Cloetta AB (publ)

Good morning, and thank you for joining us on the Q3 conference call for Cloetta. My name is Nathalie Riedemo, and I'm Head of Investor Relations. With me here today are Henri de Sauvage, CEO of Cloetta, and Fianz Rydén, CFO. Henri and Fianz will take you through our third quarter results, and we will then move on to a Q&A session. And I will now hand over to Henri.

Thank you, Nathalie. Welcome, everybody. Overall, a good afternoon. quarter really happy with with that the sales of our branded business went up with 4% but it was also notably higher than the previous record we had which was 2019 so we're lying something like 5% over 2019 sales so that's really good to to see that we're back on on track on that growth journey Also, the pick and mix business recovered. We're still not completely back to 2019 levels. But as we discussed in the previous quarters with all the actions we've taken, we're also now able to report that we're back to a profitable level pre-pandemic comparison. So that's really good. The strong sales momentum allowed also the marketing spend to be in line with 2019. So that's also positive. That seems to work. And we're actually, as we speak, for the ones in Stockholm, Sweden, or in the Scandic, we have the largest Candy King media campaign ever being rolled out for Halloween across Scandinavia. I'll show you a bit more in detail later on. We also have now submitted our science-based targets initiative submission of 46% greenhouse gas emissions by 2030. We'll await their approval before that becomes finalized. Of course, that is a huge undertaking also for us in particular in the broader supply chain into raw materials, etc. We also went with our ERP system to the cloud, which is a major achievement in the sense that it all was done under Corona restriction times, of course, and that will not only help us with enhanced functionalities, but it also is a saving and, of course, also giving us more IT security the way it is set up. The net debt over EBITDA became, again, below our target, and net debt levels are at an all-time low. Frans will talk you through that a bit more. And then, of course, looking forward, we're preparing and actioning a lot of pricing in all our markets to mitigate the surging input costs. Like all other companies in FMCG industries, we see that this is happening, raw material, packaging, energy, transport, et cetera. And of course, we are working hard to make sure that we have a stable supply of raw materials, which we'll need as we progress into next year. So if we look at the sales results, on total, of course, looking very good. As said, if we split it out in the two divisions, we see the branded business now growing with 4%. And I remember last year, we came out of the first wave during quarter three, and we had a strong rebound in sales. So it was not an easy comparator either for sales. for the branded or the pick and mix business. But nevertheless, we grew with 4% and also the pick and mix, another strong quarter with 21.6% organic sales. We then look a little bit more on the underlying consumer drivers. Mobility, very important for us. We can see that in retail and recreation. So particularly during the summer, these are the theme parks with also the cinemas, or the high street shopping which is very important for the uk picket mix business and we see now for the first time positive figures in some of the markets and improvements in the other one so that's a good signal of course important for our business and then we see the transit station so these are the kind of places where you would come in or stop your journey, particularly when you travel to work, but also when you go shopping in town or in the city centers, we still see that it's down versus the baseline, which is 2019. However, there's a significant improvement versus last year. So that is going in the right direction. But the last one that is then the workplaces. So people are still working very much from home. We don't see this really going up yet. And also the traveling to work, which is a little bit in line with the transit stations, is happening in some countries more with own car or own transport than with public transport, which is a little bit difficult to judge because, of course, there's less kiosk sales in In public transportation hubs like train stations, on the other hand, it should give more petrol station sales. So a little bit early to judge that. If we can look at the branded business, still 75% of it is in food and 25% are the other If we first look at the last three months market data, we can see that pastels and gums are still not completely recovered. And let me remind you, these are the data of May, the supermarket channels, because that is what is being measured by Nielsen. So the out-of-home channel is not in there to a large extent. And candy bags, 1% up. Of course, that we have seen at much higher levels in the in the past. So, therefore, I'm also pleased to be able to report these kind of growth figures. Now, if we then look at the category trends, we already saw that traffic is increasing, also in travel retail, and particularly on the ferries. But pastels and gums is a category still below 2020 levels, and candy bags and chocolates are above 2020 levels, despite the tough comparison of last year and also the pick and mix recovery, because of course there is some relation between pick and mix sales and branded sales. And if we look at ourselves, we keep on working on strengthening our top 25 brand positions. So whatever, Red Dead in Germany or KEX in Sweden, that's what