To Cloetta Q2 conference call. My name is Jacob Bro berg. I'm head of investor relations here at Cloetta. And as last time, I have Henri de Sauvage Nolting, our CEO, and Frans Rydén, CFO, with me here today in Stockholm. So I start with handing over to Henri to start.
Yes. So thank you for joining us. Q2, as many of you already were predicting, had strong organic growth and also a slightly improved operating profit. Good to see that organic growth came up to 5.7%, both in the branded and the Pick & Mix. Also, in the operating profit adjusted, we made a step up to 161, and then operating profit 159, and the profit for the period 97, same level as last year. Cash flow very much affected by phasing effect. Frans will come back to that later on. And after the dividend payments, the net debt over EBITDA was 2.7 versus last year 2.8. Yeah. If we look at the markets, had a sixth consecutive quarter now of growth in the branded products. That starts to become a trend, I would say, showing that we are improving quarter-after-quarer the strength of the brands.
Of course, still a lot of work to be done, and we're just starting on this journey. But of course, I am pleased to see the continuous effect of that also because it is quite spread across all the markets, which of course is also a good sign for the future. So the packaged confectionery or branded confectionery markets grew in all markets. Of course, also a bit of it helped by Easter in particular in the Nordics with chocolate. Also, Pick & Mix grew in all markets, in particular in Sweden. But of course, in absolute terms, a lot of growth. So if we unpack the organic 5.7%, there was a 1.4% growth with the brands. And as I already said, that really starts to show that we get some real traction behind the branded business. And then Pick & Mix, 18.1%. Very good. Yeah.
A lot of effect, of course, in Sweden of Easter and also in Norway to a certain extent. What we overshadow a little bit here is also the very good work we're doing in the other markets on Pick & Mix where we're growing, and even in Norway, there were many other contributing factors in, let's say, the implementation or the sales pressure, which are leading to this great result. So that is good to see. Of course, we still need to get the average profitability up so that we also can start to earn some money on these increased sales, and market shares in the majority of our business up. And again, another good data point to show that we are strengthening ourselves. If I look at the Cloetta core strategy, so the strategy was really focusing on our core business, our core brands, and our core markets.
Of course, in Q2, we can see that the brands were growing, Pick & Mix were growing, but also we can see that brands are becoming stronger. Yeah. We're both getting new buyers into our brands and shares are growing, and that is good to see. We made another step up in the working media. The amount of money we spent, which is seen by consumers, versus the money we spent on agencies to research or prepare these kinds of media, so that's also good. Becomes much more effective, and we're more out there talking to consumers about our products and our brands, and also, we can see that the strategy of doing less innovations and making them bigger is actually also helping to become more successful, though the fewer innovations, more aligned across the markets, are starting to pay off. Yeah.
Then to facilitate the growth, so the work we're doing on things like organization. That is maybe the biggest progress also versus a year ago. We just had a leadership conference. You now can really see the top 60 people within Cloetta really working much more together. We call it One Cloetta. And there's many, many examples. There's a few of them coming through in this presentation. But that, of course, is really unleashing the value of being part of a bigger company. So one example, for example, is the Cloetta UK. We now don't call it Candyking UK anymore, but Cloetta UK. They're on the M3 ERP platform of Cloetta, which really makes the integration easier.
But also, they are now fully responsible for all the branded business, which we, as Cloetta, had in the UK and where we had not been focusing a lot on and not been very strong in the last couple of years, very tactical. And now it's a good plan together with the leadership of marketing in the international markets under which the UK sits and really implementing branded products in Pick & Mix channels and vice versa, working directly with customers. So that is really showing great progress. Also on the capacity, I mean, the drying investment is all on time. Actually, we're able to cut some timing on one of the factories by going faster. We're moving to 24/7 production on foam in the Swedish factory to prepare for the sales we can realize over there.
The business units have now also made a five-year strategic plan by technology and by brand. And that is now being used for the factory network to see, okay, where are we going to see the growth in the coming five years? So where do we need to increase capacity? And coming with the CAPEX plan to the board of directors somewhere in the second half of this year. Yeah. And then on the cost and the efficiencies, the Value Improvement Plan, which we also talked about in the Capital Markets Day, very positively received by what we call the extended leadership, very much focusing on the non-people costs.
