Cloetta AB (publ)

Thank you for joining. My name is Laura Leenholm and I'm the Director of Industrial Relations and Communications. Our CEO Henri and CFO Frans will first run you through our Q1 results after which we will move into the Q&A. You will there have the option to either dial in and ask your question live or you can also choose to post your question in the chat. We will first then take the questions from the telephone lines and then we will move ahead to the chat. Over to you, gentlemen.

Thank you, Laura. So we had a good quarter. And in particularly, I think I'm very pleased that we were able to protect our profits on an absolute level of 192 million SEK despite the historic high cocoa prices and food inflation. If we take one second for the people who are new to the call, I mean, this is an overview of Cloetta. Very nice to see last year we reached the $8 billion mark in turnover, never been so big. And another maybe interesting fact, we're not a Sweden only company towards the right, you can see the kind of distribution of the sales in the different countries. And in particular, you can see that we are starting to get really some nice base sales and presence in countries like Norway, Germany, UK, and also international market, which is a big growth motor for us. It's historic positions, which we're strengthening and growing step by step. So that's really good to see because the mix of this totality also helps us to achieve our organic growth journey in the future. If we then zoom in on the quarter, as I said, we protected our profit. Very good to see because the operating environment for us is still very much affected by food price inflation in our raw materials. And although some things have come down, we can see that sugar prices are still on historic high level. And of course, anybody looking at the chocolate raw material prices, you can see that it's only going up. And of course, we always react on that in the same way as we have done so far by increasing our prices at the same absolute level as the raw materials are going up towards our customers. So that will continue, but that always takes a few months before we are able to do that. Another very important message and something I'm really proud of is that despite the organic growth, which is all price related and it is price on price because we had a lot of pricing in the first quarter last year as well, we can see that our volumes are stable. And what does that mean and why is that so important? It actually means that through all the work we've done in the last couple of years to strengthen our brands and to also invest more in our brands, that consumers across our markets are keeping buying our products, even though they're now a lot more expensive due to the food inflation than before. And this is something which you could say it really shows and proves the resilience of this business and our strategy of the last couple of years. And this is something special. There's not that many businesses in FMCG who are able to keep their volumes flat in Europe, given the economic situation. Our profit hence has been impacted by higher gross profits But we also are still investing more in our brands, like we told you in the previous quarter. And that continues, and Frans will unpack that a little bit more. And we're also looking all the time for cost savings, and efficiency savings is one of our four pillars. And we continued also this quarter to streamline the product portfolio, but also the brand portfolio, and looking over, you know, which brands are the important ones going forward for the future. And then we also, as you will see later on, had a good quarter cash-wise. And like last quarter, the net debt over EVTA is at an all-time low of 1.6. Why is that important? Well, A, money is more expensive, but this is also very good, I think, for the greenfield investment, which we'll be doing in the future, that we're able to generate the cash and have this buffer when we go into that period of construction. So those are the highlights. protected profits, volume stable, and I hand over to Frans to unpack that a little bit more.

