Good morning, and thank you for joining us on the Q2 Conference Call for Cloetta. 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 second quarter results, and we will then move on to a Q&A session, and I will now hand over to Henri.
Very good, thank you, Nathalie. A few key messages for the quarter. We see a continued negative impact of the COVID-19 on the business, and we'll unwrap that in a number of areas because it varies quite a lot. Good to see also that we saw improved sales, particularly in the branded business during the second half of the quarter. So that's also showing that the momentum over there is coming back. We can see that the branded food retail sales are up, but that the pick-and-mix and also the non-food retail channels are still down in the quarter. But with the easing of restrictions also over there, we see momentum coming back. EBIT is impacted partly by mitigation of phasing of supply chain cost to Q3. We tried to be as transparent as possible over there. Frans will come back on the particular effects over there.
We've had a lot of cost focus. Very happy that we had the VIP Plus program in place to drive cost out of the business because with the transparency we have over there, we could really rally up. So there we have taken big steps forward, and we have used part of that money to invest in A&P. And I would also say that we have created a solid financial position on the debt side, and Frans will go into that a bit more as well. So we're well positioned for gradual recovery.
An agenda: we'll take you through the sales results, a bit of an update on the COVID-19, then we'll dive into the financials of the quarter, and then a bit of an update on the strategic agenda because we don't forget about the strategic agenda we are on, and that we're making progress over there as well. So let's look at the sales results. Tried to make it as simple and clear for you as possible. So we've broken down the sales of the total quarter, the -21.2%, a difficult figure to get used to, and I'm certainly not getting used to it that we're not battling to get rid of it, but we're splitting that in the months. But probably even more interesting is to look at the sales figures for branded and pick-and-mix separately.
And if you look at the branded, you can see that April and May were still negative, and also the May figure is a bit more negative than April, and that is some phasing of promotions. There's also some innovations we had last year, but also a few big price increases we did on the 1st of May, which led then some retailers to buy in advance. Most important over there, I would say, is the momentum coming back in June on the branded business. And of course, that's an important step for total Cloetta to get back on the growth trajectory with the branded business, and that has all our focus and attention. Also in pick-and-mix, you can see it going from very bad to bad, you would say, from - 70 to - 40, mainly driven by retailers opening up fixtures again.
I'll go into a little bit more detail later on. Yeah, if you look then at the historic progression, of course, you can see that we now have two quarters with a broken track record of growth in branded, and as I said, we'll try to get as quickly back as possible. Another noticeable thing over here is that you can see now that branded is 85% of sales in quarter two. That's a lot more than, of course, when we talked about this last year, and of course, that is the decline of pick-and-mix, which is shifting that, and that will come back in the mix, of course.
If we go to the next slide, then we go a little bit further into COVID, and the first thing is that we really are also trying not to forget our employees who have been battling through these difficult times in various roles across the company. We sent them a token of appreciation last week and this week, and, happy to say, that both in factories, with all the distancing rules and keeping shifts separate, people coming back from absenteeism with maybe kids not being able to go to school, all the way down into sales reps and merchandisers working for us in store, having everyday questions from customers and consumers.
Let's also not forget the whole working from home situation where I must say I'm very impressed with how our employees have been able to not only focus on the COVID actions, but also to keep our strategic agenda going in virtual teams, not only within the country, but also across country. I think that's, yeah, it's a good sign of the stuff we already had put in place with less travel, more video conferencing, using Teams, etc., and that people were already used to that and kept the agenda going. Yeah, we have those four blocks, the four lenses to look into it. If we look at consumers first, we still have the split of last year, food and other channels. Other channels is where a lot has been closed, and in the food, we can actually see, of course, growth.
But to stipulate it out a little bit further, we said, "Okay, well, within food, we actually see also quite a big difference." That you can see there on the bottom, that in candy bags, we've been seeing growth levels of up to 39% in the Nordic countries. And these are category growth levels. It's not Cloetta, but it's the market growth, but then you can get a feeling for how that looks. Whereas on pastilles and gum, which is mostly sold in the checkout in those areas, you see a decline of 7%.
As an important other fact is that at the 39% growth, we were able to deliver without going out of stock due to the actions we had taken in February and early March to secure raw materials and packaging materials from areas which were at risk, and also the fact that we had built up stock of some of the big A-SKUs, as we call them, so that we were able to deliver also and get that growth into our P&L. Yeah, we also see shoppers gradually returning to, let's say, the 30% other channels, and particularly in the Nordics, that is now all open. Then I'm talking from the Clas Ohlson to the Tigers to the Normal in Denmark. U.K. and Germany are a little bit more behind, particularly in the U.K. The restrictions have been longer in place also over there.
We now can see those channels opening up, and for our U.K. business, it's quite important because we relatively sell a lot over there versus the normal retail channel for the branded business I'm now talking about, and we can also see that we win, we gain, we also gain shares there where we are strong, where our brands are strong, and there where we are a number two or a number three. We see that then the number one brand in that geography is gaining shares, so it only underlies how important it is to improve the strength of our brands, and that also means that we continue to invest in our brands, but of course, given the new consumer behavior, we've also changed the media channels quite dramatically over the last quarter.
