Orkla ASA (ORK) Earnings Call Transcript

Good morning, and welcome to the presentation of Orkla's third quarter results. My name is Annie Bersagel, and I'm the Head of Investor Relations and Communications. We're going to begin with a presentation from our President and CEO, Nils Selte, who will give an overview of the quarter. After that, our CFO, Arve Regland, will present more detail on the financials and the individual portfolio companies. Nils will conclude with some closing remarks. Just a reminder on the procedure for the Q&A, we are going to have a video Q&A first with analysts. So we're going to take those questions first, but you're welcome to submit questions via the web at any time, and we will take those afterwards. So with that out of the way, let me turn it over to you, Nils.

Thank you, Annie, and good morning, everyone. As Annie said, I will go through the highlights of the quarter, and then Arve will provide more details after that. I'm pleased to report a strong quarter for Orkla in a challenging geopolitical environment. While performance has varied throughout the year, the overall picture is positive with a year-to-date volume growth of 1.5%. Across the portfolio, we are seeing good progress in profitability, and the companies are navigating a challenging input cost environment well. Let's look into some of the details for the third quarter. Organic growth was 3.1%, with a broad-based positive contribution from a majority of the portfolio companies. Underlying EBIT adjusted increased by 8.1%. This positive development also contributed to a 4.9% increase in adjusted earnings per share, which reached NOK 1.94. A significant part of the organic growth came from volume mix, which contributed 2.7% this quarter. Most of the portfolio companies had positive volume growth, and the growth was particularly strong in Orkla Snacks with a volume mix growth of 11.2%, primarily led by the confectionery category. Orkla Home & Personal Care also had double-digit volume growth this quarter. Despite a challenging environment, Jotun continued to deliver underlying operating profit growth. I'm pleased to see that 8 of 9 consolidated portfolio companies delivered underlying EBIT adjusted improvements in the quarter. And in the overall picture, the volume mix was a key driver of EBIT adjusted growth across the consolidated companies. Among those, Orkla Snacks, again, stands out positively with volume-driven underlying EBIT growth of 16%. The rolling 12-month EBIT margin improved slightly from the last quarter. Input price developments varied across the portfolio. Cost for marine products, meat and packaging increased versus last year. At the same time, cost for other input factors such as cocoa and dairy decreased. The outlook for prices remain fragmented across the different input factors. We expect prices to rise modestly in 2027. However, the outlook remains uncertain. As always, we continuously monitor the situation closely. This is our last quarterly presentation before our Capital Markets Day on December 1. We are on track to finish 2026 within mid- to upper range of our targets of 8% to 10% annual growth in underlying EBIT adjusted. And the EBIT margin is also tracking within the target range. The return on capital employed has improved significantly over the strategy period, but we do not expect to reach 13%. With that, I hand it over to Arve.

