Good afternoon, and welcome to Cloetta Q4 Conference Call. My name is Jacob Broberg, I'm Head of Investor Relations, and with me today are Henri de Sauvage- Nolting, our CEO, and also Frans Rydén, who is our new CFO. But, I'll give the floor to Henri to start with.
Yes, welcome to this call on Friday afternoon. If we look at quarter four, I'm pleased to show yet another quarter where we have our branded business in growth, four quarters in a row. And if I listen to the people who've been around it for a long time, this hasn't happened f or multiple years. We also today are deciding on proposing an increased dividend to SEK 1 .
If we look at the underlying performance, we can again see that the net sales is up to SEK 1.646, but we tend to look only at the organic growth, which was -3.2%, all driven by negative growth in Pick & Mix, like we have been carrying with us during the other three quarters as well. Operating profit, adjusted, was SEK 174, and the operating profit SEK 159, driven by marketing spend, as we already talked about last quarter, but also the abolition of the increased sugar tax in Norway, and production cost in France will go into that. Profit for the period, SEK 159. Last year was exceptionally low, and cash flow at SEK 288.
Our net debt at SEK 231, again, well below the 2.5, and then the proposed dividend of SEK 1 , up from the SEK 0.75 we had last year. There was some confusion, I think, already in the media, but last year we had a SEK 0.75 dividend coming from the continued operations, and then a special dividend of SEK 0.75 , which was due to the sale of the Italian business, and that we gave the cash coming from that transaction back to the shareholders. So we see this as a step up from SEK 0.7 5 to SEK 1 . Then if we look at the markets, the branded, or we call packaged confectionery, we can measure through Nielsen. And those objective external figures are showing a growth in all markets. So that's, that's positive.
We looked in the summer at some negative development, but they all bounced back. Pick & Mix market, where we don't have a single source, we think that there was growth in most of the markets, but it is our own estimate, varied on different sources, supplier databases or POS data from one customer. But we think they're still on aggregate across our markets growth, and the growth levels are very different market by market. I already commented on the -3.2%, fully driven by Pick & Mix. So if we unpack that a little bit, a total Pick & Mix declined to 13.5%. Yeah, and it's still the same reason.
So it's the lost Coop contract in Sweden, which is by far the number one, but also the weak sales in Norway. We had no promotions due to the sugar tax, but also the government has decided to abolish the increase in sugar tax they took last year, which also that means that customers are refraining from buying the full amount in December, because then if they buy in January, it becomes a lot cheaper. And it doesn't mean that the no promo policy is immediately gone from the customers in Norway, because that was much more related to PR rather than to the sugar tax itself.
And then there's a third bucket, which is that we're preparing the Pick & Mix business in general, but in particular, the old CK business to be ready for growth by cleaning up and focusing not only on volume, but also on profitability. Now, that counterbalancing that, as I already said, packaged branded growth with 1.4%. Really nice because it's coming from Northern European markets with little to no volume growth and more price growth, and that shows in our market share evolutions. On an aggregate level, Cloetta is taking market share, outgrowing the market, on aggregate level.
So that's very positive because it's a-- that's a clear, yeah, fourth quarter where we do that, also for the full year. And I said before, we haven't seen that for, well, at least five, six years, maybe even more going back. And let me remind you, I mean, the gross margin of this business for the time being is in the branded business. Yeah, if we look at the strategic focus, yeah, these are the three pillars we've been talking about. So where do we drive our growth? So it is still very much the focus on growth on the branded business, delivering superior gross margins.
Another area where I'm really pleased to see the progress is the move towards working media. I'll remind you, the working media is the money we spent, which is actually being seen by consumers, and the non-working is all the production costs or agency fees or research fees, and we have been able to move this up with 15%, which is a big impact, actually, if you look at it on absolute numbers, that is more of our spend going into activities which the consumers actually can see, be it either traditional or new media. And the last one is an integration in our innovation process to get much more leverage between the markets or across the markets on the kind of innovations we are doing.
So moving from single market innovations to cross-market innovations. Good example which we showed last time is the lower sugar launch, which is now going in all the core markets of Cloetta. So fewer innovations, but bigger. So three important things also for 2019 to keep on driving and also as a next step in innovations, we're looking at more long-term innovations, getting more focus over there versus short-term tactical innovations. Yeah, then the second pillar is then how do we facilitate the growth? One, Cloetta is to get much more benefits of the knowledge and scale we have by combining countries and functions to work more together.
That can be from working as one HR, where we have just implemented a cloud-based HR system called Workday, where we have much more transparency on organizations and costs, but also things like a Customer Board, where all the sales directors of the different countries are coming together to really look at common challenges. The second point is brand and category management. So again, we were very decentralized in the way we were working in marketing. We have now a common forum, Exchange for Growth, under the leadership of the chief marketing officer, to really define long-term plans, category visions, the way you work with the trade, common innovation platforms.
