Cloetta AB (publ) (CLAB) Earnings Call Transcript & Summary

Good morning, and thank you for joining us on this conference call that we are hosting today following our announcement yesterday evening regarding that we are planning to invest in a new sustainable greenfield facility in the Netherlands and consolidate our manufacturing network. My name is Nathalie Redmo, and I'm Head of Investor Relations. I'm here today with Henri Sauvage, CEO; and Frans Rydén, CFO. Henri and Frans will take you through the proposal, and we will then move on to our Q&A session. And I will now hand over to you, Henri.

Yes. Thanks, Nathalie. So I think for quite a while, we have been discussing with you that we were doing a review of our manufacturing network. And that we want to communicate the outcome of that with you today with our aim to build a world-class food tech manufacturing network. We did conclude we saw, in particular in the candy category, a strong growth, both in the pack, but also in the pick & mix business, meaning that we are looking for further capacity expansion at the same time. We also were seeing that we needed to invest in upgrading the 3 relatively old plants in the middle regions of the Netherlands, Belgium, and we also were making our plans ready for our sustainability agenda to see how we could use such an opportunity to also make a big step forward in that area. We looked at a wide range of alternatives. I'll come back to that later on a little bit. But in the end, the best proposal, which we're very excited about as a long-term investment, which both will give us growth opportunities, savings, sustainability and future-proofing, the manufacturing network is to build a greenfield site in the Netherlands and closing the other 3 plants we have in the middle region being the 2, one is in Roosendaal and the one in Belgium in Dieren house. And this is a bit where we are. So if you first look at the graph, you can see that we have 2 plants in Roosendaal, and 1 in Turnhout, it's mostly candy production, in particular, the plants in Roosendaal and Turnhout are very similar, and then we want to build one new facility in the neighborhood so we also can leverage the skills and competencies of the people who are working with us for so many years. So we want to upgrade a new facility, which will enable further growth, significant cost savings, and also reduce our greenhouse emissions in accordance with design-based target initiatives. We would acquire and then start to build in 2023. And then on a phased overview, we would be operational in 2026. As said, we are talking about 3 confectionery factories in Belgium and the Netherlands. So the 2 factories in Roosendaal and Dieren House, which will be closing down around 350 employees would be affected but the majority will be able to get a job in new facilities. And yesterday, we started the consultation about this proposal, this intention with the European Works Council and also the local unions. Frans, over to you.

Yes. Thank you. So again, this proposal is expected to generate an additional annual EBIT in the range of SEK 160 million to SEK 180 million, with a gradual effect starting in 2025 and with full effect from 2026. And the savings are driven by a range of things, but that includes more automation, more efficient line layout, which allows for less operator, but also less white collar workers as well as blue collar support functions as a result of consolidating the sites. And there will also be cost savings from reduced waste and energy consumption in addition to additional EBIT from the expected growth. The overall program would at its completion, have incurred a total cost, including impairments of up to SEK 100 million net of sales of assets and the nonrecurring cost would be in the range of SEK 300 million to SEK 350 million, whereof approximately SEK 250 million would be charged to operating profit in the second quarter 2022 and be recognized as items affecting comparability. Now here, you see a simplified financial time line. And if you note the last role there on the CapEx. So the Capital expenditures, this proposed investment would incur, including capitalized interest of SEK 2.5 billion would be spent over the coming 4 years with the majority in 2023 and 2024. And then you see on the onetime cost, the initial charge in 2022 followed by 4 years, including the proceeds from sales of assets in 2026. Now in terms of financing, we have several options for financing the investments, including utilize our current facilities, the commercial paper program we have as well as strong cash generation. Our business has -- well, surprisingly generates SEK 2.5 billion, so the same amount over the last 5 years and will, of course, continue to have a strong cash flow over this program. And as we announced this, our net debt and leverage is at its lowest ever. And over the near term, we are working closely with our partners to finalize the most optimal way to finance this.

