Orkla ASA
OSE:ORK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
71.9
103.8
|
| Price Target |
|
We'll email you a reminder when the closing price reaches NOK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Orkla ASA
You don't have any saved screeners yet
Good morning, everyone, and welcome to Orkla's third quarter presentation. This is the first earnings presentation for our new CEO, Jaan Ivar Semlitsch, who joined us in mid-August. And Jaan Ivar will start this session by sharing some of his initial observations. This will take approximately 10 minutes. Our CFO, Jens Staff, will then take you through the main points of the third quarter results as announced earlier this morning. And before we move to Q&A, Jaan Ivar will come back and give you a summary of his immediate priorities. Now let's get started. Please welcome our President and CEO, Jaan Ivar Semlitsch.
Thank you, Thomas. And these first 10 weeks have been an intensive but valuable learning process for me. And I'd like to share with you some of my reflections and observations about our business, what I think we're doing right, but more importantly what I think we can do better. Let me start by sharing what I think my experience brings to this role, coming most recently from CEO of Elkjop Nordic and Dixons' international business for the last 7 years. As you know, the margins and pressure from online and digital have really challenged the retail electronics business. There has been no easy ride for any of us. It has meant that we have to focus on getting as many efficiencies as possible out of the business and to keep innovating to stay ahead of the competitors. So many close parallels to Orkla. But coming back to today's agenda, you may ask what have I been doing for the last 2 months. Well, I've been asking a lot of questions and, in some cases, quite tough questions. I've been traveling here in the Nordics to Central Europe and as far as India to see our important markets.I've toured our factories, spoken to all business unit leaders here at Orkla House and a lot of employees. Also met a lot of customers across our portfolio. And in summary, I'll come to 3 broad conclusions about the state of our business, Orkla. First, that the strength of our core brands should not be underestimated. But also, that alongside those #1 brands, we have some real hidden jewels in our portfolio. You saw some of them in the commercial, which we need to be better at developing and scaling up. Secondly, just like online changed the electronics retail industry over the last 8 to 10 years, our industry is also changing faster than ever before. Having strong brands will, for sure, win us some time but can never be used as an excuse not to change. We are good at understanding the local consumers. That's my clear impression. But we need to get even better at converting these insights faster into attractive products and services. And my third conclusion is that we have much greater potential for organic growth. M&A will still have an important role to play in our development, but the emphasis must be on growing our portfolio organically. So let's dive into these topics a bit more in detail.Firstly, on the strength of our brands. As a child and teenager in Norway, I grew up eating Toro tomato soup, Grandiosa pizza and always, of course, topping the hot dog with Idun Ketchup and the Idun Ketchup, it sticks on the hot dog. Come Saturday and I had sweets from Nidar and KiMs potato chips. The point is, I could go on and on. Orkla has a unique portfolio of strong household brands. On a normal day, the average Norwegian would also have used probably more than 10 of our products before leaving the house in the morning and maybe another 5 to 10 before going to bed. We are top of consumers' mind, with strong #1 and 2 brands across Foods, Confectionery & Snacks as well as Home & Personal Care. And we have, over time, built similar awareness in other Nordic markets and the Baltics and Central Europe and India. As I said earlier, we have some hidden jewels in our portfolio, many which come out of successful innovation strategy. One example of this, as you saw in the commercial, is Naturli' and another one, Anamma, our Nordic plant-based brands, which have been rapidly increasing sales. Naturli' is currently sold in 16 markets and expanding; and Anamma supplies vegan burgers to McDonald's outlets, both in Sweden and Finland. Same with our MTR brand in India, where we have a #1 position within spices in South India, a region with 250 million people with a growing population