Cloetta AB (publ)

Thank you for joining us on the Q1 conference call for Cloesta. My name is Nathalie Hedmo and I'm head of Investor Relations. I'm here today with Henry Solage, CEO of Cloesta and Fianco DMCFO. Henry in France will take you through our first quarter results and we will then move on to a Q&A session. And I will now hand over to Henry.

Yes, thank you, Nathalie, and welcome, everybody. A new year, quarter one, and we're off to a very strong start when you look at our growth, which is also bringing us volume through Easter and, of course, all the other things we have been putting in place in the last couple of years. So very proud of the fact that we have volume growth as well in the business. So strong growth in Branded. driven by pricing and enabled by our strategic marketing investments, we can see that our brands are a lot stronger than they were a few years ago, so that even at higher prices, people continue to buy our products. So that's really encouraging to see. Although very good to see now the eighth quarter of volume growth in pick and mix. And as you know, more volume in pick and mix is generating merchandising efficiencies. Of course, it also helps us in the factories to break the unit cost down, and that helps us to improve our profitability on that segment. If we look at pricing, because, of course, there's a lot of pricing, the pricing corresponds to the input costs. So €10 up in raw material energy also means that we raise our prices with €10 to our customers. On the other hand, the improved profitability is coming from mix, volumes, and also cost efficiencies. So mix within the portfolio and also between the countries is very positive. Volumes are up, and again, that helps us both in the factories to get... better transfer prices, but it also helps us, of course, in the whole merchandising fixed cost elements of the business, and then the cost efficiencies are there again as well. The new greenfield project is proceeding. The design work has been finalized, and we have brought that into the city council for both the zoning permit and environmental permit into one process, so that is now starting. But we also think that the regulatory process will take longer than estimated. There are a few things which have been changing in the last couple of months, so we now expect the major investments to happen in 24 and not in 23. And if we then look at the net debt over EDA, we're well below the targeted two and a half factor for that. So looks off to a good start with, of course, pricing, very important. Volume, very good to see that we are positive and a tribute to all the work we have been doing to both pick and mix and the branded business in the last couple of years that we're able to keep it at that level. With that, I hand over to Frans to take you through the financials.

