Welcome to Orkla's Q1 Presentation 2017. This quarter, I'm happy to show that we have progress in the brand consumer goods area, increased top line organically and also very good contribution from Orkla Investments and especially from SAPA. During the quarter, we have been working more and more as one Orkla, utilizing the strength that lies within Orkla, utilizing synergies, extracting synergies between business areas, business units and geographies. And we have really increased the collaborative climate in the company, but there is a lot more to do as we go forward. For the 12th quarter, we are reporting growth in branded consumer goods area.
And I'm also very happy to see that we're actually growing more than the market. That means that we are gaining market shares in several of the markets we are operating in. However, we have seen that the growth in the markets where we operate have eased somewhat the last quarters. I will also mention that the timing of Easter this year has improved our top line in some markets and especially Norway and Sweden. The timing of Easter means that we have had some more sales days in Q1.
When it comes to EBIT in the brand consumer goods area, I had hoped to see a stronger Q1 result. Our result has been hampered by timing effects of some pricing actions in the market as well as timing effects of some cost programs. That we will see effects of these as we go into further into the year. As mentioned, Sapa delivered a very strong Q1 2017 with an improvement of approximately SEK 200,000,000. Jotun also delivered strong start of the year and we are comparing with an extremely strong 2016.
Profit before tax increased by 4%. And during the quarter, we have continued to reallocate capital from the branded consumer goods area from Orkla Investments into branded consumer goods area. And we have also started a lot of new cost initiatives in the quarter. I will come back to that a little bit later. So then if you look at organic growth, we are reporting 1.6% organic growth in the quarter.
And as I said, we grow more than the markets, meaning that we are gaining market shares, but the growth we see in the markets has eased somewhat the last quarters. And again, I will mention the timing of the Easter that has a positive impact in Q1 and it will have a reverse effect in Q2. It's difficult to say how much this effect is, but there is an effect especially in some of the markets like Norway and Sweden. As you can see here, Confectioners and Snacks continued to deliver very strong top line growth. And also like to remind you that this is compared with a very strong Q1 also 2016.
I'm also very happy to see that Care is improving top line from the last quarters with somewhat flat development organically. We are now back in black figures top line and I'm very happy to see that. Foods is somewhat lower and the foods sales, especially in Norway, was also impacted by heavy price war last year on of our articles that we did not see this year. And the only business area with negative organic growth is Orkla Food Ingredients and that is due to substantially lower prices in some raw materials like almonds and butter blends in the quarter. So all in all, I'm quite satisfied with our top line, especially relative to peers.
A lot of our peers in Europe, they have reported from minus 2% to minus 3.5% organic sales growth in Europe this quarter. So compared to that, I'm quite happy. We are also constantly trying to seeking into more growth categories than we have traditional. And we are also trying all the time to find products that meet new consumer trends, and I will show you some examples of that later. So then let's take a look at the EBIT.
EBIT in branded consumer goods area increased by 7% or 10% in constant currencies. And we have to say also that this is mainly driven by M and A. That's also why I said that I'm not fully satisfied with EBIT for the brand consumer goods area in Q1. Our underlying margin is improving in the quarter. However, the reported margin is diluted by M and A activities.
And as I mentioned, our EBIT in the first quarter is hampered by time lag in some pricing actions. Some of our companies have faced quite substantial raw material prices, and we are always delayed with price increases. But actions have been taken. And also some delay in some of the cost programs that we have initiated in the quarter. During the quarter, we are working more as Von Orkla, utilizing the optimized model, and we have initiated several cost initiatives that I will come back to.
Initiatives to realize synergies across the businesses we have. We are continuing the factory optimization process. And since we started the program in 2014, we have announced closure of 24 factories and we have physically closed 17 and the remaining are under closure. But we also see quite big potential in other cost areas, also in SG and A. And in some markets where we regard to have not sufficient scale to operate as with several different businesses or companies, we have decided to merge companies together.
One example is Finland where we have merged Orkla Foods Finland and Confectionery Snacks Finland, both to realize cost synergies but also to have a more powerful organization in the market that will hopefully also help us improve the top line. In Poland, our personal care and health business have merged together into one company. And in U. K, we have merged our 2 house care units, the painting tool business we had and also with the newly acquired Harris. It's merged into 1 company.
