Good morning, and welcome to Cloetta Q1 conference call. My name is Jacob Broberg, Head of Industry Relations. With me today, I have Henri de Sauvage-Nolting, he's the new CEO of Cloetta, and also Danko Maras, CFO. So I hand over to Henri to start. Please go ahead, Henri.
Yes, thank you, Jacob. I must say that we have had a challenging quarter in Q1 . The net sales have declined, but the profit for the period has improved. If we look at the reported sales, we saw a decline of 0.8%, but the most important factor is the underlying organic growth, which went down with 2%. That's not good, and I'll come back to that, where that came from. The operating profit amounted to SEK 93 million, but the profit for the period has improved to SEK 59 million. The operating profit adjusted came to SEK 110 million. Cash flow was lower than last year, but still very positive, and Danko will explain a bit more where that came from.
And there was, of course, an important moment for the future, which was that we signed an agreement with Candyking to acquire them on the seventeenth of February, and I'll talk a little bit more about that as well. If we then go into our markets and our sales, we could see that the confectionery markets in general, where we operate, have a negative development. The organic sales of Cloetta decreased with 2%, and I must say that has my full attention. It's the number one priority for the company and all the people working in Cloetta. Our sales grew or was unchanged in the Netherlands, in UK, in Denmark, in Norway, and in the export markets.
I left out Finland because we saw a strong volume recovery in Q1 , much above the normal levels, and that was, of course, due to the abolishment of the confectionery tax, which we saw in where we saw the negative impact in December last year. Then we come to Sweden, and in Sweden, we saw a shortfall in the Pick & Mix area, and that was largely due to the Easter effect. We saw that Easter, which fell this year in April, we had a very good sales, but of course, in Q1 , we saw a negative effect of that. It's also important to mention that the, as we call it, non-pick-and-mix business, so all our pack business, grew in Sweden, so there's no underlying issue in that sense.
Next to that, there was a decline in contract manufacturing, but the main shortfall in the quarter, I would like everybody to understand, is the Pick & Mix business in Sweden, to a large extent because of Easter. Danko will tell us now a little bit more about the financials, so Danko, over to you.
Thank you very much, Henri, and, good morning, everyone. Yes, a bit of a challenging quarter, that I will go through the financials with. So let me just start by, coming back to the net sales, SEK 1.347 billion. That is a negative growth of 0.9%. I'll come back a little bit to the composition of those, in, in the next chart, but let me just go straight into the operating profit, for the quarter of SEK 93 million versus SEK 108 million last year. That, that difference of about SEK 15 million is a composition of two main reasons. One, the fact that we have lost turnover and lost gross profit due to that turnover loss, it's about SEK 7 million of that.
Another part is that we have had higher SG&A spend in the quarter compared to prior year, and that we will be addressing. It's approximately SEK 6 million. So the lion's share of the composition of the decline in profitability is related to the gross profit loss from the sales and from the incurred expense that we've had in the quarter that we will address going forward. You can see that if you go up and look at the operating profit adjusted, there is an equal difference there of approximately SEK 15-16 million. It's the same reasons on the operating profit adjusted. The reason to why it's higher is simply because we're having, coincidentally, the same restructuring amounts last year as we are having this year. And I'll come back to the restructuring costs or the items affecting comparability in a short while.
When you look at the gross margin, you see a slight improvement. The fact is that because of the mix effect, we do have a slight improvement. We're selling more of the non-Pick & Mix and less of the actual Pick & Mix. That affects our margin slightly. But in addition to that, there is one more component that masks a little bit the effect when you look at gross profit. SEK 505 million versus SEK 506 million looks good, but there is a retranslation benefit there. And that retranslation benefit is approximately SEK 7 million, which is offset in the cost side of about SEK 7 million.
So in total, the operating profit is unaffected by retranslation issues, but you see an uplift in the gross profit that mask a little bit the loss we did on the lost sales. So again, the overall issues that we are addressing is profitable growth in the sense of getting back the revenue growth, but also addressing our end drives, which we will do going forward. On the other hand, the positive here, you can see on net financial items, we are down to SEK 12 million in the quarter versus SEK 46 million last year. So now we are getting the full effect of the refinancing of our debt levels. Our debt level is also on an all-time low, the SEK 2.3 billion. So of course, both the capital cost and the debt levels are lower, and we have a significant benefit in the quarter.
