Cloetta AB (publ)

Ladies and gentlemen, welcome to the CLOECA Interim Report Q4 2023 Conference Call. I'm Vicky, the Chorus Call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Henry de Sauvage-Nolting, CEO. Please go ahead, sir.

Yes, thank you very much and welcome everybody to Q4 and the full year results of Cloetta. It's Henry over here together with Frans. and we will take you through a short presentation and then open up for So if we look at the quarter and the full year, I'm really, really pleased to say that we had a year of strong profitable growth and we reached a milestone in turnover of 8.3 billion SEC. So that is really, really nice to see that we have continued our growth, our organic growth journey, and Frans will peel that a little bit further. So the first time in history exceeding the 8 billion. And then we nearly touched the 800 million SEC in profitability as well. So also a milestone. We've never been in absolute terms at that level. So really good to see and a strong testament to all the strategic work we've done in the last couple of years in focusing on operations and, of course, our go-to-market capabilities in marketing and sales. So, our branded growth was, again, strong, double-digit, 11%. Of course, a lot of pricing. More important, I would say, is that our volumes are relatively stable. And I think that is quite important, given the economic climate, what we see around us and how other companies are doing. So, that is a very positive note. But, of course, we also see that we will be affected by consumers changing their behavior, but so far so good. Also pick and mix strong double digit growth with nearly 14% growth, and that is despite the fact that our number one customer in the UK, Wilco, is in administration and there are no sales to that channel anymore. So all coming from the other customers and other markets. Highest ever full year adjusted operating profit, despite the compressed margins. Because remember, we take fair pricing, we take kronen for kronen, so if the raw materials are up with 20 euro, we raise our prices with 20 euro, which means that we lose on the margin which we cover for the profitability. And most of that, of course, is coming from pricing, but also strong costs control which together are offsetting the higher input cost. Given the fact that we have strong volumes already year after year and capacity is highly utilized, this is also a fantastic moment or opportunity to start taking out parts of the assortment which are either small and creating complexity or maybe not the most profitable parts in the in the business. If we take those out and replace The capacity we then get freed up by products which are delivering high margins and are already big in volume, hence creating less complexity and we get more output. I'll come back to that in the end. Then a big decision is after validation is to make the greenfield facility in the Netherlands carbon emission free and that is now technically possible. I'll come back in the end of the presentation on that decision. And I would say also very positive is that the net debt over EBITDA is now at 1.7, also a historic low in this case, which I think should also give confidence that this is a nice cash generating business and that we look with full confidence to go into the Greenfield project in the future, given our position over there. And based on all of that, the board also proposed a dividend of one SEC, which of course will have to be approved by the AGM. So with having that said, let's get into a bit more details. Frans, can you take over from me over here? You always know best.

