Good morning, and welcome to Cloetta conference call. My name is Jacob Broberg, Head of Investor Relations, and as always, I have Bengt Baron, CEO, and Danko Maras, CFO, with me. I will, as always, start to hand over to Bengt, please.
Thank you, Jacob. Good morning, everybody. It's a pleasure, this sunny, warm Stockholm day, to deliver what we feel a very solid quarter and a solid quarterly report. Going directly into the material, looking at the highlights, we'd say that the net sales growing to SEK 1.238 million, which is a 9.5% growth. I'll come back to that in a sec. Underlying EBIT flat, slightly up by SEK 1 million, so it's SEK 110 million, despite having a headwind on the foreign exchange of the Swedish krona and the Norwegian krona, and Danko will talk more about that in a sec.
We're also seeing, which is satisfying, that the items affecting comparability are coming down and becoming less in accordance to plan, and that the operating profit increased by 57% to SEK 85 million , also showing that we are converging the underlying and the reported, EBIT, which is also entirely, according to plan. Cash flow reversed from a negative to a positive EUR 44 million, and as previously announced, we acquired The Jelly Bean Factory brand and Aran Candy Company in May, and the net debt, EBITDA stays at 4.6 times, and Danko will touch upon that as well in a sec. Going to sales, 9.5% growth, in a flat to negative markets across the board. The only one that's actually had market growth is Sweden; otherwise, we are facing a little bit of headwind.
Despite of that, it's a fourth consecutive quarter with organic growth, and in fact, 2% organic growth, which is the best quarter since the merger of Leaf and Cloetta back in 2012. Also, we are growing in every market except in Italy, and then also we had a decline on contract manufacturing. So all the other markets grew ahead of the 2%, which is very positive. The sales decline in Italy, it has been and will continue to be a bumpy road, as we said. We're basically up as often as we're down when we look at the market. This market, this quarter, it was a significant headwind in Italy.
The good news on that is, of course, that Italy is really big for us in Q4, and because of the seasonal sales of the Sperlari brand, and much lesser so in quarters one, two, and three. And as I mentioned, the market shares grew in most markets as we are growing faster than the market in most places. With that, I'll hand over to Danko and the numbers.
Thank you very much, Bengt, and good morning, everyone. I'll start with the top line again, and you see the 9.5% growth being itemized. So once again, exchange rate, we have favorabilities of about 3.7% on the fact that we have exchange rate moving in a strengthening euro. Structural changes being 3.6%, and above all, the organic growth, the 2.2%, it's a fourth consecutive quarter with growth. That gives about 9.5% growth in the quarter. If we then go down and look at the different line items on profitability, on gross margin, you've seen that we have 37.8% versus 38.4% last year. That's a deterioration of about 60 basis points.
That was 200 basis points in the first quarter, so we are lessening the gap there, and yet again, we are having the impact of Forex impacting the gross margin, but also the technical dilution we are talking about when we have Nutisal included in the gross margin. The benefit we see on top line, on revenue, on euro, we see some negatives on the cost side on euros. And for the quarter, we are having approximately SEK 10 million of currency impact in the gross margin. And that is what we are doing on the price increases from the first of July, mitigating that through both Norway and Sweden.
If you look at the underlying EBIT, Bengt was saying 110 versus 109, so it's about flat to last year. And of course, the FX impact is still there impacting us, but we have less restructuring, and the operating profit is improving to SEK 85 million versus EUR 54 million last year, so EUR 31 million or 57%. Perhaps worthwhile to mention also, if you look at the finance net, you see there is a charge of about EUR 66 million, and it's important perhaps to highlight that with the strengthening of euro and the fact that we are having interest rate swaps in place to hedge our variable interest to fixed for about 2.5-3 years, we have to revalue those interest swaps.
So it's derivatives being revalued immediately, although they actually don't mean any gain or loss from a cash point of view. So in the end, they actually are an effect of accounting that we have to show in our earnings per share. And I'm sure one or two of you know about what we need to do when we mark to market those interest swaps. We also have another accounting entry there that costs us an interest, and that's interest part on the earn out liability we have on the acquisitions we've done. And because we did that in Q1 and also in Q2, we are now including those. They are together representing approximately EUR 20 million. So that might be worthwhile to remember when you look at the underlying effective interest rate.
