Good morning, welcome to this presentation of Orkla's Third Quarter Results. My name is Kari Lindtvedt, and I'm the new H ead of Investor Relations here at Orkla. Today, we are webcasting live from our head office in Oslo. Unfortunately, still without any audience present.
During the presentation, you're welcome to post questions on the web, and we will address them at the end of this session. Let's begin with our CEO, Jaan Ivar Semlitsch, who will share with us some reflections on our performance and our priorities. Our CFO, Harald Ullevoldsæter, will take us through the main points of the third quarter results as announced this morning. Jaan Ivar will then sum up before we open for Q&A. Please, Jaan Ivar.
Thank you. Thank you, Kari. Good morning, everyone, and welcome to this third quarter presentation. I would like to share with you some of my reflections before I leave the floor to our Group CFO, Harald Ullevoldsæter, who will give you more details on the financials. Overall, I'm pleased with our performance during this quarter.
COVID-19 continues to have a significant impact on our business in several aspects. In general, we continue to see growth in the grocery channel from more in-home consumption, less border trade, and increased demand from domestic vacations. At the same time, we are still experiencing negative impact in the out-of-home channel, although to a lesser extent than in Q2. Coming out of Q3, uncertainty related to COVID-19 remains high in all our markets.
We continue to navigate to deliver on our three short-term priorities: safeguarding our employees, securing supply of our products, and maintaining a strong cash flow. Succeeding with these immediate priorities allows us also to work on our cost efficiency program and our longer-term growth agenda. An example of this is the acquisition of Eastern Condiments Private Limited, which we announced in September.
I would like to give some more details around this on the next slide. In September, Orkla entered into an agreement to acquire 67.8% of the shares in Eastern, an Indian branded spice company based in the state of Kerala, Southern India. This announcement makes a significant step for Orkla towards delivering on its strategy to strengthen our footprint in our core categories and geographies. With this move, we double our sales in India.
We already hold a strong position in the Indian branded food market with our iconic brand, MTR, which has grown its sales fivefold since it was acquired in 2007. By joining forces, Eastern and MTR will create a solid platform in the fast-growing Indian market based on strong local brands. The Indian branded food and spice markets are growing by double digits, and we see positive long-term demand dynamics with increasing purchasing power and more urban lifestyles.
I have strong confidence in the long-term growth and resilience of the MTR and Eastern brands. The transaction is subject to approval by the Competition Commission in India, and the initial acquisition is expected to close in Q4 2020, and the subsequent merger process is expected to be completed by Q1 2022.
As already mentioned, the trend of higher in-home consumption, less border trade, and increased demand from domestic vacations continued in the quarter. Around 1/4 of our sales is normally exposed to the out-of-home segment, and in Q3, there were signs of gradual recovery in this segment as well.
In sum, this resulted in a strong financial performance in the quarter with an improved operating profit for Branded Consumer Goods, including HQ, of 15%. The underlying profit growth was approximately 7.6%. I'm pleased to see broad-based organic growth for the quarter, both from price and volume, 3.8% growth overall, up from -3.8% last quarter.
We also see a moderate sales decline in Orkla Food Ingredients this quarter as a consequence of less rigid COVID-19 restrictions. The strong performance in Jotun continued in Q3. In sum, this contributed to an improvement in adjusted EPS of 24% for the quarter.
Finally, I would like to take this opportunity to comment on some of our interesting innovations for Q3, highlighted also on this slide. Firstly, one of my favorites, Stratos, our famous Norwegian chocolate brand, has now been launched with raspberry and brownie filling. This is a good example of how we can work to strengthen our core brands, innovating around our core.
In Orkla Foods Sweden, we have carried out an exciting launch of a completely new brand, Frankful, which aims to supply our consumers with an environmentally friendly alternative to the weekly family taco dinner. The products focus on reduced waste and reuse of raw materials. In Norway, you will now find our famous Grandiosa pizza on the go in the Narvesen kiosks to satisfy your desire for Grandiosa also when you are out and about.
This is in line with our strategy to grow in channels also outside grocery. I encourage you all to try it. It's fantastic value for money. With that, I will let Harald, our Group CFO, take us through the financial details for the quarter.