Thank you, Henry. So our organic net sales growth of 23.5% is the highest we've had in any quarter. That's more than 500 bps higher than the second highest quarter, which was Q2 2021, when we were bouncing back from the first shock of the pandemic. But not only that, at net sales, just shy of 2 billion Swedish kronors, it is also the highest sale we've had in any quarter. So it's not just a rebound here now. Now, the carryover effect of our pricing taken last year, of course, a comparator with a lot less pricing in Q1 2022, and our new pricing taken in Q1 this year is, of course, a major contributor to the growth. So let me comment first on that, also given the attention that pricing has had in the media. And as Henry mentioned, we have shared also for some time that we are taking pricing to offset our own rising input costs. And you will see later on in this presentation that our growth in profit is not coming from the pricing, but from the effect of our other efforts to strengthen Cloetta. Second, and unlike, let's say, electricity or food, where the consumer does not have any real choice to paying the higher prices. If they want to warm their homes or feed their families, the consumer is completely free to decide to buy or not to buy our products. And we are incredibly proud that so many have chosen to continue to enjoy our brands in these times. And connected to that, neither customers or consumers will accept higher prices by default. But that our products have this pricing power is the result of the multi-year effort to strengthen the quality of the product and the quality of our brands and of the organization that carries out the work across our functions and markets. Now, moving then to net sales by segment and starting with the branded packet sales, accounting for close to three quarters of our sales. It's growing by double, double digits, over 20%. And this is the ninth quarter of growth, which means that we have now beat our pre-pandemic record of eight consecutive quarters of growth. And this is also the highest sales we've had for branded packaged products since we started with segment reporting. And I would argue also before that. Now, this growth is driven, as mentioned, primarily by the pricing, but also by a favorable mix, both geographic and category mix, and we've had very strong volume growth in past deals. Overall, volumes are down somewhat in granted, but I would argue that the underlying volume is holding, given that negotiations are ongoing with some customers, relating to our fair pricing, and that has affected the volumes slightly. Now, despite this, for total Cloetta, volumes are growing versus quarter one last year, and that growth is driven primarily by our pick and mix segment, which you have on the lower half of the slide, and where you see pick and mix growing a staggering 32.7%, making this the eighth consecutive quarter of growth with profit in pick and mix. Now, same as for branded, in this quarter, the pick and mix sales are the highest we've had of this segment. And this growth is, of course, also driven by pricing, but also by premiumization, and as mentioned, by pure volume. And where I should add that pick and mix is also the bigger benefactor of the two segments of the earlier Easter this year, with around 20 million in extra Q1 sales. So let us look at the profit. On the operating profit, we are pleased to report a very strong quarter where our pricing has offset the higher input costs in line with what our stated ambition is and has been. But then we have been able to improve our profit through the volume growth, the favorable mix, as well as continue to pull all other levers to our disposal, efficiencies in supply chain with a higher volume, Easter helping there as well, as well as build some extra inventories in the quarter on the back of good performance on the production lines. Volumes, again, Easter helping, help with efficiencies in merchandising. Henry mentioned that. Although the overall sales, general and admin costs increased with the salary inflation also in our own company, and despite somewhat lower marketing spend in Q1 this year than last year. Now, we are very pleased to have been able to keep the adjusted margin double-digit for Q1 at 10.1% of the net sales. It is down versus last year, which is an effect of the compression from pricing, which offsets cost but does not generate profit. It is challenging to offset that effect, but eventually, as I have also mentioned earlier, Many times in the past, cost will start to come down, and then we will see an equal and opposite positive effect on our margins. Now, some costs have come down already this quarter, such as energy, but the effects linger, and that will do for some time, for example, to the salary inflation throughout the supply chain, whether in our company or for our suppliers. Now, not all costs are down. For example, sugar is around an all-time high, and Europe has a sugar deficit, so imports also carry extra cost of customs duties and transportation. And gum arabica, which we use in pastilles, may be affected by the strife in Sudan. Then, of course, any imports to Sweden and Norway with occurrences weak means extra cost for us. That said, last year we proved, and I think we did again in Q1 this year, that we will continue to take fair pricing to offset our own input costs, and we are not stepping away from that approach. So let's look briefly at the two segments separately. I say briefly because it's pretty straightforward. This quarter, again, it's a pricing offsetting cost. Both categories help by efficiencies. while branded has the favorable mix with the strong pastels and pick and mix has the solid volume growth the numbers show the the same direction with profit up in both segments and the compression still holding branded package margins short of last year but you can see that the improved margin in pick and mix is despite the same compression i've also said this before But I think that the hard work on building profitability in pick and mix is evident from the ability to avoid making a loss in the current environment, rather than seeing it as a stagnation on the journey, and that this positions us well to reach mid-single-digit margins in pick and mix, 5% to 7% in the mid-term. Moving on to the sales generals and admin, and I think... So with the pricing raising the top line, there is a significant drop in spend as percent of sales. So it's a bit the same compression you see here, but helping out. So from over 26% to just over 22% of sales. And that is despite the impact of the Forex, which adds 60 million to the reported sales general and admins. Excluding the translation effect, we are controlling cost, not only with respect to the marketing spend, which is slightly down this quarter, but also holding back increasing costs, such as in merchandising, below the continued growing volumes. Now, despite this, costs are nonetheless up, given the salary increases. Now, these impact not only our employee salaries, but also those of suppliers of various services, where contracts are often indexed. However, as we saw in the bridge for operating profit, we are able to offset these costs through our own efficiencies, premiumization, and that is also what we will continue to do to complement the cost controls. Looking then at cash, as is the case for our business, we tend to generate our cash in the back half of the year after investing in working capital in the first half. And Q1 wasn't different this year and coincidentally generated exactly the same free cash flow as we did in 2022. Now, that is despite the significant effect of the increased input costs and our commensurate pricing and how that affects the working capital, which is already tying up cash in Q1 in line with our normal C-slot pattern of building inventories, but the effect here is enlarged. So basically, with the higher input costs, that increases our payable, which has a positive effect on the working capital, but that is being more than offset by the resulting higher amount of cash tied up in inventories and the higher amount of cash tied up in customer receivables, even if we would have held volumes and sold the same amount of volumes as we did last year. But then again, Also, this is something that over time will reverse itself out. And in the meantime, we are putting extra focus on cash management during 2023. On CapEx, the spend is a bit lower than our most recent run rate of about 50 million Swedish kronor per quarter. Now, with respect to the green field, last quarter I shared that CapEx spend for it would not materially affect the first half of the year. And as you heard Henri confirm, We now expect that any material capex spend won't be initiated until 2024, given the timing of regulatory processes. Now, given that timing, I also want to comment on the items affecting comparability relating to the greenfield. We have again provided the details in the report and a hopefully helpful bridge at the end of this presentation. Now, each quarter, we review the accounting for the greenfield for any necessary updates. And as you understand, with the increased salary inflation, we have made changes versus what was originally assumed for severances. And now with the shifting timing for the greenfield, that impacts both provisions as well as impairments, although partially offsetting. Nonetheless, this falls within the range of numbers previously communicated for the greenfield. Actually, in some ways, of course, a later cash outflow will not hurt at all as the currently high interest rates are expected to start to come down next year. Going back to the cash flow, something that has not affected the free cash flow, and that are the high net financial items in the quarter. The simple reason for that is that they are mostly unrealized exchange differences, which are not part of the operating cash flow, but form part of the exchange differences. They do not have an effect on the net financial position, though. So let's move to that, my last slide. So our financial position remains strong. Our net debt does not exceed 2 billion. And our leverage is also at two times EBITDA, well below our long-term target of 2.5. And this is despite the impact on our net debt on account of unrealized exchange differences that I mentioned. Our unutilized credit facilities and commercial papers and cash on hand were 3.8 billion, including for the agreed financing for the green field. And you have the details shared in the annual report and at the investor event earlier this fall available on our website. Now, finally, 478 million in cash, the green box at the top of the right-hand side is maybe a bit much. But then it has declined significantly since then with the payment of the one krona dividend per share in dividend in April. And with that, that's you, Henry. Thank you, Frans.