Then following that, no big items on the profits for the period then. If we turn page and go into the graphs, you can still see a good depiction of how we historically have been delivering the growth. Year-to-date is 7.7%. The underlying EBIT is flat to last year, a little bit better than last year. Cash flow being both quarters better than last year, together amounting to EUR 135 million. If we go to the next page, you can also see the cash flow a little bit more in detail. The good cash flow delivery from the operating activity, EUR 74 million. Slight negative movement, EUR 30 million on working capital.
And here I need to highlight again, we are not yet completely out of the manufacturing strategy, so we are ramping down, but there are still effects from the manufacturing strategy having a negative impact in our, on our inventory. So the net impact of the movement in our working capital is about EUR 30 million. You can see that, we are reducing our CapEx, EUR 44 million versus EUR 54 million, and we are continuing to reduce that, as we have said all along, to be approximately 3% of our turnover, and, and that is just continuing. Then the other line item, the other cash flow from investing activities, contains two items that are relevant to mention.
Perhaps one is the acquisition of Jelly Bean Factory, but also EUR 53 million of proceeds coming in from the fact that we sold the Gävle factory in Q2, helping the financing of the net impact. Our net debt is about SEK 3.4 billion, our rolling EBITDA is EUR 760 million. That's significantly higher than last year, therefore, the 4.6 times net debt EBITDA is equal to last year. And with that, I'll give the word back to Bengt.
As Danko mentioned, we're not entirely through, but almost through on the restructuring. And also, as he mentioned, the Gävle factory, which was closed in December, has now been sold. So everything is completed and done in Gävle. And also, very gratifying is the ramp-up production, both Levice and Ljungsbro, proceeding according to plan, and we're actually producing the same volume now as Gävle did before. So we are ramping up and everything is working as well as it should. What's remaining is the insourcing of the chocolate count line, Tupla, which is a big product in Finland, and also has been launched under the Power Break brand name in Sweden.
That has started. In the last two weeks, we actually produced finished goods, but of course, it's still small scale, and we need to ramp it up, and all of that should be done during Q3 of this year. Meaning that we, towards the end of the year, should be at full run rate of the savings from the restructuring. Also, as announced earlier, we have acquired the Jelly Bean Factory, which is an Irish-based company, premium product. Most of the people traveled around the world and maybe specifically to the U.S., and probably know the jelly beans quite well. These are the gourmet jelly beans, meaning that also the core is flavored. It's not sort of a neutral flavor, but the core and the outer shell are both flavored, leading to a fantastic product.
It's a company that has shown nice growth over the past five years, primarily in the U.K. and somewhat in the U.S. and Canada. It is financially very healthy and has an attractive EBIT margin, so it will support our profitable growth proposition. Fits straight into our sugar confectionery offering, strength of position in the U.K., and also as an opportunity to travel into other core markets over time. That will not happen overnight. This is a strong premium position, so we need to expand in a sensible way. And it's all produced in one fit-to-purpose factory just outside of Dublin.
Also, about a week ago, two weeks ago, we announced the fact that we will be Coop's supplier of pick and mix, both the candy part, our confectionery part, and also the natural snacking part of it. And we will run the entire concept, which should be very exciting for us, and we are very, very early, so not too many details. We're working together with Coop to really sort of roll out the plan. It will start in January 1, but we're talking about approximately 600+ stores, so it, it's quite an undertaking. We will be able to source quite a bit from our own, from our own production facilities, but we'll, of course, complement the assortment with the classics that the consumer is looking for.
We're working through the specific product range at this point in time. Just to remind everybody, in Sweden, pick and mix is about 30% of the total confectionery market. We do have experience for running pick and mix business. We have done so for many years in Finland under the brand name Karkkikatu. It's not entirely new to us as a company, but it's the first time that we run a complete concept in the Swedish market. Going forward in focus, it's business as usual. It's about profitable growth. We are stubbornly focused on making sure that we complete the restructuring. Hopefully, next time we speak, we should be able to say done deal, and this box should be gone.
And then, of course, we are working on integrating, accelerating the growth of Nutisal and The Jelly Bean Factory. We're also active in the marketplace, so as always, a couple of highlights on some product launches. There's some seasonal things there. If you look at, for instance, the Läkerol and the Ahlgrens bilar, Glassbilar. And we also see that Polly Goes Bananas with Sean Banan. Fantastic success on YouTube. If you haven't seen it, go in there and watch the three films. A lot of people like them. We're well over a million, 1.2 million showings, which is fantastic. We also see good stuff beginning to roll out, launched in Sweden and in Holland.