Thank you, Jaan Ivar, and good morning, everyone. Let's now dive into the quarter three of numbers. Revenues in Orkla Branded Consumer Goods operation increased by 11% in the quarter. In the same period, earnings for Branded Consumer Goods, including headquarters, improved by 15%. Improvement in headquarters costs was partly related to timing of share price-related bonus expenses, as well as positive effects from the organizational changes initiated in the Q3 2019.
Industrial and financial investments, including hydropower, had a profit decline of NOK 80 million from quarter three last year. In hydropower, profits were severely hit by lower power prices, resulting in an overall loss in the quarter. We had non-recurring items of totaling minus NOK 121 million in the quarter, mainly from the write-down of goodwill and trademarks related to Pierre Robert in Finland and restructuring costs in Foods.
These costs were partly offset by a net gain from sale of the brand Vestlandslefsa and property sales. In the same period last year, this line item was negatively impacted by write-down of goodwill and trademark values. Profit from associates improved by NOK 148 million from last year. This increase was mainly driven by good profit growth in Jotun from positive forex translation, underlying sales growth, and improved gross margins.
Reported earnings per share increased by 48%, while adjusted earnings per share grew by 24%. Let's have a look at the cash flow for the first nine months. Securing a strong cash flow has been one of our main priorities this year, and so far, I think we have delivered. Cash flow from operation year to date increased by more than 20% compared to the same period last year due to improved earnings and lower working capital.
Improvement in working capital was mainly related to extended credit for public duties because of the coronavirus, which will be reversed in quarter four. These positive factors were partly offset by a temporary buildup of inventory levels to meet increased demand and maintain high service levels.
Replacement investments were primarily driven by the ongoing implementation of the new ERP systems and factory projects. In 2020, we have also seen an increase in depreciation related to higher investment levels over the last few years. Next, let me walk you through the net interest-bearing debt bridge for the first nine months of this year. Net debt, including leasing, increased by NOK 1.4 billion to NOK 8 billion by the end of the quarter.
The main cash out, as you can see, was related to dividend payments of NOK 2.7 billion in April, expansion CapEx and M&A of NOK 0.9 billion, and taxes and financial items of NOK 0.8 billion. In addition, there are currency translation effects of a weaker NOK of always NOK 0.9 billion. Our debt level at the end of quarter three corresponds to approximately 1.1x EBITDA, based on the last 12 months, well within our ambition to not exceed 2.5x EBITDA over time.
Let's have a closer look at the Branded Consumer Goods operation. I will first start by presenting the overall picture for Branded Consumer Goods and will then take you through the different business areas. Looking at the top-line performance for Branded Consumer Goods. Overall, revenues from our Branded Consumer Goods business grew by 11% in quarter three, of which organic growth accounted for almost 4%.
Positive FX translation effects of 6%, mainly from a weaker NOK versus EUR, added to the top-line growth. In addition, we had a small positive impact from structural growth, which was driven by acquisition in Orkla Food Ingredients and Orkla Consumer Investments. As you can see from the graph to the left, organic revenue growth improved by almost 4% in quarter three.
While quarter one was characterized by consumer stockpiling, quarter two had the effect from reverse stockpiling and restriction on out-of-home consumption, but on the other hand, higher in-home consumption. In quarter three, good market growth in grocery retail continued to impact organic growth positively, while reduced out-of-home consumption had the opposite effect.
During quarter three, out-of-home consumption has approached a more normalized level as government restrictions have eased. Uncertainty continues to be high concerning restrictions going forward.
As you can see on the right-hand side of this slide, every business area reported good growth except Orkla Food Ingredients. High demand for cleaning and personal care products contributed to the strong progress in Orkla Care. In Orkla Consumer Investments, we had positive sales impact from a general boost in home improvement activity and return to growth in the U.K. after the temporary shutdown during the previous quarter.
Orkla Food Ingredients have a larger exposure to the out-of-home segments and experienced an organic sales decline in the quarter. The negative impact was, however, less than in the previous quarter. Let's have a look at the quarter's profit and margin performance for Branded Consumer Goods. Looking at the chart on the left-hand side, the Branded Consumer Goods, including HQ, grew earnings by more than 15% in the quarter, of which 7.6% was underlying improvement.
The underlying progress was mainly driven by revenue growth and cost reduction, which were partly temporary, related to the effects from the coronavirus outbreak. Our earnings growth were partly offset by more A&P spending in the quarter. We also had higher depreciation following increased investment levels in recent years. Moreover, quarter three earnings were negatively impacted by higher raw material costs, including forex.
