Orkla ASA

OSE:ORK

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Orkla Q1 for the first quarter. I will now hand over to your host, Thomas Ljungqvist, from Investor Relations. Thank you.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Good morning, and welcome to our Q&A call for the first quarter. With me here in Oslo on safe distance, I have our CEO, Jaan Ivar; our CFO, Harald; and Elise, my colleague from Investor Relations. Our CEO, Jaan Ivar, will start with a 2-minute recap of the quarter, and I will then pick up on a few questions we have received this morning before we open up for Q&A from the webcast and conf call participants. Now over to you, Jaan Ivar.

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

Thank you, Thomas, and good morning, everyone, and welcome to this Q&A call. Before we open up for questions, let me share with you a short recap of the quarter. We are, for sure, going through a very challenging period. The most important priority for us is to safeguard the health and safety of our employees and also to ensure uninterrupted supply of essential products to our customers and consumers. The corona crisis has impact across all business areas. Consumer stockpiling and increased in-home consumption had a positive impact on sales and profit growth in Foods and Care.On the other hand, restrictions in out-of-home markets had a negative impact, mainly in Food Ingredients and in Consumer Investments. Underlying earnings growth of 8% was mainly driven by top line growth in Foods and Care, but partly offset by Consumer Investments and Food Ingredients. Earnings were also negatively affected by mix effects, higher input costs and higher operational expenses required to ensure delivery capacity under challenging circumstances. This resulted in an improvement in underlying EBIT margin of 0.2 percentage points on a rolling 12 months basis. The corona crisis may result in short-term priorities, which could have a temporary negative impact on margins. In the longer term, Orkla continues to prioritize margin progress from improved mix, reduced complexity and revenue management. Good progress in both our consolidated businesses and in Jotun contributed to an increase in adjusted EPS of 24%. So what should you expect going forward? As mentioned, much of the growth in Q1 was driven by stockpiling, particularly in Foods and Care. We believe this was effectively over in March and that there is a risk for some reversal of consumers' stocks ahead. At the same time, we expect a continued positive impact on demand for Food and Care products as consumers spend more time and money at home. Out-of-home consumption continues at a significantly lower level compared to pre-corona times. This has severe short-term implications for our most exposed businesses in Food Ingredients and Consumer Investments. We expect out-of-home activity to gradually pick up once containment measures are lifted. But until this happens, we are likely to continue seeing very low activity levels in this part of the business. On the supply side, we see that many external factors can affect both availability and prices of raw materials. This means that raw material prices are likely to be volatile for a while. FX is an important factor when we talk about our input costs and the significant weakening of the Norwegian krone will require pricing actions going forward.Our #1 priority continues to be to safeguard the health and safety of our 18,500 employees; second, to ensure that the supply of our products continues to meet demand from consumers and customers; and lastly, to maintain our strong balance sheet and financial flexibility. The situation we are in has only strengthened my conviction that Orkla's sustainable business model is well positioned for the future. We are not changing our 2021 financial targets. We have strong long-term fundamentals, and I'm confident that we will be able to deliver on these targets, even with some short-term deviations as we address the current situation.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Thank you, Jaan Ivar, for that introduction. And as we said initially, before we open up for Q&A from the audience, we will pick up on a few questions received this morning.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

So I'm going to start with the first question, which is for you, Jaan Ivar. So the coronavirus outbreak is understandably the key topic this reporting season, and it seems to be also for Orkla. Orkla seems to have benefited from this in the first quarter with an all-time high organic sales growth of just over 5%. But how should I think about the impact on your markets and on Orkla in Q2 and over the coming 12 to 24 months?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

Yes. So I want to be careful in predicting how consumers and customers in our markets will react in the time we have ahead of us. We are in a very, very special situation. But what I do know is that people will rely on necessities such as food, hygiene products and also occasional indulgence. And this is clearly what we saw in March. We see that consumers, they are choosing our trusted brands in times of uncertainty. And that makes me very confident about the long-term fundamentals of our business. But as mentioned, at the same time, there is clearly an interplay between in-home and out-of-home consumption. And the short term, we expect significantly lower levels of out-of-home consumption compared to pre-corona times. And in terms of impact on our business, we highlighted in our presentation this morning that our sales to this segment traded between index 40 and 60 in April. How this develops going forward, it will depend on when containment measures are lifted and also when consumers start returning. So until this happens, I think we are likely to continue seeing very low activity levels in this part of the business, the Food Ingredients part, in particular, but also higher underlying demand for food hygiene and indulgence products sold through both the traditional grocery channels but also through online channels.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Thank you, Jaan Ivar. The next question, I think, is also for you. It goes as follows: You provided additional transparency on your end market exposure in the pre-recorded quarterly presentation you gave, where you said that 25% of group sales is exposed to the negatively affected out-of-home segments. At the same time, you have, in recent year, prioritize to grow and allocate capital to out-of-home and, most recently, with the acquisition of Kotipizza and Easyfood. Now in the light of corona, have you changed your view on the attractiveness of this segment?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

We still feel that this is a very attractive segment, and we continue to see out-of-home as one of the -- of several prioritized areas to expand in. And as mentioned before, there is clearly an interplay between in-home and out-of-home consumption. And at the end of the day, we're talking about the same consumers. We will continue to win the trust of our consumers, be their preferred choice, no matter where they choose to come and consume. So I think that's the key reflection around this.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

All right. Thank you. So we have 2 more questions. I think there's one more for you, Jaan Ivar here. We've seen consumers buying more groceries online now since corona, especially, but also increased sales in physical grocery stores since the outbreak. A shift from out-of-home to at-home is one reason and stockpiling is probably one of it, a part of this story. Do you see any longer-term implications on consumer behavior and preferences? And do you -- what do you believe this means for Orkla?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

