Good afternoon, ladies and gentlemen, and welcome to the Orkla conference call. At this time, all participants are in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. If at anyone do require assistance during the conference, press star then zero on your telephone. Just to remind you, this conference call is being recorded. I would now like to hand over to today's chairperson, Åge Korsvold. Please begin your meeting, and I will be standing by.
Thank you. Good afternoon, welcome to this conference call with Orkla's CEO, Åge Korsvold. In addition to Mr. Korsvold, we are the CFO, Terje Andersen, and myself, Rune Helland, Head of IR. First, Mr. Korsvold will give you a short update on the strategic direction before he will answer your questions. Over to you, Åge.
Thank you, and good morning. First of all, I would like to stress that while there have been management changes at Orkla, the strategy that the board of Orkla decided in September last year, remains unchanged. Orkla will grow by allocating capital within the branded goods, which effectively means that we will continue the branded goods activities, which today constitutes about 60% of the value of Orkla, while what we define as non-core, approximately 40% of the values will be divested. Since September last year, we have in fact started that process. The share portfolio is being built down. Borregaard, we expect to divest later this year, and we have withdrawn from the governing bodies of REC, which I'll come back to.
The last non-core activity that we have, the aluminum extruder, Sapa, is a very considerable element of the non-core activities, there we will divest that investment following operational improvements and that we expect to take a bit more time, so there's a longer time frame for holding Sapa before we divest. We have also, since I joined Orkla, put in place a new organizational structure. Group management today is focused solely on the branded goods strategy. The four managers of the Orkla brands portfolio are today members of the group management team.
The head of Sapa, which reports to me, has left the group management simply to emphasize that or to underline that the group management should focus on the new strategy going forward. During the next year, we will continue to develop our organization. The most important element there is to change the corporate center by reducing some costs and also introducing some new skill sets so that the corporate center can better service the branded goods activity as we go forward. In terms of what a business stand for the branded consumer goods means, first of all, the essence of the Orkla strategy, which is the decentralized multi-local model, that model remains in place.
The core of the Orkla value creation ability is all the local brands and the local market positions, which is managed out of separate companies, as you know, in Norway, Sweden, Finland, and Denmark. That decentralized structure remains unchanged. However, as we go forward, I feel that we should have increased interaction within the group, and we should try to extract more synergies across the various branded goods companies. While the business model continues to focus on strong local positions, we will try to put more emphasis on extracting synergies across the entire range of companies that we control. I feel that the basis for growth is reasonably good.
There is category for growth in all of Orkla's categories, and we have in the past shown that it is possible to grow more than the market. I think in addition to the organic growth that we expect to extract, Orkla will have to add acquired growth to the equation. We are reviewing how we're going to achieve that. I think that there will be more emphasis on acquisitions initiated by line management or by the local companies, and then supported by the group center, rather than large transformational acquisitions by the corporate center.
In essence, I guess what I'm saying is that focus on the core, and focus on the geographical positions where we are strong, and focus on the categories where we are present, and then possibly increase the categories, but generally stay within the fast-moving consumer goods area, as we expand the branded goods activities. With respect to the non-core businesses, Sapa has basically three business lines: building systems, profiles, and heat transfer. Within the profiles business, North America is pretty much on track and are getting close to our target of 6% EBITDA margin. Europe or profiles in Europe still requires considerable restructuring.
We have had one round of restructuring, which have yielded, I think, good results. On the other hand, profitability remains unsatisfactory due to the fact that volumes and prices are under pressure. I expect the restructuring of the profiles activities in Europe to continue. In Asia, the work, developing the platform that we have, created there over the last few years continues, and we expect to achieve Sapa standards at the Chinese plant over the next couple of years. Heat transfer, which is an activity somewhat separated from the other activities, continues to show progress. We had a satisfactory performance there towards the end of last year, but improved performance this year.