Yeah, if we go to then pick-and-mix, we try to visualize a bit what is the status in each of the countries. So in Sweden, all the sales channels are open, but the consumer demand is at a much lower level than where we would like it to be. That's double-digit lower than last year. In Norway, all the channels are open, and the consumer demand over there is more or less back at last year's level, and at least in the customer where the customers we are serving, and that's also partly due to the great entrepreneurial work from our Norwegian team, which are trying out a lot of things together with our customers and good lessons we can then take and copy and put in place into the other markets. In Denmark, we have had some customers who have now opened.
It's very positive towards the end of the quarter. There's one big customer who we have worked together with to also prove that it is in the consumer's, yeah, wish list to get pick-and-mix open, and they will open in August. So that effect we will start to see in Q3, and that's maybe also a theme we could actually discuss all markets, that customers were there where they had closed down. They were in the beginning, but okay, what is the right moment to open up?
And great credit to the pick-and-mix teams in the countries and our small central team that we have been able to do a lot of consumer research, also do some test stores in some of the countries where we then opened 20 stores and saw that consumers really appreciated the fact that the stores were open or the shelves were open again, and then to facilitate the decision to open all stores in that retail chain. In Finland, all stores are open again, but it's a bit like in Sweden. We also see that consumer demand is at a lower level, also because there are no promotions in Finland. In Finland, we also have rolled out the concept in Lidl, and that was also done on time and within budget.
And the U.K., as I said, very important moves made in the end of the quarter in June with two big customers, really big customers doing tests and then being positively surprised by the consumer reaction and deciding then to open up all stores. So that's in progress. So that's an important one because it's, of course, important that we get the volume back into the U.K. business. Some other smaller channels like the cinema channel are still saying, "Okay, we will start with pick-and-mix after the summer." They are opening during July, but you can imagine July is probably not the biggest month for cinema visits, so they will start with pick-and-mix August, September, but that's a good commitment to have.
Other things which are worthwhile to mention on the actions we've been taking is, of course, the work we do on the repositioning of the Candy King brand. I'll come back to that a bit later, but to get more premium pricing, and that's also important. We just increased prices like in Sweden on the 1st of May. In Norway, there's a price increase which was in effect in July that we also get paid for the product so that we can start to make some money on this. Of course, we have been working a lot with merchandising cost reductions using some of the government's teams on permittering or in other countries, reducing the number of hours people are working.
So, bringing people from 40 hours a week to 20 hours a week so that we keep the people employed and have now the ability to go up again. Now that everything is opening up, it still had good cost impact during the quarter. Yeah, I already mentioned a bit on the employees. I'll not go into this one, but very good behavior, very good progress that people are able to work in this new environment in a good way and just keep our strategic agenda rolling. Yeah, supply chain also still on a very good track. We have had no closures of plants due to COVID-19, no outbreaks of COVID-19 in any of the plants. Also the absenteeism, which we mentioned last time because schools were closing down, that is back to normal level.
Of course, due to the lower sales, we have high stock levels of pick-and-mix items, particularly of those markets which were completely closed down, and also some specific out-of-home products, and we'll come back to that several times during the presentation, but of course, that is something very important, and that's also why we take action now during the summer to most efficiently close down lines or factories so that people take their holiday days, which are already paid for, you could say, and that we then reduce output and sell that stock in the market, and I would say the Capex and Perfect Factory, I mean, the Capex, that is mainly the drying chambers. I mean, most of them are in place.
The last ones are in production in Italy, but it's a matter now of commissioning all of them, and that is a delay into Q3, Q4 versus the original planning. But the first ones we have installed actually are also showing better capacity than we had in the business case, so that gives us even more capacity than we were planning for. Yeah, then of course, the cost and the cash show. Frans will show you the progress on the VIP Plus, but that is one of the things we really were able quite quickly to tell people, "Okay, now we really need to go for a stretch target on this to deliver more cost savings than we originally were planning in the year," pulling programs forward, which we were planning to do next year to just generate more cost savings. Of course, some of them are one-offs.
Other ones are structural. We also closed two warehouses during the first half, one we stepped out earlier, but we finally got the closure, and then we closed a pick-and-mix warehouse in Sweden, so we are back to one Scandinavian warehouse and taking the cost benefits as well. Perfect Factory, very encouraging to see that the programs are now running virtually, so the central team is virtually helping the countries or the lines to keep on running, and we see the good improvements of the OEE, the efficiency of the lines where we have implemented the Perfect Factory program, and of course, we're using the time as well, also during the summer shutdown, to take some big preventative maintenance programs.
So like in the chocolate factory in Ljungsbro, we're going to upgrade our power stations, or it's not where we generate power, but it's the substations which lead the electricity into the plant, which are quite old, and we're now upgrading them. So we reduce the outage because of problems over there. So that's good to have that time now well used to improve again efficiency. And on the cash, Frans will talk a little bit more about the loans, but again, over here, of course, the whole stock level is very important, and this also cash committee or the swap team on cash, as we now, I think, call it, is really starting to work. So with that said, I hand over to Frans, who will take you through the financials.
