Welcome, everybody, to the presentation of the Orkla first quarter result for 2011. I will present the highlights. My name is Bjørn Wiggen, and I'm the CEO of Orkla. My colleagues, Torkild Nordberg will present Orkla Brands, and Tim Stubbs will present Sapa. First of all, on the strategy development during the quarter, we have continued to follow up on our strategic direction, and the most important was then the closing of the sale of Elkem to China Bluestar, which was done on the 14th of April. Also then means that all the proceeds were coming into our account on that day.
Our plan is then to allocate the capital to Orkla Brands and Sapa which we have done in a smaller way. We have continued to develop the Sapa business in Asia through the joint venture with Chalco targeting the rolling stock market in China. We have established a position in the Indian market which the team will cover a little bit more later. We have also had a small acquisition in India in the Brands business. This also means that we now have a very strong balance sheet in Orkla, and which means that we have big flexibility towards continue to deliver on the strategy.
Our profitability continued to grow in the quarter, meaning that we now on a rolling 12 months EBITDA level are now at slightly above NOK 4 billion. This was the seventh quarter in a row that we showed the profit improvement. During the quarter and relative to the same quarter last year, we have an increase in revenues of 15% and an increase in EBITDA of 19% for the group. If we look at the different business areas and the main elements there, we see that for our Orkla Brands companies in the Nordics, we have a stable development.
In our international business within Orkla Brands, we have lower results in this quarter than we had in the same quarter last year, which is a combination of increases in the cost level, which is not offset totally in the pricing to the Russian market, and also some negative one-offs related to restructuring of the Russian business. In the Nordic area, there was of course the difference in the Easter sales, whether that was in the first quarter or second quarter. Taking that into account, we see that the development is stable. For Sapa, we had continued volume and then also profit growth for the Sapa business.
We are satisfied with the development in the Profiles business in North America, which has a strong performance both in the market share, and profitability. In the European market for Profiles, we see a mixed picture as we are established in all over Europe. We see both the more positive development in the northern countries in Europe, but at the same time, we see the very low market still in Southern Europe, where we have strong positions in Italy, in Spain, and in Portugal. We also see that the projects in the building and construction part are still at a very low level. T hat is negative to us in Sapa Building System.
But it is also negative in the Sapa Profiles, as new projects give us added value if they are realized. Borregaard is showing a strong quarter. We see here a tight supply situation in the specialty cellulose markets, and this is something that Borregaard can utilize and get better profits through higher margins. So when we see the total change in the EBITA, quarter-on-quarter, see the improvement in Sapa between 80 and 90 million NOK, Borregaard, a little bit more than 100 million NOK improvement, and then 100 million NOK reduction in Brands, coming from Russia and the effect of the differences in where the Easter sales were placed.
In total, a quarter of close to NOK 800 million in EBITA. The other 40 improvement is mainly related to companies that are sold off that last year had a negative result. If you see the details in the group income statement, we are at NOK 15 billion operating revenue. As mentioned earlier, 15% increase and 19% improvement in EBITA.
If we look at the associates, there, we have the REC shareholding, and as that is based on the market price of the REC shares at the end of the quarter, which was 19.4, we have then increased the value of the REC shares with some NOK 860 million. Another important point here is the discontinued operations, where we have the Elkem transaction and the final calculations on the accounting effects and the gain on the sale of the Elkem shares shows that a value of NOK 1.2 billion, which is then presented under discontinued operations.
In total, this gives a profit after tax of close to NOK 3 billion, which is NOK 2.9 in earnings per share. I will also cover the investments. As mentioned on the Borregaard, some high demand in the textile industry, in Asia especially, is causing a tight supply situation and high prices within all specialty cellulose segments. Which will then again gives Borregaard Chemicals, they then experience a strong demand and with good prices for their products in the first quarter.
In the Linen area, we have a value volume increase of 8%, and with in combination with now getting the effects of restructurings that have been made in that business by shutting down some capacity in Italy, among others. That has also given them a profit improvement. The EBITA of NOK 134 million is the highest ever first quarter for Borregaard Chemicals. On the hydropower, we still see a much lower production of power from the Sauda plant. The production is significantly lower than what we see in a normal quarter one.
