My name is Nathalie Redmo, and I'm Head of Investor Relations. With me here today are Henri de Sauvage, CEO of Cloetta, and Frans Rydén, CFO. Henri and Frans will take you through our third quarter results, and we will then move on to a Q&A session. I will now hand over to you, Henri.
Very good. Thank you, Nathalie. Some key messages to start with for Q3. Very pleased and good to see that we are back to having growth in our branded business. A good quarter driven by both marketing investments, innovation, but also increased traffic in the non-food retail stores. A continued recovery for Pick & Mix, but consumer demand still very subdued, -30%. Of course, it was -60% in quarter two. Traffic is coming back, but still quite some work to be done in order to get that back to where we want it to be. Because of the COVID situation, we put in even stronger cost control, pulled a lot of things forward, and that has been able to give us some good savings. Part of that we have reinvested into marketing expenditure, and there's also a provision of incentives, which is positively contributing to the results.
Still a good, strong balance sheet, which also means that the board has decided to propose a dividend, which we'll have in an EGM in two weeks' time for approval. A lot of work went into maintaining the business continuity and supply, both the suppliers, our own factories, and of course, warehousing and distribution. No major disruptions due to COVID, and also our commerce units in all the countries have been able to keep on working to a large extent from home. Most of the offices are partly open for team meetings and plannings. We see still a continued volatility, in particular in the Pick & Mix area. Of course, while we're speaking, we can see the wave two, in particular in the Middle European countries, starting to have an impact, and that, of course, gives a certain uncertainty within our business.
In general, a continued recovery in a challenging environment. When we look at the sales results, as I said, total is down with 7%. Organic sales, quite different. Branded business, + 1.7%. I'll unpack that a little bit further. The Pick & Mix business, -31.4%. That's, of course, an enormous figure. Better than last quarter, but not where we want to be. You can see also the months that it is slowly getting better in September, but still very volatile between the months. If we look at the branded business, 2019 as a reference, 70% in food and 30% in other channels. Other channels is everything from kiosks to travel retail to do it yourself stores, et cetera. What we have been seeing in this quarter is that the demand in the food channel, including e-commerce, is still very high. Shoppers have returned gradually to other channels.
In particular during the summer months, we have seen an uplift over there, we still have this negative product mix that we see refreshment, that is chewing gum and pastilles still being lower than the candy bag business. Those products are predominantly sold in checkout areas in food, also, of course, very much an on-the-go product in the other channels. Actions we have taken is actually to continue with our strategy to strengthen the top 25 brand positions of Cloetta, adjusting the marketing and innovation programs, also a step up in e-commerce. Of course, that already was part of our strategy. We were just bolstering that also investing over there, continue with the journey of valorization, take pricing where possible, also look at value for money, given the economic uncertainty.
If we look at Pick & Mix, we try to make that even more transparent. There's basically three things which need to happen for Pick & Mix to really recover. The first one, of course, is that the channels are open, so that the stores are open, that the shelves are open for sale. We show you a bit in Q2, we had two markets where we still had problems, both in Denmark and in the U.K., and that has gradually improved. As you can see in Denmark now, most of the stores are open. There's still a few which we need to help to open again. In the U.K., however, we have been able to work together with our customers in food retail and high street to open up.
We still see the leisure channel, including the cinemas, very much not seeing the footfall and therefore together with them, we also decided not to open the Pick & Mix. That's quite an important market, still very much impacted by the closure of channels. That's step one. Step two is that, in Pick & Mix, our customers do, and we facilitate that they do a lot of price promotions. When it is the weekend, for example, they are giving a good deal to shoppers. As you can see, in most markets, we are still not seeing price promotions back. U.K., Finland, Denmark, and in Sweden, it's a bit of a mixed picture, but we cannot say that price promotions are back. In Norway, we did not have any price promotions from before.
Over there it is activations, and that is why it is in a green situation. That's the next step. Of course, the consumer demand is something we need to bring back. There is a number of consumers who are either spending less time in store, they're either spending less time in front of our fixture, or they're consumers who we have to bring back into Pick & Mix because they went over into packed business. That you can see is still very much something which is ongoing, which we've also communicated before, that it will take several quarters to bring this back. The good thing is that we're now in full-fledged rollout with the CandyKing 2.0 concept, which is more premium, but it also has a lot of hygiene cues in there which will help consumers to return to Pick & Mix.