Thank you. So Henri has already detailed the organic growth in quarter two quite extensively here. But again, the impact of COVID-19 and how we're seeing some promising trends towards the end of the quarter, and we returned even back to growth in June. So let me just say here that the negative foreign currency translation is not really changing the picture given the size of the sales decline. Instead, I would move on to operating profits, and we have updated here how we present this to make the drivers for the variance versus prior year more visible, let's say a little bit more color maybe.
And this slide will also be followed by one specifically on selling and G&A, as we normally do. But overall, for the quarter, operating profit adjusted at 110 million SEK with a margin of 8.9% of sales is obviously a reduction versus last year by 51 million SEK or 1.3 percentage points. And as you can see here, we have separated the drivers of those SEK 51 million into three blocks. First, the impact on account of the volume drop, and then the green column is the impact on account of mix pricing, cost, or cost savings. And thirdly, the impact on account of forex. So let me start with the volumes.
So in the report, you can see that the gross profit drop in Q2 totaled SEK 119 million. And as the first driver here, volume, already accounts for a profit loss of SEK 126 million. The full gross profit drop is explained by the lost sales because of COVID-19. Now, obviously, SEK 126 million is more than SEK 119 million because we have some offsetting factors. We do have unfavorable costs also on some material, but we have taken pricing to offset that. We have cost savings. We also have some unfavorable forex.
Mix is not such a big factor here as you would like to think. We've also flagged that previously, that all of our higher margin package business is doing much better than pick-and-mix in the quarter. That favorable mix is largely negated by the unfavorable mix within the package portfolio, and as Henri showed there with pastilles and gum not doing as well as regular candy, and before detailing out the selling and G&A in this offsetting SEK 87 million, again in the green column, let's talk about this spacing piece that we have flagged.
Given the timing of the reduced production in Q2, the resulting underabsorption of cost only in part impacts the Q2 financials because most of these products that we produce at a higher cost per kilo were still sitting in our inventories as we closed the quarter in line with the normal first in, first out principles. So as a result, the higher cost of those products will be recognized when we sell those products in Q3, and we have estimated this to be approximately SEK 35 million. So consequently, our underlying operating profits adjusted for the quarter is more in the range of SEK 70 - 80 million rather than the SEK 110 million that we have reported. Now, with that, let's detail out the SG&A as part of the SEK 87 million here a little bit more.
Henri spoke of that, but I think in this quarter we have really seen the strength of our VIP Plus program with respect to managing the indirects. As you recall, we started this only in the beginning of 2019 with the spend analysis, which we then used for benchmarking, which we then used for target setting, which then led to initiative generation, and since middle of last year, implementation. As you can see from this slide, we have in the quarter reduced cost by SEK 63 million versus last year, which is about three times as much as we did in Q1. Now, here I want to flag that all these savings are not sustainable savings. Some of this, as you will understand, is cost avoidance and freezes, but nonetheless have been enabled by the groundwork we laid last year.
So for example, travel costs are down to a level which, of course, will not be sustained. It would not even be in the interest of our business to keep it that low once societies open up again. On the other hand, we have accelerated programs and will continue to do so to make savings sustainable in the future. For example, we can replace hiring freezes with reorganization as we're coming up. Nonetheless, breaking down the 63, roughly one quarter of these savings relate to reconfigured merchandising cost. So these are actions that we've taken to offset some of the gross profit losses resulting from the lower sales. For example, refilling the installations less frequently. And we've been careful to reduce the spend in such a way that it will enable us to ramp up again in the future.
Of course, when sales come back, so will part of those costs. Another roughly one quarter of the savings relate to lower marketing spend, where we have held back in some areas. For example, outdoor media, it doesn't make sense given that people spend less time out and about, while we, of course, have increased the spend on things like mixed candy bags. The spend is still down overall, but you have to put that in relation to the sales and what else is happening in the market. The takeaway here should really be that we have increased spend at the percent of sales, and that's obviously in line with the strategy that we have outlined previously. Eventually, when growth is coming back, obviously, we're going to ramp up the spend here again.
Now, the bulk of the savings, roughly SEK 31.5 million of the SEK 63 million, relates to all other SG&A. This is compensation and benefits, travel, professional services, IT, etc. And this is really where the VIP Plus program is adding the most sustainable savings, if you will, going forward. Knowing that forex is not a major driver here, and as we've said previously, this is not official IFRS forex, but our best estimate of this. So then moving on to cash. As you see on the right-hand side, the graph for this quarter and last year's quarter two directionally looks very similar. Of course, the starting point with lower operating profit is also less cash. And as some of you know, we tend to generate most of the cash in the second half of the year and not in the first half.
The first half of 2020 is obviously not different from that point of view. If we break this down further, we start with working capital. We're actually doing slightly better than quarter two 2019, but let's get into some of the details of that and look at inventories, payables, and receivables. Henri mentioned about inventories, and let's take a slightly different view on this. I don't know how you feel, but to me, the time before COVID-19 feels very distant. We have to remember that by early February, actually 99% of the cases were still contained to China, and the World Health Organization had not even assigned the name COVID-19 to the disease yet, and that feels like it's very far away. Nonetheless, during that early uncertainty, we made some decisive moves to protect our consumers, our employees, and our business.
