Orkla ASA (OTCPK:ORKLY) Third Quarter 2022 Results Conference Call October 27, 2022 2:00 AMm. ET
Participating companies
Kari Lindtvedt – Senior Vice President, IR
Nils Selte – Group President and CEO
Harald Ullevoldsæter – Chief Financial Officer
Conference Call Participants
Operator
Good morning and welcome to Orkla’s third quarter earnings presentation. My name is Kari Lindtvedt, I am responsible for investor relations. Today’s presenters will be our President and CEO, Nils Selte, and our Chief Financial Officer, Harald Ullevoldsæter. summarizing key monetary knowledge and then providing an update on the exciting adjustments we are implementing here at Orkla. After that, Harald will divide into percentages the key headlines and monetary main points for the quarter. And then we’ll go straight to the Q&A section. . And then Nils will make his final comments at the end of the session.
During today’s presentation, you are invited to ask questions about live chat. And we will answer questions with all the questions from the audience here in Oslo in the question and answer session.
But now, let’s get started, Nils, he’s yours.
Nils Selté
Thank you. Kari And good morning everyone. And thank you for attending our third trimester presentation. I look forward to this presentation and the opportunity to share with you more important points about transformational coaching.
But before I go into detail, let me start with a few words about the third-quarter figures. They recorded Group adjusted EBIT expansion of almost 30%, driven primarily by Hydro Power’s strong results.
Adjusted EBITDA for new customer goods, adding head office, was negative to 11%. Adjusted for earnings, adjusted earnings consistent with a consistent percentage greater than NOK 1. 58 consistent with a consistent percentage. Prices throughout our business. I have initiated cost-out projects for all our activities, and we will return in our fourth quarter presentation with transparent and higher ambitions for the future.
During the quarter, we announced merger and acquisition transactions. Our most recent transaction was the acquisition of 84% of the Norwegian ingredients shares. This is a vital milestone for our ingredients business in the US ice cream industry.
The food ingredients sector is fragmented and we see great potential for consolidation and expansion. Based on those opportunities, we have announced that we will begin the process of finding a long-term spouse for food ingredients to drive expansion and creation.
In September, we announced the acquisition of 74% of the shares of Da Grasso, a leading pizza franchise chain in Poland. This is another step on our way to one of the leading pizza franchise corporations in Europe.
So now I need to get into the main points of the adjustments that have been going on since I arrived in early April. I will provide our long-term organization, new control team and our operating model.
As noted in our current quarter presentation, there is potential to improve pricing at Orkla. To achieve this, we made the decision to replace our operating model. commercial spirit and long-term vision.
As a first step in this transformation, we will replace along 3 main dimensions. We have designed an efficient and efficient business center focused on active ownership, portfolio control and capital allocation. We build a portfolio of independent corporations and will generate significant synergies between teams across our commercial facilities corporations in the procurement, IT and monetary facilities spaces. And just to avoid misunderstandings and to be clear, we haven’t replaced our capital allocation or dividend policy priorities.
This is how we are going to organize ourselves in the future. Orkla is based on a business mindset combined with a deep logo and customer wisdom and innovation skills. We will have an investment team made up of investment professionals and centers of excellence. The midpoint of excellence will start with sales, marketing, innovation and sustainability. The mandate of the company will mainly serve to assist in the role of the owner. And on the right side of the slide, see the 3 business services, procurement, IT, and financial services companies.
Now I need to introduce you to my new leadership team starting in mid-December of this year. First and foremost, I’m very proud of this team and I think it represents a smart balance between business fun and active ownership skills. .
If you start in the most sensible left corner, I’m glad we secured the price or reflected image of parents on a computer. Thanks to Atle Vidar Nagel Johansen and Egg Hege Holter Brekke. New to Orkla, 3 members to register for the investment team, Audun Stensvold with experience in other roles, 12 years at Arkit ph and recently CEO of Venus Board ph will take up the role from November 7.
Maria Syse-Nybraaten joined as an investment professional at the Fed, she in Orkla on October 1 and the last Øyvind Torpp with 23 years at Boston Consulting Group. During the more than 8 years as a main partner, it will start on November 1st.