Thank you, Henry. So as we close the year and it is worth repeating, we're really happy to report our first year with net sales exceeding $8 billion. And that follows another strong quarter of growth. So in Q4, we grew 14.5% based on 11.7% organic growth. And that's terrific because it's on top of really strong growth also that they had in Q4 last year. That means net sales are 2.2 billion in the quarter. That's also the highest we've ever had. And that beats the last quarter, which was Q3 with 2.1 billion, which at that time was the highest that we've had. Now, these things are aided by the translation of foreign sales to what is still a fairly weak Swedish krona. But also, if I strip out the effect of translation, the Q4 sales would still be north of 2 billion. And the full year would also be about 8 billion in sales. Now, I want to repeat here something that I said in previous quarter, that while the stronger euro helps when we're translating our foreign-made sales and foreign-earned profits to the resulting Swedish kronors, it also means that input cost goes up relative to the Swedish kronors and the Norwegian kronors we earn when we produce products and sell them on those markets. there is a transaction impact which we also have to offset, and we are taking fair pricing for that. So moving on then to sales by segment, the branded package sales, they account for about three-quarters of total sales. They grew organically 11.1%, making this a 12-quarter of consecutive growth. This growth is primarily driven by pricing. Now, and this is also the highest sales we've had for branded packaged products since we started with segment reporting. So at the same time, the pick and mix segment grew organically and even strongly at 13.6, which is on the lower half of the slide. That's also driven by pricing and premiumization through the Candy King concept. And this is, as Henry mentioned, despite the loss of the Wilco customer in the UK as they headed into administration. Now, volume was not a key driver of this growth. That's almost stable versus last year. And I'd like to break that down a little bit for you. So firstly, as you probably know, FMCG and also many of the retailers have experienced a lot of pressure on volumes with consumers holding back on purchases. At the same time, we've been really, really fortunate to be able to keep most of our volumes. And being able to buck this trend in the market is something I'd like to attribute to us only taking fair pricing for our cost increases, while at the same time continuing to invest in our brands. And now in quarter four, if I exclude the impact of the lost Wilco volumes, we did continue to do well versus that market. Our volumes are still somewhat down, though, about 1% to 2%. Within that, pick and mix is doing better than branded, gaining, and that excludes UK pick and mix again, whereas branded package is down about 2%. So regardless of the markets, we do have some negative volume development in branded package, and this type of volatility and challenges will remain going forward based on how the market looks. But regardless of that, we are immensely proud that our volumes show that consumers continue to enjoy our products almost to the same extent as before, despite the higher prices. But to keep this up, it will be even more important perhaps to remain visible and relevant to the consumers. And I'll come back to that point. Looking then at operating profit adjusted. So while the profit is down at the percent of sales, including given As you know, we're taking pricing for absolute increases of input cost, and that does compress the margin. While that percent is down, we are pleased to report our highest full-year profit ever at 799 million, so just shy of 800, which would be the next milestone to hit. Again, that profit do benefit from the Forex translation, but on the other hand, we've had to manage also the negative transaction on the imported product, And even if I strip out the favorable currency effect versus last year, the operating profit adjusted would still be the highest that we've had. Now, if you take a step back and ask what's driving this profit, then the short answer would be that we're just a bigger business now, so we make more money. But when you go one more layer down, then the answer is a bit more complex, that there's a combination of the growth our focus on criminalization, both through innovation, portfolio rationalization, what we're doing on the Candidate King side, also our fair pricing, very strong focus on cost throughout the organization, and of course, also last year we were lagging a bit, so we have been catching up. Now, you can also see the volume mix, and It's negative, and the full year impact is mostly coming from this quarter, and this is pretty directly related to what I shared on volumes being relatively stable, but nonetheless down. There's also negative mix effects in here, with pick and mix growing faster than the more profitable branded package segments. With respect to the compression of the margin, eventually when cost starts to come down, we should see an equal and opposite positive effect on our margins. And so far, sugar and cocoa remains very high, and we are not yet at a point where we believe the pricing should be lowered. Now, if we look at these segments separately, I think it is heartening to see that on a full year basis that the branded package margins, despite the compression, just about held versus last year. But also that pick and mix, despite the loss of Wilco, in q3 and and the sales being out in q4 just by whisper stayed on black numbers making that 11th quarter of growth without a reported loss that said we will continue to drive all the levers at our disposal to improve margins including fair pricing push for volumes margin accretive innovation and here an extra focus on pastels and gum which have lagged Still a bit from really strong growth that we have on the molded can. And then, obviously, continued portfolio optimization. Sales, general and admin costs, excluding currency. It is higher on account of Saturday inflation relating to our own workforce, partially offset by cost savings, and likewise, knock-on effects from inflation at suppliers, including where contracts often are indexed. Again, however, we've been able to offset these costs together with all the other input costs under the cost of goods sold line and get to an operating profit that is improving. And, of course, with the much higher sales, spend at the percent is dropping, so 160 basis points better in the quarter and even more on the full year. Now, coming back to the investments in our brand, as I mentioned, that we would when we had the Q3 earnings call. We made a big step up in Q4 versus the first three quarters run rate, and we even surpassed some of the spend that we did in Q4 last year. Now, we strongly believe that not brands are the key to consumers' willingness to consume our products and customers' willingness to buy them at the fair price, and even more so than volumes. Right now, I do expect us to increase our advertising spend in this first quarter of 2024 by around 10 to 20 million versus what we spent in Q1 2023. Then let's look at cash. So there is seasonality to our cash flow, and I also shared in prior quarters that our cash flow would improve in the second half of the year. It did improve in Q3, and it's certainly improved now in Q4. So the free cash flow delivery for Q4 is 394 million, bringing the full year free cash flow to 496 million Swedish kronors. As mentioned, so seasonality is part of that, but so is the increased focus that we have on cash throughout our organization, but also because the rampant inflation has slowed down a bit. So we're not in a deflationary environment, and our working capital did increase during 2023, But nowhere near what we saw in 2022. So together with increased focus on cash, we are delivering about 60% more cash than what we did in Q4 2022. So an additional 153 million. And that's despite the higher external capex that we had in this quarter than quarter four last year. So for my final slides, I'm really pleased to bring here another first for the year. So beyond the sales exceeding $8 billion and our strong operating profit adjusted. Now, 2023 is also the first year when we close the year with a leverage as low as 1.7 times the BPDF. That's actually slightly below 1.7 if you do the math yourself. Our financial position remains strong, despite the effect of input cost inflation and the offsetting pricing and the effect that that has on working capital. The strong growth, improved operating profits, improved free cash flow, low leverage, and we have access to additional credit facilities and commercial papers, plus cash on hand for a total of 4 billion Swedish kronors. So consequently, the board has proposed a dividend of one krona per share, which is in line with earlier expressed ambition. This is at the upper end or just above the usually referred to 40 to 60% of profit after tax, but it is within the range when excluding one time costs for the greenfield.