Good afternoon, and welcome to the Cloetta Conference call. It's a beautiful afternoon here in Stockholm. My name is Jacob Broberg, Head of Investor Relations, and with me, I have Danko Maras, who is CFO and outgoing interim CEO, who will present our acquisition of the Candyking today. Please go ahead, Danko.
Thank you very much, Jacob, and good afternoon, everyone, to this somewhat late Friday afternoon call. But thanks for joining in. We're quite a few people, I understand, and it will be nice for me to go through the acquisition of Candyking in a short presentation for you. Let me just start by talking about Cloetta and our strategy. To just turn the page, you see Munchy moment. This is right in the middle of the Munchy moment territory of in-between meals, bringing that indulgent moment for a consumer to acquire something as a snack or as an energy boost between the meals. This acquisition for us strengthens Cloetta. It's in line with our strategy to drive pick and mix. Pick and mix is an important, and in many countries, growing part of the confectionery market.
It will significantly strengthen Cloetta's position in Denmark, Norway, and the United Kingdom, and it will strengthen Cloetta's natural snacks, pick and mix offering with the very nice Parrots brand. Also, Cloetta will continue to develop the Candyking brand and product offering in order to offer an even more attractive customer and consumer experience. Very important for us. Also, this acquisition will create substantial synergies, and the synergies are within administration, procurement, logistics, sales, but not the least, the insourcing of production. And these sort of synergies will be gradually realized within and reach a full run rate in 2020. Now, a lot of numbers, but we are intending to revert with information regarding expected synergies, non-recurring costs in due time, also giving a bit more indications on timings.
However, this acquisition means that Cloetta's 14% EBIT margin target remains intact. Now, if we look at Candyking, for those of you who do not know Candyking, it was founded in 1984, and it is a concept supplier of pick and mix in the Nordic region, the UK, Ireland, and Poland. In addition, Candyking is a pick and mix supplier of natural snacks in Sweden and Finland under the Parrots brand. It has more than 8,000 points of sales and offers stores a turnkey concept that includes products, displays, and accompanying store and logistics service. So a full service provider of the concept, which is absolutely great. There's sales of approximately SEK 1.3 billion, and Candyking has no own production, source all products from suppliers. I'll show you some pictures on both customers and product concept.
But if I move into the Candyking in-store concepts, there's a few of them, but the absolute biggest majority of concepts in store is the core Candyking or in Swedish, Karamellkungen. This one was the one that was launched in 1984, and this represents 93% of Candyking sales. This concept is available in all of Candyking's markets, around 7,000 points of sales. Within there, there is a consumer offering of about 500 items, including chocolates, jellies, hard-boiled foam, and licorice confectionery, anything that we can produce. There's a consumer mix who create their own bag or cup of confectionery from a display offering between 16-200 different items, depending on the size of the consumer offerings that is on store.
In addition to that, you also have Parrots, which I'm sure Swedes will recognize. The concept is originally acquired from Over there in 2009, and offers dried fruit, natural nuts, flavored nuts and snacks, and that concept is currently available in both Sweden and Finland at 1,600 points of sales. The concept has been revamped a couple of years ago, and the Parrots is currently the only Pick & Mix snack brand with no palm oil, UTZ Certified, and only natural flavoring. A really great brand proposition. Now, to finish off the transaction details here, Cloetta will acquire all the shares in Candyking, as well as 100% of Candyking's outstanding bond and other debt.
The majority of the purchase price will be allocated to the holders of Candyking's SEK 750 million bond. Candyking's bond will be delisted from Nasdaq Stockholm. An initial cash payment of SEK 325 million on an enterprise value basis will be paid at the closing of the transaction. An additional cash payment of maximum SEK 225 million will be payable in Q1 2019, depending on the combined volume sold of Pick & Mix at the end of 2018. So this is a form of an earn-out. Cloetta will issue an instrument to the current bondholders that will entitle them to the future potential additional purchase price. This transaction is conditional upon approval by the Swedish Competition Authority, and that was it for the presentation.
I would like to remind you all, who are asking me good questions, I'm sure, that we will come back to you with more details regarding synergies and non-recurring costs so that you can get a better idea of, the, the benefit for us purely financially, but Cloetta's long-term strategy of 14% EBIT margin remains firm. So with that note, I leave over to any Q&As.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have the first question. Our first question comes from the line of MiKael Holm from Danske Bank. Please go ahead, sir, your line is now open.
Yeah, hello. The first question is on the sales level in Candyking. First of all, how much sales do Cloetta have to Candyking today? And given that there's been a quite negative trend in Candyking sales in at least recent quarters, what do you believe is a good run rate of sales entering 2018 then, when this earn-out is based on? That's the first question.