We see some line access on Gott & Blandat, TV Mix , two huge brands, also Jenkki market leading gum in Finland. We're also seeing an exciting geographic rollout of our chocolate products from the Swedish market into the Finnish market under the umbrella brand Cloetta. So that is also very early, but exciting to see that we're now starting to move in the direction that we outlined back in 2012. So with that, message is, we feel that we have a solid quarter under our belt, and we're staying very active in the marketplace. We're staying consistent on the message. It's about profitable growth. It's on finalizing restructuring and integrating the acquisitions. There is headwind from FX. We are addressing that, and we continue.
I mean, we all know that the FX has deteriorated further recently, so we're just tracking that, and with some months' lead time, if necessary, that will be handled again. So, overall, we feel good about the quarter, and we open up for any questions that you have.
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad, and you'll enter a queue. After you're announced, please ask your question. That is zero-one on your telephone keypad to ask a question. Zero one. Our first question comes from Mr. Erik Sandstedt from Handelsbanken. Please go ahead, sir.
Hi there, Eric here with Handelsbanken, and I've got three questions, if I may. Firstly, in Q1, you mentioned that earnings were distorted by higher marketing spend and also some lower production volumes. Were there any such material impact in the second quarter?
So hi, Erik, it's Danko here. So on your, on your first question, there, no material impact. We talked a little bit about absorption, if you remember, in Q1, and we have some benefits, small benefits coming through in, in the second quarter, but no major impact. No.
Okay. Okay, perfect. Thanks. Then, if we look forward here, I mean, with effect from Q3, you will basically start to face more difficult comps on organic growth, as the organic growth really kicked off in Q3 last year. Do you feel comfortable also growing organically on tougher comps?
Our ambition is to continue to grow, and as we said, we should grow at least in line with the market, and that's what our focus is, and that's what our intention and ambition is.
But no comments on sort of short term here, if you look into Q3, for example?
No, we don't do forward-looking statements. We don't want to do pre-predictions. We feel good about four straight quarters of growth, organic growth, and we're focused on trying to continue to do so, entirely according with our targets.
Perfect. Finally, you might have touched upon this on the presentation here, but on current FX rates, could you say anything about the actual FX impact on earnings in the third quarter?
Eric, again, on forward-looking statements. Backward-looking, I can tell you that we had about SEK 10 million. It was slightly less, but around that level also in Q1. That's the impact. And then, of course, we are now addressing part of that with the price increases we are doing, so-
Yeah.
That's what I say.
Do you see price increases mitigating or fully offsetting effects?
Well, first of all, remember, these things take time. It's negotiation. It's customer by customer. We have to do it in Norway and Sweden. So on a rolling 12-month basis, our aim is to offset these completely because we see Forex as a commodity, just like any other raw material, and at the end of the day, that should not affect our underlying 14% EBIT margin objective.
Perfect. Thank you very much. That's helpful. Thanks.
But again, I would like to iterate what Bengt was also saying, the impact of a 50-50 basis point decline in the interest rate. Well, we will see what happens, and if we have to do more, we will have to do more. But the current currency for SEK and NOK are weak to the euro, and that, of course, we have to accommodate and deal with.
Perfect. Thanks.
Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
First, just a follow-up on the currency. You mentioned SEK 10 million transaction effect on the gross profit. Is it fair to assume that some of that was counterbalanced by positive translation effects when basically translating foreign earnings into Swedish kronor?
Yeah, I would say it's safe to assume that, Mikael, but it's a residual amount. So I think I will refer to the SEK 10 million as the impact that you should count on. I think-
Okay, so that's the total effect impacting Q2?
Yeah.
Okay, great. And then on the Gävle closure, with this EUR 100 million savings program, with the three factors you mentioned, you said that Gävle was the major part of this. Will we see the full benefit from savings in Q4? And is it valid to assume that it's the largest share of those EUR 100 millions in savings?
Well, the only thing, Mike, I say, towards the end of the year, we should see the full, full run rate. Whether it's going to be the entire fourth quarter, I cannot predict. I mean, it could be a little bit sort of couple millions here and there as well, but towards the end of the quarter, there should be full run rate.