Okay, thank you, Henry. So for quarter one, we continue to report for the growth with net sales of 2.1 billion Swedish kronors. That's a growth of 6.1%, of which 5.7% is organic. This is also the third consecutive quarter where we have over 2 billion in sales. And this growth is driven, as Henry mentioned, primarily by the successful fair pricing to offset cost inflation with the stable volumes mentioned. Now, compared to the last number of quarters, double-digit growth, around 6% may appear a little bit less impressive. But then you have to note, and Henry alluded to this as well, that that's on top of a lot of pricing that we had in quarter one last year. So now we're meeting a tougher comparative set of figures and we will for the rest of this year. Now, the long view on this is that 6% growth is of course still a lot higher than our ambition to grow in line with or better than the markets, which we have tagged that around one to 2% in the long term. And if you compare to quarter one 2019, so the last year before the pandemic hit, our sales are up 34%, and that calculates to a five-year CAGR of 6%. And actually, if you look into it really detailed, it's actually 6.1% five-year CAGR, which is exactly the same as the 6.1% growth that we have this quarter. So it's a bit of a, I thought, a funny coincidence, maybe mostly for finance people. Now, moving on to the net sales by segment, branded package sales grew organically by 3.6%. And you can see here that growth comes on top of 20.5% growth we had in Q1 2023. Now, that 20.5% was also the highest growth we've ever had since we started segment reporting and probably also before then. The pick and mix segment on the lower half of the slide grew organically 11.7%. And that's on top of the over 30% we grew in Q1, 2023. And this is also despite the loss of the Wilco customer in the UK last year when they went bankrupt. So there's Wilco sales in the comparator here. And 11.7% makes this also the 12th consecutive quarter with double digit growth for pick and mix. And I think that shows that our plans for pick and mix are generating some really good results. For both segments, Pricing is the main driver of the growth. And for both segments, the volume is stable. And again, despite the loss of Wilco. We have mentioned it before, FMCG and many retail chains have experienced a lot of pressure on volumes as consumers navigate the inflation. We do too, and we will continue to face the same. So we're really, really proud of stable volumes. The volumes show that the strategy is working. We are investing in the long-term health of our brands, especially our core brands. That makes us as a supplier attractive, also with the higher pricing we've been taking. So our customers know that they can in turn sell our Clueta products to their shoppers and to do so at a price that helps their businesses. Now, on the theme of investing in core brands, we can move to the next slide. I flagged in the Q4 earnings call that we were going to step up the stand on marketing in quarter one compared to last year. by about 10 to 20 million. We did that, but given how strong the volumes came in during the quarter, we held the step up to about 10 million, so at the lower end of that range. So with an operating profit adjusted of 192 million, or about 200 million without the extra marketing spend, we have been able to protect our profit despite the steep increase in input cost since last year. Of course, the most talked about increase in media recently has been the price of cocoa. So at the highest level for Total Cloetta, you could kind of stop there to explain the operating profit adjusted by saying that we have protected it through fair pricing and with stable volumes. Now, going further down in the analysis, and you have the graph on the right, you can see that our mix is favorable. Remember, the volume is stable, so this is mix. And the favorable mix is driven by increased focus on optimizing the portfolio and on net revenue management. Then on the cost in the middle of that graph, in addition to the higher marketing spend, there is also a one-time effect of the recognition of the provision relating to finished goods inventories that we have blocked from sales. That, as many of you know, are because of traces of a component that doesn't meet our quality standards that was found in a raw material used when making chocolate products. We're, of course, keeping the products blocked until they've been cleared by our quality team and the relevant health authorities. And we're currently in a discussion with the supplier about these materials provided to us. This is a company with which we have worked for decades. And as such, we will not quantify the provision at this time. We expect that this will be resolved in a good manner. It is an isolated case, and we don't expect any material negative effect going forward. That said, based on the lower profit this quarter, despite the favorable mix, mix, it's not something that should pay for higher input costs, and as costs are continuing to go up, again, I'm thinking primarily about chocolate, we intend to stay on course with our strategy to take fair pricing for our increased cost, And we will also continue to support such pricing. And in Q2, we will again increase the spend on marketing versus last year. And that, again, would be in the range of 10 to 20 million Swedish kronors. Now, while total Cloetta profit is stable, there are very important differences in how the profit developed versus last year when looking at the branded package product segment separate from the pick and mix segments. So let us look at that. So starting with the branded package products on the top. So the segment is down 32 million despite the stable volumes. The stable mix I mentioned is of course also in this segment, but so does most of the provision. And of course, all the extra spend on core brands sits here. as i mentioned though mix shouldn't pay for higher cost and as the costs are continuing to go up we will stay with the strategy to take pricing nonetheless our underlying profit if i