That's basically what is happening in Pick & Mix. We can have a further look into the financials. Frans?
No, thank you, Henri. As usual, I'll start with net sales. In the quarter, our business continued to recover from the impact of COVID-19, as Henri said, with organic growth now down at least it's single-digit compared to last year, while of course year-to-date with a very soft Q2, it is remaining down double-digits. The improvement in Q3 was both on the branded package business and in pick & mix, with the branded package business growing 1.7% over last year, despite the still very weak travel retail and the lower consumer footfall in the out-of-home channels. For Pick & Mix, while this is down, of course, 31%, at least when we compare to Q2, if you remember, we started out with roughly down 70% in April and then gradually improved then. It is a step forward.
Nonetheless, if we look at branded and Pick & Mix on an over and under, so the gradual recovery is evident on the right, but also that Pick & Mix in the quarter, and if you look at the pie chart at the bottom left, now represents 20% of our sales, up from 15% in Q2, although this is still short of the 30% of sales it represented last year. We have previously shared that within the branded side of the business, we have a challenging mix on account of lower sales in the refreshment category, including due to less sales in out of home, but also less sales in the checkouts when people are socially distancing.
With Pick & Mix decline compared to last year on half of what we saw in quarter two, we naturally will see an impact on the gross margins quarter-to-quarter, and I will come back to that a little bit later on. Starting then with operating profit, adjusted here, we are making the drivers for the variance to prior year visible. I follow this up with more details specifically on the selling and the general and admin. Overall, for the quarter, operating profit adjusted totaled SEK 130 million, for a margin of 8.8% of sales. That is a significant reduction versus last year. Half of this reduction of SEK 70 million is due to the phasing of costs from quarter two, as we previously have shared.
Together with this profit loss due to the lower volumes also in the quarter, that accounts for this full SEK 100 million. Against this volume-driven impact, we do have a partial offset, which is in the middle column, and that consists of lower SG&A on account of the strong cost control, and also the release of accruals relating to performance incentive programs. Then part of all of this has been reinvested into higher A&P than last year, as mentioned by Henri previously. Before we look on those indirects, I want to clarify the gross margin. The Q3 gross margin compared to last year needs to be understood by keeping three things in mind. Firstly, I think we were quite transparent about this in quarter two, there's a phasing of certain costs into this quarter.
Obviously in Q3, we see those SEK 35 million in cost hitting the gross margin. Secondly, at the start of Q3, basically in July, we have executed a number of planned production shuts. We've mentioned that also in the past. Here you have to remember that we built up inventory at the end of Q1 to protect the business if we would have had to shut plants or had major disruption of raw and packaging material supply on account of COVID-19. Now, of course, with better visibility, we were able to start to bring those inventories down. This has been good for freeing up working capital, and I'll come back to that later, but also reducing the risk of write-offs. It did mean much higher manufacturing cost per kilo of the products we produced during that period, and this has also affected the quarter.
Thirdly, we do have items affecting comparability relating to the Helsingborg plant closure in quarter three. The good thing is, on that closure, we've actually now found a way of accelerating the closure somewhat. It should be coming in closer towards the year-end than what we had originally anticipated. This is clearly a one-off drop in gross margin, these three drivers. As you've heard, we have chosen to reiterate the outlook that we will return to double-digit operating profit margin by end of the year. Given that our SG&A normally ranges between, let's say 24%-26%, that obviously means that we're saying that gross margins will get back to at least 34%-36%.
These three drivers explain most of the change in gross margin, not only versus last year, but also between what you saw in quarter two this year and quarter three. There's one other factor that plays into that comparison between quarters, and that is the mix that I mentioned earlier. In both quarters, we have a favorable mix versus last year, obviously on account of the higher share of sales coming from packaged products. The favorability in Q3, it's much less pronounced than it was in Q2, given the recovery of Pick & Mix. With that, let me detail out a little bit more on the sales general and admin that offsets the volume impact. In this quarter, we have continued to accelerate actions within our VIP+ program and how to get what we call more bang for our buck.
