Good morning, and welcome to Cloetta conference call Q4 report. My name is Jacob Broberg, Head of Investor Relations, and together with me, I have Danko Maras, CFO, and Bengt Baron, CEO. I'll just leave the floor for Bengt. Please go ahead.
Thank you, Jacob. Good morning, everybody, and I would suggest we go straight to the first page, the presentation, Q4 highlights. We are operating in Western Europe, so we are facing a fairly weak market. On paper, we are growing net sales to SEK 1.4 billion, but underlying net sales were down 7.4% in the quarter. However, profitability remains solid. EBITDA of SEK 80 million versus last year of SEK 90 million, but more importantly, the underlying EBITDA, for the first time since the merger, actually ahead of last year at SEK 208 million, and a underlying margin of 14.6%. Cash flow was strong, improved by more than SEK 100 million, up to SEK 147 million in the quarter, and we are basically remaining on track with the major initiatives.
Number 1, amortization, SEK 90 million in the quarter, and full year at the pace of SEK 358 million, which is totally on plan. Price increases are now implemented as previously communicated, and primarily to offset increased raw impacts, which remain at a high level, primarily sugar. The integration process, which is the integration of the commercial organizations in, primarily in Sweden, and to a certain extent in Scandinavia and in Finland, is, for all purposes, more or less completed. I can come back to that a little bit later. The restructuring, which is then the factory restructuring, where we announced the closure of 3 plants, is also according to plan. Alingsås is totally done, including the sale and handing over the keys of the building.
Aura will be closed in the first quarter, actually, within a couple of weeks. We've come to an agreement with selling the building, as well. In Gävle, we came to agreement with the unions on how to work forward for the coming year and before the closure, which is planned for the end of the year, beginning of 2014. As I mentioned, overall, weak markets, in general, across the main one market that hits us the most in this quarter is Italy, and there are a couple of things I think is worthwhile to highlight in the Italian market. Number one, we all know that there's a macroeconomic situation that is weak.
But I also like to point out that in the quarter, or actually on October 31st, there was a new payment terms that was introduced, where the payment terms were reduced to 60 days, which sounds like a long time in most markets, but in Italy, where it's not unusual to talk about 120 or 180 days. This, of course, had a big impact on inventory levels and liquidity squeezes, especially in the so-called traditional trade, which has lots of bars, cafes, and fairly small operations, privately held, who are trying to adjust to this new reality, and that hits at least in the short and medium term.
Also, what we should know is in that environment, Italy, where Cloetta has a very large seasonal business, the Italian share of total sales is significantly higher in the fourth quarter as compared to quarter one through three. Therefore, any negatives on the absolute terms is actually having much bigger percentage impact on the totality. On the positive side, we actually grew sales in Netherlands, Germany, and the U.K. in the quarter. Looking around the markets, there are several markets, and more importantly, some segments where we are active, key segments, which were flattish or down during the year. In this environment, we continue to invest because we believe it's important to defend market shares, in tough environments, so that you can take advantage and capitalize on any rebounds going forward. Finally, on the market side, raw impacts remain at the high level. That's primarily sugar.
With the EU quota system, sugar prices still remain at 40+% above world market prices, and we'll see how that evolves in the EU context going forward. With that, I'd like to hand over to Danko for the numbers.
Thank you, Bengt. Good morning, everyone. If I come in and explain just if you see the page referring to the net sales of a growth of 2.3%, we talk about an underlying growth of -7.4%, highlighted by Bengt, what the, the core reasons were and the re- and in which regions. But if we more importantly go in and look at the underlying EBITDA, there's a significant change there from the SEK 80 million reported to the underlying SEK 208 million. And yet again, as consistently with the previous quarter, we can see that the majority of that difference relates to the exceptionals that we have reported in the manufacturing strategy and the Cloetta Leaf integration. There is a small dip on currency there, but that's the predominant reason for the difference.
What is encouraging to see is you have a gross margin reported at 33.8% versus 33.5% in the prior year. So you're holding a margin level now versus the prior year, which is contributing to the underlying EBITDA. And notable to see, as Bengt alluded to, that we have an EBITDA margin of 14.6%. It was also high in the prior year at 13%, but we have now actually increased it to a higher level. And if you look at the next page, and you go in and look at the different quarters, you can now see a good picture of the historical phasing of our EBITDA.
