Good morning and welcome to Cloetta Conference Call. My name is Jacob Broberg, Head of Investor Relations. With me today I have David Nuutinen, CEO, and Danko Maras, CFO. As always, we will go through the presentation and take questions afterwards. First of all, I'll leave the floor to David. Please go ahead, David.
Good morning. It's David here. On the Q3 highlights, we are happy with our quarter results, with strong 12% top-line sales growth and operating profit increase to SEK 212 million, as well as with strong cash delivery. On net debt over EBITDA, we have seen a significant decrease versus a year ago. Despite the Lonka acquisition, we only see a slight increase versus the Q2 3.3 and now in Q3 at 3.39. In the quarter, we announced the acquisition of Lonka in the Netherlands. Danko will come back to some of the numbers in more detail. Looking at the overall market and sales development, we've in the quarter experienced significant market growth, particularly in the Nordic markets. In the Nordic markets, this has been mainly driven by chocolate, where this quarter versus last year, the weather was favorable.
We achieved 4.2% organic growth in the quarter, with sales growing in all markets except for Norway, Finland, and Italy. As you will remember, in Norway and in Sweden, we've had ongoing contract negotiations. In Norway, it's still ongoing. However, with one larger customer, we have now finalized the negotiations. However, we have missed an important launch window in Q3, and the next window will be open in Q1 2016. Now, for the numbers, I will hand over to Danko.
Thank you, David, and good morning, everyone. Let me then start on page four by highlighting the sales number of a 12% growth. We feel very good about that. I will come back to that on a separate chart. Let me just dive directly into our profit contribution on the different line items. As you can see, our operating profit in the quarter is SEK 212 million. Compared to prior year, SEK 178 million, there is an improvement in the delivery of the operating profit. The margin is 14.5% versus 13.7% the prior year. If we correct this for one- of items, which I will come back to in a second, the adjusted operating profit is SEK 194 million, equivalent to a margin of 13.3% compared to SEK 193 million last year, which is 14.8%.
Now, just one point in addition to this on the adjusted operating profit definition, as there is a slight restatement that you've seen versus prior year. We've done this based on requests from yourself out there in the market. The new definition that you are looking at is at actual rates. It includes all units as the date of acquisition, and it only excludes one-off items. There will no longer be any historical adjustments. When you look at the adjusted operating profit, it will be fixed. Why we're doing this is just simply to make it simple to review. We have moved away from constant rate conventions in our underlying EBIT definition that we were using before, and we are now using actual rates.
Now, if I then go back to adjusted operating profit of SEK 194 million compared to last year, there are two things to keep in mind. First of all, the gross margin. If you look at the gross margin, you will see that it improved from 38.4% to 38.7%. It's a slight increase of 30 basis points that we actually feel very good about because what we need to consider here is that the improvement includes a dilutive effect from the Lonka acquisition that we did in the quarter. Without the Lonka acquisition, our gross margin would, of course, have been higher. And that is affecting the margin when you go down and look at the adjusted operating profit.
The other part that you can see from the reading of the CEO words in our report is also that we are investing more in this quarter compared to what we did last year in our marketing investments. The amount is approximately SEK 10 million because of launches that we are having in this period. So if we compare like-for-like from last year, there is an additional SEK 10 million spend that we are doing in the quarter. So that explains some parts of the adjusted operating profit margin compared to last year, why it's just slightly above last year. Now, coming back to the one-off items that you see, what you normally would expect is a reduction of operating profit compared to adjusted operating profit. In this quarter, it's different. Our operating profit is better than our adjusted operating profit with SEK 18 million.
The main reason for this is that, according to IFRS, as you know, we are doing contingent earnout consideration adjustments that we have to do related to our M&As. We are assessing what the ultimate payout would be with payouts that are occurring next year and the following year. Those adjustments have been taken into the income statement in Q3. There is also a cost related to the Lonka acquisition, the acquisition cost per se, which equivalates to approximately SEK 9 million, as you can read in our report. Despite that cost that we have for acquisition, the net impact is a credit in this quarter of SEK 18 million. That is really why we're having an improvement from the adjusted operating profit to our operating profit with SEK 18 million.
