Good morning, and welcome to Orkla's presentation of second quarter results. This is a live webcast from our head office here in Oslo, but unfortunately, still without a physical audience. Those following us on webcast can post questions at any time, and we will come back to those questions at the end of this session. Our CEO, Jaan Ivar, will begin with some brief reflections on our performance and priorities. Our CFO, Harald Ullevoldsæter, will then take you through the main points of the quarterly results, as announced this morning. Jaan Ivar will then wrap up before we open up for Q&A. With those brief words, I will hand over the floor to Jaan Ivar.
Thank you, Thomas, and good morning, everyone, and welcome to this presentation of the second quarter results. We don't have many people here in the audience, but we are full of energy here in Oslo, and we know that we have many digital viewers. Overall, I'm satisfied with our performance during the first half year during these extraordinary times. We have seen good market-driven growth in grocery retail and a gradual improvement in our out-of-home sectors, and coming from very low levels in April. Adjusted earnings per share increased by 21% in the first half year, driven by strong profit growth in our branded goods area, as well as strong performance from Jotun. I will soon leave the floor to our Group CFO, Harald Ullevoldsæter, but I will start with sharing some of my reflections.
As you all know, it has been a very special first half year, significantly impacted by COVID-19. During Q2, most of our markets have experienced lockdown and restrictions put in place by governments to limit the spread of the virus. This has had significant negative effects on the out-of-home channel. Growth in in-home consumption and grocery retail has not been enough to offset the negative growth impact on our out-of-home exposed business. During the quarter, as society has gradually started to open up, I've been glad to see that the negative effects are diminishing. Furthermore, I'm glad to see that the profit protection measures we put in place to mitigate volume loss have really started to take effect in Q2. Early on, we set three immediate priorities for our business, and so far, I believe we have delivered on this. First, to safeguard our employees.
We have strong measures in order to ensure a safe working environment for our employees, no matter where they have their operations. This has also put us in a very good position to deliver on our second priority, to ensure supply of our products and brands. We are happy to see that consumers see our brands and products as trusted and reliable choices in times of crisis. Our factories are running smoothly to ensure supply, and we see positive results from solid work and great collaboration. This leads us to our third priority, maintaining a strong balance sheet, which in turn gives us flexibility to ensure we are well-positioned for the longer term. Working through this crisis, it has been important for me to, on the one hand, balance the COVID-19 mitigating actions, at the same time, strong focus on maintaining long-term growth plans.
We see rapid changes in consumer habits, some even stronger now during COVID-19. It is paramount to us to spot and act on these changes early on. The restaurant part of Kotipizza is a very good example of how we have managed to quickly adapt to changing consumer habits. Switching sales from sit-down dining to takeaway and home delivery within a couple of weeks, that resulted in all-time high sales in May, when sit-down eating was prohibited in Finland. We have continued to support our brands and innovations with marketing and A&P spend also through this special time. It's important for me to keep up the momentum on our longer term growth plans. Finally, during the quarter, we announced the acquisition of Norgesplaster and the Havrefras brand from PepsiCo, perfect supplements to our portfolio. Furthermore, we have announced the divestment of Vestlandslefsa, very Norwegian name there.
Active portfolio management and strategic M&A are high on my agenda, in parallel with our organic growth agenda. I will let Harald, our CFO, take us through the financial details for the quarter.
Thank you, Jaan Ivar, and good morning, everyone. Let's start with a look at the main items of the second quarter. Orkla achieved profit before tax of NOK 1.2 billion, an increase of 2% compared to last year. The progress was driven by profit growth for our branded consumer goods area and increased profits in Jotun. Branded consumer goods, including head office, delivered an increase in operating profit of 16%, with positive impact from Forex and M&A, underlying growth approximately 5%. In order to evaluate the sales performance, you have to look at both the first and the second quarter, you also have to look at the split between the grocery market and sales in out-of-home market. After a very strong growth in March, we experienced reverse stockpiling effects in April in the grocery market.
For the remainder part of the quarter, sales growth was good and reflected increased in-home consumption due to COVID-19. In the out-of-home market, we saw a significant drop in demand in our businesses exposed to out-of-home markets. The situation improved gradually during the quarter. Cost action put in place to mitigate volume losses due to COVID-19 had a positive effect on profit improvement in the quarter. The strong performance in Jotun continued in quarter two. In sum, this contributed to an improvement in adjusted earnings per share of 18% in the quarter. Let's have a look at the main items from the profit and loss. Reported revenue growth for Orkla's branded consumer goods operation was 6% in the quarter. Earnings from branded consumer goods, including head office, improved by 16% in the same period.