For inventories, that included to increase our stock of raw and packaging material required for our production and to increase the production of the most important finished goods. Now, we've detailed that out actually already by mid-March. We had a press release that was just a few days after the World Health Organization actually declared COVID-19 a pandemic. Fortunately, I think looking at it now and at the service levels we've been able to hold, despite the fluctuation in different types of demands, I would say we've been able to safely navigate through this, and we haven't had any production stoppage, and we have now also started to reduce our finished goods inventories.
The inventories remain high and higher than last year, but during the quarter, we have reduced our own production, and we have reduced the shipments from third-party manufacturers, and we have made that reduction so it's more prevalent than the loss of volume. So the net result is that versus where the inventories peaked, which was in April, we have reduced the finished goods inventories. On the raw and packaging material side, they remain also high here, and this is because we've continued to hold inventories of strategic items that have long lead times for replenishment. Now, on the payable side, that's really the key driver for the increased tying up of working capital, and that's obviously because with the reduced production, we also have reduced payables, and added to that, with the cost savings, we also have reduced payables.
So this is at a very low point, but obviously it's expected to come back when production comes back and when we start spending again on advertisements, merchandises, etc. Now, this is partly offset by lower receivables as well. So it's down in the quarter partly because of the reduced sales, which of course is not a very nice reason, but it's also down because our overdue is significantly lower as we're closing quarter two, both in absolutes and as a % of sales than it was at the same time last year, and also versus where we closed Q1, which feels good given the fact that there's, let's say, an increased risk of defaults in the market on account of COVID.
Then moving to the right on CapEx, we can see that we continue to spend in Q2, and again, it's a step up from 2019, and this relates to additional capacity for molding that Henri mentioned, including for insourcing. We have previously said that there will be a delay because engineers cannot travel, our own employees cannot travel, but with the ramp-up, we expect to continue to spend in the back half of the year, but obviously not reach the levels that we had envisaged at the Capital Markets Day a year and a half ago. Then finally, on the financing activities, there is a significant cash outflow here of SEK 389 million. Similar, slightly less than last year, but that's in the comparator last year. Of course, we had also dividend payment.
Now this outflow is also a reason that we have fairly low cash on hand when we close the quarter. This is intentional because during the quarter, we have operationalized the concentration of cash into one cash pool for all our countries. We went live with that at the end of Q1, and this change allows us to manage cash better than before, including eliminating excess buffers. That, together with our access to cash, has allowed us to pay back roughly SEK 350 million in debt during the quarter, which of course also is good for interest expenses. Which brings me to my last slide on our debt position. As you also on the leverage, and you know it's one of our key financial targets alongside sales, EBIT, and dividends.
First, you can see on the top left, our total utilized credit facilities and commercial papers stood at SEK 2.4 billion as we closed the quarter, which is a reduction of the SEK 2.8 billion at the end of Q1. On the right-hand side, you can see that we held SEK 150 million in cash on account of the tighter managing I mentioned, but also that we have plenty of access to further facilities and commercial papers. During the quarter, we have renegotiated one of our main loan facilities, which was valued at EUR 125 million with an extension until early quarter three 2021.
So you can see now both on the left and the right-hand side, all facilities, whether they're utilized or not, are now non-current, which of course places us in a good position, and which is why we also believe we have a strong financial position. And we further then have access to another SEK 1.3 billion in additional unutilized non-current credit facilities on top of the commercial paper opportunity. Looking then at our leverage, the year-end target is two and a half times EBITDA, and we have stayed well below that at year-end normally.
In Q2, it's usually slightly up. So is the case also this year, obviously not because of dividend, but because of the impact of COVID-19 on our EBITDA. But most importantly, we remain well below the covenants with our banks, which is around four times EBITDA. That concludes the financial section, and I hand back to Henri.
Yeah, so a quick update of our strategic business priorities. Of course, first is the organic growth of our branded business. You saw the June figures. I'm really happy to see that momentum is getting back, both with the opening of the channels, but also the execution of our branded agenda getting stronger and stronger. A lot of work going into that over the last couple of months as well. And as said, of course, strengthening our brand and our brand positions really being crucial over there. Then, of course, the whole pick-and-mix business, back to profitability and growth.
I'll show you a bit more on Candy King, but now also in this quarter, of course, it is important to get scale back into the business because, of course, it is a business with fixed costs being the depreciation of the shelves and also the merchandising setup, of course, benefits from having more volume coming through the organization. So that's an important one to get scale in all the countries back in place. And then there's some pricing related also to the premiumization of the concept. Other words to mention, there is an ongoing process in contract negotiations. We concluded a renewal in Denmark on one of the contracts, and there are two more contracts coming up for renegotiation towards the end of this year, which are also good moments to bring profitability up to the desired level.
Yeah, and as I said, of course, in the number three, there's a lot of work going on in the VIP Plus, but also the program on Perfect Factory being very important for our future. If we look at the branded growth, a little bit more appealing also the amount of money we're spending on A&P. We see this progress towards our strategic goal of spending 70% of our A&P towards working media. You can see that we're now close to 60% coming from 40%. So this is a journey where we're also then renegotiating contracts. We just made a new global deal with one of the research agencies, getting cost benefits from negotiating as one and having one standard contract for all the countries. There's a lot of work going into that.
