Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Age Korsvold - President and CEO: Good morning, ladies and gentlemen, and welcome to this presentation of the Second Quarter Results from Orkla. We have – first, I will give some introductory remarks, then Mr. Terje Andersen, the CFO will present the figures to you; and then Atle Vidar Johansen, the CEO of Orkla Foods will take you through the Consumer Goods activities.

There are three main messages in this quarter. Firstly, the financial results are unsatisfactory. We are reporting EBITA of NOK632 million versus NOK698 million last year. Secondly, all the restructuring programs' integration work going on inside our organization are on plan. Thirdly, the divestment in non-core assets continued on plan with one exception where we are now clearly behind plan.

If we then start with the financial performance, there are obviously a multitude of factors explaining this deviation from plan. First and foremost, there are some indications that macroeconomic factors may have affected this quarter, but it's maybe early to say whether this is a change in consumer behavior or it is in fact macroeconomic factors.

Competition is also still intense, but I think for the most part, we need to look inside Orkla to see the explanation for the deteriorating performance in the second quarter.

There is a weak top line development in June in particular. I would also say that the extended approval process for the Rieber acquisition has clearly taken its toll on that organization this year, and as a consequence, both top line and the profit performance for Rieber is clearly behind and below expectations.

The challenging market for Snacks & Confectionery, which has been in place for several quarters continues, and, as you know, this is also the reason why we are restructuring those activities, as I will come back to.

Finally, we are in the middle of a big turnaround in Russia, and that operation continues to perform below expectations. We see weak results affecting our results in the second quarter as well.

There are improvements, however, for Home & Personnel and Orkla Food Ingredients. The divestment of assets continues with the sale of the REC and Borregaard shares. In general, in this quarter, a lot of activity and a lot of focus on the restructuring activities inside the Consumer Goods business.

I have commented for the most part ongoing transition inside the Branded Consumer Goods, the integration Rieber progresses according to plan, the new organization is in place and in general terms we could say that the very demanding face of that integration process where the organization is probably focused mostly on themselves where we set up a new structure where we appoint new leaders. That activity is behind us. I think we can now go forward with a new highly motivated management team and organization and effectuate the plans that we have in place for that activity.

There are also, as you know, integration processes going on. In Denmark, where we merged Orkla and Rieber organizations and in Sweden where we merged Frodinge into the Procordia organization.

There is a new management team in place in Home & Personal and there is a – and also the new management teams are in place in that organization.

With respect to the divestment processes, as you know in the second quarter, we sold the remaining REC shares and the Borregaard shares. The exclusive negotiations we have had with a possible buyer of Sapa Heat Transfer has been terminated. That does not change or close strategic view on Sapa Heat Transfer, but we feel confident that in the short-term it is at this point more value accretive to Orkla to remain a shareholder of Sapa Heat Transfer.

As I said, the inside food organization, we have had several integration processes Abba and Procordia have been merged into one organization in Sweden. We feel that processes progress well. There is also an ongoing integration of Rieber and as I said that process is now come to the point where new management teams are in place and we are ready to go with that new organization. So that new organization will be operational from the third quarter.

As a consequence of these integrations the management teams in Norway, Sweden and Denmark have been reduced from seven to three. Similarly, as you know we have restructured and setup a new management team for Confectionary & Snacks. We have had several quarters with satisfactory results with that operation. That development has continued in the second quarter. The new management team is in place and also there we have as a consequence of the restructuring reduced the number of management teams from seven to three.

In general terms, we feel that we have more streamlined our organization and we expect obviously to see some results of that going forward. The operation in restructuring activity, there is a simplification in terms of reducing the number of plans and in also reducing the product portfolio that's just having an impact on the top line figures and as a consequence of the financial performance, we have also decided to write-down the intangibles in the balance sheet for that operation, so the remaining book value of the Russian operation is now about NOK0.8 billion.

The restructuring process will continue and we expect the process and the transfer to the new plants outside St. Petersburg to be completed by the end of this quarter.

With respect to the agreement for joint venture with Hydro for Sapa, we have now received approval from U.S. and European competition authorities, so the one remaining approval that is required is from Chinese competition authorities.

