presentation of Orkla's second quarter results. My name is Kari Lindtvedt. I'm Head of Investor Relations. Our presenters today will be President and CEO, Nils Selte, and our CFO, Harald Ullevoldsæter. During the presentation today, you're welcome to post questions on the web, and we will address them in the Q&A session at the end of the presentation. As some of you may have noticed, today, we report our financial results on an updated reporting structure in line with our new operating model. Historical financial information on the new structure can be found on our investor pages at orkla.com. I'll leave the floor to you, Nils, to begin our presentation.
Thank you, Kari, good morning, and thank you all for joining our presentation today. Before summing up the quarter result, I would like to give an update on our work on transforming Orkla into a leading industrial investment company with a brand and consumer-oriented scope. When I joined Orkla 15 months ago, I said that my priority would be to ensure that we accelerate growth and value creation. The ambition set out was to give our companies autonomy and decision-making authority to ensure that they have necessary flexibility and speed to act on opportunities and changes that arise. Another important effect from the new operating model is increased accountability. From an ownership perspective, I also wanted to create more flexibility to enable a dynamic approach to our portfolio and capital allocation in the future.
The change of our operating model was announced at our Q3 presentation last year. We are now organized as 12 independent portfolio companies with a lean Orkla ASA, consisting of an investment team, centre of excellence, and supporting function. In addition to this, synergies are still maintained and developed within procurement, IT, and finance in our business service companies. The organization has shown an impressive ability to adapt and execute on the changes. I'm very happy that we have reached key milestones according to an ambitious plan. The legal entities have been carved out, and we have recruited three new portfolio company CEOs and several board members. Today, we report Q2 according to our new structure with significantly more details than previous quarters. An important principle behind the new operating model is to increase transparency. This will ensure focus on each of the individual companies.
By giving more details on key performance indicators, the external market will better understand the business and the underlying performance. Let me now share some more details on the next steps to come. Our portfolio companies have just recently finalized their full potential plans. Work started in March this year. During and after summer, we will assess the plans, focusing on the value creation potential for each of the companies. Based on this, we will apply a holistic view on the portfolio to understand and prioritize where can we expand and grow, where do we need to improve efficiency, and where can we rationalize? This part of the process represent one of the major changes in the new operating model. Going forward, we will take an active ownership role and systematically evaluate the value creation potential, coupled with capital needs and structural opportunities.
We will then be able to prioritize based on facts and insights. The starting point is very good, with strong brands, experienced people, and efficient local value chains. Let me also repeat that our ambition is to reduce complexity around our portfolio. Based on this, our short to medium-term priority is to improve performance in the existing businesses. As we see this as the most value creative for Orkla and our shareholders. Our focus in the near term will be on current portfolio, but we are always open to value creative M&As and structural opportunities. At our Capital Markets Day in November, we will present you with more details and findings from our ongoing work. Our ambition is to give you a much better understanding of our governance model, capital allocation framework, and the strategies employed in our companies.
Let me give you a summary of the financials for the quarter. In Q2, EBIT (adj.) from the consolidated portfolio companies improved by NOK 354 million, and EBIT (adj.) from hydropower declined by close to NOK 300 million. Altogether, this resulted in an Orkla EBIT (adj.) improvement of +2% for the second quarter of 2023. Jotun reported 85% growth in operating profit. Congratulations to that team for delivering fantastic performance. Cash flow from operations showed positive progress with good momentum from earnings growth and less negative change in net working capital. Adjusted earnings per share for the quarter was NOK 1.55, an increase of 17%. Year to date, adjusted earnings per share was NOK 2.88, representing an increase of 12%.
If you look more closely at the portfolio companies, we had underlying growth in EBIT (adj.) for 11 out of 12. We have summarized the eight largest here on this slide. Overall, net revenue management is a priority. We see that we are able to implement the price increases necessarily to compensate for increased input costs. This translates into sales growth for most of our companies, but this is partly offset by negative volume growth, in line with what we have seen in the last three quarters. As you can see from this slide, the Pizza Out-of-Home business has changed name to The European Pizza Company. I think this can serve as a good example of increased independence. I will now leave the floor to Harald for more details on the financial performance in the quarter.
