Ladies and gentlemen, welcome to the Cloetta Interim Report Q2 2017. For the first part of this call, all participants will be in a listen-only mode, and afterwards there'll be a question-and-answer session. Speakers, please begin.
Thank you. Welcome. My name is Jacob Broberg, head of Investor Relations, and with me I have Danko Maras, the CFO, and Henri de Sauvage Nolting, our CEO. So I will ask Henri to start. Please go ahead, Henri.
Thank you, Jacob. Good morning, everybody. Quarter two has been a transformational quarter for Cloetta. Two main events have happened. As from the 28th of April, we have integrated CandyKing in our business and also in our financial reports. And as you have read last week, we have also an agreement to sell our Cloetta Italy business, and therefore we have put Cloetta Italy on one line as an asset held-for-sale and taken it out of the rest of the P&L. So those two things impact the P&L for the quarter, which saw our sales improving with 15.8%, but 13.2% was coming from acquisition and another 3.1% from forex. Our organic growth was -0.5%, which obviously is not where we want it to be.
Operating profit adjusted amounted to SEK 115 million, lower than last year, mainly driven by lower volumes in supply chain, and we'll come back to that later on in the presentation. Operating profit came in at SEK 90 million, and profit for the period amounted to SEK -329 million due to the write-down on the Italian business. Cash flow from operating activities amounted to SEK 117 million. As said, we acquired CandyKing on the 28th of April, and on the 6th of July we signed an agreement to divest Italy. If we then go and look at our business, we could see that in most of our markets the confectionery market is showing growth, most of it being value growth. Our sales, though, declined with 0.5%, which is not good enough.
If we look at our core markets in Sweden, Finland, the Netherlands, but also our joint export market, we were growing sales, but unfortunately this was offset by two smaller markets in Denmark and Norway. In Denmark we could see that our number one customer had a conflict last year with one of our biggest competitors, and that conflict was resolved, and these competitor products were back in shelf, which was bringing our sales back to more normal levels. In Norway we have a category and a brand issue. We can see that the pastilles category in Norway is going down, and also that our brand Läkerol is losing market share in a declining category. This has to be addressed by better brand positioning and brand strength, and also focusing on the core of that brand.
We can see that the quarter was predominantly driven by pick-and-mix growth in many of our pick-and-mix markets, and we also could see the positive news that CandyKing had a positive growth quarter in Q2, which has not happened for many years. So those are good signs of that business. If we then go to the acquisition of CandyKing, we have spent the last two months with the CandyKing or the former CandyKing management team, because now they're Cloetta employees, to prepare an integration plan. And our first priority on this quite volatile business with different maturity contracts is to stabilize the volume and to get volume growth. We do this by jointly focusing on the development of better concepts and also looking at assortment.
Of course we also have focused a lot on identifying synergies, and so far we have been able to identify SEK 100 million of synergies which are in execution. Those synergies will come over a time period up to 2020, but most of them will come in 2018 and 2019. And already this year we start with the first production in-source synergies, which is the majority of it. We also have a one-off cost and capital expenditure expected to amount to around SEK 175 million, and we will update you accordingly. We also have a big decision in the divestiture of Cloetta Italy, and Danko, who led that whole process, will take you through the impact on Cloetta of that divestiture. Danko, over to you.
Thank you, Henri, and good morning, everyone. You've seen the press release we put out last week on the 6th of July. In short, in terms of the numbers, enterprise value defined as SEK 450 million. There is a positive net cash effect of about SEK 415 million. Those proceeds are expected to come in in Q3. We are anticipating a closing in the third quarter. We think that will work in terms of the final arrangement that needs to be made. And obviously then, the remaining part we had of intangibles in our books and, looking at the proceeds, there is this additional impairment of SEK 365 million. So in terms of the reporting, we've done all the restatements last week, and also when you are looking at the numbers in this report, we are having asset held-for-sale or discontinued business.
Obviously then the comparators from last year and this year are out. So when we talk about business performance, Italy is no longer included. The impairment of Italy recognizes a challenging business performance over time. You know, it's been a long journey, not always easy, but I think we have eventually made the right decisions here. We are happy with the industrial player, Katjes International, acquiring Italy. It's good for our colleagues in Italy. There is probably a good calibration synergy both between Cloetta and Katjes where they will find an opportunity to grow their business in the south part. So all in all, I have to say we feel that we are in a good position of finally making a decision that has led to this. With that, I will move on into the quarter and talk about sales.