I think in general terms, we see that these processes take time, and clearly the approval from China will take more time than we had hoped for, however we feel confident that we will get this in due course. We are in the middle of the so called Phase II process, so while it is difficult to say exactly when that approval will come. We feel confident that we will have this approval in due course, but it is taking its toll on the organization, and generally speaking, we see that this approval processes take more time than we had maybe planned for. We have also in the second quarter established a financing scheme for the new company. So everything is set to go for the joint venture as soon as we get the Chinese approval. Also, here we have reviewed the accounts and we have decided to write-down the remaining goodwill in the accounts approximately NOK1.2 billion.

I think internal terms to sum up, I would say that the second quarter is a disappointment and however I think that most of the factors influencing these results – lies within our own organization. We believe that we understand why, what we need to do. We have plans and programs in place to rectify the situation.

On the other hand, some of these things that we – some of the challenges that Orkla is facing are complex. They will take time to fix, and so for some of these issues we have no easy answer to the solution, but we do believe that we will be able to rectify the situation as time progresses. As I said, we have experienced management teams in place to execute our plans.

So in closing, I would also remind you that we have an Investor Day in London on September 26th, where we look forward to share with you our thoughts and our plans and strategies going forward. Andersen?

Terje Andersen - EVP and CFO: Thank you. I will take you through financial statements and also comment on some of the business areas.

Starting with the P&L, consolidation of Rieber as of May and Jordan contributed to an increase operating revenues by some NOK700 million in the second quarter. However, the underlying top line development for both Rieber and existing business was negative in this quarter.

EBITA ended at NOK632 million in the quarter. If you look at EBITA of each, we see decline for Branded Consumer Goods by NOK13 million. Contribution from acquired companies in the quarter was in the area of NOK40 million to NOK50 million and Atle Vidar will cover Branded Consumer Goods in more details later on in the presentation.

Sapa Heat Transfer still recognized as a subsidiary. We since reported a profit decline in the quarter, but operating margins were in line with previous quarters. High prices and gain from sale of land contributed to a increase for Hydro Power compared to last year.

For financial investments, last year's EBITA was impacted by the finalizing and sale of the Eiendom real estate project in Norway and the contribution from this project was NOK47 million in the second quarter.

Headquarter cost was somewhat higher than last year, mainly due to provision for long-term incentive programs and also increased provisions for employee taxes related to stock options.

In addition, there were also some extra project cost related to the corporate center.

Back to the P&L, other income and expenses totaled NOK553 million in the quarter. As Mr. Korsvold mentioned, there was a write-down of intangibles in Orkla Brands Russia and we have also increased previous provisions somewhat in Russia. Immediate recognition of M&A cost and restructuring amounted to about NOK110 million in the quarter. Profit and loss from associates is now mainly related to Jotun. Jotun continues to perform well and high margin led to a profit increase compared to last year.

Orkla continued to sell shares on financial assets during the quarter and sales totaled NOK2.1 billion with a net gain of NOK352 million in the quarter. At the end of second quarter, the market value of the portfolio is about NOK1 billion.

Discontinued operation is related to the part of Sapa (indiscernible) for the JV. As Mr. Korsvold was mentioning, remaining intangible assets is written down by NOK1.2 billion in the quarter. Just to be clear this write down have a of course no consequences for the JV agreement with Hydro.

Looking at year end, net sales from shares and financial assets contributed with NOK2.8 billion in the first quarter. Cash flow from operation was NOK700 million and as normal this, cash flow was affected by a seasonal buildup of working capital through towards the second half.

Cash flow from operation is expected to be higher in the second half of the year.

After closing of the JV agreement, we will, as you are aware of, receive a cash contribution of NOK1.8 billion from the JV.

The Sapa business and scope for the JV had an EBITA of NOK160 million in the quarter. This was on par with last year.

Volumes in the European Profile markets continued to decline in the quarter and volume was down about 4%. However, improvement programs and the cost reduction compensated for the volume decline and a very weak solar market in Europe.

For Profile Europe, EBITA was in line with last year. Margin, however, is down compared to last year but this is truly explained by the significant drop in deliveries to the solar industry.

Although the North American market showed signs of softening in the second quarter, Sapa operation continued to increase profit. EBITA margin was up 1.1 percentage points to 6.6% in the quarter.

Asian business is still in a build-up phase. EBITA in the second quarter is still negative, but somewhat improved compared to last year. Reaching EBITA breakeven levels is expected towards the end of 2014.

The slow pace in the European building construction market continued to affect Sapa Building System negatively also in the second quarter and (this is few sign) of significant higher activity in this market during 2013.