So I'm in one way, starting to get tired, saying that I want more rain in western Norway, because I don't get very popular in that area for talking about that, but that is then the reason for a weak quarter in Sauda. We also have a maintenance program in Sauda running, which means that the maintenance costs are somewhat higher than normal, and which we expect to be the situation also for the next quarters in because this program is running for more than a year. On Borregaard Energy, they had a lower production in the quarter as well, and also some reduced access to contract power, also affecting the development negatively.
On the investment portfolio, we had a return on the portfolio in the first quarter of 1.7%, which is then 2% higher than the index we compare with, the MSCI. We have continued to deliver on the strategy within this area, meaning that we are steadily reducing the total capital invested in the investment portfolio. It's then in this quarter, reduced from NOK 11.7 billion to NOK 11.1 billion. As we have said earlier, we expect the level to be between NOK 8 billion and NOK 10 billion in the future. Jotun is not reporting on a quarterly base, so these numbers are related to 2010.
For the first quarter, Jotun has delivered a strong sales performance, but increasing raw material prices is contributing negatively to the margin development within Jotun. REC delivered its results yesterday. The REC had a strong development in the quarter, with revenues of NOK 4.1 billion, with an EBITDA of between NOK 1.4 billion and NOK 1.5 billion for the quarter. Also, positive was that the debt was reduced with some NOK 0.6 billion during the first quarter. The main reasons have been presented by REC themselves, but it is related to clearly positive development on the areas controlled by REC itself.
Strong performance in operations, both in Singapore and in the U.S. On the outlook in the short term for our different businesses, when we see the Nordic market, we expect a stable trend in the Nordic grocery market. We do see high prices coming from the raw material markets. Orkla Brands, as mentioned, have been successful in the first quarter to offset in the Nordic area the higher costs by increased prices. The work will continue to make sure that is also the case for the future.
On Sapa, we see growth in all markets, except what I mentioned on the building and construction area, where there are differences in different geographical locations, but still, it's rather weak, both in North America and in Southern Europe, although we can see some slight positive in North America. On the Borregaard part, we still see favorable market conditions for Borregaard in the short run. However, we also see that we have higher input costs, and we both for Borregaard, but which is also the case for Sapa's heat transfer business in Finspång. We see that we are operating with our cost levels in NOK for Borregaard and SEK for Sapa heat transfer in Finspång.
These areas, which are highly export-oriented, they are, of course, seeing a negative impact over time if the U.S dollar will stay weak. I will use the opportunity to invite you to the Orkla Investor Day, which this year is in London on the 14th of September. In addition to Tim and Torkil, we have also invited Morten Fon, CEO of Jotun, to present Jotun on the Investor Day. Torkil, you take Orkla Brands.
Thank you. My name is Torkild Nordberg, and I will present the results for Orkla Brands. This graph is showing the profit development for Orkla Brands over the last 8 years on a 12-month rolling basis. From first quarter 2008 until year-end 2010, the Orkla Brands companies were able to increase the profit by roughly NOK 750 million consistently over 12 quarters. This quarter, there is a reported setback of NOK 100 million compared to last year, but it basically brings the results in line with 2009. Adjusted for the unusually late Easter, the underlying reduction is NOK 70 million.
It is important to note, already mentioned, that the EBITA for our Nordic businesses, on an underlying basis, is in line with last year. The negative deviation is basically coming from our two Russian confectionery operations, which both had a disappointing quarter. Starting on the top line, adjusted for Easter, there is an underlying 2.4% growth in the quarter, mostly driven by price, and coming from good top-line development in Orkla Brands International and Orkla Food Ingredients. Profit-wise, as just briefly mentioned, both our two biggest units, Orkla Foods Nordic and Orkla Brands Nordic, delivered underlying results on par with last year, the late Easter taken into account.
We were also pleased to see that we were able to compensate for a weak development in a few companies, such as our Norwegian bakery operation, with good progress, in some of our biggest operations, like Stavre, Procordia, and Axcelis. The late Easter effect is estimated at roughly 40 million NOK. The total Easter effect, and the effect for the sale is more difficult to predict this year as the travel and holiday pattern changed quite considerably this year, in particular in Norway. Pretty weak business-to-business markets across Europe have affected our Orkla Foods ingredient operation, where we see a clear mix effect of customer trading down to cheaper solution, partly as a result of increasing raw materials being pushed through in our pricing.