Then, third but not least is a CapEx proposal to debottleneck our drying capacity so that our production lines, it's, we call it molding, but it's basically the wine gum candy portfolio, so that we can reap the benefits of the Lean program by getting more of the increased output also dried and giving, hence, more possibilities to keep on insourcing, but also to keep the branded growth volumes which are added to the portfolio into our own factories. And last but not least is then the funding the growth. We're looking at preparing the Pick & Mix , in particular, the previous CandyKing business, for future growth, and there's still some cleaning up to do.
These are customer long-term customer negotiation contracts with runtimes of several years, so we need to break those open. We don't want to do that all in one go. It's a negotiation contract by contract. And cost efficiency, we call it internally the Value Improvement Plan. Also, with the new CFO coming from Mondelēz was very much involved in looking at cost and tools like zero-based budgeting. We're going to make a step up over here to get funds from the cost we have both in supply chain and head office, and bringing part of that into marketing support and part of that into EBIT improvement. And then last but not least is the continued journey of Lean.
So we move from Lean into something we call Perfect Factory. We could call that Lean Plus. Really now working on getting our operators and engineers in the factories, on the shop floor, involved in how to improve the lines they are responsible for. If we then go over to Frans and tell us a bit about the net sales.
Thank you, Henri. This is Frans speaking. Happy to be here with everyone on the call this afternoon. So, picking up from Henri's comment on the organic growth, which you see on this slide, which is, as we said, completely driven by the shortfall in Pick & Mix , that is then offset by favorable forex rates for a basically flat development quarter over quarter. I'll just make a note also on the full year, you see there the upside from the structural change as a result of the CandyKing, CandyKing acquisition as well. Now, however, zooming in on the packaged product growth, and this visually represents now something Henri mentioned earlier, which is that, you know, we're happy to see four quarters of consecutive growth, first in a long time.
It doesn't mean that, you know, we necessarily have turned, you know, fully a corner, but it's a promising sign. And we have to remember that 70% of our business, not only where the profit is coming from. The other side, so the remaining 30%, is then the Pick & Mix, and of course, the graphs looks very different here with the decline over this year as a result of the loss of the Coop contract, as well as the challenges in Norway. I would also point out here that when we look at this business, we have to remember that you get really significant swings when you gain or lose a contract. So the 2016 growth you see there, which excludes CandyKing, was driven by, you know, big contracts gained in Bergendahls and Överskottsbolaget.
Moving then on from the net sales to the gross profit. It's in line with the prior year as the impact that we have in Norway and with CandyKing and the higher production costs we've had in this quarter are offset by the retranslation forex that I mentioned earlier. Moving down to the operating profit adj usted for items affecting comparability, you can see that the unfavorability that we have in gross profit is flowing through, but it's offset by favorability from retranslation in forex. That has now been netted off with unfavorable retranslation forex low gross profit. So this decline versus prior year is also driven by the increased investments in advertisement and promotion that Henri mentioned. And all of this is partially offset by other savings that we've had on indirect, driven by the cost control programs.
Continuing down on EBIT, we can see we had net SEK 15 million in items affecting comparability. This primarily relates to restructuring in Norway from CandyKing as well as in Sweden, and takes us from SEK 174 million to SEK 159 million. So this is SEK 20 million less of such items than we had in 2017, so that reduces the variance versus prior year to SEK 12 million. We are then having less net financial items impact. This is because, again, forex is favorable exchange rate differences on borrowings and cash, and that reduces the variance versus prior year when it comes to profit before tax to just SEK 1 million that you see on the second row from the bottom.
And then finally, we see a significant favorability versus prior year from profit from continuing operations, or if you will, after tax, and that's on account of two things. First, we have a negative tax rate in this quarter. This is a result of several countries revising their tax rates, and we have an effect as a result on our deferred tax liabilities. And secondly, in quarter four, 2017, the tax rate was unusually high because of the valuation allowance that we did that year relating to deferred tax assets in Slovakia. So moving on to the cash flow. So here I would like to start at the bottom of the table and the cash flow from the period, so SEK 240 million.
This is, of course, a healthy cash flow, especially if you keep in mind that the EBIT was SEK 159 million for the quarter. This is nonetheless SEK 80 million less than the SEK 320 million we generated in quarter four last year. The explanation for that, you can find first and foremost, towards the middle of the page, under the heading for cash flow from other investing activities.
