Welcome and thank you for joining us on the Q3 conference call for Cloetta. My name is Nathalie Redmo, and I'm Head of Investor Relations. I'm here today with Henri de Sauvage-Nolting, CEO of Cloetta, and Frans Rydén, CFO. Henri and Frans will take you through our results for the third quarter, and we will then move on to a Q&A session. I will now hand over to you, Henri.
Thank you, Nathalie. Welcome also from my side. We had another quarter with continued growth and first and foremost, a very strong focus on pricing execution. That at the time is the name of the game. If you look a bit more in detail, we have the seventh quarter of growth in the branded business. Of course, a lot of it being pricing, but also supported by increased marketing and innovation efforts, and I'll show you a few examples later on. Our Pick & Mix business continued to deliver profitable growth despite the higher input cost. Given the different business model of this division, that is quite an achievement. We talked about pricing in the previous quarters, and the communicated pricing has come into effect in quarter three. There's also new pricing announced for 2023 because costs keep on going up.
We still see raw materials going up, but we also see the conversion cost of our suppliers going up, so we need to keep on pricing. The continued rising input costs were offset in quarter three, so that is very good. We offset them on an absolute basis. There is a compression of the margins due to the strong sales growth. The macroeconomic and global supply chain challenges were managed without material impact on the business, but this is a day-to-day effort on things like raw materials, packaging, transport, et cetera, et cetera. There's a healthy cash flow, as we already talked you through before, it's coming in the quarter, and the net debt EBITDA remained below the target of 2.5.
As well, the board has decided to proceed with the investment in a new Greenfield facility in the Netherlands, so we are now progressing with that project. With that having said, Frans, can you give us a bit more insights in the financials?
Yes, thank you. As usual, I will start with the net sales, where, as Henri said, we are again reporting double digits organic growth at 11.5%, and including currency upside, the sales increased 14.8%. The strong sales are also again driven by both branded packaged products growing at just over 10% and by Pick & Mix growing at almost 16%. The growth is partly due to a favorable mix, but primarily driven by the pricing action we have taken to offset the input cost inflation, and which Henri mentioned, and which we have spoken of during the last couple of quarters. I will revert to the point on pricing when we look at the profitability. I do want to comment though on the underlying volumes. Overall, we have managed to implement this pricing without volume loss.
I would say it's really a testament to the strength of our brands that consumers in this inflationary environment feel that what our confectionery products brings to, well, to any moment really, if it's shared or solitary, is worth the higher price. While we've held the overall volumes, including, but also this quarter, increasing the investment in our brands, I can share that Pick & Mix volumes are growing steadily and that we have also grown or held the branded package volumes when adjusting for those few cases where we have stopped shipments to customers on account of not agreeing to our pricing. It's very promising, and let's look at sales a little bit closer. Starting with the branded package sales, accounting for three quarters of our total sales.
This is the 7th quarter of growth, we are now only one quarter away from matching our prior record of 8 consecutive quarters of growth, which we set in the two years that led up to the COVID pandemic. On the lower half of the slide, with Pick & Mix growing close to 16%, that is the 6th quarter of consecutive growth, and as I mentioned, is underpinned by solid volumes. In prior earnings calls, I have shared how we have gradually brought sales in Pick & Mix back towards pre-pandemic levels. In quarter 3, we are now at an index of 92. I think it's time to stop tracking that aspect and instead fully focus on ensuring the segment remains and improves its profitability despite the higher input cost, which is a good segue to look at the profitability.
As we look at the operating profit adjusted, let me revert then to the pricing and the effect of that. We've mentioned many times that we are taking pricing to fully offset the increased input cost, but that there is a lag between input costs going up and pricing coming into effect. In the Q2 earnings call, I also mentioned that given the aggressive inflation environment, we would need more than pricing. Also the benefit of managing our mix and internal cost savings or avoidances to offset the inputs cost inflation in the near term.
I'm pleased to say that for quarter three, we have done that, and we are offsetting the input cost by leveraging all the tools at our disposal. You can see the result of this effort as both our gross profit and operating profit in the quarter are in line with or even up versus last year despite the input cost surge and without the strong volume growth we had in the first half of the year. That said, input costs have also continued to go up, and we have announced further pricing at the beginning of next year to fully offset that impact.
