OUKPY

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Orkla is a Norwegian conglomerate operating in branded consumer goods, industrial and real estate markets, with a focus on branded consumer goods.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Orkla ASA (OUKPY) is a diversified Norwegian conglomerate with a history dating back over 350 years. It’s primarily known for its branded consumer goods business, encompassing a wide range of food, snacks, and personal care products. The company operates through several segments:

  • Branded Consumer Goods: This is Orkla’s core business, encompassing well-known brands across food (e.g., pizza, snacks, sauces), and personal care products (e.g., detergents, soaps, and dental care). This segment also covers the company’s food ingredients businesses.
  • Financial Investments: These investments are composed primarily of Jotun, a large privately held paint company.
  • Hydro Power: Orkla has a small position in this sector.
  • Real Estate: Primarily focused on developing commercial property in the Oslo region of Norway.

Orkla’s geographical reach is mostly in the Nordic regions and Northern Europe, with some international presence as well.

The company aims to create value by investing in leading brands within its core sectors, maintaining and improving their profitability, and developing new products. A significant portion of its revenues come from Europe and the Nordic region.

Industry Trends and Competitive Landscape

Orkla operates in several diverse markets. In its branded consumer goods business, it faces competition from both global and local players. The food and FMCG industry is characterized by:

  • Intense Competition: Multiple brands fight for market share. This increases the importance of differentiation and competitive advantage.
  • Price Sensitivity: Most food and consumer product markets are very price sensitive. This makes brand and customer loyalty even more important.
  • Changing Consumer Behavior: Health and wellness trends significantly impact consumer preferences, forcing companies to adapt their offerings.
  • Consolidation: The industry has seen a wave of mergers and acquisitions, leading to fewer, larger, global companies.
  • Evolving Retail Landscape: Retailers are gaining power, which puts pressure on supplier margins.

Orkla’s financial investments in Jotun paint expose it to the cyclical nature of construction. However, since they don’t actually operate Jotun, they have a lot less influence.

The real estate market is subject to overall economic growth and local regulatory environments.

Moat Analysis

Orkla’s moat is derived from a combination of brand strength, distribution, and to some extent, scale.

  • Brand Recognition and Loyalty: Many of Orkla’s brands are well-established with strong local recognition, particularly in the Nordic countries. This loyalty gives them an advantage in terms of pricing power and a more stable revenue base.
  • Distribution Networks: Orkla benefits from strong distribution networks in its core markets, particularly in the grocery and supermarket channels. These entrenched networks make it harder for new competitors to quickly gain share.
  • Scale Advantages: The size and scale of Orkla operations can lead to lower costs in purchasing and manufacturing. This is less important in the product mix.
  • Unique Assets: As mentioned previously in this report, the largest privately-held paint company, Jotun, as part of their financial investments. While they don’t operate Jotun, they still get returns from their investment.

Moat Rating: 3 / 5

Based on the framework for identifying moats, Orkla gets a moat rating of 3 out of 5.

  • Moat Strength: While Orkla has brands, distribution scale advantages, these moats are not as strong as a wide moat. It has some cost advantages from scale, but it’s not a company based around it, like Amazon, Walmart, and Costco.
  • Moat Sustainability: The sustainability of these moats is decent, yet the changing consumer preferences and potential for new entrants, especially private label brands, in grocery make the company still vulnerable to competition. Local and regional markets will be easier to defend due to geographic locations being barriers to entry. Its investment in Jotun is good but not a competitive advantage for most of the company.

Legitimate Risks That Could Harm the Moat

  • Brand Erosion: Consumer preferences can be fickle, and shifts in taste can hurt the company’s branded products. New and trendy products may make them outdated quickly. Competitors can spend heavily on marketing to damage these moats and steal business.
  • Competition and Price Wars: An increasingly competitive market can threaten profit margins and returns on capital. More and more companies are engaging in price competition, which can eat into margins.
  • Technological Disruption: Technological change in the areas of food production, distribution or marketing could make parts of the business obsolete.
  • Regulatory Changes: Changes in food or environmental regulation could affect the company’s cost base. A change in regulation in the paint industry can impact their investment in Jotun.
  • Consumer preferences shift: Increased focus on healthy diets may lower sales of some of their brands.

Business Resilience Orkla exhibits some resilience through its diverse portfolio of businesses. The diversified business allows them to continue to operate while one of their businesses may experience issues. Also, the established brand names and supply chain of the company may be able to weather downturns and changes in the overall market. The strong presence in the Nordic region also leads to geographic resilience. However, since some markets are sensitive to economic downturns (as a retail and commodities industry), their resilience would not be considered great.

Financial Analysis

  • Revenue Mix: Primarily driven by branded consumer goods, which make up about 80% of their revenue, their industrial and real estate business make up the rest. This is a shift over the last several years with management moving to be primarily a consumer packaged goods company.
  • Profit Margins: Gross profit margins are relatively stable at around 33% . While operating margins tend to fluctuate more often, typically in the 12 to 13% range. Margins and profitability also vary by specific sector in their report.
  • Return on Invested Capital (ROIC): Orkla’s ROIC, while decent, is not exceptional at around 10% to 12% pre goodwill and 8-10% including goodwill over the last couple years. This indicates some profitability, but less than what other moatier businesses may generate.
  • Capital Structure: Although they have been raising leverage over the last couple years, Orkla typically has a conservative capital structure. They use debt to support acquisitions and to fund growth. Most of their debt is at variable rates which makes them sensitive to interest rate increases.
  • Growth History: Orkla’s growth has been modest and they expect their long term growth to continue with a CAGR in the low single digits.
  • Recent News: During their Q1 2024 earnings call, Orkla mentions that sales increased by 5.1 percent (up 1.6 percent for branded consumer goods) and adjusted profit increased by 6 percent. They also point out a decrease in volumes due to continued inflationary pressures. Furthermore, they see increasing interest expenses due to central banks around the world raising rates. Finally, they are reviewing their strategic options for the Care Business (part of branded consumer goods) due to its lower performance and higher input costs.

Management has taken steps to address some cost issues with pricing and strategic plans.

They are shifting away from volume as a metric and moving more towards value. They are seeking profitability improvement in core business.

Understandability Rating: 2 / 5 Orkla is a company that is relatively easy to understand on a high level due to the focus on branded consumer goods. Their other investments also make it slightly less easy to understand. Since their largest competitor is in a similar structure, you can get a sense of how their performance will be. It is not as complicated to understand as some other conglomerates. The complexity stems from its vast portfolio and understanding their growth strategies. It is not a pure play business so analyzing it requires more effort from an investor.

Balance Sheet Health Rating: 4 / 5 Orkla’s balance sheet is healthy overall, due to their conservative management. However, it has become slightly more risky than it has historically.

  • Leverage: They have been increasing leverage over time to take on more debt and use it for investments, acquisitions and to buy back shares. This leverage is fairly conservative with most of the company’s assets and profitability.
  • Liquidity: They hold significant cash and have very good solvency in terms of ability to pay down their debt as it comes due. They also have good access to credit markets.
  • Off-Balance Sheet Items: They have some off-balance sheet items such as certain lease arrangements, but not so much as to be a real concern.
  • Debt levels: Debt levels have increased, and if interest rates continue to stay high or rise further, this will have more of an impact. However, debt is still considered moderate.

Therefore, based on my analysis, I rate Orkla’s balance sheet health a 4 / 5.