Profit growth for Orkla in fourth quarter - comprehensive cost reduction measures generate positive effects

Orkla's operating profit (EBITA*) amounted to NOK 1,070 million in the fourth quarter of 2009, compared with NOK 998 million in the same period of 2008. Good results for Orkla Brands and reduced costs for Sapa contributed to the profit growth. The Share Portfolio performed well in the fourth quarter; the return for the year was 39 percent, which is 3 percent better than the Nordic benchmark.

Orkla's full-year operating revenues totalled NOK 56.2 billion (NOK 65.6 billion**). The decline can be ascribed to weak price and volume peformance in Sapa's and Elkem's markets. The Group's operating profit (EBITA) amounted to NOK 2.4 billion (NOK 4.2 billion). Orkla Brands and Jotun (Orkla owns 42.5 percent of the shares) delivered their best full-year results ever, and comprehensive cost reduction programmes lowered break-even levels for Sapa, Elkem and Borregaard.

Orkla's cash flow from operations increased from NOK 2.5 billion in 2008 to NOK 5.8 billion in 2009. At the same time, the Group's financial position was strengthened by reducing net interest-bearing liabilities by NOK 7.6 billion.

In line with Orkla's dividend strategy, the Board of Directors proposes to pay an ordinary dividend of NOK 2.25 per share for 2009, the same amount as in the two preceding years.

"2009 was a challenging year with weak markets for several of Orkla's businesses. However, comprehensive measures have proved effective, and the Group strengthened its financial position in the course of the year. The Group is well positioned for the future," affirms President and CEO Dag J. Opedal.

A number of strategic moves were also carried out in 2009. Orkla took over Alcoa's stake in Sapa Profiles, thus becoming sole owner, while Alcoa took over Orkla's stake in Elkem Aluminium. Through the acquisition of the aluminium extrusion company Indalex in the USA, Sapa considerably strengthened its position in the North American market. Elkem Solar's factory in Kristiansand and the expansion of Sapa Heat Transfer's factory in China were other important expansion projects in 2009. Furthermore, REC (Orkla's stake: 39.7 percent) is also in a ramping-up stage that will continue into 2011.

Orkla's investment in REC is reported as an associate. As long as REC's market price is lower than the carrying value of the associate in Orkla's financial statements, Orkla will apply the market price at quarter-end as the accounting value. The value will be written up or down according to the future market price until the market price is higher than the carrying value of the associate. In the fourth quarter, this approach entails an accounting charge of NOK 3.1 billion.

The sales value of Elkem's hydropower plants in Salten and Bremanger was NOK 6 billion, generating an accounting gain of over NOK 4 billion.

Key figures Q4-09 (Q4-08) in NOK million:
Operating revenues: 15 040 (16 492)
EBITA: 1 070 (998)
Profit before taxes: 610 (4 375)
Earnings per share diluted (NOK): 1.1 (4.1)
Cash flow from operations: 2 687 (1 070)

As of 31 Dec 2009(as of 31 Dec 2008):
Net interest-bearing debt: 19 848 (27 424)
Equity (%):51.7 (47.7)
Net gearing: 0.41 (0.55)

The fourth quarter in brief

• Improvements in the Group's cost position contributed to profit growth in the quarter. Group EBITA* totalled NOK 1,070 million, up NOK 72 million on the corresponding quarter in 2008. 
• Continued weak markets for Aluminium Solutions and Materials explain the decline in sales to NOK 15,040 million (NOK 16,492 million)**.
• Comprehensive measures implemented during 2009 to cut costs and free up capital generated strong cash flow from operating activities in the quarter, amounting to NOK 2.7 billion (NOK 1.1 billion)**. Full-year cash flow from operating activities totalled NOK 5.8 billion (NOK 2.5 billion)**. 
• Orkla Brands achieved 9% profit growth in the quarter. Orkla Brands achieved strong full-year results, with EBITA* of NOK 2,793 million (NOK 2,590 million)**.
• Orkla Aluminium Solutions reported a positive profit and positive cash flow in the fourth quarter, with EBITA* of NOK 117 million (NOK -102 million)** and cash flow from operating activities of NOK 581 million (NOK -371 million)**. Markets remain weak. 
• Although capacity utilisation were somewhat higher, markets remaind weak for Elkem's silicon-related business (excluding Elkem Solar). Borregaard's chemical business reported satisfactory fourth-quarter results. Both prices and production volumes were slightly lower for Elkem's and Borregaard's energy operations, compared with the good fourth quarter of 2008. 
• REC reported EBITDA of NOK 567 million (NOK 936 million)** in the fourth quarter. Jotun had a positive development in the fourth quarter, and improved results for the year in total. 
• The investment in REC is accounted for according to the equity method. In future, for accounting purposes, Orkla will use the market price to value its shareholding, as long as the market price is lower than the carrying associates-related value. The value will be adjusted upwards or downwards on the basis of the market price on the balance sheet date. The market price as at 31 December 2009 was NOK 44.75, while the carrying value was NOK 56.62, resulting in an accounting charge of NOK 3,135 million in the fourth quarter. 
• Stock markets showed a positive trend in the fourth quarter, and the full-year return on Orkla's Share Portfolio was 39.0%, compared with 36.1% for the Morgan Stanley Nordic Index (64.8% for the Oslo Stock Exchange Benchmark Index). 
• Following the Norwegian parliament's adoption of a new reversion regime in the autumn of 2008, Elkem signed an agreement on 4 October 2009 to sell its hydropower plants at Salten and Bremanger, which operate under licence, for NOK 6 billion. Financial risk and control were transferred to the buyers as of 31 December 2009, and the transaction generated a post-tax accounting gain of NOK 4.2 billion in the fourth quarter. 
• Taking into account the sale of the power assets, net interest-bearing liabilities at year-end totalled NOK 19,848 million, a reduction of NOK 7.6 billion from the start of 2009. 
• The Board of Directors proposes to pay an ordinary dividend of NOK 2.25 per share for the 2009 accounting year.