For the part of the higher cost that will be impacting us already now in quarter four, we will have the benefit of the full quarter effect of the latest price increases during quarter three and together with our continued work on savings and mix, and our expectation is then that we can hold the current line until the end of the year despite the continuing inflation. While we're on track with our pricing to protect absolute profit, the strong growth compresses the margins. I gave a simple example before, and I'll repeat it here since it is really important. If costs are 50 and you sell it for 100, the profit is 50 and the margin is 50%. If cost goes up 20 and you increase the price 20, then the profit is still 50, but the margin now only 42%.
That compression is what is increasingly affecting us this year, and with more and more pricing coming into effect, it is impacting us more in quarter three than the prior quarters. It might actually be more telling to note that our Q3 margin of 10.5% is higher than our Q3 year to date margin of 10.2%. That means that despite the increase in compression, our margin is improving versus the first half of the year, which is a good thing. I also would like to remind you of one thing that underscores this improvement. Historically, we build up inventories in the first half of the year, and then we start depleting those inventories in quarter three.
This also holds true this year, and you can see in our reporting that the value of our inventories have come down versus quarter two so much that it more than offsets the higher input cost per ton of inventory. As we stop building inventories in quarter three, but actually we will stop doing that for all of the second half of the year, it means a bit less efficiency and a bit higher cost for the volumes produced than in the first half. The bottom line margin improvement is also despite that, which is arguably quite good. Now, having spoken of the pricing, let's look at the two segments separately. The compression of margin on account of the high growth affects both segments.
While the absolute branded profit on the top row has increased, the Pick & Mix profit for the quarter on the bottom row is not. Let me start with Pick & Mix. While it is slightly down, more importantly, Pick & Mix does remain in black figures despite this increasing input cost. That makes the sixth consecutive quarter with profit. Had it not been for the input cost, we would be looking at a profit step up in the quarter. I also want to remind you that this result does include Pick & Mix having first absorbed its fair share of common cost. The profit seen on this slide is not fully representative of the favorable contribution from Pick & Mix. Of course, we're not content with this, but we'll continue to strive for a fairer pricing through various margin-enhancing initiatives.
Looking then at the branded segment in the top row, as I mentioned on the very first slide, our volumes are holding when adjusting for a few cases where we have stopped shipments as customers have not agreed to our fair pricing. The growth in profit is driven by product mix management, which together with pricing and cost savings, has more than offset the input cost in the quarter. I can also mention that Refreshment, so pastilles and gums combined, are growing similarly to the other categories. The gross margin, even, you know, excluding the compression, has not yet reached its prior potential, where Refreshment represented the bigger share of sales. That also remains an opportunity for us.
I also want to say that the quality of the profit is high, as we have invested more in marketing of our brands than what we did in Q3 last year. On a year-to-date basis, we are materially higher invested this year by approximately SEK 10-20 million. I'll come back to that as we look at the next slide on sales, general, and administration cost. With the pricing raising the top line, there is a significant drop in spend as a % of sales from 23.8- 21%. More importantly, the absolute spend is down SEK 6 million when you adjust for the Forex and despite the increase in merchandising spend to enable increased volumes. I mentioned that our marketing spend on the branded package segment is above last year's spend, and this supports the pricing.
When I say it supports the pricing, what I really mean is both with respect to keeping our brands top of mind and visible to our consumers and with respect to letting our customers or the trade very tangibly see that we are investing in our brands, which will ultimately strengthen both our and their businesses. Arguably, doing this will be even more important going forward with more and more pricing coming into effect. In Q4 last year, we did a major step up in marketing spend, about SEK 25 million. While we will not quite reach those levels in Q4 this year, I can share that for the very good reasons that I mentioned, we will materially increase our spend in Q4 versus the current run rate.