The last 12 months, you can see it's a little bit stable, also given what Frans was just saying that in the pandemic Q2 situation, we also reduced some of the spend in the out-of-home channel, so we took a bit away on the working media, but nevertheless able to keep this journey going. Another important thing is that we have redefined our CSR strategy, a really clear CSR agenda, which we will start to launch probably somewhere in Q3, Q4, also to the outside world with a number of very clearly defined initiatives around consumers, around the people we work with, and of course, the impact we have on our planet, around 20 initiatives, which are very important.
If we look now, of course, in Q2, we have been able to even add more on the consumer offering to provide choice, and we're well on that roadmap of either sugar-free or lower sugar, but also taking out unnatural ingredients in our candy business. On the external relationship, really interesting work going on with our partners, be it RSPO or the Rainforest Alliance, to really see how we can also have a small but important impact in the farming industries, which of course are very dependent on us as a cocoa buyer, and how we can do good by being good in that sense as a company. And then on the footprint, an important one is that we're launching something we call Plant Pack.
So then part of the plastic, which is in our plastic bags of the candy brands, is coming from, you could say, the waste of sugarcane. And that waste, which of course is also carbon, we can then, through a third-party partnership, make into plastic so that a chunk of the plastic bags is then made of non-fossil fuel, you could say, but it's made from sugarcane by-products. So that's really good with an ambitious agenda, which I think is important. We will unpack that more somewhere in the future.
If we look then at the Candy King, at the pick-and-mix business, I mean, on the left, you have the three main trends still very much underpinned the whole Candy King business, both the individual choice, but also the plastic-free, and then of course the in-store theater, which customers want to get from pick-and-mix. We now have the new premium concept, which you can see there on the right. It's a limited picture. We've added a number of hygiene cues to it, so special scoops at the beginning of the street and then a scoop washing station at the end so that people always get a clean individual scoop, which we found out from consumer research is very important, and that is now in test stores both in Finland, in Sweden, and is already in some customers in the U.K.
The reactions from both the consumers, but also the customers, are very positive. It's premium priced, but also more quality, better assortment, better profitability for the retailer and for us. So that is something we will be rolling out towards the end of this year associated with price increases to fit with the premium position. So very good progress, I would say, by the team. And if we then go to the next one, which is then the efficiencies, I think I've mentioned Perfect Factory was also important is that in this quarter, we went live in Germany with our global solutions ERP system from Infor M3 it's called. That also means that now all the plants and all the countries are on one ERP system. And again, that drives in our one Cloetta thinking, it drives a lot of synergies.
Germany, which is a relatively small country, can be supported from the Netherlands. If there are customer service issues, it's easier to make the monthly and the quarterly close. It's easier for our auditors to work. It's easier for us to look at indirect costs all coming from the same system. And at the same time, we've also rolled out in Q1, Q2 a new planning system replacing a number of legacy systems which we had before. It's again a global solution called SO99 and is now implemented in all the commercial markets, so including Germany, meaning that we now can look in one data warehouse when we do the supply planning. And then the next step is to bring it into the factories as well on the supply side. And these are only a few examples of the One Cloetta more on the IT side.
We also have worked there now with our global HR solution, also cloud-based and being able to really integrate the way we work and taking a lot of duplication out. So it's hard work to find those savings, but it's savings, but also one way of working, which also makes it much easier to spread knowledge and capabilities around the company. Yeah, then a little bit looking forward towards the second half of 2020. I mean, what do we see if we look at the branded business? Of course, important to see and stimulate and follow the sales in the non-food retail channels to come back. We can see that here in the Nordic countries. We can see that, of course, also in the Netherlands, slower in Germany and the U.K.
Of course, some channels like travel retail still being very much closed down or operating at very low levels, but we see a strengthening over there, which of course is very important. And then also we can see also in June that the product mix is coming gradually back to normal, meaning that we're selling more chewing gum and more pastilles and probably also less candy bags when pick-and-mix starts to ramp up its sales. Fixtures, yeah, I would say that by Q3, we should have all fixtures open in all countries, and the only risk over there is U.K. still being a little bit slower.
But we're also being transparent that it will take several quarters before we get the consumer demand completely back in pick-and-mix, and that will need the premium concept or the hygiene cues and maybe some other very innovative stuff we're working on to help consumers to come back emotionally to the pick-and-mix shelf. Yeah, then the operating profit in Q3, we get that SEK 35 million hit, you could say, in the supply chain cost. So it will be lower, significantly lower than prior year, what we expect. On the other hand, with all the business momentum coming back, we can also see that we expect to gradually strengthen in Q4 our EBIT margins again to double digits. And I think that's probably where we go for the Q&A.
Thank you. If you do wish to ask a question, please use zero one on your telephone keypad. If you wish to resolve your question, you may do so by pressing zero two to cancel. There will be a brief pause while the question is being registered. And our first question is from Nicklas Skogman of Handelsbanken. The floor is yours.