And in Norway also Home and Personal Care Norway, they have initiated a simplification project with the aim to have a more powerful organization, but at the same time reduce SG and A costs. During the quarter, we have also done some trimming of our portfolio. We have decided to pull out of the Magnese based salad production in Norway, Danden, so that production will be closed down. We have also decided to close down our industrial production of Marzipan in Italy in order to focus more on our core businesses. So these are some of the cost initiatives we have done.
But I would also like to remind you that these initiatives are not on top of the targets that we communicated on program. Then we are, of course, also strengthening our core business. And during the quarter, we announced a huge investment of NOK 500,000,000 in our pizza factory at Strona. And as you know, pizza, frozen pizza is one of our really most important categories. This investment will take place over some years, 4, 5 years, but it will help us to bring new innovations, new pizzas that will delight our consumers.
Of course, it will also help us to rationalize production and reduce cost and make us we will have a more flexible factory setup at Strahma. This is a huge investment for Norway, and it's a huge investment for in one single factory. Also in food, Orkla Food Ingredients, they have improved or increased their business in both bakery and ice cream ingredients in Europe through some acquisitions, both in Netherlands and U. K. And last week, we announced acquisition of Eisgremner in Germany that strengthened our position in ice cream ingredients also in Germany.
So this is just some examples of the top line initiatives we have done during the quarter. So I will now leave the floor to Jens, who will guide you through the financial results.
Thank you, Petri. And as Petri mentioned, we saw progress both from the branded consumer goods operations as well as Orkla Investments in Q1. Let's start by looking at some of the most important items on the P and L. First, I'm pleased to report that the group EBIT improved by 10% in the Q1. This improvement is because of the progress that we have made in the branded consumer goods as well as the investment side.
We have continued restructuring and M and A activities within branded consumer goods. And you can see that this activity has €87,000,000 item on other income and expenses. And half of this relates to the decision to exit mayonnaise based salads in Norway. Solid growth from SAPA lifted profit from associates to SEK485 1,000,000. And this compares to Q1 'sixteen, which included a gain of NOK57 1,000,000 from a sale of an associated real estate company.
I'll come back to more of the details in the associates later on. And overall, profit before tax increased by almost 4%, ending at SEK1.3 billion for the quarter. We saw higher taxes than last year due to positive one off effects in 2016. And EPS developed positively, adjusting for the one off positive one offs that we saw Q1 last year. We are pleased to increase branded consumer goods revenues by nearly 6%, and the next slide shows the main drivers behind this growth.
The revenue growth you see was primarily due to the acquisitions of Hammeh and Harris. As well as the positive impact of M and A, we grew organic revenues organically by 1.6%, largely because of growth both in price and volume. This organic growth is slightly above the market growth, as Peter mentioned. The timing of Easter had net positive effect on revenues as there were more selling days in Q1 this year compared to last year, and that's primarily in our Norwegian operations. Negative foreign exchange effects resulting from a stronger Norwegian kroner reduced our reported revenues by 4%.
And we continue to experience significant volatility in currency exchange rates. However, looking at the currency exchange rates that we have today, for the Norwegian kroner, we anticipate consolidation effects should be closer to 0 for the remainder of the year, all other things being held equal, of course. Let's look now in more details performance of each of the business areas in consumer goods and then starting with Orkla Foods. In Foods, reported increases in sales and EBIT was mainly driven by our acquisitions. This was partly offset by negative currency effects.
We grew organic sales by 1.1% through both price and volume growth. Our businesses in India and Central Europe showed good sales improvements, while we had modest organic growth in the Nordics. Again, the timing of Easter helped sales. However, the foods business suffered from stock reduction due to structural changes in Norwegian retail. And we are also comparing to a strong Q1 in 'sixteen that Peter mentioned.
Several of our innovations contributed to growth. This includes vegetarian dishes and healthier products or options, such as the Toro, Baidu Bra products in Norway. And then profitability in foods was impacted by 3 factors. First, we saw higher input costs in certain markets, which have not yet been fully reflected in our prices. 2nd, we saw some negative sales mix effects.
And thirdly, we had the dilution effects from the acquisition of Hamea, which resulted in lower EBIT margin. So three factors affecting profit for the quarter in Foods. Let's now look at confectionery and snacks. Organic sales rose by 3.1%, and this was primarily due to volume growth with especially good progress in the biscuit category. And the figures were again helped by the timing of Easter.