There you can see a cash receipt of SEK 69 million in 2017, which was the final payment related to the sale of the Italian business. So that basically explains SEK 69 of the SEK 80 million. The remaining of the variance, you can see under the change in working capital. We have SEK 77 million generated from favorable working capital in the quarter, which again, is good, but it's nonetheless less than the SEK 105 million we generated in quarter four, 2017. So that concludes my part of the presentation. I hand back to Henri.
Yeah. So if we go back to a summary of 2018, very good to see that the branded business is growing. It forms a strong cornerstone of the strategy we are executing to get our base business to grow, in particular, the base business where the margin is. So that's really important. Of course, we also are working on total top line growth, and of course, we realize that we need to get the Pick & Mix business, the integrated Pick & Mix business into growth as well. On the other hand, we are also preparing the business for growth because growing a completely non-profitable business in some countries is not a good idea either.
Yeah, EBIT, and EBIT adjusted have both improved coming from CandyKing synergies, more production volumes, good cost control. That's the journey we are on towards the journey of 14%. And if we want to grow the branded business during 2018, we've been focusing very much with the markets and the marketing community to get the working media up. Fifteen percent is a very good first step. We're not at the target where I want us to be, but at least we've taken out quite a chunk and also proven that we can invest this in a wise and a good way.
Also, if I look at the results, I'll try to also share a bit more of that on the Capital Markets Day, when we have a little bit more time to go into the whole area of marketing and branding. Yeah, the CandyKing synergies are coming in as we have communicated, the indirect chunks are same offices, same field sales forces, one system, and most of that has been coming through in 2018. Biggest chunk of the insourcing is also well under its way and will com e in the time periods we have communicated. We make business decisions on what is the best insourcing, and we have to balance that, of course, also with our own organic growth on the branded business.
So we feel confident that the SEK 1 of dividend lies well between the policy of the 40%-60%, that is a good step up, also showing the health of the business. And that was it. Yeah, it was a turbulent year, a lot of change programs which have been gone into the company, also things which are too detailed to discuss here today, but a lot of transformation work going on. S o we're not there yet. I'm also pleased that my team is in place, the last one joining Frans really being able then to drive this change agenda through the whole company in all different functions. Yes, and with that, we open up for questions.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero-one on your telephone keypad now. Please hold until we have the first question. First question is from the line of Nicklas Fhärm from SEB Equity. Please go ahead, your line is open. Okay, Nick, there seems to be a bit of disturbance on your line.
Okay, just a second.
Can you hear us? Yeah?
Yep. Can you hear me now?
Perfect. Yes, you're coming through clear. Please go ahead.
All right. Okay. Sorry about that. So good afternoon, everybody. My first question would be on the comments that you're making towards the integration of CandyKing and ending up in reiterating the full synergy potential by 2020. Now, in the second paragraph of the actual section in the report that you wrote about this, you said that you expect necessary investment to-
Sorry, Nick, I'm sorry to interrupt you. This is the operator speaking. Yeah, so your line, there's still a bit of disturbance coming from your line. Unfortunately, we cannot hear you. So, okay, so I will need to, I will just need to mute that line, and then we'll go on to the next question, and that is from Stefan Stjernholm, from Nordea. Please go ahead, Stefan, your line is open.
Stefan on the air here.
Stefan?
Can you hear me?
Yes, we can hear you.
Yes.
Yes, go ahead.
Finally, finally. Okay, sorry. First question regarding Norway, the question is, have you already seen volumes coming back after the destocking in the fourth quarter?
Yes, of course. So, we are quite used and prepared to this. O f course, we discussed this with customers because we quite often work in collaboration with customers whe n it is forecasting and when they expect certain volumes. We've seen this exact same behavior in Finland before, when the same thing happened. So yes, we see volumes coming back, both on the branded and the Pick & Mix.
Is it possible to quantify how much that's been the-
No.
No. Okay. And regarding marketing investments in 2019, I understand that they will be up, but how much, and what about the timing throughout the year?
Yeah, of course, we are also prudent, right? So, I don't want an enormous increase in the first quarter and then nothing in the three quarters to follow. So the way we do this is that we spread this evenly across the quarters. It's an investment, so we also need to see the result or the continued result. I would say, I will show you a bit more on the Capital Markets Day on how we're investing and how we make those decisions.
So, the increase is evenly spread across the quarters, and then, as we said before, the goal or the target is to get cost savings in the indirect sphere to offset investments in A&P. It's a little bit too early to say statement here, how much we will increase. And again, it's on both sides, right? So it's an absolute investment, but we also think we can make a further step on the reduction of the non-working media, which also will help then on the growth levels in the branded business.
Okay, thanks. And my final question, can you, at this early stage, try to help us to understand the potential Easter impact, given that Easter is fully in the Q2 this year?