And that actually turns around the loss on operating profit into a profit before tax of SEK 81 million versus SEK 62 million. We have slightly higher tax rate in the quarter, at 27%. Some might say it's more than slightly. Well, it is predominantly because there are non-tax deductible items related to the Candyking acquisition that we have to book in the quarter that relates to the, the acquisition. So that means that when we come down to the profit for the period, we're at SEK 59 million, which is an improvement versus last year's SEK 44 million. So good to see the impact on, on, net financial items. If we then move to the page again, and look at the net sales a little bit, this organic growth, the -2%, is what affects the, the loss of, of gross profit, of course.
But you can see that the euro continues to be strong and has been for almost 3 years now, if I recall it right, looking backwards. You can always say, last year, we had a positive impact of 40 points, but we're at 9.50 versus 9.34, and that has a retranslation benefit in top line of 1.2%. One other thing that you can see here is that we don't have any M&A growth. Last year's 2.2% related to the Lonka acquisition. But please be aware that from Q2 onwards, now you're going to have a significant growth in those structural changes related to the Candyking acquisition. If you visualize this a little bit, you can see the stepwise development we have between the quarters and the years.
Of course, we are not happy to see the decline in our organic growth affecting the total. Also, the operating profit is not coming through the way we were expecting, but we will address that. Moving on to cash flow, which is another component. There is good cash flow, but compared to last year, significantly smaller. What is that due to? Well, look at the SEK 62 million versus SEK 121 million. One key component of that relates to a tax settlement in Italy, which you can read more about, that we disclosed in our annual report. It is positive for us that we have settled this, and there is a temporary cash out in the Q1 that will be recovered in the next 12 months. The total amount is approximately SEK 34 million.
We have already started to get money back from the tax authorities, but that's just simply the way it works in Italy. We have to do a cash out in the Q1 , and then we will get it back in the next 12 months. The reality is that it will have a slightly positive cash effect for us. So we are not concerned about the decline in the cash flow due to this. The other part is, of course, the operating profit being SEK 15 million lower. The third part, which is perhaps important and that I didn't cover enough, is the items affecting comparability. Last year's effect from those exceptionals were an accrual only. It related to the earn out adjustment of the Jelly Bean Factory.
This year are actually cash outs that we have done in relation to predominantly the Candyking acquisitions on transaction costs. So the total impact of that is the difference between... Those three items is the difference between those operating activities last year and this year. On working capital movements, we do have a slightly less positive impact than last year, but in total, when we look at working capital as a % of sales, we are at 9.4%, well within target. Our target level is 10%. And if you look below, you can see that the capital expenditures is SEK 34 million in the quarter versus SEK 38 million. That is also well within the strategic level of 3% of sales.
We will address cash flows, everything else we do going forward, but please bear in mind that we had some one-off issues in the operating activities that we need to recover and will recover, and we already have started to get that recovery coming through. Visually, you recognize this chart. Perhaps those of you who have been with us for a while, you can now see that we are having a financial objective of 2.5 times net debt/EBITDA , and we are now at 2.34, which is our all-time low in our history. On the other hand, please also then be aware that we have paid a little bit more than SEK 200 million in dividend on, I believe, it was the eleventh of April.
And, we also have a slight payment to do here at the end of the month, which relates to the Candyking acquisition. And so for that reason, what we're doing here is paying both the, dividend and doing acquisitions, and that's still within, well within the limits of what we can do on our net debt/EBITDA target levels. So with those messages, tough quarter, we are addressing the three items in here, and, with that, I give up the word back to, to Henrik.
Thank you, thank you. In focus areas for me and the governing board is profitable organic growth, which is, of course, most important. We will try to focus even more on consumers and customers where we bring the money into the company. The next one is the closure of the Candyking deal, which will happen at the end of April. We're all prepared for that. Then the important work of the integration will start, where we will welcome the Candyking people into Cloetta. We have a fully staffed integration team, and the work indeed is ready to start work after the closure.