It consists of a lot of different work streams in the way we've set it up together with Accenture in the visibility phase using the ZBB philosophy. And good traction and very many ideas, I would say, on how to tackle that.
Also on organization, we're looking now at getting more efficiency. Good progress. Perfect Factory rolled out now on six main lines in three of our factories. We're starting to also show good initial results. Of course, this is a longer project than just one year. After the summer, we'll expand to another six lines with very encouraging first results coming out, also showing where we have weaknesses or, in my terminology, opportunities to save cost or to get more efficiency out. Then Pick & Mix Sweden, we already alluded a little bit on that. Great progress on the sales side, but also 50% of the volume, more or less, contract-wise have been raised in price without having a huge impact on the volume. Yeah, very good progress, I would say.
There’s a number of larger contracts which we’re now tackling in the second half of the year where we also need to get a more decent profitability level. Let’s call it like that. But apart from the pricing, there are other big initiatives going on. So we’re also taking quite some article numbers out from the assortment. And you might say, well, what is that going to do with EBITDA? But less complexity means faster merchandising, means cheaper production, cost less obsolete, etc., etc. So that is quite good. And also on the merchandising, we’ve seen first signs that we get better KPIs and better control over the cost of refilling the shelves in store. Then I hand over to Frans.
Thank you, Henri. So let me just say, when I presented Q1 results, I used the word despite to describe our results in that quarter, given that we had a tough comparator with Easter in quarter one the year before, as you probably recall. But now for quarter two, we're obviously comparing versus a quarter without Easter. So I think it's important that we also keep an eye on the year to date to make sure that we see how we're progressing against our financial targets, excluding that phasing impact. Nonetheless, in quarter two, as Henri mentioned, we delivered organic growth of 5.7%. Our Q1 in some years where our total business grew. Branded business was up 1.4%, which brings year-to-date growth to 1%, which is within our targeted range to grow in line with or better than the market of 1%-2%.
Pick & Mix business grew 18.1%, obviously supported by the strong Easter sales. But as Henri mentioned, also good success in other parts of the business. And of course, everyone anticipated a strong quarter two, but this also means that year-to-date our Pick & Mix business is now delivering growth at 1.6%. And is this starting to become a trend? Henri mentioned that. I mean, it is great to see that as a total company year-to-date and not just during an Easter quarter, we are delivering now organic growth. Now, I would also pause here for a minute on the strengthening of the euro. So the 5.7% organic becomes 7.5% in total growth. Now, with that currency effect, of course, the top line looks nice, but we will also have some tougher conditions further down into the profit and loss. And I'll touch on that as we go through this.
Nonetheless, again, a quarter of very stable company performance and now also on the top line. First, though, let's have a little bit closer look at the quarterly performance here. So for this quarter, branded represented 71% of our portfolio. And there you see the six quarters of consecutive organic growth that Henri mentioned. And at 1.4%, that's pretty much in line with the average of the preceding five quarters that we've had.
And for the Pick & Mix business, the remaining 29%, you recall we've been talking about that here; the business is a bit more volatile given that it depends very much on winning contracts versus the branded business is about winning with each consumer every single time. And we had seen that the reduction in our sales over the previous quarters was at least the bar was getting shorter, and it was getting closer and closer to zero.
Now, of course, it's great to see that with a big uptick in Q2, we are back in line with prior year and slightly better. Of course, we have also said that as we're taking pricing action in Sweden, we may lose contracts, and we may have to walk away from contracts as well. That may, of course, look different in the future. Coming to our gross profit, we improved by SEK 20 million versus prior year. This is driven by this very strong top line growth, partially offset by the unfavorable mix, given that Pick & Mix grew much faster than the branded. We also have high cost of goods sold. As mentioned, the forex doesn't help on the cost of goods sold. As you're surely aware, sugar and gelatin prices are up. Nonetheless, gross profit improved versus last year.