This is one of the reason why a good top-line growth in OFI does not transform to the EBITA growth in the quarter. Some of the acquired companies in Orkla Food Ingredients have a seasonal pattern where the profit is skewed more towards the end of the year. We would also like to inform you that from October this year, our Danish margarine business and some of our other Danish units will be exposed to a new significant tax on fat. That will actually raise the consumer prices quite considerably in the area of 20% to 60%-70%. It is difficult to estimate the market volume effect of this government initiative. The basic reason, again, is for the disappointing quarter for Orkla Brands International, lies in our two confectionery companies in Russia, SladCo and Krupskaya.
Weak market development for confectionery and biscuit, combined with steep price increases to cover raising raw materials, energy, transportation, and also increase in social taxes, makes it challenging, I guess, for most confectionery operators in the Russian market at the moment. We'll come back to more details about our Russian operation in a moment. The reported EBITA margin for Orkla Brands as a total ended up at 9.1% in the quarter, down 2.4% versus last year. We are, however, satisfied with the fact that the underlying margin for our Nordic businesses is perfectly in line with last year. This basically confirms for these businesses that we have been able to cope with the dynamics on the raw material side, well, even though we observe some smaller lagging effects.
Lastly, we are glad to see that our consumer market shares are generally strengthened through the quarter. We have done two smaller acquisitions during the quarter. In India, we have done the first add-on acquisition to MTR by buying a company called Magic Kitchen in Pune, southeast of Mumbai. It is a small company, it will complement both our category and geographical presence in India. Main categories for this company is spices, mixes, and ready-to-cook products. Our Indian MTR business, by the way, is growing well at just below 20% and will have doubled its turnover during the year since we acquired it in 2007. Orkla Foods have bought a Norwegian service article company, complementing the assortment. Let's go back to some facts about our Russian operation.
With our two companies, SladCo and Krupskaya, we are the confectionery market leader in St. Petersburg and in Yekaterinburg, with a value share of 16% and 15% respectively. We bought SladCo in 2005, Krupskaya in 2006. Since then, we have done three add-ons acquisition to Krupskaya in the northwest: Larsart, Pekar, and the last, Peterhof. Our total confectionery volume in Russia is 63,000 tons a year. I guess the volumes are a bit difficult to relate to, but to try to put it into some kind of context, it represent 4 x the volume of our Norwegian Nidar confectionery operation. Our four factories are located in the St. Pete area, the Leningrad region, Ulyanovsk, and in Yekaterinburg.
We have done a lot over the last years to modernize, particularly on the marketing side, for our Russian brand portfolio. In this respect, we registered with pleasure that our Slutsko brand in April this year, was awarded the best brand in the entire Russian food industry, through the Russian Effie Award, owned by the American Marketing Association. The criteria used were market presence, consumers' opinion, and quality. We have, at the moment, 3,300 Russian colleagues, and as such, we believe Orkla Brands is the biggest Norwegian employer in Russia. Since the acquisitions of Slutsko and Krupskaya, we have done a lot to strengthen our two Russian businesses through organizational changes, cost improvements, modernization of our market offerings, and last but not least, specialization and volume exchanges between our four factories.
Now we are taking a new step by merging our two operations into one, under one company, one leadership, located in St. Petersburg, and the management leadership is already in place and operating. We have, in spite of the present challenging Russian market situation, chosen to be aggressive on the market and have been increasing our market investment in the quarter. During the restructuring process, we have one-off costs of roughly NOK 20 million related to reduction of man-years, write-downs, and one-off adjustments. Still, an important part of the short-term profit deviation is related to weak market condition and steeply increasing input costs. Through the restructuring, we aim to strengthen the Russian business both in relation to consumers and customers, as national retailers are becoming more important in Russia.
We are also targeting significant cost and synergies coming out of the merger. Far this year, our Russian operations have been able to tackle the steep and broad-based increases in raw materials by raising prices and by also improving the cost positions. As already mentioned, input costs in Russia, beyond raw materials, are also escalating, and it's more difficult to compensate in prices short term. Although we observe a challenging market, we expect the Russian operation to be in black figures for the year in total, and with certainly further strengthened momentum going into 2012 as the effects of the restructuring will be gradually kicking in.
