© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to this presentation of Orkla's first Quarter results. My name is Kari Lindtvedt, I'm Head of Investor Relations. And with me in the auditorium today, we have our newly appointed President and CEO, Mr. Nils Selte; and the newly appointed Executive Vice President of Orkla-branded Consumer Goods, Mr. Atle Vidar Nagel-Johansen. Unfortunately, our CFO, Harald is recovering from some mild illness and was not able to join us today. I will present the financials in his place.
During the presentation today, you're welcome to post questions on the live chat. And at the end of this session, we will take questions from the audience here in the auditorium and also address the questions from the web. But now Nils will share some of his thoughts on Orkla and also the main headlines for the quarter. Please, Nils.
Thank you, Kari, and good morning to all of you, and thank you for joining us today. My name is Nils Selte, and this is my first set of results since becoming President and CEO of last month. Overall, I'm pleased to say that we delivered group EBIT adjusted growth of 18% this quarter as well as 7.7% organic growth for the BCG area. I will come back to further highlights shortly and Kari will also take us through the figures in more detail.
Before that, I want to spend a few moments sharing some of my initial thoughts on Orkla. As many of you probably know, I've been a member of the Board since 2014, which gives me a good understanding of the business and the structure of Orkla. At the same time, as Orkla's strategic direction announced at the Capital Market Day in November remains unchanged. We are accelerating some initiatives which we believe will help deliver faster and higher value creation going forward.
We have already started the process of looking into how we can give the business areas and units more independence, so that we can respond quicker to opportunities in a fast-changing and at times unpredictable world. We have reorganized Orkla Fuse, Orkla Confectionery & Snacks and Orkla Care under the experienced leadership of Atle Vidar. He has a strong team of business area leaders with extensive commercial and operational experienced a follow-up on the BCG area and agenda. We already have good momentum and I strongly believe that there is a lot of potential for value creation in this part of Orkla.
The reorganization of the BCG area frees up capacity for me and the group Executive Board to work on structural opportunities and capital allocation consideration in line with our long-term strategic direction. What I mean by this, I want to refer back to the Capital Market Day. We will apply a more dynamic approach to our portfolio management. M&A will continue to be an important part of our value creation journey. And going forward, we will be more open to various ownership structures such as JVs, IPOs or other forms of value-creating partnerships. All these 3 points being important for the value creation and part of the consideration when it comes to capital allocation.
Before I leave the floor to Kari again, let's turn to the main financial highlights for the quarter. As I said, we delivered group EBIT adjusted growth of 18% in the quarter. Improved profit in hydropower were offset by negative development in BCG. Organic growth in Branded Consumer Goods was 7.7% in the period compared to 0.5% growth for the same quarter last year. This development was driven by volume growth and price increases. Despite the good top line growth, EBIT adjust for Branded Consumer Goods was negative by 2.4%. Power prices was significantly higher than first quarter last year, resulting in strong profit growth for Hydro Power. Adjusted earnings per share ended at NOK 1.24 in the quarter.
I will now leave the floor back to Kari, and I will sum up more later in the presentation. Thank you.
Thank you, Nils. As you may have already noticed, we have not made any changes to our financial reporting structure this quarter. We are currently looking into this, and we expect to be back during the second half of the year with more detail. But now let's have a look at the financial performance for Q1.
Reported revenue growth for Branded Consumer Goods was 14.4% in the quarter. Acquired companies contributed 8.8%. Earnings for Branded Consumer Goods, including head office, decreased by 2.4% in the same period, and I will come back to that. Improvement for industrial and financial investments was mainly driven by hydropower. We have net nonrecurring items of minus NOK 162 million in the quarter mainly related to the cost and write-down of our Russian operations, Hamé Foods.