During the quarter, we have also continued to invest in our organization and capabilities, such as for our Net Revenue Management program, which drives efficiencies in what happens between our gross sales and the net sales we report. I think we're off to a great start with our organization having found insights which ultimately will benefit both us and our customers. Now, the increased spend is offset by cost efficiencies, including keeping merchandising costs down, a reorganization of sales force in Sweden, which we went live with earlier this year, and by continuing to largely hold back on spend that were all but frozen during the pandemic. Looking at cash.
In the Q2 earnings release call, I reminded everyone that our business cash generation is skewed towards the back half of the year, with inventories normally being built early on and receivables coming down the weeks after the selling for Christmas. I said that I didn't expect this year to be any different, and that is also what we see now in Q3. Our discretionary free cash flow for the quarter was SEK 223 million, meaning that the year to date, our free cash flow is positive after a strained first half with inventories and receivables increasing with input cost and pricing. As mentioned in Q2, inventories were up not only due to the higher input cost though, but also indirectly due to supply volatility, as we have built some extra safety stocks to manage around that.
We will continue to do that to some extent, so we can continue to secure good service levels to our customers and in extension, great products to our consumers. That said, inventories have come down in Q3, and I mentioned this. That's in line with the normal seasonal pattern. Here you have to again take note that those inventory levels are down despite the much higher input cost per ton sitting in those inventories. The opposite of this will be payables, and our payables are up in the quarter, which is good from a cash point of view, but it also suggests how much the underlying inventories really are down. The final part of working capital are receivables, and they have continued to go up with the higher sales. Although tying up cash, given that our overdues are under control, that is not a primary concern.
That brings me to the net financial position. At SEK 2 billion in net debt, it is down versus the last quarter, and it's in line with last year despite a revaluation effect of SEK 91 million on account of the weaker Swedish krona versus the euro. At 2.2x EBITDA, our leverage is down versus both quarter two and last year, and it's also below our long-term target of 2.5. As we close quarter three, our unutilized credit facilities and commercial papers and cash on hand were SEK 1.9 billion, which is up versus quarter two and unchanged versus a year ago.
These numbers do not, of course, include the commitment we have from our group of banks to extend our further credit facilities totaling SEK 1.6 billion to finance the Greenfield, and which we now, following the board's approval to proceed, will finalize in the next few days. For more details, please see the material from the investor event held on September 27, which is available on Cloetta.com. Before I hand back to Henri, I do want to mention that in the presentation, I have included two simple slides showing our reported numbers, the numbers relating to items affecting comparability, such as the Greenfield, and then our results excluding all of that.
It's shown both for the quarter where there is no material effect, but more importantly for year to date where there is one, and that way you have it in one place and in a simple to read format. With that, back to you, Henri.
Good. We talk a lot about our growth journey in particular in the branded but of course also the volume growth in Pick & Mix. Although a lot of it is coming from price, we remain strong focused on the strategic agenda. One, of course, is the whole move into premiumization and also to follow consumer trends and consumer interest in more healthy natural products. Just to give you a flavor of a few of the launches, this is the Real Fruit launch, which in the Innovation 2.0 platform is now going in multiple markets, which you can see there above. We're not to the end of it yet. You can also see that it is really valorizing with premium price, and I'll show that on the next slide.
In the bottom, you can see the price index per kilo. I mean, this is Norway, which we've taken out. They were really on a higher price per kilo for this product, and consumers are willing to pay for that because this is the first European launch of a product with 50% fruit in it, and that's not like fruit juice, but it's real fruit puree. You can also see that the RFC, that stands for Real Fruit Candy, so the launch we're talking about, is nearly all coming on top of the existing Godt & Blandet range. In the red, you see the existing business we had, and then you can see the Real fruit launch coming completely on top now being 20% of the total Godt & Blandet sales in Norway. That's really good.
It's a valorization, and that is one of the things in Europe you really need to drive in branded in order to get growth and to expand your profit margins. Another very good example is our really strong chocolate brand Tupla in Finland. Now finally, we got this launch to work. It's been quite difficult technically to make this work, but Tupla is now going into chocolate bags with small puffs. They are much more lighter than the bar, and it is a stunning success. I mean, in candy bags, chocolate candy bags, this launch has 24% market share. I mean, I've never seen such figures, so it's really a testament to the product, to the development, but also the execution of our Finnish business to get this into the market.