Now, as we look at the gross margin, down 1.4%. Here, I think it's interesting to note that the gross margin in quarter two last year at 38% was the highest we've had for quite some time. So there was a lot of good things that came together in that quarter. If you look at year-to-date 2018 gross margin, which was 36.9%, it's probably a little bit more indicative of what we were performing last year. Nonetheless, we do see a lower gross margin for the quarter. And that's partially driven by portfolio mix following the strong performance of Pick & Mix, but also the euro. As the currency effect is both on net sales and COGS, just shy a little bit less than half of the gross margin drop that we see both for the quarter and for the year-to-date is on account of the forex impact.
Now, the other thing here is on sales and general and admin. Of course, that's also impacted by forex. And I want to dig into this a little bit closer on the next slide because actually our cost here is flat versus last year despite absorbing the forex and also increasing our investment in working media. I'll come to that on the next slide. And I'll just finish here first on the operating profit adjusted. It's up versus last year, both in absolute and as a percent of NSV. And that's, again, on account of the strong top line and also cost efficiencies that we will explore a little bit closer on the next slide. Again, partially offset by higher cost of goods sold, which includes unfavorable forex.
On the sales and general and admin, you, of course, see that as a % of NSV we have decreased versus prior year in line with what you would expect. The most important aspect here is that last year in quarter two, we had a gain of SEK 19 million in SG&A. You may recall that, and we actually had it in the CEO's word as well at that time. We had a positive impact of remeasurement of the contingent earn-out consideration relating to the Candyking acquisition. That was SEK 19 million. It would not be fair to only strip it out. I'm stripping out all the non-recurring items that we have reported. Then you can see that both for the quarter and for the six months, we have net cost savings that basically are offsetting the forex.
On top of that, some of those cost efficiencies that we have on the indirect are also in the advertisement area where we are reducing our non-working spend. And we have been able to invest more in our working media, which is seen by the consumer. I just want to call out here also that the forex number here is not the official IFRS number. It's our best calculation that we could do. Then moving on to my last slide on the cash flow. So similar to the top line, one really has to look here at the first six months because of a lot of phasing on account of Easter. And if I could direct you to the bottom right on this slide where we're showing the free cash flow. So cash flow from operating activities net of CAPEX investment at SEK 70 million.
So that was a clear improvement versus last year. Now, out of that improvement of SEK 72 million, roughly half of that relates to just simple reclassification on account of IFRS 16 implementation. And the other half is fairly equally split between higher profit once you adjust for non-cash items, slightly better working capital, and lower CAPEX. On the Q2 per se, not excluding the phasing, I'd like to point out here actually because Henri mentioned it earlier about the drying chambers. So in that CAPEX number, there is a small but first spend here relating to the drying chambers that we mentioned earlier. So that will help in our molded capacity next year. So we now actually start having cash out on account of that investment. The other important item here for Q2 is the payment of the dividends under cash flow from financing activities, the SEK 287 million.
And we also repaid some commercial papers. So then when you look at cash flow for the year-to-date under financing activities, there's really three pieces that you have there. There's the dividend payment. There's, again, the reclassification of IFRS that helps on the free cash flow. And then there is a slight increase in commercial papers as we are transitioning this quarter into one Cloetta cash pool that will help reduce complexity and also enable us to manage our cash slightly better. And with that note, I'll hand back to Henri.
Yeah. So, summarizing, yeah, three main priorities, and if we look at the branded growth, I would say good. Yeah, another quarter of growth, 1.4%. Branded EBIT, of course, already above the 14% target we have, so just motoring on and keeping the growth levels up there is very important. And, as I said, good traction with our brand. I'll show two examples later on, and on Pick & Mix, it's still, of course, a hard battle in particular in Sweden to get the margins up. Good to see that with all the good preparation, also our customers understood that we cannot continue with a loss-making situation, so 50% of the contracts done. Also some other general price increases due to sugar prices and Forex, so that's across the whole portfolio being done in Sweden.
And then in the H2, we have a number of larger contracts which we're going to renegotiate on the same basis in Pick & Mix. And next to that, a lot of other things happening, as I said, on merchandising and assortment. Candyking UK, well, actually we should call it now Cloetta UK. That's the new company name being integrated not only on the ERP system, but in all our processes in marketing, sales forecasting, branding, etc., etc. So good to see. And then we'll reduce the cost. I already mentioned that the VIP program has started. Also good to see that the actions we took last year are also paying off in lower indirect or SG&A cost, as Frans was just showing. So that's important.
