? And how much lower is the underlying fixed cost base in 2020?

[Harald Ullevoldsæter:]

We will not go into those details, but I can say that the same pattern continued into 2020.

[Kari Lindtvedt:]

And then second question from Markus Heiberg from Kepler Cheuvreux. Can you comment on the magnitude of advertising spend versus lower electricity cost in production in 2020 versus 2019?

[Jaan Ivar Semlitsch:]

So if I can start with advertising spend and you can do electricity. No, the advertising spend increase was very significant during 2020, on a full year basis approximately NOK100 million and for the quarter, Q4, a significant investment of NOK65 million. So -- and we see that Q4 was important for the increased advertising spend, then there is a lot of momentum in the market. So we think that will have an effect on the medium to longer term on having that strong visibility. So that's on the advertising spend, Harald. And we know that the electricity prices have been low during 2020.

[Harald Ullevoldsæter:]

Yes. I'm not sure why we have this comparison between advertising and electricity. But yes, it has been low, and we have, of course, lower costs in our industrial part of Orkla. But we also have poor results in our power plants, that's for sure. So our net exposure is, of course higher -- to higher electricity cost will improve earnings in Orkla.

[Kari Lindtvedt:]

Thank you. And then the third question from Markus. The Norwegian Parliament recently instructed the competition authorities to make sure suppliers with dominant positions can document and explain all price differences. It appears from the media that it lists two of your major customers in Norway now expect lower prices from key suppliers. How should we be thinking about this going forward? What share of your subsidiaries could be considered to have such dominant positions?

[Jaan Ivar Semlitsch:]

Yes. So that's a good question. First of all, we don't comment on specific customers in the Norwegian markets or in any markets. But I would say we have very good dialogue with all our customers in Norway, good momentum, both in 2020 and into 2021. Of course, we would have liked to have even more customers in Norway. But we work very well with those customers we have. I think the work we have ongoing won't change our financial targets. It's always a combination of good organic growth and having #1 and #2 positions and really being strong in the marketplace. And our brands are important to our customers, and we think we have a good momentum and good dialogue with our customers.

[Kari Lindtvedt:]

Thank you. Then, we have a question from Ole Martin Westgaard, DNB. You are taking massive write-downs and restructuring costs related to ERP project. What went wrong? And are you confident that this is the end?

[Harald Ullevoldsæter:]

That's a difficult question to -- in the short term. But of course, what went wrong? We -- I guess we underestimated the complexity in this project. To build a common platform for a lot of businesses with different processes given the value chain is not easy. So I think that's the main part. It has -- we have underestimated complexity. And as I said in the presentation, I think we are past the most demanding part of the project. We have established this platform both for our Branded Consumer Goods business, but also for Food Ingredients business. And we have implemented it in our biggest company and most complex company with 8 factories and a lot of external interfaces. So yes, I'm more confident than I was a year ago, yes.

[Jaan Ivar Semlitsch:]

Yes. And if I could add, we went live two weeks ago with our food solution in Sweden, and it was a very good launch. So we are -- I'm very confident that this will be a very good platform for us going forward, but with a more pragmatic approach in terms of how we implement going forward.

[Harald Ullevoldsæter:]

And of course, if I may add, the COVID situation has also added the complexity to this project. We were planning to have approximately 150 people into 1 room to do the end-to-end testing and now we have to sit in our home offices doing the same. So that's a huge replanning, and of course, driving costs as well, but not driving values.

[Kari Lindtvedt:]

Of course. Thank you. Second question from Ole Martin. Can you quantify what we should expect the negative margin impact from your increased marketing investment in 2021? How much are you increasing marketing spend and which product category segments should benefit?

[Jaan Ivar Semlitsch:]

If I could start, Harald?

[Harald Ullevoldsæter:]

Yes.

[Jaan Ivar Semlitsch:]

The advertising investment is not destroying or hurting our margin work. It's more that the target for 2021 is more challenging to reach, which is -- it's still a target with increased margin improvement.

[Harald Ullevoldsæter:]

Yes. As I said, we increased advertising cost by NOK100 million in 2020. But we will not guide anything around -- but to say that -- we think this trend will continue into '21. And we will support our brands and we'll support our market position and also fuel for our long-term growth.