we mean with those. So really get clarity in consumer language on what these brands are standing for, building stronger marketing capabilities in all the markets. So we're still in the process of recruiting stronger marketing people and increasing the share of working media. I'll come back to that. Also, the whole agenda of our innovation 2.0 to come with more margin accretive Innovations is helping us. A good example is the real fruit launch we have with Gothenbrand, for example, here in Sweden. And then very important, I mean, how are we going to get back our pastels and gum sales to the levels of 2019? We need to reconquer the penetration, get those light users who have now maybe for one and a half years not been able to encounter our product because the channels were closed. or they have not seen the need to buy those products because they were not traveling to work or going out in the weekend. So that's a very important one because it is a category with above average profitability, and that, of course, is not good for our mix in gross margin for the branded business. Pick and mix, not that much change in the channels because now everything is more or less open. You can see the UK now also with the Bond movie coming out. The cinemas have opened their pick and mix places. So that's good. Consumer activation still in the quarter on an unchanged level, meaning that we don't have a lot of consumer promotions, price promotions yet. in the pick and mix category. And that will be important going forward to get penetration going again. However, you know, our clear mission with pick and mix is sustainable value growth. So price promoting does not completely fit into that. So we'll find other ways like the As at any time activation, I will show you a bit later to get consumers back into pick and mix. And the consumer demand for pick and mix is still going up. So that's positive. That's a positive trend. You can also see that from the figure. So like-for-like sales on existing stores is up. And that also means that even without promotional mechanisms, we're able to attract consumers back into the Category. So actions are that the premium candy king concept is now live in all markets with good results. We even have the premium mix, as we call it, a much more expensive concept in some 20 stores in Finland really doing well. It's a lot more expensive, better quality, but even the volumes are up. And then, of course, the efficiency program is still delivering, and that's the efficiency in merchandising, transportation, distribution, warehousing, et cetera, et cetera. Then we go to Frans to give us a bit more insight in the financials.

Good. Thank you, Henry. So, as usual, I will start with net sales. And by now, you have probably both read and heard, Henry, and seen in the documents that We're talking about back to, best ever, pre-pandemic, and I'm going to continue on that theme. And it would be a bit dishonest to pretend that I'm not actually quite delighted to be able to present our latest Q3 financials, especially with the backdrop of the challenges we've met over the last 18 months. So overall organic growth up 7.5%, and this growth was again driven by both branded packaged and ticket mixes. And as Henry mentioned, for the branded package sales, that means that the quarter is up 5% versus Q3 in our best year ever for branded package sales, which was 2019 previously. And also that now on a year-to-date basis, we're ahead of 2019. In Q1 and Q2 earlier this year, we were on par, but this actually takes us one step forward versus that. Now, we know that part of that is cannibalization from pick and mix. But this solid branded package growth is coming shoulder to shoulder with pick and mix growing 21.6%. That takes us to an index of 83 versus 2019. And I'll come back to that point. So on a year-to-date basis, organic growth is actually not far from 7%. And with branded package sales up 4.5% and pick and mix more than double digit at 13.8%. So let's look at the segments then over time. And starting as usual, with the branded package sales by quarter in the top row. So this is the third quarter of growth. And it's also worth remembering, and you can see that here, that in Q3 last year, at the time when COVID actually seemed to be receding before the second wave hit towards the end of that year, we were growing. So the growth in this quarter is on top of the growth that we had already in Q3 last year. Now, that said, within the branded package segment, sales of pastels and gowns are still down on account of the still reduced mobility due to COVID. So we do have an unfavorable mix. I'm going to come back to these two points when we look at the profitability, both what happened sort of in that interim period before the second wave of COVID and also with unfavorable mix. Then looking at the lower half of this slide and the pick and mix business, so at 20% growth That's really great. And as mentioned, it gets us an index of 83% versus 2019, which is another step forward, given that in Q2, even though the growth was very high, it only got us to an index of 75. So continued recovery, continued growth, and then let's look at the profitability. So as you can see in the graph, our operating profit adjusted increased versus last year. This increase was driven by volume and margin-enhancing initiatives, taking operating profit adjusted to 12% of sales in the quarter and year-to-date profit back to double-digit margin at 10.1. Now, the gross margin, and we don't show that in this slide, but you have the details, is also very strong versus last