And then, of course, we're working as well on the strategic review of Cloetta Italy. There's a lot of work going on, but today there is no news. I must say, personally, I'm impressed with the work which the Italian management team is doing to help us in that strategic review. So those are the four or actually three areas: organic growth, Candyking , and the strategic review of Italy. Then, we make our money by selling products to consumers. Just a few examples, and I picked out Polly and Kick. It's a co-branding, so we have Polly as a famous brand, we have Kick as a famous brand, and we bring those two together.
And then, another one is the whole notion of teenagers who like to both eat at special occasions, but also more sour products. And you can see that both in Denmark, there's a Sure, which means sour mix, and you can see in the Netherlands, the Red Band brand, Zure, little bit different spelled with the same, same occasion for the same kind of teenagers. So both more sour products for teenagers. And then in Finland, the Perjantai means actually Friday, and again, teenage related mix after the big success we have with the Saturday mix. This is our bread and butter. This is what we sell. This is where the money comes into the company.
With that, having said, I would like to open for questions, and I give the word back to the moderator.
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad. That was zero-one on your telephone keypad. There will be a brief pause while questions are being registered. Our first question comes from Mikael Laséen from Carnegie. Please go ahead. Your line is now open.
Yes, thanks. Hi, guys. First on Sweden and the sales decline in Sweden, could... Is it possible to try to strip out the Easter effect and look at how the volumes have performed year on year, apart from Easter, I exclude that from last year's numbers?
Yeah. Well, what we can say is that we had a very good Easter sale in April, so that over the month March to April, we see the Easter effect well disappearing or being nullified.
the months ahead of Easter last year, I mean, if you look at the January, February, for instance, is there any negative year-on-year trend, or is it all about Easter and also the Pick & Mix volumes have to-
We should focus on the big thing. So the big thing is Easter, March to April. We see that there was a clear Easter effect, negative in March, positive in April. And let's also not forget that the non-pick and mix business, which is the majority of the sales in Sweden, was positive in the quarter. And of course, you could also think that there's a little bit of negative Easter effect over there as well.
Okay. And the ramp-up volumes for the two big Pick & Mix contracts that boosted last year's Q1, is it possible to quantify that?
No.
Not possible, or, or you don't want to?
Well, I don't have the information over here, but I think also that goes into so much detail, that we would also give too much information out to our competitors on that.
Okay. And is it too much to ask for how the year-on-year performance has been year-to-date, when we then include Easter in both comparables?
Well, then you're asking me on a quarter two update, which I think would be not so wise to do. We'll come back to that when we do the Q2 call in due course.
Okay, but there's not no underlying trend here that we should be aware of, any negatives. It's fairly as it used to be.
Easter sales in April were good, and March in Pick & Mix in Sweden was not good.
Okay. Regarding Candyking then, it's possible to give any more information on when you will announce further details regarding synergies and restructuring costs and so on?
... Hi, Mikael, it's Danko here. We will close the deal on Friday next week, and I have said already in the first announcement that it's a fact that we are still competitors, so we haven't been able to fully get all the material that we would have liked to. This is just the way it is. But we feel confident about the calculations that we've done so far. What we need to do is close the transaction, and then we will go in and validate everything that we have done in our preparatory phase, and we will come back to you. And prior to that, please be a little bit more patient, if you can.
We will come back to you when we have some more to share with you, and we will do so as soon as we can.
So we should expect some sort of press release or a telephone conference or something within a month or so?
I'm not saying, Michael, a month. I don't know, but we will come back to you separately and give more indications about both the costs that will be incurred. Please remember, I mentioned that we had a little bit of cash out because of the transaction cost. There will be both synergies and costs, and all of that we want to be very comfortable with when we are communicating to you. We are committed to the 14% EBIT margin. That we feel is a commitment on our side, but the details of it, let us get our hands dirty and do the review and secure it, and then we'll come back to you.
Okay. So that we don't have to wait until, like, the Q2 report or anything, there will be a separate announcement once you feel ready that you have more details to come with?
That's absolutely the ambition.