The extreme dynamic raw material situation globally do represent, for most food suppliers, an important challenge. The uncertainty is unusually high. Even though the Food and Agriculture index from the United Nations went down 2.9% during March, it is still 37 above last year figures for March. Orkla Brands companies do target, as previously announced, to compensate global raw materials increases in full in our own pricing, and with few exceptions, we are on track in quarter one. Still, we could see some delays in getting further price increases through, and further lifting of our prices will, in some areas, or could at least affect some of our volumes, particularly in the business-to-business sector. In general, the market volumes are a bit difficult to predict. We still observe stable Nordic market.
Compared to most other markets we know, they are stable. We did observe even that in the Nordic area, even in the last three months, we have seen a change from slightly positive figures into negative figures for the last three months for all the Scandinavian countries. The Russian and Baltic markets seems to be difficult for the rest of the year. There is still significant declines and trading downtrend in most of our auto, home, or business-to-business areas. Being right at the center of organic growth, we are working extremely hard to increase our market share by launching bigger and fewer news to the market. In the fourth quarter, we appreciate that our market shares are generally increasing even though we would like to see higher absolute growth numbers in our turnover.
Taking market share with modest growth means basically that a lot of the other operators must experience a negative growth so far this year. Reading through our competitors' first quarter results seems to support that hypothesis. On the side, you can see some examples of innovation being launched lately. For your appetite, we can inform you that Stabburet now has sold close to NOK 1 million packs of the new Grandiosa homemade pizza at a check-out value of roughly NOK 19 million so far. For Stabburet and for the rest of the Orkla Brands companies, it really confirms the true value of our whole market thinking and innovation strategy. It also fits, I guess, very well with the Norwegian saying, "Homemade is well made." Thank you. Over to you, Tim.
Good morning. Thank you, Torkild. I thought I'd just give some brief comments about the market and the development in that space before going on to the results. We often get a lot of questions about, you know, the mix of end markets for Sapa, so we thought we'd show you this again. As you can see, in summary, Sapa supplies a wide range of end markets. It's very correlated, of course, therefore, to industrial activity, particularly North America and Europe. I did want to emphasize one thing that Björn touched on, which is still a strong dependence to the building and construction markets. As I'll show you in a second, that really remains the laggard in terms of the overall recovery profile.
It also does have a double effect of us, on us, of course, in terms of our EBIT margin, because it affects our building systems business, but of course, also affects the margin in profiles, particularly in Europe, which I'll touch on in a bit. Just an update as to how we see the performance in the various end markets. I think as I said to you last time, in summary, this picture is very conducive with a broad-based recovery. You know, historically, you always look for a strong rebound, particularly in transportation, as an indication of the cycle restarting or coming out, if you like, and we definitely see that, particularly in commercial transportation, in truck and trailer activity, both in North America and Europe.
Automotive, also, performing well, distribution, end use, OEM, industrial applications, all those markets, recovering nicely. On the BNC side, again, as Bjørn briefly alluded to, on the residential side, we do see some signs of life in North America, although it must be emphasized, that's still from a woefully low number. When you look in terms of housing starts, you know, at one point, we're close to 2.5 million in the U.S. I think we're now talking about getting close to somewhere around 600,000. You know, there is life there, but albeit from a low base. Really, the last remaining market that we see actually still contracting is the commercial BNC market, the project-based business that Bjørn was alluding to, which is still difficult in both continents.
Always important to put this in context then of the overall cycle. As you can see from this, we still believe that on the current improvement rate, you know, the cycle or the market will approach the midpoint, probably somewhat, somewhere towards the end of 2012. Critically, you know, in terms of reminding ourselves of the aspirations of this business, the goals of this business, which is the 6% EBIT margin, the 18% return on capital employed. You know, given where we are in the cycle, we still remain, you know, very confident that those can be delivered, you know, in terms of the market recovery, our share performance, and of course, the operational and strategic initiatives that we are busy actioning as we speak.
Just briefly on the results themselves, I think what was pleasing for us was that we had strong share gain volume performance in both continents on our profiles business. You know, very, obviously reassuring to see that the offering we're taking to the market is resonating with our volume up 18% year-over-year in total. Again, Björn mentioned profiles in North America. We're satisfied with what's going on there. You know, good share gain and really benefiting from a lot of work.... that was done and continues to be done in terms of adjusting their cost base, switching the plants to meet the needs of the markets going forward. You know, they would be the first to say that work is never done.