So on page six, we thought we would put in a graph because it is a very transformational quarter. We have never done this kind of size of acquisition with CandyKing, but also not done a disposal of this size. So all the restatements might confuse you a little bit, despite all the numbers that you have there. It's a very short note; this is from the release we made this morning at 8:00 A.M. But if you look at it from 2016, you see that SEK 1,362 million was the number. We now take out Italy, which is the discontinued business of SEK 141 million. So the restated position here would be SEK 1,221 million, and then we add CandyKing. And it's not the full quarter, as Henri was alluding to. It's only May and June that we are adding. And please remember this also when I go through the profitability levers.
We have just put on CandyKing on May and June performance. And clearly, as you have seen in the past, it hasn't been in the best of shapes. So what we need to do is obviously to start working on the in-sourcing and the synergy realizations. But what you are seeing now is just a pure consolidation of the CandyKing results from May and June. And that is SEK 161 million. And then the Cloetta business excluding Italy and excluding CandyKing had a slight negative of SEK 6 million. That's the 50 basis points that Henri referred to. And we continue to have these positive effects from the retranslation of the euro continuously becoming stronger to the SEK. So this is now the third year in a row we have this benefit on the top line.
That results in 1,414, meaning total growth of 15.8%. Now, coming into the operating profit, a couple of points that I just want to make sure that I make distinct. There are many moving parts, of course, but now you could see this 15.8% growth on the net sales. But then you see a gross profit of SEK 519 million versus SEK 512 million. So in absolute profit terms, you have a contribution of SEK 7 million in this quarter. But in gross margin, you see a very significant decline of 520 basis points. It's so much that I have to say 5.2%. Those movements are significant. However, to remember now, the add-on of CandyKing to the Cloetta Group results have a dilutive effect of 3.1%. And it's not only the fact that CandyKing is selling at a lower margin than our group average.
It is also a consequence of the acquisition that we have to allocate something called purchase price allocation, which is the IFRS requirements on the acquisitions that we do. The real dilutive effect that we are having by just simply adding on CandyKing is 2.1%. The purchase price allocation effect in percentage terms is 1%. And that is a one-off that will go away, obviously, as we start working. And also, obviously, as we start realizing synergies, this will have an effect that will improve our gross margin going forward. But this is just simply the consolidation effect of adding CandyKing. But that's not all. Out of the 5.2%, 3.1% being CandyKing, the remaining part is the real underlying issue in the quarter, which relates to supply chain.
Here it is, production volumes in the second quarter that were quite high last year and quite low this year. The delta between these two had a almost 2% effect on our gross margin in the quarter. Some of it is driven by demand, but a large part of it is phasing issues also that are occurring in the specific quarter. These things might happen. You might have also read that we had a bit of an issue in one of our factories, and that also is affecting the output. But overall, I would say the disappointment that we saw in the quarter is something that we have seen coming through in the production planning. But to that effect, there's also an additional effect of the Easter sale of pick-and-mix that did not occur in Q1.
It occurred in Q2, and therefore the balancing between our packed business and our pick-and-mix business also had a negative mix effect. But overall, that is the 2% that I'm referring to on the gross margin. We have to learn a little bit to work a little bit more on understanding the consequences between the packed and the pick-and-mix going forward. But hopefully, as we are driving through the synergies, this will improve going forward. That explains the gross profit contribution coming from CandyKing, because in absolute terms we got gross profit at a lower margin, offset by the supply chain effects, still giving us +SEK 7 million in gross profit with this dilutive effect in the margin. Coming back to operating profit adjusted there, you see a decline of SEK 41 million.
If you clean out the CandyKing effect, it really is back to the supply chain structure that we were relating to in the discussion that I just made. So if you look at the variance versus last year, it comes down to the production volumes and the mix that we had. It's exactly that reason for why we have the decline. Operating profit is SEK -58 million, and the difference here is simply that we have taken restructuring costs in this quarter, which is SEK 17 million higher than last year. And those restructuring costs are related to CandyKing, but also to the Italian divestments where we have booked a cost in the second quarter. And if you net all of this together, the incremental increase versus last year is about SEK 17 million. That's the only difference between the adjusted and the operating profit.