Yeah. Okay. And is it possible to say anything more on Italy? Give some sort of update on the interest and so on. I mean, you mentioned before that you received a lot of incoming calls from different potential buyers, and that you had been focusing on the Candyking deal, obviously. And then now, once that is closed, you can shift focus to Italy. But could you give some sort of update on the interest or where you are in that process? And also, on the operational side, Italy in Q1, how the performance was and how it affected the total numbers for the group.
Yeah, so I can, I can only say that we are still in progress on the strategic review. And you're right, that, of course, Candyking has also taken management attention, but the strategic review is not finished yet. And when we have finished that, of course, we will communicate that to the markets. And you're also right, that of course, when we said we are going to do a strategic review, that we have been contacted by several parties who say, "Hey, you know, if the outcome would be something, then we would be interested to talk to you." And of course, we have noted down these interested parties.
The Italian business is actually managed well by the team and is continuing on the kind of levels of last year, where you would expect it to be. So conclusion is, we'll come back when the strategic review is done and finalized, and we've taken a decision on the course we want to take.
Okay. And then, finally, on the financial side, could you give any guidance on the tax rate that you expect to report for 2017?
I'm almost in the position of saying I'm not entirely sure anymore because of the acquisition that we are doing now. The underlying corporate tax rate of 22% in Sweden is impacted, as I said, in this quarter of acquisition costs, so we're up to 27%. There might be more of those non-tax deductibles that will impact the actual tax rate in 2017, depending on course of action that Henry was also mentioning. So all of that, it's difficult to give a clear answer on it. It would be in that range, probably 24%-25%, underlying normal operations. Italy has some non-tax deductible items as well in the quarter, and that continues to be the one that drives away the tax rate for us.
But we should be somewhere around 24%-25% underlying, and I will do everything I can to explain to you if there will be other items affecting it, given the acquisition that we have in front of us.
Okay, thanks.
Our next question comes from Mikael Holm from Danske Bank. Please go ahead, your line is now open.
Hi, a follow-up then on the sales development in the quarter. Just on this decline in contract manufacturing, how large part of sales is contract manufacturing today, and what was the magnitude in this quarter? And should have them expect this year, year effect for the coming three quarters as well? That's the first question.
It's a small part of Cloetta's business, and the majority of the shortfall of Q1 was the Pick & Mix business in Sweden. But in full transparency, there was also a contract which expired in quarter two last year, a tactical contract, so we had it for one quarter in the comparator, in this year, and as from quarter two, that will be gone, but that didn't help in the Q1 .
And just then to try to understand the magnitude of this in the Pick & Mix business. I mean, when you took the Coop contract, you mentioned SEK 200 million per year, so roughly 50-60, 50 per quarter, and now you report a decline of SEK 27 million, organically, in one quarter, which you don't say is mainly related to the Pick & Mix. I mean, it seems like, the decline is due to Easter should have been, like, 20-25%. Is that a fair assumption?
Yes, Michael, I think what we are saying very clearly, and I think this is important, that we are seeing a recovery of the decline we had in the Easter effect in March, coming through in April. So in terms of magnitude on Easter, it's not that material at all. And that's the positive news that we were conveying, that we can see a significant impact, and maybe we have to get used to that a little bit more going forward, that we are having seasonal effects with Pick & Mix, and we have to be able to explain that very clearly to yourself and others. But the implication of Pick & Mix can have a substantial impact because of seasonals that we're having, as well as the fact that you have comparators.
So we did a lot of sell-ins with, as you know, Valentines and Easter in the year before there. So you could say, is it a double-digit decline? Yes, it was, in March. Is it a double-digit increase in April? Yes, it was.
Yeah. Okay. On the cost savings from the restructuring of the Lonka business you acquired, what is the impact of this SEK 35 million? What is the run rate of that currently?
Yeah. The fact is that you're right, the whole Lonka acquisition and the insourcing of our production in Slovakia from the factory closure in Dieren is on a full run rate this year. And the SEK 35 million is in our numbers on a full year basis. So in fact, when we look at the total impact in Q1, I would not be too focused on the component of that in the Q1 . What I reassure is that we are seeing the savings coming through with the SEK 35 million in the full run rate in 2017. We are very pleased with the way they've executed this whole closure of the factory, done in a very professional way. And also, they've ramped up really well in Slovakia.
