Orkla As A S/Adr

Good morning, and welcome to the presentation of Orkla's first quarter results. My name is Annie Borsago, and I'm the head of investor relations and communications. So we're going to begin with a presentation from our president and CEO, Niels Koselta, where he will give a summary of the latest developments for the quarter. After that, EVP and CFO, Ida Witt-Eggland, will present some more detail on the financials, as well as on the individual portfolio companies. After that, Niels will conclude with a few closing remarks before we move over to our Q&A. So just to remind you, the procedures for Q&A, we have a web Q&A form that you can send questions through at any time. But first, we're going to do a Q&A, a video Q&A with our analyst community. And after that, we'll move over to questions from the web. So with that, I'd like to turn it over to you, Niels.

Thank you, Annie, and good morning, everyone. I would like to start this presentation on a personal note. Orkast chairman Steiner Kagen passed away suddenly on May 4th. Steinerik left his mark on Orkast through over 25 years as an active owner. He brought an entrepreneurial drive into the boardroom and was instrumental in in supporting Orkla in taking calculated risks with an investor mindset. He was also a strong supporter of Orkla's recent transformation into an industrial investment company. He will be deeply missed. In this period, I now turn over to a review of the quarter, mindful of the values and vision that Sten Erik instilled in the company. Organic growth was 4.9% in the quarter, with contribution from all portfolio companies. Growth was particularly high in Orkla food ingredients, Orkla snacks and Orkla food. Undying EBIT adjusted growth was 3%, with volume mix growth partly offset by higher costs. Earnings per share adjusted increased by 4% to 1.75 kroner. Alongside the quarterly result, there has also been change in the board of Orkla Foods. Gilles Morel will become the new board chair from June 1st. He brings more than 30 years of executive experience from international branded consumer goods companies, including Mars. I want to thank the former board chair, Xavier Bellisson, for his contribution to Orkla Foods over the last two years. Volume mix growth in the first quarter was 3.2%, another quarter with high volume growth. Performance improved on an underlying basis, supported by continued improvement in commercial capabilities, with a modest uplift from Easter effects. Looking to EBIT development across the portfolio. Operational performance in Jotun remained strong, with underlying EBIT growth of 16% for the quarter. For the consolidated portfolio, including Orkla ASA, underlying EBIT adjusted growth was 3%. Orkla snacks and Orkla food ingredients contributed especially positively this quarter, while the negative development in Orkla health rated on the consolidated results. Operational performance in Orkla India was also stronger than the underlying Røstebrot indicates, due to incentives received from the government of India last year. Let me give a brief comment on the war in the Middle East. The conflict did not materially affect first quarter results. Direct effects were limited, most notably in Jotun and Ultra India, while the broader portfolio was largely unaffected. Looking ahead, the indirect effects are more uncertain. For the consolidated portfolio, we are seeing upward pressure on energy, freight and packaging-related input costs. The picture is differentiated across the portfolio, and mitigating actions are tailored accordingly. Arru will address Jotun specifically. At this stage, we do not expect an inflationary impact comparable to the post-pandemic period, but we are monitoring development closely. Briefly, the EBITDA-adjustment margin was 10.5% on a rolling 12-month basis. I will conclude with an update on the consolidated portfolio's three-year financial target set at the 2023 capital market day. Underlying EBIT adjustments started more slowly in the first quarter but remains on track relatively to our compounded growth target for the strategy period. The EBIT adjust margin remained within our target range while the return on capital employed was stable at 12.4%. I will now hand over to Arve for more details on the financials.

