Cloetta AB (publ)

Ladies and gentlemen, welcome to the Cloeta ETHIN Report Q3 2033 conference call. I am George, the course co-operator. I would like to remind you that all participants will be listed on the board and the conference has been recorded. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star N1 on your telephone. For operator assistance, please press star N0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Henry de Chavasse-Nolting. Please go ahead.

Good. Thank you and welcome, everybody. In the room here is me and Frantz Riedem, the CFO, and we will take you through the quarter three results. So if we go to the agenda, we have the quarterly update, the financials, and then a few remarks on some strategic updates, and then, of course, we'll open for the Q&A. So another strong quarter for Cloetta. Very strong double-digit organic growth in the branded business. That is now 20 quarters of growth. Take that in the respect of the 10 years without growth and only the three corona quarters without growth. So that's really strong and giving us confidence for the future, even though a lot of the growth is driven by pricing. Then also the pick-and-mix business is very strong double-digit organic growth. And even with the effects, which Frans will show you a bit more about our number one pick-and-mix customer in the UK going into administration, which had an effect both on the top and the bottom line in the quarter. If we then look at the profitability, we can see a higher adjusted operating profit in absolute sense. So that's really good. primarily attributable to the pricing to mitigate the cost, but also our own cost control to really make sure that we're not raising more than needed to cover for things like raw materials, energy, transportation, and packaging. So we're offsetting the higher input cost, and that is a theme we've been talking about before and also the way we will keep on running this business going forward. We're also taking the opportunity also with all these supply chain improvements we are making to really streamline and optimize our product portfolio and take out those kind of lines of business which are not giving enough EBIT or creating too much cost due to the complexity. So really cleaning up parts in the portfolio where we think we can do better with. Then the Greenfield project is progressing. It's a long process, and the permitting process will probably take more time, and we're coming back with an updated timeline to take that into account. And our net debt EBITDA remains below our target of 2.5. So with that said, I would like to hand over to Frans.

Thank you, Henry. So as Henry mentioned, we are, again, pleased to report strong double-digit organic net sales growth, 12.2%. And this is honestly terrific organic growth. And especially as now in quarter three, we are comparing ourselves to quarter three last year when we had already started to catch up on the pricing. So even if the growth in the quarter is lower than the growth year to date, I would argue that this is an a further step forward. So at net sales of 2 billion, 148 million, it's also the highest that we've ever had in a quarter. Now, the sales continue to be aided by the translation of our foreign sales to the weaker Swedish krona. And including that translation effect, the sales grew 19.5%. Now, what you might find interesting, though, is that if you strip out the 7.3% effect of translation, the quarter would still be our first quarter with more than 2 billion Swedish kronors in sales. So that's a nice milestone, I think, 2 billion. Now, the effect of currencies will come back throughout this deck, but the key points are, firstly, a stronger euro helps when translating our foreign-made sales and foreign-earned profits to the result in Swedish kronors. It also makes our SG&A look higher, of course. But secondly... As a result, we also have a need to take more pricing, because if we didn't, the Swedish kronors we earn on selling those products in the Swedish markets wouldn't cover the euro cost we incurred to produce the products in the first place. That is also if they are produced in Sweden, because the raw material is often purchased in euros. The same thing applies also to Norway. Ultimately, though, offering the best value to the consumer is the basis for for consumers accepting paying a higher price to our customers. And I've said this before, unlike energy and food, the consumer is completely free to decide if to buy our product or not. And despite the inflationary environment, many are continuing to buy Cloetta products. And we're proud of this and our own work to ensure that our brands have this pricing power and that our organization has the capability to execute that agenda. Looking then at net sales by segment. So the branded package sales, which accounts for three quarter of our sales, grew organically by 10.9%, making it the 11th quarter of consecutive growth. And as Henry mentioned, the 20th quarter of growth since 2018. Similar to total sales, this quarter we reported the highest sales we've had of branded package products since we started with segment reporting. The growth is driven by pricing, but also some favorable mix within the portfolio and between markets, including with the ramped up effort on