Of course, you can also see a little bit on the impact we talked about in Q1 and Q2, but the positive trend of an increase in the Q4 EBITDA, you can see visually to 2011 there. With that, I give back to Bengt to talk more in detail on the restructuring.
Yeah, on the two major initiatives that we have been driving and will continue to drive, starting with the integration of the merger execution. I am happy to be able to say that we're more or less complete from an operational point of view. Yes, there's primarily the insourcing of third-party production, which is ongoing and will continue. We're looking at opportunities as we go forward, but everything else is pretty much checked and done. The financial impacts will roll in during the coming year, and we are confident that we will deliver SEK 110 million as we have announced before. On the restructuring program, which is then, again, factory restructuring primarily, there are no reds, meaning that everything is ongoing and on plan. As I mentioned upfront, Alingsås all done.
Production terminated, products transferred, property and equipment sold. Aura production is more or less terminated. There's some packing left to be done, and there's an agreement to actually sell the property, and that is all done, and Gävle is on track. And also, I think more importantly, is on the receiving plants, everything is going ahead with the matching equipment installation and service levels are at the satisfactory level. Also, the warehouse structure, which sometimes drowns in the noise of all the factory structures, also being executed according to plan, and we're taking the final steps during the first quarter now. As we said in the third, after the third quarter is, of course, all the movements.
I remind everybody, about 40% of our production of our SKUs are on the move, and of course, that has impact on temporary inefficiencies, that we're not spending a lot of time and effort to identify to the last digit, but we know they're in there, and that will be with us for the next coming year until we close Gävle. But most importantly, we are on track, and we feel that we will be able to deliver SEK 100 million, as mentioned before. Over to the more cash flow, and the Q4 comparabilities.
Yeah. So if we then look at the exceptional spend or the items affecting our comparability, you can see in the quarter, SEK 122 million is booked in supply chain restructure and integration expenses. And then you have an exchange rate difference of SEK 6 million. That's the real difference to put it in bigger context. Maybe it's worthwhile mentioning the full year effect as we have accumulated the full year now. You can see that SEK 199 million has been spent on supply chain restructuring, and it's a progress that is going according to plan and what we have announced. If you look at integration expenses, we're up to SEK 73 million, and we are largely completed. And the SEK 37 million was the announcement we made on the twenty-second of February of the disposal of East Belgium Distribution, so.
And also, when we do our underlying, we are including first of January to sixteenth of February of last year. And then, exchange rate difference and others are smaller items in there, but that's the total effect for the full year. So, according to plan, if we then turn the page and look at the cash flow, you can then see a positive quarter, very positive quarter on the good contribution from EBIT, of course, the SEK 113 million coming through, but also good management of working capital, good effects on it, actually delivering another SEK 34 million positive cash flow, having then SEK 147 million of contribution. You can also see we have quite heavy investment in the quarter, the SEK 116 million, and that is related to the manufacturing strategy.
So we are now really operating at full swing for that. We have a positive on investing activities, and that's a nice one, but it's actually disposals that we do on machinery, equipment, et cetera. So that is helping our cash flow in the quarter and part of the manufacturing strategy as well. And giving us a net cash flow of -SEK 99 million, and then financing activities, SEK 26 million, and total cash flow for the period then is SEK 74 million. This means that we have amortized our debt with SEK 358 million. That is SEK 90 million additional in this quarter, and our net debt position is now at about SEK 3,056 million. And as you know, our financial strategy is to reduce that debt, and therefore, we propose no dividend for the full year. And with that, over to Bengt.
So going forward, what are we focusing upon? The people on the line that have been following us the last couple of quarters notice that one of the focus areas is actually taken off, and that is the integration. That is primarily because we feel that that is more or less completed from sort of integration, operational point of view. There is still some cleanup to be done, and that is in progress, but we feel that that is not one of the key focus areas going forward. The macroeconomic development and market impact the market development is, of course, of high interest for us. We know that historically, confectionery has been a resilient category, and the picture is also largely complicated by several sort of one-time events in various quarters and years that impact comparability.
So just to mention a couple, there was a significant on sugar tax or confectionery tax, about a year and a half ago, or a year ago, two years ago, which then, of course, impacts at the year-end, the purchasing pattern. So there are build-ups and there are build-downs, and then impacts the comparability for one or two years going forward. Likewise, we've had it this year in Denmark, increased taxes, which have the effect that the Danish consumer likes to go to Germany instead and buy it. Most likely they will come back, at least historically, that is what happened, but we don't know. Italy, I mentioned the 60-day payment terms. That again is a hiccup in the system and makes comparability quite difficult.