Improvement in head office cost was mainly due to severance payment last year, and we're starting to see some positive effects from the organizational changes initiated in quarter three 2019. Industrial and financial investments, including hydropower, had a profit decline of NOK 76 million. In hydropower, profits were severely hit by lower prices, resulting in an overall loss in the quarter. We had non-recurring items of minus NOK 176 million in the quarter related to the write-down of Gorm's, Care of Bad exit from Sweden, and restructuring costs related to the turnaround program in Orkla Care. Profit from associates improved by NOK 67 million from last year. This increase was mainly driven by good profit growth in Jotun from positive Forex translation effects and improved gross margins. Gains from sales of minority stake in a Swedish real estate company added NOK 40 million to the progress.
Let's have a look at the cash flow performance for the first six months. Cash flow from operation for the first six months increased by more than 50% compared to the same period last year due to improved earnings and lower working capital. Working capital was temporarily impacted positively by timing of indirect taxes related to COVID-19, but also the continued positive trend in working capital levels we have seen over the last 12-18 months. Investments were primarily driven by the ongoing implementation of new ERP systems and factory projects. Next, let me walk you through the debt bridge for the first half year. Net debts, including leasing, increased by 2.7 billion NOK to 9.3 billion NOK at the end of the quarter.
The main cash out was related to dividend payment of NOK 2.7 billion, expansion CapEx and M&A of NOK 0.8 billion, and taxes and financial items of NOK 0.7 billion. There are currency translation effects of a weaker NOK of almost NOK 0.8 billion. Our debt level at the end of quarter two corresponds to approximately 1.3x EBITDA on a full year basis. We continue to have a sound balance sheet, well within our ambition not to exceed 2.5x EBITDA over time. Let's have a closer look at our branded consumer goods operation. I will start with presenting the overall picture for the branded consumer goods, then I will dig into the different business areas. Let's start with the top-line performance. Overall revenue from our branded consumer goods grew by 6% in the quarter two.
Negative organic growth of almost 4% was more than offset by positive Forex translation effects of 8.6%, mainly from a weaker NOK versus EUR. Structural growth of 1.4% was driven by acquisitions in Orkla Food Ingredients and Orkla Consumer Investments. As you can see from the graph on the left, organic revenue growth was down almost 4% in the quarter, following an increase of more than 5% in quarter one. This resulted in organic growth of 0.7% for the first half year. The first quarter was characterized by consumer stockpiling and increased in-home consumption. We continued to see good market growth in grocery retail in quarter two, but at the start of the quarter, our sales were impacted by a reversal of the consumer stockpiling from quarter one. Overall, we maintained our market shares.
We had a larger negative impact from reduced out-of-home consumption in quarter 2, but improving, as I said, during the quarter. In quarter 1, we only had this effect from the mid-March. As you can see from the right-hand side of this slide, foods, confectionery, snacks, and Orkla Care all reported good progress for the first half year, driven by good market growth in grocery retail. Sales growth in foods was partly offset by lower out-of-home consumption. Orkla Food Ingredients and Consumer Investments have a larger exposure to out-of-home markets and experienced an organic sales decline in the second quarter as a result of restriction on out-home eating. Next, let's have a look at the quarter's profit and margin performance for the Branded Consumer Goods.
Looking at the chart on the left-hand side, we see the Branded Consumer Goods, including head office, grew earnings by more than 16% in a quarter, of which 4.6% was underlying improvement. The underlying progress was mainly driven by cost reductions from profit protection measures in our businesses with lower activity. All business areas, except Food Ingredients, had underlying earnings growth. Earnings in quarter two were negatively impacted by increased input costs, including negative currency translation effects from a weakened NOK against EUR. Forex translation effects and M&A contributed positively to the reported earnings growth. Currency translation effects had a positive impact on EBIT growth in all business areas. As you can see from the graph on the right-hand side, underlying EBIT margin improved by 0.4 percentage points on a rolling 12-months basis.
This progress was mainly driven by positive mix effects, cost reductions from corona-related profit protection measures, and operational efficiency. The corona crisis may result in short-term priorities, which could have a temporary negative impact on margins. In longer term, Orkla continued to prioritize margin progress from improved mix, reduced complexity, and revenue management. Let's have a look at the performance per business area, starting with Orkla Foods. In Orkla Foods, organic sales declined by -0.7% in the quarter. While increased in-home consumption continued to drive market growth in grocery in quarter two, our sales were partly offset by retail and consumer destocking following, sorry, stockpiling in quarter one and reduced sales to out-of-home markets. Looking at year to date, organic growth for the first half year, we had an overall improvement of 5%.