Thank you, Nils, and good morning, everyone. I will now take you through this update on the financial performance in quarter two. Before we go into the details, let me highlight some of the biggest changes in the new reporting structure that is taking effect from today and onwards. Okay. A part of the change in our operating model is that we want to increase both internal and external transparency on each portfolio company going forward, as Nils mentioned. We think the financial market will be in a better position to assess the different parts of Orkla. We also think by opening up, we can increase accountability and focus on the portfolio company level. As previously mentioned, we will increase the external transparency by starting to report on our 11 consolidated portfolio companies and Jotun, which is treated as an associate company for accounting purposes.
For the consolidated portfolio companies, we are providing more financial information. We have split organic growth into price and volume/mix, and providing contribution ratio and return on capital employed. In addition, we will show underlying EBIT growth and change in underlying EBIT (adj.) margin per portfolio company. The adjusted element refers to other income and expenses, while the underlying means excluding effects from both currency and M&A. An updated description of the alternative performance metric is found in the appendix of this presentation and in the quarterly report. We believe that this will give the market better basis for assessing our portfolio and financial performance. Let's move on to more details on the quarterly results. Reported revenue growth for the group was 20% in the quarter.
Organic growth for the consolidated portfolio company was 8.5%. The main driver was price, with 12.9%, while volume/mix declined by approximately 4.5%. Adjusted for pacing of Easter and the extraordinary sales in June last year, prior to the price increases, our estimates for underlying volume/mix decline are reduced to approximately 3.5% for the quarter. EBIT (adj.) for the consolidated portfolio companies increased by 29%. The growth, adjusted for change in currency and M&A, was 13%. The earnings growth was broad-based. The main driver was price. The tailwind from price increases will be some reduced in the second half of this year. Orkla is still experiencing a significant increase in input costs. The picture is mixed.
The market prices for a weighted basket of our main raw materials are declining slowly, the risk of increased prices for important agricultural products has increased due to the droughts and reduced crops in Europe. The decline for financial investment was mainly driven by 46% lower electricity prices for hydropower. This result in EBIT (adj.) for hydropower of NOK 282 million, which was approximately NOK 300 million lower compared to last year. Real estate handovers take EBIT adjusted for financial investments to NOK 305 million in total. We had net other income and expenses of minus NOK 202 million in the quarter. The largest element was M&A costs related to the partnership search for Orkla Food Ingredients, and some restructuring projects, costs, and reorganizing Orkla ASA.
Profit from associates was NOK 533 million, mainly related to a strong comeback in Jotun, as Nils mentioned, and I will come back to this. Net financial items were higher than last year, mainly due to higher interest costs, but also higher debt level. The average interest rate in the quarter was 4.9%. Reported tax expenses were NOK 415 million. This is down from NOK 495 million in the corresponding quarter last year, due to lower profit from hydropower. The underlying tax rate, adjusted for hydropower tax and non-deductible M&A costs, was basically unchanged at approximately 22%. Let's have a look at the cash flow. Cash flow from operation was NOK 2.1 billion in the first six months of 2023, compared to NOK 677 million for the same period last year.
The cash flow from operation in the consolidated portfolio company was significantly higher than in 2022. This was mainly driven by improved earnings and less negative change in net working capital. Going forward, our ambition is to reduce working capital to a more normalized level. The largest project under the net replacement investment was the construction of the new biscuit factory in Latvia. Replacement investments also include other factory projects. Let me walk you through the net interest-bearing debt bridge for the first half of 2023. Net debts, including leases, increased by NOK 5.6 billion to NOK 22.8 billion from year-end 2022. Cash taxes in the first six months totaled NOK 1.5 billion, which is higher than in the corresponding period last year, and driven by higher hydropower profit in 2022 that is being paid in 2023.
We also paid out NOK 3 billion in dividend in April. Net M&A was NOK 1.1 billion in the first half of 2023. Was mainly related to the acquisition of Bubs Godis in Sweden and Khell-Food in Hungary. Additionally, we had expansion capex of NOK 227 million in the first half, compared to NOK 157 million in the first half of 2022. We have negative currency translation effect as a result of NOK, weaker NOK. That increased the net debt level by NOK 1.8 billion. Orkla has a sound financial position. Our net debt level at the end of quarter two corresponds to approximately 2.3 times EBITDA, based on the last twelve months when acquired businesses are included in EBITDA. Let's look at the performance in the portfolio companies. Starting with Jotun.