portfolio rationalization, as well as where we have stepped away from sales where our fair pricing has not been accepted. With respect to the branded package volumes, I would argue, and I did this also earlier this year, that let's call it our underlying problem, volumes, and by that I mean the consumers' willingness to buy our packaged products, that volume is just about holding versus last year. If I, however, include volumes where we have walked away, where customers are not willing to accept our fair pricing, then our volumes for branded packaged products are down, but actually not as much as the rest of the market. The pick-and-mix segment is also growing organically, 16.4%, and you see it on the lower half of the slide. This is primarily driven by pricing. And it's the 10th consecutive quarter of growth in pick and mix. This quarter, the profitability requires some unpeeling. Henry mentioned some of it, and I will come back to that. But pick and mix does have volume growth. And there's not many businesses that can claim that currently. So that is also very encouraging. And of course, it helps with absorption of costs throughout our supply chain. And that helps profit. So let's look at the profits. So we are pleased to report further strengthening of the profit despite the one-time impact that Henry mentioned. Overall, profit is up 20 million Swedish kronors. And in there, you can see a strong Forex translation effect and then a slightly favorable net price effect. And that is the combination of pricing, efficiencies, and savings, less, of course, higher input cost, less the negative currency I mentioned, and then the net effect of the two one-timers we have in this quarter. So we're very pleased to have continued growth despite all of that. Now, with respect to the one-timers, we had a gain of 12 million Swedish kronors relating to an electricity grant, but that was more than offset by the impact of one of our biggest customers in the UK entering into administration, a customer named Wilco, if you were to look that up. As a result, we have taken a provision for the receivables outstanding with that customer. That's a total of 24 million Swedish kronors. In addition, the quarter three result is, of course, affected also by the lost profit on sales that we didn't end up having to Wilco. And that's almost a full quarter three. And that, of course, is not a one-time effect, but it will affect Q4 in a similar fashion. We are now working through the immediate and long-term effect of this change, and Henry will talk more about the UK business shortly. As for the volume and mix, it is slightly unfavorable, and that is both on account of volume stepped away from, but also because the mix between the two segments, where the faster growth in pick and mix, going from a total point of view, overshadows that we do have a positive mix, both within the branded package sales, with pastels and gum holding on to volume better than average, and for a positive mix between countries in both the two segments. Now, while profit in Swedish kronors is improved compared to last year, we continue to see the effect of the compression from pricing with profit margin adjusted just shy of double digit at 9.7%. Now, we will, of course, see an equal and opposite effect, so a decompression of our margins when costs fully start to come down. Energy cost does have come down, but sugar cost and cocoa have gone even further up. And then the negative currency effect in Sweden and Norway that I mentioned. So we are not yet at the point where we are in a position to lower any pricing. But let's look at the two segments separately. So the drivers for the variants are really the same, although with a clear difference that the retailer who has gone into administration in the UK was primarily a customer of pick and mix. So almost all of that hit lands in the pick and mix segment. So to help you, we have broken out what the underlying performance is. One thinks more in terms of if consumers like the product and customers are willing to pay for it. And then separately, what's the effect of the administration of Wilco? And based on that, we have done a nice step up in profit in the quarter. Now, despite the growth in profit, compression is also very clear here. It is holding branded package below last year, although the 13.3% in the quarter is an improvement versus year to date of 12.9. The pick and mix margins, of course, are down for that different reasons. But if you excluded the one-timer, it would have improved slightly, despite the compression effect. Moving on to sales, general, and admin. So as mentioned, the currency translation helps with top line and profit, but has the opposite effect when translating the cost incurred in Euro-denominated countries to Swedish kronors. So SG&A excluding currency and minor items affecting comparability is up. on account of salary inflation relating to our own workforce, which is only partially offset by our cost savings, and likewise knock-on effects from inflation at suppliers, including where contracts are often indexed. As we saw in the earlier bridge, we are able to offset these costs together with all other input costs, and with the much higher sales, there is again a drop in spend as percent of sales, both in the quarter