Thank you, Nils, and good morning. So turning first to the income statement. We'll make some comments to some other items. First of all, operating revenues -- reported operating revenues declined by 2% this quarter, reflecting negative currency translation effects of 6.4%. The reported EBIT adjusted increased 2%, but also reduced by currency effects. Other income and expenses amounted to a net cost of NOK 490 million. This relates mainly to write-downs of goodwill and trademarks in Healthspan within Orkla Health and loss on sale of Eisunion in Orkla Food Ingredients. Under discontinued operations, we recorded a gain from reversal of provisions related to the sale of Sapa back in 2017. And as Nils mentioned, earnings per share adjusted increased by 4.9% this quarter. Cash flow from operations was NOK 4.4 billion year-to-date, approximately NOK 400 million lower than last year. And about half of the decline was due to working capital. And this reflects both a higher receivables following sales growth and a temporary inventory buildup ahead of an ERP implementation in Orkla Foods Norway. And cash flow before capital allocation was NOK 3.9 billion year-to-date. So turning to capital allocation and leverage. During the quarter, share buybacks were approximately NOK 1 billion, and this includes both the completion of the NOK 4 billion share buyback program announced in November last year as well as the new NOK 4 billion share buyback program that we announced in September. Expansion investments increased with NOK 260 million this quarter, mainly within Orkla Snacks and Orkla Food Ingredients. The net cash flow effect from acquisitions and divestments during the quarter amounted to about NOK 2.9 billion, and the largest element was the acquisition of The European Candy Group. And leverage was 2.1x EBITDA at the end of the quarter. So let's move to the portfolio of companies with some more details. And as usual, we'll start with Jotun, where the underlying revenue grew 13% in the third quarter across segments and markets, driven by both volume and price. The gross margins declined because price increases did not fully offset the higher raw material costs. On an underlying basis, operating profit rose 1.3%. Reported operating profit fell 5.1%, reflecting negative currency translation effects. And Orkla's share of profit from Jotun was down 6.6% to NOK 563 million. Jotun's outlook remains uncertain due to the conflict in the Middle East. Demand in more affected markets has been resilient, but the conflict creates uncertainty around supply, logistics and business conditions. And margin pressure is expected to continue in the coming quarters. In Orkla Foods, organic revenue grew 2.4%, of which 1.5% came from volume mix. Growth platforms delivered volume mix growth of 5.3% with growth in all markets. There was also a positive effect from the comparison to ERP challenges in the Czech Republic last year. Input costs increased slightly with higher increases for mackerel and packaging. Underlying EBIT adjusted increased 7.6%, driven by revenue growth and continued cost discipline. Organic growth in Orkla Snacks was 5.6%, and volume mix contributed a record high 11%. Organic growth was partly offset by lower prices, mainly for chocolate products. The Confectionery, snacks and biscuit categories all delivered volume mix growth. Confectionery was the largest contributor with 4 main drivers. Bubs continued to grow in the U.S., across the Nordics, with further expansion in Finland and launches in Estonia and Latvia. Secondly, Smash! also continued to grow, including from its launch in Latvia. Thirdly, chocolate volumes continue to recover, supported by lower prices. And lastly, earlier Christmas sales than last year had an additional positive effect on volumes in the third quarter. Underlying EBIT adjusted increased by 16%, driven by higher volumes, but partly offset by higher advertising spend and SG&A costs. Organic growth in Orkla Home & Care -- Home & Personal Care was 10%, almost entirely from volume mix. Volumes increased in Norway, Sweden and contract manufacturing, supported by more campaign activity. And part of the growth reflects positive phasing effects that shifted sales into the third quarter, partly from the second quarter and partly from the fourth quarter. And underlying EBIT adjusted increased by 8.7%. The Orkla Food Ingredients had a more muted development with organic revenue growth of 0.7%. Prices were lower, reflecting lower input costs in several markets and categories. Volume mix grew in bakery and sweet, but within plant-based lower volumes and unfavorable mix effects contributed negatively to both overall volume mix and EBIT development. Underlying adjusted EBIT declined by 2%. Volume growth was more than offset by higher operating costs. And as we said last quarter, Orkla Food Ingredients is taking steps to reduce its cost base, however, with limited effect this year. Organic growth in Orkla Health was flat in the quarter. Price increases in most categories were offset by lower volume mix. Most of the decline came from food supplements, where price increases negatively impacted volumes. Orkla Health and Functional Personal Care contributed positively to both revenue and EBIT growth. And the underlying EBIT adjusted increased 6.1%. Pricing and mix lifted the contribution margin, which more than offset higher operating costs. And as communicated earlier, we continue to expect weak profitability in the coming quarters in Orkla Health. And at the Capital Markets Day, Orkla will present more details about the strategy going forward. In Orkla India, organic growth was 19%, driven primarily by pricing to offset significant inflation in key raw materials, but volume growth also contributed 2.9%. Government grants had a net positive delta of about NOK 8 million in the quarter, and adjusted for this, organic growth was 18%. Underlying EBIT adjusted growth was 7%, but flat when excluding the effect of the grants. Consumer sales in the European Pizza Company increased by 9.7% with the growth in all businesses. Organic revenue declined by 1.9%. And as in the previous quarter, this is mainly due to lower third-party sales in Kotipizza's wholesale business. Underlying EBIT adjusted increased by 5.4%, supported by higher consumer sales and positive mix effects. And both Orkla House Care and Health and Sports Nutrition Group continued to develop well in the quarter and contributed to Orkla's organic revenue growth and underlying EBIT growth. So with that, I'll hand it back to you, Nils, for the closing remarks.