Additionally, we had some M&A costs, primarily driven by the acquisition of Healthspan Group in February. The corresponding period last year included costs of NOK 72 million related to ERP projects. Profit from associates decreased by 28% or NOK 93 million mainly related to Jotun. And net financial items were slightly higher due to higher debt levels. The effective tax rate, excluding associates, was higher in the quarter compared to last year. The most important driver was increase in natural resource tax due to strong profit growth in hydropower. And additionally, the write-down of Hamé in Russia is not tax deductible. Adjusted earnings per share ended down by 2.4% in the quarter.
Now let's have a look at the cash flow. Cash flow from operations was NOK 430 million in the first quarter. The cash flow from operations in Branded Consumer Goods was lower than in 2021. This was mainly explained by higher working capital as a result of higher stock values due to increased raw material prices and also an increase in contingency stock. The current capital was also negatively affected by increased activity levels in Orkla Food Ingredients.
Next, let's walk through the net interest-bearing debt bridge. Net debt, including leases increased by NOK 613 million to NOK 13.4 billion. The main cash outlay in the quarter was related to acquisitions. Expansion CapEx was limited in the quarter and includes expanded production capacity for plant-based in Orkla Foods and in Orkla Food Ingredients. Negative currency translation effects as a result of a stronger NOK reduced the net debt level by NOK 425 million. This leaves us with net debt, including leasing liabilities of NOK 13.4 billion, and the corresponding figure, excluding leasing, was NOK 11.5 billion.
Orkla still has a strong financial position. And our net debt level at the end of Q1 corresponds to 1.5x EBITDA. EBITDA based on the last 12 months where acquired businesses have been included. And this is well within our ambition to not exceed 2.5x EBITDA over time.
Now let's have a look at Branded Consumer Goods. Let's start with the top line performance for Branded Consumer Goods. Reported revenue grew by 13.4%. Structural changes had a net positive impact of 8.8%, while there was a negative FX translation effect of minus 3.1%. Organic revenue growth was 7.7% in the quarter. And this was a result of both volume and price increases where the price component is roughly 2/3 of the growth. If we exclude Orkla Food Ingredients that has a recovery element from COVID in its numbers, we still deliver volume growth.
So let's have a look at the organic growth and how it's distributed per business area. There have been large variations between our business areas for several consecutive quarters now, and this is still the case in Q1. The out-of-home channel continues to recover, especially benefiting Orkla Food Ingredients, Wound Care and also Orkla Foods foodservice and convenience channels. On the contrary, the positive reopening effects in the out-of-home channels, we saw some categories experiencing a decline in the grocery channel after a period of exceptional market growth related to the effects of the coronavirus pandemic. This was particularly the case for Confectionery and Snacks in Norway and Home & Personal Care in Norway. Also, our painting tools business in consumer investments experienced lower activity in the do it yourself segment facing strong comparable figures from Q1 2021. Now let's have a look at our prioritized growth areas. As we communicated at our Capital Markets Day in November, our 3 prioritized growth areas are consumer health, our European pizza franchise platform and plant-based. We are still confident that these 3 areas will be important platforms for growth going forward. Consumer Health grew sales by 32% on a reported basis, and this was mainly driven by structural growth from acquired businesses. Organic growth for Consumer Health was 4.5%. And we have grown our out-of-home pizza business significantly over the last 12 months through the acquisition of New York Pizza and 3 smaller German chains. The underlying growth for consumer sales was 8% and both Kotipizza and New York Pizza showed positive growth rates in consumer sales.
When it comes to plant-based, reported growth was 15% in the quarter, and organic growth was 20%, whereas organic growth for Orkla's branded products was 7%. The difference here is a manufacturing contract, which supports our scale advantages and also capability development.
Let's move to earnings performance for Branded Consumer Goods. Just for Branded Consumer Goods, including head office, increased by 2.4% -- decreased, sorry, by 2.4% in the quarter, reflecting an 7.3% underlying decline, offset by structural growth from acquired companies. The underlying decline was mainly caused by increased prices for raw materials, packaging, transport and electricity. This now applies to all our business areas. Other costs also include to be seen in connection with increased activity levels and higher sales volumes compared to a year ago. And this is particularly the case for Orkla Food Ingredients.
