Orkla margins squeezed by higher raw materials costs - Just Food
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Orkla margins squeezed by higher raw materials costs

14 Jul 2017

Orkla, the Nordic FMCG group, successfully grew first-half sales and profits but saw higher raw materials costs dampen progress on efforts to expand margins.

Orkla margins squeezed by higher raw materials costs

Orkla, the Nordic FMCG group, successfully grew first-half sales and profits but saw higher raw materials costs dampen progress on efforts to expand margins.

In a trading update released this morning (14 July), the company revealed revenues for the six months to the end of June grew 4.5% to NOK18.85bn (US$2.29bn). Organic branded consumer goods sales rose 1.1% year-on-year, supported by the performance of Orkla’s food and confectionery and snacks units. 

Group EBIT totalled NOK1.93bn, an increase of 6% on the comparable period of last year. Orkla’s confectionery and snacks, care and ingredients businesses posted profit improvement, which was tempered by lower EBIT from Orkla’s food arm. “Branded consumer goods’ EBIT margin was 10.6%, on a par with last year. Good margin development for confectionery and snacks was offset by weak development for Orkla foods,” the company noted. 

President and CEO Peter Ruzicka elaborated: “We saw a rise in raw material prices for meat and dairy products in the EU this quarter, in addition to a weaker krone in Norway and Sweden. Our goal is to compensate for this by raising the prices of our finished products, but the price increases will have a gradual effect. We will also continue to improve our own operational efficiency.”

Orkla’s operating margin failed to meet market expectations. Sanford Bernstein analyst Andrew Wood noted in an investor update, with Orkla’s branded consumer goods margin dropping five basis points, versus consensus expectations of 10bps expansion. 

“We had hoped that the waning impact of M&A would have allowed Orkla to start to deliver reasonable margin growth in Q2…but this has not transpired. Management blamed input costs (that have yet to be recovered from pricing) and the timing of advertising expenditure… but these excuses are not good enough,” Wood suggested. 

Higher financial expenses and a lower contribution from associate companies also pressured the bottom line. Net earnings fell to NOK2.16bn, down from NOK2.17bn. 

Orkla shares were down by more than 1% in early trading today. 

During the period, Orkla also entered into an agreement to sell its stake in energy business Sapa to Norsk Hydro as it focuses on becoming a pure-play FMCG company. Orkla said the sale will generate a gain of around NOK5bn.