August 14, 2022

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Biggest cost increase I’ve seen – E24

Orkla’s revenue growth surprised positively in the second quarter, but the grocery giant was still impacted by higher prices for input goods. The manager is surprised by the high prices in the market.

CEO Nils K. Selte at Orkla.
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Orkla Thursday morning presented its second-quarter accounts, sending analysts to the sausage stand. The turnover was 14.3 billion NOK, up from 11.77 billion NOK in the same period in 2021.

The turnover was expected to be NOK 13.08 billion up front, according to TDN Direkt.

However, attention is focused on increased costs, which have contributed to lower operating profit (adjusted EBIT) for the brand’s businesses, including the head office. The decrease is 0.5 percent.

Biggest increase I’ve seen

CEO Nils K. Selte says there has been a demanding situation characterized by high cost inflation, value chain disruptions and uncertainty surrounding the global food situation.

The effects of the Corona pandemic, which was followed by the war in Ukraine, have led to bottlenecks and disruptions in the value chain. Combined with strong demand, this has led to a further increase in market prices for raw materials in the first half of 2022.

Hokun Magili, executive vice president of communications and corporate affairs, was also surprised by the high prices in the market.

In my 31 years in the food industry, this was the biggest cost increase I’ve seen. There are increases in raw materials, packaging, transportation and energy.

Kepler Cheuvreux’s equity analyst Markus Borge Heiberg says the market is anxiously awaiting when the price effect will be stronger than the cost effect for the company.

More control and predictability in the future

Magili believes the company is well equipped to deal with higher market prices in the future, as a result of agreements with suppliers and a better overview of alternative suppliers and raw materials.

“We have more insight and more threads to play on than many others because we have a unique blend of local and global experiences,” he says.

Stock analyst Heiberg also believes that in the long term, Orkla will make structural changes to its portfolio that will contribute to the grocery giant’s well-being going forward.

– Many were negatively surprised by the time it took Orkla to increase its prices. Now we see signs that one might be surprised positively in the other direction in the second half of the year, because we see that commodity prices have fallen a bit.

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Competitive price offers on brands

Statistics Norway (SSB) announced on Monday that food prices rose by 5.6 percent from June 2021 to June 2022. Historical figures from Statistics Norway showed that from May to June, prices rose by 2.0 percent – the largest increase from May to June. 40 years.

Magili says that the brands’ price increase has been necessary, and that the company has always offered competitive pricing.

– We are in a competitive situation where we compete with international competitors in Norway. 90% of our products have such an international competitive status in Norway. That means we should always offer competitive pricing for our brands, he says.

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He also says the company has a good dialogue with its grocery customers, and has ongoing conversations with them to understand the market situation.

flattening prices

The manager is reassured that the company has a better overview for the second half of the year, and will not raise prices in the short term.

– In addition, we have a time window for the Norwegian market and the next window for us is February 1. We cannot increase prices in the Norwegian market before that.

– I want to add that there is no mechanism in increasing prices. First, we have to go into negotiations with the three grocery chains, and the so-called fall hunt is always demanding, he writes in an email to E24.

“Autumn catch” is an industry term used in negotiations between suppliers, such as between Orkla and grocery chains, about assortment and terms, Magili explains.

Negotiations may be difficult due to uncertainties in global commodity flows and rising inflation and energy prices. Negotiations will take place in the fall, beginning on February 1.

The previous adjustment came on July 1.

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Share price drop

Orkla stock is traded on the Oslo Stock Exchange. The results sent the stock down about one percent on Thursday.

Stock analyst Heiberg justified the decline by saying that profitability in the brands division was lower than expected, and that the growth driver for sales turnover was the state of the market.

This growth is not driven by Orkla gaining significant market shares, we think. Primarily, the stock analyst says, it’s the market situation that makes growth so strong.

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So far this year, Orkla’s stake is down just over seven percent on the Oslo Stock Exchange. With a share price of NOK 81.46, the company was valued at less than NOK 81.6 billion at closing time on the Oslo Stock Exchange on Friday.