Orkla ASA
OSE:ORK
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Orkla ASA
Earnings Call Analysis
Q3-2024 Analysis
Orkla ASA
In the third quarter, Orkla reported a solid performance with adjusted earnings per share increasing by 10% and underlying EBITDA adjusted growth of 17%. The company experienced organic growth of 3.9%, attributed to positive contributions from 8 of its 10 consolidated portfolio companies, despite facing inflationary pressures and heightened competition from private label products.
Jotun, Orkla's largest portfolio company, continued to outperform with sales growth of 8% year-to-date. Orkla Foods Europe saw slight volume growth with improving operating margins, but faced mixed consumer sentiment across markets. Orkla Confectionery & Snacks overcame operational challenges, particularly in its biscuit factory, driving a 4.4% growth in organic sales. Positive growth was also noted in Orkla Food Ingredients, particularly strong in the Bakery segment.
Orkla reported an operating growth increase to NOK 17.5 billion and EBIT adjusted growth of 13%. Cash flow before capital allocation for the year-to-date reached NOK 4.9 billion, an increase of NOK 2.1 billion compared to last year. Strong cash conversion was highlighted at 112% on a rolling twelve-month basis, signalling effective cash management across the portfolio companies.
Notably, the quarter saw NOK 741 million in other income and expenses primarily due to specific write-downs. These included a NOK 300 million impairment in Orkla Confectionery & Snacks, Latvia. However, these write-downs did not affect cash flow, maintaining the overall financial stability for the company.
Looking ahead, Orkla anticipates stabilizing market conditions and is optimistic about maintaining margins. The company will continue monitoring raw material price developments, specifically cocoa, which are expected to stabilize, barring unforeseen fluctuations. There is guidance for a slight positive impact from ongoing operational improvements and a commitment to structural sales processes aimed at optimizing their portfolio.
The management team will undergo changes, with two long-term executives planning to retire in 2025. The restructuring aims to enhance operational efficiency and strategic focus within Orkla's organizational framework.
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Good morning, and welcome to Orkla's presentation of third quarter results. My name is Annie Bersagel, and I'm the new Head of Investor Relations.
To begin, our President and CEO, Nils Selte, will begin with a summary of the quarter. After that, our CFO, Arve Regland, will go into a deeper dive with the financials. Before we move on to Q&A, Nils will summarize some of the main messages from the quarter.
Just a bit of housekeeping. So during the presentation, you're welcome to submit questions in the webcast, and we will address all your questions in the Q&A session at the end of the presentation.
So I'll now leave the floor to you, Nils.
Thank you, Annie, and good morning, everyone.
Overall, in Q3, we continued to improve profitability and cash flow. Adjusted earnings per share were up 10%, with underlying EBITDA adjusted growth of 17% for the consolidated portfolio companies, including headquarter. This comes despite significantly increased advertising and promotional spending during the quarter. Organic growth was 3.9% in the quarter, with positive contribution from 8 of 10 consolidated portfolio companies.
On a macro level, inflation rates continue to normalize in many of our markets. Competition from private labor remains high and some markets were negatively impacted by weak consumer sentiment.
We nevertheless see that the challenges, as I said, with weak consumer purchasing power, have eased somewhat compared to the same quarter last year.
As we said, in Q2, the development in raw material prices remains polarized, but we see slight positive effects in our Q3 figures. Based on what we see today going into 2025, we expect raw material prices in sum to stabilize excluding cocoa.
Lastly, turning to cash flow. Under the new operating model, we listed cash conversion as a key metric for the companies, and we are seeing positive effects. Arve will revert to this later in the presentation.
As I said, underlying EBIT adjusted was up 17% for the company as a whole.
Let me give you a few comments on the largest portfolio companies. Jotun continued to perform well ahead of the company's communicated financial targets. Sales growth was 8% year-to-date for August despite strong comparables. Jotun return on capital employed was 34% on a rolling 12-month basis.
For Orkla Foods Europe, volume growth was slightly positive for the quarter with variation across the markets. Operating margins in Foods Europe continued to improve, supported by ongoing cost reduction. And in September, Aku Vikström joined as the new CEO for the company. I'm very happy to have Aku on board.
For Orkla Confectionery & Snacks, operational challenges at the biscuit factory are now largely resolved. We see a positive market share development overall. And in terms of volume, we see pressure on the chocolate category, following an extraordinary increase in market prices for cocoa.
For Orkla Food Ingredients, operating margin growth and volume/mix growth were positive for both the Bakery and Sweet segments. The company's performance was especially strong in the Bakery segment, both in terms of volume and margin development.