So a few strategic updates. The Jelly Bean Factory is one of our international brands, and we just executed a complete review of the brand positioning, making it much sharper. and we can see that this is already helping us to get more growth in the core markets and international of the Jelly Bean factory. So you can see both the design is sharper. We are having great success on e-commerce with Jelly Bean. It is also a product and a brand which is more in the gifting area. We're now live in Amazon US as well after the successes we have with Amazon in in Europe, in Germany, and in the UK. So really picking off, and also Easter was very good. And then it also is really working well for us in travel retail, so airports. I myself flew back from Malaga after Easter, and then, you know, it gives me such a great feeling if I see a big jelly bean exposure in the, how do you call it, duty-free shop over there and people shopping and looking at that. So that's really building for the future a strong and profitable brand. So that is one. Then, of course, on our core brands, we know also now within the current environment, it is so important to focus on the core of your brands and not to venture in too many new initiatives. Just to share you what is happening, you can see Lekkerol, a mix of three of our best sellers into one box, really targeted at young people. That's where we want them to enter into the brand. You can see the results from Nielsen, the fastest growing SKU in pastels are really good. Then Minton, that's a zip mint pastel in Finland, just being launched. very good to see, and it doesn't happen that often, that it is the number one in Casco, which is one of the two big customers in Finland. And also another example, Tupla, our count line from Finland, every year we come with an addition, a new flavor to entice people within the brand, and bang, 10% market share, number one count line in the market. These are just a few examples of what we're doing to grow the business to keep our volumes and that we're directing most of our efforts towards these core brands because that's where the business is and that's where the money is. Yeah, we talk a lot about Candy King. We talk a lot about the cost and the merchandising efficiency and all the other stuff we have been doing to to make that brand profitable, and we are showing profitable growth in a very low-cost manner. The team, and that's the beauty with one brand across these markets with similar consumer behavior, the team is able to generate more and more, let's say, earned media on platforms like Instagram or TikTok and and others, traditional newspapers. And that is really starting to have a positive effect on the brand. It starts to have a positive effect, of course, on consumer behavior, but we also see, which is very good to see, more and more customers who are approaching us who want to move into the Candy King brand. And that's happening across markets where we then get new customers who really like the Candy King brand and the fact that they see this also in media or on social media. So very, very positive. And then, of course, with the greenfield, I mean, we're spending a lot of money and we realize that. So we feel it's also important to keep you updated of how this is going to look. So here you have like a bird's eye view of the industrial area, which we are intending to purchase and to buy. So the greenfield is within the red line. You see these roads going across with the red line. And then you see a black building which has the Cloetta logo. That's the warehouse. And then the actual plant is the big building behind the black building. And then on the left, you can see an amenities office, canteen, changing rooms. uh place uh etc so a big square box and you see grass towards the right that is where we can extend in the in the future and it is well placed within this industrial area as you can see so this is the the the building design we have forwarded to the community also approved by their aesthetics uh committee and this now goes into the permitting process of the commune And with that said, we're ready for questions. We realize you have a lot of other calls this morning, so that's why we try to keep it as quick as possible. So we'll start with the questions in the live audience, and then we'll go to the internet questions.