The Group
Orkla's fourth-quarter operating revenues totalled NOK 15,040 million (NOK 16,492 million)**. The decline is ascribable to continued weak markets for Orkla Aluminium Solutions and Orkla Materials. Full-year sales amounted to NOK 56,228 million (NOK 65,579 million)**. Currency translation effects had a negative impact of NOK 933 million on fourth-quarter operating revenues, but a positive effect of NOK 722 million for the full year.

The Group's EBITA* for the fourth quarter was NOK 1,070 million (NOK 998 million)**. For 2009 as a whole, EBITA* was NOK 2,448 million (NOK 4,240 million)**. The results were impacted by negative currency translation effects totalling NOK -64 million in the fourth quarter and NOK -102 million for the full year.

Orkla Brands continued to report good profit growth in the fourth quarter. For 2009 as a whole, Orkla Brands achieved its best EBITA* ever. This improvement is primarily attributable to cost-cutting programmes and the effect of earlier price increases. Successful innovations and sales campaigns helped to achieve a relative improvement in volume and market share performance towards the end of the year.

Although Orkla Aluminium Solutions' markets have been relatively stable during 2009, on an annual basis both the European and North American markets have experienced drops from 2008 (estimated at 23% and 19% respectively). As a result of comprehensive programmes to cut costs and improve capital efficiency, however, the business reported positive operating results for the second half-year at this low volume level. Sapa also achieved its target of neutral cash flow for the full year, even taking into account the acquisition of Indalex in North America. Further, in the fourth quarter, Sapa decided to close down a production line in the Netherlands, and a restructuring provision of NOK 91 million was made in the quarter for this purpose. Restructuring provisions for the full year totalled NOK 195 million, which also covers the simplification of the production structure in North America following the acquisition of Indalex.

In Orkla Materials, average capacity utilisation for Elkem's Silicon-related units (excluding Elkem Solar), increased to 67% in the quarter, but market growth remained weak. Elkem Solar followed its ramp-up plan in the fourth quarter, and aims to be operating at full capacity at the end of 2010.

The gain on the sale of Elkem's power plants at Salten and Bremanger totalled NOK 4.2 billion. The gain is presented on two lines of the income statement: NOK 3.1 billion is shown on a separate line above operating profit, while NOK 1.1 billion is reported as reversed deferred tax.

The Group's equity stakes in REC (39.7%) and Jotun (42.5%) are presented according to the equity method on the line for associates. Orkla has, however, decided to use the market price on the balance sheet date as the accounting value of the shareholding in REC as long as the market price is lower than the Group's carrying associates-related value. This value was NOK 56.62 as at 31 December 2009, while the market price was NOK 44.75 per share. Isolated this entails an accounting charge of NOK 3,135 million in the fourth quarter 2009. In future, the accounting value will be adjusted upwards and downwards on the basis of the market price and the accounting effect will be shown on the line for associates.

In 2009, the return on Orkla's Share Portfolio was 39.0%, compared with 36.1% for the Morgan Stanley Nordic Index (64.8% for the Oslo Stock Exchange Benchmark Index). At year-end, the market value of the Share Portfolio was NOK 11,037 million after net share sales totalling NOK 2,866 million during the year. In the fourth quarter alone, Gains, losses and write-downs on the Share Portfolio amounted to NOK 337 million (NOK -3,537 million)**. The corresponding figure for the full year was NOK 584 million (NOK -6,043 million)**. Accounting write-downs in compliance with IFRS totalled NOK 47 million in the quarter and NOK 1,214 million for the full year.
Dividends received by the Group totalled NOK 13 million (NOK 16 million)** in the fourth quarter and NOK 252 million (NOK 473 million)** for the full year 2009.

In the legal dispute regarding taxation of convertible debentures, Orkla and the Central Taxation Office for Large-Sized Enterprises agreed in September 2009 that the valuation of the REC share as at the conversion date in March 2006 should be reduced from NOK 81.50 per share to NOK 65 per share. Accordingly, in a new tax assessment decision for 2006, the Central Taxation Office has reduced Orkla's tax on the gain by NOK 189 million, from the original NOK 751 million. Although the amount of tax that Orkla has paid has thus been reduced to NOK 562 million, Orkla still disagrees with the basis for tax liability, and will continue to contest this in court. In January 2010, therefore, Orkla appealed against the judgment of Oslo District Court of December 2009, which found in favour of the State as represented by the Central Taxation Office.

Orkla's industrial activities are subject to ordinary company tax in the countries in which one have business. The Share Portfolio's investment activities in the EEA are largely exempt from taxation. The sale of power assets resulted in an accounting reversal of deferred tax of NOK 1.1 billion, and therefore, for accounting purposes, caused a tax income of NOK 496 million for the Group in 2009.

Orkla's diluted earnings per share were NOK 2.5 in 2009, compared with NOK -2.8 in 2008.

The Board of Directors proposes to pay out an ordinary dividend of NOK 2.25 per share for the 2009 accounting year, same as for the 2008 accounting year. 

* Operating result before amortisation, gains on sales of power plants, write-downs of inventory in Sapa Profiles in 2008, restructuring and significant write-downs. 
** Figures in parentheses are for the corresponding period in the previous year. 

Ref.:

SVP Corporate Communications
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