Good morning and welcome to Cloetta Conference Call. My name is Jacob Broberg, in charge of investor relations. As always, I have Danko Maras, our CFO, and Bengt Baron, our CEO here. So please go ahead, Bengt.
Good morning, everybody. Happy to report from third quarter of 2014. We feel that it is a solid quarter. We are especially satisfied with the profit development and the fact that the restructuring that we've been working hard on over the past almost three years is coming to an end on time and as planned. If we look at the highlights: net sales, including FX and acquisitions, increased by 9.1% to SEK 1,300,000,000 in the quarter. Operating profit was up by 36% to 178%, and the underlying EBIT was equally 178%, which is an 11% increase versus last year. And as you see, they are identical, meaning that we are coming to an end and converging on the underlying and the reported profit, which is very satisfying, we feel. The cash flow also improved to SEK 75 ,000,000, which is SEK 21 ,000,000 better than last year.
The net debt EBITDA is at 4.5, which is compared to last year 4.4. In fact, if we compare to previous quarters, it's actually an improvement because we were at 4.6 at that point. Also, as we mentioned in the previous call, we had come to an intention to supply Coop Sweden with a complete pick-and-mix concept, and that contract has now been duly signed as of November 5th. Looking at the overall market and sales development, slightly positive is confectionery markets across Europe, except in Finland, where we still have a macro situation impacting consumer confidence and consumer spending. So there we actually saw a shrinking market, not dramatically, but it is under pressure, without a doubt. Our organic sales growth was a -0.6% for the quarter.
We've had four consecutive quarters of growth, and we still, for the first nine months, were +0.7% in organic growth. Sales grew or remained flat in all markets except Sweden and Norway. Looking at Sweden, the ones around the phones who stuck around in the Swedish market in the summer probably remember there was an extremely hot summer. And one of the things you don't consume when it's a hot summer is chocolate. And Sweden is a market where Cloetta has the biggest presence in chocolate, and that's where we also felt the impact the most. And then there's also come and go and pick-and-mix, and we actually had a contract that was not renewed in Norway impacting that market.
We had a conflict in the Netherlands with one of the major customers, which impacted sales a little bit, but that has since been resolved, and we're back into normal. Market shares grew, and this is market shares measured in POS sales, point of sale sales, i.e., sales to the consumer, grew in most markets in the quarter versus last year. With that, Danko.
Thank you very much, Bengt. Good morning, everyone. I'll go into page four, and if you look at that, I come back to the sales that we had in the quarter, SEK 1,300,000,000 . As you can see there in the table, it's consisting of 3.9% for an exchange rate, structural changes 5.8%, and then organic growth -0.6%. Good to note that the euro continues to strengthen, and you might have all seen and heard the fact that we have lowered the interest rates already in Q4. The euro continues to be strong, so that is a thing to note. On the underlying EBIT, we are at SEK 178 ,000,000. The 14.9% EBIT margin is improved with 11.3% versus last year, and the operating profit margin equally at SEK 178 ,000,000, improving 36%. I'll come back to that.
We have a special chart on the convergence that Bengt was just referring to, where the results are becoming the same both on underlying EBIT and operating profit. Profit for the period is SEK 87, 000,000, SEK 1,000,000 above last year. So here I go back into the interest line, and if you look at that in the income statement on page 8, you will see in the quarterly report, you will see SEK 52,000,000 spent in the quarter. And here we have introduced a new table for you, so you can actually see on page 9 what they consist of. The actual interest expenses that we are doing to the borrowing arrangement that we have is SEK 39,000,000, and it's progressing well compared to prior year.
Prior year, you have a one-off benefit because we did not apply hedge accounting last year, and that benefit is making the comparator a bit distorted. What you're seeing now is a true underlying cost of our interest expense specified line by line. On tax, we also have on page 8, you can see SEK 39,000,000. And in there, there are two items that are affecting the tax rate a little bit. One is some non-deductible interest expenses that we have in the unit that we had to book in the quarter. And then there is a one-time adjustment of filing positions that we do versus last year that will not be there in. It's a one-time adjustment that we've made for the period. If we turn page and go into page 5, again, you can see the trend by quarter, a nice development of sales growing by quarter.