We now begin the question and answer session. Anyone who has a question, may press start on one at this time. The first question is from Niklas Skogman from Handelsbanken. Please go ahead.

Hey, good morning, everyone. I apologize because I just joined the call since I was on another one before. But would you be able to give an update on what you're seeing in terms of input costs? I just heard from a food retailer here it appears that they are stabilizing at least the raw material side. Could you please run through sort of your key raw materials and say what you're seeing there and sort of how you see that filtering through to your cogs for the remainder of this year, please?

I can give you a feeling for the raw material. So we also see only in the last three weeks that it is stabilizing, although it is stabilizing on a high level. Two exceptions. One is the sugar price. As Frans already alluded to, sugar price is at an all-time high, and there's an underproduction in Europe. So that is a negative in that sense. And on the other hand, of course, we all see the energy prices coming down. Of course, these are spot market prices. That doesn't mean that it will be like that in the coming years. in the coming months but that of course then has to work through in the raw material prices of our suppliers uh as well because as we explained in in q4 and we feel and we saw a lot of raw material price increases on the basis also of the high uh energy cost and then this has to stabilize and then also come down as we i think all um expect and then if it comes down it will have to come through hard negotiations, of course, with our suppliers to start bringing down prices before we can enjoy the benefits of that.

Okay. So my thinking is that for you to sort of start repairing your margin, I mean, admittedly, the absolute EBIT is, I think, as far as I can see, the highest Q1 in the history of the company. But anyway, if we focus on the margin, Am I right in thinking that you would basically need to see input prices not only stabilizing at these levels, but also start coming down for the margins to start picking up?

Yeah, that's also what Frans explained. Then you get the reverse of the compression effect, and then the margins will be positively affected. That's a big one, but as we also explained, there's other things we're doing, of course, in the mix of the products, so more gum and pastilles. The country mix is also helping us. Then, of course, the cost side is important. So both the own cost, but also merchandise. There's also our own cost, the merchandising cost. And then, of course, the fact that we have volume growth, I think that we cannot underline that too little. The fact that we have volume growth in total Cloetta also means that our factories are benefiting from that. So the unit production costs are also positively impacted with that. And these, of course, these factors also contribute to margin.

Yeah. And on the Pastille or the refreshments category, Is it sort of normalizing consumer behavior or is it a lot of you pushing these categories or reworking packaging or what's driving the recovery?

