Good afternoon and welcome to Cloetta Q1 Conference Call. My name is Jacob Broberg, Head of Investor Relations, and with me I have Bengt Baron, CEO, and Danko Maras, CFO. So please go ahead, Bengt.
Good afternoon, everybody. Diving right into the material and the presentation, looking back at the first quarter, I think a good summary of the performance is that it was a significantly improved underlying profitability. The underlying EBIT went from SEK 47 million to SEK 91 million, implying a margin improvement from 4.1 percentage points to 8.1%. The external market is not really helping us. We're still experiencing continued weak conditions in most markets in Western Europe, which is our primary home market, as you all know. In fact, the underlying net sales was reduced by 3.3%, and I'll come back to that a little bit later. In the quarter, as every quarter, we continue to amortize our debt by SEK 90 million.
Also, as we continuously communicated last year, is that we implemented some price increases during last year and that there will be rollover effects of that during this year. The integration, the organizational integration primarily in Scandinavia, is essentially completed from an operational point of view. But of course there is some fine-tuning; there's remaining, and also some insourcing and IT coordination. For all intents and purposes from an operational point of view, we feel that we are pretty much there, meaning that we are on time and we're actually on budget as well. Similarly, factory restructuring, where we have more work ahead of us, relatively speaking, we are on track. Alingsås and Aura are closed and sold. And if my memory serves me correctly, I think we're actually handing over the keys to the Aura unit tomorrow.
The warehousing operations in Scandinavia is now completed, all being consolidated into an external warehouse in Helsingborg. And again, we are still on track, time-wise and savings-wise. Going to the next slide on the overall sales and market development. As I mentioned, we have continued weak markets. We're seeing it especially in Italy, Denmark, and Netherlands. In Italy, I don't think it's a big surprise with the ongoing financial situation and also the formation of the new government, which has been somewhat chaotic. In Denmark, we're still seeing volume declines, even though if you look at it from a value point of view, it's up, but it's just because of the increased taxes last year. Volume continues to slide, as the consumer is shifting its purchasing pattern and more and more buying cross-border, in the border trade.
The tax authorities in or the government in Denmark decided to reduce taxes on beer. So we'll see if that has an effect going forward, but we haven't seen anything to date. In the Netherlands, we're seeing a sluggish performance in most segments we are active in. So therefore, jumping to the next bullet points, we're extremely pleased to see Netherlands actually growing in sales in the quarter despite the headwind. Also, the markets most impacted by the integration also show growth in the quarter, namely being Sweden. We're also quite pleased with the flat development in Finland, given that it was a very strong quarter last year, the first quarter, as well as in Germany.
On the decline of sales, after my description of the market developments, I don't think anybody's surprised to hear that Italy and Denmark accounted for most of the group's decline in sales. In Denmark, in Italy is primarily the market in general than the financial crisis. In Denmark, in addition to the tax situation that I mentioned, we are still in negotiations with one of the major customers, which is unresolved and also has impacted our performance and sales in the market. Also, I mentioned the 3.3% reduction in underlying net sales. That would actually be reduced to a -2.4% if we take into account that we have decreased the contract manufacturing, which is manufacturing done on behalf of another branded goods company, in the quarter. This is because part of the contract has been canceled and that will impact us as we go forward as well.
Then overall, the raw material prices are not showing too many major moves and they remain on a historically very high level, I would say. So having that as an overall, overall verbal description, I now hand over to Danko.
Thank you, Bengt, and good afternoon, everyone out there. Let me perhaps just start by saying that this quarter is probably the last quarter where we have somewhat difficult comparator. If you recall, the deal was actually made on the 16th of February last year, and also we had a LEAF Belgium Distribution disposal on the 22nd of February last year. So I'm afraid I have to bridge a little bit the underlying growth with the net sales that we have reported. But as of Q2 onwards, we start to get more comparators versus prior year, and it becomes a bit simpler to explain. If you look at the sales to the first quarter, we're about 4% growth. Out of that, we have a weak currency affecting us with about 2.3%.