Also on underlying EBIT, you can see in 2014 that we are picking up, and it's pleasing to see the improvement we have with SEK 178 ,000,000 on underlying EBIT versus last year's SEK 160 ,000,000. What you also see on the right side there on the cash flow from operating activity is also very pleasing to see positive delivery in every quarter. This is becoming more and more the normalized way of how cash flow streams are working. Again, we have to consider comparators being affected by the manufacturing strategy. But here we are more and more coming into a normalized business where we are collecting cash from our receivables and building up inventory for seasonals. However, on page six, if I can just have a minute on that one, what you see there is a few staples.
Just first, the 2012 and 2013 are full-year numbers, and then to the right from there, you have quarters. So we just want to highlight the fact that in 2012, you could see an underlying EBIT of SEK 423 ,000,000. In the operating profit level, we generated SEK 125 ,000,000. The majority of that, as you know, were all part of the restructuring program that we announced. In 2013, you see SEK 591 ,000,000, which is an improvement of EBIT versus 2012, and closing in on operating profit at SEK 418 ,000,000. Yet again, driving value in the underlying profitability but also converging and reducing the spend on restructuring, closing the gap significantly. And now in 2014, you can see by quarter how we have gone from SEK 77 ,000,000-SEK 52,000,000 ratio, SEK 110,000,000-SEK 85 ,000,000, and now SEK 178 ,000,000 on both.
You can also see in the lines there how we are starting to converge also in the percentage term. The difference between the 14.9 and 13.7 is because we're using a different comparator in the underlying metrics on sales. We have come to a point where we feel that the line item that refers to restructuring is completed. So we are not going to report more on that table. As soon as we have material issues to report, we will do so. But if we look at items affecting comparability, which relates to currency translations, M&A, and restructurings, they are actually equaling zero in the quarter. And that, to us, is a good testament of us continuing our journey to delivering value. And we will more or less say that the restructuring phase that we've been into is no longer material enough to highlight on a specific level.
On cash flow, to come back to that point, a good cash flow in the quarter coming from the operating results and the fact that we are improving operating results. The working capital movement is a specific seasonal buildup that we're doing for everything from Sperlari to Juleskum, and that will be sold in Q4. On top of that, excuse me, that delivers the SEK 75 ,000,000 that we've been referring to. What you can see also on the capital expenditures that we are having, it's SEK 38 ,000,000 versus SEK 42 ,000,000, so we are gradually actually declining that. That is also a result of the manufacturing strategy that we are investing less than in the prior period and will continue to do so so that we come to the outspoken 3% of NS level.
We do have a one-off in other cash flow from investing activity, and that relates to The Jelly Bean Factory, a residual payoff that we have to do on about SEK 13 ,000,000. That's the item you see in investing activities. Overall, we feel very good about the EBIT delivery, the cash flow delivery, moving in the right direction. With that, I'll give the word back to Bengt.
Thank you, Danko. As Danko mentioned, the restructuring program that we announced back in February 2012 is completed. The final step was the insourcing of the production of Tupla, which is a countline product, chocolate countline product that is big in Finland and actually also launched in Sweden. That is all done. That means that all the pieces that we set out on, it's easy to forget that actually 40% of all our products have been on the move over the past two years, and we are now completed with all of that, and we are in a structure that we feel is fit for the future, which is very, very good. And as we said, towards the end and going into 2015, we should have the run rate off the savings.
We also mentioned that there was an intention signed between Coop and Cloetta regarding pick-and-mix. That is now signed. It is about 700 stores that need to be refitted during the first quarter of 2015. So that is, of course, a huge undertaking that is being planned right now. It is all of them in getting the product range right, getting the racks, getting the merchandising. We're talking a sizable business. It will be approximately SEK 200 ,000,000, somewhat less depending on the buildup and the timing in 2015. We will work together with SRB, Svensk Rikstäckande Butiksservice, which is one of the largest merchandising companies, to actually do the actual practical merchandising, and that cooperation is developing nicely. We will work under the concept names Godisfavoriter for the candy and Natursnacks for the natural snack.
So we will have a complete offering through Coop across the Swedish market. Raw material prices deserve to be noted, even though the impact of the past year, maybe in totality, hasn't been so much. I stress in totality because there are huge swings in between different raw materials. Cocoa prices, as you've probably seen, have been sky-high at record levels. Hazelnuts and almonds have also been sky-high based on a poor crop last year, while on the other hand, sugar prices have decreased.
The only reason I'm highlighting this, even though in totality it's not a huge impact, is that because of the big fluctuations and our policy of that savings should be given back to the consumer and increases in cost needs to be charged to the consumer, we also need to recalibrate to make sure that the products on an individual basis have the accurate and the correct pricing. So price changes will be necessary going forward on an individual basis. And that always is a process. It takes somewhat time. Sometimes it's a bumpy road, but it's something that needs to be done and will be done. Overall, okay, but on individual basis, big changes. So going forward, the focus will, of course, continue to be profitable growth. That is sort of the star.