Forex translation effect and M&A contributed positively to the reported earnings growth. Currency translation effects had a positive impact on reported EBIT growth in all business areas. As you can see from the graph on the right-hand side, underlying EBIT margin improved by 0.5 percentage point on a rolling 12 months basis. This progress was mainly driven by production efficiency, other cost improvements, including temporary COVID-19 effects, as well as positive mix effects.
Let's have a look at the performance per business area, starting with Orkla Foods. Orkla Foods had a broad-based sales growth of 3.7% in the quarter. In most markets, Foods was positively impacted by increased domestic in-home consumption following the coronavirus outbreak.
At the same time, we see less sales activity in food service, export, and out-of-home consumption compared with last year, but with progress from quarter two. Earnings grew by 11% in the quarter. As mentioned, currency translation effects had a positive impact on the reported EBIT growth in all business areas. In Foods, earnings growth was also supported by good progress in our business in India.
Profit-wise, however, the quarter was relatively weak in Norway due to a negative mix of high campaign intensity, increased purchasing prices, and higher production costs relating to the running in of our new pizza production line at Stranda factory in Norway. Earnings growth for Orkla Foods in the quarter was also impacted by higher maintenance costs, depreciation from increased technology and capacity investments, as well as A&P spend.
Moving on to Confectionery and Snacks. Our Confectionery and Snacks business grew organically by 4.5% in the quarter. Sales were positively impacted by good market growth in Nordic grocery trade, boosted by earlier seasonal sales than last year. The coronavirus outbreak has had a positive impact on demand in the Nordic grocery trade, especially in Norway. In the Baltic markets, however, the coronavirus situation is still challenging and has led to lower sales, mainly explained by less tourism.
In Denmark, reduced listing with one of our larger customers continued to have a negative impact in the quarter. Our earnings growth in the quarter was driven by increased sales and currency translation effects. Cost improvements had also a positive impact, but were partly offset by higher input prices. Let's have a look at the performance in Orkla Care.
Orkla Care achieved organic growth of 11.5%. Higher demand for cleaning and personal care products drove sales growth in our largest home and personal care categories. Demand growth flattened slightly during the quarter.
Orkla Health continued to report good sales growth in Norway and increased exports, but compared with relatively weak levels in 2019. Our online supplier of sports nutrition products, HSNG, also saw strong sales growth in the quarter. Certain categories, such as sunscreen and wound care, were negatively impacted by coronavirus lockdowns in several of its key markets.
During the quarter, earnings improved by more than 16%. This progress was positively impacted by sales growth and cost improvements from our turnaround program. Overall, profit growth was negatively impacted by the weak performance in wound care, as well as increased A&P spend. Product mix and increased A&P spend were the main reasons behind the 0.5 percentage point drop in the EBIT margin in the quarter.
Let's turn to Orkla Food Ingredients. We saw a gradual improvement in food ingredients during the quarter, with less negative volume impact from coronavirus related restriction on out-of-home consumption. Our operations were most impacted in regions with less tourism and in larger cities. Organic sales were down by 1.5% in the quarter, compared to a decline of 16% in quarter two. Roughly 60% of our ingredients business is exposed to the out-of-home market.
In quarter three, the out-of-home sales index was back at around 90%-95% compared to last year's level. To put this in context, we saw a 40%-60% decline in out-of-home sales back in April, while the sales index was back at 80%-90% in June. There is still high uncertainty going forward. Our performance will largely depend on how the pandemic evolves and the prevailing government restriction on out-of-home eating.
Going into quarter four, restrictions were implemented in some of Food Ingredients' key markets following higher infection levels. Earnings grew by 4% in a quarter, driven by fixed cost reduction from profit protection measures, in addition to M&A and the already mentioned forex translation effects. Let's have a look at the performance in Orkla Consumer Investments.
Consumer Investments had organic sales growth of 7%, driven by the rise in home improvement activity we have been seeing across markets, including a return to growth in the U.K. that experienced shutdown during the quarter two. The wave of increased home improvement activity is expected to ease going forward. Our professional cleaning business also made good progress, mainly from higher demand for disinfections. Kotipizza achieved a solid growth in restaurant sales of 14% in the quarter three.
