Good morning and welcome to Cloetta Quarterly Results. My name is Jakob Rydén, Head of Investor Relations, and as always I have Bengt Baron, CEO, and Danko Maras, CFO, with me. I will now leave the presentation to Bengt. Please go ahead.
Good morning, everybody. First quarter, I'd like to start out with the highlights of the quarter. We're very pleased to have a third quarter with organic growth, 0.6% organic growth, but adding FX and adding the Nutisal business, we actually had a growth of almost 6% in the quarter versus last year. So again, third quarter in a row with organic growth. Underlying EBIT was down versus last year, EUR 77 million versus last year, EUR 91 million. I'd like to emphasize that this is our smallest quarter historically from a seasonal variation or annual variation. So the numbers, the differentials might seem large on a percentage basis, but in absolutes it's actually not that big of a difference, EUR 14 million.
And on top of that, if you look at the 3 driving factors, which is lower production volumes causing absorption issues, foreign exchange, and increased investments in marketing and promotions, we could actually have been ahead of last year taking those into account. But Danko will talk more about that in a sec. Items comparability is coming down as we continue to work towards the completion of the restructuring. Operating profit, you're starting to see the convergence of reported and underlying. Differential is minimal, so it's EUR 52 million versus EUR 58 million. And also, I would say, very pleasing on the growth, but we are equally pleased on the cash flow from operating activity, which was EUR 91 million in the quarter versus last year, minus EUR 16 million.
Also it's an indication of us actually approaching the phase where we have less and less of restructuring, and you see the cash flow flowing through as we actually said at the outset about two years ago. Factory restructure, I'll make some comments, but we are getting very close to completion. So three activities left, and I'll leave that as a cliffhanger and come back to that a little bit later. Likewise, Nutisal, we actually completed the deal and acquired the company on January 8th, and we are in the integration phase, and we'll also have a little bit more detail in a couple of slides. Net debt, underlying EBITDA is at 4.4 times versus last year, 4.7 times. Looking at the sales number, overall growth, as I said, 5.9%. The general market, we would say, are marginally positive.
There are always ups and downs by segment and by market, but we would say mostly it was marginal positive. Third consecutive quarter with growth, and we actually grew in six out of nine markets, especially strong growth in Denmark and Germany. As you may recall, a year ago in Denmark, we were still battling it out, sort of the end of the price increases after the sugar cost increases back in 2011. We have resolved that issue, and now we're back into full distribution, and that is having an impact when you compare it to last year. Also in Germany, we have managed to increase our distribution, and therefore we're driving some nice gains. Italy, after three consecutive quarters of growth for us, was in decline, and primarily driven by the market decline.
We saw market growth in the fourth quarter, but now we see a market decline. I would like to remind everybody that Italy is a much smaller proportion of the totality in quarter one, two, and three, whereas in Q4 it more doubles in relative size as we have big players in the seasonal business. Contract manufacturing continues to decline, but that is non-branded production, so it is not, in our view, as important as the organic growth in our core markets. So on that positive note, I would like to hand over to Danko.
Thank you very much, Bengt, and good morning, everyone. Let me just start by talking a little bit about the top line, and then I'll move on to the different line items on the underlying profit and the reported profit. As Bengt was saying, we have a 5.9% growth in the quarter, and the predominant reason for that is, of course, that we had the acquisition of Nutisal, which stands for approximately 3% of that. But also we continue to have benefits coming through from the fact that the euro currency continues to be strong and becomes stronger. And let's remember that a large part of our sales are in the Euroland area, and therefore we are having a 2.3% benefit coming through continuously. This is also the third quarter in a row when we have benefits from exchange rates.