Yeah, so I mean, the full Easter is in Q2 versus 2018, so that is for sure going to be there. It is a big impact on Pick & Mix, but also remember that last year in Q1, we still had Coop in Q1 for about half the business because they started to rebuild the Coop stores, let's say, on the first of January, and that ended more or less at the end of Q1. So on average, we had half the business there. But then we also had the Easter effect in Q1, right?
So like for like, yeah, that will hurt us a little bit more than we would like, of course, because now we do not have the Easter in Q1, so the comparator of the Coop Easter effect, those two together, I would say, are a bit maybe higher than we would like it to be. I mean, there's nothing in the underlying business which is different. We also try to, of course, compensate for that. We have a huge activity in Sweden for those with the Melodifestivalen, but that effect will be there.
Yeah. But it's not possible to give a range for the Easter impact on the EBIT, is it?
We've always said that the Coop effect was around SEK 150 million-SEK 160 million, so SEK 40 million in a quarter. So you could say, well, if then one quarter is SEK 40 million, and you have half of it-
Half of that.
In Q1, you're talking about 20, but then there is an upside in Easter. And you know, how much that exact is also for us, very difficult to estimate, that because there were so many moving parts during Q1 last year. You know, did Coop start with the bigger stores first and then the smaller ones, or was it by region? It's very difficult to get that picture from from them, so... But it, it will be an effect too.
Yeah.
Of course it will.
I see. I will try to estimate it myself then. Okay. Thank you.
Okay, and the next question we have again from Nicklas Fhärm from SEB Equity. Go ahead, Nick, your line is open.
Thanks, operator. Can you hear me now?
Yes.
Yes, all good.
All right. Excellent. Good afternoon. My first question relates to your comments in the report on the integration of CandyKing . You're writing that you expect necessary investments to further increase insourcing, right?
Yes.
I'm a bit stuck on the word further. How does that relate to your original plans when guiding for... I understand the end game-
In line with the original plan. So what we said is that we would insource about half of the volume of CandyKing, and that we would have about SEK 175 million of cost both the restructuring, but also investment to be made in the factories in order to do that. And we have and we've started, of course, with the insourcing already in 2017 and in 2018. And we now need to make this investment to unlock for further or the continued journey in the insourcing of CandyKing .
Mm-hmm. Okay.
That will come out of the SEK 170 million, out of the SEK 175 million.
Right.
And then on the SEK 100 million of savings, the majority of that is the insourcing, and a smaller part is the, let's say, the indirect savings in systems and people and back office and, things like, like that. I mean, that has mostly, apart from the U.K., that has mostly been put in, in place in 2018, but not, not all on the first of January. So there will be some benefit still coming through in, in 2019. And the insourcing is, of course, a continued journey where we follow and track ourselves as well, quarter by quarter, the volume which is coming in, from the insourcing. So we express that as, you know, the percentage of the volume being produced by ourselves or the absolute amount of volume, which is still, outside.
The only caveat, of course, is that we are also growing our own business. And of course, that is also important to be able to cater for that. And then there are also some other third party, like the Italian business, which are interesting to insource if that gives us more. So we make, you know, what is best for the business financially, those trade-offs.
Mm-hmm. All right. So just if I may, just so I get this right, what you're saying. What you're saying to the market is that there are no changes to the sort of synergy, not in terms of amounts or in timing, uh-
Yeah.
But, yeah. But for 2019, it sounds to me at least that you expect to incur the costs more or less to get the savings in 2020. Is that fair?
Yeah. I mean, what is fair, of course, we need to make an investment in the drying capacity. So nothing to do with our lines. We just have the same number of lines, but to get the drying capacity expanded, we will need to make a CapEx. So that... But I don't think we've communicated the exact timings of the CapEx when we did the CandyKing acquisition case, but they will now come in 2019, and I would expect a part of it in 2020.
But, you know, I don't know yet if that is 50/50 or 25/75 or 75/25, but we will make that investment. And then, I mean, the good thing with the drying chambers, the moment they are installed, you can more or less start to use to use them. But that's, that's capacity unlockable then, of course, always come later than when you make the, make the investment.
Mm-hmm. And in terms of OpEx, just to be clear, I mean, you talked about increased wage and production costs, right? To improve insourcing volumes in this quarter, how do we sort of model that from a timing perspective in 2019?
Yeah, I'll ask Frans to answer that, but there were quite a big chunk of one-off cost in there in the comparator, but maybe you'll give
Yeah. No, but that's exactly correct, Henri. I mean, the increase in production cost that we see, about half of that are one-timer, you know, variances that won't repeat themselves going forward.
No.