Then we have these structural changes with Cloetta and LEAF Belgium Distribution, etc., having a 9.6% effect on us, giving us a net impact of 3.3%. If we move down straight perhaps to the underlying EBIT, you can see an improvement from SEK 47 million last year to SEK 91 million. The composition of those, that improvement lies in the fact that we've done price increases. We have effects coming through from the manufacturing strategy, and we have the effect of the Cloetta LEAF Integration. Again, there's a lot of ins and outs on the comparators versus prior year. So, we have chosen not to disclose the composition of the three, although we are tracking it internally. It's better for the future when we start getting more in order, what are the different compositions of that significant improvement.
Another positive is also, if you look at the profit for the period, we don't have items disturbing the net, the financial net. And therefore you see a real profit for the period of SEK 36 million versus last year's negative result of SEK 119 million. So that, that's positive to see that we can come through on the net income basis. The restructuring for the period was about SEK 33 million and predominantly, as we have said before, are manufacturing related. We are essentially completed with the Cloetta-LEAF integration, although there are some calibrations that we are doing in the year to come. If you turn the page and just look at the seasonality or the quarterly contribution for the underlying EBIT, you can see that we started off in a good quarter for Q1 2013.
I think this is a good indication of the trend, historically, of what we have contributed. With that, I leave again back to Bengt to talk a little bit about the progress on the.
Yes.
The work?
Thank you, Danko. Two slides that the most of you on the line probably recognize. First one is on the synergy program. Essentially completed. There is one yellow left, which means it's under implementation, but on plan, and that is the insourcing of third-party production, and that will take a little bit longer before that's all in place. As I said, going forward, this will be primarily fine-tuning more than anything else, and most likely this is a slide that will disappear pretty soon from the presentation. Going to the next page, which is more the factory restructuring program, there are three bullet points on the left I would like to draw your attention to, and that is Aura, which today is green. It is completed, and Alingsås, which is now equipment sold and everything done.
Then the final bullet point, with the new Scandinavian warehouse structure in place, which is also green. So what we're focusing on right now is on the receiving units, Ljungsbro and Levice, and then of course also the rampdown and the continuous service levels out of Gävle, which is scheduled to be delivering products up until quarter one of 2014. But all in all, on track, as we have communicated earlier, and there are no major deviations today either. Back to Danko.
So on the Q1 cash flow, you can see there on the next page, page 8, that it's positive, the cash flow from the operations, obviously, because of the results. A negative move in the working capital, predominantly associated with an increase of stock because of the closure in Aura, but also because of the work we are doing in Sweden, in the Gävle facility. And therefore we have a negative movement that relates to the stock build for the quarter affecting the working capital. You can also see on the cash flow from investments, we are up to SEK 54 million of spend in investment for the manufacturing strategy. Both that number and the prior year number are impacted by the manufacturing strategy. So we will come back to more normalized numbers when we are ready with the investment program for the manufacturing strategy.
So there is an effect of that also in that area. However, we managed to sell, continue to sell, as Bengt highlighted, although that was in a prior period. We have sold the Aura facility. We also sell some land and facilities, and we have disclosed some of it in the report, giving us a positive effect of SEK 31 million in the cash flow statement. And despite that, you can see that we do have a negative cash flow for the period, that we will manage. The net debt position for the quarter is still hovering around SEK billion 3.19. Okay? And then, Bengt?
So looking a little bit into the future, looking forward, are there three areas? We mentioned it after the Q4 report as well. Of course, number one is the macroeconomic development, the impact on market development, to understand when Western Europe will turn out of the sluggish behavior. I think anybody's guess is as good as ours, but it's something we definitely are tracking and following. Number two is we want to complete the restructuring process, involving Gävle, which is the biggest of the three plants that are impacted. And then the third one is also looking further into the future as we are less preoccupied with short-term projects and actions. It's of course developing the vision, the mission, and the values of the company.
