Okay, welcome to the new Cloetta Group's first Q1 report. My name is Jacob Broberg. I'm in charge of investor relations. And with me today I have Bengt Baron, CEO of Cloetta Group, and Danko Maras, who is CFO. And I will start to hand over to Bengt to introduce. Please, Bengt.
Thank you, Jacob. Good morning, everybody, and again, welcome. It's exciting times. It's the first quarterly report, as a joint company since the merger of Cloetta and LEAF. I must say that this first period has been incredibly hectic, with lots of extra projects and activities which all have to be managed on top of everyday normal, regular business. Overall, I'm very, very pleased with where we are as a company and also with all the progress that we have made in many areas. And with that, I would like to go into the highlights of the first quarter. I don't think it can be overly stressed, the fact that we're so pleased that the merger between the companies now are completed.
Afterwards, it seems like it was easy, but there's a lot of effort that goes into it that actually started as early as December 16th in 2011 when we announced the deal. It was then closed on February 16th when we moved into the rights issue, with the release of a comprehensive prospectus in March, and then we actually completed the rights issue in April, and that is more or less behind ourselves. In parallel, I will come back to that a little bit later, but in parallel, we are continuing to plan for the integration and the supply chain restructuring, as announced earlier, and everything is on track. Market conditions during the first quarter, even though it's always difficult to judge on a quarterly basis in the consumer world, but we have to say the market conditions during the first quarter were quite weak, across many markets in Europe.
As we communicated already in the prospectus and the pro forma from Q4, raw materials continue to be on a high level. The higher raw material prices, of course, is no surprise to us, and we have diligently worked with the price increases and, so far, quite successfully implemented them. But of course, it takes time before they kick in in the various markets, and that will happen throughout the year, and we will not have full effect until later on this year. You've probably all read the quarterly report, and you're seeing that the underlying operating profit has declined. But given the fact that raw material prices are higher and it takes some time to get the pricing all the way through, it is actually in line with our internal expectations.
Again, mergers often are a great start, and we are, in the process of creating a much stronger and a more profitable group consisting of old Cloetta and old LEAF. I mentioned the overall market development, and it has been soft, in most markets. One of our key markets is Italy. I don't think it's surprising with the financial pressure that they are on from a macroeconomic, economic point of view. Overall, the uncertainty of the financial situation in Europe, puts a little damper on the consumer confidence. And of course, the elections and the re-elections in Greece, provide additional headlines in newspapers, and there are a lot of concerned consumers, and at some point in time, that will turn around. In the quarter, we saw that the sugar confectionery category was flat and some in some places down in our major markets.
On the other hand, there's some highlights on the positive side, and that is primarily the chocolate category in, in Sweden that grew. And also in Finland, which is a difficult market to analyze, we see that the market's recovering from last year's confectionery tax. And let me elaborate a bit. There was a significant confectionery tax introduced in Finland, January 1, 2011, which meant that there was a lot of forward buying by the retailers in quarter 4 of 2010. And then when prices increased in the first quarter of 2011, the market was down as the consumer reacted. The market has recovered, and the consumer is back. So we're happy with where we are today, but it's been a bumpy ride and difficult to analyze and understand unless you really get into the details.
I also mentioned that we are on track on our synergy and restructuring program. We have mentioned that we are looking at synergies from the merger of about SEK 110 million on the EBITDA level. Everything is on track there and on plan. We also announced an ambitious restructuring plan, which included plans to close the factories in Aura in Finland, Alingsås in Sweden, and Gävle in Sweden, and also the intention to streamline the warehouse operations in Scandinavia. These projected activities would give rise to annual savings of about SEK 100 million on the EBITDA level. I'm pleased to be able to announce that the board of Cloetta yesterday took the decision to go ahead, after all the customary negotiations with unions and other representatives, to close the factories in Aura and in Alingsås.
We are on plan, so it should be closed by the beginning of 2013, and we continue negotiations regarding Gävle. It was also decided to go ahead with the streamlining of the warehouse operations, so we are all still very much on track. With that, I would like to hand over to Danko to take you through the numbers of the first quarter.