And then, of course, Henri spoke earlier also about, you know, the need to drive this, let's say, Lean Plus, the Perfect Factory program, you know, to address where, you know, costs have been maybe higher than what we had hoped them to be.
Yeah.
All right. Then my second question, if I may, is, if you could somewhat elaborate a bit on your view of M&A in 2019 versus dividend focus in the company, please?
Yeah, I mean, the first thing is that, M&A has been, let's say, redefined. I think we talked about that. So we're saying: Well, we are interested in M&A, when it meets a certain threshold in size. So we're not interested in small M&As, because I can also see that the small M&As are taking disproportionate amount of time and focus, which is then not being spent on the base business or the core business, so rather bigger than smaller. The second one is that, we want the M&A, first and foremost, to be in our core categories. So we're not going to venture out in new categories.
So that's a bit of a breach with the, maybe old philosophy that we would buy a lot of different consumer occasion categories. No, we'll stick with what we know best, so core categories, and then predominantly in our core countries, being the four Nordic countries, plus the Netherlands, and then target group number two, again, core categories. We have synergies in production, in technology, in innovation, in marketing, et cetera, but then core categories in adjacent markets, and adjacent markets are markets like the U.K. and Germany, where we are present with own organizations, but maybe are not having the market shares we have in our other core markets.
So, establishing ourselves there and being able to bank on the scale benefits of Cloetta is potentially a good acquisition case. And adjacent could also be Belgium and the Baltics, maybe even Poland, and that's where for the time being we will stay and we'll focus on and not venture out yet in other parts of Europe or the world until we have our new international vision clearly established, working with the hubs we have now out there in the different geographies. So if I say that, you know, you could also, of course, conclude the case that there may be fewer acquisitions, but the ones which will come through when they come through will be slightly bigger.
Yeah, I think that answers your question. Also on the dividend, we will be looking really at acquisitions which can strengthen the core business of Cloetta. And there are fewer of them than... Well, I think we talked about popcorn last time we met, popcorn business in the U.K. would have fit perfectly in the old Munchy Moments acquisition strategy, but, you know, we have no capability in popcorn, nor do we have factories where we can produce popcorn, or we have marketing or salespeople who understand popcorn. So, clearly, we said, no, not of interest. So we'll stay within the categories we have.
I guess my question was actually more leaning towards the dividend, your view, not the board, but your view on dividends. So if you had the opportunity to make one of these acquisitions that you're talking about in 2019, would you prioritize that ahead of paying out extra dividends? I guess that's my question.
Yeah, I mean, I think each business case needs to be judged on its own, right? So I'm not blank signing a check for an acquisition. I think an acquisition, that's also something we've learned. It needs to be able to deliver value to Cloetta, maybe not on day one, but... well, maybe after month six. So if there's a very interesting acquisition which can strengthen the core business we have one of our core markets, that would be interesting, particularly if it comes with a light manufacturing network, so we can produce more in our existing factories, and there's not too much restructuring cost. If there's some really strong brands where we can build on, yeah, then we would be interested in that.
But of course, we need to balance that with our dividend policy and the continued stream of dividends. We want to be a stable company also in the amount of dividend we pay out.
Okay.
If it is fit, yeah, I mean, we should look at it and judge it on its attractiveness.
All right, thank you. I have a few more questions, but I'll come back later in the call. Thank you.
Yeah.
Just as a reminder, if you do have a question, please press zero one on your telephone keypad now. Next question is from Mikael Laséen from Carnegie. Please go ahead. Your line is open.
Yes, hi. Just if you, if it's possible, again, on the CandyKing, synergies and, and, what has been realized and, what we can expect going forward. I mean, if you look at since the acquisition, and particularly in 2018, it doesn't seem that, the, the, the synergies, have come through at all. If you look at only the numbers, if you look at SG&A to sales, partly maybe on gross margins, but definitely not on, on SG&A. And also, you did announce that you were gonna make savings of SEK 50 million. That was a new savings program
Yes.
which I guess lies besides the sort of-
Yeah.
back-office SG&A-related synergies. So when you add those SEK 50 million to another SEK 50 million in realized synergies, I struggle to get your numbers for 2018.
Yeah. So before I hand over to Frans, I mean, the SEK 100 million stands strong, and we're delivering that over the time period communicated. Also, in the same kind of shape we have been talking around. Yeah, the majority of that will again come from the insourcing, and of course, that will be spread across the whole portfolio. The benefit won't only lie on the Pick & Mix, and then on the indirect parts, we've implemented most of that during 2018. Remember that on the first of May, we went live with our enterprise system in the four Nordic Markets. Only after that date, we were able to start integrating back offices and processes, warehousing, et cetera.