On the right-hand side of the slide, you can see that EBIT-adjusted margin decreased by 1.3 percentage points on a rolling 12-month basis. The underlying performance in the 12-month period was minus 1.4 percentage points. Orkla has started to compensate the adverse cost effects by increases prices to our customers through 2021 and also in Q1 2022. As a result of continued cost inflation, we will implement further price increases in the coming quarters.
Now the chart on the left behind me here, severs for illustrative purposes and shows well-known trends. Looking at the market indexes, it's important to bear in mind that they are based on global prices. Orkla has a more regional procurement scope. And we also source categories from protected European and Norwegian markets where pricing compared to world markets may differ. We exploit scale advantages through our centralized procurement function. And for several major raw material categories we have long-term or medium-term contracts. Historically, the length of these contracts have been approximately 6 to 12 months. But due to the challenging supply chain situation at the moment, the length of these contracts have currently come down.
Now let me remind you of our raw material exposure and our cost breakdown. In total, the material costs, that means including raw materials, finished goods and packaging, is approximately equivalent to 50% of revenue in branded consumer goods. The raw material spend in 2021 was approximately 50% of this again, equivalent to approximately NOK 13 billion. And our top 5 categories, excluding packaging are: vegetable oils; additives; dairy; grain-based products; and meat. And combined, these 5 make up a cost base of approximately NOK 7 billion, more or less equally distributed.
Orkla's exposure to euro is approximately equivalent to NOK 4 billion, 50-50 SEK and NOK, and approximately NOK 0.5 billion to U.S. dollars. So with this in mind, let me then remind you of the mechanisms that we are facing for adjusting our prices to our customers. In the Nordics, the markets are fairly regulated and follows a firm schedule with the same dates for price changes every year. In Norway, this takes place twice a year in February and in July. And in Sweden and Finland, different categories have different set dates. However, for all these states, there is typically a notification period of up to 3 months and in some instances, up to 6 months. And this creates a lag in profitability in markets with curly rising costs and an inability to fully hedge our input costs. Orkla Food Ingredients follow the same -- follows this price winter structure to a lesser extent due to higher business-to-business exposure, but some mechanics are also true in this business area.
We will now sum up financials for each business area. Atle Vidar will start off with Orkla Foods and Confectionery & Snacks & Care.
Thank you, Kari. Good morning, everyone. Orkla Foods reported a revenue increase of 11.4% in the first quarter, of which 7.2% was organic growth. The sales growth was broad based across all markets. The growth was good in food service, in convenience and in exports, which were all positively affected by the reopening after the pandemic in several markets. But growth in the grocery channel was also moderately positive in the quarter.
EBIT grew 4.7%, largely driven by the revenue growth. And while the margin was negatively affected by higher input costs, as Kari has presented. The trend with steep cost increases across categories continued in Q1 and was further enforced with the breakout of the Ukraine war. The improvement in EBIT in this quarter for Foods should be seen in light of the Go Live with a new ERP system in Sweden in Q1 last year, which incurred higher costs and temporarily a lower productivity.
Significant price increases have been implemented through -- in all markets, while the latest cost pressure arising from the geopolitical situation requires further pricing actions this year.
Let's then move to Confectionery & Snacks. Orkla Confectionery & Snacks had an organic decline of 1.1% in the quarter. Sales were negatively affected by a general market contraction after 2 strong years of market growth driven by the pandemic restrictions. This was particularly the case for the Norwegian market. Sales growth was also negatively affected by the removal of the sugar tax in Norway at the beginning of quarter 1 last year. This tax removal led to high demand in the corresponding quarter last year. And in addition, the timing of Easter compared to last year had a slight negative effect.
Earnings declined by 20.7% in the quarter, also for this business area, input costs, transport and packaging increased significantly. And also here, price increases will take effect successfully through 2022.