Thank you very much. So on the gross margin, firstly, am I right in thinking that the underlying margin in Q2 was down by roughly 200 basis points, considering these SEK 35 million that will now come in Q3? And then for Q3, should we then assume that you basically will see a similar hit, so 200 basis points, in addition to the SEK 35 million that stem from Q2? So we're looking basically at a 400 basis point hit to Q3.
No, no. I think the way we should think about this is that, obviously, because some of those products produced at a higher cost while sitting in our inventories, we wanted to make it very clear that SEK 35 million had moved, if you will, from Q2 to Q3 as a result of this, right? So that you have a better view of what Q2 would look like. Now, Q3, all else being equal, would then look the same as this adjusted Q2. So all else being equal, it would mean that if we had the same sales, the same production, etc. So all else being equal, then you have the key for Q3 based on Q2. Now, if we then have an opportunity to, obviously, to continue to ramp up sales, the mix may change. So these things would then have an impact on top of that.
Okay. Perfect. Thank you. On your Q4 EBIT margin comment there, should we read it as you're planning on exiting the quarter at double-digit margins, or is it double-digit margins for the quarter as a whole?
Yeah. I mean, we say it's going to be an exit on double-digit margin. If that is going to be November and December or October, November, December, that's not the guidance we provide. We say we will exit with double-digit also to give or to signal that we see an improvement in Q4 and that we are, let's say, getting back or getting closer to where we left our journey before COVID.
Okay. I mean, I'm trying to sort of get a feel for how much the underproduction also in Q3 are going to hit. I mean, you have the underproduction from Q2, but now you're closing down lines and so on. So is there anything more you can say on that?
Yeah. What we could say is that we have now the underproduction in Q3 because of the lines which we're stopping. Of course, we try to do that as cost-efficient as possible by doing it in the summer break so that people take their entitled holidays and that we also can reduce shifts. So we try to do it as cost-efficient as possible. Yeah. And then the balance we strike is we will start in Q3 as well with more insourcing of production to bring volumes from the outside into Cloetta. And of course, that is a continuous, how do you call it, trade-off versus then producing for growth. And of course, while the business is recovering, we also need to weigh that in because we don't want to get back into a situation where we are too full production-wise.
Then on the other hand, we'll get the drying chambers on stream, and we can also see that the efficiencies through the Perfect Factory program on the molding lines are really stepping up. So there's a few elements to consider to make the factories as occupied as possible, but not too occupied so that we will face out of stocks and have lost sales and unhappy customers.
Okay. And then on the pick-and-mix, I mean, the Swedish pick-and-mix shelves have been open throughout pretty much the year. But you still say that consumer demand remains quite sluggish in Sweden. So I was thinking, have you had any feedback from retailers in Sweden that they are considering cutting down on the shelf space that they dedicate to pick-and-mix or even removing it completely from their stores?
No, because I think what we see, of course, other people also see, right? So retailers, they see the whole demand for individual choices, and they try to do that with concepts like the salad bars where you can pick your own salads or cheese counters where you can choose your own cheese. Then the whole plastic-free is something which is also, let's be honest, driven very much by retail. We also try to make big steps on selling more products without plastic packaging, and they really like the fact that pick-and-mix is either in a carton cup or in a paper bag. And then maybe most important, they also look at their future, and that is our main driver, I would say, if we go 10 years forward, where they say, "Okay, our stores need to become like in-store theater.
We need to make it into like, let's say, an Apple store. I mean, in an Apple store, you don't go in with a basket or a trolley, and you pick a few iPhones and a few iPads, and then you go to the checkout. I mean, you experience something over there, and that's maybe a bit far off, but of course, a current retail store is quite often shelves with products which are stocked over there, and then you go there with the trolley, and you go to the checkout. So how do they bring more experience into the store? And therefore, candy, pick-and-mix is the answer. At least that's what they're telling me. And hence, they want to develop this together with us also into a category where everybody makes a decent margin so we can keep on investing in the category.
Okay. No signs of them sort of giving up on the category. That's good. Would you be able to provide sort of the progression of sales growth for pick-and-mix in Sweden throughout the quarter?
Monthly. Well, next quarter or last quarter.
Yeah.
On Q2, I would say it follows very much the same pattern as what we have been showing when we split out Q2 month by month. I mean, not similar figures because, of course, Sweden was not completely closed down, but it is also down more double-digit, and it is improving gradually. Yeah, and then I would say that both Sweden, but also Finland, and maybe even Denmark after opening up, we see the same kind of percentages of consumers which have not been in the habit of shopping pick-and-mix or are buying now something else like candy bags plus 30%.
And those we need to bring back to the shelf. Yeah. We still need to because it's early days. We don't have all the consumer data because this is not being measured by Nielsen. I mean, is it heavy buyers who are staying and light buyers who have left, or is it people all buying a little bit less, or is it people really wanting to move quickly through the store to the checkout because they don't want to spend too much time in store? And of course, we know that pick-and-mix is one of these places in the store where you spend three to four minutes at least to pick. That is still work in progress. We have a few we concluded one big consumer research across all the markets to see what are the main drivers, but also what are the main blockers.