I also would like to take this opportunity to give you a glimpse on where we're heading and what we have communicated, and maybe some of you have seen it already in our annual report. Looking at which markets do we wish to serve as a company, and, going back, you can see the three bubbles or the four bubbles in there. Three of them are basically the old LEAF world, chewing gum, candy licorice, and pastels. One bubble, chocolate, is primarily old Cloetta. We all brought this together. There's a lot of industrial logic to this, and I think we're also in the process of realizing the synergies and also the competitive edge of having a full portfolio.
Going forward, we think there's plenty of white space in each of these areas, looking at it from a more sort of technocratic or engineering point of view. But there are also new territory that we could look at. The way we've looked at it is much more from a consumer-centric point of view rather than from an engineering point of view. So, what we have said is one thing we do not serve is we are not the main meals. We are not breakfast. We're not lunch. We're not dinner. We are not lunchy, whether you're cold lunch or, or hot lunch. So we are not the main meals, but everything in between is territory that we could be in. And this is the territory that we call the Munchie Moments. These are the moments where we indulge ourselves. These are the moments when we energize ourselves.
These are the moments when we reward ourselves. Whether we do it alone, whether we do it together with friends, whether we do it in the open nature, whether we do it at work, whether we do it at home, doesn't really matter. We are into products that are primarily impulse-driven, that are full of enjoyment, full of emotional benefits, typically very branded, and in between of the main meals. So again, Munchie Moments is the territory that we are aiming for and going towards. You saw some evidence of that already last year when we saw the Tupla, the Countline brand in Finland going into biscuits quite successfully. You also seen it or you will see it in a couple of slides, early also, the brand TV Mix in Finland going into popcorn, as an example.
Going in that direction, what is our purpose and mission? Well, what we want to do is to bring a smile to your Munchie Moments. And once we do that in the long term, the vision is once we get there, we want to be the most admired, satisfied of Munchie Moments. The smile is extremely important to us because we are an emotional category. We are in the feel-good category. We are in a time machine category. Regardless of which market you're in, once you encounter our products and enjoy our brands and interact with our brands, we want it to be an emotional feel-good, physical feel-good, but also a bit of a time machine. A little bit going back to those nice warm feelings and nice warm memories when you interacted with the brand the first time.
Going forward, as we all say and we all know, visions are long-term, ambitious stretches. But if we were to ever get really close to what we aim to do, to be the most admired satisfied Munchie Moments, that means we should look at it from many stakeholders' point of view. It's not only but from the consumer's point of view, but also customers, competitors, employees, suppliers, shareholders, and so on and so forth. So, Munchie Moments is something you will hear a lot about from us, going forward, and that is the direction we are going. We think it opens up a lot of exciting opportunities, both within the categories within we are in already, but also beyond. And then finally, I can never resist to show you some new exciting, wonderful products. Here's a sample of first quarter launches.
The sweets on the line, hopefully have all tried the Ahlgrens bilar, the Fruktkombi, fantastic product, Läkerol Hals, going a little bit more medicinal, and Toy continuing its return on the market with another SKU. Holland, I think, is an interesting brand stretch. The gum leading, market-leading gum brand, Sportlife, goes into mints, which is a very natural next step. And so far, very, very early days. We're still building a distribution, but it's a very interesting launch. Continuing to the right, Dietorelle, the first real sugar-free branded candy out there in Italy, is relaunching with a new fantastic product, stevia-based, fruit juice-based, and sugar-free. So definitely a better-for-you alternative. And on top of it, extremely tasty, very yummy, to be honest.
And then down to the left, as I mentioned, the TV Mix brand, which is a candy brand, going into the popcorn shelf, to the snack shelf with a hybrid product, which definitely is Munchie Moments. And also, I think it's worth to mention Polly, which is a good example of old Cloetta products starting to travel across border, within the new Cloetta footprint, with Polly Rocks successfully being launched so far, in the Finnish marketplace. So, we are staying active in the market, and we intend to continue to stay active in the market on our journey to bring a smile to all your Munchie Moments out there. So with that, we'd like to open up for questions.