Let's then have a look at performance in Orkla Care. Orkla Care had a sales growth of 18.9%, which was 5.9% organic growth. Organic growth was supported by the reopening of international markets for Orkla Home & Personal Care, for Orkla Wound Care and for business-to-business channel. The online business, HSNG, continued to see a strong sales increase to the fitness markets.
On the other hand, Orkla Home & Personal Care in Norway experienced a demanding market situation with strong sales last year driven by the pandemic restrictions. And Orkla Health was negatively affected by the Ukraine war in the quarter with regard to its exports market in that area and the Board traded to Finland.
Earnings in Orkla Care declined by 4.4% due to steep cost increases for logistics and raw materials and thereby driving a margin contraction of 3.2 percentage points compared to last year.
And then let's turn to Orkla Food Ingredients, and I hand it over to you again, Kari. Thank you.
Food Ingredients delivered organic growth of 21.1% in the quarter. Approximately 60% of the revenue in Food Ingredients is exposed to the out-of-home channel where easing of pandemic-related restrictions have impacted sales positively this quarter. Growth was also supported by price increases for Orkla Food Ingredients and the EBITDA just margin was positively impacted by volume, although still hampered by cost inflation and challenging supply chain in certain areas. The demanding delivery situation has been handled well so far, but the challenges are ongoing, coupled with increased input costs.
Now let's have a look at the performance in Consumer Investments. Orkla Consumer Investments reported a sales increase of 14.4% and organic growth of minus 4.3%. The main driver for organic sales -- organic sales decline was a drop in demand for painting tools compared to high levels in corresponding period last year. And this was somewhat offset by continued growth in our pizza franchise business. EBIT adjusted declined by 19.5% in the quarter mostly driven by the revenue drop in painting tools primarily in the U.K. High transport raw material costs continued to impact several business units, and price mitigating actions have only partly offset this so far.
And then lastly, some comments on Jotun. Jotun had double-digit sales growth in all segments compared to Q1 last year. Adjusted for currency effects, the underlying sales growth was 17%. The strong growth was driven by volume and price. All segments experienced increased raw material costs, which was -- has led to lower gross margins and operating result. Price increases and cost mitigating actions have dampened these effects.
Jotun decided to suspend its operations in Russia until further notice, and Russia accounted for between 2% to 3% of Jotun's operating revenue in 2021. For Jotun, higher inflation, global supply chain challenges and the COVID situation in China creates higher uncertainty. On the contrary, some markets like ship newbuilding are showing progress and could contribute to growth. The company expects continued uptick in input costs and pressure on gross margin that will require further price increases.
I will now hand back to Nils for some final comments before we move on to Q&A.
Thank you, Kari. As I said in the introduction, we are accelerating the part of shaping Orkla for the future. By this, I mean creating more independent and empowered business units and equally being more flexible and agile in our portfolio management and capital allocation. My immediate priorities will be to secure that our brands and products are available to our customers and consumers and that we will be -- and we will continue to invest in our core brands and categories. We have to compensate higher input costs with further price increases and other mitigating actions over time.
We need to ensure that the business areas are empowered and well set to navigate the current business environment, and we need to accelerate our focus on structural opportunities and capital allocation. I'm very happy to have a strong and hard working team in place with a good balance of commercial and strategic experience. And I'm very excited heading such a great organization with such much potential for value creation going forward.
We will now open up for Q&A.
Let's start with some questions from the web then -- sorry, from the audience, if there are any in the room. Okay, there seems to be no questions. I believe we have some questions from the web. Maybe we can start off there, then [indiscernible], please.
Yes. We have a twofold question from Ole Martin Westgaard from DNB. On organic growth, what was the mix between volume and price in Q2? I assume he's meaning in Q1. And the second part of the question, can you give some indications on what level of price increases that is needed to offset the current inflation on raw materials in the coming quarters?
