Cloetta AB (publ)

Good morning, and thank you for joining us on the Q2 conference call for Cloetta. My name is Nathalie Riedmo, and I'm head of Investor Relations. With me here today are Henry de Sauvage, CEO of Cloetta, and Sian Frudén, CFO. Henry and Frans will take you through our second quarter results, and we will then move on to a Q&A session. And I will now hand over to Henry.

Very good. Thank you, Nathalie. A few key messages for the quarter. We see a continued negative impact of the COVID-19 on the business, and we'll unwrap that in a number of areas because it varies quite a lot. Good to see also that we saw improved sales, particularly in the branded business during the second half of the quarter. So that's also showing that the momentum over there is coming back. We can see that the branded food retail sales are up, but that the pick and mix and also the non-food retail channels are still down in the quarter. But with the easing of restrictions also over there, we see momentum coming back. EBIT is... is impacted partly by mitigation of phasing of supply chain costs to Q3. We tried to be as transparent as possible over that. Frans will come back on the particular effects over there. We've had a lot of cost focus. Very happy that we had the VIP Plus program in place to drive costs out of the business, because with the transparency we have over there, we could really rally up. There we have taken big steps forward, and we have used part of that money to invest in A&P. And I would also say that we have created a solid financial position on the debt side, and Frans will go into that a bit more as well. So we're well positioned for gradual recovery. An agenda will take you through the sales results, a bit of an update on the COVID-19. Then we'll dive into the financials of the quarter and then a bit of an update on the strategic agenda because we don't forget about the strategic agenda we are on and that we're making progress over there as well. So let's look at the sales results, try to make it as simple and clear for you as possible, so we've broken down the sales of the total quarter, the minus 21.2, a difficult figure to get used to, and I'm certainly not getting used to it, that we're not battling to get rid of it, but we're splitting that in the months, but probably even more interesting is to look at the sales figures for branded and pick and mix separately. And if you look at the brand, you can see that April and May were still negative. And also the May figure is a bit more negative than April. And that is some phasing of promotions. There's also some innovations we had last year, but also a few big price increases we did on the 1st of May, which led some retailers to buy in advance. Most important over there, I would say, is the momentum coming back in June again. on the branded business. And of course, that's an important step for Toto Clueta to get back on the growth trajectory with the branded business, and that has all our focus and attention. Also, in pick and mix, you can see it going from very bad to bad, you would say, from minus 70 to minus 40. mainly driven by retailers opening up fixtures again. I'll go into a little bit more detail later on. If you look down at the historic progression, of course, you can see that we now have two quarters with a broken track record of growth in branded. And as I said, we'll try to get as quickly back as possible. Another noticeable thing over here is that you can see now that branded is 85% of sales in quarter two. There's a lot more than, of course, when we talked about this last year. And of course, that is the decline of pick and mix, which is shifting that. And that will come back in the mix, of course. If we go to the next slide. Then we go a little bit further into COVID. And the first thing is that we really are also trying not to forget our employees who have been battling through these difficult times in various roles across the company. We sent them a token of appreciation last week and this week and happy to say that both in factories with all the distancing rules and keeping shifts separate, people are coming back from absenteeism with maybe kids not being able to go to school all the way down into sales reps and merchandisers working for us in store, having everyday questions from customers and consumers. And let's also not forget the whole working from home situation where I must say I'm very impressed with how our employees have been able to not only focus on the COVID actions, but also to keep our strategic agenda going in virtual teams, not only within the country, but also across country. I think that's a good sign of the stuff we already had put in place with less travel, more video conferencing, using teams, et cetera, that people were already used to that and kept the agenda going. Yeah, we have those four blocks, the four lenses to look into it. So if we look at consumers first, we... still have the split of last year, food and all the channels. All the channels is where a lot has been closed. And in the food, we can actually see, of course, growth. However, to stipulate it out a little bit further, we said, okay, well, within food, we actually see also quite a big difference. That you can see there on the bottom, that in candy bags, we've been seeing growth levels of up to 39% in the Nordic countries. These are category growth levels. It's not Cloetta, but it's the market growth, but then you can get a feeling for how that looks. Whereas on pastels and gum, which is mostly sold in the checkout in those areas, you see a decline of 7%. As an important other fact is that at the 39% growth, we were able to deliver without going out of stock due to the actions we had taken in February and early March to secure raw materials and packaging materials from areas which were at risk, and also the fact that we had built up stock of some of the big HQs, as we call them, so that we were able to deliver also and get that growth into our P&L. Yeah, we also see shoppers gradually returning to, let's say, the 30% other channels, particularly in the Nordics. That is now all open. Then I'm talking from the Klaas Olsens to the Tigers to the Normals in Denmark. UK and Germany are a little bit more behind, particularly in the UK. The restrictions have been longer in place. Also over there, we now can see those channels opening up and for our UK business is quite important because we relatively sell a lot over there versus the normal retail channel for the branded business I'm not talking about. And we can also see that we win, we gain, we also gain shares there where we are strong, where our brands are strong and there where we are a number two or a number three. we see that then the number one brand in that geography is gaining shares. So it only underlies how important it is to improve the strength of our brands. And that also means that we continue to invest in our brands. But of course, given the new consumer