If we continue on the right side with the corporate function, we have Harald Ullevoldsæter, who will remain my trusted CFO. The same goes for Christer Grönberg, as Executive Vice Preaspectnt of Human Resources and who you designate on this list is Vice Preaspectnt Legal and Compliance, Camilla Robstad, General Counsel in [indistinguishable] 2018. And finally, Håkon Mageli continues as Executive Vice Preaspectnt of Communications and Corporate Affairs. A strong and varied team with whom I am proud to be a spouse to move forward.
Let me continue with a few words about what we believe will differentiate or classify investment businesses in the future. First, we have an advertising mindset and will take a long-term view of our investments. Delight and take the lead in structural opportunities and capital allocation.
This, along with the new operating style and synergies within our portfolio, will give corporations a competitive advantage. And the newest criteria and code of conduct should serve as a quality for our stakeholders.
Areas either portfolio or corporations of the future. For starters, we’re going to have 12 companies, served here along: at the top left, you’ll see Jotun, by definition, already a holding company and a good example of price creation through a long-standing partnership.
Well, click here will be split into 3 portfolio companies, with Orkla Health focusing on emerging or translating as a leading player in customer health. Orkla Home and Personal Care will continue to expand its position of elegance as a leading Nordic player. The Health and Sports nutrition organization will continue its position in the Nordic online markets. Orkla, the left side of hydropower, will continue as vital monetary investments.
Today we announce the new leadership team and then they are designing an operational style for Orkla in the future. We plan to provide you with an update on the progress of the transformation procedure in our fourth quarter presentation.
The new corporate design of the holding company will be operational from March 1 next year. And we will begin reporting on the new design in the current quarter of 2023. Until then, our monetary reports will stick to the same design we are presenting today.
We also plan to host a Capital Market Day at the end of 2023 where we will share more important points about the potential, ambitions and plans of the companies in our portfolio. We will share the celebration of the event as soon as it has been confirmed.
And with that, I’ll pass Harald an update on our third-quarter 2020 monetary performance. Thank you.
Harald Ullevoldsæter
Thank you Nils. Et good morning to all. Let’s take a look at the fund’s functionality in the third quarter. But let me note that we did not make any adjustments to the design of monetary reports this quarter, but we have split Orkla Foods into Orkla Foods Europe and Orkla Foods India. In the After Slides, the logo’s new customer intelligence figures come with Orkla’s food ingredients and customer investment, just like in previous quarters.
So, let’s start looking for the group numbers for the third quarter. Reported revenue expansion for Orkla-branded customer products was 7. 5% in the quarter, product earnings from branded customers who added the primary workplace decreased 10. 7% over the same period, more on that later on.
The improvement in commercial and monetary investment is basically due to the significant accumulation of electric power costs for hydropower. This resulted in an adjusted EBITDA for hydropower of NOK 773 million, and this is a new quarterly EBIT record for the hydropower business. Later in the presentation, I will return to the effects of the proposed adjustments to the Norwegian law on the taxation of hydropower.
We recorded non-recurring pieces of minus NOK 101 million in the quarter, with the most significant item being trademark impairment of NOK 64 million similar to Harris’ acquisition of Orkla House Care in 2016.
The partner’s profit amounted to NOK 238 million, basically similar to a strong recovery of Jotun. Net currency items were higher than last year, basically due to higher interest expenses, but also higher debt levels. And the effective tax rate on affiliates was higher in the quarter compared to last year. The maximum vital driving force was the accumulation in the resource rental tax due to the strong profit expansion in Hydro Power.
Let me note that the tax line comes with the proposed increases in the hydroelectric tax legislation, as the proposal is subject to parliamentary approval through correspondent [ph] Adjusted earnings consistent with participation, as Nils said, ended up reaching 50% – up 15% in the quarter and 10% so far this year.
Next, let’s take a look at moneyArray operating money amounted to NOK 2200 million in the first 3 quarters. Cash from branded customer goods operations was particularly weaker at the end of Q3 than in the corresponding era in 2021.
The accumulation in net current capital is basically due to higher inventory values due to higher unfired curtain costs and higher sales resulting in higher receivables.
Next, let me bridge the net interest debt for the first nine months. Net debt, adding leases, increased from NOK 3. 7 billion to NOK 16. 5 billion between the end of 2021 and the end of September 2022.
