Good morning, and welcome to Cloetta conference call. I'm very happy to welcome you all to this presentation. My name is Jacob Broberg. I'm Head of Investor Relations, and with me, I have Danko Maras, CFO, and Bengt Baron, CEO. I would like to start with handing over the word to Bengt.
Thank you, Jacob. Good morning, everybody. Diving right into the material, I propose to start on page two. We are quite pleased to announce what we feel is a very, very solid and successful third quarter, all the way through the income statement, starting at top line, which is quite gratifying that we have a 3% growth. Actually, 1.4% organic underlying, if you take away the FX effects. So we reached almost 1.2 billion SEK of net sales, and it drops all the way down to the underlying EBIT, which went up to 160 million SEK for the quarter, which is an almost 30% improvement versus last year.
The EBIT margin continues to strengthen in accordance to what we set out to do, almost two years, or a year and a half ago, towards our long-term target of 14%. And in the quarter, we were at 13.3% underlying EBIT margin, which is a 2.6 percentage point improvement. And operating profit is SEK 131 million. In the quarter, it's also worth mentioning that we did a refinancing, and this is something that Danko will talk a lot more about in a couple of minutes.
Integration process, which was a significant effort that was initiated in February 2012, is virtually completed, and it's something we're taking off the radar screen for with one big exception, and that is the insourcing of the Tupla production, which we're preparing for in Ljungsbro during the summer of 2014. But otherwise, the whole integration it is a lot of hard work, many difficult decisions, but in hindsight, we have to say that the integration has been both faster and smoother than anticipated, and I think the team's done a fantastic job in that area. The other big active activation theme is, of course, the factory restructuring. We are proceeding according to plan, and the Gävle factory is still scheduled to be closed during the first quarter of 2014.
Looking slightly closer on the growth in the quarter, we are seeing improved market conditions. I should not exaggerate that. It's not like we're seeing rapid growth, but we're seeing a stabilization and then small increases and small growth in the quarter. And notable is also in Italy, that is stabilized, and we actually noticed a slight growth in the overall market condition. Finland still in the quarter was a bit challenging from a total market perspective. Our sales, Cloetta sales, grew in most markets across the only ones that sort of stuck out that didn't was what we call sales rest of world, which is outside of our main markets, showed a slight decline, and that is a mixture, of course, on ups and downs in various geographies.
And then also in the Netherlands and in Norway, and in Netherlands, the primary driver is a weak development in the chewing gum market total, where we are market leader, but the overall development has been weak year to date. And in Norway, it was primarily driven by two things. One is the discontinuation of the third-party sales. And secondly, there was a reorganization in the sales force that short-term had impact on our sales. But overall, I would say a more stable external environment and a positive development from a Cloetta point of view. With that, I'd like to hand over to Danko to take us through some of the numbers.
Thank you, Bengt. Yes, good morning, everyone. Let me just reiterate what Bengt was just saying initially on the sales numbers, the 3% growth, very pleased to see that. The underlying growth of 1.4% is coming from the various markets that Bengt was highlighting. But we also had the fact, strengthening euro compared to last year in our income statement, so we have a 1.6% benefit coming through on the, on the top line, and that is, of course, also welcome. If we look at the operating profit and the different profitability measures, let me just start by underlying EBIT at SEK 160 million. You can see that the margin there is coming through at 13.3%.
So a good, healthy development of the underlying margin versus last year, that was 10.7%. But also then, if you look at the operating profit, the EBIT, we're coming up to SEK 131 million versus SEK 90 million last year, and the margin goes up to about 11%. So it's a nice convergence in line with the strategy that we've talked about, driving the margin expansion and gradually reducing our exceptional costs. It's, of course, also nice to see that our profits for the period is SEK 86 million. Before tax, it was around SEK 101 million versus last year, and, and, and we are, of course, very pleased with that.