We are preparing Sapa for standalone sort of life outside of Orkla. That will take some time, so a divestment in Sapa will could only happen after the end of this year, and we have not committed to a definite timeline. This will depend on the progress that we do in the operational turnaround that is taking place at Sapa. As regards Borregaard, we expect to divest Borregaard sometime in the second half of 2012. We are running a dual track process with a possible sale or an IPO, and we feel confident that we will be able to divest the company sometime in the second half.
The share portfolio is being divested according to plan, and that plan calls for a market value of the portfolio coming down to about NOK 2 billion by the end of the year, compared to a market value of about NOK 7 billion+ at the start of the, or around the third quarter last year. Summing up, we refocused Orkla towards a branded goods company. We expect to achieve organic and acquired growth in all categories and markets. There is a focus on the Nordic market and the Baltics, and we will develop categories and look at new categories as we move forward.
The centralized structure is in place and will be continued, but we will increase operational focus and in particular, look for more synergies across the portfolio of companies that we own. I think, pretty much sums up the position. Operator, we are now open for questions.
Thank you, sir. Ladies and gentlemen, if you do have a question or comment at this time, please press the star key, followed by one on your telephone keypad. To cancel the question, please press the hash or pound key. Once again, that's star one to register a question and the hash or pound key to cancel your request. There will be a short silence while participants register for questions. Our first question comes from the line of Monroe Helm. Please go ahead with your question announcing your company name.
Yes, I'm with Barrow Hanley in Dallas, Texas, and thanks for doing the call. I was just kind of curious if you could update us on the search for the CEO and how you see your role in the company going forward in light of the timing of a new CEO?
There is a search going on with an international search firm. The criterias are that that person needs to have, I think, deep consumer brands expertise, but he also needs to have capital markets experience. Of course, he needs to be a native of one of the Nordic countries, speaking Norwegian, Swedish, or Danish. I would expect my role, depending on when this transfer takes place, I would expect to go back on the Orkla board, and I would expect to, if we still have Sapa, I would expect to continue to work on the non-core portfolio, if there are processes there, so that a new CEO can focus solely on the consumer brands activities going forward.
Okay, thank you.
Our next question comes from the line of Daniel O'Keefe from Artisan Partners. Please go ahead.
Good morning. Thank you for taking my question. Could you give me your diagnosis or your analysis of the somewhat disappointing performance of the brand business over the last few years, and what you guys are putting in place structurally, organizationally, et cetera, to improve it? Thank you.
Well, I think, organizationally, I would say that the reason why we made the recent management changes is I think that my sort of view is that where we can improve our practice is in the interaction between the board and the operating companies. In other words, it is the process and the interaction up and down the organization where I think that improvements can be made.
I think the consequence of a somewhat, sort of a, less than optimal, functionality between board and the organization is that you lack process, and you lack, in a way, decision-making ability, so you simply are not able to have the commitment and the clear, decision-making sort of platform that you need in order to be successful. I think as a consequence, when I think the operational performance has been satisfactory, I think that the, one is acquired growth. If you do that analysis, I think you see that it is in the lack of sort of acquired growth that we have, been, underachieving.
I would also say that if you look at profitability, we are on par with our international peer group. I feel that in a sense, that the operating companies have, in many ways, confirmed that they are performing satisfactory. I think it is in the interaction between the operating companies and in the interaction up and down the decision-making line that we can improve. In particular, I feel that it is the acquired growth that we where we need to have better performance going forward.
Our next question comes from the line of Boris Jinovka. Please go ahead with your question, announcing your company name.
Yes, hi, it's Boris Jinovka with Otkritie Capital. You've been pretty active in buying back shares during the first quarter, and the share price was higher than what it is today. What was the reasoning for stopping the share buyback?
I'll leave that. I'll have Mr. Andresen answer that question.