Yeah, it's a bit of both. I mean, normalizing is always difficult and I rather look forward than backward. I mean, we just need to grow this business. We need to We need to execute our strategic plan, which is very much about bringing people into the brands, into the categories. And we do that, for example, with what I showed you with the lacquerol mix, because that is more fruity, which is very much against youngsters, and then limited editions. And then, of course, it's a mix of what we call our 6P model. So it is about promotion. It is about advertising. It's about visibility, a place...

in uh in store uh etc etc and and that is going in the right direction so that will keep on contributing positively to the uh to the mix okay very good and uh based on sort of my back of the envelope calculations it looks like maybe maybe volume in the package is flat ish and then uh pick and mix is is growing recently yeah It seems like you're very much insulated from any private label encroachment that we're seeing in other categories. Would you agree with that?

Yes and no. Of course, we were in different markets. And in some markets, we do see private label coming up. But as we started, it's a tribute to the investments we made our brands because it's perfectly fine if private label becomes more active as long as you have a strong brand. If you have strong brands with good consumer propositions and good products, and you have supported those brands, you are perfectly fine as a brand. And of course, the private label is growing in certain markets across Europe. We also have markets where there's more private label activity than in others, but it's all about your brand. Strong brands are not being affected by private label.

Okay, good. And then what can you say in terms of Q2? Is there more price increases coming? I mean, I'm sure you do sort of minor price increases all the time, but the big sort of... hikes that you've needed to do in the past, given that commodities... Yeah, you gave the answer yourself, right?

You also said that you see raw material stabilizing, and we see that as well. So there's always going to be minor price increases here and there. There's a few things we, like Frans alluded to, with a few customers in in some markets where we're still in discussion about the second part of the price increase, etc. But I mean, the big bulk, of course, has been done.

Okay, good. I ask because sometimes the FMCG industry tends to lag the hikes they need to do in order to sort of catch up. But okay, I hear you. Good. Okay, I think that's it for me, actually. Thank you very much.

Good. Then I think we take, Frans, you want to take this?

Yes, a couple of questions from Stefan Stjernholm at Nordea. First, just to understand the positive impact of the early Easter this year, and the question is, would about a 10 million upside on Q1E be a fair assumption? And Yeah, as I mentioned, it's about 20 million extra save. Now, of course, when pick and mix does really well towards the Easter, maybe a little bit less on the branded side. Now, we don't have a 50% gross margin on pick and mix for sure, but then you also have efficiencies as a result of the volumes, both on merchandising and in supply chain. So I think it's a ballpark. It's probably a fair assumption.

Yeah.

Then there's a question here if we expect one-off costs in the common quarters. And I assume that, Stefan, you're thinking about items affecting comparability. So the point would be there. I mean, we always had a little bit here and there. And now in Q1, it's a bit bigger. And as I mentioned, it's partly related to the timing of the greenfield. So a later go-live affects both provisions and impairments. But, of course, since we started with, let's say, the first provisions in Q2 last year, a big driver here has been the submarine inflation, which is also captured fully in our items affecting comparability. So there will be a little bit here and there, but this does not deviate from the range of sort of the net range of one-timers expected for the green field that we communicated previously.

And if you look at the pick and mix contracts, I mean, these are mainly stores from chains which are coming towards us. So this is not like one big central agreement with 500 stores swapping in one go to us. This is about retailers in certain countries coming towards Cloetta saying, hey, we would like to swap the current quick and mix concept we have for your concept, because we can see you have a lot of traction in the market. So it is not going to have a huge effect on the sales. Of course, it helps with it more tribute to the fact that we're making progress in really building the Candy King brand as a very attractive retail concept as well. Okay, I think we don't have any more questions online and not on the internet either. So concluding, very strong growth. Of course, a lot of pricing, but also a tribute that we are able to get that pricing through and that consumers keep on buying our products to all the strategic marketing and sales stuff we have been doing in the last couple of years. And as we already alluded to, we think that the... Role material costs are now stabilizing. And then we will see how this develops in the coming quarters. But we will just not change our strategy and the way we work through with pricing with our customers. So thank you very much. And that was it for today.