Now, if we go further down the line and look at the finance net, you can also see that we are having a lower finance cost versus last year. It's SEK 43 million versus SEK 52 million. And we are getting benefits from the lower interest rates, of course. And you can also see that our corporate tax rate is about 23% when you calculate it. It's our normalized tax rate. Nothing strange in the quarter occurring, meaning that the end result for the period is SEK 130 million to be compared to SEK 87 million last year. So a good improvement versus last year if you compare the two quarters to each other. If I then go back to sales on page five, you can also see again the split on the 12% growth that we are having.
The organic growth is a very nice 4.2% that David was saying, but also the structural changes are entirely related to the Lonka acquisition. So it's not combined with anything related to Nutisal or The Jelly Bean Factory or so forth. We really do have only the Lonka part being our structural impact. But it's a 6.6% growth coming from Lonka. And then we continue to have a strengthening of the euro, although not as much as we used to have in the past, that adds another 1.2%. So in total, that adds to 12% growth. The staples that you can see below, it's a nice graph of showing the trend of our sales development in the last 12 months. You can see the split both between our organic growth and the acquisition growth that you are having by quarter.
It's a very nice trend, we think, in terms of the development since Q2 2013, where we mostly had growth in each and every individual quarter, also related to our organic part. If we move further on then to page six, you can also see by quarters the net sales improvement that we've had between 2014 and 2015, also our operating profit increasing every individual quarter, and then the operating profit adjusted for only one-time items. So that's a restated number that you can now see on the staples. Nice trend development on all three of them. Then the last part that David was alluding to is also our cash flow. We have SEK 174 million cash flow delivery from changes in working capital. That is SEK 100 million better than last year.
For those who are interested in calculating, you can see that our rolling 12 month cash generation here from our operating activities is SEK 850 million in total. Our cash conversion in the quarter is 87.7%, so above our target level of 80%. It might be notable to remember that the earnout consideration that we have done as an adjustment is a non-cash item. So good cash flow delivery coming through on all three quarters, and it's really showing up in our net EBITDA that I will come back to soon. On the next page, you can see more in detail. There are SEK 236 million of cash flow from operating activities. You do have a negative working capital movement. We would consider this being normal with the seasonal buildup that we are having for Q4 for the Italian sales, but also our cash collection that we're doing in the quarter.
So the SEK 174 million is really a good cash-generating capability that we have sort of delivered in the quarter. You can also see that we are investing less versus last year. We are coming down to the benchmark level of about 3% of CapEx of NSC, and we're actually trailing slightly below that level now. And then, of course, the actual cash tax paid sorry, the actual cash paid for the acquisition is coming through in other investing activities. That's the SEK 206 million that you see there on the net basis. I'll stop there, and then we'll go in to look at the net EBITDA on page nine. And here, as David was saying, last year, the same period, the net EBITDA was 4.3. Last quarter, it was 3.3.
We managed to have a net EBITDA in the quarter of 3.39, including a rolling 12-month definition of EBITDA for our Lonka business. With that, I'll give the word back to David.
Thank you, Danko. As you remember, in July when we announced the acquisition of Lonka, Lonka has a portfolio of products including fudge, nougat, and chocolate. This acquisition will strengthen significantly our position in the Dutch market and will also give us an entry into the chocolate market in that country. In addition to the Dutch market, the Lonka portfolio offers us opportunities, particularly in the pick-and-mix area in the U.K. and the Nordic countries. The integration process is progressing according to plan. Particularly happy to see that sales development and profitability are moving and developing according to plan in the quarter. As stated already at the time of acquisition, this acquisition will, over time, support our margin target of 14% adjusted operating profit.
Going forward, focus areas. Q4 is now seasonal sales. As we have noted earlier, there have been significant price increases on nuts, and therefore, we are also implementing substantial price increases in our seasonal sales products in Italy. That's now in focus and in implementation. Second focus area is the continued integration of Lonka, which has started very well. Then third one is our initiatives in pick-and-mix. As you know and remember, that we have, as of beginning of 2015, had a contract in Coop in Sweden that has been progressing according to plan. And we have now signed two additional smaller contracts in Sweden. And I believe that this demonstrates our capability and that consumers and customers believe in us and like our products. We are now focusing then on execution of these new contracts as of quarter one, 2016.