And that is being used to upgrade the new Candy King concept to take in more of these hygiene cues. But it is going to be work of several quarters to bring the full consumer demand back to the level of 2019 in those main markets. And I would say Norway and the U.K. are a bit special cases.
Okay. And lastly, I haven't been able to see any comments on market share developments in this report or in the last quarterly report. Maybe it's a bit too messy in the markets right now, but.
Exactly. Because we don't have the same data in all the markets. We have the out-of-home channel, which of course is very important for us, and then we've got the in-home channel. But I mean, in a way, it follows if we are number one in a country, then we are also gaining market share. If we're number three in the country, we tend to get the growth of the category, but then the number one is gaining more than we do. And it is also that is maybe the most important thing. And there's such big swings between the categories that we thought it was a little bit useless to report at this time.
Okay. Thank you very much.
Next question is for Mikael of Carnegie. The floor is yours.
Yes. Thanks. Just first, a couple of, if I may, some clarifications perhaps. First, on this supply chain costs that you are sort of pushing over to Q3, why is actually this done? I mean, typically, you have production I guess you always have production of products in one quarter and sales in the next quarter. So why is it different this time around?
Okay. Yeah. So good question. So no, we're not pushing anything at all here. It's simply the difference now versus what you've seen before is that we held back a lot on our production in Q2. I mean, if you recall, we exited on high inventories. We had a forecast that said that we would have a sales drop. So we have held back on our production, which means that obviously production is down, but a lot of the fixed costs are still there, although good cost-saving initiatives in supply chain.
But the cost per kilo of the products produced in the quarter went up. And as it is, a lot of those products are still sitting in our inventories. So it's called cost of goods sold because the cost will appear when we sell the products. So when we sell them in Q3, the cost will also be realized in Q3. For the products that were sold in Q2, of course, that higher cost is then realized in Q2. Normally, this is not an issue when we're moving up and down 1% or so. It's because this is so steep that it had an effect.
Maybe to add, this is what we always do. There's no difference this quarter versus any of the other quarters. But like Frans said, if we produce 1,000 tons and then it becomes 990 or 1,050, it doesn't have such a profound impact. But now it has a profound impact. And also with the fact that we want to give you a bit more guidance going forward, we said, "Okay, let's communicate the SEK 35 million so you guys know what to expect in Q3." But there's no pushing, of course. This is just the way accounting-wise it works already for many, many years within Cloetta.
Okay. Thanks. And you don't see any similar big impact in Q3? You feel that it's going to be more normal?
So basically, so obviously, the effect what's happening now is that the reduction happened in Q2. That's why we're flagging that underabsorption will appear in Q3. But if we would continue at the same way, I mean, this is something that will just keep carrying forward. If you adjust our Q2, all else being equal, you will have a very good idea of what our Q3 gross margin will look like.
Yeah. I was meaning if demand remains low, which you are guiding for at least the pick-and-mix side, I guess you will have an underabsorption also in Q3, which then could result in the same sort of significant impact from the cost side.
It should result then in a gross margin that will look like the Q2 gross margin if you would have reduced that by SEK 35 million. It's not a double whammy.
Okay. Okay. Thanks. Another thing on SG&A, I didn't really follow exactly when you said you mentioned roughly a quarter of the cost savings on SG&A on a year-on-year basis was marketing spend, and roughly one quarter was sales-related, I think you said. If we look at the other side of it, how much of the cost savings do you feel are sustainable?
Yeah. So the other 50% so well, let's just first comment on the first two. So the reduction in A&P, within there, there are also sustainable cost savings, as Henri showed that we're increasing the working media at the expense of less non-working. So that is a type of cost saving, but obviously, we are reinvesting that again. Similar on the merchandising cost, we have reduced those costs given the lower volumes in the quarter. Eventually those costs will go up again.
But I think that we will continue to find ways of still reducing merchandising costs per kilo by just working in a smarter way. But that aside, so the other half, so let's say half of the 63, which is more other indirect cost. If you take travel in there, of course, travel costs will go up. But we had even before COVID-19 started, we had started to reduce travel costs just by basically encouraging more people to work virtually with each other. And when we went live now with M3 in Germany as a pretty good example, all the training was done remotely.
It's never done anything like that before. So obviously, we've now tested things, and we realized that there will remain opportunities to keep costs down, although of course, we will travel more in the future. Same thing, the freezes that we're seeing, we're going to replace some of those freezes with reorganizational activities instead. But obviously, all of it is not immediately sustainable, but over time, it will be.
Okay. And then on the FX side, I guess now with the strengthening of the Swedish krona, which has been pretty remarkable during the last three months or so, what are your projections there in terms of purchasing costs from Q3 and onwards, given where the krona is right now? I mean, you've had a negative FX impact on your gross profits now for quite a while, but I guess they will turn positive.
Yeah. Yeah. I mean, that is true. I think in the quarter, as you saw there, the forex impact there is about 15 or so. So of course, that would then turn around, but the biggest challenge is the volumes and just getting those going.