The perfect factory to really create capacity and also bring the efficiency and the material usage in our main plants up to scratch and not to be underestimated as the effort we need. What we are doing and we need to do over there also on things like maintenance programs to live in a new world where our lines are fully occupied in the big plants, and there's less forgiveness if you have problems, so the reliability has to go up quite significantly, and good to see that also the working media has increased. We also now have a new media director who joined us and a new CMI manager really looking at all the contracts we have with our agencies and questioning why do we pay this in this country, and that has never been done before.
So more money, I would say, to be gained over there as well. Yeah, then two big things. One is the Läkerol relaunch, which will come in September. Really good to see how this, first of all, has been done across markets with one brand manager for Läkerol and not anymore market by market with a lot of cooperation between the markets, a lot of sharing of ideas, common platforms, common toolkits for implementation. And that all will lead then to moving Läkerol more towards what we call a permissible treat. So a small treat, sugar-free, very sophisticated. That's what we also can see that people are playing back the sophistication of our tastes. You can see that a little bit on the right. You can see we're using for the Swedish listeners a little bit what Systembolaget is using.
Showing signs of the strength and the taste of the products. That level of sophistication should also help us to modernize the brand quite a lot, communicate these sophisticated flavors in that way. It's a big relaunch, 360, as we call it, both above and below the line in store to also get further growth in this category. We already have category growth in pastilles, but of course, we want to pick it up. Also the profitability on Läkerol is good. That can really help us in our EBIT targets. Yeah. Another one which we have been talking about with some of you is the self-scanning in the checkout zone. We see more and more across Europe that retailers are moving to self-scanning. They're also complaining or saying, "Yeah, that is good from a cost point of view.
We don't need to have checkouts, but then we lose the impulse sales. And again, a good example of Cloetta. So the main markets coming together, developing a number of different concepts, which we then took out to retailers and said, "Hey, this is how we think you could still capture those impulse sales on self-scanning checkouts." That is more what you see there on the left bottom picture than how it looks in reality. You can see on the right, on the right top, you can see the before. So a self-scanning checkout without any impulse products. And then next to it, you can see that we are having an impulse point of sale at the self-scanning checkout. And actually, very much liked by retailers, we're proactive. We're also not only talking about our own products. We're then taking a category view.
So also in the markets where we have no chewing gum, we can offer them chewing gum as a solution as well. And I would say a good example of how do we partner with retailers in helping them to grow the category. And also a very good example of how we use the collective knowledge within Cloetta across the markets to be more, yeah, more knowledgeable, you could say, in these kind of areas with retailers. And that was it for presentations. And we can now open up for questions.
Thank you. And if you do wish to ask a question, please press 01 on your telephone keypad now. And please press 02 if you wish to cancel your question. And please note that you can also submit questions via the webcast. The first question on the telephone lines is from Nicklas Fhärm from SEB. Please go ahead. Your line is now open.
Thanks, operator. And good morning to you. My first question would be thanks for a good presentation and a lot of very interesting details. But still, my first question would be if you would estimate the calendar impact in the reported 5.7% organic growth rate for the quarter, that would be helpful, please?
Yeah. Frans, you take that.
Yeah, sure. So, I mean, it's not an exact science, but we would say it's roughly SEK 30 million-SEK 40 million is the impact.
Yeah. Yeah. Very clear. Thank you. And second question is actually relating to the pick and mix segment. And I was hoping that you could update us a bit on your thoughts now that you have sort of revisited all the, in particular, the Swedish contracts and sort of the outcome and the expected impact from renegotiations onwards, please.