Taxes on smelter and monetary items amounted to NOK 1. 1 billion. The accumulation of taxes on raw iron compared to the corresponding consistent last year is basically similar to hydroelectricity. The largest spending of money in the first nine months, the 3 NOK3 dividend consistent with quota, paid – paid at the beginning of May, and this amounted to around NOK3 billion.
Net mergers and acquisitions amounted to approximately NOK 1 billion in the first few months and were also similar to the acquisition of Healthspan Group and Vesterålen Marine Olje. In addition, we had an IN CapEx expansion of approximately NOK 228 million.
Negative exchange and conversion effects resulting from the decrease in NOK’s higher net debt through NOK 578 million. This leaves us with net debt, adding lease debt, of NOK 16. 5 billion at the end of the third quarter. The corresponding rent figure was NOK 14. 7 billion.
Orkla has a strong monetary position and our net debt point at the end of the third quarter is 1. 7 times EBITDA, in the last 12 months when the acquired businesses are included in EBITDA. The acquisition of Acquisition and Denali is expected, as mentioned by Nils. to close in the fourth quarter. If we were to approach those two acquisitions, the net debt figure would be approximately 1. 9 times EBITDA.
Let’s take a closer look at the functionality of branded products for customers. Let’s start with the most productive functionality of new branded products for customers. Organic expansion accounted for 9 per cent of the increase, partially offset by negative exchange rate effects of 2. 7 per cent. Structural adjustments have a net positive effect of 1. 2%.
Therefore, the biological expansion of 9% is due to increases in value and is offset by a reduction in the combined volume of about 3%. pandemic.
The volume picture is confusing because there are entry drivers facing each other between quarters and market contracts and from the highest levels of the pandemic. Overall, in the future, we see a greater threat of negative volume effects. To date, biological expansion into a new customer brand segment of goods 9. 6%.
Let’s take a look at how expansion through the commercial sector is damaged. All business segments recorded biological expansion in the third quarter. The overall picture is that value increases were implemented across all activity spaces in the end markets. Value increases took effect successively during this year, so far, with the greatest impact in the third quarter.
Above-normal sales in anticipation of July 1 value increases in Norway had a negative effect of around one hundred million Norwegian kroner in the quarter. This effect is basically attributed to the commercial, food, candy and Orkla Care sectors.
The potential negative volume effects we discussed last quarter have materialized to some extent. We estimate that the combined volume will be minus 3%, as I said in the quarter, adjusted to cope between quarters.
As you will see in the table on the right, for the first time we have split Orkla Foods into Orkla Foods Europe and Orkla India. The two combined businesses recorded a biological expansion of 6%, while Orkla Foods Europe recorded a biological expansion of 4. 2% and Orkla India 20. 1%.
The market contraction in some segments of the Norwegian grocery market continued after higher levels due to the pandemic. Basically, this is the case of Orkla Foods Norway, Confectionery
Before moving on to benefits functionality and new branded products for customers. Let’s take a look at our precedence expansion spaces. Our 3 precedence expansion spaces are Consumer Health, our European factory and pizza franchise platform, all of which experienced advancements in the quarter.
Consumer Health increased sales by 28% in the first nine months of 2022 as reported. This is basically due to the structural expansion of the acquired corporations through New Trochu ph Vesterålen Marine Olje and Healthspan Group.
Biological expansion of consumer health 3. 5%. The Digital Chair in Consumer Health reached 45% in the first nine months, compared to 37% in the corresponding era last year, also definitely impacted by acquisitions.
In September, we announced the acquisition of Da Grasso, one of Poland’s leading pizza chains. Orkla has a main competitor in the European pizza market through a series of transactions since 2018. As a component of Da Grasso’s large investment, Orkla’s network will come with 860 franchised pizzerias in Finland, Benelux, Germany and Poland. Its portfolio will consist of leading brands Kotipizza, New York Pizza and Da Grasso and the acquisition of Da Grasso is expected to close later in the fourth quarter.
The underlying expansion of customer sales for our existing pizza business was 7% in the first nine months. Kotipizza and New York Pizza recorded positive expansion rates in customer sales.