and increased purchasing power. Linked to this, to our brand strength, is undoubtedly our genuine passion for the sustainability agenda. This passion comes from the Executive Board right across the line organization and into the support units. We manufacture locally and even more so with products supporting the sustainability agenda. These KiMs potato chips bags, which you have in front of you, are a good example of that. To be honest, I have seen so many companies, both from a time as a McKinsey consultant but in other companies as well, where the sustainability agenda is just something to tick off. In Orkla, this agenda is for real. I would like us to continue this journey, perhaps even taking an activist role as it will be a key differentiating factor towards our employees, consumers and customers and a responsibility we have towards future generations. We have more work to do, but we have set out a clear path. Moving then on how we make decisions and operate. In these last weeks, I've met highly competent and very impressive people throughout the Orkla organization. Orkla clearly attracts talent and has a strong culture of developing people. I've also seen many examples of inspiring and bold decisions, but we need to be even more brave. You will have seen from the press release this morning that I'm looking at how best to organize the group and support functions so that we can continue delivering on our strategic priorities. I want to strengthen our execution capabilities around organic growth, operational efficiency and more active portfolio management. It's about simplifying our current structure and empowering teams to increase product time to market. We need to encourage our colleagues to make bold decisions, become more responsive by trying and perfecting small scale. Before looking at how we will continue to grow, I want to first address the issue of cost. We had a clear agenda to continue driving cost efficiency throughout our supply chain. At the same time, I want to stress that one size and one solution does not necessarily fit everywhere in Orkla. It's still early days for me, but I recognize that one of our key strengths is to retain the flexibility required to be more local than our global competitors, and at the same time having more resource, more talent, scale and best practice sharing than our smaller local competitors. But let's now turn back to growth. We clearly, as I mentioned, have untapped potential to speed up organic growth. I believe we should push our #1 and 2 positions in core markets even harder. And at the same time, we need to deliver on our margin and cost ambitions. Even though we are a market leader, we will go for more market share by being brave and thinking as a challenger. Simply put, we will have the big focus on improving and innovating around our core. I also want to stress the potential we have in bringing existing products with unique selling propositions into new markets and you, in this audience, know a lot about them. For example, Möller's, Jordan toothbrushes, Smash!, P20, just to mention a few. In fact, and this is something to be proud of, 2 weeks ago, we launched Jordan toothbrushes in over 4,000 stores in South India. And I saw for myself, when I was in Bangalore, a city with 12 million people, just how much visibility and space we had in all the stores. I know several of you have questioned why organic growth was removed as a KPI criteria from Orkla's incentive scheme. This was only meant to be temporary. So together with the Board, I have already agreed that top management's incentives for 2020 will be much closer linked to achieving profitable organic growth. So where does that leave M&A in our growth plans? Well, we will focus M&A on markets where we have a solid position already and into areas related to our core and adjacent core. As you can see from today's Q3, we have made some write-offs related to recently acquired businesses and brands primarily in Orkla Care. Although our overall M&A strategy and execution have been highly value-creating, there is still room to improve. That is why I have decided to strengthen the top management team, creating a new M&A and strategy business function. And I will personally be actively involved here.So to sum up, we have a unique portfolio of strong local brands. We need to step up growth in our core and scale up jewels, and we need to simplify and empower the organization to be faster to market and drive further cost improvement. Now I'd like to hand over to Jens to take us through the quarter 3 results.