We had good growth in most of our markets, except in Denmark and Latvia, where we have a relatively higher share of sales in channels with out-of-home. Lower out-of-home consumption has impacted sales negatively during the COVID-19 crisis, but we saw a gradual improvement in the out-of-home sector during quarter two. Earnings grew by 22% in the quarter, despite headwind from a weakened Norwegian krone and higher raw material costs. Price increases, mix effects, and active portfolio management had positive impact, but it will take time to fully compensate for the rise in input cost we have seen during the first half-year. Temporary cost improvements related to COVID-19 from reduced SG&A costs and lower campaign activity, and also some lower A&P spending in our international business, resulted in lower cost level in the quarter. Moving on to confectionery and snacks.
Our confectionery and snacks business grew organically by 4.1% in a quarter. We had good sales progress in the Nordics, except in Denmark, when the reduced listing with one larger customers, as we also mentioned in quarter one, had negative impact. The corona crisis had led to significant sales decline in other sales channels such as convenience stores, food services, and especially the Baltics. Non-periodic items related to correction of accruals from 2019 had a positive impact on both sales growth and earnings in the quarter and accounted for about half of the reported earnings growth. Higher raw material costs, a weakened Norwegian currency, and reduced listing in Denmark had an adverse impact on earnings growth. Let's have a look at the performance in Orkla Care. Orkla Care achieved organic progress of 5%.
This growth was mainly driven by stricter hygiene requirements and change in consumer behavior, which continued to drive demand for cleaning and personal care products. Orkla Health continued to report good sales growth in Norway and increased exports, but compared with weak levels in 2019. Our online supplier of sports nutrition products, HSNG, also saw strong sales growth in the quarter, while Wound Care sales were negatively impacted by coronavirus lockdown in several of its key markets outside the Nordics. During the quarter, we improved earnings by 27%. This progress was positively impacted by increased demand, but our ongoing turnaround program has also started to have a positive impact on cost and earnings. We expect to see the full effect of this program towards the end of 2020.
Overall, profit growth was negatively impacted by the weak performance in Wound Care, as well as higher input costs, including a weaker Norwegian kroner. Let's turn to Orkla Food Ingredients. Organic sales in this business area continued to be heavily impacted by a drastic drop in the out-of-home market, showed a decline of 16% in the quarter. Ice cream ingredients normally have their peak season in quarter two, were heavily impacted by the coronavirus situation. Roughly 60% of our ingredients business is exposed to out-of-home market. While we saw a 40%-60% decline in out-of-home sales in April, the situation improved gradually during the quarter, the sales index was back at approximately 80%-90% in June. There is still uncertainty going forward. Our performance will largely depend on how the pandemic evolves and the prevailing government restriction on out-of-home eating.
The out-of-home segment represents higher margin than food ingredients average. As a result, the steep weakening in out-of-home sales led to an earnings decline of 48% in the quarter. In addition, we had headwind from weaker Norwegian kroner and higher raw material costs. Profit protection measures contributed to a fixed cost reduction in the quarter. Now, let's have a look at the performance in Consumer Investments. Organic growth was negatively by -8%. This sales decline was caused by COVID-19-related restriction impacting our out-of-home related segments and our textile business. Sales and earnings in our painting tool business were positively impacted by higher activity in the Nordic markets, but this was partly offset by a temporary sales drop in the U.K. during the lockdown. Our restaurant business, Kotipizza in Finland and Gorm's in Denmark, have been heavily impacted by government restrictions following the COVID-19 outbreak.
Naturally, external sales of ingredients from our wholesale business in Kotipizza fell sharply during lockdown. Our franchise-driven restaurants in Kotipizza have proven resilient during this period and achieved an all-time high pizza sales in May and profit growth for the quarter too. Our textile business, Pierre Robert Group, continued to be hampered by restrictions. With effect from the second half of 2020, we have closed down our Swedish textile operations. Earnings growth in the quarter two of 46% was driven by solid profit improvement in House Care, as well as acquisitions. This progress was partly offset by profit decline for textiles and for the restaurants in Denmark related to the coronavirus outbreak. I will end my presentation with some comments on industrial and financial investment. As mentioned initially, earnings in hydropower were down due to significantly lower power prices despite higher volumes.
Forward prices indicate continued low prices in the short-term. Jotun had sales growth in the quarter helped by positive Forex translation effects. Earnings were driven by both sales and improved gross margin. However, there is still considerable uncertainty going forward concerning the consequences of the coronavirus pandemic. This concludes my review of the quarter, and I will leave the word to Jaan Ivar for his final remarks.