It gives a really nice addition to the Tupla brand, which is stretchable into other categories, and also over here, it is a premium price and a premium position. I thought I'll give you also a flavor of what we're doing in the UK. I always remind people, 60 million people living over there, 60 million potential consumers compared to what we have here in the Nordics. We have a very nice, old established brand, Chewits, and a little bit of love and care, I always say, and this brand starts to prosper. When we put the new team into place in the UK and International Markets, marketing-wise, we started to relaunch this brand, rejuvenate the brand.
As you can see, we're getting really good results, in particular on the bar chart, you can see that we're really selling more consumer units. We've also added a new range to it, which are the Bites, which you then see there in the middle picture, really adding the number of consumers buying into this brand. We also get awards for people externally looking at our guerrilla marketing campaigns. I call them we're not on national TV, therefore we don't have the size, but you can do a lot to really get into the right target group. Very positive as well, building a platform for the future.
We also did a big piece of work on our sustainability agenda, where we have, as you know, subscribed to the Paris Agreement through the Science Based Targets initiative, where we commit to a 46% reduction of our total scope 1, 2, and 3 greenhouse gas emissions. We've now quantified that, and we are confident that we are coming close. We're not completely there, but identifying all the three scopes, and of course, the most important, biggest one is the one where we work together with our suppliers to see how they can also contribute to this journey. Over the years up to 2030, we now have initiatives in place to reach this goal of 46% reduction. That's also very good.
We have selected a number of KPIs, which we will be sharing also with you on a regular basis because what measures gets done is our firm belief. That was the last update from the strategy before we now open up for questions.
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from the line of Nicklas Skogman with Handelsbanken. Please go ahead.
Thank you very much. Good morning, everyone. I'm gonna focus a little bit on the input costs and your plans to offset this. I think, Frans, you said that we're gonna hold the line or we expect to hold the line in Q4. Was that? Did you refer to sort of the absolute level of gross profit being unchanged year on year or what were you referring to there?
Yeah. Yes. Well, yes, close. I was referring to that, obviously what we've shared before is that when input cost goes up, there's a bit of a delay before our pricing come into effect. Only once, you know, costs are sort of leveling out does the pricing catch up. Of course, when input cost starts coming down, then we also have a bit of a benefit for a period of time. In quarter two, we also said that, you know, pricing wouldn't be enough given, you know, how quickly costs were going up. It would require us to work everything else.
We managed to get that down now in Q3 that we are offsetting the input cost. Now, in Q4, costs are also going up again. We only have new pricing coming into effect from beginning of next year. But we do get the full effect of the pricing we took during quarter three, so we can also offset some of that there. Together with the pricing we have that rolls into the quarter together with, you know, working mix and savings, we will continue to hold the line against this input cost increase. We will continue to offset that.
On an absolute level?
On an absolute level. Absolutely. Yeah.
Okay. 'Cause in Q3, you did slightly better than just offsetting on an absolute level on the gross margin.
Well, I mean it depends. Yeah, I mean, I would say that using everything we had, we've been able to offset the input costs. That's what, you know, we're expecting to continue also to do now in Q4. Of course, if the input costs would have, you know, stopped going up, then we would also not be talking about more pricing in the beginning of next year. Unfortunately that's not the case.
Yeah. On a net effect, will there be, 'cause you said there will be more. You will have a full quarter of price hikes now in Q4 compared to, I guess, only partially in Q3. At the same time, you said costs are going up. Will there be more or less cost pressure in Q4?
I think you should assume it offsets. That's when I say we will hold the line. You know, we will basically do neither worse or better from a sort of ability to offset the input cost in Q4 than what we've done in Q3.
Okay. Very good. Then on the cost control, I note that the big change year-over-year is with an admin cost, which of course were exceptionally low in Q3 2020, and then quite a bit higher last year. Then at SEK 143, it's like still below SEK 19. What are you holding back on here within admin costs to keep them this low given all the inflationary pressures?