Thank you, Jaan Ivar. Let's look at the highlights from Q3. I'm pleased to report that Orkla continued to increase its sales growth and profit in the third quarter. This progress comes on top of a relatively strong earnings improvement that we saw in Q3 last year. All 4 business areas delivered organic sales growth in the quarter, with especially strong performance in Confectionery & Snacks. Orkla Foods and Food Ingredients business both reported good progress in earnings and profitability. The challenges that we've seen in House Care U.K., the Harris business, and Health recently have resulted in write-downs this quarter. This is mainly related to goodwill in House Care U.K. and 2 brands in Orkla Health. Although this is disappointing to us, we see opportunities for these 2 positions in the future. The strong performance in Jotun continued in Q3 and the share of profit from associates, which is mainly related to Jotun, was up 43% in the quarter. In sum, this contributed to an improvement in the adjusted earnings per share of 11%. As mentioned, all business areas delivered organic growth in the quarter, adding up to 1.5% for the Branded Consumer Goods. We saw strongest progress in Confectionery & Snacks driven by successful innovations and continued positive market growth. Positive development in Orkla Home & Personal Care contributed to revenue growth for the Orkla Care business area, but then they're comparing to a fairly weak Q3 last year. The progress in Foods, on the other hand, was lower than it has been recently, and that is partly due to timing of campaigns. Orkla Food Ingredients continued its trends from previous quarters with moderate organic sales growth. However, skewed towards more profitable sales. Overall, revenues from Branded Consumer Goods grew close to 6% in Q3. On top of the organic growth, we had positive currency translation effects of another 1.5%. Structural growth added 2.7% driven by acquisitions in Foods and Food Ingredients. And some of these acquisitions that we have recently done that contribute is Easyfood and Lecora in Foods. It's several transactions in the Food Ingredients area. Most recent ones is Vamo, Confectionery by Design (sic) [ Confection by Design ], Risberg and Zeelandia. Next, let's look at the profits and the margin performance for the Branded Consumer Goods, including HQ. Branded Consumer Goods, including the HQ, grew earnings by just over 6% in the quarter, of which close to 3% was underlying improvement. This progress was mainly driven by top line growth from improved revenue management and positive mix effects in the Branded Consumer Goods area. Profit decline in Care and higher bonus-related costs partly offset this improvement. HQ costs is still at a relatively low level in the quarter, but it's higher than last year. In Q3 '18, reversed bonus provisions related to the group's long-term incentive program gave a positive one-off effect of NOK 15 million for HQ and NOK 20 million for the total Branded Consumer Goods area. On a rolling 12-month basis, this resulted in a modest improvement in underlying margin of 10 basis points. Revenue management and positive mix effects are the key drivers of this progress, and it's partly offset by higher purchasing costs and bonus-related costs. Let's now have a look at each business area, and then, as always, we start with Foods. Top line growth in Foods was mainly driven by the structural growth that I mentioned and only moderate organic sales progress. Strong demand for plant-based products in Sweden and good progress in India were amongst the drivers for growth. This was partly offset by lower campaign activity in Norway versus last year and the sales decline in Denmark from lost lower-margin contracts. We saw nice improvements in earnings mainly from increased revenues, but also from cost improvement projects and structural initiatives. These had all positive impacts on the profits. Better revenue management and more active portfolio management compensated from a negative effect that they've seen from a weakened Swedish and Norwegian kroner as well as high raw material prices. And in sum, we improved profitability with 70 basis points. Let's move to Confectionery & Snacks. Our Confectionery & Snacks business continued to deliver strong organic key growth. We saw most progress in chocolates and snacks, and the growth was mainly volume-driven. We continue to see good market growth, especially for Snacks in Sweden, Finland and in the Baltics as well as for Confectionery in Norway. Profits continued to grow mainly from higher revenues, but we also see positive effects from cost improvement projects. Price increases compensated for higher prices of raw