Somewhat mixed performance for Heat Transfer. In the second quarter, EBITA was lower compared to last year, but margin was maintained and in line with recent quarters.

Swedish operation in Finspang is working hard to improve the productivity in the factory. Plant organization has strengthened and improvement plans are in plan – are in place, but performance in second quarter was still behind targets.

In addition, increased metal premium and a strong Swedish krone impacted profit negatively for the Swedish operation.

Chinese operation in Shanghai performing well and demand in Asia is still strong.

Hydro Power had profit increase in the quarter due to higher prices, but mainly due to a gain from property sale linked to the Borregaard plant.

Production was 12% lower than the quarter and the rest of ours at the end of the quarter was somewhat lower than normal. So, all-in-all, production for the year will be significantly lower than last year.

Then Jotun; as I said, Jotun continue to perform well despite lower demand for the Marine segment due to reduction in new shipbuilding in Asia. All other segments, however, shows healthy growth, and even though cold weather has a negative impact on the Scandinavian markets.

Gross margins are improved and contributed 20% increase in EBIT in the four – first month of the year. The comprehensive investment programs continues in 2013. Largest investments in the quarter was related to construction of new factories in Brazil, U.S., and Russia.

Then I'll leave it to Atle Vidar to go through the branded consuming good businesses.

Atle Vidar Johansen - EVP and CEO, Orkla Foods: Good morning. This graph shows the long-term EBITA development for Orkla Branded Consumer Goods area since 2004, 2005 and the EBITA has grown about NOK800 million in that period in a mix of organic and acquired growth.

Now with the acquisitions of Rieber & Son and the Jordan and the restructuring going on in Branded Consumer Goods area. That gives Orkla an even larger foundation to continue the long-term profit growth.

Nevertheless the performance for second quarter was not satisfactory and I will present some more detail in each business area. First onwards on the integration Rieber & Son, which had a main focus in the second quarter.

The transaction was closed on 26 April after more than eight months, since we announced the deal with the Rieber family. In quarter two, the integration of Rieber & Son into Orkla could finally commence.

In order to realize maximum synergies we have chosen to integrate Rieber’s business units in Norway, Sweden and Denmark into Orkla’s existing companies there and these entities will be part of the Orkla Foods business area.

Since May, the focus has been on shaping the organizations, selecting leaders and reducing money in its two months that was executed with huge efforts in May and June in order to limit the period of uncertainty on both sides.

As of July, Orkla has already entered agreements and contracts securing about 50% of the synergy potential coming from the Rieber deal. The P&L effects of that will gradually come through second half of this year and with full effect into 2014.

Purchasing synergies take some longer time to realize, but we'll have a full focus on that in the second half of this year. Naturally, the long pre-merger period and the strong focus on the organizational shaping in second quarter has taken its toll on the organizations and led to increased internal focus, which of course to some extent (explains) the weak sales and profit performance, especially from Norwegian entities.

Going forward now, there will be sharp focus on harmonizing business processes and business plans throughout the value chain to improve profit and growth, and of course continue to realize the cost synergies coming from Rieber transaction. Rieber's corporate headquarter will be integrating into Orkla’s headquarter and the Rieber companies in Czech, Poland and Russia will continue as standalone entities within Orkla international business area.

The Rieber account for the first half year, highlights from that is presented here. Sales decline with the 10% in the first half. This downturn relates to most markets in the Rieber & Son Group and is broad-based across the product categories.

The pro forma EBITA is down NOK8 million to NOK43 million. Lower cost in the headquarter from a lower activity level compensates the weak performance in the Norwegian business entity.

In the Orkla accounts, Rieber is consolidated as you may as you already know and the profit contribution from the EBIT in May and June was NOK7 million and as you probably know there is a seasonally low profit in the second quarter.

For Orkla Foods, the quarter must be described as unsatisfactory. Orkla Foods reported an EBITA of NOK263 million, which is in line with second quarter last year, and for the first half year, the EBITA is NOK489 million, up from NOK464 million last year.

The consolidation of Rieber & Son units contributes with NOK9 million in this second quarter.

The sales development in the quarter was not satisfactory. Organic growth including Rieber entities was 4.2% down. Excluded Rieber & Son, the growth was close to 2% and down 1% first half year. The main reason behind this is that the product launches conducted, especially in Norway is less successful this year than it was last year.