The reported expansion for plant-based products was 18% in the first nine months, the biological expansion is 22%. While the biological expansion of Orkla brand products amounted to around 8% so far this year. The difference here is a production contract with scale benefits. and capacity building.
We are committed to the plant-based category and see the underlying long-term fundamentals for the category and/or class’s market position. Even with short-term uncertainties.
Next, let’s move on to the benefits functionality of branded products for customers. EBIT from branded customer products, head office, decreased 10. 7% in the quarter, reflecting an underlying decline of 8. 6% and a negative currency effect of 2. 3%. But offset through the structural expansion in acquired companies of 0. 2%.
The underlying decline in the third quarter was basically due to strong charge deflation across all lines of business and, as noted, minimizing volumes. Cost increases will also have to be similar to a peak of activity during the era, especially Orkla’s food ingredients. On the right side, you can see the EBIT margin being minimized by up to 1. 8%. For 12 consecutive months. Underlying functionality during the 12-month era was minus 1. 7% points.
Let me develop the charging scenario a bit more before moving on to the activity spaces. Market imbalances are the result of the pandemic and war bottlenecks in Ukraine remain a reality for our businesses.
Commodity costs are still at very high levels, despite some signs of stabilization in some categories in recent months. Due to the contractual design of our raw curtain sourcing to our centralized sourcing function, we continue to move towards higher cost contracts.
At the same time, energy charges continued to rise in the quarter. In addition to our direct energy charges, we also see that higher energy charges have oblique effects, as in many cases it is a central charge detail for the production of raw materials. For example, sugar refining and the production of glass for packaging.
For our input charge base, which covers raw materials, packaging, commercial goods, energy and freight, we expect an increase of 15-18% this year. In addition, we are seeing an increase in SG$A parts and plants. overheads. This is basically due to headline charge inflation, the normalization of post-COVID activity levels, and the charge of protecting our supply chain. That said, new PH cargo projects will be needed with the ambition to build on the goal we have set for ourselves. At the same time, we will continue to invest in our brands for A.
Then, let’s move on to the commercial areas, starting with Orkla Food Europe. Orkla Foods Europe reported earnings expansion of 0. 6% in the third quarter, adding a biological expansion of 4. 2%. Sales expansion became widespread in all markets, while volumes decreased in several markets due to market normalization in the Nordics and customer tension in Central Europe and the Baltics.
Restaurants and convenience stores continue the positive trend of the first part of 2020, while sales expansion was more moderate to somewhat negative in the grocery channel. The positive effects of reopening are diminishing, more people spending their holidays abroad have also had a negative effect. have an effect on sales figures.
Market stocks remained strong during the quarter. But we are seeing shrinking market trends in terms of volume in some countries. EBIT decreased by up to 19%, mainly due to higher input charges. Charges
Before we take a look at the quarterly figures for Orkla, India for the first time, let me remind you of the corporations we have in position and why we do it. The entire history of trusts in India dates back to the acquisition of MTR in 2007. MTR has since recorded a cumulative average expansion rate of 13%.
India is characterized by significant regional differences in taste and culture and there is no global Indian market for our product categories. It is very suitable. With our elegant operational style that nurtures local uniqueness and local customer knowledge.
Our two companies, MTR and Eastern, have strong market-leading brands in the local states of Kerala and Karnataka, as well as Andhra Pradesh, with a combined population of approximately 160 million. In addition, export accounts for 18% of sales, basically targeting the Indian diaspora worldwide, for example in the Middle East and the United States.
Growth is supported by strong underlying customer trends with a shift from unprepared spice blends and in-position foods to prepared spice blends, greater purchasing power and more urban lifestyles.
Eastern’s integration is progressing and Orkla India is on track with the synergy plan implemented as a component of the acquisition. We are very satisfied with our control team in India, market positions and customers for our Indian business.
That said, let’s take a look at third-quarter functionality. India recorded sales growth of 26. 4% in the quarter, where biological growth was 20. 1%, driven by both value and volume. Progress has been widespread across all categories and peak markets.
Sales to grocery retail outlets were strong. Most sensitively, the export market is recovering from the pandemic, as Indians hoped to return to work abroad. Masalas and spice blends recorded stable growth with double-digit growth in the third quarter.
