Welcome to Cloetta Q1 Conference call. My name is Jacob Broberg , Head of Investor Relations. As last quarter, I have Henri de Sauvage Nolting, CEO, and Frans Rydén, CFO, with me here today. Henry, you can start. Please go ahead.
Yes, thank you, Jacob. Q1 highlights. Of course, very happy to see the fifth quarter of organic growth in the branded business, 71%, and that we have a stable operating profit. Net sales declined organic-wise with 3%, not to do with pick and mix. We'll talk about that later. Operating profit adjusted SEK 166. And the cash flow doing well at SEK 154. And the net debt EBITDA is still at the target level. If we then look a little bit more at the markets, we can see that the packaged confectionery markets, so again, this is the Nielsen numbers in our main markets, so excluding Pick & Mix , declined in most of the markets. We can clearly see that March month was much lower than last year, which is all to do with Easter. So the market was down, but no big change.
Our estimate of the pick and mix market is that it grew somewhat in all markets except from Sweden, but these are estimates, of course, because there are no market data really available on pick and mix. Our organic growth was minus 3%, all coming from pick and mix, and then mainly from Easter timing and also the last quarter of the lost contract in Sweden. Those are the two main contributors to the minus 11% on pick and mix, and as I already said, the branded part grew with 0.6%. Last year, we had a strong start in Q1 with branded. Frans will allude to that, so I'm pleased to see another quarter with growth. Even more pleased to see that we're growing market shares on an overall level and also in our main category, so that's really important competitive-wise.
If I look at a quick update on the Q1 progress on our core strategy, as said, market shares are growing. It's a signal that brands are becoming stronger, which is important. Further progress on the working media, so the money we spend on getting our messages across to consumers. So another 10% up, which is really good because that means that the money we have is being used more efficiently and also a continued strong traction on some of the recent big launches like the Plopp tablets and also all the low and no sugar candies on the Venco or Gott & Blandat, etc. So that is good. If we look at the facilitated growth, we can see that the One Cloetta program is getting traction both in cooperation across the markets commercially, but also some more tech things.
We're now live with an HR system across Cloetta where all the people, FTE, salaries, etc., are in a cloud-based system, which will facilitate also virtual teams. With more and more managers, we have people in different locations. Candy King U.K. is ready to go live on the Cloetta ERP system as from the 1st of May. We gave a go decision on that. The capacity investments we announced last time have been approved and initiated in the two big molding sites and on the international markets. We now also have the Dubai hub for the Middle East opened to get more traction on the brands we have in that region. If I look at the funding growth, we have the value improvement program initiated together with Accenture. We're getting the first results, the first cost buckets, first ideas of the potential over there.
Very good positive feedback from the Perfect Factory in two of our biggest plants where we did this assessment on what we can do to improve things like efficiency, waste, etc. Really inspiring to hear also operators and technicians talk about that the insourcing is continuing, and last but not least, the price increases we have announced in March in Sweden on Pick & Mix to get out of the loss-making situation over there are progressing. Frans, over to you.
Thank you. So thank you. So first, let me say that this is a quarter where I think it's appropriate to use the word despite. And as you started to familiarize yourself with the results, the gross profit and operating profit, I think you would join me in saying that this is a very stable business, and that's despite a fairly tough comparability that we have with Easter shifting by one quarter. Nonetheless, to dig a little bit closer into the net sales, so obviously, we're down 0.2%, primarily due to this Easter effect. But recall also that we lost a Coop contract in Q1 last year, and it was only by end of March we had exited the stores. And of course, March was still a pretty strong month with Easter that year. Pick & Mix , as such, was down 11.4%.
But then the branded packaged products continued to grow, as Henri said, for the fifth quarter by 0.6%. Now, on the next slide, we're going to look at that in a bit more detail. Before we go there, I just want to call out, of course, the Forex upside here. We did have a 2.8 gain on Forex this quarter, fairly similar to what we had in quarter four and overall for last year, which, of course, then brings us back to pretty flat net sales. The flip side of this and that we will see when we look at the P&L is, of course, where we get the benefits of Forex on our sales. We also have a negative effect on our sales G&A. Moving then to a little bit of a zoom-in on branded and Pick & Mix .