Well, let's say two components to keep in mind, first of all. When you go back all the way to 2019, that's when we also launched our VIP plus program. We have shown previously that we have actually taken the equivalent of 1% EBIT margin of cost out of the business, you know, in a sustainable fashion. We've also kept investing, which we've also offset. Of course, when you compare it back to 2019, you'll have the effect of that. In 2020, because of COVID, we of course have stopped doing certain things.
Where we are now with the input cost, some of those things we are still holding back on, even though you know COVID wouldn't be a reason to, for example, not to travel. COVID is not really a reason for that any longer, but we're still holding back on the cost until all the pricing kicks in. The other aspect of course in the sales, general and admin here is you have the marketing spend, and the other one which is more volume driven is the merchandising costs. I think we've shown that with the growth continuing on Pick & Mix, then the merchandising costs haven't been rising at the same rate. There's a nice efficiency gain we get out of that.
Now, of course, merchandisers also have to travel between the stores, so fuel costs are going up there. It's not, you know, quite the same situation now as it used to be. We have to work hard on that as well. Then on the marketing spend, here we have increased the spend versus last year. We're up year to date. As I flagged, we will actually accelerate the spend in the next quarter versus our current run rate, but not to the extent what we did in Q4 last year when we really did a major step up. This is simply because we couldn't take this pricing.
I mean, the fact that consumers with less, you know, money in their wallets are willing to pay more for our products, you know, is largely because we are also investing behind the brand. That's sort of one of the last things that we want to, you know, hold back on.
Sounds good. I think, you know, the shift to private label is taking place in some of the subsectors within the grocery segment. I guess for confectionery, it's still private label penetration, I guess, remains extremely low. Do you see any changes recently in this setup?
Not, yeah, not yet. Of course you have a bit of a Nordic view on this. In other markets like the UK, private label is much more developed. The only market where we are having a higher private label share than what we see here in the Nordic system, Netherlands. I would say, in general, no. What we do see is a move of shoppers to the more discount, both soft and hard discount channels, and also that in what we call our new channels, that we see people spending less money per trip, like all the do-it-yourself stores. We see that we sell a lot less because, yeah, people just don't have the money at the moment to buy paint or start refurbishing their houses.
Of course, there was a COVID effect there as well. I would say that is normally what happens first when spendable income goes down, is that you see a channel shift, and then maybe later on, also a private label increase.
Do you see a step up in use by the food retailers using Pick & Mix as sort of a traffic driver now?
Yeah, it's a bit different by market. In the end, that is their decision to do that. I mean, our clear strategy is to get profitable growth from Pick & Mix. We see that there's also very good baseline sales improvement in Pick & Mix. In some markets, we see promotions are going up when retailers are deciding that themselves. That is not Cloetta who are very much behind that kind of pricing policy. It could well happen. Yeah.
Yeah. Very good. Last one for me, on the where this you know Pastilles versus non-Pastille sales, how is that developing now?
Yeah. We're getting back on track. We see positive sales on pastilles. That is very positive there where we have our own cough and cold brand, like in Finland. We see indeed also in our sales a really good development. We're talking like 20%+ in that sense. We see also on the other markets where we have the strong licorice brand that we are growing, and that first signs also of market share recovery are happening. There's still a lot we have in the plan to really start gaining market share in all those markets.
We've changed both the agency, the media company, and also the creative company, and coming with a new campaign to support that profitable business.
Okay. Perfect. Thank you very much.
Thank you, Niklas.
The next question is from the line of Andreas Lundberg with SEB. Please go ahead.
Thank you, and hi, everyone. Just a couple from me. Thanks for the clarification on all the cost equation and cost versus sales. Are you saying that you need a decline in input cost in order for your gross margin to stabilize or increase?
I mean, since we're offsetting in a very transparent way we work with our customers, but we are increasing our price commensurate with the increased input cost. Of course, that drives top line, but not gross profit. That's why we get a compression of the gross margin. Obviously the gross margin from a pricing point of view will only increase when you reverse this. You know, at some point here, you know, cost will stop going up. We still have pricing, and then you start seeing more effect of mix and other margin enhancing initiatives like Henri shared here on the value accretive innovations that we have, et cetera. That's, you know, that's a different track of getting to gross margin.