Yes. So this is a very difficult question. And again, I want to be cautious in concluding on long-term implications on consumer preferences and behavior. But personally, I think it will take some time before society opens up again. It will take time before travel comes back to where it was. I do think we can say that the online sales and the habits being changed by the consumers. I think the online share post-corona will also be high and continue to be high. At the same time, we start also to see some impact on higher unemployment and how that will impact consumption patterns and purchasing power, that remains to be seen. But I think in all of this, we strive to be the consumer's friend in the everyday life and we see that having the necessities, the products we have under very strong local brands, consumers really trust us and they return to us. And we've seen that through this period as well. So that has just strengthened my conviction that Orkla's sustainable business model is well positioned for the future.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Thank you, Jaan Ivar. So the last question I had here, I think, is for you, Harald. In the presentation and report, you say you maintain your 2021 financial targets, where part of these targets are to improve underlying EBIT margins by at least 1.5 percentage points from 2018 level. But at the same time, you report a rolling 12-month margin improvement of 0.2 percentage points by Q1 this year. What makes you comfortable that you can improve margins by more than a percentage point over the next 7 quarters?

[Harald Ullevoldsæter]

As a CFO, I'm never comfortable. As Jaan Ivar said, our short-term priority is to protect our people and operations. However, we will incur higher operational expenses during this phase, which is likely to impact profit growth and margin short term. So it's clearly an ambitious target to improve EBIT margin by more than 1 percentage points by the end of next year, and it may even get worse before it gets better. But we have seen good progress on revenue management in 2019, with improvements in both mix and ability to compensate for higher input costs. But as we can see, raw material inflation is picking up again and a significantly weaker Norwegian krone requires pricing action going forward. We have, however, completed a reorganization of central support functions and have also started improvement projects both in Orkla Care, health care and Pierre Robert Group. These projects will clearly contribute to our margin. So although I'm never comfortable, Thomas, I have a strong confidence in our ability to deliver on these initiatives and that the 2021 targets are challenging but realistic.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

All right. Thank you, Harald. And I think that concludes the questions we've had coming in before this call. Emilia, I will now hand the line back to you to start taking questions from the line.

[Operator]

[Operator Instructions] Just got one through from Charles Eden from UBS.

[Charles Eden, Research Analyst of Consumer Staples]

I wanted to ask on the Confectionery & Snacks division. Obviously, the margin declined 100 basis points year-over-year. Is there anything other than sort of the raw material costs that you called out in the presentation that explains the declines? Or is it simply a raw material impact?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

I think it's also fair to say that we have some increased production costs as well due to a bit sick leave and more expensive shifts.

[Operator]

We have no more further questions in the queue.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Okay. Then we can -- I can take some from the web that I have here in front of me. I have one from Sparbanken, [ David Moss ] again. What is the direct and indirect out-of-home exposure in percentage of BCG revenues?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

Yes. So thank you for the question. The total exposure is 25%, and the main part of that is Orkla Food Ingredients. But we also have some exposure in the Foods segment and some exposure in the Orkla Consumer and Financial Investments. So it's 15% exposure in the Foods segment, 60% in Food Ingredients and around 30% in Consumer and Financial Investments, where we have Gorm's and Kotipizza. And if you add that all up of our total revenue base, you are at the 25% exposure in our BCG area.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Thank you, Jaan Ivar. I also have a question from Goldman Sachs, John Ennis. It goes as follows. Given the NOK weakness and based on current spot prices, what do you expect the FX impact to be on the EBIT margin for the BCG business unit? Any guidance here would be appreciated.

[Harald Ullevoldsæter]

I don't think we comment on those details. But we have said that we have approximately NOK 2 billion in euro purchasing cost. So -- and we have seen the weakness of the Norwegian krone in the range of 10% to 20% over the last weeks, so it's quite easy to calculate.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Right. And that's on a full year basis, so with that...

[Harald Ullevoldsæter]

That's on a full year basis. And in addition, we have some raw material purchasing costs also in the U.S. dollar.

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

And also, as mentioned and described in our presentation, we are also taking pricing actions in Norway as a result of that.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Good. I also have another question here, actually not from an analyst or an investor, but from Nettavisen. I think we can take it. It's -- are there any particular products that drove the sales increase in Q1 that you want to highlight?

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

Yes. Well, one specific example we highlighted in the call this morning is the soap Lano, which is a very well-known brand here in Norway, and we had 128% growth. There are many examples of very strong growth, in particular in the Foods and the Care segment. I guess we could just send over some examples to Nettavisen as an illustration of that with the exact increases.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Yes. I also had a follow-up question. If you see any -- if there are any big differences between how this looks in Sweden, Norway, if there's anything there to highlight.

[Jaan Ivar Semlitsch, President, CEO & Member of Group Executive Board]

We see very similar patterns. We see the patterns broad-based within foods, within hygiene products. I think we do see a difference within confection and snacks, while we see a bigger increase in some markets than in other markets due to the reduced purchasing power in the Baltics. We don't see the same effects in confection and snacks in that region, for example.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

Thank you, Jaan Ivar. Emilia, do you want to see if we have any questions coming from the line?

[Operator]

Yes. We don't have any questions at the moment. [Operator Instructions] Nothing's coming through so far.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

I don't have any more questions here on the webcast either. So let's just give them a minute on the line to see if they have any last questions before we wrap up the call. Nothing on the line?

[Operator]

Nothing on the line, Thomas.

[Thomas Ljungqvist, Senior Vice President of Investor Relations]

All right. Then I think from us here in Oslo, I just want to say thank you to everyone listening and for the good questions. I think this wraps up our Q&A call. Thank you all for joining.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.