So sustainability plays also an important role in this decision. We have signed up for the Science Based Targets initiative. And of course, both consumers and customers are expecting companies of our size to also start really moving on sustainability. We looked at one alternative, which was probably the main. Other alternatives, we looked at, which was to upgrade the 3 existing plants, one of the plants, the bigger one in Roosendaal is a factory which is more than 90 years old. The other ones are more in the area of 40 years, and we really found it difficult to retrofit sustainability measures. On these plants without spending serious money as well and upgrading the plant to be able to work in a modern way again. And then not delivering any capacity, not delivering any savings. And then as I said, we did not really calculate the sustainability of savings or let's say, cost we would avoid into this proposal. So building a completely new plant from scratch, building insulated much less energy consumption. We already are using electricity from renewable sources, and we estimate a serious gas consumption reduction and the possibility to go over to other sources of energy. We'll work with recycling of the heat coming from the drying chamber that's one of the biggest consumption of energy in our production process. We have much less transportation because there's a lot of shipments between the plants, and particularly between the Roosendaal and Turnhout factories. New processes and systems and a lot of new technology, which we cannot retrofit on our old plants, which we could use now when we build from scratch. And of course, we're building being efficient and also waste water management and reduced waste in total. So there's a lot of positive impacts actually in this proposal for a sustainability agenda of Cloetta and as said, the financial benefits of this have not been put into the business case because that's not completely possible to calculate other than very concrete like savings of natural gas or reduced waste. Then concluding it's a big decision for Cloetta. I'm really proud to present this today to you because this is a long-term investment into the health and future proofing of our manufacturing network within the Cloetta group. It would also simplify our business enormously if we would go from 3 plants to one, new one. One more time, it gives us a lot of growth potential for the candy business by also being able to upgrade on the number of ships in that new factory. It's a lot of savings, which are important as well for our journey on EBIT. It all answers to the sustainability drive. And I said, it really also helps us to build a really good food tech company out of the candy business within Cloetta. We looked at alternatives -- many other alternatives, but we very quickly saw that investing in old plants to bring them up to standards without being able to give savings or a clear sustainability of future proofing that is not good. And then we are still lacking the growth potential, which we then would have to buy outside at the serious [indiscernible]. That's why we together with the Board firmly believe that this is a very attractive proposal for the long-term future of this business. So having said that, we'll come back to this probably many times. We will update you when -- there are decisions on certain parts. We have to talk with our union members in the local countries, the EWC, and will go into finalizing next steps in this process like buying land or designing on technologies, et cetera, but that is going to come as a next phase. So with having said that, we would like now to open up for questions.

[Operator Instructions] Thank you for holding until we have our first question. [Operator Instructions] Our first question comes from Nicklas Skogman, Handelsbanken.

So my first question would be, where you see the net debt to EBITDA ratio peaking at what level in what year roughly?

Yes. So Nicklas, we're expecting that to stay within our long-term target and external component. And it's sort of -- it will be hovering in between there over 2023 until 2025, and then coming back down again to the low levels that we have now.

Okay. Good. And in terms of dividend, there is no change to the dividend policy during this period?

That's correct.

Okay. And when you sort of measure this investment against other opportunities, for example, M&A -- how did that process look? I mean, I heard what you said about the difficulties about upgrading the old facilities. But looking at the sort of return on the investment, it doesn't look like it's super high?

I think we've always said that our strategy is, first and foremost, to facilitate the organic growth of this business, and this fits completely in line with both the organic growth as well as with the savings coming from this. And I understand the background of your question. But I would also take that into the factor the risk factor of such an investment because this is an investment we fully control ourselves, right? I mean we built the plant with partners, and we execute the process. And of course, an acquisition is always much more risky because you're going into new territories in new countries, maybe even new, new categories, the risk factor of such an investment is a lot higher for something not working out. And I think we've also seen that on a few of the acquisitions that it was not always as good as the business case was saying and here, the risk profile is a lot lower. And again, it really gives us opportunities to keep on growing the candy category further, which is by far our #1 category and we get quite some savings out of this. And that is something we will be happy with in 10, 20 years' time as well I would say. And then there are all sorts of additional benefit, but one we're really excited about is that it will also give us a lot of new technology and manage the food tech and position them in that way. I mean, we have just launched the real fruit products in now nearly all the markets where we have candy brands available. We're the only ones at the moment who can do that within Europe at that high level of fruit puree content and with the new facility, including the R&D people who will work in that new facility, we think we can really step that innovation funnel even further up in the future. So it's -- yes, it is different than an acquisition, less risky, a lot more on the core brands and the core business. And as I said, there's still a lot we can gain from expanding the core business and making them more profitable. And maybe last but not least, that this is also a region with the Netherlands in the middle, of course, with the levels of our markets in both the U.K. and Germany, where we're talking about what is that SEK 160 million potential consumers just over the 3 markets. The Netherlands alone is nearly as big as the Nordics with the 25 million potential consumers and the 20 million in the Netherlands. So it also really is a strategic choice to go over organic expansion based on the business and the brands we already successfully are driving there in that region and to make a further step on that strategy.