Okay. And my last question is about the expansion into the pick and mix segment. How are you thinking going forward? Do you want to see how the Coop is progressing before you approach other customers? Or what are your, like, for your view on the pick and mix business in Sweden?
...Well, our focus right now is to ensure that we service our customer, Coop, basically from January 1, and that's a huge undertaking. There's a lot of, sort of, execution that needs to take place. So focus right now is to make sure that we have a very solid and a good launch together with Coop. We, of course, believe that we have a very good concept, and we have a fantastic product assortment. So if it is successful, we would be happy to talk to other customers as well.
And what is the main risks in that business?
I think, I mean, primarily, we have experience from running it in Finland, so we feel quite comfortable in so the whole merchandising, the assortment and everything. But of course, it's quite an undertaking to refurbish and rebuild a lot of stores. And then over time, I mean, these are big contracts that run over a number of years, so it could be a bumpy road. Sometimes you win, and sometimes you lose.
Okay, thank you.
Our next question comes from Mr. Dean Best from just-food.com. Please go ahead, sir.
Good morning. I have a few questions. Starting off on the issues in Italy that you described, the outlook for the market as a bumpy road ahead. Why did you call it that?
Well, if we look over the past 10 quarters or so, we basically has every other 50% have been up and 50% have been down, and then sometimes, last year, we had a string of three quarters in a row where it was positive, and now we have two in a row where it's negative, and we think it is up and down. What we've seen from other companies in the Italian market, it's been a tough market all around during the second quarter. And we think it's gonna be bumpy, and confidence comes and goes in the Italian market, which is not entirely surprising given the macros and also the political insecurities that are in the marketplace. So we're not calling out that it's either gonna be very depressing or very optimistic.
We just believe we should stay cautious. As I mentioned, I think, I mean, quarters 1, 2, and 3, Italy is not huge in our portfolio, but in Q4, it basically doubles in weight. So our focus right now is to make sure that we have solid plans in place for the fourth quarter.
What are the specific issues there? Is it just the fact that the macroeconomic situation is impacting consumption?
Well, I think it's a combination of consumption, and then, as you may recall that there was a new payment law put in place, which is almost two years ago, where they went basically from 120 or so days payment terms down to 60 days payment terms. And we were surprised initially that we didn't experience any bankruptcy, but of course, inventory was pulled down, and cash shortage, especially in the traditional trade, but also to a certain degree in the modern grocery trade. So people are cautious on putting on inventory, and if they do put on inventory, they're not selling through; well, then they're hurting the next quarter.
That's why we think we're seeing bigger, bigger swings than you normally see in, in sort of a, in more stable marketplace.
Okay. You made a couple of acquisitions in recent months. How happy now are you with your current portfolio? Are there any other gaps that you wish to rectify?
Well, we think there are a lot of munchy moments out there that we're not satisfying at this point, so we will continue to look for opportunities. It's very difficult to say when and how. We've also not committed to sort of a percentage of NSV or a number of transactions because we don't want to be slaves on this sort of external commitments, but we're looking for interesting proposition that sort of complement our portfolio, whether it's within existing segments, like Goody Good Stuff or Jelly Bean Factory, or whether it's complementary, like the Nutisal was. We will continue to look because we think that we have skills and that there is consumer demand within munchy moments, and that is our territory.
Can you be more specific on those munchy moments that you're not meeting right now?
Nah, not really. I think if you think about everything that is in between the three main meals that are brand driven and impulse driven, and it fits our customer sets, and it fits our distribution, physical distribution, then I think you are as solidly equipped as we are in sort of thinking what the alternatives are.
Finally, sort of your medium to long-term growth trajectory. I'm interested to know if you guys would look more at emerging markets and expanding your position there, or is your medium to long-term growth strategy more about finding pockets of growth in sort of the flat to declining Western European markets that you're mainly in?
We would be very excited about finding a good entryway into emerging markets, of course. I mean, it's nice to be sort of more exposed to faster-growing markets than we are right now. However, we are within confectionery. Confectionery is quite a fragmented category, and also, as I said, it's impulse driven through its brands. So you need to have a solid position in order to be in front of the consumer's face, and therefore, given the opportunity to be bought by impulse. And to be able to really sort of get the best sort of shelf positioning and the right slots and promotions, and in the cash registers on the way out, and secondary placements, you need to be a significant player and have, I mean, a significant portfolio.