The packaged products accounted for 73% of our sales in the quarter. And what is worth calling out here on the very right-hand side, the 0.6%, which is then on top of the 2.4% that we grew in quarter one last year, which in turn was on top of the 1.3% that we grew in the first quarter of 2017, which was the only quarter in 2017 where we had organic growth in the branded business. Now, on the pick and mix side, given the Candy King acquisition and sort of the reliance on gaining or losing big contracts rather than winning every day with the consumer, we can't quite make the same comparator. Of course, it's not nice to see an 11.4% drop, but if I am looking for a silver lining here, at least these bars are approaching toward zero here.
So the reduction is getting smaller and smaller. So moving then to our profits, if I start with the gross profit, it improved by 6 million SEK versus last year. Obviously, the shortfall in organic growth was offset by the currency translation effect on the sales that then flowed through. Where we have a stronger ability to influence, though, I think, is on the gross margin, and it's great to see it's up by 0.4%, largely driven by the favorable mix in the portfolio. Of course, given that the Forex impacts both sales and the profit, you don't really get an upside on that in gross margin. So this is really driven by the mix in the portfolio. On sales and general and admin, you have an increase of SEK 8 million , which is probably similar to what many of you expected with increased spending on advertisement.
We have increased the spending, but not as much as we originally envisioned because we were able to utilize the available money better than what we've done before. So our working media, that which is seen by the consumer, is up by 10%, whereas we could then reduce what we're spending on agencies and on production and so forth. Now, the other piece which is very important here, as I mentioned, we get the upside on Forex on net sales, and here we see the downside. So it's about SEK 11 million, is the hit on this line on account of Forex alone. So our cost-saving program is working well and is delivering, but it gets obscured here by the Forex impact. Operating profit favorable by SEK 2 million, obviously the net of the two previous lines and very much in line with last year. So moving over to cash flow.
We have slightly better cash flow from operating activities before changes in working capital. And here I want to call out that we do have an effect as a result of implementing IFRS 16. It's only about SEK 1 million on the operating profit line. But here we see a shift from this line down towards cash flow from financing activities by SEK 19 million. Towards the back of this deck in the appendix, there is a summary that highlights all the changes, which I think describes it actually better than the official interim report does. And I invite you to have a look at that. However, it doesn't really influence our leverage or any other big changes. Now, the working capital in the quarter increased by SEK 50 million.
This is driven by increased inventories heading into Easter, while we also have increased receivables largely on account of Norway and as some of the retailers were holding back purchases towards the end of December. Now, this is offset by favorable payables, which have increased given that we exited with very low payables last year. We then have a big movement, as you can see, the SEK 146 million as part of cash flow from investing activities. This is the payment for Candy King, so the earn-out. It's the only payment we're doing now. There is no more payment after this, so that is settled. And then cash flow from financing activities.
As I mentioned, there is a reallocation on account of IFRS 16, but these are also commercial papers that we entered into given the fact that at the end of the month, we needed to manage the cash also for the payment of the dividends early April. Now, we use commercial papers because it's actually less costly than using our credit facilities, which we still have about SEK 1.2 billion unutilized. So in conclusion, before I head back to Henri here, I would say it's a stable financial performance despite a difficult comparator.
Summarizing for those of you who were at the Capital Markets Day, on the four, sorry, the three main areas. Again, the branded growth, really important because it has the over 14% EBIT contribution to the business. It's 71% of Cloetta. We had 0.6% growth fifth quarter. It starts to become a trend for sure. It has all the focus in the company to deliver quarter-after-quarter growth in our branded business and making our brands stronger. Then the second bucket is, of course, how do we get Pick & Mix to sustainable value creation. Yeah, very important is that we get out of the -SEK 60 million loss we made last year in Sweden on Pick & Mix . We've announced price increases. We're taking cost-cutting exercises, assortment rationalizations. That's all in progress.
