Cloetta AB (publ)

Good morning and thank you for joining us on the Q1 conference call for Cloesta. We are now live. We hope we have some technical issues here, but hopefully everything should be in order now. So my name is Natalie Redmo and I'm Head of Investor Relations here at Cloesta. I'm here today together with Henri de Sauvage, CEO, as well as Scrum 3D and CFO. Henry and Frans will now take you through our first quarter results and we will then move on to Q&A sessions. I now hand over to you, Henry.

Thank you, Nathalie. Of course, we start with the tragedy in the Ukraine. which is, of course, a tremendous suffering with a lot of people affected. There are a few messages I would like to convey on this. Of course, we immediately stopped with our shipments to both Russia and Belarus, not a huge business for us, so no real material impact for Cloetta. We also worked both with direct contribution to people arriving in our countries, and we also did a employee scheme where people could contribute money to the UNHCR, and Chloëta doubled that amount. Then, of course, there is an indirect impact from raw material and energy prices going up, and we'll come back to that later in the presentation. So we go to the next one. What are the key messages from the quarter? Really good to see that we had great growth and through that growth, more volume and through that volume, more profit. Another quarter of strong growth in the branded business, well ahead of 2019 as well. So really good to see that, but also the continued profitability in pick and mix with all the initiatives we've been talking about in the in the last two years. That's really showing even now with the COVID impact and we're coming out of that. So good improved margins. Then we took a lot of pricing in Q1 to cover for the costs of raw materials and energy from 2021. And we covered those costs in absolute terms in the quarter. So as said, stronger profitability driven by higher volumes, but we also managed to invest in the brands on the continued step up, you could say, and that, of course, drives these volumes to a certain extent as well. We had quite some supply chain challenges of raw materials or packaging materials or illnesses in our own plants, but we managed that and we kept the impact limited, I would say. Of course, there is still uncertainty in the global supply chain, but we're not the only ones, of course, who have to manage that. And then we see that raw material and energy, of course, keep on going up in 2022. And that means that we are having pricing plans or pricing actions on the way during 2022, both in this quarter, but also in the coming quarters. And then there is, of course, a preparation to see, okay, what happens now in our markets with economies maybe going down or inflation going even further up. But I think it's really good to see also if we look back historically that our kind of products and we as a company have been quite insensitive to economic fluctuations in the past. So that's really positive. So 2.5% growth on the branded business, 24% growth on the pick and mix business. I would say really nice growth figures. If we go to the next, what do we see on consumer trends, which is also important to say. So we see a lot of channels coming really back. So we can see out of home to everything, which is not supermarkets coming back, also travel retail really coming back, but not yet at 2019 levels. We also see the pastels category recovery, and that's both shopper mobility into these channels, but also the cold care now that people get the flu again. We are growing, but we're not gaining share yet. So that's a challenge we have. And we're not at 2019 levels, neither with pastels nor with gum. So also on gum, we can see that we have growth in the Netherlands, but not yet share growth in Finland. And then candyback as a category in the Nordics is down. Of course, that is coming from pick and mix. growing, but we are growing. So that's a category trend, but we, despite the big growth we have in pick and mix, managed to grow our candy bags as well. And so a few actions for us. Of course, we need to build more penetration in the out-of-home channel. That's important, particularly for pastels and gum. We work with the pastels task force to to get more younger people who have maybe lapsed out of the category back into the category. We have a penetration plan for gum in Finland, which is an important brand for us. And there's further optimization of the pure media spent on advertising. So a lot of work to be done, but in general, very positive. And then we go to Frans to give us a bit more insights into the financials. Frans, here you go.