behavior, we've also changed the media industry. channels quite dramatically over the last quarter. Yeah, if we go to then pick and mix, and we try to visualize a bit what is the status in each of the countries. So in Sweden, all the sales channels are open, but the consumer demand is at a much lower level than where we would like it to be, that double-digit lower than last year. In Norway, all the channels are open and the consumer demand over there is more or less back at last year's level and at least in the customer where the customers we are serving and that's also partly due to the great entrepreneurial work from our Norwegian team which are trying out a lot of things together with our customers and good lessons we can then take and copy and put in place into the other markets. In Denmark, we have had some customers who have now opened. It's very positive towards the end of the quarter. There's one big customer who we have worked together with to also prove that it is in the consumer's interest. yeah, wish list to get Pecky Mix open. They will open in August. So that effect we will start to see in Q3. And that may be also a theme we could actually discuss all markets that customers were there where they had closed down. They were in the beginning a bit, okay, what is the right moment to open up? And Great credits to the pick-and-mix teams in the countries and our small central team that we have been able to do a lot of consumer research, also do some test stores in some of the countries where we then opened 20 stores and saw that consumers really appreciated the fact that the stores were open or the shelves were open again, and then to facilitate the decision to open all stores in that retail area. In Finland, all stores are open again, but it's a bit like in Sweden. We also see that consumer demand is at a lower level, also because there are no promotions in Finland. In Finland, we also have rolled out the concept in Lidl, and that was also done on time and within budget. And the U.K. has had very important moves made in the end of the quarter in June with two big customers, really big customers doing tests and then being positively surprised by the consumer reaction and deciding then to open up all stores. So that's in progress. So that's an important one because it's, of course, important that we get the volume back into the U.K., Some other smaller channels like the Cinema Channel are still saying, okay, we will start with Pick and Mix after the summer. They are opening during July, but you can imagine July is probably not the biggest month for cinema visits, so they will start with Pick and Mix August, September, but that's a good commitment to have. Other things which are worthwhile to mention on the actions we've been taking is, of course, the work we do on the repositioning of the Candy King brand. I'll come back to that a bit later, but to get more premium pricing, that's also important. We just increased prices like in Sweden on the 1st of May. In Norway, there's a price increase which was in effect in July. We also get paid for the for the product so that we can start to make some money on this. And, of course, we have been working a lot with merchandising cost reductions using some of the government's teams on permitting or in other countries reducing the number of hours people are working, so bringing people from 40 hours a week to 20 hours a week. so that we keep the people employed and have now the ability to go up again. Now that everything is opening up, it still has a good cost impact during the quarter. Yeah, I already mentioned a bit on the employees. I'll not go into this one, but very good behavior, very good progress that people are able to work in this new environment today. in a good way and just keep our strategic agenda rolling. Yes, supply chain also still on a very good track. We have had no closures of plants due to COVID, no outbreaks of COVID in any of the plants. Also the absenteeism, which we mentioned last time, because schools were closing down, that is back to normal. Normal level, of course, we have due to the lower sales, we have high stock levels of pick and mix items, particularly of those markets which were completely closed down, and also some specific out-of-home products. And we'll come back to that several times during the presentation. But of course, that is something very important, and that's also why we take action now during the summer to most efficiently close down lines or factories I know that people take their holiday days, which are already paid for, you could say, and that we then reduce output and sell that stock in the market. And I would say the CapEx and Perfect Factory, I mean, the CapEx, that is mainly the drying chambers. I mean, most of them are in place. The last ones are in production in Italy. But it's a matter now of commissioning all of them, and that is a delay into Q3, Q4 versus the original planning. But the first ones we have installed actually are also showing better capacity than we had in the business case. So that gives us even more capacity than we were planning for. Then, of course, the cost and the cash of France will show you the progress on the VIP plus, but that is one of the things we really were able quite quickly to tell people, okay, now we really need to go for a stretch target on this to deliver more cost savings than we originally were planning in the year, pulling programs forward, which we're planning to do next year to just generate more cost savings. Of course, some of them are one-offs, other ones are structural we also close to warehouses during the during the first half one we stepped out earlier but we finally got the closure and then we closed in a pick-and-mix warehouse in in Sweden so we have back to one Scandic warehouse and taking the cost benefits as well perfect factory very encouraging to see that the programs are now running virtual so the central team It's virtually helping the lines to keep on running, and we see the good improvements of the OEE, the efficiency of the lines where we have implemented the Perfect Factory program. And of course, we're using the time as well, also during the summer shutdown, to take some big preventative maintenance programs. So like in the chocolate factory in Joomsbu, we're going to upgrade our power stations, or it's not where we generate power, but it's the substations which lead the electricity into the plant, which are quite old, and we're now upgrading them, so we reduce the outage because of problems over there. So that's good to have that time now well used to improve, again, efficiency. And on the cash front, we'll talk a little bit more about the loans, but again, over here, of course, the whole stock level is very important. And this also cash committee or the swap team on cash, as we now I think call it, is really starting to work. So with that said, I hand over to Frans who will take you through the financials.