Okay. Hi, Michael. First of all, the sales that we have indicated, the SEK 1.3 billion, is also including a Danish sugar tax, and the impact of that, I am not entirely sure what that will be. We will restate it because we don't include the Danish sugar tax on that top line, but it is above SEK 1 billion, of course. But what the actual amount is, I will come back to. The other part is that I don't do any forward-looking statements on the development of volumes, but of course, we have an earn-out instrument to incorporate any potential issues. On the other hand, we believe that this announcement today will strengthen both Cloetta and Candyking in the marketplace in terms of providing, offering security and stable future.
To that extent, our intention is not that volume will decline, but that we will build the whole concept and drive this concept to a better level. In addition to that, you might be specifically thinking of a specific country, but we will double our turnover in Denmark, Norway, the UK, where we don't have a stronghold on pick & mix, and that will give us an already existing business for Cloetta, an even stronger establishment, which I just find as a perfect opportunity for us to grow in the Nordic market.
And okay, and also just, longer term, how much of these volumes do you think you could in-source in your own product production facilities? And what kind of investments would you need to be able to take on those, those volumes?
Yeah, and maybe I should just come back to your question. You were asking how much share Cloetta was selling to Candyking, and I just want to say it's immaterial. It's really an incremental affair between ourselves. Obviously, as you know, we have 13 factories with a variety of technologies, so we believe that we can find good opportunities to in-source. Too early to tell how much, but a lot of this is in the candy segment, in the enjoyment segment, where we have very, very good capabilities. We are very excited about this opportunity. At the same time, it's important to have strategic partners in the different offerings.
The timing for all this and the incremental investment, I would want to come back to, but it fits very good—well for us in timing, considering that we have done a manufacturing strategy where we have optimized our opportunity for capacity utilization so that we could take on more volumes without necessarily investing a lot more.
Okay, and my final question is regarding, I guess, the... You say that you need the competitive authorities to say okay to this deal, and I guess it's related to Sweden. Could you just remind us what would be the market share in Pick & Mix, and what would be the market share in the whole confectionery market in Sweden following this deal?
That's a little bit too early for me to say, Michael. We will file the competition filing in a few days, and all the information and preparations that we have done have suggested that everything will be okay. In Sweden, if you think about Pick & Mix as such, it's a very competitive market with a lot of established own concept, including ourselves and others. But in total, we talk about 30% of the total confectionery market in Sweden is Pick & Mix. So, I would like to wait a little bit with that when we have done. Let's do our filing, and I have every reason to believe that this will be passed through, and we'll deal with it from there on.
Okay, thank you.
Our next question comes from the line of Mikael Löfdahl from Carnegie. Please go ahead, sir, your line is open.
Yes. Hi, most of my questions have been answered, but first of all, the timing here, could you say anything more on when will we get a closure of this? And also then when can we get some more details on synergies and so on?
Hello, Mikael. Well, those two questions belong together a little bit. The timing, as you know, in Sweden, you have a competition filing. There are different stages of that, phase one, phase two, depending on how deep they want to go into it. We, of course, would like to have this closed as soon as possible, and we have to respect the time that the competition authorities would need. The first phase one could be 6-8 weeks, and then if it goes to phase two, it could take another 2 months or 3 months. It's difficult for me to say.
But as we are coming closer to the actual closing and clearance, we will come out in that time period around that level about more details on the synergy realization and the timetable and the cost required to implement this.
Okay, and could you say something about your funding here, and the cost for that?
Yeah, absolutely. This will become EPS accretive immediately, considering the fact that if you look at our EBIT, it is higher than our incremental cost of borrowing and tax. The effective tax rate that we are referring to is about 22%, and the capital cost that we are having is just below 1%. So the interest cost is within the existing club bank arrangement. This does not affect our existing facilities. It's just a drawdown of the revolver. We don't need any acquisition financing for this. This is completely within our capabilities of you know, self-financing the actual deal itself, and the effective interest rates will be below 1%.
Okay. Final from me then, the natural snacks part, the Parrots part of Candyking, could you say something about how big that is?
You mean in size of market share or in turnover or in?
I guess both.
Well, in total, out of the Candyking sales, we talk about 5%. And as you know, it's complementary to an existing product portfolio we have within the snack segment, which is Nutisal. And they are really complementing each other, both Parrots, who is a little bit of a wider snack segment offering, where nuts is just simply nuts. And you can combine these in a very exciting way, we think, also with the latest development that I talked about on the UTZ and the palm oil-free offerings within Parrots. So this, for us, is tapping into a strategy of, you know, consumers really liking to take naturalness into their munching moment territory, and growing this area is important for us. But let's not forget where we belong. It's a complementary strategy that's growing between 5%-8% per year.
So, in that respect, we're very excited to bring this along and grow further in that segment.