Thank you, Nils, and good morning. So before turning to the individual portfolio company, I will briefly comment on the overall financial results for the quarter. So beginning with the income statement. reported operating revenues increased by 1.3% to 17.4 billion, while EBITDA just decreased by 1.3%. And the difference between the reported and underlying numbers that I just mentioned is primarily due to negative currency effects, as well as lower contribution from Oikla real estate. Other income and expenses were minus 45 million and was mostly related to M&A expenses and ongoing restructuring projects in Orkla Foods and Orkla Health. Profit from Jotun decreased by 5.8% in the quarter, and I will come back to Jotun in more detail shortly. We also see that net interest costs decreased as a result of lower interest rates and lower debt levels, contributing to the 4% increase in adjusted earnings per share. Cash flow from operations amounted to 1.1 billion and declined year on year due to higher working capital from strong late quarter sales and increased net replacements investments. We received the first installment of the 2025 Jotun dividend, which last year was received in the second quarter. So, cash flow before capital allocation ended at 1 billion in line with last year. So, turning to the capital allocation bridge, we repurchased shares for 1 billion during the quarter in accordance with the buyback program announced in November. Expansion investments of approximately 100 million relate to increased production capacity across the portfolio. and purchase of companies consists of a bolt-on acquisition in Oikla food ingredients. Oikla ended the quarter with a net debt of 13.6 billion, equal to 1 times EBTA, and 0.8 times excluding Oikla food ingredients. So let's continue with the portfolio companies. And as Nils mentioned, Jotun had another strong quarter, while reported numbers once again is influenced by currency effects. So the underlying revenue growth was 9.4%, with growth across all segments and regions. Higher volumes and positive mix effects, including increased premium sales, contributed positively. Reported operating profit was 5.3%, and 16% when adjusted for negative currency effects. This was driven both by increased sales and improved gross margin. Profit from Jotun Torkla declined by 5.8% to 617 million. The decline relates to financial items due to lower currency hedging gains and currency losses on intercompany loans. Jotun faces a high degree of uncertainty related to the Middle East conflict. And most importantly, all employees in the region are safe. Jotun experienced reduced revenues from business units within the region in March. At the same time, affected units amounted to only 8% of Jotun group revenues for the quarter. The indirect effects impact the paints and coating industry globally. The ultimate scope depends on how the conflict develops. but there will be a negative impact regardless. Jotun's sourcing base is partly linked to global oil price developments, and the highest exposure is within marine and protective segments. Jotun forecasts substantial input cost increases from the second quarter, which are expected to compress gross margins. They are taking mitigating steps to mitigate the impact through price increases, alternative sourcing initiatives, continued cost control, and delayed Middle East investments. Nevertheless, mitigating actions will take time to materialize, and demand-related effects remain uncertain. Jotun has significant experience in handling geopolitical instability and demonstrates from a globally diversified portfolio and a clear and consistent long-term strategy. Moving on to Oikla Foods, which had organic growth of 3.5% in the quarter, with 2.3% from volume mix. Organic growth was higher in the prioritized growth platforms than the rest of the portfolio. Volumes were somewhat supported by positive easter-facing effects in Sweden and Norway, as well as the comparison to a quarter with weaker volumes, in particular in Norway last year. Orkla Foods continued to roll out the commercial tools outlined at the Capital Markets Update last year. The underlying EBIT growth of 5.1% was mainly driven by volume growth. In oilcloth snacks, all three categories contributed to volume mix growth, led by cocoa-related recovery in the confectionery category, but also high bubs amount and positive easter-facing effect. Equity improvement was driven by increased volumes, as well as contribution improvement from COCO. The BUBS U.S. rollout continued in the first quarter. It is now available in more than 40,000 stores across the U.S., and BUBS also recently launched a global limited edition collaboration with H&M Beauty. Also, Oytla Snacks continues to invest in building brand within the U.S. market, and BEBS U.S. was therefore not a significant contributor to EBIT in the quarter. Organic growth in Oytla Hovind personal care was 3.3%, while underlying EBIT grew by 9.1%. Volume growth in Norway and Sweden reflected both It continued positive underlying development, as well as easter timing. Underlying EBIT growth was driven by volume growth and cost control. The company had positive market share development in both Norway and Finland, while the development in Sweden was stable. Organic growth in original food ingredients was 5.4%, driven by volume growth across all clusters. The bakery cluster was also aided by the timing of Easter. Underlying EBIT growth was 10%, led by sweet ingredients, where volume, mix, price and efficiency improvements all contributed positively. Bakery also supported EBIT growth, while plant-based declined slightly due to product mix effects. The organic growth of 1.3% in Orchid Health was driven by price in most markets, excluding the isolated phasing effects previously communicated from Q4 to Q1, Volume development was weak in food supplements and functional personal care categories. Cod liver oil prices remained a drag on both volume and margins. Underlying EBIT declined due to lower volumes, negative mix effects and higher costs. Urgla Health is taking measures to reduce the cost base and announced the planned closure of three factories two which are related to the food supplements business. While these measures will improve profitability over the long term, we anticipate negative impacts related to the wind-down of the factories going forward. With this backdrop, we expect this to be a challenging year for Orkla Health. Management is currently defining the long-term strategy within the new operating model, and will present at the capital markets day in December. Voiklaa India's organic growth was 2.8% in the quarter, mainly driven by price increases to offset higher costs for key raw materials. Adjusting for grants received from the government of India in the first quarter last year of NOK 26 million, organic growth was 6.5%. Underlying EBIT declined by 7.8%, partly impacted by higher freight costs arising from the Middle East conflict. Adjusted for government grants, underlying growth was 16%. In the European pizza company, all businesses delivered same-store sales growth, with overall organic growth of 4.9% and consumer sales growth of 8.9%. The growth in consumer sales was led by Koti Pizza in Finland, with 14% growth from a renewed brand strategy and targeted growth initiatives. Underlying EBIT improved by 13%, supported by Cozy Pizza and New York Pizza. And we are happy to see that the two smallest portfolio companies showed continued positive momentum. Oracle Healthcare reported growth of 4.4% in the quarter, with an underlying EBIT growth of 10%. Health and Sports Nutrition Group delivered organic growth of 3.4%, and underlying EBIT growth of 26%. With that, I'll hand it back to you, Nils, for the closing remarks.