materials, such as wheat and cocoa, as well as currency effects from a weaker Swedish kroner. And overall, our profit margin ended at the same level as last year. Let's look at Care. Care achieved positive organic growth of 1.7%, with progress in Home & Personal Care categories despite a continued challenging market trend. HSNG and Wound Care had good organic growth driven by successful campaigns and market growth. Traditional grocery in retail in Norway continued to experience channel leakage. In addition, the main retail chains are increasing their share of private label in core Care categories, mainly impacting Home & Personal Care and Health. In House Care U.K., the Harris business, the ongoing restructuring of the business is on track and has resulted in EBIT growth in Q3 and year-to-date. In Poland, EBIT has bottomed out and have gradually improved throughout the quarter, but there's uncertainties associated with the future development of these areas. The challenge that we've seen in House Care U.K. and in the Health business has resulted in write-downs this quarter. The write-downs are booked under the line item, other income and expenses, and I'll elaborate a little bit more on that quite later on. In sum, EBIT growth was negative by 2.5%, and the decline is mainly related to investments in A&P in the quarter. Lastly, let's look at Food Ingredients. Food Ingredients reported strong revenue and profit growth mainly driven by M&A. We saw good sales progress for the bakery ingredients categories, but we saw weaker sales from ice cream ingredients. But this is compared to a very strong Q3 last year. It was an extremely good ice cream season last year, as you remember. So tough comps. Our plant-based brand, Naturli', continued to grow strongly in this business area. For the total business area, earnings were up 16%, and that's primarily driven by M&A, and it's driven by positive results from improved pricing in the Food Ingredients and the positive mix effects. In sum, this resulted in a profitability increase of 40 basis points. Let's have a look at Kotipizza. The sales growth in Kotipizza continued in Q3, with increased chain sales and growth into the wholesale business that we have, Foodstock. Continued chain sales growth of 14% year-to-date and 7% like-for-like is solid, but the rate is decreasing somewhat as Kotipizza are now facing tougher comps from expansion that it did last year. This year, normalization of overhead costs, including marketing spend in Kotipizza and combined with solid growth, this translated into an improved EBIT, both in absolute and relative terms. The restaurant expansion continues in Kotipizza. And during this quarter, we opened up 4 new restaurants. Let's look at Jotun. And Jotun continues to grow sales in the third quarter driven by continued strong markets in Protective Coatings and improved sales of Marine Coatings and price increases previously implemented in all segments to offset the rising raw material costs that they've seen. Operating profit improved further in Jotun, explained by this solid sales growth and higher gross margins. Last year's implemented price increases combined with a more favorable raw material cost situation this year have gradually improved the gross margins throughout 2019. In addition, persistent cost control in Jotun have resulted in loan growth in operating costs year-to-date. Let me sum up the Q3 financials and go into some detail in our Investments division and other material items. Earnings growth of 14% from Orkla Investments include both Hydro Power and Financial Investments. In Hydro Power, profits were down with 24% due to lower power prices. Financial Investments reported an adjusted EBIT of NOK 29 million compared to minus NOK 8 million, Q3 last year, and the delta is mainly explained by the inclusion of Kotipizza from February. We had nonrecurring items of minus NOK 267 million in the quarter, and the largest items, as I've mentioned, is related to write-downs of the goodwill in Harris, House Care U.K., and parts of the trademarks of Gerimax and Colon C in Orkla Health. These costs were partly offset by the net gain of selling a real estate property in Oslo, Treschows gate 16, and the gain was booked in the quarter. The effective tax rate was high, and higher than last year, and this is primarily due to the write-down of goodwill in Harris, which is nondeductible from a tax perspective. Good progress in our consolidated business, and Jotun contributed to an increase in the adjusted earnings per share of 11% in Q3. Reported earnings per share came in 9% lower than last year. I'll now leave the floor back to Jaan Ivar for his final remarks and then open up for Q&A.