This growth was partly offset by weaker sales to external customer in its wholesale business. Earnings growth of 47% was driven by profit growth in House Care, Kotipizza, and Lilleborg Professional. M&A positive forex translation effects added to the progress. The overall progress for Consumer Investments portfolio was partly offset by a profit decline in our textile business, Pierre Robert. I will end my presentation with some comments on industrial and financial investments.
As mentioned at the beginning of my presentation, earnings in hydropower were down due to significantly lower power prices, despite higher volumes. Forward prices also indicate continued low prices in the short term. Jotun, on the other hand, had sales growth in the quarter, helped by positive forex translation effects.
Earnings were driven by positive forex translation, underlying sales growth, and improved gross margin. There is, however, considerable uncertainty around the consequences of the coronavirus pandemic for Jotun going forward. This concludes my review of the quarter, and I will now leave the floor to Jaan Ivar for his final remarks.
Thank you, Harald. About a year ago, I was here in the same room presenting my first quarter for Orkla, and on the one hand, it feels like yesterday, but on the other hand, it feels like a long time ago. A lot has happened, and the circumstances have been extremely special following the coronavirus pandemic, I see this as a good opportunity to reflect upon my first 15 months in office.
To do so, I went back to my notes from a year ago, where my main message was threefold. Firstly, that the strength of our core brands should not be underestimated, and that we have a greater potential for organic growth. Linked to this is also our sustainability agenda. During 2020, our work on the sustainability agenda has been recognized externally.
There is still a way to go, but I'm glad to see that we're moving in the right direction. Furthermore, we have increased our marketing spend during 2020 to support our prioritized brands and prioritized categories. Even in a challenging business environment due to the coronavirus, we have managed to launch innovations that deliver on local consumer preferences.
Secondly, I said that as our industry is changing faster than we have ever seen in the past, having strong brands can never be an excuse not to change. Building on the value of being brave, I've urged the organization to think like a challenger and be more flexible to adapt quicker to changes in consumer behavior.
During the coronavirus pandemic, we have seen how our organization has managed to respond quickly. For example, switching production and being able to deliver hand sanitizers within weeks.
For example, Kotipizza ramped up their digital plans in Finland and was able to switch sales over to the online channel very quickly. My final and third point a year ago was that although emphasis must be on growing our portfolio organically, M&A will still have an important role to play in our development going forward.
Our acquisition of the Indian branded spice company Eastern is just one example of how we'll create a solid platform in fast-growing markets based on strong local brands in categories growing by double digits.
Today, we deliver strong financial results for the quarter, and I also believe that we, as an organization, have managed to deliver on my longer-term priorities from a year back, alongside handling our short-term priorities during the coronavirus outbreak.
Uncertainty still remains high, but seeing how we have managed so far makes me both humble and proud to be part of this fantastic organization, and I truly believe that Orkla will emerge from the pandemic even stronger. Thank you for listening this morning here from Oslo, and now we open up for Q&As.
We have got some questions from the web. Let's start with Petter Nystrøm from ABG. He has three questions. I'll start with the first one. Within Foods, you say profitability was hurt by increased maintenance costs in addition to higher startup costs for the new pizza production line. Is it possible to quantify the effects? I assume these two effects will not impact Q4.
This is, of course, difficult to quantify, and if we will have some negative effects going forward, it's also difficult to say. We are trying to improve our production line with the new factory at Stranda, but we are still working with that. We can't go into any details of the cost effects.
Okay. Second question from Petter. Impressive margin improvement within Consumer Investments. Any one-offs that positively affect the Q3 margin, or is this improvement underlying?
Depending on how we define underlying. Of course, very positive effect by the COVID-19 and a lot of people at home working to improve their homes. That's the main effect, I guess, on the top line.
Thank you. The third and last question from Petter. Given the cost program at head office, should we expect lower underlying costs going forward?
I think the level we see in the quarter three is a bit too low, not representing the normalized level going forward. Some COVID effects positively and some other effects, I think we'll come back to you at a later point to give you some guiding of the level of headquarter costs going further.
If I may add, without going into quantification, the organization, as you all know, went live 1st of March, and we are tracking according to plan on our target cost plan from 1st of July.