Thank you, Bengt. Before I start talking about the numbers more specifically, we just would like to highlight that it has been a difficult Q1 report to understand, and it's not. I'll try to explain why that is. There are two major events that are affecting this. One is that the accounting treatment of this merger that happened means that this is a so-called reverse accounting. LEAF is the accounting acquirer, and Cloetta is the legal acquirer. So when you look at the parent report, you will see Cloetta, but it's actually the history of LEAF that is the comparable figures that you are looking at at the moment. We have only started to include the former Cloetta numbers from the 16th of February onwards. This means that there will be comparators that you perhaps haven't seen before that we are going to use going forward.
That makes the deal a little bit more complicated to understand, and we'll spend some time on that. The other part, which is very important to mention, is that the whole merger execution of the merger was not fully completed at the end of the quarter. So the numbers that you are looking at for the 31st of March does not include the rights issue and the completion of the rights issue that we did. It's also including a vendor loan note that we have highlighted in the prospectus and in the report of SEK 1.4 billion, which is artificially increasing the debt number. And all of those activities on the second bullet points that you can see have been closed down for April.
Therefore, the comfort I can give is that it's going to be easier going forward, but we will still have the reverse accounting that we need to elaborate and explain for you. If I then go into the next page, on page 6, you can see the reported net sales and EBITDA. Let me here talk a little bit with you about what we mean by underlying performance. If you look at the reported numbers, the +3.9% growth that you have on net sales does only include former Cloetta from the 16th of February onwards. The underlying is including a like-for-like period of 1st of January to 31st of March of both former Cloetta and former LEAF, and therefore we then have an impact which is negative of -1.8%. It also includes the discontinued business that we announced in February on LEAF Belgium distribution.
We are excluding that number from the underlying sales figures and third-party distribution that we have discontinued with. This is for us an underlying performance on sales, and therefore you can see that we are highlighting the fact that we are down on -1.8% growth. On the EBITDA level, you have another additional element to consider which we are highlighting in the quarterly report. You see that our EBITDA is reported at SEK 7 million while our underlying is SEK 50 million. That's a large difference, and the difference predominantly relates to the discontinued business that we have defined as exceptional items. You can also find explanations of that. It relates to the LEAF Belgium distribution discontinuation and the profit from that. And it also excludes costs that relate to the closure of Slagelse, the factory that we had in Denmark and that we have just completed.
So therefore, you come back to the point of SEK 50 million in underlying EBITDA versus prior year comparator of 74 showing a decline of 30%. And I come back to this point that Bengt was highlighting about raw material costs and the pricing activities that we are doing to mitigate that shortfall. It's an ongoing process that we continue to work on to address the input costs that are there. With that, I'll go over to the cash flow, and that's, in a way, a positive way. You can see that even though we had a negative profit from the operations in the first quarter, we have a positive cash flow. And what we have done there, you can see the impact on the operating cash flow before changes in working capital and CAPEX being negative SEK 15 million.
That is what is coming from the reported results. But we have a significant improvement in our working capital related to inventory, and we have a relatively similar investment level on our fixed assets of about SEK 43 million. So you can see a real measure to compare is SEK 74 million positive cash flow versus a prior year of SEK 95 million positive cash flow, somewhat less than last year but still positive, and that's a good sign. In addition to that, we also have activities that are affected by the deal. So you can see a very large portion of SEK 118 million being investing activities. And that relates to the deal, and I would not like to attribute that to underlying cash generation. That is actually the merger and the cash position that we had from former Cloetta.
But all in all, the cash flow for the period then adds up to SEK 204 million, versus negative SEK 6 million in the prior quarter, 2011. So with that, I think I will stop, and then, Bengt.
Yeah, just to end up, we are talking a lot about transactions. We're talking a lot about restructuring. We're talking a lot about reverse accounting. We're talking about prices, raw materials, and sometimes it's difficult, it's easy to forget that we're actually pushing a very, very joyous and fun business every single day out there and that we are giving the joy and pleasure to consumers across Europe every single day. So rest assured, we continue to focus on the business every day. We put the sample of some of the product launches in the various key markets that we have, and it's everything from new gum in Finland to launching a sweetener in Italy based on stevia, the new sweetener, giving new varieties of the most sold confectionery product in Sweden where we invited the consumers to actually decide what the name should be.