and even more year-to-date. Now, with respect to investment in our brands, we have ensured to keep investments during year-to-date 2023 quite close to what we did last year, including with a bit less spend now in Q3, followed by, and I can flag for that already now, followed by an expected significant step up in Q4. Q4 spend is planned to land around 20 to 30 million Swedish kronor higher than Q3 spend, And that's similar to what we also did the last two years. So we strongly believe that love brands are the key to consumers' willingness to consume and customers' willingness to buy them at a fair price. I will also here comment on that there is no major movements in the items affecting comparability on account of an expected different timeline for the startup of the greenfield as the increase of restructuring provisions is largely offset by a reversal of the impaired production assets, given that we will use those assets for a longer period. Moving then to cash. As you probably recall, I mentioned that our cash flow would improve in the second half this year, as it generally does follow such seasonality. And the free cash delivery for the quarter is 123 million Swedish kronors. bringing the year-to-date free cash flow to 102 million. In this over and under comparison to last year, it does appear that we are doing worse than last year, but then there was a bit of a catch-up effect in Q3 last year, and on a year-to-date basis, we are actually doing better in free cash flow by about 38 million Swedish kronors. That said, cash is not where we want it to be, and we have increased our efforts in managing working capital, to help offset some of the effect of the inflation and pricing. And given that we pay our suppliers before we get paid by our customers, our high business growth inevitably means more cash tied up in working capital. And that is what you see impacting our free cash flow also this quarter. Now, the investment in CapEx was a bit higher than normal run rate as we are installing new packaging equipment in the plant in Slovakia. And the spend also includes about 5 million related to capitalized engineering support for the technical design of the greenfield. As mentioned by Henry, given the regulatory process, we now expect to start the new plant later and therefore also start major CapEx investments later in 2025 rather than in 2024 as previously communicated. On the matter of the greenfield, we have again provided the details on items affecting comparability in the report and a, what I hope is, helpful bridge at the end of this presentation. Each quarter, we review the accounting for the greenfield for any necessary updates, including now based on the revised estimate on timing. And for this quarter, as I mentioned, there is no major movements. Now, coming back to the estimated timeline. So, Henry will come back to this, but I still want to mention that we will still close one of the plants in Rosendal in 2024, and we will selectively outsource volumes. This reduces the need for capex, and together with other improvements identified in the quite detailed work on the greenfield, enables us to stay within the net investment shared previously, which was 1.9 billion Swedish kronors, even if the current higher interest rates would remain when spend starts in earnest. Today, we're not providing a full update on the business case, but given the high salary inflation in 2023 and based on the work to date, the incremental EBIT has improved within the range previously shared, which was 220 to 260 million per annum. I also want to, as I did in Q2, spend a little bit of time on the net financial items on this slide and the continued effect of this week's Swedish krona and the Norwegian krona. As before, you really can't tell from the cash flow since the net financial items in this quarter are mostly impacted by non-cash, unrealized exchange differences. In Q2, the exchange differences on cash and cash equivalents year-to-date were significant. Negative 137 million Swedish kronors as we close the quarter with very weak, both Swedish krona and Norwegian krona. And now in Q3, about half of that has reversed out given the strengthening of both currencies. So positive 67 million effect. And while it's not impacting the cash flow, the strengthened Swedish krona does impact revaluation of euro denominated debt. And that in turn helps net debt. So let's look at the net debt and the leverage. So this is my final slide. Our financial position remains strong despite the working capital and the effect of the higher input cost inflation and our offsetting pricing on that. We have strong growth. We have improved operating profit adjusted. We have improved free cash flow year to date. And we have access to additional credit facilities and commercial papers plus cash on hand of 3.7 billion Swedish kronors. Our leverage of 2.0 is improved versus last quarter, and it is also the lowest we've had in a quarter three ever, as far as I know. Now, it's in part because the strengthening of the Swedish krona and the effect of that on the revaluation, but also without that, the leverage would have been, for yet another quarter, well below our long-term target of 2.5%. And on the positive note of the leverage of 2.0, back to you, Henry. Thank you, Frans.