The strong sales momentum continued in the second quarter. Excluding currency effects, the underlying sales growth in the quarter was 11%. The strong growth year to date was mainly driven by volume growth and price increases. In addition, regional and segment mix effects, including increased sales of Marine Coatings, contribute positively. The marine protective and decorative segments have all delivered double-digit sales growth year to date, while sales in powder segment have increased modestly. Operating profit year to date nearly doubled compared to the same period last year, driven by improved gross margin, volume growth, and good cost control. Gross margin continued to improve through the second quarter. Although raw material prices have come down from the peak reached last summer, not all regions have benefited, in part due to the negative currency translation effects.
Raw material prices remained stable in this second quarter. High inflation, rising interest rates, and lower global growth projection create some uncertainty in the outlook for the paint and coating industry. Year to date, however, these uncertainties have not significantly affected activity in most of the market in which Jotun operates. Look at Orkla Foods Europe. Orkla Foods Europe reported a revenue increase of 18% in the second quarter, of which 7% was organic growth. The growth was broad-based and price driven, while volumes declined across most markets, mainly in grocery. The volume/ mix decline of -9% was negatively affected by the earlier timing of Easter this year, and as I said, abnormally strong sales ahead of price increases of the 1st of July last year.
If you adjust for these items, the volume/mix decline was approximately 7%, which is almost in line with the underlying performance in quarter one if you adjust for the timing of Easter. Food service and convenience continued the positive trend from previous quarters. Market shares in grocery declined in most markets, particularly in the Czech Republic, Sweden, and Denmark, much in line with the performance in quarter one. This can, to a large extent, be attributed to changes in consumer behavior, where hard discounters, hard discount stores are gaining market shares and promotion are used to drive customer traffic. Underlying EBIT increased by 21%, largely driven by price increases and offset by cost increases and negative volume development due to the effect of timing of Easter and the extraordinary strong sales in June last year. High costs of raw materials, packaging, and energy remain challenging.
Weighted exposure for different procurement categories makes the cost increases more challenging for Orkla Foods Europe than other portfolio companies. Meats, dairy, sugar, tomato paste, and rice are examples of raw materials with significant increases. Glass and metals are large packaging categories with strong price increases. Moving on to Orkla Food Ingredients. Orkla Food Ingredients had sales growth of 33% in quarter two, of which 10.6% was organic growth. The organic growth was price-driven, as shown by the volume/mix of -2.4%, mainly driven by the bakery segment, while plant-based continued to grow. Organic growth has been diminishing throughout the first half of the year, related to both price and volume. Growth was still good within plant-based drinkables and margarine in quarter two.
The margarine segment, in particular, will face tougher comparables in the second half of the year. Despite large difference in raw materials, the overall cost of important purchasing categories has been more stable compared with previous quarters. The 4% improvement in underlying EBIT was driven by positive effects from price increases, offset by cost increases. Let's look at Orkla Confectionery and Snacks. Orkla Confectionery and Snacks had sales growth of 19%, of which 8.8% was organic growth. The volume decline of 7% was related to a combination of negative effects from the earlier timing of Easter this year, abnormal sales ahead of price increases the 1st of July last year, and delivery challenges due to the new biscuit plant in Latvia. Taking this into account, the volume/mix decline is more in line with -2% in quarter two.
The ramp-up issues of, at our new biscuit factory are ongoing. However, production increased successfully during quarter two and is expected to improve further during the rest of the year. The ramp-up has increased operational expenses by approximately NOK 30 million in quarter two, corresponding to NOK 60 million in the first half of 2023. On the top of this, we have delivery problems resulting in reduced sales. Market shares are slightly reduced, and an important driver is the low service level from our new biscuit factory. EBIT grew 8% in underlying terms in quarter two, including the ramp-up issues. There was good profit growth in most markets, and particular in Sweden and Finland. Raw material costs show a gradual flattening for some purchasing categories, although still at a significantly higher level than in the corresponding period last year.
The weak Norwegian krone and Swedish krona are affecting the overall procurement cost negatively. For the first time, let's have a look at the Orkla Health. Underlying EBIT (adj.) growth of 16% was driven by positive price and volume growth and improved contribution margin. Volume grew 1.9%, supported by Oral Care, Sun Protection, and NutraQ. On the other hand, vitamins volumes in Norway declined due to loss of market shares in grocery. The growth in Sun Protection sales during the first half of this year was partly driven by pipe filling after a strong season last year. Although the underlying EBIT (adj.) margin improved in quarter two, it is important to remember that the corresponding period last year included temporary costs due to supply chain challenges. This will not have a positive effect year-over-year in the second half of 2023.