I think the decision was Kexchoklad at the end of the day. New variety of Toy, very, very iconic brand. Also in Netherlands, very active on the gum side, entering into new categories, from a packaging side in the jar and also on the soft gum slab side. Also in Denmark, with new sugar confectionery products. I just want to make sure that we also signal to the outside world that we are staying active in our interaction with our loyal consumers. With that, I would like to open up for questions and-
Yeah.
On that area.
Yep. Operator, please go ahead.
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. Christian Hellman from Carnegie. Please go ahead.
Thank you. I have one question on the raw material prices. Could you elaborate a bit on which raw materials are increasing in price and how much? And also on the flip side, your price hikes, how large are they and will they completely mitigate the rising raw material prices? And also if you could say something more about the time frame for those mitigations.
On the raw impacts, the ones that have impacted us the most are sugar and other raw packaging where the prices are tied to the sugar price. As you may know, there is a quota system in Europe which makes it difficult. So even if we've seen declining sugar price on the world market, they consistently stay up in Europe. We'll see when that changes. We've had some increases in some other areas as well, but I mean, these are the ones that are of most importance. It is our ambition to offset the impact of increases. And, of course, there are tough negotiations with big and strong retailers across Europe. So far, I feel that we've been quite successful.
When the effects kick in varies by market because of different trading windows and also, when the negotiations are completed.
Okay. So the price hikes are not, the negotiations for price hikes are still ongoing?
In some areas and with some retailers, they're still ongoing. In most cases, they have been closed.
All right. Also, the underlying EBITDA, it fell by—I guess that Q1 is not the biggest quarter earnings-wise for you, but still, it fell by 30% underlying while sales underlying only fell by 2%. It feels like earnings are quite sensitive to sales. Or could you speak a little bit on how you should interpret that?
Well, then I come back to this point that we were highlighting about input cost. Already when we made our announcement for the four months from September to December 2011, we were highlighting that input costs were already coming through last year. So we have the full effect of the input cost in the first quarter, and we are not able to fully mitigate that through the pricing because of the different time windows. And that has a significant effect in the gross margin and the underlying EBITDA. And that is a predominant reason to why you are having an erosion of the profitability level. The pressure is also high out there in terms of our negotiations with the retailer.
So we are going back and forth and making sure that we are not increasing our promotional discounts together with the retailer but actually can get the underlying sales through. So if you want to see the predominant reason for why we have an erosion, it's coming back to the input cost of raw materials.
All right. And I guess that we'll see this effect also partly in Q2. It would be a fair assumption, right?
Well, what we said is our pricing because it should kick in during the year.
All right. And the final question, EBITDA, how much was your underlying EBITDA in Q1?
Just hang on. Just hang on. I have been so focused on EBITDA and operating profit, I just have to come back to you in a bit with that. Just give me a minute, please. I would suggest we continue, and then I'll just pick it up.
Okay. Operator, if there are any other questions, you can let them through, please.
Our next question comes from Mr. Peter Wallin from Handelsbanken. Please go ahead.
Thank you, and good morning. I think I will continue in the same area where we're at. In terms of looking at the gross margin, it's down by 4.2 percentage units year-over-year. Could you give some flavor in terms of how much of those 4.2 percentage units are a mixed effect from the merger? I mean, Cloetta having lower gross margins than you guys or LEAF used to have. And how much is the gross mar or the raw materials impact?
Given this, being new in the market and given there's so many effects going on, we have elected at this point in time to not be more granular than we are. I think over time, we will revisit if there is a reason to be more granular on the data.
Okay. But just ballpark then, I think then. If I would conclude that the raw material would constitute the bulk of those SEK 4.2, would I be very, very far off?
I think that's a reasonable assumption.
Okay. Thank you for that. And then, maybe more of a technical question on the transaction was finalized, February 16th, and then you're having net sales contributions from old Cloetta some SEK 82 million, although old Cloetta's full quarter sales were some SEK 212 million, I think I saw in the notes somewhere here. 221, actually. That, so that to me seems, I guess I would not have guessed that the bulk of their sales would take place in the first half of the quarter rather than the second half, especially with Easter early in April this year.