Yeah. I mean, as I said, we have gone out in March with the price increases on pick and mix. We have finalized all of them in the, how would we call, concept sales. Few larger contracts to be done now in H2. But we did the price increase also in conjunction with a general price increase across the whole portfolio. So also the branded part based on currency and sugar prices, of course, not moving favorable to us. And we have lost a few customers, single customer or groups of customers, but let's say much less than what I anticipated when we went in. So that's very positive, of course, to beat those volumes.
so difficult to say a real impact because, of course, you have to look at this maybe a few more months because some of these customers, they might say, "Okay, I accept this price increase," but they start looking and shopping around and looking at what our competitors are offering. And they might come back and say, "Hey, I found somebody else who is still willing to do this cheaper." So the effect of that is still to be seen. But so far, it has not had a major impact on our underlying volume in Sweden. So that's positive. And of course, also good to see a bit of a sidestep that the central team, together with the countries, are becoming stronger and stronger in actually understanding pick and mix and helping retailers on how to grow this category based on consumer and shopper insights.
And that, of course, ultimately should be the reason why they want to do business with us and not with somebody else.
But just to be very clear, thank you, Henri. Just to be very clear, I mean, if any one of those customers that I assume are unprofitable actually come back and say, "Hey guys, we found another supplier," I guess you would just thank them and move on, right?
Yeah.
So I guess my question is, yeah, my question is really, should we still expect sort of Candyking Sweden to be break-even, say, on an annual basis somewhere this year or early next year? I guess that's the question.
That would be communicated also in the capital markets day: that the run rate by the end of next year should be above break-even. That is very clear. Also, we are willing to take the risk with these volumes. First of all, I've never seen a business becoming long-term successful when you're selling your products with a volume. That is actually very, very simple. Also, we're not desperate for those volumes because we have good organic growth in our branded business. We've got good organic growth in the other pick and mix business. We still have insourcing opportunities, as we said, from Candyking suppliers and from other third parties. It's a good position to be in, and we can definitely make that call. Now, over here, we're always focusing very much on the pricing.
Of course, that is also maybe the most difficult one to get that right. But I'm also very pleased to see that the team and as a new leader for the Pick & Mix Sweden team, very structured program they have developed. It's also about the assortment efficiency, the merchandising, and the warehousing and distribution. I'll not give you exact details, but the effect of that on the P&L is not to be underestimated. In merchandising, we have now much better tracking on merchandising cost per store, merchandising cost per kilo, so that we can also benchmark that with the other countries. Of course, you need to look at the size of the country.
But we're really starting to pull this together as one Pick & Mix business under the leadership of Nicklas and really trying to get best practices from one country to the other, which never happened in Candyking and not in Cloetta either. And there's quite some benefits to come from that as well next to the price increase.
Final question. Would it be okay to assume that you've had some volume growth in the sort of calendar-adjusted organic sales that you delivered this morning for the quarter?
Sorry, what do you mean with that?
You mean if we excluded the Easter effect, would we still be growing? Is that the question?
No, no, no. You will clearly still be growing, excluding the Easter effect. My question is, is it only price and mix, or is there also some volume growth in the organic sales number?
Yeah, absolutely. There's a lot of volume growth in here. We don't disclose it, but there's a lot of volume growth in here. Hence also the, I would say, stress we put on our supply chain to produce that. And there's a lot of volume opportunities, and not only in Pick & Mix, but also in the branded part. And that's one of the reasons, for example, that we also took the decision to go to 24/7. That means that we're going to produce 24 hours a day, seven days a week on one of the main lines in Ljungsbro in Sweden in order to create the capacity and not having to invest in CAPEX.
And that is not coming from Pick & Mix. It's pure the volume growth we're seeing in the branded business. And of course, Easter was important, as Frans alluded to it, but we should not underestimate that also in the other markets, we're having good traction on the branded business and on Pick & Mix.
Yep, sorry. You still there?
Yes, yes.
Yeah, you're still there.
Okay. I'm still here sort of interrupting perhaps your answer, but thank you so much for taking all these questions. Thank you.
I have a follow-up question from the web from Matthias Ledemann. Praktischenerzie asked about how big part of the Pick & Mix contracts are our loss-making today and the remaining term of these contracts.
Yeah, that's a little bit dangerous to communicate because my competitors might be listening as well, and they would love to hear that. And I think even from a competition law perspective, I would not be able to answer that in that detail. The loss-making contracts, there are also contracts which are marginally at 0% EBIT, and you can always question, how do we allocate the cost to all of these contracts, both merchandising and central cost? I mean, the whole thing just needs to lift up. And marginally loss-making or marginally profitable contracts is actually not such a big difference. I mean, it needs to lift up to a higher level, both on the price and on the cost. And that's the journey.