And naturally, as a fourth focus area, is delivering continuous profitable growth. Then on the last page, a nice selection of great products that we've been launching in the quarter. I think that this demonstrates a sample of line extensions with some new flavors and pack sizes. It also demonstrates and shows and highlights some new concepts. I'll highlight, for instance, on the line extensions, the Nutisal product range where we are introducing the dry-roasted concept now into dry-roasted peanuts. Then we have the Crispy Bites product in the middle there where we have a better-for-you concept with whole-grain wafer and berries. And then on the Tupla product, we are entering a new category and a new shelf in the stores in the Finnish market with our protein and energy bars. So a nice big selection of active new product launches in the quarter.
Thank you, David. With that, we open up for questions. So please go ahead, those of you having questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold while we have our first question. Our first question comes from Erik Sandstedt from Handelsbanken. Please go ahead. Your line is now open.
Yep. Hi there. Thank you. Erik here with Handelsbanken. I have three questions, please. Firstly, you generate a lot of cash, but you obviously still a bit on the geared side. So I'm just wondering how we should think about the dividend capacity for this year?
Good morning, Erik. It's Danko here. And again, as we have communicated when we refinanced part of our debt with the corporate bond, we have a capability of doing dividend payments if our net EBITDA is below 4.0. So the capability would be there, and it's then following our strategy that we should not actually pay dividend until we come down to 2.5 x net EBITDA, and then 40%-60% should be paid out. However, that is a decision for the board, and the board will make those choices based on what the year-end results will be and what they will recommend for. So we are both awaiting their decision.
Yeah. Fair enough. Thanks. Also, you mentioned that the contract negotiations in Sweden have now been finalized, but that it will still impact Q4 as the next window is not until Q1. I'm just wondering how significant that is given the importance of Q4 being sort of the Christmas quarter. Could it even jeopardize positive organic growth? You still, of course, did very well here in Q3 despite the fact that you had the same issues.
Yeah. David here. You're right that it's now been resolved, and we did miss that launch window. However, as in any similar case, we would always try to find mitigating actions going forward. We did miss that launch window. The next one is in quarter one. I do not see that this would be a significant impact on our performance.
Perfect. Thank you. And my final question also relates to organic sales, which was, of course, fantastic here in the third quarter. But on the other hand, adjusted EBIT was only up around 1%. So I'm just wondering if you could elaborate a bit further on why adjusted EBIT didn't follow organic sales to a large extent. I know you've already mentioned higher marketing costs, the Lonka acquisition. I suspect maybe higher input costs might have played a role as well. But is there anything else we should be aware of?
It's Danko here. Not really. I think the fact that we are including Lonka I didn't itemize exactly how much that was, but it's approximately 100 points on effect on the gross margin that sort of flows down to the adjusted operating profit. Now, we feel confident because we are communicating about our Lonka acquisition as being part of delivering the 14% EBIT margin target in the long run. But of course, we need to work on getting there. So the effect on the gross margin is quite dilutive in the quarter. Underlying metrics are good. We feel comfortable on the gross profit levers. And then the fact that we are spending more, we would not highlight it unless there would be a little bit more material investments because you move quarter by quarter.
But approximately SEK 10 million of additional marketing investments is a bit unusual for us, but that's the fact in the quarter.
Yeah. So just to clarify, SEK 10 million more in marketing costs and then the Lonka burden results by around SEK 15 million then if it was around 1%?
Yeah. Slightly less than that. So SEK 12 million-SEK 13 million. But you're right. Yes.
Okay. Perfect. Yeah. Thank you very much.
Thank you. The next question comes from Michael Holm from Danske Bank. Please go ahead. Your line is now open.
My first was just a clarification on this definition of adjusted EBIT. That excludes the earnings impact from Lonka in the quarter. Is that correct?
No. So now we are the earnings coming from Lonka is now part of our adjusted operating profit. The operating profit is having an earnout credit in the quarter that is making the results better, which is a bit unusual. But earning streams from Lonka is completely included in our adjusted operating profit.
Is it fair? I mean, what kind of margins? I mean, it seems to be around, what is it? SEK 80 million-SEK 90 million in sales from Lonka in the quarter. What kind of margin did that sales carry underlying?
I know you're good in math, Michael, but as you know, we don't disclose the margins by individual brand. What we say is that we will contribute to the 14% EBIT margin also with Lonka in the long term. But with the immediate acquisition now, we just simply consolidate it. And although we are happy with the results from Lonka in the quarter, we do think we can drive higher profitability in the long run.
Okay. Just a question on organic growth. Is it fair to assume roughly SEK 50 million in contribution from the Coop pick-and-mix contract in the quarter? And if that is correct, I mean, then the rest of the business is basically not growing at all. Are you really satisfied with that development?