Previously in the quarter, we did communicate on the closure of the Helsingborg plant, although that sits in gross margins, savings around SEK 10 million per year. We have also now taken other VIP+ actions, that is we have executed a change in the Swedish organization, which will improve the ways of working in the business and also deliver savings. These savings will be somewhat higher than the savings that we will deliver through the Helsingborg plant closure. In the quarter, excluding items affecting comparability in Forex, which you can see here roughly offsets each other, the indirects was down SEK 48 million compared to prior year. Within that, we released accruals for performance incentive programs totaling SEK 45 million, that's a year-to-date number. We also stepped up our A&P investment.
The reason that you don't see that in the profit and loss here is because we were able to fully offset those investments, as well as annual merit increase for our employees since last year through the continued VIP+ savings. In quarter two, I had mentioned that out of the reduced indirect costs, about half related to savings, some sustainable and some one-off, a quarter related to lower merchandising costs, and a quarter related to lower marketing spend. Year-to-date quarter three, the proportion has changed to excluding the incentive program release, VIP+ savings now account for almost three-quarters of the reduction that we have, and merchandising cost for a bit over a quarter because marketing spend is now close to what we had last year, despite the volume reduction as we are protecting our brand equity.
Moving on to cash, as you know, as a company, we tend to generate most of the cash in the second half of the year, and Q3 is from that point of view, not an exception. We did deliver very strong on the working capital this quarter, as you see in the second column from the left. SEK 151 million was freed up, which is SEK 145 million better than last year. With CapEx investment similar between the two years, our Q3 free cash flow of SEK 252 million, as you see in the middle of the top waterfall graph, is SEK 53 million better than last year, and this is despite the lower operating profits. In summary, we had a very strong quarter on cash. You should also note that year-to-date, our working capital is significantly better than year-to-date Q3 last year.
It's not just for the quarter, it is also an overall improvement. Looking a little bit closer to the working capital. Obviously, on inventories, we had shared in Q2 that we would bring them down in Q3, and which we have done. We reduced inventories to below SEK 1 billion, which is lower than we were at quarter one end, and certainly lower than we were at quarter two end. We have also improved the days inventory on hand from 108 days down to 93. It does remain higher than last year, and we will continue to manage this in a careful way. We will build appropriate stock for seasonal products such as Christmas, and we're going to safeguard our ability to bounce back as societies opens up again.
We're also going to make sure we can safeguard production and keep an eye on the cash. That's the balance we're taking. Payables also increased versus quarter two, but that's of course because production has been ramping up again towards the end of the quarter. Receivables also increased because sales also ramped up towards the end of the quarter. Both remained below last year, both in value and in terms of days. The next piece here, also on the CapEx. Despite the travel restrictions we've had and other challenges with COVID-19, we have actually proceeded quite well with our CapEx projects, in total executing to a value of SEK 61 million in the quarter, which is actually higher than last year.
As I mentioned in quarter two, we expect that this year's spend will be higher than last year-to-date spend is actually already higher than last year, that's good progress. Assuming we can continue as per current thinking to get things done, which of course costs money, spend will probably land around 5% for this year. Moving on to my last slide. As you know, leverage is one of our key financial targets next to sales and EBIT and dividend. Here I'm trying to capture that in our debt position. First you can see top left, our total utilized credit facilities and commercial papers of SEK 2.4 billion. To the right, we're holding SEK 330 million in cash, including for the upcoming dividend payment.
We have access to another SEK 1.3 billion in additional unutilized facilities, as well as SEK 750 million in commercial papers that are not yet on the market. Hence our conclusion that our financial position is strong. Now, our financial strength is also reflected in the leverage, where the year-end target is to be around or below 2.5x EBITDA. We have stayed below that at prior year ends, but normally of course, we exceed it in quarter two, which is the quarter when we pay out our dividend. Now with the dividend payment in quarter four instead, we expect to end this year higher than normal for the year-end, but not to stray too far from the targets or too far from around 2.5. That concludes my part of this presentation, and I hand back to you, Henri.
Thank you, Frans. A few words on what we're doing going forward. We have already at the outset of Q3 looked at our strategic priorities and adjusted where needed. I mean, the overall picture remains very much the same. It's to keep on focusing on the organic growth of the branded business, really important, above average profitability. It is of course to restore the profitability in the Pick & Mix business by sustainable value growth. Of course, number three, as you can see, is focusing on cost and efficiency. On the branded business, I think the things we are doing are very much in line with I've told you already before. Maybe one thing is to bring sustainability into our brands.