year. I mean, on a reported basis, we're up almost 600 basis points. But then, To be fair, if we adjust for the phasing of costs that went into Q3 last year, and we take out the restructuring costs we had for the plant closure last year, gross margin is still up by a solid 200 basis points. So from below 33 in 2020 to over 35% in this quarter. Now, even so, if it wasn't for the challenge that we mentioned about unfavorable mix within the branded package segment, gross margin would have been even stronger. So refreshment has declined further with the 2020, whereas the rest of the branded package sales are obviously doing really well being up versus 2019. So we're widening the gap between the categories and that is worsening the mix. So getting consumers back to pastels and gum first with the return mobility, and then of course, rebuilding previous habits is, and will continue to be one of our key challenges. That said, the nonetheless growing operating profit, as you see here, by 49 million, that's partially offset by cost, 29 million, which is the net of a tough comparator as we released incentive programs last year, although we also have lower supply chain costs here. Importantly, the 29 million increased cost does not include an increase in marketing spend. as we kept it in line with 2019, given the good sales momentum from the first half. It is a reduction versus Q3 2020. But then again, we did a big step up in marketing last year. In that period, I mentioned when COVID seemed to be receding until the second wave hit. And we did that to bring consumers back in. But I'm going to get a bit more detailed about this when we get to actually the SG&A slide. Now, importantly, what you do not see in this bridge or in the commentary are any significant increases of input costs, which you see reported on a daily basis in the media, nor any of the supply chain challenges with logistics or missing containers, et cetera, that is happening across the world. For increased input costs, given our forward contracts and inventories, there is no material impact yet. And we have also been able to manage our supply chain to avoid any material disruptions. Now, we're going to look at this topic again a little bit later on, and Henrik will have a slide on that. But we are actively working on mitigating both of these challenges, including through required pricing. So before moving to the SC&A, let's look at operating profit by segment. So I'm pleased to report that the branded package business delivered 181 million in operating profit adjusted and a 15% profit margin. So again, above the 14 plus percent margin that we've used to quote before the pandemic and also before we actually introduced segment reporting earlier this year. Versus prior year as shown here on the slide and having adjusted for that cost that was faced to Q3 last year, profit is largely stable as the growth And somewhat lower marketing spend offsets down favorable mix and the absence of last year's release of the incentive program. But then when we look at pick and mix, we have a really good trajectory. In Q1, we said we could get back to profit without all the volumes back, thanks to the margin-enhancing initiatives. And in Q2, we were just about break-even, and now above break-even again. Actually, with these results, we're back to pre-pandemic profit levels. So it's really nice to see a steady profit without full recovery of volumes. But it's important to note that this result does not, does also include that pick and mix first having absorbed its fair share of common costs like in headquarter, IT, supply chain. So there is a favorable contribution also in that respect beyond the reported profit. Ultimately, however, and I said that in Q2, the most relevant comparator is not 2019 or 2020. but where we want to go, so this is not where we stop. And as volumes continue to recover, profitability can improve further, and we will also have further margin-enhancing initiatives, whether that is fairer pricing, reducing costs for warehousing, distribution, merchandising, or in support functions. Looking then at the sales general and admin costs. So the total cost increased, as you see, 15 million to 362 million Swedish kronors in the quarter. Now, if you look at this increase, if you exclude items affecting comparability, you exclude the Forex, then the 47 million increase is almost fully explained by the absence of a repeat of last year's release of bonus programs. So basically, this means that the lower marketing spend dimension paid for other increased SG&A. That's in line with what we talked about in the last quarter, which is that cost would start to come back as the business also started to normalize. That's also the case for quarter three. So rebounding sales of pick and mix naturally brings higher costs for merchandising and for fixtures. So these are good cost increases. And you can also tell that from the progress on building sustainable profitability in pick and mix. Secondly, other costs are also coming back, and we do have continued to invest in e-commerce and other capabilities. Now, part of these increases offset by our VIP plus program, which continues to deliver savings versus last year. And here what we have in is restructuring of our Swedish business, the launch of the shared service center in finance and migration to the cloud based ERP. Now, if we compare to Q2 again, the reason there are no cost increase at all versus last year, Again, when excluding this incentive program release, it's due to the lower marketing spend versus last year's step up. And here I want to