Yeah, thank you, Henry. So as usual, I will also start with a net sale. And of course, we're really happy to report a strong organic growth of 7.1%. And that adds just about 100 million Swedish kronors to our top line on an organic basis. And including the Forex translation, we are reporting a double-digit growth for the quarter. And these sales are, again, driven by both the branded packaged products and by pick and mix. And as you see here, the branded grew 2.5% in the quarter as sales were supported by the strong marketing and innovation that Henry also alluded to. Now, this solid branded growth was achieved in parallel with pick and mix growing 23.8%, which is really phenomenal to see. But actually, it will get even better as we look at the recovery of profitability, which I will come back to. Henry already talked about Russia's invasion of the Ukraine, and I can here say that our operation for Russia and Belarus was very limited. On a full-year basis, the loss to our top line is about half a percent of our sales, and it's limited to that. But that said, let's look at the segments over time. So starting with the Branded packaged accounting for the majority of our sales. So this is the fifth quarter of growth. And the sales in this quarter is not only matching, but actually exceeding the pre-pandemic sales by 2.6%. And as some of you may recall, we had eight quarters of consecutive growth prior to the pandemic. So in a way, we're just now over the halfway point. So five out of three and counting. And then moving on to the lower half of the slide and the pick and mix business. So at almost 24% growth, that of course is great. And it gets us to an index on a constant currency basis of 87 to the pre-pandemic sales of 2019. So that's another step up from Q4 last year. And it's about 10 percentage point higher than the average we had in 2021. Now, this growth is also despite that Easter is coming a bit later this year than it did in 2021. And that has an impact, especially in the Swedish market. So we're also very pleased with this growth. Then moving on to the operating profits. So for the quarter, operating profit adjusted is up significantly versus last year from 107 million kronors. to 158 million, so almost by 50%. And likewise, the operating profit margin is up from 7.7% of net sales to 10.3%. So let me explain this really strong result and help put that into perspective of both what we said before and what we're seeing in the market. Firstly, we had previously shared that as input costs were steadily climbing last year, be it raw materials, packaging, energy, or transportation. We were partially protected at that time through inventories and forward buying contracts, but that we would start to see the cost coming through properly in Q1 2022. And I also shared that we were both committed and confident in our ability to offset the full absolute impact in 2022 of those costs. And that is also what you see reflected in these results. We worked with our customers last year to ensure a fair pricing commensurate with these cost increases, and that new pricing became effective in Q1, with very few exceptions, offsetting the cost increases. Now, what is not in these results, neither as an input cost nor additional pricing, is the full effect of the acceleration of cost increases that have happened following Russia's invasion of the Ukraine. So we are now seeing drastic further increases to input cost, be it energy or the globe calls we use that come from wheat and where Ukraine is a major global producer. Now our commitment to ensure fair pricing for our product also with respect to these new costs remain unchanged. However, there is a timing difference between when the cost goes up and when commensurate new pricing comes into effect and the cost inflation in the second quarter will only be partially offset. Now, on a full year basis, where commodities will end up, I think is anyone's guess. We, however, remain committed to addressing this. And based on what we know today, we're still confident that we will be able to manage the cost through pricing and other actions within the year. So the first point here is that pricing is offsetting the input cost in the quarter. That means that the key driver to the strong margin and profit improvement is our sales. We have again in this quarter invested heavily behind our brands, giving our sales teams efforts an extra boost, and that has driven not only strong volume growth and better fixed cost absorption, and we have continued other margin enhancing initiatives, especially on pick and mix. And I'm going to share a bit more about the market investments and index shortly. But in combination, this allows us to match the gross margin we had in Q4 2021 at 36.4%, which is actually really great, because normally in Q1, margins tends to be lower than the preceding Q4, given our seasonality of the portfolio. Now, this gross margin is, of course, very significant up versus 2021, but that is also, let's say, an easier comparator given the circumstances at the time. Then moving on to the profit by segment and starting with the branded package business on the top row. So the operating profit adjusted and the margin is up versus last year, adding 90 bps to get to 12.8%, and that's despite the step-up in marketing spend. Now, the unfavorable mix due to lower refreshment sales is still suppressing the operating profit below the 14% we normally quoted for branded portfolio pre-pandemic. But that is also an important opportunity for us as we start to regain that. It's also important to note that in the step up in profit versus last year, The real step is a bit hidden by the fact that we spent a lot more on marketing in this quarter. So the quality of this result, again, is very high, given that we are not starving our brands, but on the contrary, we are fueling them, not only for the quarter, but also for the quarters to follow. Then with respect to pick and mix, this is now the fourth quarter back at profit, which I believe shows that the recovery has been sustainable, and versus last year, It's actually a fairly staggering double-digit margin improvement from minus eight to plus two. As I mentioned before, though, and I want to repeat it again, that this result does include pick and mix also having absorbed its fair share of common costs in head offices, IT, supply chain, et cetera. So the segment does provide a favorable contribution beyond the reported profit. We've also said, however, this is not where we're going to stop And input cost aside for a moment, as volumes continue to recover, so will profitability improve. And we will continue with other margin-enhancing initiatives, better pricing, reducing costs in distribution, warehousing, merchandising, and support functions. Moving then to sales, general, and admin costs, including the marketing spend, the increase here is driven by the higher marketing spend, as well as higher selling expenses to drive the growth that we've been talking about. Now, the comparator from last year also benefited from certain one-time cost avoidances. That includes earlier provisions for long-term incentives, which unfortunately the pandemic rendered unachievable that we could release at that time. Part of these increases are offset by further savings coming from our VIP Plus program, And in the quarter, the Swedish business went live with that new joint sales force between Branded and Pick and Mix, which is serving us well. Moving then to the cash flow. Now, when you look at cash, you have to recall that our business tends to generate cash in the second half of the year, whereas in the first half, we build up inventories, et cetera. Now, in Q1, the cash flow we see is affected by exactly the same thing. Inventories and associated payables are going up, a bit more than normal, of course, because of the cost for those inventories. And we're also securing customer service levels given the uncertainty in supply chain currently ongoing. In addition to that, our receivables are up despite the later Easter, but that's on account of the strong growth. So consequently, Our discretionary cash flow for the quarter is negative, including after about $50 million in CapEx investments, which is roughly what we tend to spend. But it's difficult to draw too much conclusion. But looking at the cash conversion cycle, however, we are down nine days versus last year. And that does make a lot of sense directionally, given the increased focus on cash we have introduced the last few years. Which brings me to my last slide and on our financial position, looking at leverage and net debt. And that's on par with or even improved versus Q4 last year. And you may recall that I shared that at the time, that was an all-time best since the Cloetta and Leaf merger in 2012. So as we close Q1 now, our net debt remain at 1.7 billion kroners. We have additional unutilized credit facilities and commercial papers and cash on hand for an additional $2.2 billion. Now, in addition, we closed the quarter with a net debt over EBITDA even below Q4's 2.0, and leverage is now at 1.9, well below our internal target of 2.5, and the lowest for as many years as, frankly, anyone in the company could imagine. Remember. And on that positive note, back to you, Henry.