Also in Norway, we have a new model for pick and mix implemented as from Q1, which is able to operate at lower cost, which is important again for profitability. Candy King U.K. is going on to the ERP platform of Cloetta, which will also enable us then to create one company in the U.K., not only doing the old Candy King Pick & Mix business, but also the Cloetta brands in the U.K., mainly Chewits and The Jelly Bean Factory will be managed now from the U.K. with English people knowing the customers better than our export international organization. And of course, the insourcing synergy is really important, and that is going in line with our plans. And then the third bucket is the reducing of the cost and to drive the efficiency up in the factory. The Value Improvement Program has started.
Actually, this afternoon, we'll see the first results from all the transparency we're getting through Accenture and looking at different cost buckets to look at the kind of savings we are going to make in each of those cost buckets. The cost savings which are coming out of the program we announced at the end of last, sorry, of the end of 2017 are coming through. Of course, exchange rate is not showing that in the external results, but it's good to see the Q1 progress we are making. And then the Perfect Factory, really important to drive the efficiency and the waste side of it, but in particular, the efficiency side to create more capacity in our factories to also be able to grow more and to insource more. So a lot of progress over there as well. And with that, we open up for questions.
Thank you, sir. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Please hold until we have the first question. The first question we have is from the line of Nicklas Skogman from Handelsbanken. Please go ahead, sir.
Yes, hello. Thank you for taking the question. Could you say something on the timing of your expected SEK 60 million in losses in pick and mix in Sweden, the improvements there over the coming quarters? I think at the CMD, you said it'll take 18 to 24 months to remove this. But when do you think we should start seeing the improvement and roughly what rate do you expect?
Yeah. Yeah, I mean, the improvements we should start to see as from H2 this year, right, with the pricing we are doing, but also the efficiency in the merchandising and some assortment rationalization. So of course, that is going to come. It's normal in these situations that you have to, I don't want to say educate, but you have to take your customers and your consumers with you on this journey. So it cannot be a big shock. We might lose too much of the business. So there will be several steps we have to take. So I still stand by the timing that it will take us this year and next year to bring it into black figures. Yeah, that is the plan we are executing right now.
But do you think it's going to be gradual improvements, or will it be 2020 heavier?
No, it will be steps. So on the matter of pricing, you also have to take consumers with you to a new price point. Yeah, and that is something you better do gradually, not to completely lose them.
Okay. And do you think you have lost any business in this quarter because of the announced price increases or tougher terms for your customers, or is that?
Yeah, not yet in a big way, but there are some contracts which we have ended which were low or negative margin and no possibility to increase prices also for other reasons. We're not able to insource these products. So there has been a small effect, but it doesn't play a major part of the minus 11% Pick & Mix development in Q1, and then how customers are going to take this going forward is speculation. We don't know yet.
Okay, perfect. And was there a negative impact from extra shifts that we saw in Q4 in Q1 as well, or?
Yeah.
But it was less than in Q4, or?
That's very difficult to say. But of course, it's pleasant to see that, in particular on the branded side, that we keep on growing. The growth, also if you look at the market shares, is very much in candy and on chocolate. And that means also that there's a volume shift towards the molded products and to a certain extent also towards some chocolate products. And yeah, if we have the lines, I mean, I'd rather run them more shifts than coming with an investment proposal to build a new line. But of course, these extra shifts, particularly if there are not planned months and months in advance, then you pay overtime, and that is normally a bit more expensive than a regular, let's say, seven days a week, 24 hours a day shift pattern.
But that's something which we are developing and taking decisions on how we're going to go forward, also hand in hand with the extra drying capacity we have been talking about last time.
Okay, perfect. Thank you very much.