It's Danko here. I come back to the reference point that we have given to you about SEK 200 million on a full-year basis for the Coop pick-and-mix. We are comfortable in delivering the SEK 200 million on a full-year basis. I'm not really saying that we are having a quarterly impact that has a meaning for us. But when we look at it year to date and full year, we are comfortable with the SEK 200 million.
Okay. I have two questions more on the price increases. You mentioned that you've raised prices to compensate for unfavorable effects, basically. At the current exchange rates, do you think you need to do more, or are you done with these price increases? The second question is related to the price increases in Italy. Do you believe those will mitigate the negative impact from higher raw material prices for nuts?
Okay. It's Danko here again. On pricing, as you know, the euro and SEK and the euro and NOK keeps moving. I cannot say that there is a definitive impact where we will not do more price increases coming through. Both the Norwegian krone and the Swedish krone is affecting us in terms of profitability because both those units are acquiring our goods in euros. So if you have continuous deterioration of the currency, we have to go out to the market and do price increases. And that has a time lag for us. So we can't say that if in a quarter, as you know, if we lose on the currency, that we can mitigate that immediately on pricing. We have to follow the price windows in Norway.
We have done price increases due to effects both in Sweden and Norway, actually also in Finland because of input costs last year. But we are not completely getting the full run rate of those savings in our quarter. So there will be some time lag effects on the pricing.
David here on your second question on the price increases in Italy. As you know, our pricing strategy is very clear that when raw material prices go up, we pass them on to our customers. In this case, it is a substantial price increase that we're pushing through. However, it is too early to say where we will land with that. The negotiations are ongoing. As you know, the actual then sell-in takes place in November, and sell-out doesn't happen until in December. We really won't know the end result until late December, early January.
Okay. Thank you.
Thank you. Our next question comes from Virginia Nordback from Berenberg. Please go ahead. Your line is now open.
Yes. Good morning. I was wondering if you could give some more color regarding the improvement in the gross margin in this quarter.
It's Danko here. Hi, Virginia. The gross margin has different levers in terms of volume, mix, price, and supply chain cost. What I think we can say with good confidence is that the full run rate of the manufacturing strategy is coming through in our gross margin. So we see efficiencies in our supply chain coming through compared to both last year and the year prior to that. So as we've been communicating, the full run rate of all these savings that we have initiated in the program, they are really coming through. We don't have any negative levers in terms of volume, mix, or price in any major circumstance. It is really the benefit from the supply chain strategy that is coming through and then being mitigated with the fact that we are including an acquisition that has a lower-than-Cloetta Group gross margin diluting it a little bit.
That's what I can say.
Okay. Thank you.
Thank you. Our next question comes from Fredrik Villard from Carnegie. Please go ahead. Your line is now open.
Thanks. Good morning. I have a question with the contractors being resolved in Sweden. Was it on your terms or on their terms that this was resolved? Did they meet you guys, or did you have to meet them to get it resolved?
As you know, it always takes two to tango. In any kind of contract negotiations, you find an amicable solution for both parties, and then you go on.
All right. Perfect. Thanks. Just one more question. So the SEK 10 million, maybe we've covered it extensively, but just want to make sure. Are there any such more launches planned for Q4 that are extraordinary items year-over-year, you would say? Or is this truly one-off in the Q3, or should we expect similar impact in Q4?
Well, as you know, we are now speaking about Q3 launches. Of course, we will be continuing to support those launches. With regards to Q4, I would refrain from making any forward-looking statements.
All right. Cheers. Thanks.
Thank you. Our next question comes from Alexander from Nordea. Please go ahead. Your line is now open.
Yes. Good morning, gentlemen.
Good morning.
I have three questions. I'll just take them one at a time. Firstly, you mentioned there's some problems in the Netherlands, in the confectionery markets. And I think also you mentioned that in the last quarter. Can you provide some color on that and describe what they are?
Can you please repeat that question?
Sure. I think you mentioned in the last quarter as well as in this quarter that you see some issues in Netherlands.
Netherlands.
Could you describe that, what those issues are, and possibly also how you see that going forward?
Well, actually, in the quarter, as stated, the market experienced some decline. However, also as I stated, that we saw growth in all of our markets, including Netherlands in that list. So I think that I'm not totally clear on what you're alluding to.