Thank you, Arve. In 2023, I set out 3 strategic priorities: drive organic value, reduce complexity and carry out value-adding structural changes or transactions. This quarter, our progress came from driving organic value, and I'm pleased to see the progress made. At the Capital Markets Day in a few weeks, I will review the full strategy period and present priorities and financial targets for the next 4 years. With that, we are now ready to begin the Q&A.

Welcome back. We're now ready to begin our Q&A. [Operator Instructions] So it looks like our first question is from Ole Martin Westgaard in DNB Carnegie.

When it comes to the volume growth in this quarter, there was a clear improvement from the second quarter. But at the same time, you highlight that you benefited from some promotion phasing going forward from Q4, and Snacks also had some Christmas phasing. Can you quantify this effect on organic volume growth on the group level? And what should we expect on Q4 for that?

As you know, we don't guide for Q4. But what I said in the presentation was that if you look at the year-to-date numbers and the growth -- volume growth year-to-date, 1.5%, we think that that's kind of a correct underlying or view on the underlying performance of the business at the moment.

Okay. And just on snacks then to follow up on that. Can you say anything about how much Bubs contributed to the organic growth in Snacks in Q3?

Sorry, we will not give you precise numbers. But what we see in Bubs is that Bubs is growing across its markets. So it's growing healthy in the Nordics, in the Baltics and also in the U.S. So good performance across the board in Bubs.

And then a question on the cost side, both in Foods, Snacks and Food Ingredients, you point to higher energy, packaging, freight and raw material costs. Is this reflected in Q3? Or is this something that will accelerate going into Q4?

It is reflected in the Q3 results as well. And given the picture we see today, we expect it to also continue in Q4 in the coming quarters. But obviously, it depends highly on the Middle East situation. But as of now, it's a picture that we have seen and continue to see going forward.

And then just a last one on the cost side. On the marketing spend in this quarter, how was that compared to Q3 last year? Was it stable? Or how has the marketing spend been so far this year?

Slight increase this quarter compared to last year.

It looks like our next question is from Andrei Condrea in UBS.

If we could go to go back into the volume growth, particularly in Foods. Obviously, we saw a nice step-up there. Can you speak to what's -- what's changed in your underlying markets? And whether the performance was a bit flatted by any small one-offs beyond the Czech ERP implementation?

I think the volume in Foods was, as you said, affected by the ERP implementation in the Czech. So that has been kind of addressed in the presentation. But otherwise, we see a good growth in Sweden as communicated. We see weaker performance in Vietnam. And what we see across the board and in all the markets that the Orkla Foods are operating in that we see that prioritized categories have a fantastic growth this quarter. Otherwise, we are not precise on other items or more -- we will not like to be more precise than that actually at the moment.

Understood. And if we were to go to India, obviously, pricing, strong acceleration Q3 versus Q2. You mentioned that it's driven by input cost inflation. If we look ahead, do you see -- is there a potential for it to accelerate further? And conversely, is there a risk that price elasticities are going to increase? And this question applies for the rest of the group as well, just seeing where we have inflation right now.

So if we look at India through the third quarter has experienced high -- extreme high inflation on input prices. And that's also reflected in the numbers as well. I think as always, we don't guide precisely on the different input factors. It will give a lot of sense for you to watch the call that they have last -- or yesterday morning. So probably can enlighten you from that perspective. But we are monitoring the situation closely together with the team in India. And -- but I think what's encouraging is that they are able to take out price to the market on the increased input prices that we are experiencing at the moment. Anything to add to that?