And also on the raw and pack side, it remains at a high level, despite the markets not being very buoyant. I would argue that it's artificially high, especially on the sugar side, because of the EU sugar regime, which then continues to keep the prices up about 40% above world market levels. So yes, we're keeping an eye on this, but we're also being very, very aware of the fact that our one-time events and impact are on top of it. Restructuring process is then, of course, the factory restructuring. We're gonna be focusing on this for at least another year, until we have completed the closure of the Gävle and the transition of the production to Ljungsbro and to Levice, primarily, out of Gävle. And then we're adding a new one going forward.
We are a new company as of one year. Yes, tomorrow is actually one year, the new company was formed, and we're in the process now, really working on the new, joint vision, mission, and core values of the company, and enjoying more and more time to focus on the daily business and getting back to a 100% focus on the daily business. And then, of course, at the end, we cannot resist to show some beautiful, delicious, and joyful, sumptuous new products. The Juleskum that hopefully everybody in Sweden enjoyed during the holiday season.
We launched a new Sportlunch Powerbreak, also a leading sugar confectionery brand in Holland, Red Band, three new products, and then Xylifresh, which is our 100% Xylitol gum in Holland, which is actually a product you should definitely chew if you want to take care of your teeth. So there are plenty of activities in the marketplace as well. So with that, we would like to open up for any questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from Mr. Peter Wallin, from Handelsbanken. Please go ahead, sir.
Thank you, good morning, guys.
Morning.
I would like to kick off with a question on the Italian market, and just ask if you have any kind of feeling for how much of the weak sales trends you've seen there, with which is attributable to the macro environment? And how much which comes from this, like, stricter payment terms, and then how quickly those, like, the payment term effect can fade out?
Peter, it's very difficult to separate those two, because I think they interact, because I think there is a nervousness about the macroeconomic environment that could exaggerate the effect on the 60-day payment terms, depending on how our customers foresee the future. I think we will. Now, we've been through the seasonal sales, I think we will have a much, much better picture of that after the first quarter, when everything settles, we actually go through the first 60- or 90-day cycles of purchases.
Okay. Okay, sounds reasonable. Thank you. And then turning to Denmark and their higher sugar tax. Are there any like actions you can do on your behalf in order to like try to mitigate the effects, I mean, at the end prices to the consumers? And if such, if there are any, are you doing them?
I think, I mean, typically what happens is, consumer has to get used to the new price level. At the end of the day, we still love to indulge ourselves, we still love to reward ourselves, and that's the type of sector and segment and product we're in. Then there is always a situation where there could be strategic price points, and if you cannot reach those strategic price points, and if they remain, there will be efforts done on sort of sizing and pricing of the product offerings. And that is, of course, something we're always reviewing and following and adjusting, when deemed appropriate.
Yeah. Yeah, okay. And then if you could just give an update on how you're proceeding with this, the terminated distribution agreements that old Cloetta had, and, I mean, how those products are, so, I mean, selling through in your sales force now?
Yes, thanks for bringing that up. I should actually have mentioned that earlier. We have taken over now in all three markets. Norway, we did already in September, and now we are in full swing in Finland and in Denmark, and I think it's too early to sort of declare success or be nervous about, but so far, promising signs all across.
Okay. And then one final, but I guess very big question is on the sugar prices within the European Union. And I mean, how do you have a view about how our competitors are dealing with this? And are your competitors acting so, like, similarly in all your geographical markets, or is it very different depending on which market you're looking at?
I think there has been a difference in view among various players on whether this is very temporary, somewhat temporary, or long term, and therefore, I think people have moved at different speeds. I think it's now settling in, and everybody is feeling the pain of the increased cost. So I think we were probably quite early in going out and taking price, but I think everybody has to move because the type of margins are not available in, I don't think, in any industry, to be able to offset those types of raw material increases. So I think everybody will move at various speeds, but everybody will move.
Okay. And then if we look at the Norwegian market, Norway not being part of the European Union, is there risk that any of the major players there being very domestic in their production infrastructure could, like, you know, don't have to raise their prices simply because they don't see the European cocoa prices?