But above all, it's the third consecutive quarter where we have top-line growth, which is organic. So the underlying sales is continuing to show the strength that we have shown now for three quarters in a row, and that's a good thing to see. When we come down to the underlying EBIT, you can see results of EUR 77 million versus EUR 91 million. And Bengt was alluding to that. There's a difference of about EUR 14 million. One has to look at the proportion of EBIT in the quarter relative to the full year. And here, as you might remember, we have talked about production volume and absorption issues in conjunction with securing the manufacturing strategy and doing the security of our products to deliver them out in the market.
In Q1 this year, we had an impact of actually producing less than last year, and that's an absorption effect that we might be seeing coming back and forth in the quarters because they are phasing related. On a full-year basis, we're very comfortable with the fact that we have volumes, as we have indicated before. But one should be aware that with small EBIT contributions in a quarter, it can actually have an impact in the quarter. The other part is FX, and it might be a bit confusing when I say that the euro is strong and therefore we have top-line growth, but there are some transaction exposures in Norway and Sweden, which actually are affecting the commercial operations in Norway and Sweden.
Those transaction exposures are impacted because of the strong euro, and therefore we are initiating price increases in both Norway and Sweden to take those into mitigation. In the context of the total impact, it is not significant, but it is contributing to our erosion on EBIT in the quarter. Then finally, we are investing in A&P, even though we will see in our line items, you see a relatively flattish cost on selling expenses and G&A, but we're actually reducing our indirect. So net-net, it's sort of a flattish number. On the underlying EBIT, that's the explanation. If we then move down to operating profit, we see this convergence that Bengt was talking about. We have less restructuring in the quarter relative to last year, and that continues more and more.
So that the impact that we are seeing in the quarter is EUR 52 million, approximately EUR 6 million off from last year. We will continue, of course, to have this convergence, and if you look at the bottom line, you can see that the profit for the period was EUR -12 million. One contributing factor of that is, of course, that we are still having restructuring costs. But another part which might be relevant to perhaps look at when you compare to prior year is that last year, in the finance net, you saw a one-time gain of EUR 37 million, which we don't have this year, and that's because we are applying hedge accounting to the finance net item. I can explain more in detail on those questions if you would have them for me later on to explain it further on. So those are the line items for our results.
If I were to go in and just talk a little bit also about how this looks like by the phasing of it, I think the tables on the next slide on page 5 is illustrating it a little bit more, where you can see our top-line growth on the left side, but also the proportions of our EBIT over the quarters. It's a good historical reflection of how we are delivering our EBIT going forward. And I think the most encouraging one we are seeing here on the right side is, of course, the cash flow, which for the quarter from operating activities was EUR 92 million. We should perhaps also add that if we are not including the working capital movements from Nutisal, it would have been even higher, up to about EUR 113 million.
So a very, very strong cash flow in the quarter, and that's very encouraging and makes me very pleased to see. If we move down to below operating activities on the next page, there's a couple of numbers coming through again. You can also see there the EUR 91 million on the operating activities versus last year's negative minus EUR 16 million. But also the fact that, yet again, the convergence of us not having cash out from restructuring and investing in the manufacturing strategy, you can also see a decline in the investing activities, EUR 36 million versus EUR 54 million, continuing in the right path that we have been indicating all along. And of course, this quarter, we've made the acquisition of Nutisal, and as you can see on the line item for investing activities, that's what we actually paid for Nutisal.
Our net debt, as Bengt was indicating, is 4.4 times on EBITDA. One might be saying, if the acquisition would not have happened, we would have reduced our net debt to about 3.156 or EUR 75 million lower than what we currently have. Indicating strong cash flow generation, acknowledging the fact that we did an acquisition in the quarter, still having very good cash flow from operations. With that, I'll give the word back to Bengt.
Updates on the integration of Nutisal. As we mentioned, the company and the brand was acquired on January 8th, so it's very, very early on and very much integration mode. We believe it's of strategic importance, and it demonstrates our ambition to move into a broader product offering within the Munchy Moments sphere, as we talked about, in our home markets. We took over the sales responsibility within the Cloetta sales organization in Sweden on April 1, so it's very, very fresh. In the other markets in Denmark, of course, Sweden is by far the largest market at this point in time. However, we also launched it in Finland through our own organization in the month of March, so early on. So everything is moving in the right direction.