However, negative currency effects reported in affected the reported sales with a decline. And then several innovations contributed to the organic sales growth that we see. And the key ones were chocolate bars under the brands Smash and Lakeris Gutter together with snackers, salted crackers, oven oven baked potato crisps and popcorn. You'll notice EBIT growth and the adjusted EBIT margin improved by 1.8 percentage points and ended at 14% for the quarter. And this was driven by positive product mix effects and operational improvements in supply chain in all markets And positive effects from the restructuring efforts that we've done in Latvia also added to the overall improvement that we see in confectionery and snacks.
Let's move to Oikawa Care. We're pleased to report organic growth of 3.6% in the quarter. M and A also contributed to the OrklaCare growth story. All business units except Pieder Erobair demonstrated organic growth. As Care has high exposure to Norway and limited Easter products in their portfolio, the additional sales days that we see from the timing of Easter had a strong positive impact for this business area.
The business units, Orkla Home and Personal Care, had broad based growth in all markets, but still the competitive environment in Norway is tough. Our professional cleaning business had revenues more or less on par with last year, while our operations for painting tools, wound care and health all achieved good organic growth. The decline in sales for Erupyreberg was partly due to having fewer campaigns this quarter compared to last year. And the profit improvement you see come from M and A, it comes from synergies and contribution from organic growth. Profit margin in several segments was, however, offset by dilutive effects from acquisitions and higher A and P spend.
So to sum up the story for Orkla Care, there's good progress, but EBIT margin was slightly down compared with last year. Let's look at the final business area within branded consumer goods, the Food Ingredients. And food ingredients reported a decline in reported revenues of 3%, and that's partly because of the negative currency translation effects. Organic sales declined by 0.6% because of a number of reasons that also Peter mentioned. And first of all, this the loss of PL contracts, butter blends and the loss of last year's Norwegian contracts.
And both of these items will limit organic growth throughout most of the year. In addition, negative price development of almonds, which dropped, reduced the value of marzipan, resulting in a negative organic growth effect. However, this had no impact on the EBIT. The decline in EBIT that we see is largely because of a weaker profit development in Romania. The minimum wage in Romania has been raised and packaging fees increased sharply.
In addition, raw material costs have risen. We have taken action on this, and you will see effects from this going into the second half of this year and further on. With an increased exposure to ice cream ingredients, we also have a larger negative seasonal effect this first quarter compared with previous years. Let's move on to Orkla Investments and start by looking at hydropower and financial investments, which are both fully consolidated areas. And for hydropower, higher power prices resulted in improved EBIT despite for lower sales volumes.
In line with our strategy, we continue to free up capital through sales of share portfolio and real estate assets. And during this quarter, Oikla sold a real estate asset in Bergen and sold the remaining shares in Solstad Nordic Equity Fund. And this means that we have totally exited this fund. Our real estate portfolio had a book value of SEK1.3 billion and this value will continue to increase as we progress constructing our new headquarters. Let's look closer at the associates in Orkla Investments, Sapa and Jotun.
As Peter mentioned, Sapa has steadily improved over many consecutive quarters. And in Q1, underlying EBIT continued to increase. The increase was driven by a higher share of value added business and internal improvements for all the business areas, as well as higher volumes in Europe. All business areas improved their underlying EBIT. And demand for extruded products grew both in Europe and North America.
Moving on to Jotun. Jotun continues to deliver volume growth, although reported sales were marginally below last year. Decorative Paints segments had a strong start to the year, which was offset by cyclically weak markets for marine and newbuild and offshore impacting Jotun's marine and protective coating segments. Operating profit was somewhat lower than the strong start of last year with a strong Q1 in Jotun. And Jotun continues to invest in increased production capacity in Leiden with their growth strategy.
Let's look at the net debt development. At the end of March, our net interest bearing debt was SEK7.8 billion, representing roughly 1.4x rolling EBITDA, which is well below our targeted level. Operating cash flow was higher than last year, partly due to an increased profit but also positive timing effects on CapEx and working capital. So to sum up, this has been a quarter with further growth in Orkla. We delivered organic growth of 1.6%, largely driven by innovation and timing of Easter, and we achieved EBIT improvement of 10%, and the balance sheet has also been further strengthened throughout the quarter.
And finally, I'd like to remind you of our Capital Markets Day on the 1st June. And I hope you all will be able to attend. And all the details are on our website. So with that, I would like to leave the floor back to Tete for his final remarks.
Thank you, Jens. I will just like to show you some of our new innovations this quarter. I think some of these innovations, they are showing our strong innovation culture, but it also shows our ability to meet the consumer trends and several of the trends we see are strengthening. First one is Pierre Lobar. They launched underwear with so called GOTS certified textile or cotton.