Okay. Sounds good. Then on -- I might have missed if you said it in the beginning of the call, but does this investment provide additional capacity compared to today in terms of tonnes and kilos?

So there's about 15,000 tonnes of potential extra capacity with this investment. We will have new -- a number of new mobile lines and also existing mobile lines these are the lines which are producing the Gott & Blandat kind of products, and then we can even go up a number of shifts to increase the capacity or the potential outputs. And that is a big plus in this business case that we can do to the 15,000 tonnes you should put in relation to around 70,000 tonnes we are selling of -- those kind of candy related products in total Cloetta.

Yes, just to clarify that. Yes, total candy in-house produced today is a bit over 70,000 tonnes. And then if you think about this type -- wine gum type candy like Gott & Blandat to [indiscernible] in Finland, Red Band, that's around 35,000 tonnes. So 15,000 tonnes is really material, whether you compare it to total candy produced today or this particular type of products that the plant will be primarily focused on? And then as mentioned, that is -- that is the capacity that comes with this investment, and then there is further room to expand within the site and what we're putting in place there has been [indiscernible].

Okay. So in percent in terms of your total production capacity today, we're talking around 15%?

On the total volume? Correct.

Okay. Very good. And those -- the SEK 160 million to EUR 180 million EBIT uplift that includes what you will sell based on the increased capacity?

Not quite. We have assumed some growth in the, let's say, the next few years that we have clear visibility on. But beyond that, that would be further upside to this business case.

Okay. So it's almost purely cost savings than the guided for EBIT uplift.

Yes. Correct.

That's our logic, right? From 3 locations with 3 canteens, 3 changing rooms, 3 management teams, 3 workshops, 3 boiler rooms or maybe even more 3 logistic departments, warehouses, et cetera, et cetera, et cetera. Now you basically go to one big box where you have the lines standing next to each other and with packing lines behind that which can be fetched from each of these lines with 1 management team. And it's a bit like the Levice we have in Slovakia, a lot of size matters actually in this business. Well, quite often, that of course, matters. So we can also see that what we have done is achievable based on the division part. And then we have also more automation in this plant being at the plant, which is then in a Dutch relatively higher labor, of course, than the Levice, but then we can have the big volumes in this plant and with the high automation, we can then still reduce the labor cost per kilo quite significantly. And I would also say, it puts us in quite strategic even nice place where you then put at Levice in Slovakia is the plant where we're doing a lot more of the complex products or [ pot ] which require a lot more manual labor and then the products which are really being produced every week and the high runners you produce them in the high automated plant. They have a bit of, how you say that, using the lower labor cost in the East, and then the complex -- sorry, the lower cost and automation in a more complex factory in the West. So that's a nice future situation to be in with 2 plants then for candy and then use them, those will be then the really big plants of Cloetta within Dublin with Jelly Beans and the gum factory in [ snake ] being too much smaller plants, we would have a factory network with 3 really big plants, which is really fantastic also from a complexity management and further improvements we would be able to make.

Okay. Very good. My last question is on the one-off costs of SEK 300 million to SEK 350 million gross, but up to SEK 100 million net. What do you think will be the net cash flow impact from these i.e., how much is noncash flow of your guidance for costs and offsetting income?

Yes, yes. So for the 2022, I mean the big item you see there is obviously impairments, that's noncash. And then we will have -- severances are expected, which is also going to be [indiscernible], of course, when the plants are closing. So the 2022 impact now will be, let's say, limited from a cash point of view from that respect. And then you have, of course, in 2025, 2026. That's where you see severances being paid, but we also have the proceeds from the sales of the land. The other thing is just on the CapEx side, the 2022 here, that's a lot of pre-engineering work. Of course, land purchase is expected, and then it really ramps up in 2023 and 2024, which gives us let's say, there's a bit of a buffer before there is a significant -- really significant cash outflow which is also good from a timing point of view, I believe, given some of the uncertainties in the world right now.

Okay. Good. And now another question has popped up. So if you impair the Dutch and Belgium factories now, then you will stop doing depreciation of those already starting now basically. So that will impact your depreciation charge over the coming years. Is that correct?

Yes.

[Operator Instructions] We have no further questions. Dear Sauvage Back to you.

So that was it for today. It was a very important intention for Cloetta for our long-term growth journey and focusing on our core business, and make that stronger. So thank you for your attention. And for sure, we will be back with more updates around this area. Thank you very much.

Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.