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Orkla celebrates 350 years of continuous industrial activity

This year it is 350 years since mining of the extensive deposits of chalcopyrite at Løkken in Central Norway began. Under the Orkla Grube-Aktiebolag (Orkla Mining Company), which was founded in 1904, the mine was further developed and comprehensively modernised. In 1987, after 333 years of continuous operations, the deposits were exhausted and the mine was closed down. At that point the company had been preparing for the changes that had to come for some time. From the beginning of the 1980s in particular, the company embarked on a strong period of growth based on a combination of new industrial ventures and financial investments. As the result of major acquisitions and restructuring, organic growth and constant emphasis on improving operational efficiency and building expertise, the company has achieved profitable growth. In recent years, Orkla has especially developed its position as the leading supplier of branded consumer goods to the Nordic retail trade. At the same time Orkla has increasingly expanded its international activities beyond the Nordic region. In this anniversary year, the company is selling its interest in Carlsberg Breweries, which has accounted for a significant proportion of Orkla’s industrial operations. This sale represents a temporary hiatus in more than twenty years of continuous growth, but it does not change the company’s ambition of investing in further industrial ventures as a basis for value creation.

Main trends in 2003

Earnings per share totalled NOK 9.2, compared with NOK 7.7 the previous year
(+19 % from 2002). Adjusted for goodwill amortisation and other revenues and expenses, earnings per share amounted to NOK 16.2 (+53 %).

In Orkla’s Industry division, the Branded Consumer Goods business performed well and all business areas achieved growth. All in all, the Branded Consumer Goods business reported a 13 % increase in operating profit before goodwill amortisation. Although profit growth was mainly driven by internal improvement programmes, successful product launches, especially within Orkla Brands, also made a positive contribution. However, the Chemicals business had a challenging year in which weak markets, particularly for cellulose, and a weakening US dollar had a negative impact on sales and margins. In addition to this, the Chemicals business suffered a non-recurring loss in connection with its soybean operations.

The upswing on the stock markets led to a substantial rise in the value of the Group’s investment portfolio in 2003. The increase in value amounted to NOK 3.4 billion and represented a return of 29.8 %. Only NOK 700 million of this is reflected in book profit.

At year-end, book goodwill in Berlingske amounted to NOK 712 million. The ambitions and objectives for the company remain firm, but as a result of uncertainty concerning the Danish advertising market Orkla has adopted a conservative approach and written down goodwill to zero. This amounted to NOK 712 million, equivalent to NOK 3.5 per share. The write-down has been posted in the accounts as “Other revenues and expenses”.

There was strong focus on improving capital efficiency in 2003 and improvement programmes were initiated in all business areas. This had a positive impact on both working and fixed capital. No major investments were made in expansion, and after the sale of associates and net sales of portfolio shares, cash flow for the year, excluding dividends and buybacks, totalled NOK 3.8 billion, up NOK 4.5 billion from 2002.

In 2003 the price of the Orkla share increased from NOK 118 to NOK 149. The return for shareholders, including dividend, was almost 30 %.

The Board of Directors proposes an ordinary dividend of NOK 4.00 per share, which is 18 % higher than the NOK 3.40 paid out in 2003.

As previously announced, the Board of Directors will also propose an additional dividend of NOK 25.00 per share (approximately NOK 5.2 billion) as a result of the very strong financial position the company will be in after the sale of its interest in Carlsberg Breweries, and also to mark Orkla’s 350th anniversary.

Sale of the Beverages business

Since the end of the 2003 accounting year, Orkla has entered into an agreement to sell its 40 % shareholding in Carlsberg Breweries to Carlsberg A/S. The agreed price for the shares is DKK 14.9 billion. When settlement is made, Orkla will receive DKK 11.1 billion in cash plus a debt certificate in the amount of DKK 3.8 billion from a first class bank. The debt certificate will fall due in two years’ time and run at a market interest rate. The total proceeds from the shares in Carlsberg Breweries are equivalent to NOK 17.5 billion. The sale will entail a book gain of approximately NOK 12.5 billion. The shares will be sold by the Swedish company Orkla AB and the transaction will thus be subject to Swedish tax regulations. There will therefore be no tax on the gain. These transactions are expected to take place at the beginning of March, subject to the prior approval of Orkla’s Corporate Assembly. Orkla will then be in an extremely strong financial position and have considerable capacity for new expansion.

Beverages became part of Orkla’s Branded Consumer Goods business as the result of a merger with Nora Industrier in 1991. At that time, the Beverages business comprised only the Ringnes breweries in Norway. In connection with the acquisition of Volvo’s food and beverages business in 1995 and 1997, Orkla took over the Pripps brewery in Sweden and the associated 50 % interest in Baltic Beverages Holding (BBH). Orkla’s beverages business was still small in an increasingly international, global sector and in 2000 Orkla entered into an agreement to merge its Beverages operations with Carlsberg A/S (CAS) and form a jointly-controlled brewery group, Carlsberg Breweries A/S (CB), which was one of the five or six biggest in the world. This solution was based on sound industrial considerations and has created value for shareholders. In line with this, Orkla’s ambition was to further develop Carlsberg Breweries industrially and the stake in CB has accounted for approximately one third of the Orkla Group’s industrial operations. In Orkla’s view, cooperation between CAS and Orkla has functioned well until recently. However, in summer 2003 the attitude of the Carlsberg Foundation and CAS to the partnership that had been established changed. The Carlsberg Foundation, which is the controlling shareholder in CAS, has increasingly expressed ambitions and attitudes which, in Orkla’s view, would not promote CB’s value creation and would weaken important intentions that were laid down in the cooperation agreement signed in 2000. The opinions of the parties concerning the further development of CB have therefore differed. Since CAS refused to sell its shareholding in CB to Orkla, Orkla has negotiated an agreement to sell its shareholding in CB to CAS. The price shows that the value of Orkla’s Beverages business has almost tripled since CB was established in 2000.

Reference is made to the pro forma income statement, balance sheet and cash flow statement for 2003 excluding Orkla Beverages.

The Orkla Group has a solid foundation for continuing to pursue long-term, profitable industrial growth. Its financial position will still be very strong even after more than NOK 5 billion is paid out in an additional dividend. The remaining funds will be retained in the company to realise such growth.