It's something which we will probably talk about in the coming months in a little bit more specific way, and to increase the A&P investment into our main brand positions to make them really competitive and to be able to keep on growing our business in the brands in a profitable way. On the Pick & Mix, of course, that's where we have the biggest impact. As you are aware, that's also where we did the biggest changes. It's good to see that the repositioning of CandyKing to a more premium concept is in a rollout phase. We're doing that, for example, in Sweden with all the previous Karamellkungen stores and also improving the assortment, but also very much improving the price towards the customer and the customer towards the consumer. It is of course rebuilding the profitability through scale after the volume drop.
That is of course an issue we are managing. The fact that we're raising prices, of course, is good for the kilo price, but if then the merchandising cost per kilo are going up because we lose so much of the scale, then a lot is being eaten up by that. We need to bring in back the scale because the cost and the savings in merchandising are not linear with the, how do you call it, with the volume drop. We're working still on the price increases that's happening basically month after month in the different markets. I cannot tell you exactly what we are planning, but there are further plans to work on pricing to bring profitability into the Pick & Mix business. Then we are looking at really building a brand around CandyKing.
There are certain activation programs on a small scale from a cost perspective. You can see that, for example, in the Swedish market already from two weeks ago. Number three, I think Frans already talked about the reorganization in Sweden to take resources out and make savings. It's the savings for the nut manufacturing in Helsingborg. It's in a lot of initiatives, both for sustainable cost savings plans we already have, we're executing being faster, and then the last point on the working capital management. A few highlights on the marketing agenda. I mean, we are going into adjacent categories. Here you see a brand which is in count lines, Plopp in Sweden, going also in chocolate tablets, quite important and I think also making use of the Ahlgrens Bilar brands to give us a USP over the existing other brands in this market.
It's also very much trying to strengthen the top brands we have in Cloetta. You can see an example in the bottom is Familie Guf, which is a Danish brand to bring that under Gott & Blandat. When we go and advertise Gott & Blandat towards the consumers, and we also increase the franchise in the same way, a relaunch we do in Finland on the top. Of course looking at value, how can we price up? How can we premiumize? Bring more value to our products is two Finnish examples, but they could as well have been in the Netherlands. How can we create an extra price platform on top of the existing ranges in order to basically get more euros per kilo by premiumization?
Yeah, the purpose of the Power of True Joy, really bringing that and bring that alive also in our brands and the decisions we take is something we are working on throughout the company. Given the time, we will not go into that right now. It will be something which we'll be communicating on a separate notice towards our shareholders and analysts. I think it's an important program also from stakeholder management, both internally but also our customers want to cooperate with this, and that's also very much in that light, a business opportunity. We decided also to join the Science Based Targets initiative, which is quite important on the climate action elements in this program. Yeah, Q4, key expected impacts on the branded sales. We think we will be around last year's level.
Of course, very much focusing to keep the momentum we have and also for the mix to gradually improve with chewing gum and pastille slowly coming back at Pick & Mix. Yeah, on Pick & Mix, we are planning to gradually improve a further step, but it will take several quarters before the full consumer demand comes back. The first thing now is to get promotions back into place and to work with the CandyKing 2.0 rollouts to bring all consumers back into this business. The operating profit adjusted, we expect that to be gradually stronger and ending the year on double-digit margins in a way to get back to the journey we are on. With having that said, I think we open up for questions.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad. It is zero and one on your telephone keypad. If you feel that your question already had been answered, you can press zero two to remove yourself from the Q&A session. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad. First question from Mikael Löfdahl from Carnegie . Please go ahead.
Yes. Hi. Maybe I'm a bit slow here, but when you went through the EBIT bridge or the adjusted EBIT bridge and also spoke about the gross profit and the gross margin impact, I'm a bit curious. First of all, on the SG&A bridge to start with, when you speak about this release of accruals or this incentive programs, this is a big number, SEK 45 million, and you report that in this quarter, and I understand that this should probably have been then lower amounts provisioned in Q1 and Q2, obviously, and now you release that. Isn't the full impact of the SEK 45 million included in the adjusted EBIT for the quarter? If so, if you extract that, when you look at the net cost reductions of SEK 48 million, that makes it only SEK 3 million then on a year-on-year basis, or am I wrong here?