If we move over and then look at the next slide on page five, you can also see that we are delivering in the quarters in line with what our historical track record is, but also a little bit above. But you can also see that we are starting to meet the synergies in Q3. So the benefit is gradually declining versus last year, but we are still delivering above last year. That's all on this one. And then on page six, when we look at the cash flow, of course, very pleased with the higher EBIT and the EBITDA, and therefore, there we have a good cash flow from operating activities versus prior period. What you might think is when you look at the cash flow from changes in working capital is it should have been a little bit higher.
But there are two key components that relates to the cash flow outflow there. And one is, of course, that we sold a lot on the second half of the third quarter, which has an impact in our receivables that we will collect in Q4. And then also, we continue to be closer and closer to the closure in Gävle, we are building inventory for, in particular, our past sales and phone products. So we are still working on securing customer service for the closure that is coming up very, very close by. If you look at it, you can also see the cash flow from investments that we are having. We are gradually also reducing that relative to last year. So our investment in line with the manufacturing strategy is tapering off compared to prior years.
If I move on then to the refinancing, you might have heard it, or you might have read about it, but we have renegotiated the bank loan. We are pleased with the fact that we both renegotiated the bank loan and issued a corporate bond. But on the renegotiation of the bank loan, what we have managed to do there is to reduce the cost of borrowing. We've also eased part of the relationship with Handelsbanken. We had a very substantial security package, and that has eased a bit, and one example of that is the distribution of dividends, where you can see now that previously we talked about 2.5, but now we could make dividends if we reach a net debt/EBITDA of 4.0 or lower.
However, I want to reiterate that our financial targets remain unchanged, where we say that we should come down to 2.5, and we do a dividend payout of 40%-60% of profit after tax. It might be notable, perhaps, to remember that in Q2, our net debt EBITDA was 4.7, and we are now down to 4.4, so good development of the EBITDA. Moving over to the corporate bond issue of SEK 1 billion, yet again, quite pleased with the market reaction of the issuance of our bond. We managed to replace a more expensive bank loan of 350 points mark up to a SEK 1 billion bond issue on 5-year at STIBOR plus 310 points.
So we feel the actual demand for this bond was oversubscribed about 4.4 times. So very nice to see the execution of that. It was a somewhat new kind of bond issue in the Swedish market, and it was a bit of an innovative structure of the security, yielding a pari passu, both on the bondholders and the bank loan. With that, I hand over back into Bengt to talk about synergy and restructuring.
Brief update. As I mentioned, integration process, I would say, virtually completed. It's only the Tupla insourcing and some small insourcing contracts that remain, and Tupla will be towards the end of the summer before that is full speed, and everything is on track to do that. So we can tick the box on that one. Factory restructuring proceeding according to plan. Gävle, scheduled to close in the first quarter of 2014. We have matched in principally all products all major products. We also have test runs, and now we go into the phase that is the most difficult, but where we practice quite a bit of the past two years, which is ramping up into full production speed.
We reiterate the ambitions of closing in the Q1, and towards the end of 2014, we should realize all the savings. Going forward, in focus, well, of course, Gävle is the biggest of the three, so we remain focused on making sure that that will be closed successfully and transferred successfully. Number two, we talked about last time, and the quarter before that, the new vision, the bring a smile to munchie moments. We are rolling that out within the organization. It's important to make sure that every employee in Cloetta has a common view of where we're heading, sharing the excitement of the direction we go, and also the values and the mission to create a cohesive culture.
We're in the process of actually rolling it out, entailing that every single employee of Cloetta will go through a training session on that topic, something that we believe long-term is very, very important. Then finally, of course, it's all about going back to and then driving profitable growth in a mature market. So it's about gaining market shares and fighting in the marketplace, and we feel that the third quarter of 2013 was an important and very gratifying step in that direction, and we look forward to keep on meeting those challenges in the marketplace. Important in driving that growth is, of course, the fun part on page 11, which is to continue to develop our wonderful brands, launching fantastic products that many, many consumers love to try.
We have given you a number of examples, and since most of you are from the area close by, I would like to highlight Polly bilar, which has had a renowned success in the marketplace, and also in Finland, where we have the retro relaunch of Hopea Toffee, which has gone beyond our wildest dreams in its reception in the marketplace. And also, I think, with the advertising promotion, I think, if you've not been out on YouTube and checked out the Malaco Lördag hela veckan Candid Camera clip, I urge you to go out there. Lots of hits and very fun way to interact with our modern and young consumers. With that, I would like to open up for questions.