So you will see that coming through, and we will put an X by it to it also to explain it for you going forward, so that you can see it coming through in the margin. It's not that visible in the Q1 .
Okay. And just on the CEO statement in the report about increasing the focus on organic growth and investments related to that, is it possible to give any examples of what you intend to do, which the company hasn't done before?
Yeah, I think, I mean, mainly my task, of course, to really get the whole company to particularly in the commercial area, to really focus even more on consumers and customers, and also look much more at cross-border potential when we're looking at international brands or product platforms, which we can get to travel across borders based on the same kind of consumer insights. You will see more of that also in quarter two, when there will be a launch called Crazy Face, which is going to go across all core markets and the UK under different brands, same product, same execution. And we will try to leverage consumer insights across our core markets.
Okay, thanks.
Our next question comes from Nicklas Fhärm from SEB. Please go ahead, your line is now open.
Thanks, operator. I would like to ask you to start, if you could comment a little bit on the financial net in terms of interest costs. Is the current sort of run rate, is that, would it be mostly accurate to annualize that as a forecast for the full year? And the reason why I'm asking is that I think it was slightly lower cost than I expected. Please.
Hi, Nick. There are two components of-
Oh.
Sorry, two components to the financial net here. If you look at, there is a table that we have introduced, so you can see the, the items of it. The effective interest costs we had in the quarter was somewhat lower than I would expect. Please remember, again, we are paying dividend, and we are acquiring companies, so the absolute debt level will go up. I've made a reference to an approximate effective interest rate of about 1%. What we have communicated to you in 2016, I think, was an effective interest rate of 2.38%, so you gradually are reducing it. And the last 12 months, including the Q1 , now has an effective interest rate of 2%.
We are declining because we are getting out of the increase that we had, or not the increase, the higher cost that we had. So, very low debt levels, slightly below our ambition level. And, of course, that will then have an impact on the run rate. So it's a little bit lower than expected. In the Q1 , it will go slightly up a bit. Use the 1% as the effective interest rate for the debt level.
That's very clear. Thanks. Could I go back to the commentary on sort of pushing organic growth going forward, but from the other side of from the other perspective, from the cost side? If you look at the SG&A to sales ratios, they have been impacted by currency fluctuations as well. But if you look at, say, cost per ton production or some similar operating metrics, what are your thoughts as new CEO coming into the company, Henri, on sort of cost management and what could be the main areas of sort of revisiting to lower cost management? Sorry, to improve cost management going forward, please.
Yeah, of course, there's one very important one in there, which is volume. Yeah, so we say organic growth. We want to have profitable volume growth, to be more specific, because volume in our manufacturing network gives us so many scale advantages in driving the conversion cost down. Yeah. That's, of course, an easy one. Next to that, the supply chain is working on structural improvements to take conversion costs down, like we have been doing the last 5-6 years. Volume being a really important part. So that is one and the indirect in the non-supply chain. And there we are looking at can we find savings, in particular, to invest behind our brands in order to get the organic growth up.
Yeah, we have started to look at that with a small team. No limits where we can find cost savings in the SG&A area, like Danko was already alluding to?
Thank you for that. And if I could raise a similar question, just I understand I was a bit late into the conference call, but I understand that you will come back to us updating us on more specific synergy potentials from integrating Candyking. But it would be meaningful, in order for me to think about it, if you could give us sort of the main areas, both in terms of top-line synergies and cost synergies, where you expect sort of integration to bolster bottom line from that acquisition.
It's a good question, but it's a difficult question to answer now. There are three core areas that are important for us to look at when we go forward. One is what we call the front end of the business, which is, in fact, developing the Pick & Mix concept together now with Candyking skills. That would be a fantastic opportunity for us also in Cloetta to learn from each other and actually establish ourselves as a regional player in the Pick & Mix area. That will drive top line, of course. So we have a lot of hopes for what we can do in developing that concept. The other part, which is the one that comes to mind many times when we talk with you guys who are investing, is the cost synergies, of course.