Ladies and gentlemen, if you have a question for the speakers, you will have to press 01 on your telephone keypad. That is zero one. Our first question comes from Mr. Staffan Åberg from Handelsbanken. Please go ahead, sir.
Thank you. I've got two questions for you. I'll start with if you could give an update on how your price negotiations are proceeding in Norway.
Price negotiations in Norway are essentially completed. Then this is never completed, to be quite honest, but we have implemented the prices that are in place, so there are no real negotiations going on. But that is just a matter of time. This is something that's annual, so it will be coming back on the agenda.
All right. Thank you. And question number two. Could you give us an update on how much contract manufacturing you have and if you risk losing more contract manufacturing, and also, what the reason was behind the terminated agreement?
Contract manufacturing is a very, very small part of the totality. So it is not insignificant, but it's a very small part. The reason for it, when you lose contract manufacturing, is what I think is always the reason, is pricing. So we get to a certain point where it doesn't really make sense for us to do it any longer. And then if we cannot agree, it will be diminishing.
Okay. Thank you.
Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
Hi. First of all, a question on pricing. Is it fair to assume that you in Q1 this year basically took back what you lost in Q1 last year in terms of the net of prices versus raw material?
Well, that's what we said. I mean, this is something that goes on throughout the year. So price increases were gradual during the year last year. So, it will all roll into rollover effects during the year. Then price negotiations will start over, all over again. So we'll see where we end up net for the year. But it is a gradual rolling process because, as you may remember, Mikael, it was all the way up until November last year, we were still sort of negotiating the final contracts with customers.
Okay. And also a question on the savings from factory closures. Now, when you closed Aura and Alingsås, and that was basically 50% of the employees of all Alingsås and Gävle, is it fair to assume that 50% of the SEK 100 million in savings will be fully visible from Q2 this year? Who?
You're absolutely right that it is about 50% of the employees. But it's also the two smallest plants out of the three. And the biggest savings is actually not with regard to employees or labor costs. The biggest savings is with indirects and all the other costs associated. And those are more proportional to the size of plant than to the number of employees.
Okay. Also, you sold the property in both Alingsås and Aura. Did you book a capital gain on those? And, is that included in the adjusted numbers?
They are, thank you. Here they are booked in the quarter. They are in other operating income. You can see it there. We disclosed it at SEK 7 million, and they are actually being booked as exceptionals. So when we look at our underlying performance, both the gain and the loss of write-downs or sales that are related to the strategy are actually booked there. So they don't appear in our underlying profitability to be fair on both the ups and the downs.
Okay. Thank you.
Our next question comes from Ms. Catharina Farrow from Deutsche Bank. Please go ahead, madam.
Thank you. I was just hoping you would give us a bit of an update on financial expenses and sort of what we can expect really for the rest of the year on that side. And then also, if you could just talk us through a little bit what you're finding. I mean, you talked about pricing in Norway there. Is it fair to say that you've got pretty much where you sort of want to be at the present time in terms of passing through those higher sugar costs? And then finally, could you just let us know if there is any change on the kind of working capital situation in Italy? Obviously, there's a bit of destocking going on in Q4. Has that... is that something that's sort of normalized now? Thanks.
If we start by looking at the financial expenses, I assume you want to see more components within the financial expenses and not the financial items.
Yes.
I can explain that also if you want.
Yeah. Thank you.
Well, if you look at the 55 million that we spent in the first quarter, it's true that we are having an underlying interest expense that is much smaller than that. And then we are having effects that relates to the fact that we negotiated a new loan last year meant that we have to capitalize the financing costs of, of, the transaction itself. And there is a component of that included that will continue, every quarter. There's also an interest on pensions that is, booked in that area. And we also have derivatives in place that fixes the interest rates for a period forward. The two first one are non-cash related. So if I only look at the interest expense, I could disclose that, and that is, somewhere in the range of, SEK 35 million-SEK 40 million.