Yes. Good. Thank you. Right, we move on to questions from Vincent Lien, Bernstein. Three questions from him as well. Number one, you're soon coming to the end of your margin target. With new restrictions and high levels of uncertainty on the horizon, what gives you confidence that you're on track to meet your margin target?
Of course, our margin target is, first of all, it's an ambitious margin target, but we maintain our target. We have realized approximately half of the targeted improvement so far. The question is: Will this continue or not? I think we will be positively affected by further improvement from the turnaround projects in Orkla Care and Orkla House Care and Pierre Robert. I also think our increased focus on revenue management and portfolio management will also have some positive impact, I guess.
Yeah. We continue our program around also our supply chain efficiency agenda. As Harald pointed out, we are also stepping up on our revenue management work, also have recruited externally and internally, and using the best practice to roll that work out in the whole organization. As Harald pointed to, it's an ambitious target, but we are committed to deliver on that target and with good progress now during Q3 as well.
Great. Thank you. Second question from Vincent. Related to the above, can you give us your progress thus far relative to the margin target? I think you answered that.
I think I already mentioned that.
Yes. We move on to the third question.
Yeah.
Yes. Halfway. Your in-home division have performed quite well. With new restrictions coming up, would you expect in-home growth to stay at these levels or even accelerate during Q4?
Well, I can start and probably Harald can, one thing is for sure, people need food and they need the hygiene articles, and they need and would like to have chocolate and snacks. The in-home consumption, less border trade, more domestic vacations, that's a positive for Orkla, and I think that will continue.
Now we are into a second wave in all of this with more outbreaks, so of course there is uncertainty market- by- market, especially in the out-of-home segment. We are also present, of course, in the Czech Republic where we've seen a quite massive outbreak. Our factories are running according to plan. All our 108 factories are running with good capacity but, of course, we monitor the situation very closely.
Great. Moving on to questions from Ole Martin Westgaard, DNB. How was your performance in Foods and Confectionery and Snacks relative to the market in Norway and Sweden?
It's a mixed picture. In some categories, prioritized categories, we are gaining share. In some other categories, we are not gaining share. We are growing in our pizza category, therefore also the increased production at Stranda, but we're not gaining share on the pizza category in Norway, and our plan is also to take back share, coming from a high level but still taking back share in that area.
It's a mixed picture but overall, we continue to work hard on the market share agenda, also continuing our advertising spend, the increase we saw in Q3. I would say it's a mixed picture, but we will probably also come back during 2020 when we have the full view of the market and how that plays out. Also difficult to estimate the market in out-of-home versus the total market, given the weekly and the monthly changes.
Great. Thank you. The second question regarding margins, I think we already answered. Moving on to what was your growth rate in NATURLI' and Anamma in the quarter?
The growth rate for plant-based, that continues both for Anamma and NATURLI'. Anamma actually has a higher growth rate than NATURLI', both of them strong delivery. We said, I think, in the last quarter that we are committed to really stepping up on plant-based, coming from around half a billion NOK of turnover this year and into NOK 1.2 billion for 2021. We are on track on the plant-based, and we see that plant-based is growing while at the same time Confectionery and Snacks in the market is growing. Both sides of the market are growing.
Thank you. We have a question from John Ennis at Goldman Sachs. On Orkla Care, can you add some more detail behind the drivers of the acceleration of growth between Q2 and Q3? Are there any inventory or stock changes that we should be aware of, or do you consider the 11% growth underlying?
I think the 11% growth is underlying, there is also an online retailer in this portfolio, HSNG, which had a much higher growth than the average of the portfolio. So, yeah.
A second question from John Ennis. On the out-of-home channel, can you give us the current index for October? Has it deteriorated versus the Q3 level, or is it largely in line with 90-95 index you cited for Q3?
We will not go into any details in quarter four, no.
Right. Thank you. Markus Heiberg, Kepler Cheuvreux. Can you comment on any potential timing differences in sell-in versus sell-out to retailers which could impact Q4?
As we mentioned, we had a bit earlier sales of some Christmas sales from Confectionery and Snacks. I guess that could be approximately half of the growth we saw in Confectionery and Snacks of 4.5% in a quarter. Half of it could be some phasing of the sale to Christmas. Of course, there are a lot of volatility in the value chain. It's a difficult question to answer.
Right. Ingrid Aftal, Carnegie. Could you please share your thoughts on market share gain losses across your portfolio, both versus private label and other BCG players?