Thank you. The next question we have is from the line of Nicklas Fhärm from SEB. Please go ahead, sir.
Thanks, operator, and good morning to all. I would just like to ask you, obviously now you're running a positive like in the packaged branded goods business, which by the end of the day is most of your revenue. Now, going into this quarter, there should be some substantial calendar effects, of course, impacting in a positive way. But without you, because you probably won't guide us on organic growth for this current trading, but my question is, could you elaborate a little bit on what are the risks for you not to deliver positive organic growth on a total basis in this quarter?
What quarter do you mean? Q2 or Q1?
Q2.
Of course, there's an Easter effect in Q2. I mean, I think everybody understands, right, that last year Easter was to a large extent in Q1, although the refilling was probably partly in Q2. And now there's a bit of pre-selling in Q1, but it's largely a Q2 effect. Yeah, that's very broad, very overall. It doesn't satisfy the answer. Then, of course, within Easter, pick and mix is very much impacted, mainly in Sweden. Also, in the other markets, there is some Easter effect, but not as much as in Pick & Mix . Then there's also within between the categories, there is, of course, a difference where chocolate is much more Easter sensitive than, let's say, candy. And you know that we have a lot of chocolate business in Sweden, some chocolate business in Norway and Denmark, less so in the other markets.
And then the third factor you need to take in is the fact that Coop is now out. So out of the minus 11%, less than half of it was the Coop effect of last year that we don't have with us now going forward. So that is, of course, a positive in the comparator. Yeah. And then, of course, there are a lot of other effects which have nothing to do with Easter. Of course, we have a good Q1 in Norway due to the abolition of the sugar tax, but then we can see in the U.K. that one of our customers wants to do less promotions because that's where they think they lose too much money on the promotion. So there's several other things. And then, of course, we're having the previous question. We're doing serious price increases in Sweden on the Pick & Mix .
Because we want to get rid of the loss-making situation, yeah, we're adjusting, of course, there is a risk that we might lose some of these negative margin contracts, but we still think this is the right thing to do. Overall, of course, Q2 with Easter should give us a good lift.
Agree. Thank you. That's very clear, Henri. Also, the follow-up question then would be, so in Q1, you had basically zero sales growth, right, from a combination of FX and organic developments, while your cost growth adjusted for the small items of non-recurring nature is up 1.8% year on year, which I think reflects good cost management. But my question is, how should we think about operating leverage now that you're likely, I say, going into a quarter with positive organic growth? Should we expect the current cost run rate to be a good proxy for current trading in the rest of 2019, I guess? Or should we expect even positive operating leverage? Could you give us an idea?
Well, there are quite a few things. I mean, the first one, which is really important, is the branded business. Yeah, the branded business has above-average gross margin, yeah, also above-average EBIT, as we showed, so more than 14%. So every quarter, we get positive branded growth. Of course, there are differences between the countries, between the brands, but branded growth is helping us to get a full P&L effect, you could say, from growth to gross margin to EBIT. Yeah, then you also point out that, of course, there's an Easter effect. So Q2 will be more pick and mix. And Pick & Mix is having a lower gross margin, but also a higher cost base because you have the merchandising cost over there. Of course, part of that is fixed, part of that is variable.
And we know that apart from Sweden, we make an A margin in the other countries and not in Sweden. So when you think about it, you have to balance those two things. Then we're working on the underlying cost. And if I strip out, let me say it like that, if I strip out the currency effects, yeah, I'm happy to see that our indirect costs, which of course are only part of the SG&A, because that is excluding the advertising part of the indirect costs, are going down in Q1. And that, of course, is good because we also are embarking on the next program with the Value Improvement Plus. So there is traction on that, and we want to get more out of that. So that should also help. And like we put in the report, I mean, good cost control has helped us also in Q1.
Of course, that is not something we want to immediately throw out. Of course, you need to dissect that because, as I already pointed out, if you sell a lot more pick and mix, you will also attract more variable merchandising costs. They are also going into the SG&A line. In order to get a real good picture, you need to look at those separately.