would exclude the provision is of course better than what you can see here and i will revert more on that topic as we learn more on the matter with our supplier for pick and mix the quarter looks very different and also requires a bit of an explanation maybe not to get ahead of oneself. The profit increased by 24 million, which is a doubling versus last year. And we have said in the past that our midterm ambition is to reach an operating profit adjusted of between 5% and 7%. And now in this quarter, we are reporting 6.9%. So what you see is a lot of work over a long time that is really coming to fruition. Pricing has been caught up largely. And despite higher prices, a healthy volume and higher efficiencies relating to merchandising in assortment, fixtures, et cetera. I must add though, that the profit is clearly boosted by the Easter sales, not just with respect to gross profit, but also scale benefit as higher volumes were managed much more efficiently per kilo. And I said, you should probably knock off about 3% of profit as a percent of sales to get to the profit excluding the Easter gains. But even at that lower profitability, the quarter would be a clear improvement and would be approaching the range of 5% to 7% that we've set for ourselves in the midterm. That is really great and encouraging, and it's not that often I get to present this type of numbers for pick and mix. So then moving on to an overview of the road to 14%. So without making a detailed update on the efforts to drive bottom line profitability, I did take the bridge that we presented also in the annual report recently, and I updated the first light green arrow for pick and mix to a shade darker, given the strong results. The branded light green to the right of that is obviously ongoing, and while margin is down, there are, as said, some distorting factors in this quarter, and those are not related to the long-term outlook. Of course, we did see good benefits from net revenue management in the quarter in the form of the mix, and we will continue that alongside driving for efficiency in supply chain through the perfect factory program. With respect to the greenfield delivery, based on what we have previously presented, it will secure and improve on our ability to deliver the targeted margin. In Q3 2023, we reconfirmed that despite the higher interest rates, the net investment remains in line with what we've communicated. And I can again stress that we had shared previously and we said that we had taken headroom at the time of the original announcement for the uncertainty. So we also confirmed in Q3 2023 that we would generate higher up in the range of 220 to 260 million EBIT upside per annum from the project given that part of the upside comes from savings on payroll costs and those costs have increased a lot with inflation since 2022. We will be able to provide a more detailed update on both investments and savings when we have sufficiently progressed or even closed the ongoing tendering and contracting process. And that, in turn, depends on the complete finalization of the required permits. So we will revert to this in the future. Now, going back to the quarter. So sales, general, and admin in the quarter is pretty straightforward here, where the cost, excluding currency, is higher, driven by the higher spend on marketing. I think we might move one slide too much here. That said, there has, of course, been salary inflation relating to our own workforce since last year and the same effect for suppliers. And often there are contracts that are indexed. Yet again, however, we've been able to offset those increases. And with SG&A at 21.6% of net sales, that is the lowest we've ever reported for a quarter one. So we're very happy with that. but it's not the end of the good news. So let's move to cash. So there is a seasonality to our cash flow. And I've spoken about this in the past and most of the cash generated is generated in the back half of the year. And quarter one is normally not very strong because the quarter starts with low working capital as the receivables from the selling to Christmas has largely been collected. but we haven't sold a lot immediately before Christmas and after Christmas. Now, despite that, we generated a healthy free cash flow of 99 million Swedish kronors in Q1, and that's 122 million better than what we did in Q1 last year. Part of the improvement is due to the efforts to increase the focus on cash across our organization, and part is due to the inflation having slowed down somewhat. not to the point that we are in a deflationary environment. Our working capital did increase in Q1, but it didn't increase as much as it did last year. Now, 99 million is also not just better than quarter one 2023. It's also the best quarter one free cash flow delivery we've had in the last five years. Which brings me to my final slide and that I'm really pleased to share. that on account of the strong cash flow, we closed the quarter with a net debt EBITDA of 1.6 times. That is lowest, not just for a quarter one, but it's the lowest we've had in any quarter since, well, technically anyone can remember. Naturally, as quarter two will have a set of dividends being paid out, as is normal, the leverage will go up in quarter two. But then again, based on the seasonal trends, the leverage will start to improve again in the back half of the year. And you can see that on the graph here that that is our normal pattern. Now, if you look long term, however, our financial position has consistently been improving over the last years. Now, this was expected, but I think it's worth to emphasize. And this also means that we are consistently, quarter by quarter, positioning us better with respect to the upcoming investments for the greenfield. Similarly, on that note, we currently have access to additional unused credit facilities, commercial papers and cash on hand for 4.1 billion Swedish kronors, which is well over double the need for the greenfield based on what we have previously communicated. So I feel I can conclude that our financial position remains strong.