Let's look at Orkla India. Underlying EBIT (adj.) growth of 16.8% was driven by sales growth, while partly offset by higher fixed production and other indirect costs. Raw material costs continued to increase, particularly within spices and dairy. Organic growth was price-driven across business units. Growth in core categories applied both to domestic sales and export sales. Core categories like spices and masala grew, while food and drink mixes saw a flat development. Negative volumes are driven mainly by the pure spices categories in Eastern, which is more generic in nature. Masalas, value-added blended spice with higher margins, have shown good volume growth in the quarter. EBIT (adj.) margin in the quarter was 13%, up 1.1 percentage points, underlying from the corresponding period last year. Let's have a look at Orkla Home and Personal Care.
Organic growth was price driven across markets, while volumes declined by 3.3%, mainly as a result of decline in the grocery channel in Norway, as Private Label are gaining market shares. The market shares for home care categories were reduced, while the development in personal care is more stable. Positive price effects were offset by higher input costs and weakening of the Norwegian krone. Most of the input factors are purchased with exposure to euro. Underlying EBIT grew 16.7% due to higher sales, partly offset by higher costs. Orkla Home & Personal Care has implemented an organizational restructuring to right size the organization to the carve out of Oral Care. Moving on to the pizza franchise business.
The European Pizza Company grew revenues by 37%, of which 10.7% was organic, where the difference is the positive consolidation effect from the acquisition of Da Grasso and positive currency translation effects. Sales were positively impacted by increased consumer sales and price increases for the wholesale business. Consumer sales in quarter two totaled EUR 110 million, which is an underlying improvement of 3.2%. This was negatively affected by consumer sales in Germany. That declined due to the closure of pizza outlets. The German market is challenging, with high cost and wage inflation, in addition to which consumer spending is under pressure. A network restructuring is ongoing, where underperforming stores are being closed to ensure a robust base going forward. A provision for future losses was booked in quarter two. Performance in Kotipizza in Finland is good.
Let's have a look, brief look at the remaining four portfolio companies. The remaining four companies are smaller in size. All four companies report EBIT adjusted growth in the quarter, and more details on these company can be found on a regular basis in the quarterly financial report. Let me now hand back the floor to Nils for his final remarks.
Thank you, Harald. I am happy to report EBIT (adj.) growth in the quarter, supported by improvement in 11 of our 12 portfolio companies. Our short-term priority now is to improve performance in existing business and in parallel, to continue implementing the new operating model. At this point, I sense a lot of energy in both Orkla ASA and in the portfolio companies. Increased transparency and accountability will, for sure, have positive effects by creating more spirit and entrepreneurship. I very much look forward to share more details with you at our upcoming Capital Markets Day in November. As earlier announced, we are in the process of finding a partner for Orkla Food Ingredients. This is going according to plan, and we are seeking to find a partner and a structure that is value accretive for all parties.
We will revert to the market when we have something to announce. We will go into the Q&A.
Good. Thank you. We have a couple of questions from the web. Let me start by asking if there are any questions from the audience here in Oslo. There seems not to be. We'll start with one of the questions from the web. It's from Patrick Folan, Barclays. He actually has three questions. I'll take them one at a time. Good morning. Thank you for taking this question. I have three, please. The climate comments, the comments that you make on the outlook, is this related to specific weather events or just general higher global temperatures? What categories will be most impacted due to this?
This was-
Yeah. I think first of all, this is about the drought in Europe, that we see are maybe most probably coming this year, and that will affect the prices. Harald can give you the details on where it will hit us.
Yes, the most important categories will be the vegetables, important for Orkla Foods Europe, but also fruit and berry and other grain-based categories. It's quite important for especially Foods Europe.
Thank you. Second quarter, on the shift you are seeing to the discount channels, has this accelerated in Q2?
I think we see the same pattern.
Yeah.
As I said, that we see more or less the same development in the last three quarter as we saw in Q2. We see that the shift to hard discounter in some market are hitting us.
It started with Denmark and the Czech Republic in quarter four, and then we had Sweden in quarter one, and that's the same picture, as you said, Nils, in quarter two.
... Thank you. Lastly, can you comment on the pricing environment? Are you engaging in more promotional activity now that Private Label intensifies? Is there any more incremental pricing to come for the rest of 2023?