There's still a little bit more to be done over there. Yeah, the other remark you make is on the SEK 50 million saving. Correct, but what we communicate is that we would have that SEK 50 million run rate in by Q4 2018. So that's a saving which you should start to see coming through in the SG&A cost during 2019. And then that should indeed be seen as something which is standing next to the CandyKing synergies. The progress we've made over there versus the export, the communicated external report, I'll ask Frans to elucidate us a little bit more on that with forex retranslations.
Yeah. Thank you. Yes, so on the SG&A, if you recall, when I spoke about the gross profit, I, you know, I mentioned that we had the upside there from the retranslation forex. But you have the flip side on SG&A, so when you see the increase in costs, that's sort of obfuscating the fact that we have the savings. You know, on the quarter, it's the translation, and on the full year, you both have translation impact, but you also have the CandyKing structure, where we're comparing now for 2018, 12 months of CandyKing, you know, SG&A versus eight months in 2017. So the savings are in there, but they're basically obfuscated by these other drivers.
And then maybe last but not least, I mean, we said we would make this run rate of SEK 50 million of savings, but that would also partly be reinvested in advertising to get the branded growth going. That is also, of course, something which you need to take into account when you look at total SG&A costs. But nevertheless, I mean, we're on a journey. We both Frans and I think we can find more costs to come out of the business. We have, Frans alluded on some restructuring costs we took in Q4 to reorganize, both in Sweden and Norway, with the aim to bring cost levels in SG&A down, and that journey will continue.
Okay, but if you only look at Q4, then all those savings that you're speaking about, the first sort of SEK 50 million for CandyKing and the other savings, everything is in there, in the Q4 numbers, I guess, since you said that it has come gradually during 2018.
Yeah. Not everything is in there, but the SEK 50 million savings program, we said we will have the run rate of SEK 50 million
Mm-hmm.
by quarter four, 2018. So that doesn't mean there's SEK 50 million savings in quarter four, but the run rate, so the full year run rate, we should have at, at SEK 50 million by.
The quarterly impact should be there already in Q4 from those SEK 50 million?
Yes.
Or, yeah.
The quarterly impact should be there. I mean, we-
So, on SG&A-
Because in Q4-
On SG&A-
Yeah
... the only thing that sort of stands out in Q4 is the marketing expenses, let's say SEK 20 million or so. But that's what stands out in Q4 on SG&A. Is that fair to say?
... No, and I think, again, so I mean, yes, we have the incremental investment in A&P. You have the translation impact on SG&A, which is unfavorable here, just like it's favorable at the gross profit level, it's unfavorable there. And then there, I mean, there's, I mean, the bits, you know, bits and pieces, but the savings are in there. On a full year basis, you see even less of this, as I mentioned, because of the structural difference due to CandyKing, with eight months of SG&A versus twelve months this year.
But if I had to make it simple, I mean, the way we communicated organic growth as a clean subset from the P&L, we're also looking, of course, at our indirects, which are a breakout of the SG&A. And I think we can just say we're pleased with the progress we are making in the indirect cost without the translation effects and without the increase in marketing cost.
Just so we can understand where we are as we move into 2019, because obviously Q4 was on a gross profit level hit by the Norwegian tax, inventory reductions and so on from the sugar tax and everything. But going forward from Q1 2019, the SG&A is not where we will see any particular savings going forward on a quarter-to-quarter basis. It would rather come on the gross margin side from more insourcing of the CandyKing's assortment.
Well, if you talk about the CandyKing part, the SEK 100 million, I mean, the vast majority of that will come on the on the insourcing. A smaller part is coming from the indirects, and then most of those indirect or SG&A cost savings have been put in place in in 2018 with an important date, the first of May, 2018, was the go live. So that's also where we really could start to integrate processes and things like that. So there will be some benefit still in in early 2019 from from that. But I agree with you, the the bulk of it will and has always been planned to come from the from the insourcing and the continued improvement of the performance of the of the factory network.
Okay. Another just clarification on the CapEx side. You had SEK 182 million, I think, in 2018. That is up from SEK 134 million in 2017. I guess that increase is partly driven by investments needed for insourcing of CandyKing 's volumes. So the first question, of those 50 million, roughly, in increase in CapEx, should we assume that, or should we take away that from the remaining CapEx need that we should put in for 2019 and potentially 2020? Because from my point of view-
Frans will give you more on this also, when we have the Capital Markets Day. But of course, we also have a continued operation we are running. So we're also with the increased organic growth in our branded portfolio. We're investing in chocolate production because we're coming to the close of the capacity over there. So there's more things than CandyKing insourcing. And another part, of course, is the investment of putting the M3 system in place in all the countries in the Nordics for the CandyKing business, which is not production-related, one-off costs we then had in 2018. Frans, anything more?