That is the true underlying financial expense that we are having in the quarter. That is the trend that we continue to look at. Obviously, with the amortization of the loan, it, it will gradually decrease.
Excellent. Thank you.
Then if I just should take the component of the exchange gain losses, it's the fact that we are having a euro loan in Sweden. We are revaluing that one, and that provides a gain to us in the quarter, because of the weakening euro. Effectively, we would like to avoid having volatility in the results. So we are looking at that component to see if, how the accounting treatment for EBIT should be for that one going forward. But it is a gain of a weakening euro in the quarter.
Okay. Thanks here on your question on pricing. Are we happy with where we are? I don't think there's ever a supplier that's entirely happy, 100% happy with where they are. But I think we have on a fact-based way, we've gotten through the process on list price level to where we exactly want to be and where we can expect to be. Going forward in the market environment with the competitive activities, also a question about, okay, what do we do with those regained funds? Do we invest them back in the marketplace and battle for share, or do we let them drop back to offset the increased cost of raw impacts? And that's something that's gonna vary by market and also as the year goes on.
Great. And Italy?
Working capital, Nathalie. Could you repeat the question there?
Well, I remember in Q4, you were seeing some impact on volumes because there was a bit of destocking, because of the changes to working capital requirements within Italy. Is that something that sort of had any impact on Q1 or just sort of was a one-time issue in Q4?
There is a benefit coming through in Q1 in the cash collection in Italy because of the payment terms that we had on 60 days. It also means that people have to pay us. So we didn't see that effect coming through in Q4 when we sold the products. But very quickly in Q1, we actually got the proceeds coming in earlier than what we normally would expect to see. Normally, you would see that being between March and April. So a certain effect, a positive cash flow effect, yes. Significant in the total scheme of things, not major for the totality of the cash flow.
Okay. No real impact on volumes?
No, yeah. I mean, it's really difficult to separate what is driving what in Italy. Everybody's trying to find a feed. What is macro? What is payment terms? So it's really difficult to separate. But as I said, overall, Italy is still it's still a challenging market environment.
Great. Thank you very much.
Our next question comes from Mr. Christian Hellman from Carnegie. Please go ahead, sir.
Yes. Thank you. A question on Italy, if I may. Just, to clarify, in Q4 last year, Italy was attributed a lot to the downturn and reported organic decline of 7.4%. And in this quarter is - 3.3%. And you also mentioned Italy as a factor. But could you elaborate a bit on how big Italy is in Q1? You mentioned in Q4 that you had big seasonal products in Italy, and Italy was a major part of sales in Q4. But how big is Italy in Q1, or has Italy improved, or how should we look upon it?
Italy is relatively far smaller in Q1 than it was in Q4. We say it basically doubles in size, relative size, in the quarter. Italy is still struggling a bit. But overall, I mean, Q4, we were at -7%. Q1, we're actually at -2.4% if you exclude the contract manufacturing. So overall, we are improving going the right direction. But Italy is definitely not yet in a turnaround situation, but much more a question of being in a stabilizing situation. And in the quarter, I think Italy is somewhere around 10%-11% of sales.
All right. So but adjusted for seasonality, it's less of a decline in Q1 versus compared to Q4 in Italy?
Marginally, I would say.
All right. Another question, in terms of the EBIT margin, how does 8.1% compare historically to, for example, what LEAF performed, before the merger with Cloetta? It's just to get a sense of the seasonality in terms of margins over the quarter.
Oof, that's a tricky one on quarter. But when we did the pro forma, I think there was a combined EBIT margin of 10.6%, of which LEAF had a 12.2% margin. And you also see the same pattern, I think, relative to what you have seen in 2012 on the components between the quarters. But I do not recall by quarter yet. And we could look at that if you want to. But the totality you got there on the EBIT margin?