In fact, they closed a small plant in the quarter in Vancouver, in Canada. In Europe, I think it is a mixed story. As I say, overall, we had a good volume performance. We are, you know, still suffering with the weak markets in Southern Europe, particularly Spain and Portugal. The overall margin of business is impacted by the BNC mix, as Björn talked about. At the end of the day, you know, there are, as we talked about last time, a lot of actions in place in terms of extracting the synergies of the Europe business, looking at our plant footprint, and we obviously intend to share more of that with you in the coming quarters.
In terms of the Heat Transfer and Building Systems business, we're still satisfied with the market in Heat Transfer. Underlying the, you know, the outlook for that business and the products of that business remain very good. As Björn said, offset a little bit about, we have one rolling mill operation, which is a, you know, fairly significant piece of the Heat Transfer that is in Finspång, in Sweden. Does all its business in or the most of its business in USD and Swedish krona. Overall, Heat Transfer continues to progress in a way that we're happy with. Building Systems, struggling with obviously extremely difficult markets, but doing a good job on the cost side to enable them to continue to contribute to the business as a whole.
Just finally, just talk a little bit about the, you know, Sapa's Asian expansion plans, and we obviously talk more about this in the Investor's Day, but this is a critical component of, where we, you know, where we're trying to go and what we want to achieve in this business. Two significant deals in the quarter. The first, the joint venture with Chalco. This is focused on the growing, rapidly growing, developing rolling stock market in China. It's a very nice combination of Chalco's relationship, experience with the market, and the large rolling stock manufacturers, coupled with our specific expertise and capabilities in this market, both in Europe and North America. Very nice marriage, on track, and very excited about the potential for this.
I think it emphasizes how, you know, we don't aspire in China to become, you know, market leaders at all the existing markets. We see opportunities for us to enter, to leverage our capabilities in the more developed, more technically focused markets in China. Compare that with India, which is, you know, a market much more in its infancy. We're in the process, we expect it to close later this month, an acquisition of a business called Alufit, which we believe is an extremely good platform acquisition for us to then organically grow through this market, that, of course, you all know has extremely good growth potential. In outlook, as I say, I think we see continued recovery both in North America and Europe.
The exception to that being building construction. You know, we do not see anything miraculous happening in that space anytime soon. However, you know, we do, as I say, I think, believe that we will hit the midpoint of the market, you know, at the back of 2012 somewhere. We continue to see new applications such as solar, further opportunities in automotive, offsetting to a certain extent the lagging building construction. That market development, as I say, coupled with the activities that we have in place, both in terms of extracting the synergies of the group, but also looking at restructuring opportunities, gives us the confidence as we've continued to tell you, that this business is on track to achieve our long-term targets. Thank you very much.
All right, we are ready for some questions, so please proceed.
Samir Bendriss from Pareto. A few questions: Could you help us quantify, at least ballpark, the restructuring costs in both the Russian operations and in the hydropower operations for Q1? Secondly, with regards to Russia, do you expect to be able to do a full price increase, as you have been able to do in the Nordics, or is that more challenging? I do understand the lag effects, but do you eventually plan to get there, or is it tougher in that market? Finally, on Sapa, how long do you think before you can reach the NOK 1.5 billion-NOK 1.8 billion target that you've set? Do you see any potential to shift your exposure away from building and construction, for example, to capitalize on potential copper substitution effects like that? Thank you.
All right, Torkil first.
Yes, starting with the restructuring cost in Russia. As we said, it's a combination of several factors, but the total amount is NOK 20 million. The other question regarding pricing, so far in Russia, and in line with most of our other markets, we have been able to take out the raw material prices in our own pricing. The other costs are more challenging. Like I said, energy, transport, and increased taxes, and that would probably be the same situation going forward, as the market, also volume-wise, is weak. The Russian confectionery market has been then exposed to significant price increases from us and the rest of the operators over a long time.
The raw materials, I guess we will cope with. The rest of the cost increases are more difficult to compensate. Having said that, with what we are doing on the restructuring side, I think the cost reduction would compensate for what we see as other cost increases in Russia.