Thanks, Mikael, for asking the clarifying question. The first piece is that, yes, you're correct. This is a year-to-date number. Generally speaking, if we go back a couple of years, given our business and let's say the still fairly limited span of growth rates we have, it's normally only around quarter three that we have felt that we have sufficient visibility on where we're going to land, that we would start either to provide more or to release. This year, with even, let's say, starker fluctuations up and down, that has not been different. It is in Q3 that we have felt that we had enough visibility to make the decision. That's one thing. It is a year-to-date number.
The other aspect of this is that, remember when we report SG&A here, it's not only the indirects in the sense of people cost and non-people cost, it's also the marketing spend, so the advertisement and promotions. The way you should think about this, that 48, yes, 45 there is the release, then you would have expected to have an increase versus last year on account of merit, and you should have expected to see a pretty big step up in cost on account of the increased A&P investment. The reason that you don't see an increase there is because we're offsetting all of that with various VIP+ savings.
Okay.
Did that answer the question? Yeah
Yeah. I guess it does. When you look at the Q1 and Q2 numbers, I guess A&P was significantly lower in those quarters then because you don't have the same kind of mitigation factor from A&P increases in those quarters.
Yes. What I meant was that when we are at Q3 year to date, we are roughly in line with what we spent Q3 year to date last year on A&P, because we have stepped it up in quarter three, even versus last year. You remember that was also a bit of a step up with Läkerol, et cetera. Whereas in Q2, earlier we held back a bit given the fact that the volatility we had in the market, we pulled back on outdoor advertisement, and we redirected some of that spend. Yeah. If you imagine if there was one more column here that just talked about marketing, then on the third quarter you would see a big red, as a result, we would show the 48 would have been a higher number to get back to the same place.
Whereas on the nine-month basis, the marketing one would be fairly small, that box, and the cost reduction would as a result look fairly similar to what you see here.
Okay. On a year-on-year basis in Q3, the marketing spend is basically not-
Higher.
...or?
No, it stepped up. On quarter, it stepped up.
Yeah.
Higher. Year to date, it's roughly in line with last year.
Yeah. Okay. It's a third quarter thing. Okay. As we move into the fourth quarter now, obviously A&P will remain at roughly the same level, I would assume. You don't have the positives from these release of your accruals. Still you're guiding for an adjusted EBIT margin of above 10%. How is that achievable? I know that you also spoke about the gross margin coming up so significantly. Could you specify that a bit more then? I guess it's on the gross profit side, how should that or how will that be able to rise so much from one quarter to another?
Okay. No, great. Yeah. I think the easiest one, which is very transparent, that is also, of course, the exceptionals with the closure of the Helsingborg plant, where the exceptional is slightly higher than what we originally thought, but that's also because we've moved the closure a little bit. It's happening a little bit earlier than what we originally envisaged. Obviously, we're not closing the plant one more time in Q4. There, already you have it, that's an impact. Beyond that, in simplified terms, one could say that this quarter is helped on the bottom line by the, let's say, one-timer of releasing these performance incentive provisions. We are hurt by arguably a one-timer hit in the gross margin on account of the lower volumes, which has then two aspects.
One is the lower volumes and the impact that was carried in from Q2, and two, the lower volumes in July, where that impact stays within the quarter because it happened so early. In a way, you could imagine that in Q2, our worst month in terms of production was at the end of the quarter, whereas in Q3, our worst month in terms of production was at the beginning of the quarter. Therefore, we take a big hit there. We have also used some of those plant closures to ramp up on the maintenance, get even more focus on Perfect Factory program, which of course will deliver some good numbers going forward. As a result, costs are quite high at the beginning of the quarter against very low volumes.
In a way, you could think of that as more or less a one-off drop on the gross margin, and we have a one-off gain on the indirects. I think still our reported numbers are probably quite representative to what the numbers should be.
Okay. Another question on the Cloetta guidance on the packaged sales for Q4 being, as you say, probably unchanged year-over-year for Q4. Does that mean that you still expect the positive impact from higher retail sales to be fully mitigated then by reduced sales in other sales channels? Or is it something else there? You are at the same time speaking about more normalization and so on, which the net impact should or could even be positive for the packaged side, which you saw in this quarter growing, actually, on a year-over-year basis. Now you're saying that it's expected to be unchanged. What is behind that guidance?