Turning to our targets from the Capital Markets Day. The 3 targets on this slide represent the aggregate effects of the portfolio companies reaching their targets over the strategy period. Although it's still early days, we are on track on each of these metrics.
I will now hand over to Arve for more details on the financials.
Thank you, Nils, and good morning, everyone.
So the third quarter was a strong quarter for Orkla with a 4.3% organic -- or operating growth increase to NOK 17.5 billion and an EBIT adjusted growth of 13%. EBIT for the consolidated portfolio companies, including HQ, increased by 17%, driven by strong underlying growth and improved margins for most of our portfolio companies. The decline in EBIT adjusted for Financial Investments was mainly related to the handover of apartments in Orkla Real Estate last year.
Then on the other income and expenses, we have a negative number of NOK 741 million this quarter. NOK 650 million of this is related to 3 specific write-downs. Firstly, we have done a NOK 300 million impairment of Orkla Confectionery & Snacks, Latvia. So this is not the biscuit factory, but the business unit acquired back in 2015, which has not shown the necessary profitability to defend their book value of intangibles in the balance sheet.
The same reasoning is behind a NOK 50 million write-down of NIC Germany, a part of the Sweet segment in Orkla Food Ingredients. And last year, we had done a NOK 300 million write-down of a common ERP template which was developed under the former strategy of Orkla developing a common ERP system for all group companies, which has not the same relevance now with more independent portfolio companies.
On that basis, the system is taken down from NOK 360 million to NOK 60 million on the balance sheet. And please note that these write-downs have no cash effect.
Profit from Jotun amounted to NOK 548 million in the quarter, and increase by 8% compared to last year. And the increase in profit in noncontrolling interest is linked to loans ownership in Orkla Food Ingredients.
Reported earnings per share were NOK 1.18, while adjusted for other income and expenses is NOK 1.77 per share, an increase of 10% compared to last year.
Overall, we continue to see EBIT margins to tick upwards, reaching 10% on a rolling 12-month basis at the end of third quarter, an increase of 30 basis points compared to last quarter.
All of the largest portfolio companies experienced positive EBIT adjusted margin growth supported by positive volume/mix development despite of the higher advertising spend across the portfolio companies in line with strategy, as also Nils mentioned.
Organic growth was 3.9% in the quarter, of which 2.6% volume/mix positively affected by 1 additional sales day compared to last year. And as shown in the table to the right, the positive volume/mix growth was broad-based across the portfolio companies.
Aggregated level, we continue to see stabilizing market conditions following a period of high inflation pressure.
Total cash flow before capital allocation year-to-date amounted to NOK 4.9 billion, up NOK 2.1 billion compared to last year. You'll notice a slightly different format to this cash flow than in previous quarter, focusing on the cash flow before capital allocation to M&A, CapEx or distribution to owners.
The increase in cash flow is mainly driven by EBIT growth in the consolidated portfolio companies, lower net replacement investments, higher dividend received from Jotun, lower taxes linked to profit in Hydro Power, but partly offset by reduced profit from Financial Investments.
Cash flow from Financial Investments declined to approximately NOK 500 million due to working capital buildup in Orkla Real Estate, handover of our apartments in Orkla Real Estate last year and reduced profits in Hydro Power.
Cash conversion in the portfolio companies remain strong on an aggregate 112% on a rolling 12-month basis.
And we maintain a strong balance sheet, supported by the increased cash flow as discussed on the previous slide. Net cash flow from M&A, but also taking into account the increased dividend paid to shareholders in the second quarter.
Net interest-bearing debt was NOK 18.3 billion (sic) [ NOK 18.8 billion ] at the end of the quarter corresponding to a net interest-bearing debt to EBITDA of 1.8x. And excluding external debt and EBITDA in Orkla Food Ingredients, the ratio was 1.4x.
Now let me walk you through the financial performance in the portfolio companies. Starting off with Jotun, the company continues to deliver strong results with revenue growing 8% on a year-to-date basis with growth across all segments and regions. Growth was particularly strong in the Protective Coatings with double-digit sales growth. The Marine business also had good growth, while Decorative Paints and powder had a more modest development.
EBITDA grew by 2.3% year-to-date, driven by positive volume growth on back of high demand in most geographical areas. Raw material prices have remained fairly stable, but the company is facing some inflationary pressure on operating costs going forward. However, the outlook for the remaining -- the rest of the year is still positive.