[Jaan Ivar Semlitsch:]

And I think if I was asked the question, if you have to choose between growth and margin, we focus on the value creation. So if we see that increased marketing spend is important for organic growth and perhaps less increase in margins, then we will balance that in a good way and work on that and focus on the value creation part, which has turned out well during 2020, I believe, and also with an uptick in our organic growth.

[Kari Lindtvedt:]

Great. And then last question from Ole Martin. Can you quantify the impact on organic growth in Confectionery & Snacks from the sugar tax in Q4?

[Harald Ullevoldsæter:]

We won't go into those details. But as I said, if you adjust for this -- that effect and the effect that the seasonal sales from -- between quarter three and quarter four, you will end up approximately the same organic growth rate as the full year figures, approximately 2%.

[Kari Lindtvedt:]

Yes. Thank you. Then we have a question from John Ennis, Goldman Sachs. Can you give an update on the pricing environment in your core markets? Are you taking pricing to compensate for higher raw material inflation yet? How do you see the promotional levels of your categories evolve over 2021?

[Jaan Ivar Semlitsch:]

Yes. So we are factoring in increased raw material prices and also during 2020, a weaker Norwegian krone. So we are adjusting our prices based on that, and that's part of our revenue management plans, and that's going very well. So yes, we are taking those actions. In terms of marketing spend, it's a mix in different categories and different markets where we have increased the spend. So it's difficult to comment upon specific markets or specific categories here. For competitive reasons, we are not revealing those kind of details.

[Kari Lindtvedt:]

Great. Petter Nyström, ABG Sundal Collier. Can you repeat the marketing spend increase year-on-year in Q4?

[Harald Ullevoldsæter:]

No, we cannot. We said NOK100 million for the year. But of course, a major part of that is into quarter four.

[Kari Lindtvedt:]

And should we expect marketing spend as a percent of sales in 2021, in line with 2020?

[Harald Ullevoldsæter:]

As I said previously, we don't comment and don't give any guidance on these numbers.

[Kari Lindtvedt:]

Final question from Petter. Margin in Care is soft. What is the fixed cost accruals? And does this mean a lower fixed cost base in Q1 2021?

[Harald Ullevoldsæter:]

It's a lot of different things that happened together in quarter four in Orkla Care, both last year and this year. So it's -- what I would say is that the profit -- the conversion -- profit conversion rate vary especially in the quarter. And you have to look more on the full year figures to have -- to give a more correct picture of it. So this profit decline in quarter four is not representing for the underlying growth in these categories. And of course, we have also increased marketing spend, as we said, that it has been spent in this category.

[Kari Lindtvedt:]

Good. Then we have a question from Bruno Monteyne in Bernstein. Margins in Jotun were very high in 2020. Is that a new level? Or should we expect some inevitable decline?

[Jaan Ivar Semlitsch:]

Well, there is always an element of cyclicality in Jotun and also based on the raw material prices. But I think it's been working very well with Jotun in terms of cost discipline. But I wouldn't give any guidance on Jotun as such in terms of Jotun going forward. But again, it's a strong year for Jotun and with very good momentum and a significant part of also Orkla.

[Kari Lindtvedt:]

Okay. Second question from Bruno. With food commodity going up across the world, should we expect gross margin compression in 2021?

[Harald Ullevoldsæter:]

That's also very difficult to answer very precise. But as we have said, we will take out and compensate our price increases. But if we compensate on margin, that's more difficult to comment on.

[Kari Lindtvedt:]

Okay. Thank you. Final question from Bruno. Is this the end of the margin target? Is this the time to move on and focus on top line without reference to this margin target?

[Harald Ullevoldsæter:]

I think we will wait for our Capital Markets Day to go into more details of new targets. But Jaan Ivar, you have...

[Jaan Ivar Semlitsch:]

Yes. I would say also that we've said that the margin target for 2020 to reach the -- what we said in 2018 is challenging, but we have not given up the target, and we -- our messaging is important that we always balance organic growth versus margin improvement and focusing on the value creation as such. And as Harald mentioned, we'll come back to the Capital Markets Day on our targets for 2022 and onwards.

[Kari Lindtvedt:]

Great. I believe that concludes the questions from the web. And unfortunately, we don't have an audience in the room to continue. So thank you, Jaan Ivar and Harald. We will be back with our first quarter results on 29th of April this year. And I'd also urge you to remind you to save the date for our Capital Markets Day on the 23rd of November later this year. I think that wraps up our session here today. Thank you for joining.