Here, you must excuse, but when we say around last year's level, I would say, if you're a percent up or down, that's still around last year's level. It's not a major deviation from what we're seeing here. Obviously, a couple of things you have to think about there is that when consumers exit, when they choose not to buy Pick & Mix, obviously, and they walk over to the packaged products, we have many more competitors there. If they move back into Pick & Mix, we will lose some of that, but our competitors will also lose some of that. That's between, let's say, these two aspects of the business. Also within the branded business, while probably recovering the travel retail is still some way off.
As society hopefully opens up again, and we're not going to have a very strong second wave, then you also have more footfall in out-of-home channels, where we are arguably quite strong. Overall, what we're saying is that, we had some nice numbers on the branded business growth in Q3, and we're sort of reaffirming that we will also in Q4 be around where we were last year.
Okay. Just to remind me, last year, Q3 and Q4, in terms of marketing, you had this very big Läkerol campaign. Did that impact both Q3 and Q4, the marketing spend? That's one thing. I guess the top line effect was probably in Q4 last year from that campaign.
Yeah, it did impact. The spend was in both quarters. You would see, let's say, an effect on the top line in both quarters as well. Of course, the tricky part is that there's a difference between the timing when the consumer buys the product versus when we sell it to the retail as well, in anticipation of the uptick when we advertise.
Just to reiterate on that one, of course, we made a strategic plan to get organic growth on the brands, start with getting the organic growth on our top brand position, so that is brands per country. Let's say Gott & Blandat in Sweden. We looked at the competitive situation of all those brands. The first step we did was we were bringing down the non-working media to below 40%, ultimately below 30%, so to utilize the money we already have in A&P more efficiently. That journey is still continuing, we're coming towards the 65% level. We said, "Okay, when we have done that, the next step will be to also bring up the absolute amount of A&P spend." That you could see now in quarter three, and that is not something which will go away.
We will be spending more also in absolute money on A&P to strengthen those brands, in particular, those brands in those countries where we have not had any spend or far too little versus competition, because that is a necessary investment we need to make in order to keep the organic growth going year after year.
Okay. Thank you.
Thank you. Next question from Nicklas Skogman from Handelsbanken. Please go ahead.
Yes, hello. The first question is on Pick & Mix. Q3 was obviously better than Q2, but the sales progression throughout Q3, unfortunately, does not actually sort of support the gradual recovery that you guide for, if you will, for Q4. My question is, are you seeing improvements now in October, or are we looking at easier comps, or what makes you sort of make that statement that you expect a gradual recovery in Q4?
Yeah, it's a little bit back to the chart about the three different parameters. The Pick & Mix business, it is still very volatile, you can see that from the month-to-month figures. Why are we saying there's a gradual recovery? Because first, we work very much on getting the basics back. Yeah. The basics are that we get our fixtures open in all the countries, in all the retailers. We've made good progress on that. Yeah. The second thing is that we are seeing that some retailers are now contacting us, say, "Okay, we want to start doing promotions." Yeah. Promotions have a big impact. In some countries, more than 40% of the volume are being sold in promotions. Having a promotion or not having a promotion, also gives huge swings, you could say, between months.
You need to think that is in the comparator of last year. Particular Halloween is an important month. We see the basics improving on both opening of all the fixtures, and that in some countries we also see retailers starting to look at promotions again, but again, not everywhere. The third one is those consumers who have left Pick & Mix or have reduced consumption in Pick & Mix, those need to be regained. We see good first responses of the CandyKing 2.0 implementation in the markets where we're implementing. I think all in all, we can say, we look with confidence that things are improving, but of course, it is still very volatile in that sense.
Okay, perfect. I'm trying to sort of put together your various pieces of guidance here. Starting out with the double-digit margins for Q4 EBIT, which I take it as it means. Then you've guided for flat-ish packaged sales and gradual recovery, so in Pick & Mix, so we're not going to be -30%, at least. I think you also said that SG&A costs to sales would be to the tune of 24%-26%, right?
Yeah. No, actually, on that one, I just want to say, without saying if that's correct or not, just want to say that my comment was that if you look historically, if you take, let's say, 2019, that is normally the range that we are between, sort of 24%-26%. It's more to-
Okay.
Just sharing what you already have. Give some confidence why, what it actually means to say double-digit margin or what it should mean for the gross margin.
Okay. Yeah. Let's say I put in 25.4% in SG&A sales. We're then looking at the gross margin year-on-year deterioration of roughly two percentage points, or am I sort of ballpark right there? Q4 gross margin.