You will also see a significant increase in SG&A, and the sole reason to that is also that we are adding CandyKing's merchandise and indirect cost structure to that. If we were to exclude it, our indirect structure in total is actually coming down. Very small numbers, but it's actually lower than last year. So even there you have this might-confusing effect of adding only two months of CandyKing with no comparator. That was a lot in one go, but maybe I'll just take two more things on the P&L. We continue to have a good benefit from the financing, the refinance that we've done. So you can see an SEK 11 million benefit on the net financial items. And then profit before tax is then SEK 71 million versus SEK 118 million last year, so SEK 47 million difference.
Then we have to add, in the end, the discontinued business, and that is the net number of the results and impairment that we've done with Italy at SEK 372 million, meaning that the results for the period will then be negative SEK 329 million. Okay? Then I move on, and I will not spend more time on the changes in that side. You can see there the negative organic growth -13.2% for CandyKing. There's nothing else. It's CandyKing. Then 3.1% is the Forex. That gives you the total. On the cash flow, which is positive, if you look at it, we are actually better than last year, SEK 117 million. The composition of this is obviously, as we are doing a lower EBIT or EBITDA. That's the drain in the cash flow generation in the quarter.
On the other hand, very positive development in the working capital movement. So if you compare those two between each other, it's a SEK 60-70 million difference between last year and this year. So they are in practice offsetting each other on individual lines. And the total SEK 117 million versus SEK 114 million is a good delivery in the quarter. No particular issues on CapEx. Obviously we are paying now for the CandyKing acquisition. That's the SEK 244 million you are seeing there. And with that, I'll stop on the cash flow part and I go down to the financial leverage. So what you are seeing now is a little uptick, and obviously in the quarter we pay dividend of +SEK 200 million. We also have acquired CandyKing. But we also generated some cash.
The net debt/EBITDA level that you see now has gone up to 277, which is still below last year's quarter. And please keep in mind that we will have proceeds of cash coming in in the third quarter, and that I can give you as a forward-looking statement because that's for sure if the deal is closing. And that will take us down to a net debt/EBITDA level, which is very close to the pre-dividend, pre-acquisition levels. And with that, I just want to make a little short acknowledgment to the team in finance who have been able to do the acquisition, account for the disposal, and put the consolidation together under such a short time. So thank you for the great job you've done. And now over to you again, Henri.
Yes. So under the last two months, the group management has been working hard to develop a strategy into execution modus to underpin our financial targets. And it's a longer-term strategy with eight components which are important for this year and for next year. And I thought I'll take you through the highlights because they are important to get us back to organic growth. So the first one is the CandyKing integration with main activities to develop the concept and assortment even more to be the most attractive concept for both shoppers and customers. There's also a lot of people and organization work going on, and of course we now have to realize the identified synergies. The second part is the Lean 2020, which is our program to drive efficiencies in our factories. Of course, we have four factories less after the closing of Italy.
We want to increase the efficiency in order to create space or capacity for the in-sourcing of the CandyKing volumes. The third block is to grow the core. It's very obvious that we have some very strong brands in our core markets, but that the brands need to be strengthened and also that there are some issues in competitiveness in certain categories in certain countries. So to restore competitiveness and to strengthen the brands in the core is utmost important to get organic growth. In order to fund some of these restorations of competitiveness, we have started a program or cost savings initiative to fund this growth. And this is both SG&A cost, looking at factory indirects, and the most effective way to organize ourselves.
The fifth block is that we have identified a number, a small number of brands where we think we have a repetitive model to bring them into international markets through distributors. And that is interesting margin. It's also interesting growth levels in those markets. So we'll expand some international hubs to bring those brands into the international markets. Then the six points are integrated category and brand plans. And group management has seen that we're working too much on a local-for-local business, ways in our markets, and we've decided that we will go for integrated brand and category plans across the markets and also more aligned with the global category plans we have. This will unleash the synergies across markets and also with global by working much more on common platforms.
I'll show you one on the next slide, but also more common media development, more efficiency in media buying, and also more common innovations across the markets. The seventh bullet is that Cloetta has made a fantastic journey in digitalization of the media. We want to step this up even further because we can see the effect of that, and we have decided to establish a small central team to become really better in the e-commerce area. That is e-commerce both in business to consumer but also business to business, very important for the future. Then last but not least, of course, there's a sugar debate going on in the society. On one hand, we have many consumers who love our brands and our products, and we also are really proud of the products we are selling.