Okay. Final question for me. Just when you look at pick-and-mix, I mean, obviously, you bought Candy King a few years ago, and if you hadn't owned Candy King today, maybe you would have had a different type of strategy. I mean, you are speaking about trying to get consumers back from buying packaged candy basically to pick-and-mix, or at least candy bags to buy pick-and-mix candy. But why is that actually? I mean, obviously, yes, you have the organization and have everything in place, and you bought Candy King, but wouldn't you make the same amount or perhaps even better margins and better earnings from having a permanent shift away from pick-and-mix to packaged candy?
Yeah. I mean, that would follow business logic what you are saying. Of course, there are some caveats if that will be true because, of course, in the packaged business, there's a lot of competition. So if one kilo of pick-and-mix is not being bought, it doesn't mean that one kilo of pick-and-mix then moves into Cloetta candy business, right? In particular, in those countries where we are number two or number three in the market.
This is only in Sweden where we are really a big number one player, but in the other markets, we are number one or number two, but quite close. Yeah. Then the other thing I would say, and that's maybe the most important one, we're not alone in this world. It's called fast-moving consumer goods. I mean, the consumer in the end decides whether they want this or not. And if we would not be in pick-and-mix, somebody else will be in pick-and-mix. And then we will be sitting here saying, "Well, hey, we defocused on pick-and-mix because we were hoping that nobody else would take it over and that all the sales would come back to the Cloetta brands." But that is not the case. Yeah.
We can also see in markets. Let's take Denmark as an example, where Haribo is the number one candy brand. That if pick-and-mix goes down, and in pick-and-mix, we have Haribo products. And of course, also Haribo bags is gaining. So I think you need to conclude this by saying, "What is the strategic rationale for us to be in pick-and-mix?" Yeah. And I would see that from two sides still. One is that there are three fundamental trends. I talked about them: individualism, plastic-free, and in-store theater due to the e-commerce trend. Those three will stay, and they will only become stronger. So then it is a choice. Do we want to play there, or do we leave that to somebody else to play there?
And then I would say the second strategic rationale, if you look at Cloetta, we have on one hand, we have the big international players, the Mondelez, the Haribos, the Perfetti Van Melle . They play a very different game, and they will not get into pick-and-mix. That's too complex for them, and they just want to be as simple as possible and have business in many markets and sell more or less the same product platforms under different brands. Yeah. And then we are in the middle, and then we have smaller local competitors who have been able to sometimes compete with us in pick-and-mix because Candy King, they had commoditized pick-and-mix.
But if we're now looking at, we can't disclose that right now, but all the stuff we're bringing in, particularly with the central team on pick-and-mix to add value. I think our position there in the middle is quite unique that already now we are, let's say, the number one in pick-and-mix in Northwest Europe. And if we get this concept really strengthened and it starts to really contribute to our EBIT journey, we might even go into other countries and claim a position for ourselves, which is difficult for the small ones without scale to copy and too complex for the big ones to come in. And then it is the strategic role of pick-and-mix to provide volume growth to Cloetta, which is predominantly in the markets Northwestern Europe, where there's little volume growth and a lot of value growth.
So then you would say, "Okay, branded business is going to deliver me value growth." That's also what you can see from the Nielsen figures. That doesn't really help our factories. Volume growth will then come from the pick-and-mix business. Of course, we have the third element of the international markets, which will do both, but that's how the strategy or the strategic agenda for Cloetta works. But of course, it's not at any cost. We need to make money on pick-and-mix, and that's why we also said we're willing to walk away from contracts like we did with one in Sweden if we're not able to make money. We need to get paid for delivering a good service, a great assortment, a really good in-store experience for the consumer.
Okay. And the final there, you mentioned the contract you walked away from. Is it possible to quantify how much that accounted for in the quarter in terms of share of the declining sales?
I would say a million or so. Yeah. A little bit more. A bit more.
Okay. On a quarterly basis, a million?
Yeah. Okay.
Okay. Thanks very much.
And we don't have any more questions on the other line. I give the floor back to you.
We have a question from Stefan Stjernholm here as well, who's asking about pick-and-mix business and the timing to break even and further price increases planned for the second half and impact on the gross margin in the next quarter. Let's say we had previously shared, I think, in detail that, and we have to remember, it has been the Swedish business that has not been breaking even, not the rest of pick-and-mix.
So that is not missed out here. Obviously, now in this current situation, it really depends on how quickly we can ramp back the sales up again. So I mean, to now give a revised forecast of when the Swedish business will break even, that would be, I think, getting ahead of ourselves somewhat. But there is pricing coming in as well in July, for example, on account of the Norwegian currency. And so we will continue to take pricing based on forex and based on commodities as we normally do. And over time, that tends to offset each other.
And then, of course, what I just quoted is that we're now launching this premium concept of Candy King with a better assortment, a better look and feel, better service, better activation, and we will price for that. So that's pricing, which is not linked to commodity or forex, but due to the fact that we're launching a more premium brand, you could say, if you want to make the analogy with the branded business. And that is also pricing, which we're planning to do in the coming six months. I can't be more specific by country because then I would get into competition law risk zone, let's call it like that.
Anybody else? I know it's past 11:00 A.M., so. Good. Then I propose we close. And thank you for today. And I hope we have been able to give a little bit more clarity both on quarter two and the outlook with the way we presented the quarter and the H2 going forward. So thank you very much.
Thank you. Bye-bye.