No, I mean, for example, the one of those would be the M3 implementation-
Yes
-as an example.
Yeah.
Because you said at the time of the acquisition, you would have charges and investments of SEK 175 million. And...
Yeah
... I think I read between the lines that, some 60% or so of that would be CapEx and be more back-end loaded.
Yes.
That is what you're saying now as well.
Yes.
Let's say that SEK 100 million or so of those SEK 175 are CapEx related.
Yeah.
And of those, you have already taken a portion, but a majority of those SEK 100 million will come in, in 2019 and 2020.
Yes.
Is that what you're saying? Okay.
Yes.
Okay, good. Final question from me regarding Coop. Have you seen... Because when they sort of insourced the concept as such, obviously you are still delivering candy to their Pick & Mix concept.
Yes.
Has those volumes been in line with what you expected, or have they sort of replaced your assortment with something else, or-
It's a little bit dangerous because, you know, Coop is a customer from us, and I don't think they would like us to comment on the development of their business, because that could be competitive information, really interesting for their competitors. So, that's not something I can really comment on in figures, up or down, or the same. But we generally tend to say and also to see that, depending on the strength of our brands in the market, you get a certain share of the assortment.
And within Coop, we were, we're okay with the share of assortment, which then is based on real consumer preference or consumer demand, you could say, depending on the number of brands we have in pack or in other pick and mix concepts. Whether then their concept is doing better than the old Cloetta one or worse, I mean, that is something I think you should ask Coop.
When looking at Pick & Mix in Sweden, is that business, has that stabilized excluding the Coop effect?
Yeah, so if you look at the total Pick & Mix business, this is the country where we have most focus to prepare ourselves for growth. I mean, I think you can, or at least I would conclude if I was you, that if we lost the Coop contract after three years, that also says something about how well we, as a business, have been managing that. And you also know that the CandyKing business before we bought it was struggling in Sweden, if you look at their report.
So we basically two, two businesses together, which were not performing on the level where you would like it to be, and certainly not on the level where you would like to get growth from the business. And that take more time to get that right than maybe initially thought. But it's my firm belief that with the people we now have in place driving this, looking at all the processes, and it is actually, of course, quite an operation with the merchandising, bringing these products into store that we will sort this out. But again, you know, it needs to be healthy before you kick it into growth, because otherwise it would be just dilutive. So it's not at any cost that we want to drive top line growth in Pick & Mix, Sweden. That's maybe the best answer.
Okay. Okay, thank you.
I have a couple of... Sorry, I have a couple of questions from the web, too. One is related to delivery accuracy. We spoke about that in Q3, whether we should be able to come back on that on product delivery. And the second question is related to Easter, whether, I mean, a lot of Easter is just two, three weeks into Q2. Is it not so that some of the products actually will be delivered in Q1, or will it mostly be in Q2?
Well, let's start with, let's start with Easter. I think we always need to look at Easter versus last year, and the majority of the sales will go into Q2, yeah. And that's a significant - there will be a significant effect versus last year. We tend to work with quite short lead times with customers. So, I would say two to three weeks is long. I mean, customers don't want to have this stock sitting either in their warehouse or on the shop floor. We can push that a little bit, in particular with the field sales force in Sweden, with the more independent stores.
But, nevertheless, the effect will be that most of the sales will be in Q2. And then on customer service, we're constantly balancing, of course, the balance between getting more insourcing, and of course, still being able to produce flexible on consumer demands, or customer demands going up and down. But, there's much, yeah, with every quarter we go on, there's more processes in place, better forecasting also on the old CandyKing business, and less complexity in the portfolio, where we're cleaning up as well in the pick and mix portfolio between the countries.
So, I can't say that we are always 100% delivering on time in full, but we have, yeah, we have a good balance over there. And also, as from January onwards, I can see further steps in the right direction. More questions from the web?
No, no more questions on the web. Operator, please go ahead.
Okay, and the next question is from Nicklas Skogman from Handelsbanken Capital Markets. Please go ahead, Nicklas, your line is open.
Yes. Hi, a question on the insourcing and, and, so on. So given the bottlenecks you had, which you name as one of the reasons for the declining earnings in the quarter, is it fair to think that the, the insourcing did not contribute to any synergies, in, in the quarter, but rather you had extra costs, for this? And then the follow-up question on that is, it appears to me you're now investing in more, capacity. When do you expect to have that up and running, in 2019?
Yeah, let me start with the last one. I mean, there I'm also a little bit sensitive in discussing that so public over here, because we also constantly work with third party producers with flexible contracts, so if I now would announce exactly when we think we are coming online with that, even though I don't exactly know that, that would not be good for our negotiation position.