Ladies and gentlemen, if you have a question for the speakers, you'll have to press zero one on your telephone keypad. That's zero one to ask a question. Our first question comes from Mr. Peter Wallin, from Handelsbanken. Please go ahead, sir.
Thank you, and good morning, gentlemen, and congratulations to a strong report with the clearly better than expected sales recovery and where we once again see Italy showing sales growth. Do you think that so, like, if you try to take the comparable sales into consideration, just elaborating on if the same sales trend we've seen in Q2 and Q3 in Italy prevails during Q4, would it become even more visible in the reported figures for you guys, considering that Q4 last year was quite weak in Italy, further burdened by the more strict capital, more payments regulation implemented in that country that year?
Well, it's difficult to predict, Peter, because I think it's important, because you're alluding to it, that the characteristics of our Italian sales, I mean, Q1 through Q3, Italy is normalized, so to speak, and then in Q4 it becomes very big because there's a lot of seasonal sales. So, the underlying market, I mean, it has stabilized. We've shown growth in Italy in the past two quarters, which is very, very pleasing. Going into Q4, there was a lot of things going on last year, so of course, there is ambitions and expectations, but at the same time, the market is still quite fragile in Italy. And the question is, okay, how much inventory do the retailers there to take on? And how much will the consumer return at the marketplace?
It's very difficult to predict, but you're absolutely right. In whatever direction Italy goes, it will have a much bigger effect on the Q4 than it does in the first three quarters.
Okay, thank you. And then the question on your quite successful then increased market activities in terms of your sales development. Have these been like spread evenly over your markets or have you been focusing especially in a few of your markets?
No, we've been, I mean, we're returning to sort of more normal state of business across the board, I would say, and everybody is moving forward. And then we have different external environments, and there are different sort of launch plans or promotional plans, the different comparators. But I feel in general that we are more and more returning into sort of a normal state of business and staying very, very active in the marketplace, and that's across the board.
Okay. Great, thank you. And then a final question of mine would be if you could just give a quick update on the price development on your key commodities, key input commodities.
What we can say over this last or the latest six months, I would characterize it as stability after, I mean, a quite turbulent end of 2011 and beginning 2012, where pretty much every raw impact shot up through the roof. We've seen some easing on the world market in sugar and a bit also within the EU. On the other hand, as you know, we buy forward sort of six to nine months in general, so therefore it's not really sort of hitting the numbers. So and we'll see where it goes towards the second half of the year. It's difficult to predict, but the positive side is we see some easing and some stability.
Then a lot of our raw materials are crop definite or defined by sort of crop results and expectations, so they could still bump up and down. But it's nice to see that at least we don't have every curve going up through the ceiling.
Okay, great. Yeah, thank you. Sounds good.
Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
Hi, Mikael Holm at Danske. First a question on just looking at the underlying EBIT improvement from last year. It's mainly driven by an improved gross margin, and underlying OpEx seems to be quite stable. Why aren't we seeing more effects from the cost-cutting initiatives on the OpEx side?
Well, I think we are in a way. Thank you. Good morning, Mikael. We are developing, of course, the majority of our margin expansions that we have talked about is the development of the gross margin.
Yep.
So the factory closures and the effect coming through from there. But also, if you look at the actual operating profit, we have improved our underlying profitability even there. So I'm not exactly sure on which specific point you're comparing it to, but delivering our margin expansion is a combination of both the gross margin enhancements, but also reducing our indirect from the integration activities.
Okay. Okay. And just, just on the cash flow, looking at the net debt, it's basically stable from last year, and there have been some working capital. Is it possible to quantify the effects from this piling up inventory ahead of the Gävle closure? And what kind of positive effects will we see going forward from the supply chain restructuring? Is that possible to quantify as well?