We're not giving a guidance for Q4 on gross margin, but rather we've given a guidance to say that we should get back to double-digit EBIT by the end of the year. If you use your assumption that, if that is evenly spread across Q4 and we have normal indirect, including then the marketing spend, that should mean that we have to get to at least 34%-36%. That's as far as I would give guidance.
Yep. That's very good. Where do you think your inventory will be at the end of this year in terms of millions?
Yeah. Now we brought it down to SEK 986 million or something. We're below SEK 1 billion and it's of course a big reduction. It's less than what we had last quarter and quarter one. What we're trying to balance here is, on the one hand, we want to be lean on inventories. On the other hand, already last year before COVID, we said that we need to increase our inventories to improve our service levels. That remains a priority for us as well, to make sure that our customers can sell when there is a demand from the consumer. With the uncertainty, and what we're seeing now that there's further action taken by governments relating to COVID, we also have to protect the supply that we have.
I think that the intention is, of course, to make sure that we position ourselves at the right place on the inventories.
Ballpark, it will be the same as last year.
Yeah. Ballpark, I would say will be the same as we're now.
Yes.
Yeah.
Okay, good. Very good. Finally then, if I'm allowed to ask, can you give me the breakdown of your inventory in terms of raw materials, work in progress versus finished goods in Q3 and then in Q3 last year, would be great.
Yeah. No.
I don't think we have that here with us.
I don't have it top of mind.
Just maybe make this happen. What did we do? At the beginning of the year, we already increased some of the production because we could see that we had the space in our factories to pre-produce certain items which we were then going to sell later on, and that we would later on then go do some more insourcing, so to get to fully occupied factories. Which is extremely important for the fixed cost coverage. Then we got into COVID. We built up stock, both of raw material, intermediate, and on the most important SKUs. Then, of course, we saw in COVID that we were not selling so much Pick & Mix, and we were not selling so much on out of home. We stopped the production in Q2 on basically those two items, and we were still getting in stock from third party providers.
That's why we ended up with a relatively high stock levels at the end of Q2. Which, of course, given the COVID situation and the cash generation being important, we said, "Okay, we're going to address this." How do we address that? By reducing the factory's output and also doing it very much in the summer period, which I think was cost-wise the most beneficial way to do it, because we could ask people to take holidays. In other years, we ask them to stay so we keep our most important lines running, but we reduced output a lot in July and August. Of course, there are other things we could or we had to do in that time, and that's why there is quite some supply cost impact in both from Q2 products already into Q3, and then the Q3 effects, which Frans explained.
I think that was a good decision, even though it had an impact now on gross margin, because we've really reduced our stock levels to the level where we want it to be, but also to the products where we want that stock to be. You can see that from the work in progress and the cash flow statement. That is something which happened in Q3. Now the factories are, let's say, back to where they should be producing for the demand, which we're also selling. We're looking at further insourcing. We don't talk about that so much, but that's of course still a very nice thing to have, that we can bring in products from the outside to make up for the other - 30% or wherever it will land of the Pick & Mix business.
That we don't sit with fixed costs which have nothing to do. We can just bring in volumes, then on top of that, we have the growth projections for the branded business. That's a continuing journey. The only thing is, it takes a bit of time. We cannot respond within a month or within a quarter because a lot of these things have to be pre-planned. We need to cancel contracts with third party to bring it in. We need to test those products and see that we can produce the same quality or the same taste, I would say, as what we bring in. There's travel restrictions. If it is in Slovakia, it's difficult to travel there, it takes time to adjust. We have that possibility, which I think is a very nice cushion to have.
Yeah. My question was more focused on if I know what proportion is finished goods of your inventory, I can calculate how much you can produce without the finished goods inventory stacking up, but maybe we can take those numbers at a later stage. You mentioned something very interesting there, the insourcing of volumes. Can you just maybe talk a bit more about how you're viewing this?
How we're doing that, because we have an installed capacity, mainly in molding. Wine gums, et cetera, Gott & Blandat . We want to occupy that installed capacity as financially interesting as we can make it. That's a little bit different by plant. Some plants, it is like in Slovakia, it's very attractive to produce seven days a week. In other plants, it's better to work five days a week, 24/7, and then some extra shifts in the weekend if needed. That means that if we now have a lower demand on Pick & Mix items, like you see as a - 30%, we can bring in more production from the outside, so from third party producers to compensate for that, so that our factories over a time span, let's say, of 12 months, are not going to stand idle because we have less production.