Thank you, Harald. Needless to say, COVID-19 has had a strong impact on our business and results so far in 2020. Significant negative effects in our out-of-home exposed business in Q2 were partly offset by growth in grocery retail and positive short-term cost effects of mitigating actions. We delivered satisfactory earnings in the quarter and an adjusted EPS growth of 18%. The level of uncertainty going forward is still high, and we still continue to prioritize our short-term target, which is to safeguard our employees, secure supply of products and brands, and maintain a strong balance sheet and a strong cash flow. That said, several difficult decisions have been made during the last couple of months. Many of our employees in the hardest hit areas have unfortunately been temporarily laid off.
I'm glad to see that as the out-of-home market has started to recover, most of our colleagues are now back at work. Along with the COVID contingency work, we focus on executing on our long-term growth plans. We have maintained A&P spend levels and improvement projects and innovation plans are more or less on track. I'm confident that Orkla, with our strong brands and sustainable business model, is well-positioned for the medium and the long term. I'm happy to see that our brands and organization have proven resilient in the challenging situation we are in as a society. With those words, we will now open up for Q&As. Thank you so much.
Thank you, Jaan Ivar. We have a nice list of questions here coming in from our analysts on the webcast. The first one is from Eirik Rafdal in Carnegie. He has several questions, actually. We'll take them one by one, I think. Could you give me some more color on why you only managed negative 0.7% organic growth in foods when the underlying grocery market in the Nordics have posted mid to high single-digit growth rates in Q2? That's the, I understand the destocking and lower out-of-home, but was a loss of market share also an issue?
No, we maintained our market share. In fact, in total, we have increased our market share in foods. It's important here to balance Q1 and Q2 when you look at the figures. We had huge stockpiling effects in March. We saw some reversal of that, especially in the foods area in April. When you look at the retail figures as such, you have to look at the sales out of the stores. A large part of that was during April when we had the reversal of some of that stockpiling. The underlying trend is there that we see that people spend more time in home, there is less border trade, the fact that people spend more. We expect the grocery retail figures to us also to be at an elevated level going forward.
All right, thank you.
I think you have to bear in mind that we in Orkla Foods have this exposure also to the out of home. Approximately 20% of the revenues are out of home export.
Right. Thank you. Second question, can you please share some more details on how you managed such a strong margin expansion in Orkla Foods? Was this related to non-recurring COVID effects? How should we think about these margins in Orkla Foods going forward?
As you said, having some of these cost reduction are temporary and related to COVID-19 due to lower activity. We also have some temporary layoffs. I think we peaked at almost 1,400 people during the quarter two. Now we have just below 400 people, temporarily laid off. Of course, reduced traveling, reduced conferences, et cetera. It's very hard to give a precise answer on what is going to continue or for how long, a long period of time.
Right. I think that adds enough color. Third question, in confectionery and snacks, you highlight non-periodic items with positive impact on both organic growth and earnings in the quarter. Could you please give me some more details on these non-periodic items and how much impact it had on the quarter?
Start with the last part of your question is the easy part. It's approximately half of the reported growth, as we said, for quarter two, is related to these non-periodic items. It's related to our accruals at the year-end 2019, which was a bit too high. We had to do this income in quarter two.
Thank you, Harald. His last question is, you continue to state that in light of the current extraordinary situation, it may be necessary to set short-term priorities that could result in differences in margin performance compared with, well, to your 2021 target. I understand you don't know more about the pandemic's development than anyone else, what should we think about short term? Is it this year? Is it 2021? Is it something else? I think also because we have several other questions related to the 2021 target, and whether we will still keep that target, essentially. I don't know.
Perhaps to start and say that, you know, until we have a vaccine in place, there will still be a level of uncertainty. Of course, we have been through a period now where we have experienced the spread of the virus and where we have been doing mitigating actions, and we delivered on the stockpiling. Although there was very big demand, we were able to deliver on that. Will we have a second wave of the coronavirus? We don't know. You know, so far when we say short term, it's at least during 2020 and to deliver on those targets. The fact that we have those targets is it makes us in a very good position to deliver on our products and our brands to maintain or increase our market share and to also capture M&A opportunities going forward.
Thank you. Yeah, I think you realize it's a bit difficult to be completely precise.
Yeah.
I'm just seeing if this is a question we've already had. no, it isn't. I'll take the next question from, Markus Heiberg in Kepler Cheuvreux. The strong underlying profitability, in the quarter is impressive considering the weak organic growth and raw material price increase. Can you give me a rough breakdown of the improvement, i.e., how much is due to product mix and how much is due to improved efficiency?