But there are two components here that are important to remember, and one is, of course, we will have to look at the indirect, and we will do so in making sure that we can optimize that. But more importantly, the fact that we are having opportunities to utilize our manufacturing network in a much better way. The point that Henri was mentioning, if you are adding more volumes to our factory, the cost per unit comes down. So those three core areas will help us drive a successful business. And I would say the emphasis is more on the front end of the business, make sure that we develop this concept together and establish ourselves in a positive way.
All right. So, of course, I understand. The main synergy potential is on the top line, and then you're saying basically that, secondly, it's probably the manufacturing volume aspect of integration, and then thirdly, you know, revisit, correct?
No, I said it's an interpretation, perhaps, of how I'm expressing myself. All three are important, all three of them.
Okay.
We look at this as a great business opportunity, and you'll see the benefits and the way we are rationalizing around it in due time, and hopefully as soon as possible. But give us the time to come back to you, and we will give you more specific on it.
All right. Thank you very much.
Our next question comes from Klaus Kehl from Nykredit Markets. Please go ahead. Your line is now open.
Yeah, hello, Klaus Kehl from Nykredit Markets. Just one question related to this sales trend here in Q1 and also this Easter impact. Would it be fair to say that sales are more or less in line with the expected numbers as of today? Or are you in fact falling behind schedule? That would be my question.
Yeah, I would say that we are in line, but I also want to make sure we talk about Q1 right now, and we don't start to speculate on, on quarter two.
... Okay, and okay, so you don't have any comments to if we—it's just in order to get this quarterly impact from the Easter out of the numbers. But okay, you won't comment on that one?
No.
Okay, fair enough. Okay, and so what you're saying is that this Q1 is then more or less in line with what you, yeah, expected on, on top line?
No, we were thinking higher, and as Danko was saying, we're probably still learning to a certain extent in the Pick & Mix business and the impact Easter has on Pick & Mix. It's much more hefty, you could say, than we expected. So if we say this is a disappointing or challenging quarter, it also means that our own ambitions were higher than what we have actually achieved, and we're not proud of that. So it's but let's also, we grow in Sweden in the pack business, which is a very profitable business, very big part of the business, but we lost a lot in the Pick & Mix business in Sweden in Q1 .
Perhaps just to say that, as you know, we don't do forward-looking statements, and it is one of the first times where we're actually indicating April, Easter effect and this notion of understanding how to better work with, understanding our Pick & Mix business, we felt it was important to mention to you that what we lost in March, we recovered in April. And that's why we are talking about a period from January to April when we are, both giving you Q1 and the Pick & Mix sales for the Easter effect in April. For the rest of it, we want to be a bit more restrictive. We don't want to continue to do forward-looking statements on any other business, because that's not our principle.
Ah, okay, I get it. Thank you very much.
Our next question comes from Magnus Bernet from Nyhetsbyrån Direkt. Please go ahead, your line is now open.
Yes, hello. I wanted to go back to the CEO comment about the organic growth. Part of my question has been answered, but what I was wondering about, you're stating that your key focus for the coming years will be the organic growth. And so then I wonder, when do you think we can see effect of the initiatives that you were talking about earlier? And what is a reasonable level for organic growth going forward?
Yeah, I think, I think Danko already answered your question. We never give forward-looking statements on expectations. But, of course, my, my certain ambition is that, we get organic growth up by focusing even more on consumers and customers. And also, I started eight weeks ago. I interviewed a lot of people in the different commercial markets, and I see a lot of pockets of excellence and good ideas which could travel from one country to the other. And, if we could, have consumer insights and products, which come from one country to be brought to another, that should help to, to give us, organic, organic growth.
I realize that it is, of course, a challenge, but we're going to focus ourselves on the organic growth and on the Candyking acquisition. And those are the two big things for 2017, probably early 2000 to get right.
Thank you.
Dear ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad now. There are currently no further questions registered at this time. Please go ahead, speakers.
Okay, thank you very much for listening and asking questions. Speak to you next time. Have a good day. Thank you and goodbye.