We have a program, a dividend policy in Orkla saying that we pay a relatively high owner dividend, and we do some share buybacks, moderate share buybacks, normally every year. We started that program, and we normally buy the amount of shares that you saw that in one go. That was in line with our more general dividend policy. There wasn't a program to fix the capital structure or a special view on the share price at that time. It was more about allocating capital back to the shareholders by doing share buybacks.
We haven't decided, on what to do during the rest of the year. That is more up to the board to decide on.
Ladies and gentlemen, if you have a question or comment at this time, please press the star key, followed by one on your telephone keypad. To cancel your question, please press the hash or pound key. Once again, that is star one to register a question and the hash or one key to cancel. Our next question comes from the line of Jeffrey Taylor. Please go ahead with your question announcing your company name.
Jeffrey Taylor, Invesco Perpetual in the U.K. Good afternoon. Could you just give us an update on REC and current thinking and coming plans?
We have made the principal decision that since REC is no longer a core holding, first of all, we have decided to withdraw from the governing bodies of REC, in the sense that we have supported an independent chairman, Mr. [Thak Moo]. There are no longer any member of Orkla management on the board of REC. Orkla has a representation through a board member of Orkla on the board. I think it follows from our principal decision that it is highly unlikely that we will commit more funds to REC.
For the time being, we are holding on to our positions and we don't expect to and we expect to sort of hold that position for a while. I think we need a more clear picture on where REC is going before we feel that we are free to act on a disposition or anything else. The principal position is that no more funds into REC.
Thank you.
Our next question comes from the line of Mark Rooney. Please go ahead with your question announcing your company name.
Hi, thank you for taking my question. Regarding Borregaard, could you talk a little bit more about the dual track? Who knows what the IPO market will look like later this year. Are you really pushing forward on trying to find an industry buyer or, maybe a financial buyer, so you don't have to sell part on the market, leaving more issues about.
Well, a dual track is exactly that, a dual track. It meaning that, if there is an industrial buyer, I think that has attractions. I think fundamentally, I guess it boils down to financial results and with price. I would say that in terms of an IPO, there are, of course, two options. Above a certain price, we will do the IPO. Below that price, we will probably dividend Borregaard to the shareholders.
I think the important thing here is that in terms of executing on the strategy and focusing Orkla, I think it's important that we can divest Borregaard before the end of the year, because that, in essence, means that we have effectively executed the initial part of the restructuring. We will have the branded goods portfolio, which we will continue to develop, and we will have the Sapa investment, which of course, is the major part of the non-core. Everything else, in a way, will have been cleared away, or we will have reduced our exposure sufficiently so that shareholders no longer need to focus on the remaining assets that are non-core.
Understood. Thank you.
Our next question comes from the line of David Samra. Please go ahead with your question announcing your company name.
Hi, I'm from Artisan Partners. Could you comment a little bit more about the restructuring in Sapa's European portfolio? In general, you know, the view on the restructuring today versus maybe six months ago, and what you're doing with those 21 facilities, given the economic conditions that we're starting to see in some of the more difficult parts of Europe, Portugal and Spain, where some of those facilities are, and whether or not you think perhaps we need more restructuring than initially thought. On a second question with regard to Sapa, in terms of disposing that non-core activity, would you also, when you're ready, consider a dual track for that business, an IPO or a distribution to the shareholders in the same way that you're considering Borregaard?
Are we committed to selling that for cash and using that cash inside the holding company?
Let me take the last question first. We will keep all options open. We are not committed to a sale. I think we are committed to optimizing return to shareholders. We will, you know, we will do what we think is an optimal solution at the time. I think, depending on the fundamental situation in the company and depending on the market conditions and everything else. I think also to some extent, this will also probably be driven to some extent, also, just by developments in the branded goods company. If, you know, if we feel, depending on the dynamics there, it may be natural to divest Sapa earlier than initially.