We are working towards our 14%, taking one step in the quarter, and we are treading towards that ambition level. As I mentioned, refitting 700 stores in a quarter, being ready ahead of the Easter period, which is a peak season, is a big undertaking from a practical point of view. So that is getting a lot of attention internally and together with our customer. We're continuing to integrate and accelerate the growth of Nutisal, especially the branded business, and the Jelly Bean Factory that is performing nicely. And then finally, as I mentioned, the changes on individual raw materials need to be transferred or translated into pricing changes over the coming years and tracked going forward because it has been quite volatile. And as it is, we need to pay attention to that.
In addition, as always, a very active quarter, lots of line exits, making sure that we continue to be contemporary, exciting to the consumer. I would like to call the attention to two. One of them is the Ako relaunch, which has received lots of attention, especially in social media. Old favorite that a lot of Swedes grew up with is finally available again, and everybody's very happy about that, and the childhood memories are coming back into life. And then secondly, I think it's also very exciting is that Cloetta chocolate products are now moving into, and the brand is moving into, the Finnish market. And that's also received a lot of interest in the first couple of SKUs that we're launching. And there's also positive reception to the brand name Cloetta in Finland.
Of course, a lot of Finns do recognize the brand as there's a lot of travel and interchange between the markets. But now the brand name is also available in a broader way in the marketplace. We will continue to be active. We are an interesting category. On the one hand, we love our favorites that we grew up with. But on the other hand, we also love to try new stuff just to make sure that the old favorites are still the best. With that, open up for questions.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We have a first question from Mr. Erik Sandstedt from Handelsbanken. Please go ahead, sir.
Hi there. Thanks. It's Erik here with Handelsbanken. I have a few questions. Firstly, hi there. You mentioned the Coop contract is worth around SEK 200 ,000,000, but can you say anything about the profitability on such a contract?
The intention is that that should definitely support our journey towards the 14%.
Okay. Could you be a little bit more specific?
Not really, to be honest. No. I mean, it's part of the overall, I mean, evolvement, and our intention is firm. We are working towards the 14%. We have taken steps in that direction. It is a challenging ambition, without a doubt. But the Coop contract will help us towards that.
Perfect. I only have actually a few other more sort of nitty-gritty questions. Firstly, the tax rate for the sort of medium term, or specifically 2015, could you give us any more guidance there?
Thank you. Hi, Erik. As you know, we don't make forward statements on what we expect, but you could always start with the Swedish corporate tax rate, and then there are some international rate differences that we will always have. But we have to remember that we are coming from a background where we have some movements in tax that are, if you go into our balance sheet, there are some deferred tax assets that we can utilize over time. And looking at the effective tax rate and the actual cash tax paid is perhaps relevant to do given where we come from. In terms of calculating an effective tax rate going forward, it will be in that range of the Swedish corporate tax rate plus the international rate differences and those items which are non-deductible for us that we are working on, but that won't have material impacts.
That's as much forward as I can do for the time being.
Yeah. Perfect. And also perhaps with a risk of forward guidance, but cutbacks for next year and medium term.
We continue to think that an appropriate level for our type of business is around the 3%. So as we go into the years, we hold that limit. If we don't have to invest, we will not. And if we think we have a value-creative idea to invest more, we will do so, but then we will announce that.
Yeah. Finally, from me, you mentioned there was a negative impact from currencies on the EBIT level in the quarter. I'm not sure if you said roughly how much that was. Also at current FX rates, what do you foresee for the fourth quarter?
Yeah. So that's a little bit the point why I was mentioning that the euro continues to be stronger. So from a translation point of view, we have the benefit of turnover growth, but on the fact that we have transaction exposures in the Nordic countries, there is an additional SEK 5 ,000,000-SEK 6 ,000,000 more of currency effects on the EBIT. So if you look at our underlying EBIT performance year to date, there's approximately SEK 25 ,000,000-SEK 26 ,000,000 of currency impacts that we are mitigating. And the reason to why it's a bit less coming now in the second half of the year is because we are doing price increases, and it takes some time to get the full effect of that, but currently about SEK 25 ,000,000. Then if you look at the reported results, there is a translation benefit, but I won't go into that.
You can give me a phone call if you want to, and I'll give you the specifics of how that works.