Well, as you know, Mikael, there are two components to the cash flow. One is the actual current assets of our inventory that we will focus on next year, that will reduce and generate cash. But it's also the fact that we've had the exceptionals. They are cash out items that we will more and more taper down. And as you might have noticed, we are talking about Q2 2014, where we believe that the end of the expense we have announced SEK 450 million will stop. So you have a double effect on the working capital impact, where we will reduce inventory next year, but then also the absence of exceptionals coming through is giving us the benefit.
I'm not quantifying any specific numbers, but you can see the underlying working capital numbers from the past, and where our ambition is to ensure that we come back to the normalized levels.
... Okay, and just a last question, just on the financial cost following the refi. Is it possible to give a ballpark figure of what kind of the interest rate will be post the bond issue?
Well, as you know, the markup on the term loan that we talked about was 350 points.
Yeah.
We have replaced that with a bond at 310 points. You also know that we had an effective interest rate of 4.2%.
Yeah.
That we have announced. And what I can say is that it's gonna be less than that, but then you also have to consider the fact that it's markup plus a mix of STIBOR and EURIBOR. So the total interest cost is dependent on the mix of the proportions of the debt that we have, and they can develop in any way or form. You see, it looks nice when I hear that the European Central Bank are reducing the EURIBOR, but it's very difficult for me to predict exactly what the impact will be. To a certain extent, we have interest swaps in place to fix the rate going forward, but not the whole portfolio.
So the mixture is there, but for sure, I think we can see something that goes below the existing interest cost that we have in place.
Okay, thank you.
Our next question comes from Christian Hellman, from Carnegie. Please go ahead, sir.
Yes. Hi, good morning. Just a question on Italy. I remember last quarter you mentioned that you had launched Chewits, or were about to launch Chewits in the Italian market. Is that one of the reasons why Italy is looking a bit better for you? Or could you elaborate a bit on the Italian market and perhaps the new product launches?
Of course, launching Chewits, even though it's relatively new, and therefore a small brand, we're still building distribution on that in the Italian market. So, but of course it contributes. But I would say that it's the total portfolio, the base. In particular, I would say that we have relaunched the brand Dietorelle in Italy during the quarter, and it's been received quite well initially. And of course, it's all about getting the first wave of sales, but then also getting loyal consumers that comes back over and over again, and that's a bit too early to say. But I would say it's much more sort of across the board, which is also highlighted by the fact that the Italian market in totality is more stable than before, rather than pointing to one or two brands in specific.
All right. And in general, in terms of market growth and relative your growth, are you taking market shares in any markets, or are you losing market shares, or are you holding your market shares, or could you elaborate a bit on market shares developments in different markets?
It's always, I mean, this - one of the reasons why we've not been more granular with quarterly data by market and market shares, is the fact that it moves around quite a bit, depending on what launches did you do this year, what launches did you do last year? What was the promotional calendar last year? What is the promotional calendar this year? When did you do price increases versus not pricing, and so on and so forth. But in general, I would say there are ups and downs, of course, by market and by segment. But in general, I would say we are defending market share and slightly ahead in some markets, but in general, I would say no major movements in totality.
You can talk sort of small, small, sort of small digit numbers movement here and there, but in general it is quite stable. There are ups and downs. Of course, what we're trying to do is to really win in the segments that are crucial for us, but I wouldn't say any major deviations and changes in this short time period.
All right, thanks. And final one, just on your acquisition here a couple of months ago, Goody Good Stuff. Any developments there in terms of... I think they were about to launch in the U.S. or anything else that you could just highlight? It's a small company, but nonetheless, interesting products.
Absolutely. And I would say that actually we're starting to build up during the coming quarter, where I mean a lot of transfers and customer negotiations and contracts have been put into place, and we're actually starting to increase from a small base, but quite promising this early on. So it's nothing that's gonna move the needle in the totality, in the short term. Also what we said up front, what is really interesting about this is the technology and the concept, and something we can build on for the future.
The U.S. rollout, when was that due?
Well, we're beginning in this quarter to ship to the U.S.
All right, thanks.
Our next question comes from Miss Alina Kapran from Deutsche Bank. Please go ahead.
Good morning. Could you give some color on current trading? Do you continue to see the same positive trends as in Q3?