Well, you're absolutely right. It's a good analysis from you. The point is that we are, when we do the like-for-like comparators, including the SEK 221 million that you were referring to. That's the number for the first quarter. And we have then used an approximation of the sales that we had. There were some complexities with the closing of an op or closing balance sheet on the 16th of February. So there's some residual effect in February that we are not including, saying that if we look at the numbers from at the time of the completion of the merger, you will see only a period of March month in the sales figures. But we capture that in the underlying sales because there we are including the full effect of the former Cloetta of SEK 221 million.
Okay. Okay. That seems to make more sense than.
If I should just come back to the question on EBITDA, our first quarter EBITDA was SEK 93 million versus SEK 117 million in 2011. So we have a decline of approximately SEK 24 million, which is similar. That was the previous question that came earlier.
Okay. Peter, please.
Yes.
Continue.
Then, I have a question also on, now that you said that actually you, the board of directors, have made a decision on two of the planned three additional shutdowns of production plants. Could you give any flavor of as of what kind of non-recurring costs that will mean for the second quarter?
I mean, the non-recurring costs will primarily start kicking in in the second half of the year. There might be some in the second quarter, but the bulk should start kicking in in the second half of the year.
Okay. Okay. And then basically just a big picture in terms of market sentiment and how things are progressing. You're seeing that the Finnish market is continuing to recover after the tax increase last year. And also I guess that you should have had some positive effects on your cash flow this quarter from the kind of, since you didn't have the negative hoarding effects this year as you did last year. But, do you think that basically, is Q1 a good for, like, temperature check, or is it really such a small quarter normally that it doesn't tell you very much about the underlying market sentiment?
I think that I think it's difficult to draw conclusions on, on a quarterly basis. I mean, I think the general trends, I mean, Italy being a challenged market with all the macro going on. Finland, your comparability is difficult. And then the other markets are up and down, and then you have Easter moving in between. So I think it's being the smallest market and just being one quarter, I don't think you should draw too, too, too many conclusions from those trends.
Okay, well then, I think basically that's what's so like caught my attention in the report. Otherwise, I think basically that was it, something during this quarter in terms of operational activity which deviated clearly from what you would have been expecting three or four months ago or what stood out the most?
I think from an operational perspective, I have to say, I'm extremely proud and pleased of how the organization responded to all the things we did in addition to everyday sales and everyday negotiations. Also, I mean, let's not underestimate; there is a reasonable amount of uncertainty in some areas of our organization with all the announcements and all the activities. So I think from an operational part, I think we have been remarkably good in actually handling the day-to-day operations.
Okay. So that means, I guess, operational is progressing according to plan also in these sites which will be shut down. You're not seeing any disruptions there or anything like that?
Of course, they're temporary, and it's a day-to-day. But overall, I have to say that I'm extremely pleased with where we are.
Okay. That sounds very good. Thank you.
Okay. Operator, please go ahead if there are any other questions.
Our next question comes from Ms. Anna Fagerlind at TT. Please go ahead.
Hello. I have a question about the three factories you're planning to close in Sweden and Finland. How many employees are affected?
In total, there are about 320, according to the plan. There are about 140 in Aura in Finland. There are 30 in Alingsås in Sweden, and there are about 150 in Gävle. And then in addition to that, we also mentioned the warehouse restructuring which will impact about 25. So in total, we're talking about 345 of which 320 in production and 25 in distribution.
25 in distribution. Okay. Thank you.
Okay. Operator, please.
Yes. Our next question comes from Mr. Erik Spjut from PVC. Please go ahead. It seems he canceled his question. We take next question from Mr. Christian Hellman from Carnegie.
My question is just EBITDA. I'm still wanting to know what EBITDA underlying was in the quarter.
The underlying EBITDA that we are referring to is SEK 93 million versus a prior year period of SEK 117 million. So a difference of about SEK 24 million, which is sort of in line, in variance versus the EBITDA that we were referring to.
Okay. Great. Thank you.
There are no further questions from the telephone at this time. Please go ahead, speakers.
Okay. Then I think we'll conclude and say, thank you for your attention. Thank you and goodbye.
Bye-bye.