Yeah. But would it be, I appreciate your answer. And would it be a fair sort of conclusion, though, that because pick and mix is also a smaller part of your business, that it doesn't necessarily have to end up as negative operating leverage in Q2? I mean, maybe cost doesn't have to increase as much as sales in Q2.
No, I don't think we should necessarily, I mean, it's difficult to answer it like this if we don't have the P&L and your understanding of the total P&L, but of course, if we sell more, we get more top line, we get more gross margin out of pick and mix, but as you also know, pick and mix, it's not contributing yet a lot to the EBIT level, and Sweden is actually negative, in the other markets, it's positive, so there's also a big relation between how much is Sweden going to grow and how much are we going to grow in the other markets before you're able to really judge the EBIT impact of pick and mix, which brings me back to it is so damn important to keep on growing the branded business because that's where we make the profit right now.
All right. Thanks so much. Final question. Did you say anytime how much you actually increased your pricing with as an average, say, on an annualized basis? What are we talking about?
No.
No. All right.
No, but that is something which for several reasons is not smart to communicate. Both, I mean, I don't want my competitors to know what kind of price increases we are negotiating with our customers. And there's actually also a competition law issue with this because that could be seen as price signaling, right? If I'm telling you and it comes into the—this is a public call. So the competition authorities might think that by saying a figure that our competitors would then hear that, they would think, "Oh, well, then we will also follow," because in those markets where we're market leader, yeah, that is not allowed.
Sure. All right. Thank you so much for your time and taking all of these questions.
Yeah, more than welcome.
Thank you. We have a follow-up question from Nicklas from Handelsbanken. Please go ahead, sir.
Yes, two follow-ups. Marketing spend was lower than maybe you had planned for in Q1. How do you see that going forward?
Yes. Well, I think we've said previously that we would increase the spend. And obviously, we will invest time getting the branded products to continue to grow. But we're also looking for opportunity to spend what we have more wisely, similar to what we did in Q1, to increase the working media at the expense, if you will, of the non-working media.
Okay. So the Q1 level is a fair level for Q2 and Q3 as well, then?
No, that I would, I mean, we have a few big launches. I'll not tell you which ones they are, but there's a few strategic launches coming up in Q2, Q3. And it is something we're looking at all the time. And if we manage to get more working media, then we don't need to increase the absolute numbers. But of course, that becomes more and more difficult. Let's say it like that. We will start to look at all our media contracts and renegotiate it. So there's a bit more scope here and there. And then when these business cases are being presented, yeah, of course, when we have attractive business cases which are delivering good gross margin, if we're growing more high-margin products, then we will invest also in absolute terms more in advertising. And it goes hand in hand with the savings program.
That's also very clear for both the markets, well, for everybody, that we have to find the money, our sales through savings.
Okay. Thank you. And then one on inventory. Are you happy with the levels and the status of the inventory?
If you're thinking about on the cash side, obviously, we have some unfavorable working capital on account of increased inventories, but that's to be expected as we're heading into Easter. Of course, I would say I would be very happy if we could have some more candy inventories because we're constrained. So.
Okay. Great. Thank you.
Thank you, Nicklas. The next question we have is from Mikael Laséen from Carnegie. Please go ahead, sir.
Yes. Hi. I was just wondering on Candy King and the synergies, if now that you have sort of summarized 2018 and also now you have the plan of further investments to achieve the last half, I guess, of the synergies that you communicated earlier. But is it possible to say something more on first 2018, how the synergies actually came through in 2018? How much was actually already in place in the first half versus the second half? And how much impacted the gross margin versus the top margin? And going forward, then the second half, if you could say something more on the timing now that you have put the investment plans sort of into realization.