Orkla Foods Europe had an organic growth of 2.7% in the quarter, evenly split between price and volume/mix. The volume/mix growth is mainly driven by Norway, partly due to a weak July last year but also positive out-of-home development this year. We have a continued market share growth in Denmark, and we had a comeback in retail in the Czech Republic following price reductions. We continue to experience demanding markets in Sweden and Finland, where the consumer sentiment remains muted.
Despite the substantial increase in A&P spend compared to last year, underlying EBITDA just grew by 17% and EBIT margin was up 1.6 percentage points. The increase is positively impacted by stronger focus on category and product profitability, supported by cost savings from reorganization projects in Norway, Sweden and the Czech Republic.
Note that the third quarter EBIT last year was negatively impacted by one-off costs of approximately NOK 25 million from recall of catchup across several markets.
Orkla Confectionery & Snacks reported organic growth of 4.4% in the quarter, driven by price as volumes were hampered by softening demand in the confectionery segments, related to increased chocolate prices as well as production issues at the BUBs factory. These production issues are now resolved.
In Q3, improvements at the biscuit factory contributed approximately NOK 45 million to the EBIT growth. Even though the biscuit factory improvement was the key driver behind the NOK 53 million underlying EBIT growth in the quarter, growth was still solid, given the substantial increase in A&P spend compared to last year.
And when it comes to cocoa, we want to reiterate that volumes for 2024 are secured. We have also started to secure volumes into Q1 next year. And while cocoa prices have declined since the spring, they remain extraordinarily high compared to historical levels. We continue to take mitigating actions to dampen the effect.
Lastly, at Orkla Capital Markets Day last year, a redesigned operating model was presented. The transition to this new model is progressing well and is expected to be fully implemented by early next year.
Orkla Food Ingredients delivered organic growth of 3.1%. Volume/mix was positive at 4.1%, while prices declined slightly on back of input price reductions.
The Bakery segment continued its solid performance driven by volume/mix growth and price management. Volume in the Sweet segment grew during the quarter, partly explained by weak comparables in Q3 last year for ice cream ingredients. We also see that the program of mitigating actions mentioned last quarter is progressing according to plan.
We have a slight decline year-over-year for Plant Based, but that's fully related to the margarine segment, where results were temporarily very strong in the second half of 2023, and in particular, in the fourth quarter. The strong underlying EBIT adjusted growth of 18% in the quarter can be explained by the organic growth in Bakery and Sweet.
Moving on to Orkla Health. Orkla Health had an organic growth of 10% in the quarter due to broad-based price increases combined with continued good momentum for Builders and Jotun, have the Maxine we launched in Norway and as well as positive development for Möller's and Jordan via the Maxim relaunch in Norway and as well as positive development for Riemann and our D2C business.
Underlying EBIT adjusted growth of 13% was driven by top line growth and favorable mix, but partly offset by increased investments in the A&P and commercial resources. This is in line with the growth strategy to accelerate international expansion for global brands and new market entries for NutraQ as well as supporting our brands in our Nordic home markets.
Organic growth in Orkla India was driven by positive volume/mix development of 3.3% and negative price effects on back of input price reductions. The strong growth in the international business continues, while consumer sentiment in the domestic market was weak, combined with modest festive sales and distributor inventory reductions.
Underlying EBIT adjusted growth was 8.4% in the quarter, driven by contribution margin improvement and reduction in fixed costs, but partially offset by higher advertising costs.
European Pizza Company reported an organic growth of 2.3% in the quarter. Da Grasso in Poland continues to show positive momentum, while consumer sales in Finland and the Netherlands remain soft.
The strong focus on pricing and cost control contributed to underlying EBIT adjusted growth of 23%, but growth was also positively affected by the turnaround in New York Pizza, Germany, which is now operating at a smaller but more healthy base.
Orkla Home & Personal Care achieved an organic growth of 4% in the quarter, driven by increased volumes in contract manufacturing, meaning manufacturing products on behalf of external customers. Underlying EBIT adjusted increased by 25%, driven by revenue management and lower input prices but partly offset by higher advertising spend.
Turning to the remaining portfolio companies in the Transform or exit category. All 3 of them experienced challenging market conditions during the quarter. While I'm impressed that Orkla Health Care, nevertheless continued to perform in line with the company's financial targets, delivering 17% EBIT growth in the quarter, driven by improved cost efficiency as well as onboarding of new customers and successful campaigns.
Then I would like to give the floor back to you, Nils.