On the general level for Branded Consumer Goods, as we said in the presentation, organic growth was 7.7%, and that was driven by both volume and price increases. And we also say that roughly 2/3 of the increase was related to price. And then there was a part 2 of the question.
Yes. Can you give some indications on what level of price increases that is needed to offset the current inflation on raw materials in coming quarters?
Of course, we cannot and I don't think we are allowed to either. So sorry about that.
Okay. Let me go to Markus Heiberg from Kepler. For Orkla Branded Consumer Goods generally and Foods specifically, what was the Food service volume compared with Q1 2021 and 2019?
As we have it was a strong growth in the food service sector, but we don't comment specific detail on each channel in each market. So -- but yes, we saw a stronger food service market in Q1.
Is the approximately 2/3 of growth related to price also representative for Orkla Foods? That's also from Heiberg in Kepler Cheuvreux.
Sorry about that, Heiberg, we don't comment on that detailed level either. But I may remind Foods is 40% part of the totality. So that's the guidance.
And the third question from Markus Heiberg. How do you see consumer behavior develop over recent months? Any signs of increased price sensitivity?
Yes, I can elaborate on that. So far, we have not seen any strong signs of a total change in consumer behavior. But what comes ahead, we can only speculate. So with the price increases that are showed, we probably should expect to see some changes.
And then we have 3 questions from John Ennis in Goldman Sachs. First one, can you break down organic sales and growth in the quarter between price and volume? I believe that one is now answered. Second, we can do them one by one. You cite the need to take further pricing throughout the year. Can you talk about how the price negotiations work in your main markets of Norway and Sweden? How frequently can you renegotiate price increases with retailers and when is the next pricing round?
I think that was summed up in the presentation and then we can maybe repeat that bilaterally if they still need to.
And then last question from Mr. John Ennis. On portfolio review, are you -- as you look at the various subcategories, which or cap rates, do you think that all of them have a future part of Orkla Group? Or is the need to streamline your operations related to this? How would you describe your capital allocation priorities?
I think I'm not in a position where I would like to give you a specific comment on that. I've been basically one month in the chair, and I will revert to that when we have something to announce to the market.
And then there is a follow-up from Markus Heiberg in Kepler. On your reorganization there are still material parts of our new BCG portfolio that are not directly linked to growth areas outlined at the Capital Markets Day. Is it fair to assume that you will focus on the BCG portfolio in these areas?
I'm not sure if I really understand the question.
I agree. But I think we can only reiterate that the strategy stays firm. So the focus on those 3 areas will go on regardless of the change in organization.
Then there is a question from Petter Nyström. Have you discussed the share buyback program since the share price is at a low level at the moment?
We have a very clear capital allocation policy. We're paying out dividends is the first priority. And then we always look for opportunities to invest in current business or through acquisitions. And then if we see that we have excess capital over time, we will consider either share buybacks or paying out extraordinary dividends. And that's something we consider, and we have done so historically. Other than that, I can't comment on what we are planning and looking into more specifically.
Within Consumer Investments -- this is from Petter Nyström, within Consumer Investments, you delivered an EBIT decline of almost 5 percentage points. Can you share some light on this? And what we should expect in coming quarters?
Well, we don't guide forward, I'm afraid. But what I can comment on is that a lot of the decline in consumer investments was related to the house care portfolio where we saw very high levels, especially in the do-it-yourself segment through COVID and through 2021. So we are meeting strong comparables. That's a main driver for the profit decline and also top line organic top line decline in the quarter.
And then second question from Petter Nyström in ABG, which quarter will you have full effect of the initiated price increases?
Again, as we did mention through the presentation, the various markets and categories have various dates for when you can adjust prices. So that's a running activity. The main window in Norway, where we have a lot of our exposure is 1st of July and 1st of February.
That was the last question from the web.
Are there any more questions from the audience? There seems not to be. Then I'd like to remind you that we will be back with our second quarter results on the 14th of July. Thank you all for joining today and have a nice day.