Maybe just on the Candy King synergies, so we've shared that number also during the Capital Markets Day that cumulative 2018, we're at SEK 55 million out of the SEK 100 million. Then we're looking to getting up towards SEK 80 million this year. Obviously, that also requires some of the further insourcing. It's most of what we've been able to do on the sales and G&A we have. There's still a few pockets where we can do a bit more. Yeah, SEK 55 million end of last year and going for SEK 80 million this year.
Yes. But the 55, how much of that impacted the gross margin versus the EBIT margin?
Yeah. Yeah. I don't.
The majority is the insourcing, which, of course, is in the gross margin. I think we've said 60/40 or 70/30-ish on that path.
No, But yeah. I mean, you're copying. I mean, our only focus has been to communicate EBIT uplift SEK 100 million. We have never split that into gross margin or something else.
But the majority is from the insourcing.
The majority is insourcing. Absolutely.
Yeah. But I think you communicated earlier or last year that the first synergies were more on the SG&A side. And then the insourcing takes some time, obviously. And first, you had to end the contracts with other subsuppliers. And then now, obviously, more capacity. So my question is, again, is the remaining part then going from 55 to 100. I guess that will show in the gross margin and what we saw in 2018 perhaps was more on the SG&A side.
Yeah. No, that's right. There's a little bit more to do on the U.K. and a few further SG&A indirects, but not so much, and the majority is the insourcing. So you're right.
Okay and in terms of.
Just one thing to add to that, though, if I may, Mikael, we had part of the savings that we achieved up until end of last year was also insourcing. Just a call. And again, we've shared some numbers on this in the Capital Markets Day because obviously, we went ahead and insourced pending the new capacity using existing available capacity. So there's already insourcing upside in the P&L today.
Yeah. Okay, and in terms of the investments that you will be doing now, the 100 million, when will that start to show in CapEx?
Yeah . 2020. I mean, there will be something maybe towards the end of this year already.
Okay. And to further specify then the remaining synergies of the remaining 45, you say 80, 2019, and 100, 2020. But is that a run rate? So you will be up on the run rate in 2019, and by the end of 2020, you will have the run rate of 100, or will it be for the full year?
No. Run rate. The 2018 number is the cumulative where we end at, but then we're talking about the run rates.
Okay, so maybe we shouldn't expect too much in the next couple of quarters then until you have built this new capacity.
Yeah, and what makes it a bit tricky as well is obviously because when packaged products are doing very well, we also have to consider what we should insource and at what point. So obviously, we're always going to make a decision which is best overall for the company. But it could be possible that we will allow our available capacity to manufacture for the branded business instead of insourcing something if that's more beneficial. So that could change the timing a little bit on that.
Okay. Thanks. The other question for me is regarding Easter, and if you could say anything about the Easter period now occurring, obviously, in Q2, and first of all, I know it's mostly a Swedish thing, but in Norway, with the sugar taxes coming back to the 2017 level, has there been any promotions and so on in Norway now, which was not the case last year, and in Sweden, has there been sort of a normal Easter impact?
Yeah. I would say so. In Norway, of course, there are a number of effects. The first one, of course, was that with the sugar tax abolition, customers stopped buying in December and then started buying again in January. So of course, that's an effect, a positive effect for Q1. And then we can also see that our new setup for Pick & Mix with two main elements over there is the consumer price and the way we communicate that, but also the fact that we back with, call it, secondary display units, that that has a very positive impact on the pick and mix sales. The customers so far are not price promoting. So that is not back like it was in 2017. But I think we've adopted well to that situation by still communicating price in a good way and with those extra display pallets.
Then in Sweden, yeah, Easter is Easter, I would say. And it's a big season for Pick & Mix .
Okay. Thank you.
Thank you, sir. As a reminder, ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad as a final reminder. Ladies and gentlemen, if you wish to ask a question, please press 0, then 1 on your telephone keypad. Okay. At this time, we have no further questions in queue. I'd like to hand back to the speakers if there's any closing comments.
Okay. Thank you very much for listening in on this call, and speak to you next time. Have a good afternoon and weekend. Thank you and goodbye.