Right. Yeah. I was just trying to get a sense of 8% in a historical perspective. 8% in Q1, if that's really, really great or if that's decent or just to get some sense of it because there aren't too many historical numbers to go by. You're absolutely right.
You're absolutely right. I mean, last time, we actually had a Q1. There was not the impact. It was 2011. And we were in a totally different environment, in a private environment rather than a public environment. So historical data, it's difficult to get by. I understand that. But I think, I hope you sense that we are pleased with the quarter.
Yeah. Maybe to add to that point, we are combining former Cloetta and LEAF now. So our only margin that we look at is the combination of the two. Right. Yeah. I understand that. Final question, it's just to get a sense. I think you touched upon it in the presentation, and perhaps you don't wanna speak any more of it. But just some sort of bridge between the EBIT margins, year-over-year, 4.4% last year, 8% this year. Could we get some sense of the difference, 4 percentage points, how much is price hikes, restructuring programs, etc.?
As I said before, that, compared to us last year, it's tricky with the ins and outs. We do track it internally, but it's better for us to wait with that and do the analytics when we come out of the woodworks from the Rambo deal or the deal that we have done. And then we will do the analytics coming going forward.
All right. But you can't say which one of the components we is, is the largest or the smallest if it's mainly price hikes, mainly restructuring?
No.
All right. I tried. Thanks.
I remind you, if you have a question for the speakers, you will have to press zero one on your telephone keypad. That is zero one . We have a question from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
Hi, again. Just a question on the restructuring cost. Is it fair to assume quite low restructuring costs in the coming quarter until you close the Gävle factory next year?
We have indicated that we will spend SEK 320-370 million in restructuring for the manufacturing strategy and approximately SEK 80 million on the Cloetta-LEAF integration.
Yeah.
The proportions on when they will fall out is also dependent on certain activities. So we are not saying exactly when they are going to come through. It's also actually not that simple to plan with precision because of activities that are happening. So a large part is being invested at the moment, but there are certain activities that come in the future that we will just have to wait and see.
Okay. Thank you.
Our next question comes from Mr. Fredrik Villard from Carnegie. Please go ahead, sir.
Hello. I've got a question. In the Q4 report, you mentioned the continuing temporary impact of efficiency gave rise to some short-term costs. You're not mentioning that in the Q1 report, today. Can we expect similar costs going forward, or is it a one-off for Q1, or are we gonna see temporary costs in Q2, Q3, or Q4?
I think if you look at the situation we were in, in particular in Q1 and Q2 last year where the actual deal happened and we had a lot of products on the move, I think Bengt mentioned that 40% of our products were on the move. We do not have that situation, that significant situation, in the period to come, although you don't know for sure what will happen. And again, it's then important for us not to disclose either way. It is of a lesser activity, but it's still very active, the fact that we are moving products, securing our inventory level to make sure that we don't run out of stock of these fantastic products out there.
So they could happen, but we don't see the same size of the activities as was the case last year considering the significant change agenda that we were exposed to in all areas, I would say.
Okay. And you're not willing to quantify what kind of the delta, so to say, would be in terms of Q1, Q2?
No. And it's very difficult to do also. I, it's better not to do.
Yeah. And I think, I mean, to that latter point, I mean, I think we said also last quarter, we could spend a lot of time trying to track and allocate and designate, but we don't really think it adds a lot of value. Also, I think going forward, it's gonna depend a lot on how smooth the transition of the move of the largest plant of the three, Gävle, is gonna be. And, of course, our ambition is that it's gonna be as smooth as possible, but you never know. So we're staying cautious. Okay. Thanks.
I remind you, if you have a question for the speakers, you will have to press zero one on your telephone keypad. That is zero one. There are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for listening in on the asking questions. We'll speak to you in July, if not before. So thank you for today, and goodbye.