Thank you, Arve. In my view, the Orkla organization has delivered solid results year-to-date. We see positive development in value creation and growing entrepreneurial spirit within our portfolio companies. It is crucial that we continue to adapt and we want to stay competitive on all levels. And therefore, reducing and simplifying my management team, both Atle Vidar Nagel-Johansen and Christer Gronberg have decided to retire early in 2025. I want to thank Atle and Christer for a dedicated leadership and service over the past 25 years. Having said that, Atle Vidar will continue as Chair of Orkla India for a period to come.
The new Orkla ASA organization will be operational from November 1. In addition to the organizational changes, we are also reviewing cost within Orkla ASA with the aim of achieving a leaner and more cost-efficient operation.
My #1 priority is to drive organic value in our existing portfolio. This is only the third quarter of a 12-quarter strategy period. We are performing in line with targets. We see high EBIT adjusted growth, margin expansion and increased return on capital employed. While, this reflects normalization to a certain degree, these are encouraging early signs.
We have started to reduce complexity in our existing portfolio with the sale of Lilleborg in June this year. As previously communicated, we are also considering different structural opportunities in moving Orkla's Hydro Power business. We have initiated a sales process involving the whole or parts of other Hydro Power assets. We will provide an update when and if an agreement is reached.
I experienced that there might be some needs understanding in the market that bought the Orkla Food Ingredients transaction with Rhône and the assessment of the Capital Market Day for Orkla India are only about crystalizing value. Let me clarify. Both are examples of how we are working to find the right platform for further growth and value creation.
Lastly, we will still purchase structural opportunities when the timing is right.
With that, we will move on to the Q&A.
[Operator Instructions] We have a few questions on the web. So we'll start with that with first it's from Eirik Rafdal from Carnegie. He asked on the Hydro Power sales process, first, could you give any indication of a time line? Second, how does Saudefaldene impact this? And excluding Saudefaldene, are you free to pursue any potential buyer for the remaining assets? Or are there any limitations from a regulatory perspective?
First of all, time line-wise, we -- I don't want to guide on that. I think we will do a thorough process and make sure that we get the right price if we achieve a sales -- a final sale of the assets. This process also includes all assets, as I said, for all our Hydro Power assets. And we don't want to guide any more than that on this issue. Of course, we have checked the regulatory issues before we initiated such a process.
Second question is from Hakon Fuglu from SEB. First question is how confident are you on maintaining price increases in 2025? And the second question is related to BUBs in particular. What is the last 12-month sales from BUBs and what is the potential of expanding the brand abroad? So we can start with the first question. How confident are you on maintaining price increases in 2025?
As we are always saying, we don't guide going forward. So I will -- but we have seen so far this year that price increases are lower this year than the last previous years. Otherwise, we don't want to guide going forward.
And on BUBs, last 12-month sales and what is the potential of expanding the brand abroad?
Well, we don't give details on each of the different categories. What we can say about BUBs is that the demand is increasing. And its demand is also now globally. So what we're working on at BUBs is actually to increase production volumes to meet that demand. So still find a huge perception for that brand globally.
The next question is from Ole Martin Westgaard from DNB Markets. He asks, on the biscuit factory, we understand that the operational challenges have now been resolved. Was this fully reflected in Q3? Or should we expect a further improvement in Q4?
We said at the Capital Markets Day last year that we will -- a significant part of the cost of NOK 150 million last year will be the again this year. That is still the case, and we continue to guide that. So we will see a slight effect also in the Q4 numbers.
The second question from Ole Martin is how should we think about the impact on cocoa prices for next year for Orkla Confectionery & Snacks? Will you be able to offset this with price increases?
As I said, we don't guide specifically to the market for that. We have covered volumes for this year and also partly into the first quarter next year, and that's everything that we want to say on the cocoa prices effects this year. If the cocoa price remains at this level, we will continue increasing prices, if necessary.
Next question. Two questions from Petter Nyström at ABG. First, you talk about reviewing costs at Orkla ASA. Is it possible to share some more details on this?
We will revert to that later. We are exploring -- going through all the costs in our class, and we have already looked at the market maybe fourth quarter this year.
And we also have a question from Petter on India. His question is, India delivered relatively soft sales growth in Q3. Can you give some more details on the development in India?
I think what we've seen in India, if you look at peer sales, so have a soft development in the third quarter. So this is a market -- due to the market situation in India and, of course, consumer spending or consumer confidence is also about inflation is quite high on some food prices to say. So that affects also our value chain.
So I think we are performing in line with our peers in India, third quarter. This is, in our belief, a temporary drop in the market.
That was the final question on the web. Are there any more questions from the audience? No?
Before we round off, let me remind you that we report our fourth quarter results on February 13. Thanks again for joining, and enjoy the rest of your day.