Okay. Well, I guess that was it. Just one more clarification. On you said that it was immaterial, your part of Candyking's sales, but of Candyking's offerings, if you go out in the stores, I mean, how big portion of Candyking's offering includes Cloetta products? I mean, you could speak about one way of looking at it is volumes being sold at the selling price, and the other portion is, of course, how much of the volumes that they buy come from you.
Yeah. I mean, it's virtually... I was almost about to say it's zero, but, but, there are a few hundred tons out of the context of a combined tonnage of almost 50,000 tons. So we are talking about a situation where Candyking's offering in store has a very small assortment of Cloetta products, and it has a history of having declined over time. But that's also what's making this business and bringing it together such a beautiful combination, because we can bring our Cloetta brand offerings together with the Candyking offerings, and also increase the quality of the assortment into full-branded products in the Candyking portfolio. So to us, it is really a perfect combination of incremental volume that will be introduced.
Okay. And you think your customers, I mean, the retail chains and so on, they will think that this is okay? I mean, the competition authorities are one thing, but do you think they want this to be more or less one actor?
Well, I would- I wouldn't say there's one actor. There are multiple actors, but we want to be category captains and, you know, develop the concept and making the concept very attractive for the consumer and therefore also the customer. So there's a lot of things we can do in making the whole Pick & Mix experience in a better way. And I think that is to the benefit of anyone who are into enjoying the Pick & Mix assortment today. There's no reason to assume that we want to create any obstacles. On the contrary, we want to grow this category. We want to have modest consumers should be consuming our product with modesty, but we want to increase the consumption, of course, in the offerings where we have them.
If you think about the total territory, and perhaps not only singling out potentially Sweden, this is a great opportunity for us to expand in the Nordic region, but also in the adjacent territory around UK, Poland, et cetera. So we see that as a, you know, really good concept development opportunity.
... Thanks very much.
Our next question comes from the line of Devdeep Chakraborty from Nordea Markets. Please go ahead. Your line is open.
Hi, afternoon. Just one question, really. Could you clarify exactly what's the payment the Candy King bondholders would receive, and also the timeline on that? Because there's, yeah, there's part payment now and part later, and there's instrument involved, so.
Yeah. Okay, I didn't catch your name, but I will come back to you on the question. The initial price that we will pay will be paid at closing, and it's SEK 325 million. It will be paid in cash to the bondholders, who will then allocate that out further to those, I think there are some residual payments that need to be made in terms of net debt adjustments and so on, small details. And then the other part is, in all intents and purposes, a real earn-out composition, meaning that there are criteria that needs to be fulfilled, and if those criteria are being fulfilled in terms of achieving a certain volume assumption, there will be a full payout.
Assuming that volume assumption is reached, SEK 225 million will be paid out to the bondholders, and that would then mean a total consideration of SEK 550 million. If the volumes are less, there is a linear equation that just simply calculates out what the earn-out would be, and it goes down to a certain level where the payout will be zero. So an earn-out is a great instrument to de-risk, I think, an acquisition, but it's also a great opportunity to share the composition when it goes well. We have an interest to pay full earn-out. That would mean both bondholders and ourselves will benefit tremendously from this deal, and the synergy realization will be substantial for us.
So it simply is a de-risking opportunity if you choose to look at it like that, but also sharing the benefits going forward.
Sure. Actually, my name is Devdeep. I'm sitting with Nordea-
Okay.
- Credit Research.
Hi, Devdeep.
Yeah. Hi, hi.
Hi.
Just to follow up on that, so basically, the simple math is that, 43% is the upfront, if the deal closes, 43% is the upfront recovery for the current bondholders, a little less than 43%, if you have to adjust for other stuff, right? And then the ceiling is 73% if there's a full, you go up all the way to the volume target. Is that correct?
Yeah, yeah, 43%. If you are talking recovery rate, which I believe that-
Yeah.
- you bondholders are doing, it is 43%. I think there are some smaller residual payment that needs to go out as well, but let's approximate it to 43.
That's on deal closing, right? So it's contingent on the when you close the deal.
Yeah.
Yeah.
There's some smaller adjustments that will be made, which is agreed with, with the bondholders, and then a maximum payout then for, if we say, SEK 550, then you're up to 73%.
Okay.
Yeah.
Okay, and that's-
That's the potential upside.
That's the potential upside, and that's 2019, is that right? First quarter.
The base for the calculation will be the full year 2018, December 31, and the payout will be in the first quarter 2019.
First quarter, 2019. Okay, any interest included in this calculation? Any kind of accumulated interest from, you know, the previous years and the following years-
No.
- when you're paying out? Nothing.
No, no.
No. Okay, and what... Sorry, just to catch up, what's the instrument called? It's called the,
It's a debt instrument only. That's what we call it.