Thank you, Jens. I'm pleased to see our quarter with an uptick in organic growth and okay earnings development in our Branded Consumer Goods business. The goodwill and brand write-downs we have done in Care in the quarter is clearly disappointing and reflects the challenges we have seen, both in the U.K. House Care business and in the Orkla Health business. Having said that, it's encouraging to see the turnaround in U.K. progressing according to plan with growth earnings compared to last year. The situation in Health remains challenging, and we have initiated actions to turn the trend. Maintaining a strong capital discipline is a key priority for us, and I will be closely involved with our M&A agenda going forward. Let me then just summarize what my priorities will be over the coming months. Turning the negative trend in Care continues to be our top priority. As announced a couple of weeks ago, we will move the Care development portfolio for our new business area, Consumer Investments, progressing our initiative on how to best organize the group. In addition to empowering the organization to increase speed, we foresee meaningful cost-savings in the range of NOK 150 million to NOK 200 million; continue delivering on our cost agenda through a combination of structural efforts and continuous improvements throughout our supply chain; and gearing for profitable growth, taking a challenger role, where we already have leading positions; and finding ways to scale up our jewels; changing bonus metrics to incentivize profitable growth. I'm committed to deliver on the 2021 targets that were set 1 year ago. I will come back with more details around our priorities and progress towards our target when we present Q4 results in February next year. I thank you all for listening. We will now open up for Q&A from the audience here in Oslo and from those following us on webcast.
Very quiet.
Maybe we can start with some questions from the webcast then. We have a couple of questions from Bank of America Merrill Lynch. We can start with those. First one is could we please have some more color on the NOK 150 million to NOK 200 million annual cost savings identified in the headquarters? Is this something we can expect to translate into the bottom line or will it be reinvested?
Yes. This project, [ Project Future ], which we have announced this morning, will help us in delivering on the existing targets that we are committed to for 2021. And we will also, perhaps, use some of the opportunity to see how we can speed up organic growth as a basis of this flexibility.
Okay. Thank you. Second question. In the press release, it states that the vegan portfolio under the Naturli' brand showed good growth. Is it still growing at the estimated 30% level as you experienced in 2018?
Yes. The growth is continuing at good levels, and it's growing approximately 30%.
Let me have a question from Preben Rasch-Olsen. Can you please explain the reasoning for the -- well, the question is can you please explain the reason for moving Lilleborg out of the old Care and into a new area with Care and Home Care?
The key reason for that is to have an extra focus on Lilleborg, with extra attention, and we see that, that structure works very well in the current review and the feedback we have had so far.
Okay. Thank you. Second question also from Preben. Do you increase market shares in snacks and chocolate?
Yes. We are increasing the shares somewhat in chocolates and also in some markets when it comes to snacks.
Okay. I'm going to continue. We have also a couple of questions from Goldman Sachs, John Ennis. First question. Can you run through the new corporate structure you are creating for some of the Orkla Care brands and Kotipizza? Which brands are going into this division and how do you think this will help performance? Are there brands within this group that you do not believe Orkla is the best owner of?
If I start with Kotipizza and Gorm's, that's established as an out-of-home area under Consumer and Financial Investments to give it extra focus and to develop and build that category. So -- and so far, as you can see, we've had good progress from Kotipizza, and will be followed up very closely from that perspective. In terms of the other 3 companies into the portfolio, we think that we are a good owner but we will, of course, always look at opportunities. But it's good momentum, and that's the current strategy.
Okay. Second question also from John Ennis. You discussed a greater potential for organic sales growth over M&A. Do you think that the focus of recent years have been too skewed towards M&A? Is that the right way to interpret your opening remarks?
As I mentioned, M&A is still very important for us. But I think as important is the organic growth, and I think it's sometimes difficult to calculate the exact organic growth. But freeing up the resources in the organization, incentivizing people for organic -- profitable organic growth, I think will have a potential. So I think in the world we are living in, we have to do both, good M&As and a very clear and good organic growth strategy.
Thank you. I can continue if there's no more work. I'm not making them all up. So our next question is from UBS and Charles Eden. Do you see an acceleration in organic growth coming hand-in-hand with margin expansion? Or do you believe there is a need for reinvestments near term to drive this acceleration?
Well, first, I want to say it's early days for me, but the part of Project Future might be a potential to reinvest parts of that into advertising and thereby also have a positive effect on organic growth. And then I think it's a matter of just staying focused and work hard on the organic growth agenda.
Thank you. That's all the questions I have for the time being. Any more questions in the room?
Okay. No further questions.
Okay. Thank you all for listening.