We think it is also our obligation to offer consumers choice. So we will, next to our fantastic current products, we will develop also a choice for consumers who want to have either lower sugar or no sugar at all in these products in order to remain competitiveness in the competitive in the markets. If we now go forward on the focus, the focus still is the organic growth, which should be underpinned to drive our strategic priorities. So those eight strategic priorities, executed well, should bring our organic growth to levels where we want it to be. So that is priority number one. Of course, we have an agreement with Katjes, but we now need to work on all the practicalities of the closure of the divestment of Cloetta Italy, which is a big piece of work.
The third one is to really step up the integration of CandyKing, both in growing the business, bringing the organizations together, but not least also to start working on the implementation of the identified synergies. And last but not least, focus on cost and gross margin improvement in order to create the space for us to grow. So these are the four areas for the next quarter. And if we look at this quarter, and as the product launches, there are a few things I would like to pick up. I mean, one is, Grillbilar, I think a very, entrepreneurial idea. Bilar is, one of the most liked, candies in, in Sweden, and the Swedes also like to grill.
Grillbilar is a product which you can actually use when you have grilled your dinner to bring basically this product into a different consumer occasion, which I think is a very good example. Another one would be the Kick Bites from Norway. Kick is a famous product. It's a stick, and we brought it now into smaller bites, which is giving us a lot of success. The last one I would like to highlight is Crazy Face, which is the product portfolio on the right, bottom hand.
That is one of the first times that we are actually developing a platform across our markets, across different brands and with one product range, but also with one activation idea, with one media campaign through Snapchat with only one agency developing that and also executing this in the same way across those markets. And it's a product very much in tune with teenagers who like to have more soury products. So with having said that, we go to the Q&A session, and we can ask the operator to open up for questions.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you want to withdraw the question again, please press zero two to cancel. Once again, that's zero one on your telephone keypad. We'll have a brief pause while questions are being registered. We have our first question from the line of Mikael Holm from Danske Bank. Please go ahead. Your line is now open.
Yes. Hello. Just first of all, a question on, on CandyKing. You mentioned the, the impact on the gross margin, but I missed what was the impact on, on, on the adjusted EBIT level from CandyKing if you look at it from a year-over-year perspective. That's the first question. The second question is more of a related to, to the financial targets. You have a operating margin adjusted of 12.1% now, if you look at it latest 12 months. And you basically indicate a margin of, of on CandyKing of, of slightly below that. So what should add those extra 2% up to, to the financial targets, roughly SEK 100 million of, of EBIT? What, what would that come from? So that's, that's my two questions.
Okay. Good morning, Mikael. On your first question, I think I understood it, but let's make sure that I got your questions right. The impact on gross margin from CandyKing by adding May and June is a diluted effect on a group level of 2.1%. So simply adding those two months with the gross margin from CandyKing results in a diluted effect of 2.1%. But that's not all. That's another 1% that comes to the dilution effect because of the acquisition booking we have to do on the purchase price allocation. And that will go away again. And that's obviously also something which I was alluding to before, which is addressing your second question. We just simply consolidated CandyKing. We have not created any benefits yet in our consolidation.
We are preparing for an integration that will drive synergies, across the time period we alluded to. So simply consolidating CandyKing, this particular quarter is also and I don't think we have disclosed it, but it's not making any profit, as you know, from before. It's a very slight decline, of a few million SEK. And obviously, that's not what we had in mind in the acquisition case, when we did the calculations. So the contribution of the synergies from in-sourcing and the overhead of SEK 100 million that we are indicating now as a preliminary identified synergy, that will contribute to the overall group margin so that the acquisition increments will drive the 14% EBIT margin for the total group.
It is not CandyKing that is causing a bit of an issue in our EBIT margin currently. It's the rest of the business which is causing the issue. So we stand firm on the 14% EBIT contribution coming from the CandyKing acquisition in whole. And then obviously, we have to address the impact on EBIT margin we've had, compared to last year where we have had a slight erosion because of the issues we talked about on production and top line. Did I address that well enough for you, Mikael?
Yeah. Yeah. Yeah. I think that's fair enough. Thank you for that. Could I just also do a follow-up then on this in-sourcing of production in CandyKing? How has the suppliers of CandyKing reacted to this? I mean, is there any short-term risk of them raising prices ahead of the products you buy from them being in-sourced? Is that a short-term risk for you?