Okay. All right. On this net, this small residual payment, just if you have any idea, how much would that be? 10%, 5%, 3%?
That's difficult for me to answer because it really depends on the regular closing mechanics of the deal, which sort of correlates to cash positions and working capital position and net debt. It should not be material. That's all I can say. It's just a regular, residual arrangement that needs to be done, and it can move in any way. So it's better to come back to that when we know at the closing. And I don't know if the bondholders will disclose something more on their part, but on our part, we consider this one being sort of a residual part in the closing.
Okay, but this is not anything to do with the advisory costs or the financing costs?
No. No, nothing.
Okay. All right. All right, thank you very much.
Thank you.
We have a couple of questions from the web here, so operator, I'll take them in between. One from Daniel Harlid at Cicero Fonder, where he asks: What's your take on the fact that Candyking was purchased at a substantial lower price than it had been acquired before the loss of the Coop contract?
I have no views on that. We think that the situation as it lies forward today is of great interest for us. I'm very pleased that we have managed to find an arrangement between the owners of Candy King, the bondholders, and ourselves, and this is really what I'm looking at, at this point in time. And for us, we're very excited to build this concept going forward. We are industrial players, as you all know, and we think this is a great industrial fit for us, and that has been my driving force in making this deal happen.
... We have another question from the web that actually is not related to today's deal. It's Chris Redding, who's asking about what's going on in Italy, and I guess it refers to our strategic review of Italy.
We will come back to you on Italy as well. Perhaps you can put it in context now that we've been a little bit busy in dealing with a couple of activities. But, Italy and the strategic review is also a very important priority for us, and the alignment of the direction of Italy, we will absolutely come back to you. A lot of good work is being done, at the moment, and let me come back to you on that in due time.
Okay, operator, if you have any more questions?
We have a couple of more questions in the queue. The next one comes from the line of Simon Sjöström from Carnegie. Please go ahead, sir, your line is open.
Hi, thank you very much. So just a follow-up question on how the purchase price is allocated. So if I understand you correctly, all the SEK 325 million, less a small residual, will be paid to the bondholders, but does that mean that you will not pay anything for the shares or for the mezzanine loan?
There will be absolutely. The mezzanine is written down, but there will be a payment to the owner of Candyking today, and there has been arrangements that have been done between the bondholders and the equity owners. So from our perspective, the purchase price is SEK 325. How they will be distributed is something that you will have to have a discussion with Candyking and the bondholders. But you are right, there is one portion that actually goes to the owner as well, of course.
All right. Thank you. That's all for me.
We have a follow-up question registered from the line of Michael Holm from Danske Bank. Please go ahead, sir, your line is now open.
Oh, just a follow-up on the earnings level in Candyking. Could you say—I mean, you've given us just a little bit on EBITDA. Could you say something about the gross profit, the run rate of gross profit in Candyking?
Can I come back on that one? Because the gross profit is not the same as our gross profit. As you know, we produce, we have warehouse and distribution. It's somewhat different because they have merchandises and definitions that are not the same as we are doing. So let me come back to that and talk about that in our terms and definitions when we have a little bit of a better grip of the, let's say, the Cloetta definitions. But in the meantime, I'm sure there is information that you can have with Candyking. Absolutely.
Over time, do you believe this segment will have different types of gross margins than you have in your other type of business?
Well, important to say is that we can utilize vertical integration in our Cloetta network, and therefore, our current group EBIT margin, and when you look at this, the 14% is firm. When we look at individual segments, and we have quite a few of them, they can vary up and down. This is what drives the Cloetta total group EBIT margin. And for that, I'm comfortable in our ability to deliver 14%, even though if the segment itself might be a bit lower.
Okay.
Our next question is another follow-up question from the line of Devdeep Chakraborty from Nordea Markets. Please go ahead, sir, your line is open.
Yeah, hi. Thanks. Sorry, I think somewhere I heard that the SEK 325 million payment you're talking about, it will be decided by Candyking, how much of it goes to bondholders and what happens to the mezz loan and the owner. So it's not guaranteed 43% minus the small residual debt payments, which goes to the bondholders?
It's a little bit difficult for me to talk on behalf of the selling part. And I am sure that information will be available on the Candyking part, the exact recovery rate, et cetera. From our point of view, the purchase price, that's what we are focusing on, will be SEK 325 million. And then if the recovery rate on the initial part is 43, 41, or whatever it might be, it's difficult for me to outline, and I ask you to go to the selling part.
All right. Thanks.
I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad now. As there are no further questions registered, I'll hand back the conference to the speakers.
Okay, thank you very much, everyone, for calling in. I wish you all a nice weekend, and please do not remember-
Forget.
forget to buy some good candy for the weekend. Have a nice weekend. Thank you and goodbye.
Goodbye, everyone.