Perfect. Thank you very much.
Just as a comment on the FX also, I mean, once it stabilizes, if it ever does that, then I mean, we will catch up. But if it continues to weaken, then we will be behind the curve because we don't have as many opportunities to change prices in the marketplace as the swings are in the market when it comes to FX.
Excellent. Thank you very much.
We have the next question from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
Hello. Mikael Holm here at Danske. Just a question on the production efficiency. Where are you now in the when you basically have completed the restructuring, but where are you in terms of efficiency on the new lines? That's my first question. The second question is related to the working capital. It increased by, I think it was SEK 130 ,000,000 trailing 12 months. How much of that is related to currency? And Q3, the level of total working capital, how much do you believe it's possible to lower that now when you are in the end of the restructuring phase?
So I'll give it a shot, and then Bengt can fill in. On the production efficiency, we are still improving our production efficiency. If you remember, we talked a little bit about absorption in Q1. The machines are going full now, and if we look at it on a year-to-date basis, we think we are doing well on the absorption issue. But clearly, we can produce more at a higher output, and that is a ramp-up scale that continues in our ongoing business. On working capital, it's important perhaps to notice also if you do the comparator on absolute, there's approximately SEK 60 ,000,000 that relates to the acquisitions that are not part of the comparator's prior year. So of course, the nature of nuts is a little bit different to the confectionery. And then on the Jelly Bean Factory, those two together are about SEK 60 ,000,000 of it.
I have not calculated exactly what the FX impact is on inventory, but we can do that. Then I think the last question you had was on working capital as such. Here, if you look at it year to date, I think it is SEK 15 ,000,000. We work towards an ambition of keeping it structurally at that level. A structural change of inventory, we've talked about before. We are moving towards the 10% level. Around that level, we haven't specified it specifically. Clearly, it's a bit higher than it should be, and it becomes higher also now when we are building for the seasonal effect, which we always have to do in any way. See it as a working capital movement should not be significant over a year unless we do structural changes.
That's the ambition level for next year as we are starting to focus more on efficiencies on working capital.
Okay. Thanks.
We have the next question from Mr. Oscar Karlsson from Erik Penser Bank. Please go ahead, sir.
Yes. Hi. Oscar Karlsson from Erik Penser Bank. In the report, you mentioned a lost pick-and-mix contract in Norway. Could you please quantify that a little bit further?
Actually, we prefer to not go down on that level of detail. For the reason we do that, if we do that on a quarterly basis, we will be ending up in sort of endless sort of bridges and try to explain differences on a very detailed level. It had an impact, but I mean, and it is in Norway in specific. It is not huge. I mean, it's not material on the global basis. Just remember that the -0.6% equates in percent of growth in the quarter. That equates to SEK 4 ,000,000. It's not big numbers in the grand scheme. We would prefer not to go down that level of detail because it will even out in the longer run.
Okay. But organic growth would have been higher if that contract would have stayed?
Yes.
Yeah. Okay. Perfect. Thank you.
Mr. Stefan Cederberg from SEB. Please go ahead, sir.
Yep. Good morning. I have a question starting on accounts receivable. You're saying that those increased in the quarter. Is that the seasonal impact, or is it the growth rate was higher in September?
That's really. Thank you. Hi, Stefan. The pattern over the three months in a quarter is very different. Coincidentally, if we are having more sales in the end month of a quarter than we normally have, then of course, our receivables will have a temporary impact. And I think in that respect, it's always better to look at it on a rolling 12 months or a full-year basis. That gives you a good idea about where we are in our days sales outstanding. And as a general statement, we think we are in a good position in those markets where we are. We have worked a lot on keeping the days competitive. And also please remember that payment terms changed in Italy, so we have reduced our receivables to 60 days there just like any other food supplier in that market.
I would not go too deep into detail on a specific month, but it's a reference that we made for Q3. You're right.
Okay. And then a question on the non-recurring items. You write in the report that year to date is SEK 61 ,000,000. This gives an impact of SEK 16 ,000,000 in Q3. So should we read this as saying that the underlying EBIT adjusting for this is SEK 194 ,000,000, and this is at the base of your 14.9% EBIT margin?
No. We are excluding all the exceptional items in our underlying EBIT. So it is what it is. It's the reported that's been impacted with a negative number that you referred to, offset by benefits in forex translations and M&A. So the impact of that is zero.
When you're talking about impact on M&A, is that the profit contribution from the acquired business ?
Yes. You're right.