Cost increases in primary inputs are also an issue in India and continued in the third quarter. This led to the need for additional value increases. The profit expansion was partly offset by increased investment in AMP for the logo over the long term. The EBIT margin for the quarter was 13. 5% to 1. 44 percentage issues compared to the corresponding era last year.
Let’s move on to pastries and snacks. Orkla confectionery snacks recorded a biological expansion of 7. 5% in a quarter, expansion driven by value increases, while volume expansion was negative. Part of the negative volume expansion similar to coverage between now and the third quarter. fourth to 3rd quarter of this year due to holiday sales.
The functionality of the grocery market is negative, partly explained by the strong expansion of the last two years. This is the case of the Norwegian market. era last year.
Increases in input prices were offset by value increases that took effect in the prior year and quarter. However, prices continue to increase in the load base of confectionery snacks also effectively in the third quarter.
Let’s take a look at the yields in the order of Orkla Care. Orkla Care recorded a profit expansion of 7. 4%, of which 3. 7% was biological expansion. Increases in value between firms and expansion in foreign markets drove overall biological expansion, despite market contraction in several Nordic markets.
This quarter, Orkla Care and Orkla Home and Personal Care in Norway experienced a decline in sales, as more markets adjusted following strong demand due to the pandemic. the margin was negatively affected by higher costs, negative combined effects and declining volumes in healthcare and non-public home care in Norway. Profits fell 28% in the quarter, margin contracted 2. 4% year-over-year.
Let’s move on to the ingredients of Orkla Food. Orkla Food ingredients achieved another quarter with a strong biological expansion. In the third quarter, biological expansion was 20. 9%, mainly due to prices. Broad-based growth across all categories and markets, and basically price-driven.
Sales of ingredients for the ice cream and confectionery industry were negatively impacted by declining demand and bloodless weather at the end of the third quarter. demanding situations similar to security of supply, in addition to increasing input prices. High inflation across Europe creates uncertainty about purchasing power.
Now let’s take a look at the functionality of the client’s investment. Orkla [ph] Consumer Investment recorded sales growth of 6. 3% with a biological expansion of 0. 7%. The solid expansion of chain sales in the pizza franchise sector contributed positively, supported by value increases.
Orkla’s home care risk [ph] decreased sales in the quarter due to negative functionality in the UK. As I mentioned, in the third quarter, we amortized NOK 64 million brands similar to the acquisition of Harris in 2016. Lower demand for representation tools, mainly in the United Kingdom, has been the main driver of the 15% drop in EBIT.
Higher energy and input costs, combined with broad-based inflation, continued to put pressure on margins in business and investment, and led to a decline in profits in the quarter.
Higher sales volume and emerging costs resulted in strong earnings expansion for Jotun in the third quarter. All 4 segments recorded double-digit sales expansion in the quarter. Strong earnings contributed to EBITDA-EBITA, our 75% accrued in the third quarter. Margins are still under pressure due to high raw material costs. But don’t expect further sales expansion in the future. High input costs will remain a challenge, while there are signs of calm in commodity markets applicable to Jotun.
Finally, let’s take a look at hydropower. Hydropower volume in the third quarter was 26% higher than last year, while it was 23% lower than the quarter’s 10-year average production. Prices were more than 3 times higher than last year. And this was the main driving force of the record EBIT of NOK 773 million in the third quarter.
Let me elaborate a little more on our hydropower business. It’s a loaded slide, but I’ll try to pass it on. We received many questions earlier in the year about our hydroelectric assets. This has been reinforced through the Norwegian government’s proposal to increase the effective tax rate on hydroelectric activities in Norway. I would like to take this opportunity to share more data on the dynamics of our hydropower business and the effect of the proposed tax adjustments on us.
Let me begin by reminding you of some fundamentals. If we use the average volumes of old generation as a reference, we produce about 2. 5 terawatts consistent with the year. Hydropower consists of our own power plants in [indistinguishable] and power plants leased to a stake of 85% or more in Safdar [ph]
The exploitation of electric power in Safdar is a reservoir founded and regulated by lease with artisanal ph inventory that extends until the end of 2030. Upon termination of the lease, the power plants will be retrofitted to artisanal inventory in exchange for monetary compensation, for the estimated residual value, depreciated for tax purposes of approximately NOK 1. 1 billion.