That is always a risk, and then there is a process of actually getting some restitution from taxes paid when you export products out of the EU. But I would argue that without a doubt, in the short term, that will be an advantage for the domestic player, but on the other hand, they become very domestic.
Okay. Well, thank you very much.
Our next question comes from Mr. Mikael Holm from Danske Bank. Please go ahead, sir.
Hello, Mikael Holm at Danske. Just understanding the EBITDA improvement year-over-year, considering the quite significant volume decline, and I guess not that huge cost savings yet, is pricing net of raw material a clear positive contribution to the results in the fourth quarter?
Yeah, it's Danko here. Good morning. We can clearly see that in the fourth quarter, we get better impact on pricing than we've had in the prior period, so your assumption is correct.
And also just coming back, just understanding that Italian issue, to me, it seems like sales were down almost 20% in this quarter. Do you believe that is more of, like, a one-time effect for this quarter, and that your sales will be more aligned with the underlying consumptions for the coming quarter? Is that a correct interpretation?
I would be very hesitant to make any forward-looking statements on that, but what I personally believe is that whatever trend there is in the Italian market, it has been greatly exaggerated in the fourth quarter because of the change in payment terms.
Okay. Is it also possible to quantify the effects in Sweden regarding the inventory build up last year? How much that, let's say, was negative in the year-over-year comparison?
It's very difficult to separate exactly. What we wanted to make sure a year ago was, of course, to maintain service levels when we did the ERP implementation, which was across three markets and quite significant in big markets for us. So we did build up extra inventory, but exactly how much of that is sort of seasonal, how much of that is for the ERP, we would be hesitant. We could sort of give you a number. The only thing I would know is that the number would be wrong. Therefore, we rather point out that there is an impact, and exactly how big that is, we'd rather not try to speculate on.
Okay. And just for my last question for modeling purposes, are you willing to provide some guidance for the interest cost, the tax rate, and the CapEx level for 2013?
Um, no.
Okay, no on all, on all three questions then?
Yeah.
Okay. Thank you, then.
Our next question comes from Mr. Christian Hellman from Carnegie. Please go ahead, sir.
Hi. Yes, thank you. I have a question on the cost savings, the ongoing cost savings. How much of the synergy and the structuring program, that aims to save SEK 110 million, how much of that program has come through in 2012, and how much of it will impact 2013?
Well, there will be a significant rollover effect in 2013 because we, we started basically in the third quarter to, to realize the savings. And again, it's always, you can always try to separate it 100%, but, 45 of those 110 came from the Slagelse closure, which was in the previous year. So most of that is all, is, is in, of course.
Okay, so the remaining 65 or so will impact 2013?
I think that was your mathematics.
Okay. But you're not disagreeing with me?
I would say a significant part of the 65 will impact.
All right. And the closure of the factories, none of those SEK 100 million have impacted 2012, or?
No, we are working on the closures, and actually what we said also to Q3, there are a lot of temporary inefficiencies during the year, so it might even have gone the other way, and that's what we said. Rather than try to really dig down, we're focusing on executing according to plan, and we feel... From a activity level, we're totally on plan, and from a financial point of view, we are on plan when it comes to investments.
All right. Thank you.
Our next question comes from Miss Katharine Farrant from Deutsche Bank. Please go ahead, madam.
Thank you. Only one question really left from me, which is just coming back to the sugar tax in Denmark. I was just wondering if you could sort of highlight if you think there are any significant differences between the tax that's been introduced in Denmark and what we've seen in Finland, where clearly you're starting to now see consumers increasing their consumption again, or at least, you're purchasing it within the Finnish market. Is there any reason that the two markets should be significantly different in the way that consumers react to the tax?
Yeah, I think there are, I mean, I think there is, there's one huge difference, and that is, I mean, Denmark being a country that's bordering to, to Germany with geographic closeness, and then there is, there are differences in, in more categories in confectionery. So I think the German... The Danish consumer is becoming more and more sort of induced to go across the border and buy, and now as price differences come up on confectionery, they will also then pick up confectionery products when they're on their side. And that's something we have to adjust to and make sure that they are able to buy their favorite products also on the other side of the border.
Very clear. 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 is zero one. There are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for joining the call. Hopefully speak to you when we present the Q1 report. So thank you, and goodbye for today.
Thank you.