reaffirm our commitment to our brands. And although it's down in spend versus Q3 2020, we're not down on a year-to-date basis. And we intend to continue to invest strongly behind our brands, both in the near and long term. And while we talk about lower spending Q3, the spend is nonetheless on par with our spending Q3 2019. So we're not talking about having gutted the support here. But it is lower than what we would have spent without the good momentum from the first half. But also the mix of the spend is also better because we have also improved the ratio of working spend versus non-working. And within the working spend, the ratio of pure media, so basically what is really reaching the consumer is also increased. Now, finally, on SG&A, if you take a step back, at the percent of sales, 23.1 in the quarter, it is the lowest percent we've had since around, I think, 2014. So that is really very good. And even with a higher marketing span, this KPI would have been one of our lowest percentages for quite a number of years. Looking then at cash, we had, again, a healthy free cash flow in the quarter, delivering 238 million kroners on an operating profit of 189. And this strong operating result in cash is the main driver of the good free cash flow, almost on par with last year. But then in Q3 last year, we benefited a lot from the reduction of inventories that we had built up to avoid supply disruption when COVID broke out. So with respect to working capital, as we close the quarter, Days inventory on hand is actually further down by nine days versus last year, in line with what we said that we were going to do. At the same time, our receivables are up, but so are our sales, so that is really expected. And our overall cash conversion cycle is down six days versus where we closed 2020 Q3. Now, the working capital is not yet affected here by the new European UTP legislation. So our days payable outstanding and our days sales outstanding is fairly similar, but the new UTP legislation is nonetheless risking having a negative impact on our working capital, given that different countries in Europe are implementing UTP differently and our manufacturing sites supplies multiple markets. That means our trade payables and trade receivables do not line up by country. So we're working through this, and we will have to report, you know, further on when we know how this will affect us. Now, for the investment in PPE and intangibles, it was 52 million and a bit lower than last year. Now, the cost for the new carton packaging technology that we mentioned earlier this year is not yet materially reflected in the numbers. So there was 130 million we said we were going to invest, out of which 40 was going to come this year. And I think we're going to land a little bit below 40 on account of restrictions to traveling because of COVID. And that has slowed down the work somewhat. Now, with the seasonality of our business, we tend to generate our cash in the second half of the year. Yet with our strong start, we have now delivered a solid 350 million in free cash flow in the first nine months. So it's good improvement year to date versus last year. by 237 million. Now, we had a very strong cash flow in Q4 2020, so you have to factor that in when you think about Q4 2021. Then, moving to my last financial slide, leverage is one of our key financial targets, and this slide seeks to capture that and our debt position. I'm pleased to share that our leverage is back below targeted 2.5 in the quarter, which is the first time since the pandemic started. I'm also pleased to share that our net debt is at an all-time low since the Cloetta merger, basically, at 2 billion. That's the lowest we've had since 2012. And we're still having access to additional unutilized credit facilities and commercial papers, not yet on the market, of almost 1.4 billion. And we held a solid cash of $505 million at the end of Q3. So our conclusion is that our financial position remains really strong. Now, before handing back to Henry, I have one additional slide to you, which is more of a heads up. So earlier this year, the IFRS Interpretations Committee finally concluded on the treatment of cost for system implementations related to cloud computing, so basically software as a service. This has been an open question for some time, and if one should treat that type of implementations different from when you house the software on your own server. And they have concluded, yes, it should be treated differently. So we're currently investigating to what extent previously recognized assets are now going to be retrospectively expensed, and we're going to be able to have figured that out by Q4. Things are leaning in that direction, however. And we expect to record a negative adjustment of the operating profit. We don't think it's going to exceed 25 million kroners for the full year of 2021. And that impact will be distributed across all four quarters because we're going to do a restatement. So if you look at this table, I'm trying to illustrate this, that the cost for cloud computing is going to go up. That's the three red arrows towards the middle. But then it's going to be partially offset by amortization charges being reversed. So that takes it down a bit for a net negative impact. But there's no impact on cash. And again, only a limited part of this will impact Q4, probably not even a quarter of that 25 million. And when we close the next quarter, we will have nailed down these numbers and we will populate the table for you. So that concludes my part of this presentation and back to Henrik. Good.