Okay, thank you.
Okay. And the next question from the telephone lines is from Stefan Stjernholm from Nordea. Please go ahead. Your line is now open.
Hi, Stefan with Nordea. Can you hear me?
Yes.
Yeah. Yeah.
A follow-up on the Candyking. Is it fair to assume lower losses year-over-year already from Q3?
Sorry, I didn't catch you.
Can you repeat that, Stefan, please?
Yeah. Is it fair to assume lower year-over-year losses for Candyking from Q3?
Yeah, I think that is a fair assumption, right? I mean, if we're going to bring this back to black figures, it is not going to be one big bang in whatever September 2020. It's quarter-after-quarer that there are activities coming into the business and ultimately into the customers and even towards consumers. So yes, we are planning for continuous improvements. And of course, some things are coming sooner than others. Some of them will have to do in steps. The pricing will not be something which will all be done this year. We need to work on that for next year as well. And then it doesn't stop either. So yeah, I think you're fully right to assume that.
Yeah, and can you give some comments on EBIT for Candyking for the first half of this year?
No.
to last year.
No.
But it will start to improve from Q3. And then another question on marketing spend. If I remember right, the marketing spend was quite high both in Q3 and Q4 last year. What can we expect from the second half of this year?
Yeah. I mean, if I show you the example of Läkerol, which is one of our bigger brands also going across all markets, then I think a fair conclusion would be that we're going to spend quite a significant amount on that so that the spend will go up on the working media, let's call it like that. And my own estimate is that we'll not be able to compensate that increase in the working media with even more savings on the non-working media. Because we're already progressing quite a lot and a lot of the low-hanging fruits on the non-working media have been found. So now also over there is contract renegotiations with the agencies, with the media buying companies. But that will take a bit more time. I think that will come more into fruition next year.
So yeah, I would say you should be able to expect a step up in marketing, net marketing investments for Q3, Q4. But that's, of course, also something we monitor ourselves quite closely, both on the budget, but also on the efficiency of it and whether it works and it delivers against the targets we've set for the marketing. So it is one of these things where we can accelerate or not. And like last week, we took a decision on Gott & Blandat lower sugar, which is doing really well to increase the net marketing investments to get even more traction on that in a specific country. And that's the way we work with marketing investments.
I see. And are you willing to share with us a range of this increase year-over-year?
No, that is too detailed. Again, we'd not like our competition to know exactly the amount of money we're putting in. Then they can do some marketing mix modeling themselves and see how they could compete with us. But it's going to be a step up, and that is then the effect you will see in the P&L. Of course, it's then the net effect of the increase in the working media and the decrease in the non-working media. And that is still something which is challenging to forecast really that precisely. So even if I would like to, it's something we monitor month by month. But overall, it should be an increase.
Then, of course, on the indirect parts in the SG&A, we continue to look for savings and also with the VIP Plus program coming on board so that we're able to get savings as well to offset investments, at least on the full year.
Okay. Thank you.
Of course, it's failed, right? I mean, it should lead to higher Läkerol growth. It should lead to better gross margin or gross profit coming in.
Okay. Thank you.
Yep.
And next question is from the line of Mikel Lödén from Carnegie. Please go ahead. Your line is now open.
Yes. Hi. First, just a clarification. You mentioned the Easter effect that you estimated to be, I think you said, 30-40 million SEK. Was that correct? And was that on a group level, so also for the branded packaged candy or only for pick and mix?
No, I'm referring to Pick & Mix impact here.
And I guess there is an impact also on the packaged side. Would you?
I would say, so I think in Sweden, there's a little bit of impact, but in the other market, it's very little. In some markets, it's absolutely absent. In the markets outside of Sweden, I would say, then there's actually more a chocolate branded chocolate part, which you can see with Easter eggs and things like that. We're not playing in that segment. Very limited, I would say. Maybe even sometimes negative because people are then moving their purchase more to chocolate eggs away from regular candy. It's mainly a Sweden thing. Then it is in Norway also on the pick and mix part. For the rest, I would not assume big impact. Yeah.