That means global organic textile standard cotton, which is an increasingly more important standard for textiles in the industry. This meets the consumer trend of more responsible sourcing and also sustainability. This is also a good example of a cross country launch. It's launched in Norway and Sweden this year and will be launched in Finland in the beginning of next year. Orkla Health have launched 2 new Maxim Sports Bars with only naturally functional ingredients.
They are sweetened from coconut sugar instead of regular sugar and of course they are high on fiber. Draugspek in Denmark, they have launched a new range of vegan ready to eat meals, ready to heat meals. This also meets very strong consumer trend, especially what we see in Denmark, consumer trend for vegetarian food, but also a trend for convenience. These products are, of course, put in packaging that are microwave ready. So it's extremely convenient, at the same time healthy vegetarian products.
And last but not least, we also this quarter launched a new pizza. I think you saw the ads before we started. It's grandiose freshly baked. It's based on or is produced with raw dough instead of having pre baked crust. It's a raw dough that will rise in the oven as you make the pizza.
And of course, as we usually do when we innovate, we do very detailed tests on consumers to see how they like the products and to look for improvements and so on. And this has had extremely good results when we did the test of this new pizza. And it is launched in retail in Norway and the feedback so far is very, very positive. Consumers love the products and our customers are very happy with the product. This is a long term innovation platform.
This has taken really some time and a lot of resources to manage to make a raw dough that you can freeze, but at the same time that it will rise in the oven. So there will be more to come as we go forward. So far we have launched 2 variants, one with ham and one with pepperoni. But you can look forward to more delicious new pizza from Grandi Olsson. So to sum up the quarter before we go to Q and A.
We see, as I think I mentioned several times, we see a somewhat weaker growth in the markets where we operate. But there is still growth in our markets opposed to a lot of our European or the other European countries. We grow more than market. So relatively, I am very happy with our top line performance versus the market where we are gaining market shares. But I again remind you of the positive Easter effects in Q1 that will have opposite effect in the Q2, difficult to say how much.
I had hoped to see a stronger EBIT from brand consumer goods area in the Q1. The result was somewhat hampered by lag of pricing actions due to increased raw material prices in some of our main markets and categories and also lag on some timing or timing effects of some of the cost programs that we have initiated. As I also showed you, we continue to work as 1 Orkla. We continue to restructure the brand consumer goods area, not only in production or supply chain, but also in other areas like SG and A that I show you some examples of. So we had several SG and A initiatives in Q1 and there will be more to come as we go forward.
To our financial targets that we communicated during Capital Markets Day September 2015, they are unchanged. We aim for 6% to 9% EBIT growth in the period 2016 to 2018 according to the definition we had at that time. That means that bigger acquisitions or M and As will come on top of that target. And of course, the dividend will be at least €250,000,000 this over last year, it was €260,000,000 And we will continue the strategy that we have started becoming a more pure branded consumer goods company. So with that, I will open up for Q and A.
Thank you. No questions.
Two questions. Could you try to explain a bit more in detail what has made timing issues on the cost cutting? The reasons for one of the reasons for being a bit disappointed on the EBIT? And when will this sort of reverse so that we start to get some positive effects? And also on the international part of your food business, are you willing to give some indications on where the margins are on your international business and where they're going to and when?
I think I can answer your first question, if I understood it correctly. It was the effect of cost initiatives in Q1 and when can we expect to see results? Well, as I mentioned, our underlying margin increased in the brand consumer goods in Q1, but the reported margin was dilutive by M and A. So we see some effect, but not as much as I would have liked to see. We have and of course, we are now only looking at 1 quarter and we have to look this on a long more long term perspective.
So we expect, of course, to have effect of these cost initiatives in Q2, Q3, Q4 and onwards. And I think especially when you look at the supply chain restructuring projects, we know that they take takes a long time. On average, it takes 18 months from we decide to close the factory until it's actually closed and the cost is out. So this will take time, but you have to have a long term perspective.
And just to add on what Petri said there, you have to remember also what I said according to the price or the cost increases that we saw in food ingredients this quarter with the rapid change in a lot of cost elements in Romania, which has been taken action on, but this obviously also affected the cost of development in this quarter. Your question on the margin side on the international businesses, we don't guide or give details on the margins specifically per business unit. But if you look at the dilutive effect that Petter showed on his slide in his presentation, the dilutive effect from acquisitions were 20 basis points this quarter, and that's less than we've seen previously over M and A effects because of the fact that, for instance, Seadrota and the distribution agreement with PepsiCo now is in the like for like numbers. So the main dilutive, call it, acquisitions now are Harris and Hamir. Hamir will be in the like for like figures going from Q2.