No, we cannot go into those details. Sorry.
I would say it's been fantastic work in the organization in terms of taking quick actions when it comes to cost efficiency. Although those actions are not there forever, we have seen strong actions in the whole organization. Having a global enemy like COVID-19, it creates a fantastic momentum internally. I'm proud of the cost actions being taken, but also the way we have worked with customers, the way we have maintained A&P spend, and not sort of letting the medium to long term focus go away. We have to balance both things, doing good COVID contingency work and working on the medium to long term. I believe many competitors are only focused on the short term, but while we have this set up now to do both, I think.
Good, thank you. I'll take his second question. He's posted a second question, also from Markus Heiberg. In recent months, we've seen strong growth in value for money in discount retail. How do you see price value and private label demand growth going forward, and how do you consider your positioning in this perspective?
I can start with that. We see some external reports from some markets saying that the growth in grocery retail has been driven by the branded goods and not private label as such. We saw a report now coming out from Norway where 80% of the growth was driven by branded consumer goods, and that the biggest suppliers have the biggest growth. We also see both internally and, I would say, externally, that people really go to the trusted and reliable brands, and very often the local brands, during a period like this. That's back to my point why I feel that we are quite confident on the medium to long term as well. We have delivered now very well during Q1 and Q2, it makes me also confident on the medium to long term perspective.
Good, thank you. I think that answers the question. Scrolling around a bit.
It's very unusual with not having the audience, so we're trying to keep up the energy here while Thomas is finding the next question.
Yeah. It's here. I have one question from Ole Martin Westgaard at DNB. What are the shorter term priorities that impact your long term margin guidance negative? I guess that's a bit related to the previous question. What kind of short term priorities do we have that makes us possibly deviate from.
As Jaan Ivar said, this is very hard to estimate because we have our priorities to protect our people and to protect our supply chain. It depends on what might happen, and we don't know.
I think when we announced Q1, we said that we had a more costly supply chain during March due to the stockpiling. We see less of that now. In fact, in some areas, we have a very efficient supply chain when we run at a very good capacity in our production facilities.
Right. Thank you. I think that answers the question well. Another question from Ole Martin: How was the performance of Anamma and Naturli', i.e. our plant-based brands, in the quarter?
Great question. The momentum on plant-based continues. Anamma actually with even higher growth levels than Naturli'. We said that in 2019, we had a 40% growth level for plant-based and the target to reach more than NOK 1 billion of sales by the end of 2021. We're well on track in reaching that. I would say that's a minimum to reach by the end of 2021. Great progress for plant-based and very good for our positioning in terms of a new business area in many ways, building on top of our existing categories.
Thank you. Let's see. We have another question from Øyvind Mossige, Sparebanken. I think I know the answer to this already. Can you quantify the positive one-off effects on costs in Q2?
No, we cannot go into those details.
Clearly it's had a positive effect.
Yeah.
I think that's what you're saying.
Yeah.
In the quarter.
We have said it several times, yeah.
Yeah. Yes. Let's see if we've had this question already. This is a question from Gard Aarvik in Pareto. Your margins were very strong this quarter, and you highlight cost mitigating actions related to COVID-19. Can we expect these actions to positively affect margins when sales normalize, or will spending costs also go back to normal?
I would say we are committed to the communicated levels for 2021. I would say that Q2 has given us even more comfort in terms of reaching that.
Thank you. I'm trying to see if these are questions we've had. I think one question from Petter Nystrøm at ABG. I think I know the answer to this as well. Can you shed some light on your price increases in Norway from 1st of July?
Yeah. Well, we don't comment on specific customers or price increases. We are taking the actions necessary to cover up for a weaker Norwegian kroner into the Norwegian market. That has taken place with effect from 1st of July into the Norwegian market.
Right. Thank you. Some questions from Oliver Pisani at Nordea. How have you seen your input prices developing for key raw materials excluding FX recently?
It's increasing both in the quarter one and increasing further in the quarter two. Several product areas like marine products, meat, cocoa. Yeah.
Vegetable oil.
Vegetable oils. It's several products, large product groups increasing.
Right. Thank you. He has a question about, I think that sums up the questions, so thank you very much, Jaan Ivar. Thank you, Harald.
Thank you, Thomas.
We will be back with a presentation of third quarter results on the 29th of October. Personally, however, I won't be, because this is my last quarter as head of Investor Relations, so if you want to speak to us ahead of next quarter, you have to contact my successor, Kari Lindtvedt or Elise Heidenreich, both in IR. You'll find their contact details on our Investor Relations webpages. This wraps up today's session. Thank you all for joining.