Well, we're not really sort of giving updates in the quarter. We have been quite strict on sticking to what's out there in totality, and not making forward-looking statements, and all that, sort of, in the middle of the quarter.
Okay, thank you. And, in the statement, you mentioned that the growth can be driven via acquisitions. Do you have any further acquisitions on your pipeline?
The acquisition, I mean, as we said, in within the space of the munchy moments, we are looking at the market, what is available. It's no secret that we have, I mean, Danko talked about our net debt to EBITDA 4.4 times, so a bit of a stretch on our balance sheet. And then also, as you know, when making acquisitions, a combination of the attractiveness and also with the price and the willingness of the seller and the buyer to agree on what the value is. So we are sort of-
...Thank you. And the last question, on other financial expenses, there was a step up in financial expenses in the third quarter compared to the first two quarters. Could you give some color on what it was driven by, and what should we expect in Q4?
Yes, this is Danko here. So just to give some response to you and also to Mikael before. I mean, if we look at the totality of the selling expense in general and admin, we are about SEK 100 million better than last year on a year-to-date basis. But in fact, what Bengt was referring to on the third quarter, we are stepping up our A&P investment. So in the selling expenses, we are increasing our investment in the brand, although the underlying overheads are reducing. So that is the key component on the difference you see in the quarter. But if you then look at it structurally for a year-to-date basis, we are having the benefits from the integration work.
On the interest rate in, for the full year, do you expect it in line with 2012?
We don't talk about the forward-looking statements, but we, as I mentioned also before, the actual interest expense or the effective interest, we don't revise what we just said before.
Mm-hmm.
There are some one-time items there that we have that have to do with the fact that we refinanced part of our loan, but the impact is very immaterial in total. So we don't highlight that as an expense driver, and it's a one-off item. So we are going in the right directions on the interest expense line.
Okay. Thank you. Thank you.
Our next question comes from Mr. Rickard Herman from Nordea. Please go ahead, sir.
Thank you. Rickard Hellman here, Nordea Credit Research. Just a quick question regarding Denmark. I wonder if you could give us an update on the unresolved negotiations which you had with the major customers. You reported as an argument to the weaker sales in Denmark during the Q2 report.
We are feeling good about the developments with the negotiations with the customer, and are probably more optimistic today than we were a quarter ago.
Okay. Thank you.
I remind you, if you have a question for the speaker, you will have to press zero one on your telephone keypad. That's zero one. Our next question comes from Mr. Fredrik Villard from Carnegie. Please go ahead, sir.
Hi, good morning. I was wondering, you alluded to, in, in, Goody Good Stuff, the, the, the technology used by them could be seen in, in, in new products or at, or in, during the... under the brands that you have in your current markets. I was wondering if that's something that's continuing, and if we can expect to see that in the shops, anytime soon, and, what, what's your expectations on that?
Fredrik, that was a broad interpretation of what I said.
Well, I tried to-
No, what I said, no, but just, joking aside, joking aside. No, and what you said is we're learning a lot about, about the technology. It's interesting, but, the platform is, is Goody Good Stuff for that. It's a very clearly positioned brand. It is, I mean, it is, it is for people who really want to enjoy indulgent candy, regardless of, of, of many other potential limitations. So that's the platform of Goody Good Stuff, pure enjoyment for everybody, and that's what we should build upon. Then, of course, we're learning about, and there's maybe the things to do, but it's not about rebranding, refocusing, any, any of the existing brands. It will be a separate, strong platform.
Okay. Will we be seeing Goody Good Stuff in Sweden anytime soon, for example?
It is my sincere hope that you will see Goody Good Stuff in Sweden. Timeline-wise, we will be back.
Okay, perfect. And I was just wondering, I mean, you, we mentioned the Dietorelle and, and the strong development that had in Italy. The product launch schedule going forward, is there anything that you have high hopes for? I mean, of course, there are, but anything in particular we should sort of be aware about?
We have a lot of high hopes-
Or in the stores?