Thank you. So Henry has already detailed the organic growth in quarter two quite extensively here. But again, the impact of COVID-19 and how we're seeing some promising trends towards the end of the quarter. And we branded even back to growth in June. So let me just say here that the negative foreign currency translation is not really changing the picture, you know, given the size of the sales decline. Instead, I would move on to operating profits. And we have updated here how we present this to make the drivers for the variance versus prior year more visible. Let's say a little bit more color maybe. And this slide will also be followed by one specifically on selling and G&A as we normally do. But overall, for the quarter, operating profit adjusted at 110 million Swedish kronors with a margin of 8.9% of sales is obviously a reduction versus last year by 51 million or 1.3 percentage points. And as you can see here, we have separated the drivers of those 51 million into three blocks. First, the impact on account of the volume drop. And then the green column is the impact on account of mix, pricing, cost, or cost savings. And thirdly, the impact on account of Forex. So let me start with the volumes. So in the report, you can see that the gross profit drop in Q2 totaled 119 million. And as the first driver here, volume already accounts for a profit loss of 126 million. The full gross profit drop is explained by the lost sales because of COVID-19. Now, obviously, 126 million is more than 119 because we have some offsetting factors. We do have unfavorable costs also on some material, but we have taken pricing to offset that. We have cost savings. We also have some unfavorable forex. Mix is not such a big factor here as you would like to think. We've also flagged that previously, that all of our higher margin package business is doing much better than picking mix in the quarter. That favorable mix is largely negated by the unfavorable mix within the package portfolio, and as Henry showed there with pastels and gum not doing as well as regular candy. And before detailing out the selling and G&A in this offsetting 87 million, Again, in the green column, let's talk about this phasing piece that we have flagged. So given the timing of the reduced production in Q2, the resulting under-absorption of cost only in part impacts the Q2 financials because most of these products that we produce at a higher cost per kilo were still sitting in our inventories as we closed the quarter in line with the normal first-in, first-out principles So as a result, the higher cost of those products will be recognized when we sell those products in Q3. And we have estimated this to be approximately $35 million. So consequently, our underlying operating profits adjusted for the quarter is more in the range of $70 to $80 million, rather than the $110 that we have reported. Now with that, let's detail out the SG&A as part of the 87 here a little bit more. And Henry spoke of that, but I think in this quarter, we have really seen the strength of our VIP Plus program with respect to managing the indirects. And as you recall, we started this only in the beginning of 2019 with the spend analysis, which we then used for benchmarking, which we then used for target setting, which then led to initiative generation and since middle of last year, implementation. And as you can see from this slide, we have in the quarter reduced costs by 63 million versus last year, which is about three times as much as we did in Q1. Now, here I want to flag that all these savings are not sustainable savings. Some of this, as you will understand, is cost avoidance and freezes, but nonetheless have been enabled by the groundwork we laid last year. So, for example, travel costs are down to a level which, of course, will not be sustained. It would not even be in the interest of our business to keep it that low once societies open up again. On the other hand, we have accelerated programs and will continue to do so to make savings sustainable in the future. For example, we can replace hiring freezes with reorganization as we're coming up. Nonetheless, breaking down the 63, roughly one quarter of these savings relate to reconfigured merchandising costs. So these are actions that we've taken. to offset some of the gross profit losses resulting from the lower sales. For example, refilling the installations less frequently. And we've been careful to reduce the spend in such a way that it will enable us to ramp up again in the future. So, of course, when sales come back, so will part of those costs. Another roughly one quarter of the savings relate to lower marketing spend. where we have held back in some areas, for example, outdoor media. It doesn't make sense, given that people spend less time out and about. While we, of course, have increased the spend on things like mixed candy bags. The spend is still down overall, but you have to put that in relation to the sales and what else is happening in the market. And the takeaway here should really be that we have increased spend at the percent of sales, And that's obviously in line with the strategy that we have outlined previously. And eventually, when growth is coming back, obviously, we're going to ramp up the spend here again. Now, the bulk of the savings, roughly half of this $63 million, relates to all other SG&A. This is compensation and benefits, travel, professional services, IT, et cetera. And this is really where the VIP Plus program is adding the most sustainable savings, if you will, going forward. Knowing that Forex is not a major driver here, and as we've said previously, this is not official IFRS Forex, but our best estimate of this. So then moving on to cash. As you see on the right-hand side, the graph for this quarter and last year's quarter two directionally looks very similar. Of course, the starting point with lower operating profit is also less cash. And as some of you know, we tend to generate most of the cash in the