I mean, I would add as well as for a family with children, maybe when they get the Easter egg with Pick & Mix candy, then they won't get the bag of Gott & Blandat for that weekend. So yeah. But I mean, in Sweden, the Easter egg contains candy. In the other countries, the Easter egg is a chocolate egg wrapped in an aluminum foil, like in Holland or in Finland.
Yeah. Okay. Because I would have assumed slightly higher than the 30-40 actually for the group. But nevertheless, just one more on this Swedish pick and mix and the turnaround process here. First of all, you spoke about the timing and when we should expect positive impact. And I guess all of these 100-plus contracts that you have been renegotiating now, I guess the price increases, are they in effect as of that date or is it like?
1st of July.
Sorry?
1st of July. 1st of July for all of those.
Okay. And secondly, when you speak about your ambition to reach break-even by the end of next year, when you just think about it now, if you have raised prices to a reasonable level already by the 1st of July for half of the volumes, just reaching, first of all, reaching break-even seems like a very cautious ambition given what kind of possibility you have in the other countries for Pick & Mix. And secondly, the timing as well. I mean, of course, things can happen. You can lose contracts on the way. But if everything works out, I would assume that you are planning to make money. And the timing seems a bit cautious also. Is there something to comment on that?
Yeah, there is because I think you guys are overestimating the effect of the pricing on the bottom line. And that's why I also alluded to the other factors we are addressing, like warehousing, to warehouses still, the whole distribution to stores maybe versus central, the whole merchandising efficiency we talked about, and also the assortment.
That is also a very important factor in the profitability journey because we need, in some areas, we need to come in, let's say, on the cost level, which is also competitive versus our competitors because we will not be able, from where we are right now, to just take pricing to solve our own internal inefficiencies and ask our customers to pay for that when our smaller competitors do not have these kind of cost disadvantages and would be able to offer them more or less the same service for a lower cost. Yeah. It's not just a matter of pricing. It's also not just a matter of pricing once, which we now have done with half the volume. We will need to come back with another round of pricing. It's actually also a little bit more complicated than what we are just talking now.
I mean, it's not just the contract, it's also the balance between our bulk sales and the sales to other channels and then the individual contracts and how we get that pricing right. So there will be more rounds of pricing in order to get this right. And that's why the timing is not so optimistic in that sense because, as we also said in the capital markets day, I mean, the simplest decision would have been to just delist the whole pick and mix business and the problem would have been gone. And we said, "No, strategically, this is such a big segment, it's so important in confectionery.
We're going to keep this business and bring it to profit and then we're going to grow it as well, and that's why we need to be a little bit more, yeah, we need to be a little bit conscious as well about the world around us and that we're not pricing to mask our own internal inefficiencies.
Okay. Thanks. But is it fair to assume that if, I mean, let's say that you reach break-even in Sweden and I know all these how you allocate costs and everything, I mean, that can be done differently. But would a break-even business with the current cost allocations that you have still be positive for you on a group level? I guess you fill the factories with volume and production and so on. I guess there are other benefits from having a big Pick & Mix business in Sweden. So maybe break-even is good for you anyway.
No, I mean, I would not stop with break-even. I mean, I think we need first say, "Okay, we put a stick in the ground." And the timing we just discussed to get the pick and mix business in Sweden in black figures, how do you say it in English, hell or high water, we will get there. By that time, we will also have a much better position, I think, on things like category visions, category drivers, different concepts for different channels so that we can also start to work with our customers on how to grow the category and how to attract shoppers with pick and mix, etc. And that should allow us, I would say, to bring the Swedish profitability on pick and mix to the kind of average level we have in other markets. So the journey is not just stopping.
And if we get there, then I would agree with you, then it starts to contribute to the overall, let's say, EBIT journey of Cloetta. I mean, of course, making it break-even, that's already 1% EBIT, right, versus last year. But it should be a bit more than just break-even.
And you mentioned also that, of course, there's a risk that some of these who have accepted the price hikes now will come back and feel differently in a few months' time. But have you so far seen any activities from your competitors? I guess they are listening now to what you are doing and might see opportunities to either raise prices themselves or take points.