Well, the first thing to say is that we are we're developing a strategy for the in-sourcing which puts the consumer and therefore also the customer at the heart of these decisions. So we're not bluntly going to in-source everything which we can because we want to keep an attractive assortment for the shoppers and the consumers out there in the markets. Yeah. So that is the first and foremost importance.
This is driving then the in-sourcing program, which takes into account that there are certain suppliers who will play a strategic role for the combined business going forward and some other suppliers who are more, let's say, tactical-based also in the old CandyKing world who are interested to keep supplying us as long as we can. So far, we have not seen any suppliers reacting in a negative way. It's actually more the other way around that suppliers are reaching out to us and trying to see if they can become a strategic supplier to the joint business of Cloetta and CandyKing. And this is all being taken into the strategic sourcing plan which we are developing or already have developed to quite a large extent.
Okay. Thank you.
The next question comes from the line of Mikael Löfdahl from Carnegie. Please go ahead. Your line is now open.
Yes. Hi. First of all, follow-up on the former question. Could we get a number on the EBIT level for CandyKing, how much they contributed or hampered the earnings and EBIT margin in the quarter?
Yeah. It's between. I can give you a range, between -SEK 5 million to SEK 10 million.
-SEK 5 million to -SEK 10 million or -SEK 5 million to +SEK 10 million, 5?
I wish. -SEK 5 million to -SEK 10 million. So they came in with a negative EBIT result. So that, of course, we have to address. But it is in that range. And I want to say that range because it is important for us not to give you a fixed number given the way they do the accounting and the way we do the accounting. There's a little bit of discussions. But that range is absolutely comfortable to use in your calculation.
Okay. And coming back then to accounting, first of all, you mentioned PPA. But is there PPA in the cost of goods sold here? So that hampers also the gross profit contribution?
Yeah. That's the way it apparently works. And I have to rely on two auditing firms. But I've also experienced it in prior acquisitions. What you have to do when you do an acquisition is to value your inventory at a fair market value. And to me, that is, in a normal operation, you have it at cost of goods value. But when you sell the product, you have a sales value. And that difference is what we have done. You value your inventory at sales value. So you pick up the margin, of course. And that is booked in cost of goods sold as well. So you have this diluted effect of the purchase price allocation where all your inventory is now acquired at sales value according to the accounting. And that's why you have this effect in the cost of goods sold.
Okay. And that number will not appear anywhere else. So it will be in the cost of goods sold. You won't specify that in amortizations or anything else?
Obviously, it's a bit that still, perhaps in a later stage. But when I look at it now, there is a gross profit contribution from CandyKing, as I mentioned before, which is offset by this purchase price allocation. And the net number is the contribution on our gross profit now. It is considerably less than the gross profit contribution we got from CandyKing. That I can say. But it is a 1% on the gross margin overall. And that's as far as I would go this time.
How long will that remain? Is the straight line amortization of those PPAs, or?
No. This is the way you book the total value of the acquisition price we paid. As you recall, we acquired CandyKing at SEK 325 million. And now we've done the final adjustments. It is a one-time impact only in Q2. So that disappears immediately. It's just how you distribute the values. And when we go into Q3, you will have the true underlying gross margin from CandyKing for three months. If we haven't done any synergies until then, that's the true reflection of the diluted effect of the CandyKing margin to the overall group.
There won't be any other amortization of acquisition-related intangibles, other PPA-related amortizations going forward?
That's a good question. A very small part will come into the A of EBIT EBITDA, which is a customer contract that we have also allocated a certain value on. It is very marginal, a couple of million SEK, SEK 3 million, SEK 4 million, SEK 5 million, around that range. But we have to get accustomed with that now. We didn't have any A in our EBITDA, previously. That's why we always talked about EBIT. But a very small part that should not affect your models, significantly.
We're talking SEK 3 million-SEK 4 million annually then?
Per quarter, per quarter .
Okay. Okay. Thanks. When you look at the accounting and the gross margins that one could see from CandyKing's old calculations standalone, are those numbers not comparable to how they end up in your accounts now?
I want to validate that. Even if it's only two months, we've done a major task, as I mentioned to you, to secure that the definitions are exactly the same between Cloetta and CandyKing. I would say we are 95% there. But there might be something happening in the classification of things. You know, the net sales is defined in a certain way. But you have gross sales. Or you might have merchandising costs in overheads and not in cost of goods. All of that, we have sorted out. You should feel that the big picture is correct. I need to have a little safe harbor statement on the ultimate definition. It might change a little bit. My anticipation is that we are basically done.