With this level of input cost increases, that's obviously not possible. I mean, that has a compression on the margin.
All right. Would you say it's more fair to judge you on your operating profit performance?
Yes. Yeah, I think so. I think, you know, when, for example, with the Pick & Mix, and I think I mentioned that, I mean, profit is low, but it's still profit despite all of these things coming in, which we're, you know, of course very pleased with. That's why if we can hold the line on the gross profit and operating profit, then I think we've done a good job on the input cost, given the model we have of only pricing for the input cost increases.
On the inputs you're buying today, are those costs higher or lower than a year ago?
No, of course they're higher. I mean, all the costs are up significantly.
Have you seen any sequential decline or is it going up throughout 2022 as well?
Well, yes. I mean, costs are going up. They're going up in this quarter as well. I think if you're following, you know, just as much as we are, you know, what comes through various sources, that there is an expectation that costs will continue to go up also during next year. We will stick to our strategy, which is to take fair pricing for those increased costs. At the same time, trying to work mix, savings, avoidances, and also invest behind the brands because, I mean, that's what gives us sort of the passport to take this pricing.
Maybe a bit of a flavor, you see the raw material cost, and for us, that is like sugar or cocoa or wheat, starch, et cetera. You see that still going up, maybe not as fast as a few months ago. What you should not forget, all these raw materials are then being processed by our suppliers who have higher conversion costs because they are now also being hit with higher energy prices and labor inflation and transportation. That is a big effect on the raw materials. It's not just the raw materials coming from harvest, it's also the conversion cost. Then most of these raw materials are also quoted in U.S. dollars when we buy them.
Of course, there's also a Forex effect of the US dollar versus the euro and the.
The Swedish krona. There are quite some variables in the raw material component other than just, you know, what is a kilo of maize or starch costing when it comes from the field. Of course, on top of that, we are ourselves also faced with energy inflation and labor inflation for next year.
Thank you. Lastly, what do you see for your CapEx for 2023, excluding any potential stuff from the Greenfield?
Yes. I mean, for the CapEx, the guidance that we've given is obviously mostly relating to the Greenfield, where we've said that we would reduce CapEx over the next, you know, 10-year, you know, roughly, you know, equal between the two 5-year segments, but that the avoidance would come more towards the end of the next 5 years. As of now, you know, over the next year, there's not really any change versus our current run rates. We will obviously, you know, there may be some CapEx that would have happened in the plants that are scheduled for closure now is not going to take place, but then there's also other areas where we need to catch up a bit.
Okay. Thank you so much.
Thank you.
I think we have a question here on the web. I will take that one, whether we will expand to new countries in the coming years. I mean, let me start first by stating we have a division within Cloetta called International Markets, where we're selling to 40+ countries already. We're not just a Nordic or European company. We're selling in Asia, in North America, in Eastern Europe, travel retail, and that is a very strong division. Maybe it's good to also give some flavor of the stuff we're doing over there. In the next quarter, we're growing way above double digits in that area, so that's very positive.
Of course, like in good FMCG practice, we focus on those markets and on those brands where we are already strong. That means that just going into a lot of new countries with unknown brands for those markets, that's a costly exercise. It is much better, in my opinion, to keep strengthening the Red Band positions we have in many countries, Red Band Tutti Frutti, but also Chewits, which we talked about, very famous brands in like CEE and some markets in the Middle East to strengthen those positions. I mean, that is.
Those are huge markets, a lot of people, yeah, and we're making very good progress, so very pleased to see that, where the ambition we have is to double that division within Cloetta to also contribute to the volume growth in branded business.
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Okay. Nathalie, I think we can close. Thank you very much for the call. I think it was a good quarter, good growth, a lot of pricing, and that remains the name of the game for us to offset the high inflation with pricing also when we go and look forward, but not forgetting about the long-term strategic priorities of branded growth, picking mix to profitable growth, and then cost and efficiency underpinned with the sustainability agenda. Those four priorities remain important, but first and foremost, it's the pricing we work on. Thank you very much for today and speak to you soon.