In Sweden, the integration of Abba and Procordia must be (referred) as successful. The (manual) induction is fully completed and the combined company is recording a volume growth in the retail trade over 2% in the first half year.

Overall, the market share for Orkla Foods decreased somewhat in the quarter. The reported EBITA margin was 11.0% and consolidating Rieber dilutes that margin with 1.8 percentage points.

For Orkla Confectionery & Snacks, there is also a major restructuring going on as the business area establishes now one operating company per country. That means that during the second quarter, seven management teams and organizational structures is – are merged into three. The total cost synergy effect from this is estimated at NOK50 million to NOK70 million (indiscernible).

Orkla Snacks & Confectionery reported an EBITA in the quarter of NOK119 million versus NOK151 million. The drop in performance is mainly related to the weaker sales developed as the top line was down for 10.8% in the quarter.

The business area faces tougher competition in Snacks, both from other suppliers of brands and from retailers' private labels. Orkla's own innovations and campaigns has not been strong enough in a quarter to counter that competition. In total the market shares are reduced and the overall market momentum was weaker in the quarter.

For Home & Personal reported profit and EBITA in the quarter of NOK165 million, which is up NOK34 million from the corresponding quarter last year. After six months in 2013, the EBITA is up NOK77 million from last year. Especially Lilleborg and Axellus is driving the EBITA increase. Lilleborg partly due to the integration and synergy realization from the Jordan acquisition last year, but also a strong performance on the Lilleborg's core portfolio.

However, the business area sales was down 4.8% in the quarter, which is partly explained by weak development for Jordan House Care as the cold weather is the important spring and earlier summer season has led to a softer market development. In addition Pierre Robert Group had lower sales in the quarter due to somewhat weaker market program.

Orkla International is partly covered by (indiscernible), there is continued challenges in the Russian operation, despite major restructuring efforts.

Sales are down 18% in the first half of 2013, the competition is fierce and Orkla Brands Russia are facing lower sales, both in modern trade and in traditional trade.

MTR in India delivered a growth of 13% in the first six months due to launches of successful innovations. The investment in market and organizational development continues in the first half here.

In Austria market shares in ketchup and pasta sauces were strengthened and the company recorded an increase both in retail and in the out-of-home sector.

The Rieber & Son units, Delecta in Poland, Vitana in the Czech Republic, and Chaka in Russia are from (May) consolidated into this business area, these units contributed by a – with a NOK1 million to EBITA under development for (ECU) and its EBITA was fairly stable compared to last year.

For Orkla Food Ingredients, the quarter was satisfactory with a good underlying improvement in the bakery segment in Norway and Denmark leading to an organic growth of close to 1%. The EBITA was also up and that is mainly related to acquired companies.

That concludes my presentation. As we understand, the financial performance in this quarter was not satisfactory with the exception of Home & Personal and Orkla Food Ingredients. However, we are very satisfied with the progress made on the restructuring of Orkla's Branded Consumer Goods area and the actions taken to realize synergies throughout the business areas.

Now I think it's time for questions.

Transcript Call Date 07/18/2013

Atle Vereide - SEB Enskilda: Atle Vereide with SEB Enskilda. A question regarding the Heat Transfer process, you have dealing with that for quite some time. Could you give us some more flavor on the process as such and your thinking going forward with regard to other potential buyers?

Age Korsvold - President and CEO: I think the only thing we can say is that, we did not agree on terms and as a consequence as I said is more value accretive to keep Heat Transfer, as you see the performance is fine. We will, of course, actively manage that asset. There is no change in strategy. It is a non-core asset, but we will keep it for the time being.

Unidentified Company Speaker: One question from the web. (Sandy Mehta). Can you comment on the decrease in cash balance and two, what are the prospects for the regular dividend and possible special dividend upon further divestment activities?

Terje Andersen - EVP and CFO: I think we went through the cash flow during the second quarter, the main changes was related to the acquisition of Rieber by close to NOK6 billion, acquisition of real estate for a new head office and also payout dividend in the quarter. So, I think the slide showing the net debt development explained the cash flow in the quarter.

Age Korsvold - President and CEO: Maybe I should add, of course, therefore there is no change to our dividend policy as a consequence of these deviations.

Unidentified Company Speaker: I might even add as we say that onset we believe that a maintaining dividend throughout a (recession) period where you may have quarter like this is actually partly the rationale why we maintain the dividend the way we do. No more questions, then thank you.