Thank you, Ivar. Returning to our three strategic priorities, we continue to drive organic value within the existing portfolio, with progress in line with consolidated targets. we are also reducing complexity across the portfolio, including targeted divestment at the portfolio company level. Recent examples include the divestment by Orkla food ingredients and Orkla snacks of non-core operation in Iceland. Lastly, in times like these, we benefit from our strong balance sheet and a diversified portfolio. This provides the flexibility to act on value as creative opportunities should they arise. With that, Arvind and I are happy to take your questions. Thank you.

Welcome back. And we're now ready to start the Q&A. We're going to begin with the video Q&A with the analysts. And you're welcome to submit questions via the web as well. And we'll take those afterwards. So it looks like our first question comes from Oldham Market Invest Board and D&B Carnegie. Please remember to unmute yourself as well. Just one moment, we're having a little trouble with the sound.

Now?

Yes, now we hear you.

Perfect. OK, so you highlight in the quarter that there has been some Easter impact. Can you be a bit more specific on how we should think about this and the potential impacts on the second quarter of these timing effects?

quantified it, let's say that it's not an important driver to the growth, but it's a support effect for the Q1. And typically, if it's a support effect on Q1, it has the opposite effect in Q2.

Okay.

You're saying that Q1 actually still reflects the underlying trend fairly, is what we also want to highlight.

Okay, and then on health, you highlight that this will be a challenging year for health. You're closing down three factories. Can you give some more color on what will the potential cost of this, how big are these factories, and when will that cost hit the P&L? And also... Is that common with this being a challenging year? Is that more affected to the demand side or is that affecting the cost side of the closing of these factories?

To start with the last one, when I said that it should be a challenging year, it reflects that if you look back on the health ambitions presented on the capital market in 2023, they are obviously lagging the plans. And we see that they are still struggling on both volume growth in several categories, at too high cost base, and also an increase in raw materials in certain of the categories. So that in combination will, it's guiding that it's overall profitability in North We don't expect that to be satisfactory for this year in total. When we are like 30% back on Q1, I wouldn't say that that's representative for the full year, but still it's guiding that it's still challenging times both on top line and on the cost base for the coming quarters as well. And then we have these factory closures, which we'll add on that. We say that these sectors will be closed up until the end of next year, so it will be a gradual impact over the coming quarters. We don't know yet in turn either how that will affect the cost base, but it obviously will be a double cost in the wind-down period in the coming quarters that will have a negative impact on the quarters in the short term, but with clear ambitions to increase profitability in the longer term.

Okay, and then a final question. On Bubz and the US launch, it looks quite significant. Can you give some indication of how much this contributed to the overall organic growth in snacks? I understand that probably the impact on EBIT was not that significant, but how was the impact on the organic growth there?