So therefore, if we were to go into an emerging market, with either we have to find an acquisition candidate that has a portfolio that's locally entrenched, that's culturally similar to us, or we need to find a partner that has the portfolio that is willing to invest in and drive. That is not that easy. However, I mean, we would definitely look at those opportunities. In the meantime, we still think that there are plenty of opportunities to find more synergistic acquisitions and opportunities as we have over the last year and a half or so. So I think it's both, but it's not as easy getting into the emerging markets, and I think a lot of our colleagues in the industry are finding that.
Mm. So therefore, would you say that the priority is more the pockets of growth in the more mature markets then?
I would say, I mean, the focus is on both, but I would say that the likelihood would be more in existing markets.
Okay. Thanks then.
Our next question comes from Mr. Fredrik Villard from Carnegie. Please go ahead, sir.
Hi, good morning. I was wondering, talking a little bit about the gross margin and then Nutisal, and now, the Coop business coming in. Would you say, given, given the, the type of business, that this is slightly different from what you do normally in Sweden, would you—is it a fair comment to say that this has a lower gross margin than you're used to? Or do you wish to, do you wish to rectify that statement and say that it's perhaps, in line with, your overall business or even higher?
Well, what I, what we can say, Fredrik, is that, we have, we see no reason to change our ambition level to the 14% EBIT margin, and that is where what we're focusing at. Then, when you do acquisition, we have to take the Nutisal example, as we mentioned, it will not be EPS accretive until 2015. So maybe it pushes the 14% EBIT into the future, but we're saying focus on the 14%. It's our ambition and our intent to get there.
Okay, perfect. And just if you could comment on the Coop business. You mentioned refurbishment, and are you going to... How fast will you be able to sort of get merchandisers, or will you be able to use your current personnel or staff to sort of to spend time in stores? And how are you thinking about sort of—are you taking over the cleaning and the refilling and the everything in the stores? And how fast will you be able to sort of get that staff in place and get that operation running smoothly?
We are, yes. The answer to number one, yes, we will take care of the merchandising and, and, everything that is, all the practicalities around running the concept. We are looking at the alternatives, on, I mean, whether to do it in-house or whether to do a third party. So we're working that through. It will be a ramp up. Our clear intention and desire is to be fully operational, fully rolled out by the very important Easter season, 2015. But it will be, as I said, a very hectic period during the first quarter.
All right, perfect. Thanks. And just, if you could just comment on the interest rate you pay to your banks on your loans. If we exclude all the hedging and the interest on the earn-outs, et cetera, what's your interest rate currently?
What we have said is, hi, Fredrik. We said, 3.8% is the effective interest rate on the average net debt that we had in 2013. What we are having this year is in that level.
All right. Perfect. Thanks.
The next question comes from Mr. Rickard Hellman from Nordea Bank. Please go ahead, sir.
Thank you. Just a follow-up question regarding the new pick and mix concept. Do you expect any large investments in terms of perhaps for racks and things like that when you enter this market?
It will be an investment in racks, absolutely. But it will not really rock the boat for us. It won't change our CapEx ambition of 2.5% per year. We will manage that within.
Okay. Okay. Thank you.
I remind you, if you have a question for the speakers, you will have to press zero one on your telephone keypad. That's zero one to ask a question. Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
I just have a question on Nutisal. I think you mentioned that that business would add around EUR 200 million when downsizing the contract manufacturing you had there. But looking at the run rate for the first six months, it looks more like EUR 150 million. Is there something I'm missing there?
No, I don't think you're missing anything. And, I think what we said is that the contract manufacturing, the private label business, has not been reduced to a lower level than expected on plan, but probably faster than expected plan. So it might take us a bit longer to grow the branded sales to compensate that, but we are having some nice growth on the branded sales, and we still feel we're going to get to where we should get to. But, we have gotten out of the contract manufacturing faster than we thought.
And the branded products are... I think you said that should add around SEK 50 million in growth per year, the coming years. Are you trending on those numbers?
We see no reason to change that ambition level.
Okay, thanks.
There are no further questions at this time. Please go ahead, speakers.
Okay, thank you very much. I would like to take the opportunity to wish you all a nice summer and holiday, in case you have it, and speak to you next time. Thank you and goodbye.