So depending on the M and A activity, of course, there but the picture that we see now is that the dilutive effect will be less and less going into the year, of course, dependent on the M and A activity.
Good day. Kenneth Tsiosin from SMB. Your cash flows from branded consumer goods seems very solid this quarter and your net debt continued down. Could you talk a little bit about your the prospect for acquisition? Or and also how you look at your net debt versus EBITDA, which seems low compared to your target 2.5 to 3 and not exceeding at least.
So you have some headroom for dividend potential and also acquisitions. So
Yes. I think a comment on acquisition. As you have seen, we are quite active on M and A side. We are constantly seeking to buy companies that fit with our strategy in the markets where we in general, in the markets where we already have a presence and of course, companies that we can buy at an attractive multiple and where we can realize synergies. I cannot comment on any further on M and A, but of course, we are as you have seen, we are quite active on the M and A side.
I think when it comes to our balance sheet and debt, I think you can answer that, Jens? Yes. What's important and given what that says about our ability
to do M and A, it's important for us to have a capital structure that enables us to deliver on our growth strategy. So that's the capital structure we want to have. Having said that, of course, nobody wants to sit with it to, call it, inefficient balance sheet over time. But we will have a capital structure that enables us to deliver on our strategy.
Yes. So I have a couple of questions from the web, starting with a question from Peter Nystrom at Abigail. And it's actually 2 questions. You mentioned timing of price hikes and cost initiatives is set to impart numbers later. Is this something we would expect to help in Q2 numbers?
I believe you have answered the cost side. But regarding price hikes, will that
have an effect going forward? Can you please repeat the question?
Yes. You mentioned timing of price hikes is set to impart numbers later. Is this something we should expect helping Q2 numbers?
I think it's a little bit hard to say. There are, of course, more parameters that influence the bottom line than just pricing actions that we have done. But I mentioned that in some markets, we have had some quite strong headwind due to currency that has led to quite dramatic increase in raw material prices. And we know that we are always delayed on pricing actions. So I will not predict or give any prediction for Q2 regarding the price actions.
Yes.
And the second question from Peter. Is it possible to give some more details regarding the positive Easter effect in Q1 and the corresponding negative effect in Q2?
Well, we've said it many times, but it's very hard to estimate. And therefore, we won't be estimate. It was a leap year last year. This year we had more sales days because of the timing of Easter. The Easter effects are have more effect in Norway compared to our other international portfolio.
There were timing effects of piping effects and so on. So a lot of moving parts moving in one and the other direction. It has a positive effect for Q1 and it will have some negative effect in Q2. So that's my answer.
Yes. And then I have a question or several questions on the same topic from James Gurry at Credit Suisse. It's regarding Sapa. Given its non core business, have you decided when you will exit the Sapa JV? Do you think you will own it at the end of 2017?
And how will you assess if IPO or trade sale would get the highest price? And the last question, will it be a dual track sales process?
I'm surprised that this question comes up. I will not comment on any timing of our exit from Sapa, except that we have been very clear that said that Sapa is not part of our core business. We will eventually exit our holding in Sapa, but I cannot give any details about timing or IPO or a sale or a dual track process. Time will show.
Then I have two questions from John Ennis at Goldman Sachs. EBIT margins were diluted by 20 basis points in Q1 from M and A activities. Can you give any rough guidance with regards to the magnitude of diluted impacts we should expect for full year 2017? That's the first question.
No. But we said that, of course, given our M and A activity, of course, but the picture that we see now with the portfolio that we have now, the dilutive effect will be less and less going into this year. As I said, FedRoth and the distribution agreement from PepsiCo is in the like for like numbers. Hamir will be in the like for like numbers going from Q2 and onwards. So less and less effect as we see it now.
Yes. And the second question. On the 24 announced factory closures, can you give us the factory number you started with when the program began? And where it is today with the 17 closed factories? Because there have been a number of additions from M and A.
Yes, I can give that number. When we started the program, we had 97 factories. We have closed or announced closure of 24, but we have actually closed 17. And today, we have 106 factories through acquisitions. Of course, that's why the number increases.
But I also like to mention that as we do acquisition, it also creates a lot of new opportunities to realize synergies also in factory footprint projects. Okay. Are there any further questions? No? Okay.
Thank you all for participating in our Q1 presentation and hope to see you next time in July.