Yeah, we don't go into all details around that, and we also have the out-of-home segment where it's difficult to estimate the market growth as such. In some categories, we're definitely gaining share, prioritized categories. We see that our brands are very trustworthy.
People choose the local brands to a large extent, the trusted brands, but there are also in some categories where we're not gaining share. I mentioned the pizza category. We are growing in the pizza category in total. Again, we haven't gained share in that category coming from a very high level. That depends a lot between categories and prioritized markets as well.
In general, we have a very big focus on stepping up and improving further, as I mentioned in my closing remarks on the innovation agenda on our A&P spend, which was up, and also making sure that we're really close to the latest trends. I guess that's the overall answer to that question, and we'll probably come back in when we have finalized 2020 of our overall view on how the market was in 2020.
Thank you. What seems to be the last question from Bruno at Bernstein. You say you have achieved nearly half the margin target. That would be 75 basis point improvement. At Q2, you claimed only 40 basis points improvement, and Q3 margin was down year-on-year. How can the improvement go from 40 basis points to 75 basis points progress?
Okay. Let me try to explain. This is from the margin improvement. It's related from 2019 to 2021. In 2019, we had an improvement of 0.3 percentage point, and so far this year, we have improvement of approximately 0.5 percentage point for the first nine months. We had made the analysis on comparable figures, adjusted for M&A, and our calculation shows that we have increased by approximately 0.7% since the beginning of 2019.
Thank you. One final question that came in just now from Oliver Pisani at Nordea. Jaan Ivar was in an interview in Sweden where he announced significant targeted investments, both M&A and organic into Sweden going ahead. Can you elaborate more on these plans for the market?
If you look back over the last five years in Sweden, we have invested NOK 5 billion, two of them being organic investments and three of them being M&A investments. We are progressing very well in Sweden, taking also market share in many categories. This is my personal view, but you know, Sweden is now the same size revenue-wise as Norway, but we have twice the population in Sweden, so I don't see any reason why we shouldn't double our size in Sweden over time.
Now, when it comes to M&A, we're not commenting upon specific items or specific issues as a policy, but we will continue to work hard on that agenda as well, of course, also on the organic agenda. I mentioned Frankful, the launch in Sweden, it's been a good launch, and it's also an example of great innovation into Swedish market.
This is a long answer, but it's a great question. The Swedish population and the Swedish consumers are very at the forefront when it comes to sustainability, and that agenda. There is a lot of learning for us for coming out of Sweden into the other markets. I mentioned the plant-based Anamma as an example. The third most selling SKU now in Sweden, Orkla Foods Sweden, is our Anamma frozen meat plant-based product. That's a great start.
Exciting. Two more questions come in. Markus Heiberg from Kepler Cheuvreux. Amazon launched in Sweden yesterday. Can you elaborate on your growth strategy with Amazon and more direct to consumer e-commerce in general?
I can comment on that. Yes, Amazon Sweden went live yesterday. We are present with nine brands and 90 SKUs in some key categories. I don't think we'll expect big volumes, but it's a good start, and we have learnings from the U.K. with Amazon, from Germany, from India, and from the U.S. We will follow our strategy to be where the consumer is, no matter which channel or which platform. Again, you shouldn't expect significant volumes. This will take time also for Amazon to enter into the Nordic region.
Thank you. A follow-up question on that from Ole Martin Westgaard, DNB. Several of your international peers have shown significant growth in e-com sales. What is your current share? What growth rates have you seen recently? What do you think is long-term realistic level for Orkla given your current portfolio?
We don't reveal our online share as such, but we are growing rapidly during this pandemic, and I think we're taking our fair share, and we work closely with the direct online retailers. We also have our direct to sales from our own web platforms as well. Amazon was mentioned, although very small figures.
We would like to step up further on the digital agenda. It's a large part of our journey over the next three to five years as well. I think the pandemic has shown that this is something which will stay, and we'll see a change in the consumer behavior, people ordering more online, especially in some categories.
Great. Thank you. I believe that was the final question from the web. That concludes our presentation here today. Thank you both, Jaan Ivar and Harald .
Thank you, Kari.
Thank you, Kari.
We will be back with the presentation of our fourth quarter results on 11th of February. This wraps up today's session. Thank you all for joining. Have a nice day.