I think that, if you look at the value of Sapa, and you look at the value potential, the current thinking is that the restructuring, that is going on in Europe and the operational improvements that are taking place in Asia, as soon as we can document effects, and as soon as shareholders see, the effect of some of that activity, I think, that should potentially have a very significant impact on values.
Whether we then end up selling or whether we IPO or whether we dividend up, I think is more dependent on current market or on market conditions at the time, and I think, our assessment, our ability to execute whatever we decide to do. I think that, so I think that's essentially what we can say about, you know, we will keep sort of options open, really, and it, and it boils down to extracting as much value for Orkla as and other shareholders as possible.
When you sort of tied it to the branded goods company, did you mean that if there were to be large acquisitions that the branded goods company would be more inclined to try and get some cash proceeds back into Orkla? Is that what you meant by that?
Well, first of all, I think that, you know, Orkla, you know, is not dependent on cash from Sapa to execute on the branded goods strategy as such. First of all, I don't think that the financial resources from Sapa is a prerequisite for executing a branded goods strategy. I think, but I do think that, I think that it's more, you know, what I'm thinking of is more that if we have a successful execution on the expansion on the branded goods company, I think that, you know, we want to become focused as soon as possible.
In other words, the focus of the company and the focus of the management needs to stay on the branded goods side. In that sense, you know, it's, that will accelerate a plan, divestment of Sapa.
I see.
I think I should add that one of the reasons why we are taking some time preparing Sapa for an IPO or a divestment is that, you know, Sapa has been existing under the sort of Orkla financing and Orkla umbrella, and we feel that we can restructure the balance sheet, and we will also evaluate whether there are part of the Sapa portfolio that we could divest. I think there are capital optimization issues related to Sapa, simply because we think that that is a way of extracting more value than selling Sapa as it is today, relates to capital structure, it relates to portfolio and so on, so forth.
Sapa, you know, under the Orkla umbrella, has also dependent been dependent upon the group management and the corporate center, and we need at least six months to establish that, you know, Sapa as an independent entity before we sort of go to the next level.
I see. Okay, thank you.
I think on the first part of your question, I think that, I think that, you know, there are three initiatives inside the Sapa related to purchasing, commercialization, and cost. Clearly, if we see volumes and prices continuing to deteriorate in Southern Europe, the way we see today, at some point, it will be, I think we will have to sort of revisit whether the current restructuring plans are sufficient. And that is obviously something that is subject to a continuous evaluation. So far, we have made the progress in the restructuring.
Rest, but it's also quite that the results or the first round of restructurings is basically absorbed by deteriorating prices, margin pressure, and declining volumes.
Okay.
Our next question comes from the line of Stephanie [Vacher]. Please go ahead with your question and answer the company name.
Hi, I'm from Investec Commercial. Just a quick question on Russia and where that ranks in your sort of geographical build-out from here for the brands business.
Russia is, as I'm sure you know, a turnaround situation.
Yeah.
Basically, the mandate to management is to turn that around and prove that the Russian business, as we have it, is a sustainable and profitable business. I think that the we management will need another maybe two years before we are through with the restructuring, and we have reestablished the company on a sufficiently attractive platform. At that point, we would like to revisit our Russian investment and see, you know, where we go from there.
Okay, thanks.
Next question comes on the line of Jean-Francois Cote. Please go ahead with your question.
Yes. Hi. I'm just wondering on the branded business, what were where were more precisely the disappointments in the performance of that business that led to the firing of both the group CEO and the company CEO? I mean, was it more having to do with organic growth and market share, or was it more having to do with the lack of profitability improvements? I mean, what were the focus and the big disappointments there?
I think as I said previously, if you look at the financial performance, the deviation according to plan relates to organic growth. I think as I indicated, I think that the big improvement in inside Orkla is in the interaction between the operating companies and, you know, through to the board, and how we define strategy, how we execute strategy, and all the processes related to that. I think it's a so that would be my answer to that.
What is the kind of organic growth that you think this division should be able to sustain?