We have said all along that it will be EPS-accretive in 2015, so it will impact us negatively under 2014 as we're investing into growth and taking over and also integrating the production and supply chain into the overall operations. But we feel so far so good, and we are on track with the integration of Nutisal. Factory restructuring progress, we're moving ahead. Production was terminated in Gävle at the end of 2013. What is remaining are two things. One is to sell the property, which is an ongoing process. And number two is actually relocation of equipment, and that is primarily one major packaging line, which currently has been moved and is being installed in Levice. But those two things are what is remaining.
And then, of course, we need to wrap up production fully in Levice and Ljungsbro, as they are taking on the brunt of the Gävle production. Then the third major activity is the insourcing to Ljungsbro of Tupla, the market-leading countline in Finland. And as we said, that is on track and is expected to be done late Q2, early Q3. So all in all, we are moving along as we should. Focus areas, we will continue to focus on profitable growth. Three quarters down, we will continue to focus on organic growth. Factory restructurings, only three things, as I said. Make sure the packaging line goes up and performs well in Levice, sell the Gävle property, and completing the Tupla insourcing.
And then we also, of course, paying a lot of attention into our new baby, the integration acceleration of the Nutisal branded sales in our core markets and beyond. Before opening up the floor for questions and a little bit of a flavor of some product launches during an active quarter, I think it's also a nice illustration of the variety of launches. Starting in Italy with a very unique milk-based product, Galatine, which has launched line extensions. Going into Finland, which is a geographic roll-out of existing products under the Center brand. Going down to Sweden, where you have if you look at the Powerbreak, that is actually the Tupla product, but in the Swedish wrapping and branding.
But also, I think Viva Lakrits Calabria, where we are continuing to broaden our offering within the licorice category, which we are attempting to establish in the Swedish market, and this is a premium offering on top of the Viva Lakrits offering. And then you have a couple of other examples of new packaging or product line extensions or cross-border initiatives. So all in all, continue to be active in the marketplace. With that, I would like to open up for questions.
Ladies and gentlemen, I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. That's 01, and you enter a queue. The first question comes from Mr. Erik Sandstedt from Handelsbanken. Please go ahead, sir.
Hi there. Thanks. So this is Erik Sandstedt with Handelsbanken. I've got a few questions here. Firstly, do you have a view on why the Italian market showed a weak development after a couple of more stable quarters, and how did you perform relative to that market?
Oh, it's difficult to tell. I mean, one of the things, if you look over time, our markets are growing somewhere between 0%-2%, so it's not rapid growth. Of course, there are variations from quarter to quarter, and I do not have a specific reason for this quarter. I mean, we've been positively surprised a couple of quarters. It was a big I mean, big Christmas season, maybe it's a backlash, so I think we need to give it a couple of quarters. Then how we performed, I think we are sort of defending our market position, but we reiterate, in Italy, we are not as big a player in quarters one through three. It is actually in Q4 where we are really, really big and becomes very important for us with the seasonal sales.
Yeah. Perfect. Thanks. A more of a nitty-gritty question, perhaps. Net financial expenses, we're over EUR 50 million in the quarter. Should we annualize that and assume interest rate costs of around EUR 200 million on an annual basis, or is it fair to assume a lower level as you pay down debt?
Well, first of all, Erik, welcome to the team. It's nice to hear from you. I would say if you look at our annual report, which I'm sure you have read through now, you can see that our effective interest rate that we had in 2013 was 3.8%. It's a gradual decline. Our actual interest expense for 2014, we don't do any forward-looking statements there, but it's roughly in line with that level in 2014, that's as much as I can say.
Yeah. Perfect. Thanks. Also, on FX, if you look at the current FX rates, do you foresee also a negative impact on your operating profits in the second quarter?
