On Friday, Orkla (ORK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Brands and Lilleborg
Age Korsvold – President and CEO: And then I can take care of the other one afterwards. With a bit of volume reduction in Europe of close to 10% in first half, a number of competitors are also taking down production at lines, but so far, permanent capacity reduction has been fairly limited, but if markets continue at this level, it will be – it’s expected that more companies than so far will adjust capacity to reflect the demand in the market.
Unidentified Analyst: A bit more detailed question on Brands and Lilleborg. Have you seen any big effects on Lilleborg’s market share in washing detergents after the introduction by some new competitors?
Age Korsvold – President and CEO: Not very significant, but you are right that there are some increased competition in that segment. We are still dominant market leader and with a high market shares behind, we have to expect some minor changes than other competitors are advancing bigger initiatives. But all-in-all, we hold the position quite well also in that segment.
Unidentified Analyst: Could you shed some light on the size of the Procordia loss of contracts, and to the extent that will also have an effect for the rest of the year?
Age Korsvold – President and CEO: That will have an effect also in third and fourth quarter and I think we have said that total effect from loss of contract, not only for Procordia some NOK 25 million, NOK 30 million in the quarter, but that also include the other ones.
Unidentified Analyst: Question on the confectionery biscuits segments, how did they develop during Q2 there, now that they have weak trends?
Age Korsvold – President and CEO: Compared to second quarter last year, they were more or less in line with that one. But we are still not fully satisfied with the trend, but compared to last year, they were in line with that.
Unidentified Analyst: We have seen some relief in raw material prices for the Brands business last couple of months there, but then suddenly grain prices started really throughout again, 30% last month. Could you try to quantify or elaborate a little bit regarding your exposure towards, let’s say, grain prices, wheat, corn?
Terje Andersen – EVP and CFO: I don’t have the exact figure with me, so I think we have to come back to you. But in general we don’t have huge exposure to that, and we also have the Norwegian situation that is different. But you are absolutely right, our increased uncertainty on raw material price is going forward, that we also mentioned. So I think our view now is that, it’s more uncertain and we expect more volatility, and as I said, we actually expect increases in international prices for Orkla.
Unidentified Analyst: Just one more question from my side, on Borregaard, have you decided to go for an IPO or are you still running the old process?
Age Korsvold – President and CEO: We still run the old process and that’s, like I said, we expect to conclude the process in the second half. There is no news on that.
Unidentified Analyst: Just a question with regard to REC and your thinking about that has been sounds – you get to something back and forward with regard to the new acquisition, participation for Orkla. Could you shed some light on your thinking on the REC position for the month?
Age Korsvold – President and CEO: Well, our position remains the same. We want to exit that position. While we are determined to reduce the exposure, I think, in the end the negotiations with respect to the equity is still under negotiations with convertible bondholders, have a potential of diluting Orkla to an acceptable level. So, the reason why we in the end decided to at least partly participate in the equity issue was simply and a need to protect values and it has not changed our position. We will exit that position in due course.
Rune Helland – SVP IR: Good afternoon to all of you in Europe and good morning to all of you in the West and welcome to this conference call covering our tough Q2 results. Around this table on this end, we have CEO, Age Korsvold; CFO, Terje Andersen; CEO of Sapa, Svein Tore Holsether; and myself Rune Helland, Head of IR. CEO, Age Korsvold, would give you a brief introduction of status and we will then open up for questions. Please, Age.
Age Korsvold – President and CEO: Thank you. The second quarter for Orkla has shown stable performance for the branded consumer goods operations in the Nordic region. We have underlying sales growth, there were also several factors that had a negative impact on the P&L. We have charges related to restructuring in Russia. There is a loss of contract production that influenced this result. Advertising has been front-loaded this year and there is also a seasonal impact related to Easter. The European markets for Sapa continues to be weak and more than offsets the satisfactory development of profiles in North American and heat transfer. The favorable markets and strong results for Borregaard continues. Also in this quarter we have now established a new organizational structure in the Group Executive Board focused on the consumer branded goods (securities) and dedicated to support Orkla’s strategic direction. The divestment process in Borregaard is on track. We are also on track in the reduction of the share portfolio and the ownership of REC will be reduced and there’s no change in strategy there. We will reduce our ownership in REC. Finally, in the second quarter we were able to acquire Jordan, which is a strong branded goods company in the Nordic region but also with an interest in export activity. Jordan will considerably strengthen at oil care activity under the Lilleborg umbrella and in addition, we have a home care division, which we will run independently within the Orkla Brands portfolio. Then we shall open for questions.
Mohit Khanna – Value Investment Principals Ltd.: Congratulations for a good set of numbers out there, I know that there can be some volatility in numbers quarter-on-quarter, whereas I suppose you are progressing well with the disinvestment strategy overall. I had a question regarding the cash balance on the balance sheet, but despite the sales of our shared portfolio, the cash balance seems to be a bit down. So could you just help me collecting the dust there?
Terje Andersen – EVP and CFO: Yes, we have cancelled one loan agreement. So, it probably collected through that. That was about NOK 3 million. We had quite expensive loan arrangement, but we don’t need all the drawing rights that we have. We actually had to put some cash in our banks for a while and that has ended through the cancelling of that loan agreement.
Mohit Khanna – Value Investment Principals Ltd.: So, I suppose the next quarter should be a more normalized one?
Terje Andersen – EVP and CFO: Yes, I guess so.
Mohit Khanna – Value Investment Principals Ltd.: A follow-up question on Sapa. How is the business progressing in Europe now, particularly the Heat Transfer business?
Age Korsvold – President and CEO: Holsether will answer that question.
Svein Tore Holsether – CEO, Sapa: Just to clarify, is your question on market conditions in Europe for Heat Transfer or for Profiles?
Mohit Khanna – Value Investment Principals Ltd.: No, no. There was some kind of restructuring done in the last quarter. So, what are you seeing in the current quarter for the business?
Svein Tore Holsether – CEO, Sapa: We (indiscernible) to the Profiles business we did have fairly extensive restructuring last year and shutdown execution in one of our facilities in Belgium, one facility in Portugal and also our fire fabrication in Denmark. Since then, the markets have continued to be challenging, and we had a 9% reduction in volume, first quarter compared to first quarter last year, and in second quarter we see a further 10% deterioration in market volumes. So, we are looking at further capacity reduction as we announce after first quarter. If the market continues at the same level, we would have to evaluate further plant closures and with second quarter coming in at this level, there is definite need for further restructuring and we are currently working on that.
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