Okay. Also follow up on the 14% margin target. That target, you stood by when you announced the acquisition of CandyKing. That was also when you were supposed to continue to owning Italy, even though you were entering into a divestment phase. Now that you have divested Italy, given that Italy has much lower margins than the group, one could argue that the 14% should be higher.
I think that's a very logical point and maybe a good point. I think you have seen when we did the restatements that last year's EBIT margin was 13.7% excluding Italy. And that's coming back to the same point that we are saying, that I said before, about the contribution from CandyKing is also an effort. We need to in-source. We need to create the synergies. And that in itself is an effort that we will embark upon and make sure that that happens so that the share of the contribution from CandyKing reaches the 14% for the overall group. But the 13.7% last year has been diluted by performance issues this year. And that we need to get back to. And it's not something that you just press a switch on.
You, you just have to make sure you get back to that. At the same time, you have to realize the synergies with, with CandyKing. And overall, gross profit will be higher if you think about it. The discontinuation of Italy in turnover is lower than the add-on on CandyKing. And if we get all of this right, we both will get a good margin but also a higher gross profit at the end of this journey. But it's not that easy to just press the button and say, "Let's go up to 16. Let's just first make sure we do 14."
Exactly. Okay. One more on this on the synergies and, or rather the integration costs and investments you're mentioning, SEK 175 million. Could we get a split of that? How much will be restructuring charges going into the P&L? And how much because I guess part of that is also CapEx?
Yeah. And we are a bit careful here. We will say 40/ 60 at this point so that's the reference point on what hits the P&L is about the 40 and then 60 on the investments. But it's a bit too early to be hard fact on the exact number at this point. It's a little bit depending, but use that reference point for now.
Okay. And then to follow up on Italy, how much was what kind of CapEx need there for the Italian business on an annual basis?
It's in line with our 3% that we do on turnover, also in Italy. So obviously, you take out the turnover. You take out the CapEx. So we're still at the same place. But some of the metrics and you will see that going forward when we take out Italy, it's a completely different asset base. So our working capital will significantly improve as a percent of NSV because the working capital was disproportionately high in Italy compared to our group level. Our return metrics will also obviously improve. But all of that is because of the disposal. We then need to take that restatement and make that better, of course. But I won't say that there's more CapEx to gain because we have now taken out Italy. We still have to invest in racks in CandyKing and things like that.
Okay. And could we get a guidance on the tax rate for the group as you see it going forward now excluding Italy but including CandyKing?
Yeah. That's also an interesting point. We have a horrendous tax rate in this quarter as you've seen, over 30%. But that's because of non-tax deductibles related to the acquisition and the disposal. So that's the primary reason for why you see it being high. But it is conceivable now that part of the international rate differences that we've had and non-tax allowable expenses, they were in Italy. And going forward, we will be more homogeneous in our region around somewhere around 24%. And, you know, in Sweden, we are at 22%. We are lowering it. We are finding a competing environment in the operations where we are. But for now, I would use still the 24% as a guiding principle. And we will keep working it down as much as we can.
Okay. Final question from me. Given the pick-and-mix and that business you've grown quite large now, what have you received any thoughts or anything from your customers, primarily then in Sweden where you are becoming a very large market leader? Anyone arguing that you have become too large? Is there a risk for contract losses, perhaps? And secondly, on the same subject, the Coop contract that you did win from CandyKing, I guess that is up for renegotiation now. Could you get a timing on that and your hopes on that?
The first thing, I think, and not only in Sweden but in all the markets where we are working, I mean, it starts with having the most attractive concept and assortment for shoppers because if the shoppers are happy and rewarding the concept with more sales, you can also see that customers are reacting by wanting to work with us. So that is the number one priority. Also therefore, we're reaching out or we have reached out to customers in all markets to show what kind of concept development we're doing, which kind of new ideas do we have. The way this works is that you try to manage the category together with customers. That is something we have been doing in all the markets.