Well, if I knew what currencies would do going forward, I would be making a lot of millions here. But you can see a relatively stable weakening of the Norwegian krone. So it's been stable but weak, and it hasn't deteriorated any further. So that, of course, we will look at this very carefully. On the Swedish krona versus the euro, I guess there are a lot of people having views about that. But over the long run, perhaps important to remember that a strong euro is good for Cloetta over the long run. So rather than specifying anything on a quarter, just perhaps keep that in mind, that the retranslation issues that you are seeing as a favorable turnover growth actually have an impact also on underlying profit in the end.
Yeah. Perfect. One final question, if I may. Would you care to comment how much exactly you spent more on marketing and sales initiatives in this quarter to drive growth?
Bengt here. Honest answer, no. The reason is because, I mean, you have these phasing issues, and we don't want to get into reconciliation every quarter on what did you do last year, reminding everybody last year on the aftermath. I think the core message is we will continue to invest in our brands and driving the brands and growth in the marketplace, even if it has an impact in an individual quarter.
Perfect. Thank you very much.
The next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead.
Hello. This is Mikael at Danske. Just a clarification on the currency. Did you say that the transaction effects were larger than the translation effects in the quarter? The negative transactions were larger than the positive transactions.
Are you referring? Hi, Mikael, are you referring now to EBIT or top line, or?
EBIT.
Yeah. You could, yes. That is the immediate impact. The fact that you are having units acquiring goods during the quarter, they will have to pay for the spot rate. So these fluctuations that are immediate will impact the results, of course. But if you continue to have a very strong euro ongoing, that will, in the long run, give a benefit to the company.
Okay. And you also talked about price increases there. Is that price increases that are implemented already, or do you see or is it something you intend to go forward?
They are communicated, and they should be implemented in the summertime. There is a lead time on all of these things in both directions. So they are communicated to trade, yes.
Just on the Nutisal acquisition, because we were looking at the year-on-year development in the underlying EBIT, I guess you should have had some positive effects on savings. But was Nutisal that a major negative delta year-over-year on underlying EBIT?
I wouldn't say it's a major negative on underlying, but of course, it impacts. As we said, it should be EPS-accretive in 2015.
Okay. Just my final question is related to the raw material situation. We've seen the sugar price be on a declining trend for quite some time. Your raw material costs, how did they develop year-over-year in Q1?
There are ups and downs. I mean, sugar is publicized as going down. Of course, cocoa is going up. Almonds are going through the roof. There is nervousness around wheat and wheat-related products due to the Ukraine issues. So it is a little bit of a shaky market right now. But as you know, we have some forward buys. It takes a bit of time before it really flows through. And more importantly, if it comes down or goes up, it will be temporary effects because in the long run, we have as a strategy that the consumer is either going to pay the price if it goes the wrong way or enjoy the benefits if they go the right way. That's also important in credibility versus trade.
Okay. Thank you.
The next question comes from Mr. Fredrik Villard from Carnegie. Please go ahead.
Hi. Good morning. I was wondering if you were willing to quantify in one, two, three, which of the effects Nutisal and production absorption on the gross margin, which was the biggest and which was the smallest of these effects?
Good morning, Fredrik. Thank you again. So if you look at the gross margin, you compare it to last year, you could actually say that the two key contributions to the gross margin, as reported, are the production absorption issues that we are having, number one. And then the second part would be Nutisal. And here you need to think about the dilutive effect that we were referring to, that if you combine branded and private label within the Nutisal business, we will be driving the branded side, of course. But given the fact that we acquired the business just in the middle of January, you will have that immediate effect in the gross margin. So it's about 50/50, you could say, on those two. FX, of course, plays in, but if you want to have that priority setting, those two are the most relevant ones for the quarter.
Okay. Cool. Thanks. The second question is with regards to inventory level. I mean, there's significant release of working capital in the quarter, which helps drive your cash flow. And in previous quarters, we've talked about you building inventory and you having a higher inventory than you wish at the end of the quarter. I was wondering if you would want to comment on your satisfaction with the inventory now.