That should bring us back to the fixed cost coverage and the scale benefits, which are going to help us in the gross margin journey we've been talking about so much today.
Okay. Over what timeframe do you see this happening? Let's say by the end of this quarter, you're confident on the volumes and where they will develop. Is it a quarter or is it half a year or?
No, it's more half a year because as I said, it depends very much. We need to cancel some of these contracts with third party or reduce them. We need to match these products. If they have been always produced by third party and now we have to produce them, we need to do tests on those lines, get consumers to taste those products. This is not something you can put on and off within a month or even within a quarter.
It also depends, and that's maybe the last thing, it also depends on the outlook we have and with Pick & Mix in particular, for it to be so volatile, it's all the time a balance between putting a lot of more volume in, but then running the risk that we are not going to be able to produce everything, and then we have supply chain or customer service issues with the customer. It's that balance we need to strike right. Of course, if the demand is becoming less volatile, we can then have a better utilization of the factories. The more uncertainty there is in the demand, the more you need to be able to react within your supply chain network on that volatility. That's going to gradually improve as well.
Okay. Very good. My final question is, I noticed an Amazon logo in your presentation next to e-commerce.
Very good.
Interpret that as you are about to launch direct selling on the Amazon Swedish website?
It's of course one of the players. We're working both with all the existing omni-channel, as we call them, the ICAs or the Albert Heijn of this world. We're also working together with the pure players in this world, in Sweden is MatHem, it is also the Amazon of this world. Already we are working with Amazon in the U.K., in Germany, that's of course something we now want to roll out across all the countries. We just got the listings in Australia for The Jelly Bean Factory with the two main retailers over there. It also makes a lot of sense if you have 80% distribution in the physical stores to also be available on Amazon in Australia. Yes, it is a signal, of course, that we take this serious. It's an important trend.
It's one of the key elements of our strategy to get branded growth. That's the beauty of Cloetta. We can do these sort of things across markets and work then in a central way with the likes of Amazon.
All right. Thank you very much.
Good. Thank you. Should we look at the questions which were written?
We don't have any more question by phone. Ladies and gentlemen, if you wish to ask a new question, please press zero one on your telephone keypad.
There are two questions which have been sent. One is from Franz Junger. It's a question about rumors of Orkla. I think the people to ask that are the people at Orkla, not at Cloetta. I don't know more than what we read in the newspapers. There is a question from Stefan from Nordea. I think we have answered most of that, but on Pick & Mix, larger contracts are up for renegotiations, and if you lost contracts due to price increase. If I answer that, we are raising prices in Sweden on an individual store by store that is going on. We've lost some contracts, but not more than what we already thought. We won a big contract and implemented that in Finland this year.
That's fully operational and there is another contract coming up for negotiation towards the end of this year in another market. It's a bit of nature of Pick & Mix, but so far, so good. If you say you lose a contract, I would rather say we walk away from certain contracts because we are not in the business to sell with a loss. We're in the business to make money on Pick & Mix. So if the customers want to only look at the P of price, then we walk away from that contract.
Okay. I'll take the last.
Yeah.
Stefan, the other question you had here was around the items affecting comparability on the SEK 19 million and whether that sits in gross profit or in the SG&A. The answer is, actually it's both because there's two SEK 19 millions, and I appreciate that gets a bit not absolutely clear. Let me just say it again. The first SEK 19 million that sits in gross profit is related to the closure of Helsingborg, where we previously said it was going to be around SEK 15, and that we're going to have a closure during 2021. It's now SEK 19 because we brought it forward, so it comes earlier than originally anticipated. There are certain costs that we then have to take as exceptionals. For example, ramps that will no longer be utilized. That's the first SEK 19.
It will deliver about SEK 10 million on an annualized basis in savings. The other SEK 19 million relates to the reorganization in the Swedish business, which both will improve ways of working and help the business, but is also delivering savings. That's also SEK 19 million coincidentally. That will deliver savings, which is actually higher on an annualized basis than the Helsingborg plant closure. Slightly higher, I would say.
Good. Any more questions? Good. Well, I thank you all for being here today, and we go on and try to sell more for a higher price.
Yes.
Thank you very much.
Thank you. Bye-bye.