second half of the year and not in the first half. And the first half of 2020 is obviously not different from that point of view. But if we break this down further, we start with working capital. We're actually doing slightly better than quarter two 2019. But let's get into some of the details of that and look at inventories, payables, and receivables. Henry mentioned about inventories. Let's take a slightly different view on this. So I don't know how you feel, but to me, the time before COVID-19 feels very distant. And we have to remember that by early February, actually 99% of the cases were still contained to China. And the World Health Organization had not even assigned the name COVID-19 to the disease yet. And that feels like it's very far away. Nonetheless, during that early uncertainty, we made some decisive moves to protect our consumers, our employees, and our business. And for inventories, that included to increase our stock of raw and packaging material required for our production and to increase the production of the most important finished goods. Now, we've detailed that out actually already by mid-March. We had a press release. That was just a few days after the World Health Organization announced actually declared COVID-19 a pandemic. And fortunately, I think looking at it now and at the service levels we've been able to hold, despite the fluctuation in different types of demands, I would say we've been able to safely navigate through this. And we haven't had any production stoppage. And we have now also started to reduce our finished goods inventories. The inventories remain high and higher than last year. But during the quarter, We have reduced our own production, and we have reduced the shipments from third-party manufacturers, and we have made that reduction so it's more prevalent than the loss of volume. So the net result is that versus where the inventories peaked, which was in April, we have reduced the finished goods inventories. On the raw and packaging material side, they remain also high here, and this is because we've continued to hold inventories of strategic and items that have long lead times for replenishment. Now, on the payable side, that's really the key driver for the increased tying up of working capital. And that's obviously because with the reduced production, we also have reduced payables. And added to that, with the cost savings, we also have reduced payables. So this is at the very low point, but obviously it's expected to come back. When production comes back, and when we start spending again on advertisements, merchandises, et cetera. Now, this is partly offset by lower receivables as well. So it's down in the quarter, partly because of the reduced sales, which of course is not a very nice reason, but it's also down because our overdue is significantly lower as we're closing quarter two, both in absolutes and as a percent of sales than it was at the same time last year, and also versus where we closed Q1, which feels good given the fact that there's, let's say, an increased risk of defaults in the market on account of COVID. Then moving to the right on CapEx, we can see that we continue to spend in Q2. And again, it's a step up from 2019. And this relates to additional capacity for molded that Henry mentioned, including for insourcing. We have previously said that there will be a delay because engineers cannot travel, our own employees cannot travel. But with the ramp up, we expect to continue to spend in the back half of the year, but obviously not reach the levels that we had envisaged at the capital market day a year and a half ago. Then finally, on the financing activities, there is a significant cash outflow here of $389 million. Similar, slightly less than last year, but in the comparator last year, of course, we had also dividend payment. And now this also is also a reason that we have fairly low cash on hand when we close the quarter. And this is intentional because during the quarter, we have operationalized the concentration of cash into one cash pool for all our countries. We went live with that at the end of Q1. And this change allows us to manage cash better than before, including eliminating excess buffers. And that, together with our access to cash, has allowed us to pay back roughly $350 million in debt during the quarter, which of course also is good for interest expenses. Which brings me to my last slide on our debt position. And as you also on the leverage, you know, it's one of our key financial targets alongside sales, EBITs and dividends. So first you can see on the top left, our total utilized credit facilities and commercial papers stood at 2.4 billion Swedish kronors as we close the quarter, which is a reduction of the 2.8 billion at the end of Q1. And on the right-hand side, you can see that we held 150 million in cash on account of the fighter managing I mentioned, but also that we have plenty of access to further facilities and commercial papers. And during the quarter, we have renegotiated one of our main loan facilities, which was valued at 125 million euro with an extension until early quarter three, 2021. So you can see now, both on the left and the right-hand side, all facilities, whether they're utilized or not, are now non-current, which of course places us in a good position, and which is why we also believe we have a strong financial position. And we further then have access to another $1.3 billion in additional unutilized non-current credit facilities on top of the commercial paper opportunities. Looking then at our leverage, the year-end target is 2.5 times EBITDA, and we have stayed well below that at year-end normally. In Q2, it's usually slightly up. So is the case also this year, obviously not because of dividend, but because of the impact of COVID-19 on our EBITDA. But most importantly, we remain well below the covenants with our banks, which is around 4 times EBITDA. And that concludes the financial section, and I hand back to Henry.