Well, I would say, first of all, if you look at the balance sheet in the quarter, of course, you will have to include the Nutisal piece on receivables, payables, and inventory. And then it looks like inventory is increasing, but the fact that it's not increasing, that's as far as we go. So you can see that we have good effects in this respect.
Okay. Thanks. And the final question. I mean, sure, 0.6 is organic growth, and it's the third consecutive quarter growth. But given your I mean, you're alluding to the relative more spend on A&P. Did you expect more, or was this the anticipation you had, that this increased A&P spending was going to drive 0.6% organic growth?
I wish it was as simple as spending more A&P and you immediately get more organic growth or vice versa. So I mean, of course, what is key is that the continuous investment in the brands and in the market to drive it. And then you have peaks and troughs depending on seasonality, depending on launch windows, and of initiatives. And then also, I mean, again, this being our smallest quarter, it has the biggest impact on the EBIT in an individual quarter. So we are happy with that we are consistently driving organic growth. That is important, and that's the part where we want to stay. Then, of course, we always want to grow faster. Regardless of what the number would be, we would like to grow faster. That's just the way we'd like to operate.
Okay. Thanks.
The next question comes from Mr. Thomas Merry from Lancelot. Please go ahead, sir.
Thank you. Good morning, gentlemen. I wondered if you could elaborate on the underabsorption issue because you mentioned a lot of things in the report and in the presentation, which I can't really judge which ones are really significant. So you mentioned decreased contract manufacturing, relocation of equipment, this packaging thing, ramping up production in the Ljungsbro. So can you just talk about a bit why the underabsorption happened? Was it planned, or is ramping up not going as you would hope it would go?
Hi, Thomas. Thank you here. So I would say, of course, we work under the umbrella of a manufacturing strategy. So the activities that we are doing have the effect of the fact that we are sometimes producing to secure inventory that is primarily driven by this fact of making sure that we are not out of stock of our products. Had we not had a significant change program, you would have a more stable production scheduling, and you would have less of these issues. But now when we are ramping down some of the activities, Gävle was closed already by the end of the fourth quarter or in the beginning of the first days in January.
These implications will mean that the factory productions will have an effect compared to last year when you look at the fixed cost in the factories and how they are spread out over the quarters. So it's nothing unusual. I think in many companies, you see absorption effects being related to. We haven't really alluded to them in a large extent in the past. But as we are now coming back to a more status quo, we will refer to them. And I think the more important part is, is this an issue? No. Absorption is normal. We will produce as per the requirements for the business, and all of that is according to plan. So we feel that these phasing issues on absorption is something to acknowledge but not to feel worried about.
And again, Bengt here, I think also, I mean, just to add to that, I think it's not an effect that actually arises this year. It is in the comparison to last year, where last year was impacted by the fact that we were building inventory before taking down lines, moving lines, not producing, building down inventory, then starting up lines, then producing again. This year, it's much more continuous. We have a couple of steps left, as I said and as you also mentioned, but it's much more stable and continuous than what we have been through over the past two years. So I think one important message is not about this year being up or down. It's much more in comparison.
Yeah. No, I think it's natural that when you move equipment, when you ramp down somewhere, it's going to have an effect. But also, a lot of it is non-cash then, I guess. I mean, what you said, Bengt, sounded like a big part of it is, for example, depreciation in Gävle, which is not really that relevant. And once you sell it, you probably have a capital gain, and so forth. Is that fair to say? I mean, quite a bit of it is depreciation in Gävle because there's not a lot of people working there, right?