We have a lot of high hopes. But I mean, right now, we are mostly... I mean, where we are right now, looking at Q3, we are quite pleased with several of the initiatives in the marketplace. I mean, I think the Polly bilar of the world and then the Hopea Toffee of the world, I mean, the relaunch or the rebranding of some of the Malaco products, the launch of Läkerol Hals. So there's a lot of things are moving in the right direction. The Kick products that we launched in Denmark and Norway, well received in the marketplace. Launching Chewits in Italy, early reception, positive. So, we're building on what we're doing right now.
So maybe you also saw, I don't know whether you saw it in, in Denmark, a lot of commotion around the Skipper's Pipe when the EU was about to ban Skipper's Pipe and it didn't, which had an enormous impact on, on the activity on, on the net. So again, it's, it's showing that people are very excited and involved in our brands and our products, and that's great.
Okay, thanks so much.
Our next question comes from Mr. Thomas Merritt from Lancelot. Please go ahead, sir.
Thank you, good morning. I just had a question on the... it's a minor point, but I just did not quite understand it. The Netherlands weak chewing gum market, I didn't quite understand why that would be. So what's been driving that? Is it volume? Is it someone else being aggressive on price, so you're losing market share, or why would the volumes in chewing gum go down?
Well, Thomas, I mean, one of the issues, again, is the quarterly market before. Then when you go into specifics, could be a lot about driven about launches and then promotional pressure the year before versus this year, not only by us, even though we're market leaders, it's quite intense competition in the Dutch chewing gum market. So a lot of things moving, but in totality, the chewing gum market has been down this year in Holland, and that is no prediction on what's gonna do in the future. It could be up to next year. But the fact is, it is down for a various number of reasons. You cannot point to one single thing.
Okay, thanks. And how much of your sales roughly are chewing gum in Netherlands and then the group as a whole?
I mean, totality, this is one of the things we have a very broad portfolio, both geographically but also by brand, so you cannot really pull out one being sort of the driver of the totality. That's also why we're trying to stay away from too many comments by brand, by market, by quarter, because it easily becomes sort of a huge halo effect, which is disproportionate to the impact on the totality.
Sure. But sorry, just roughly how much of total sales are chewing gums in Netherlands or and the whole group?
We have not broken it down to that finite level.
Jacob, I mean, you can—I don't have it yet at hand, but, I mean, we have disclosed chewing gum as a total of the group yearly sales. But then I can, I can send it to you on a, on a separate note, because I don't have it at hand.
Okay. Thank you. That's it.
Thanks.
Our next question comes from Mr. Ola Eriksson from Handelsbanken.
Yeah, good morning. I have a que-
Thank you, sir.
Yeah, thanks. Good morning. I have a question around the financial target on net debt/EBITDA 2.5x. You previously guided for to reach there in 3 years. I wonder if that is still valid, and also, I mean, EBITDA is trending up, but net debt is sort of unchanged over the last 2 quarters. So I wonder if you could provide some guidance around that.
Yes, of course. Our, our financial target of 2.5 remains, to start with, and it's the two components that drives that, of course. And you're absolutely right that, in the initiation of our factory restructuring, we talked a lot about the fact that we, we needed to fund the manufacturing strategy and the, and the closure of those factories and the integration activities. They are coming more and more to an end, so we are driving all of this, and the cash out that was consumed by that is now yielding its benefits. So going forward, we have the absence of these costs, and we have the, the margin expansion coming in. So we are, we're comfortable with our ability to drive down our debt.
We will start amortizing, or we will continue to amortize in line with plan. And the fact that we have had a component of net debt EBITDA that is more driven by the EBITDA development is in line with what we have, what we have planned for all along. So I would say that the target remains. We will reduce our net debt EBITDA to 2.5, and the two drivers of that will gradually shift more towards reducing our debt and retaining the 14% strategic EBIT margin that we're getting in closer and closer towards. So you will see a gradual shift and the net debt come down.
Okay, thanks.
I remind you, if you have a question for the speakers, you'll have to press zero-one on your telephone keypad, zero-one. There are no further questions at this time. Please go ahead, speakers.
Okay, thank you very much for listening in and asking questions. I would like to thank you for today, and have a good day. Thank you.