Okay. So you don't see any difference right now between the market in Netherlands compared to Sweden, for example?
It's Danko here. I think in the quarter, there was a negative development in the Netherlands. But if we look at it on a longer-term basis, it's a contested market. The market shares is the name of the game in Holland. But the development of the market is not in decline in the long run. So you can actually see something in the short term but not in the long run. That's not really what I think is the message that we want to give back to you.
Okay. Fair enough. Any words on what the events have been in Netherlands during the quarter?
Sorry. Can you repeat the question again?
Just what do you see as the contributor for the development then in the quarter in the Netherlands?
I think in the Netherlands, in the quarter, we saw the market going down. However, our sales grew. And on a quarterly basis, you can see market developments based on whether there's been promotions or new product launches. But in this quarter, our development from our sales point of view was positive.
All right. The second question with regards to sugar prices. How has the development been there in your cost base?
Well, as everyone's seen, sugar prices are holding fairly steady now. We are seeing world market prices that have come down, and they are fairly steady at this point. You do see some indications, slight indications of prices going up again. But I would describe them in our environment as fairly stable at this point of view.
Okay. Is that also the same when you're comparing it to last year, that they're stable?
Yeah. And as we've said a couple of times, we don't actually speculate in input cost or sugar. But we do buy in six to nine months because of replenishment and securing that we have available stocks of raw materials and so forth. So when we start looking at it, please remember the time lag effect that we are having because of that. But if we look at the world market prices and the quota prices we have in Europe, they are fairly stable. Yes.
All right. And then just one last question on the timing of your target on EBIT margin. Whether you see any or how you see timing of that considering the Lonka acquisition?
David here. We have not given any definite timeline on that. My ambition is to continue on the profitable growth path. I feel confident that we will be able to deliver the 14% target. When? I don't know yet.
Okay. Fair enough. And then perhaps just one final question, if I may. The cost synergies versus sales synergies, has there been anything communicated on the weights between those two, or where do you have the highest ambitions, if that's possible to say?
Well, we have previously communicated the whole restructuring program related to our manufacturing strategy where the cost and the savings was all about a margin expansion to help us to get to the 14% EBIT target. Since then, we haven't communicated anything else in terms of synergy realizations. But a very large part of the program that we've been running since 2012 is about getting margin expansions from our EBIT margin that we used to have in the past of about 10.6% towards the 14% EBIT journey. So margin expansion was the key deliverable that we had on that we have communicated.
Okay. Thank you very much.
Thank you. As a reminder, it's zero one on your telephone keypad to ask a question. There will now be a photo post where questions are being registered. Our next question comes from Michael Holm from Danske Bank. Please go ahead. Your line is now open.
Could I just follow up on a question on the 14% margin target? Currently, you're at 12.3%, trailing 12 months, so 170 basis points up to the 14%. You have basically done all the measures on the cost saving program that should be in the numbers. So looking, where will that come from?
Again, we have to remember the fact that we've done acquisitions that are not part of our regular gross margin target. And Lonka is a good example of that, which affects the timing of the achievement of the 14%. So of course, the program that relates to our acquisitions are supposed to contribute. And that will take time. In some parts where we've done acquisitions, they already have very good margins. And then the achievement of the delivery will be earlier. But there is a timing aspect that relates to the acquisitions that we've done. It's also the case that we can continue to work on supply chain efficiencies that we haven't done in the same extent in the past. So when we communicate our Lean 2020 program, this is about getting significant yields coming through by operating with higher efficiency and lesser waste. So there's still work to do.
When we say that the full run rate of the savings have come through, that's a fact. But that doesn't mean that we haven't driven our efficiencies further on operational efficiency, wastage, and so forth. There's still a lot to come from our supply chain organization that can deliver more. We also want to have more volume. As you know, we have communicated our pick-and-mix strategy is contributing to our 14% EBIT margin because we have a vertical integration with our factories. The more volume we have, the better we can utilize the factory, and the cost per units will come down. That will also contribute to the 14%. That's key in those areas to drive the profitability. Of course, there are other items also that relate to the continuous improvement by our implementation of our ERP system and so forth.
But I will stop there in terms of the key ones. There's still a lot to do in our supply chain area.
Okay. Thank you.
Thank you. There appears to be no other questions. I'll hand the conference back to your speakers.
Okay. Thank you very much. Thank you for this presentation. Speak to you next time. Have a good day. Thank you, and goodbye.