On the hydropower, it's not restructuring that, it's maintenance that you do, you know, for several years. The additional cost in the quarter was around NOK 9 million more than what we normally would have in a regular ongoing business. Tim on Sapa?
On Sapa, I think, two questions. The first one on the, you know, when will we hit the target? I mean, I think as we showed last time, that, you know, if you extrapolate out where we are to the cycle, to the midpoint, you know, it's easy to calculate in the numbers and show that, you know, we will be at that target at that point. I'm, you know, I'm not able or willing to give specific guidance exactly on when I think the market will achieve that. I think that's in the not too, you know, distant future. I think that's probably the simplest way to answer that question. In terms of the dependence on building construction, absolutely is the short answer.
We continue to develop, you know, new markets, new applications. I mentioned, you know, briefly, obviously, solar and renewable has been and continues to be a very exciting market for us. Copper substitution is another very interesting opportunity, not only for the heat transfer business in terms of HVAC substitution, but also within the extrusion space itself. The short answer to the second question then is that absolutely, yes.
Preben Rasch-Olsen, Carnegie. Starting to you, Torkild, talking about market shares and Lilleborg. Because I've been speaking to a lot of your competitors, and they believe to have taken market shares from Lilleborg in the first quarter. The numbers seems to indicate the same thing. Is that a one-time effect, or do you think this will continue for the rest of the year? To Sapa, I need a bit more help in the Profiles business, because it seems like volumes this quarter was pretty much the same as the volumes in the second quarter last year. Given the cost-cutting effects and also the synergies from Indalex, I'm a bit disappointed by the numbers you are making. I'm just trying to figure out what are the differences. Is it pure margins, or is it currencies, or?
Starting with Lilleborg. The market shares of Lilleborg is basically both on a three-month and a twelve-month rolling basis, very stable. It varies across the portfolio of Lilleborg. Of course, market share is an important measurement for us, we try in every aspect to gain market share and strengthen them. That is, of course, what Lilleborg is trying to do. To guide on market share is difficult.
Yeah, on Sapa, on the profiles business, I mean, you know, the short answer is that there is a, you know, there is a margin effect versus prior year, particularly in Europe. You know, largely to do with this, you know, this B and C effect I talked about. That is offsetting, you know, some of the work that's been done. That doesn't, as I say, change, you know, my long-term view, if that helps.
Tore Østby at Nordea Markets. Two questions on the other units. On chemicals, are there any windfall profits in the quarter, or is this kind of margins on the level we should assume for the rest of the year? On hydropower, can you give an indication of how much lower the production will be for the year, this year, unless you get any kind of favorable weather conditions?
On the windfall, Torkild, maybe you take that?
Well, on the windfall profit in Borregaard, we expect to see quite good performance for the next quarters. How long this very favorable market condition will last is difficult. You also will probably have some negative impact from a very weak U.S dollar if that continues. There's no particular windfall in the quarter.
Johan Hovland, who is Head of Communications, but he is also leading Elkem Energi, which is still part of the group, who can comment on the Salga part.
I expect, with normal weather conditions from now on, throughout the year, we will see about 10% lower than the normal production.
To just begin, can I just add a question on hedging? Can you describe a little bit about your hedging policy now on currency and raw materials and other issues?
I think it's best to tell you, because we are a separate. There are issues in many countries and in many different markets.
I t is mainly Borregaard that has an exposure to especially U.S dollar, but also euro. That is referred to in the annual report, but I also get the figures here, I see. The exposure in the sensitivity in U.S NOK for Borregaard is about NOK 200, with NOK one in chains for the exchange rate, and it's EUR 80 million, that is the exposure. We do hedge that on a running basis, we do typically hedge six to nine months of future sales. That is the principle for Borregaard. In Sapa, maybe Tom will give a comment on that.
I can answer Sapa. I mean, you know, as I mentioned, the principal currency exposure is on the one particular rolling mill in Sweden. We do hedge those as we, you know, certainly the long-term contracts. As you know, that's no magical solution, you know. I mean, over time, you still get, you get squeezed. On the metal, again, I think, as I hope everybody in this room knows, is, you know, we're a margin over metal business, so, you know, we ensure that our exposure to LME movements is minimized, and spend a lot of time and effort doing that.