What I can say about that is that we've, in the first half this year, we have increased AMP quite substantially. We will continue to invest in our brands going forward, if that's through campaigns or through more kind of AMP spending, that there will for sure be a mix, of course.
I guess we will not comment on further price increases.
I don't think we can.
Mm.
Thank you. We have some questions from Eirik Rafdal, Carnegie. Are you seeing increased pushback on price hikes as consumer wallets become gradually tighter? What are your thoughts on price hikes for the second half of 2023?
I think we basically have commented on, upon that. If you look at the pattern that we see that the hard discounter is gaining market share, we see that Private Label is also all taking market shares in basically all formats. I think that's the pattern we will continue to see for the second half as well.
Mm.
Mm.
The second question from Eirik: This is the first quarter in two years where margin, where you report margin expansion for branded consumer goods. Should we expect continued margin expansion in Q3 and Q4?
As we have said many times, we do not guide on margins, going forward. We are happy to see the turn on the margin, during quarter, especially during quarter two, and it's quite broad-based.
Thank you. We have a question from Ole Martin Westgaard, DNB. You have strong organic growth in the quarter, but the volume is, in key segments, are significantly negative. Can you please elaborate on what your expectations are with regards to the volume development in the coming quarter for these key segments?
I think, once again, we don't guide on the future. I think, I said we have said something about the development over the last three, four quarters. In the formats, we have seen Denmark and Czech first coming in, low discount or hard discount to taking market share. We saw that in Sweden coming in first quarter this year. I think we will see the same pattern going forward, as we said, and Harald was also more specific into the details and the periodic effects of different events in his presentation. I don't think we need to repeat that.
We actually have a follow-up question from Håkon Fuglu, SEB, on the volume development. He asked specifically, volumes for Foods Europe and Confectionery and Snacks came in weak. Did you experience volume changes through the quarter?
As, as I tried to say in my presentation, is that if you adjust for the phasing of Easter, and if you adjust for the abnormal strong sales last year because of the price increase by the 1st of July in the year last year, it's approximately the same pattern, the volume-wise. Broadly the same, both in foods, and also in confectionery snacks. If you adjust for these problems, we have the delivery problems with the biscuit of a new factory in Latvia.
Thank you. A second question from Ole Martin Westgaard, DNB. You have significant costs related to finding a partner for food ingredients in the quarter. Can you please provide an update on the status of this project? When should we expect a closing?
I think I closed my presentation by saying that we will revert to the market when we have something to announce. As I said, we also will look for an a value accretive transaction for both us and the potential partner, we will announce to the market when we have something to announce.
Thank you.
I think I need to add to that. There has been involved some cost with that transaction.
Mm.
I think it's fair to say that Orkla Food Ingredients is probably the most complex structure we have in the Orkla system today.
Mm.
There's a lot of countries, a lot of different categories, I think that there has been a lot of cost kind of to restructure and to find the right comp structure, and also kind of make sure that we have everything in place for a transaction. That's why you see it's quite high cost in this quarter, but I think most of the costs are involved, have been kind of booked in the second quarter.
Thank you.
Mm.
Two questions from Henry Dennis, Bernstein. The first one, regarding ESG. The ESG regulation. The EU has approved the due diligence directive on deforestation. As a user of palm oil in particular, is there anything in that directive that means that you will have to accelerate plans for sustainability? Are you able to quantify what sort of cost headwind you expect from this, if so?
I think we are on the path to deliver on the requirements from EU, in that, when it comes to palm oil. So I don't think we have any technical depth related to transforming into palm oil going forward.
No.
Mm.
I believe this is something we've worked on for several years.
Yeah
I think, from what we now know, the costs shouldn't be significant.
No.
Right, the second question from Henry. Private Label pressure. You mentioned increased pressure in certain categories. Are you able to give any more detail on which categories are most affected?
I think As we have said, we are losing some market shares, slightly, both in quarter one, but and the same pattern in quarter two. It not much, but it's some reduction, and most of it is to Private Label. It's I think it's the main competitor in all our categories. I guess if you're looking at the most important one, I guess will be the home care categories in home personal care in Norway.
Right. Thank you. I think that was all the questions we have from the web. Are there any other questions in the audience? No, there seems not to be. Well, please remember to save the date for our Q3 presentation on the 26th of October, and also for our Capital Markets Day, end of November. Thank you all for joining today, and we wish you all a very nice day.