I think that, you know, I'd be hard-pressed to give you a number, but I think if you have a, if you have a market growth of 2%, then I think it's certainly possible for, you know, with the strong number one brand position to take market share. You know, whether that adds a percentage point, or a little bit more, a little bit less, that I think that is hard to say. If you want to have, you know, if you want to see this company grow in categories 6%-7%, then obviously you will have to add some acquired growth to achieve that.
Last question, if I may, this time on Sapa. I'm just wondering, is there an impact from the China slowdown to that business that is impacting maybe Europe or even the U.S. to a lesser extent?
No. I think that first of all, if you take the China operation, I think, there, that the performance there is purely related to our ability to get that plant, onto, you know, normal Sapa standards. The moment we are there, and that will take some time, we are in a cluster of large, multinational companies, and, you know, we have all the clients who need to fill that demand. I would also say that the heat transfer activity in China is fine. We don't see any sort of particular, China impact, in the performance of Sapa.
There hasn't been any export volumes going to or trying to find its way in Europe, for example, from China?
No, no.
No. Okay. Thank you.
We have a follow-up question from the line of Monroe Helm. Please go ahead.
Could you give us your perspective on the acquisition markets as they exist today, and areas you want to focus on, and whether or not, two things, whether or not your stock would be used in making acquisitions, and whether or not you think we could see some progress in acquisitions prior to appointing a CEO?
First of all, I would say that I feel my mandate is such that I'm not waiting for a new CEO. You know, I'm, we can execute, and we can do whatever we feel is right, and the board will support, I think, sensible suggestions as we forward them. There's no delay in executing on this strategy while we wait for some more management changes. I think on the contrary, everything is moving ahead as it should. I think it reflections on the acquisition market, I would say, you know, it's nuanced. First of all, I think you need to make the comment that the first-class assets are still expensive. You know, it's.
Although, I mean, even though, financing available to private equity is of course much more subdued than it used to be, and the multiples are down, we feel that for the first-class assets, prices are holding up, I would say, remarkably well. I think, generally there is, it's a, it's a relatively active market, with strong interest from private equity and industry. There is, normally for most of these assets, there is competition. I think in terms of some of the larger, more, sort of well-known, structural opportunities, they are complex in the sense that they are controlled by trust, they are controlled by families.
There's rarely a simple shareholder structure. I think the experience is that those transactions take time to execute and they will continue to be time-consuming and, you know, and depending on the lot of factors, not only financial factors. I think the part of the focus that I'm sort of going back to line management with is that I feel that the most interesting opportunities would be for Orkla to really build a pipeline of small and medium-sized acquisitions. I think in particular, acquisition opportunities that are under the radar of investment banks and private equity.
I think Orkla should be well positioned to find those opportunities and should be an attractive home for a lot of these family-owned businesses. I think, whether we make acquisitions in the next few months, depends on if things are available, we will, and we think they make sense, we will do so.
Thank you.
We have a follow-up question from the line of Boris Ginovska. Please go ahead.
Yes. You've mentioned that North American operations of Sapa are doing well and getting close to your targets. Are there structural reasons why it does not make sense to divest the U.S. Sapa operations and continue with the structuring efforts in Europe?
What I think, I think that we have, so far, we have assumed that a Sapa that entails North American, European, and Asian profiles, activities under one umbrella, would we, you know, have the greater value. You know, we have, we have been a consolidator in this industry, and I think the assumption is that that is the most attractive value proposition at the potential exits. As I said, heat transfer is maybe a little bit sort of independently, and I think that there are, there is more optionality there than on profiles.
Mm-hmm. Okay.
We appear to have no further questions at this time. I hand the conference back to you. Thank you.
All right. Thank you all, and, have a good afternoon, and good morning.
Thank you. Thank you.
Ladies and gentlemen, thank you for your participation today. This concludes today's conference, and you may now disconnect your lines. Thank you, and good afternoon.