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.