Okay. That means that if you look forward, I mean, this SEK 60 ,000,000 will not last while the profit contribution will last.
And that's a very good point, Stefan, that as we go into the new year, we will give you information on how we are defining our underlying, and M&A will be a comparator because we acquired Nutisal in January. So your point is absolutely valid.
Yeah. And in terms of the Coop contract, how much will you externally source of this SEK 200 ,000,000, and how much is internal?
It's not totally set yet. We're working together with Coop to make sure that we have an assortment that is competitive from the external and from the consumer point of view. So it's not entirely set yet. So therefore, I would prefer not to get to that level of detail. But it will be, I mean, as we say, it will be a significant improvement for us net versus what we delivered via Candy King in the old contract.
Okay. On your contract structure in sourcing of raw material, how long is your contract structure, and will you balance price increases upfront? So you will have just a little impact from any price changes in sourcing materials?
We have a policy of working on replenishment and securing our raw materials. So you see around about 6-9 months of forward contracts in place entirely to ensure that we can replenish our production and deliver our product. And therefore, also, impact internally on prices are lagging, but equally, it's the price increases we're doing towards our customers. And this is a process where you do have these lagging effects. And as we are having high volatility of raw materials, we will have high volatility equally in the profitability aspects of this area specifically. But over time, again, back to Ben's point about our strategy, the 14% that we are aiming for should be unaffected by price increases or cost increases.
The challenge for us is actually not what level they're at. It's always the volatility when it goes up and down.
Yes. Yeah. And what's your feedback of your product launches Q3? Ako, for instance, have you received any sales?
It's early to tell. So I mean, there's always an also when we launch new products. There's always a so-called pipeline fill, meaning that in order to get displays and exposure towards a consumer, you fill up a lot of shelves, and that is typically quite consistent and predictable. Then the big question is, of course, okay, how's the consumer going to react? So what does it take off from the shelves and the consumption? And then the replenishment phase sets in. But that takes a little bit longer post-launch. That's probably a quarter or two quarters down the line. And then also, when you look at launches and pipeline fills, you always have to compare to what launches did you do the year before and the quarter before.
And that's why, again, that's one of the reasons why we are quite stubborn on not going into very detailed levels on a quarter-by-quarter basis because we'll be reconciling numbers and reminding each other of, "Okay, what did we do a year ago," and so on and so forth. What I can say is what I can say is it's been very positively received by the consumer. That we can track via social media. And also, our customers are very excited about both the Ako and also, as I mentioned, the Cloetta chocolate launch in Finland. Most of the other ones that you see on the page, on page 12, are more of line extensions or replenishment. So they're not as big.
Okay. All right. Thank you.
We have the next question from Mr. Christian Hellman from Carnegie. Please go ahead, sir.
All right. Thanks. First question on the price changes there and the shifts in the raw material prices lately. We've seen some go up, cocoa, hazelnut, etc., and sugar come down. What do you think, given your product mix in the group, what will be the sort of net effect of price changes going forward?
Quite honestly, Christian, going forward, I have no good guess. I wish I would because then I would buy forward or hedge. So it has been so volatile that it's difficult. It's also very difficult in some of these products to differentiate between what is fundamentals and what is speculation. So therefore, it's extremely difficult to make anything forward-looking. So we are more backwards-looking and saying overall, our challenge is their movements in between. And therefore, we need to rebalance the pricing in order to live up to our commitment, which is we should not gain and we should not lose from raw mat changes. I wish I would know what it will do going forward.
Oh, sorry. Yeah. But my question is, would you have to raise your prices going forward or lower them in order to balance the raw material price changes that have already occurred?
Absolutely. That has already occurred. I mean, there will be a rebalancing. So that is in process because, as we mentioned, sugar has been coming down, and cocoa and almonds and hazelnuts have shot up. And then there are some other ones that move as well. So there is a rebalancing that is being done.
Exactly. And is the rebalancing positive or negative?
Fairly flat.
Okay. Also, just a question on the first slide. I missed the beginning of the Q&A or presentation. You were talking about customer conflicts in the Netherlands. Could you just elaborate a bit on that
No. In the quarter, as part of pricing, as always, we were heading towards a conflict, and we were actually impacted during a couple of weeks where sales were significantly down to that customer, one of the major customers in the Netherlands. However, that has now been resolved, so it should have no impact in the fourth quarter and going forward.
All right. Thanks.
I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. There are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for joining our session. Have a nice weekend. Speak to you next time.