I will not answer it that directly, but normally, what you would see within FMCG is that the number one in a certain market takes the first step to raise prices, and particularly in an environment where price is so sensitive, like in retail and certainly also in Pick & Mix. I think we've done the right thing to go out with this price increase, and then normally, the smaller players, they can follow. That's then their decision. They follow or they try to, how do you say that, to take advantage of it and try to get volume. Now, we do this not by coincidence, but also in a timeframe where sugar prices are going up. Of course, the Swedish krona has weakened and a lot of this candy is also being produced outside of Sweden.
I don't know what our competitors are doing on an individual basis and certainly not on an individual store basis. But of course, the fact that we are not losing that many contracts is probably, of course, a signal to me and to you that probably our competitors are not having these similar problems, let's call it like that. And they take the opportunity to follow and at least not to cut their prices.
Okay. Final question for me on then the synergies with Candyking or the insourcing of production of their assortment and how that is progressing. And I know that you've been having some bottlenecks within the drying capacity and so on. But I think the last guidance you gave was that around half of the total SEK 100 million in synergies were to be realized in 2019 to 2020, but that there will probably be a lag now because you need to invest in this capacity. So in this quarter, where are we in this remaining, let's say, SEK 50 million or SEK 45 million or something like that? Where are we and how would you see the timing of those synergies coming through?
Yeah. I mean, I think you say the right thing. So there is around 40 still to be insourced in benefits. On the molding, we are constrained, and the insourcing, every time we need to put that next to selling more organic growth on branded products and what do we want to use the capacity for, and of course, if there's more profit to be made from the organic growth before we have the extra capacity of the drying chambers, then obviously we are making the right business decision if that is more profitable, then of course, there's a lot of other technologies where we still have capacity from hard boiled candy or the chocolate products, the longer products, the jelly beans, etc.
There we are still having insourcing benefits during the year because we took some of these products in, not on the 1st of January, but during the year of 2018, and those benefits will come. Then there are also some smaller still indirect savings which are coming in. Take, for example, the UK business going live. I mean, they have another third-party provider for their ERP system. Of course, those costs are going out. We are on track, but the insourcing of the molded part, that will speed up again after we install the extra drying chambers. Yeah, it is a continuous balance between organic growth and more insourcing.
Okay. But is it fair to assume of the remaining SEK 40 million, more than half of that will come 2020 then? Is that fair to assume?
Yeah. Yeah. That I think is a fair judgment.
Okay.
Okay. Thanks very much.
Good.
There are currently no further questions registered on the telephone line. I'll hand the call back to the speakers.
I actually have one final question here that you mentioned that you have a cost disadvantage against competitors in Pick & Mix. I would assume this is a scale business and that you are one of the bigger players in the market. First of all, is that the right assumption? And what would you say is the main reason of the disadvantages and what is your goal to shift into advantage in the future based on scale?
Yeah. I think that's a very good conclusion. I mean, it is a scale business. Yeah. We definitely have scale, of course, in the production versus buying this third-party. But then on the merchandising part, we have competitors who also have a lot of other products which they are merchandising in store. And there we don't necessarily have a scale benefit. But I think we need to look at ourselves and we need to look at the business we acquired. It was just not in a very good shape. And the merchandising efficiency and the merchandising control in Sweden, sorry, that was Sweden I'm talking about now again. We just did not have good control over the merchandising cost and the route planning and the time spent in store and the merchandising cost per kilo. And that is now all getting under control.
We just need to bring that to the level where our competitors are working. Of course, we don't have exact numbers on how they are doing this, but we can see it with our own benchmarking. We're benchmarking our own countries on things like merchandising cost per kilo. We can see there's still some more gains to be done. The fact that we have two warehouses still for Pick & Mix, yeah, I don't think any of our competitors will have two warehouses. We have the old Candyking warehouse and we have the old Pick & Mix warehouse of Cloetta. That also needs to be joined to one to get scale benefits.
Okay. With that, I would say thank you for today and have a good afternoon and a good weekend when the weekend comes. Thank you and goodbye.
Thank you.