Sites that provide power or run-of-the-river operation in cascade rights are not subject to any reversal. Orkla Hydro Power’s operation generates and supplies electricity to the Nordic electricity market at spot market prices. But about 1. 1 terawatts are sold with a constant delivery commitment with a net effect of 0 and profit, provided that productions exceed delivery commitments. Please note that hydropower is only subject to resource rental tax on about 60% of its total generation volume. It’s a bit confusing, I know.
What makes this lesson undeniable is that the constant contract volume component and the constant value contract are taxed on the spot value basis when calculating resource income tax. However, this is a matter of explanation with the tax authorities. And with respect to the proposed adjustments to the tax legislation, the effective tax on the proposed resource annuity will go from 37% to 45%, as of January 1 of this year, and the tax on the resource annuity is paid in addition to the general corporate tax of 22%. In addition, an exceptional tax of 23% will be established on values above 70 [ph] kilowatt hours and will take effect on September 28, 2022. If passed, it is an excise tax not eligible for any form. of tax deduction and it will be a little bit and not the tax line.
If the new tax law is passed, the effective functionality tax rate from the beginning of the year in the third quarter would be five and five %, of which NOK 8, five million or five percentage issues will be due to the proposed accumulation in the resource rental tax. , NOK 8five million so far this year.
The estimated effective tax rate under the new exceptional tax regime for the year 2022 is approximately 54% of the declared pre-tax result. It’s in my presentation, I think we’re going to move on to questions and answers.
Q&A session
Operator
Well, we have some questions on the web. All 3 for now come from [indistinguishable] I’ll answer them one at a time.
unidentified analyst
First, assuming that existing commodity and energy costs remain at existing levels, when will margins recover?
Nils Selté
I perceive the consultation perfectly, and I think it is very, very difficult to be very explicit about it. We cannot move on to those details, because the environment in which we operate is still uncertain, but it will take longer than we do in past thinking. So there you have it.
unidentified analyst
Well, and then query number two, how do we think about your previous overall strategic objectives under the new operating model?
Harald Ullevoldsæter
I believe there will be no replacement, we will continue to invest in health, we will continue to invest in Out-of-Home and we will continue to work on select protein resources. So there will be virtually no replacement in that. And if there will be replacements. I think we’ll come back to that later. But right now we’re focusing on the same thing as before.
Nils Selté
So, I think if I can add, I think we’ll probably set new goals for each of the corporate portfolios over the long term if we look for a long time after we’ve calculated the new strategy for each. one of the companies. So, I guess when we have capital markets next time, we’ll have more, more targets at the corporate point than at the organizational point.
unidentified analyst
Merci. Et, third and last of my entire team. How did your Market Place percentage perform in the third quarter?Are you wasting Market Place’s percentage on personal etiquette?
Nils Selté
We don’t see any sign of losing the percentage of market place for personal etiquette. So, the general observation is that our market place percentage is about the same point as before, of course, with the difference in meaning bouncing off all our market place places and categories. But, of course we are – we are concerned whether personal etiquette will occupy a percentage of market share in the future, as we have noticed in other countries.
unidentified analyst
So we have one from Mike Hughes [ph] Can you elaborate on the underlying decline in EBIT of minus 9% in branded products for customers?Is volume or charge the main factor?
Nils Selté
I think volume and cargo should perceive this recommendation as a 10% drop. I think the charging component is a little higher. But the volume component, of course, is also Array.
unidentified analyst
This turns out to be the last query on the web. Before we leave today, I have some final comments, Nils, that you would like to share.
Yes, absolutely. Thank you. Kari and Harald. I deserve to be brief. But what I literally need you to take away from this presentation is that we’re seeing EBIT growth forged, adjusted growth. And this was basically due to hydroelectricity. And also that we locate that the environment or the companies in which we navigate are difficult.
I wanted to remind you that we are becoming a business investment company. And I think it’s a bold resolution. This step turns our pricing into the future. And finally, I’m proud of the new control team. With me, I have a WS [ph] on a committed team of strong Americans and wonderful team players at a position at our club. Thanks a lot.