Well, Thomas, I'm more than happy to have a one-on-one with you if you want to. And I can work a little bit through how the fixed cost allocation goes out on products and how you produce of it. But effectively, it is how do you spread out your costs in factories over the products that you produce? And the more you produce compared to a prior year, the more you spread out those costs. And that has the timing impact, but it doesn't have an impact on the results at all if you stay flat on inventory levels and you are driving your sales. So I think depreciation per se doesn't really have any impact of it. But I'm more than happy to sit down with you one-on-one and go through it a little bit more in detail so that you get a better understanding of it.
Thanks. Yeah. Let's follow up then, Nathalie. And then so finally, just I mean, if you sum it up, is it going according to plan, i.e., because then you build inventory to be able to deliver goods while you're relocating? And so this does not mean then, okay. Yes. No question. Is it going to plan, i.e., you will not have a problem delivering going forward because you have built up inventory and this underabsorption, underproduction was planned? Is that fair to say?
Yeah. That's fair to say. Last year, we were building a lot of inventory, having an effect in last year's numbers. This year, we are not building inventory. We are just doing steady state.
Okay. Thanks a lot.
The next question comes from Ms. Alla Korotonozhkina from Deutsche Bank. Please go ahead.
Hi. Good morning. I have a couple of questions. The first one is on financial expenses. This interest of EUR 50 million, could you give me more color on that? What does it include? Any pensions? What is the proportion of third-party borrowings? So just basically, what drives this EUR 50 million?
Yes. I can say that the majority of those other financial expenses are external borrowing, but there's also interest on pensions. The fact that we are hedging our interest expense, we secure our interest rates to make sure that we don't have any volatility of it going forward, and therefore, we also have some interest rate swaps, and that you can see on other financial expenses as well. But you also need to look at the financial income because those are the income parts of the swaps. But overall, the majority of it relates to external borrowing costs. However, not all of it. Some of it are pension-related. Some of it are also related to amortization of financing and transaction costs that were part of the initial borrowing arrangement that we put in place. Those are being amortized, and they are not cash-related.
I'd rather do the reference back to what is the effective interest rate that we are paying to the bank, and that was 3.8% in 2013.
All right. But can you quantify how much is external borrowing?
External borrowing is SEK 3.2 billion in the quarter.
Thank you. Another question is on depreciation. It increased by 9% year-on-year. Is it because of recent acquisition of the Nutisal business or because, given that you have factory closure, I would expect it to go down year-on-year?
It's not a major increase of depreciation. So we should perhaps keep in mind that the fact that we have been ramping up with machinery and equipment in the manufacturing strategy is adding to the capitalization of our machinery and equipment. But at the same time, we are taking out old equipment. So it should be relatively the same. What we're also doing to perhaps keep in mind is that we're implementing an ERP system where the costs are being capitalized. But in total, we are seeing a relatively similar depreciation level as we did in previous years. So we don't expect it to increase significantly.
Right. Thank you. Last question on the restructuring costs. Can you give guidance for the year? Will they continue to be in Q2, Q3, Q4?
We have talked about having restructuring expenses in the initial outset that would be approximately up to EUR 450 million or around that level. We feel confident that we will continue to be guiding in that direction. It also means the way we work with our supply chain that some of the costs will also come out a bit later. Overall, we are keeping it around that level in 2014 because we will then in the completion of this project, we will be able to do the full evaluation when we are done with it.
Okay. Thank you very much.
The next question comes from Mr. Christian Hellman from Carnegie. Please go ahead, sir.
Yes. Thanks. Christian Hellman here from Carnegie. Most of my questions have already been answered, but one question I do have left. Just could you say something about Easter? Has that impacted Q1 in any way that the Easter being in Q2 this year and quite late? And yeah, that the Easter should be a big part of your business.
Good morning, Christian. Well, Easter is actually not that big of an impact on our business. I mean, it's more Pick & Mix seasonal products. We're not very big on the seasonal products. Of course, we have some of them, but it's not really material. So therefore, we've not sort of really tried to go out and specify it. So it should not have a big, major impact.
All right. Okay. Great. Thanks.
There are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for listening and asking questions. So speak to you next time. Thank you and goodbye.