That will, I think, put us in a good position to, to keep building on that, on that business. If we look at the Coop contract specifically, Coop has indicated they want to, to have more impact and more, more influence in that, in that business. That is also something they've stated, publicly, which could, well mean that there is going to be a, a different way of working for, for Coop. But of course, with, with CandyKing, Cloetta being an important, supplier with a lot of knowledge at the different models, going forward with, with Coop where we might see, a Coop taking more responsibility in, in managing the pick-and-mix, category together with, with Cloetta. But I don't want to say much more on that right now, because that is also a customer who makes their own decisions and competitors who are also listening in, of course, on what we are commenting.
Okay. Okay. Thanks. Thanks from me.
I have a question from the web here from Josep Boria from Fidentiis Equities. And he asks about organic growth that is obviously pointing. And what are the big picture level explanation why market growth is so low? Is it market issues, internal issues, competition pressure, sugar debate, and so on that he would like us to elaborate on, Henri?
Yes. Yeah. So I don't think sugar debate is an issue. I actually see it more as an opportunity. Everybody, all consumers know that sugar is part of our product. We're very open and transparent about that. We already have quite a nice part of the portfolio being sugar-free, and we're launching sugar-free and lower sugar products. So that is not the issue. It's quite specific to certain markets and certain categories. So we can see across Cloetta that we are being challenged, that the pastilles category is being challenged. Of course, we are so big in pastilles. And we need to turn that around, coming from multiple factors like self-scanning in the supermarkets or less people going into a petrol station with the payment being done at the petrol pump or the electric cars. You know, those are just understandings of consumer behavior. We need to then build plans, which we're doing, on how to meet those consumers in other channels.
We are having success in finding new channels for these kind of pastille products. And there are also some competitive issues where our brand strength is not strong enough. I mean, we have a lot of brands. But certain big brands in one of our core markets need a sharper definition and more support. That's why we also started the big program to look at our media spend and how we can move from towards more working media spend. And that's more or less it together with the eight strategic priorities I've talked about, which should be enough to address these organic growth levels we have been seeing right now. Would you operator?
As a reminder, if you wish to ask a question, please press zero one on your telephone keypad. We'll have a further pause while questions are being registered. We have a follow-up question from the line of Mikael Holm from Danske Bank. Please go ahead. Your line is now open.
Hello again. I have a question on the price on the Italian business. I mean, you got SEK 450 million for a business that generated SEK 63 million of EBIT last year. So I mean, it's a multiple of 7x. That's almost half the level. I mean, Cloetta has been trading at itself. I mean, do you really see this transaction adding shareholder value?
It's a perspective of where you're coming from, Mikael. We have to look at it from the past history and also where could we take the Italian business going forward. And sometimes, you find as I said before, you find synergies in calibrating your focus. I think both the buyer and the seller are happy because of their ability to calibrate their focus in a better way. So if you take at one point in time, you're absolutely right. It's traded at a multiple, which is lower than the Cloetta than the Cloetta group. But if you look from the past and also what could be done going forward, I am, actually, not unhappy with, where we ended up. Both the seller and the buyer are pretty unhappy with the price. And that probably means that it's a good price.
Yeah. Maybe to add on that, I mean, we have done a strategic review. And we've also looked at the business performance and the EBIT development over the last couple of years. And I think it's no surprise to say that the Italian market is not an easy market. In the out-of-home market, so outside of the supermarket channels, there has been a steady decline in consumption not only for Cloetta but in general, which is putting a lot of pressure on that whole wholesale model. Then next to that, we have four factories in Italy, where we're not fully utilizing those factories with all the associated inefficiencies and issues with that. So I think it's not the right calculation, I would say, to look at Cloetta Group and take that multiple to define the value of Italy. We would have had, as an alternative, to invest significantly to keep those kind of EBIT levels.
Because I read something on, I think it was, like, Merger market that there were plans implemented for the Italian business to actually improve earnings this year. But wasn't that correct?
I don't comment on what you're reading in the newspapers. But just like Henri was saying, underutilized factories can now be completely approached in a different way with a new buyer. And essentially, what we are doing in our strategy of manufacturing, we have eight remaining factories going forward. And if we utilize them in the right way, you get that leverage on profitability that we are seeking. And rather than having a forced decision to do certain things with factories, they will now continue or the buyer will have to decide what to do with those factories. We don't have any significant investments we have to do in that area. We have to focus on our eight factories and make sure that they run smoothly.
Okay. Thanks.
I think we need to conclude with that unless there are no other questions. I would like to say, thank you very much on behalf of Cloetta for this Q2 and speak to you next time. Thank you. Goodbye.