It's a part of the very positive development in snacks. Let's say that the cocoa recovery in the chocolate segment is a bigger contributor, but the very high demand on bubs is also a contributor to the volume growth in the confectionery category of snacks in this quarter as well.

Okay, thank you.

The next question is from Andre Kondrai in the UBS.

Hi, good morning, and thank you very much for taking my questions. Two for me, please. Now, on the outlook for the remainder of 2036, a lot has changed since you last reported your full year earnings. How has your thinking changed as a result, given obviously what we're seeing on the ground and the impact on costs and potentially demand over the longer term. And perhaps tied to it, a few of your peers have come out with various oil price scenarios and potential dollar, in your case, knock impact. Anything you can share on that and whatever mitigation options you have at your disposal? And secondly, sorry, just on Yoten, it drives a big part of your profits, thanks to its outstanding growth, but How are they thinking? How are you thinking about the outlook for 2036, particularly in terms of time and profits and contribution to your business? Thank you.

So what we normally don't guide, or we don't guide to say so, I think Jotun have been, and we have stated that in the report as well, that it will be a significant increase of input cost through this year. We are not specific on that increase. And when it comes to our consolidated portfolio companies, we have been guiding that this will affect energy prices, freight prices and packaging specifically. And we will also see some inflation impact on other parts of the portfolio as well. But as we have said in the report that this is something that is handled through our portfolio companies and is discussed in the different borders. So this time we don't expect the same huge effect as we saw from the post-pandemic inflation. Now we will see much more specifically kind of initiatives to mitigate this through the portfolio companies.

Understood. Thank you.

Looks like our next question is from Petter Nyström in ABG Sundal Collier.

Yeah, thanks for taking my question. I think I have three. I'll follow up on the health question from Morten. Is it possible to say if the cost, or call it the restructuring cost, will be booked under this segment, or under the other income and expenses?

This is too early, Petter, to give any clear guidance on this. It's decided in the Board of Virtual Health to close down these three factories. That would be, it's a gradual wind down of the next quarters up until the end of next year. So any amount when it comes to costs, double costs, increased costs and, you know, possibility of any breakdowns of balance sheet items, etc., it's not quantified internally either. So I can't answer that at this time.

Understood. And then on India, how should we think about these government grants for the remaining of 2026? You know, previously we have seen the segment receiving these grants from time to time. So, yeah, what should we think about that for the remaining of the year?

Yeah, we have no possibility to guide on if we are to receive any grants for the remaining of the year. It's linked to production. And it's very hard to calculate in the future if we are able to receive anything. What we can say is that the current program is ending at the end of March. But if we receive anything, how it will impact the numbers, we are not able to guide, unfortunately.

Thanks for that. And then final question for the Branded Consumer Goods portfolio companies. I think Nils and Jørge highlighted that you're seeing higher freight costs, packaging costs, energy costs. Is this an effect that we will start to see already in the second quarter, or is this more like a second-half effect?

I think, first of all, this picture is kind of changing every day, so it's very hard to guide on that. But we don't expect to see that huge effect in Q2, so this will come gradually through the years. The only guiding that we will give you.

Okay, perfect. Thank you. I jump back at the Q.

Looks like our next question is from Håkon Fugehu in SEB.

Yes, good morning all. Thank you for taking my question. It's regarding jultun. You talked about price increases already in the first quarter. Are you able to quantify that?

You mean price on raw materials, Håkon?

No, price increases out toward customers.

I see. But did you comment that you already raised prices? towards your end customers to mitigate for the input costs I don't think we will guide you on that I think that is as we are operating our consolidated portfolio companies we give them freedom to act that's the same way Jotun is operating their business so different measures are taken in the different regions and countries throughout the world in Jotun Thank you and just a follow up there on Jotun could you

compare this sort of relative crisis and compare that to what we saw in 2022?

No, in general, I don't expect to have the same huge effect as we saw. But for the consolidated portfolio companies and Newton, as I said, this is not like what we see back in the post-pandemic inflation period.

Okay, thank you. I'll jump back in the queue.

That seems to be the last question that we have on video, and it doesn't look like we have any questions from the web. So with that, just before we conclude, I want to remind you that we report Q2 results on August 20th. And otherwise, thank you for joining, and please enjoy the rest of your day.