But you know, a further supply chain strategy update at calls like that, we will do in the Capital Markets Day in March, the 14th of March. And let's also again be clear, we're talking here only about the mold. It's the wine gum factories, right? We're not talking about jelly beans or chocolate or nougat products. So let's say the other 50% of the portfolio. Maybe, Frans, you can say something on the-
On the cost side.
On the cost side.
Yeah, I mean, on the cost side, I think it's important not to equate the increased cost with the insourcing.
No.
So obviously, as we've been insourcing, we have... It's a saving in that. We're able to, you know, generally speaking, manufacture basically this product at a lower cost than what we were buying them. However, you know, as we've also, you know, increased the utilization of the network, you know, we've also had to, in some cases, you know, bring in, you know, additional shifts. But that's not only related to the insourcing, that's also because of slightly different sort of mix of product that has come through the strong packaged product growth, and that has necessitated, you know, additional costs. So I wouldn't equate these two things.
Yeah. But there's no secret that if you look, if you would look at Nielsen, which is public information, you can see that also in the branded business, we have a lot of growth in the, well, call it the wine gum segment. So that's where we see the shares across markets going up really, quite, well, I won't say dramatic, because it's positive, but quite forcefully going up. So and that is, of course, volume, which is coming from the same, the same factories as where we do the investment for the drying capacity.
Okay, but do you see a need for additional shifts also in Q1, Q2, Q3 next year? Or is this completely difficult to forecast?
No, that's not so difficult to forecast. I mean, again, we make business decisions. Now, what is best, you know, what makes financially more sense to produce it ourselves with the extra own cost of the shifts? We want those shifts to be flexible, so we also can take them away versus sourcing or staying outside with more volume. And that can be then the CandyKing volume, that can also be the ex- Italian volumes, which we can take back in over a five-year period. So, on average, I would say, yeah, that it is something we will see in Q1 as well. But, you know, the...
It still is cheaper than the, than the alternative, to keep more of it outside. And in general, I would say, you know, it's sounds maybe strange, but it's a luxury problem, right? That your factories, where we can really produce, as much as we, as we want, and then we can further optimize, the running of those lines and take, not only then the less hours produced as an, as a variable benefit, but we can immediately fill it up with even more, volume to produce even, even more.
So, I've been all too often in situations that your factories, which are heavily underutilized, and here we have, three plants which are, which are fully, fully, fully utilized. But it's not that all of them are running at seven days a week, because we make the trade-off between benefit and cost quite consciously.
Do you see a need to invest in capacity for these product categories where you have had to bring in additional shifts?
I mean, I'm not going to spell out the shift patterns of all the factories. That's probably not the purpose of the call. But in the molding network, you would say, well, half the lines we have are running on seven days a week, and the other half on five days a week. You know, demand can fluctuate or the customers have late changes, and if we then have to react at maybe with three weeks' notice, we can't ask a third-party supplier to suddenly produce that, because, you know, they are also trying to plan their factories at a 100% level because their margins are so thin.
So then we have to indeed put extra cost on to produce extra shifts over a weekend, and those are expensive shifts. But hey, we also have a customer service reputation we want to hold up to, and it still makes sense to produce that business. And then, of course, we need to become better in planning, more collaborative forecasting with customers. But as I said, it's a better situation to be in than if you have ample capacity and you never have to add shifts, because then your fixed cost over the volume produced will be much higher than what we have right now.
But in the short term, I mean, it seems very clear it's hurting profits.
Yeah, as Frans explained, I mean, there's several aspects in the production cost, and some of them are of a nature which are one-offs, and some of them are of a nature of extra shift cost. Yeah, and they are temporary, but of course, if we get another level 400 tons of products because a customer really wants to do a big promotion with us, and we have the capacity with the machines, but not the people, and we have to ask people to work overtime or to do a number of months of extra shifts, we'll probably say yes to that. Because long term, that is value creation, even if there's then an impact on a quarter with higher cost. I mean, in the end of...
The business over here is being generated, of course, by consumers. And if those consumers are then being more able or more consumers are being able to buy Cloetta products, whatever, 30% less sugar or a Venco relaunch we're doing with TV and digital, which goes extremely well. In the long term, that generates value for Cloetta, because those people don't buy it only then in quarter four, 2018, but they will continue to buy those products going forward. So when we make those decisions, we take a longer term view than just the impact on that quarter. And that's what I stand for, and I think that for the shareholders as well, that's a better decision, given the long-term nature of the business.
Okay. Thank you very much.
There are currently no further questions registered on the telephone lines. So I'll hand the call back to you, speakers.
Thank you very much for listening and calling, and I would just like to remind all of you of our Capital Markets Day in Stockholm on March 14th. So thank you, and have a nice weekend.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.