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

A very warm welcome, and thank you for joining Cloetta's Q4 interim report presentation. I'm Laura Lindholm, I'm the Director of Communications and Investor Relations. Our CEO Katarina and CFO Frans will first go through our results, after which we will move to the Q&A, where you, as per usual, either have the possibility to dive in and ask questions live or alternatively post your questions through the chat. The chat is already open, so you are already free to post your questions. Over to you, Katarina.

Thank you, Laura. So I'm super proud to present an exceptionally strong quarter, which ended a very strong year with continued profitable growth. But before we dive into the details, first, over to the agenda. Today, it looks as following. I will start with an updated company overview reflecting the result from 2024. And then I'll move over to our Q4 highlights. Our CFO Frans will walk you through both our Q4 and year-to-date financials. And after that, I will shortly highlight a few things related to our strategic priorities. And as always, we wrap up with a Q&A. So I would like to start by sharing a brief description of Cloetta that also has been updated to reflect the result of 2024. We are a leading confectionery company in Northern Europe. We are proud how our loved brands and product bring joy to memorable occasions. Our primarily goal is to always be consumer-centric as we are convinced that this is the basis for us to grow and our leading brands to flourish. I have more than 2,600 colleagues at Cloetta, and we have sales in more than 60 countries. Sweden continued to be our largest geographical market, followed by Finland and then the Netherlands. But I'm also pleased that during 2024, Denmark and Germany have increased their share of our total sales compared to last year. In terms of product categories, candy is our most significant one, followed by chocolate. Pastilles and chewing gum stands for a bit less, 14% of the portfolio, but they are important category as they contribute to a profitable mix. We focus on developing leading brands. 10 of our brands account for 50% or more of our net sales, and we have 2 reporting segments, Branded packaged products is what the name implies, all our packaged branded products. Pick & mix is candy and natural snacks that are picked by the consumers and are primarily sold through our CandyKing brand. In 2024, Pick & mix grew by 2 percentage points and now accounts for 28% of our total sales. As previously mentioned, we have a very strong quarter with continued organic growth, and we are further strengthening the profit, and I'd like to highlight some key takeaways. So we continue our strong growth, both annually and quarterly. In Q4, we delivered SEK 2.3 billion in net sales, which is equal to 5.7% organic growth. And during the year, we reached SEK 8.6 billion, which equal to 4.7% organic growth, while we also continue to strengthen our profit. The total volumes were stable, whereas Pick & mix grew faster than the Branded products. As mentioned in both Q2 and Q3, Pick & mix as category is the fastest-growing confectionery segment in the Nordics. In our last report, we flagged for the high cocoa prices, and at the same time, we took on the challenge to continue to deliver double-digit adjusted profit. And I'm very pleased to say we more than met this challenge and reached an adjusted profitability of 11.3% in the quarter. The positive profitability was impacted by higher gross profit, even it was -- if it was partly offset by increased marketing investment in our core brands. And I'm also happy to once again share that the net debt over EBITDA is again well below our long-term target and landed at 1.3 and the dividend proposal is SEK 1.10 and it's in line with our policy and target. So now it's already time for the financials, and I hand over to Frans, who will walk you through both our Q4 and full year financials.

Thank you, Katarina. So if any of you looked at our organic growth and then you wondered if you accidentally picked one of our old reports, then I can understand why. So in quarter 1 2024, we grew organically 5.7%. In quarter 3 2024, we also grew organically 5.7%. And now for Q4 2024, we are, for a third time in 1 year, reporting an organic top line growth of 5.7%. So this is really a coincidence that the growth is exactly the same, but it's not a coincidence, it's that this is our work reflected from investing in building our core brands and in-store execution muscle, and that is continuing to pay off. Now the 5.7% organic net sales growth in the quarter is driven by an improved and respectable 1.6% Branded package growth and an outstanding Pick & mix growth of 17.3%, then partially offset by the effect of the sale of the Nutisal brand. Let me comment on that, as I also did in prior quarter to understand how our continued business is doing by organic growth, I mean our ongoing business, excluding Nutisal. In accordance with the relevant accounting standards, comparable numbers have not been restated for the sale of the brand. And going forward, you will also continue to see that we report sales on the nuts category given that we will continue to sell nuts as part of our Pick & mix segment. Now total sales of SEK 2,285 million made this quarter our sixth consecutive with sales above SEK 2 billion. And it brings, as Katarina mentioned, our full year net sales to SEK 8.6 billion, and that makes 2024 our first full year of sales where we are closer to SEK 9 billion than what we are to SEK 8 billion. And that is on a reported full year 3.8% growth, given an organic 4.7%, less the 0.9% due to Nutisal, while on the full year basis, the currency effect was 0. Let's look at organic sales over time by segment. So starting with the Branded package sales on the top, 1.6% up. And you can see that we have been hedging that gradually upwards the last few quarters from 1.2% to 1.4% and now to 1.6%. Now in that growth, there are some important dynamics, which really becomes visible in the profitability. And I would just summarize that in one word, and that is mix. We flagged earlier this year on the rising cocoa prices and how we were going to do everything we could to manage through the hit of that. And as Katarina said, we did. Firstly, we deemphasized sale of chocolate in quarter 4, choosing to put our focus and trade activities instead on our other categories, and that is something that is probably unique to Cloetta. We are the only major player with a diverse confectionery portfolio where we have leading or strong positions in packaged candy, in chocolate, in pastilles and gum and in Pick & mix. And certainly, we're the only listed company with such a stable and diverse portfolio. Now we're not giving up on chocolate, not at all, but those cocoa costs will be a better match to our revenue as our new pricing fully kicks in. Secondly, and on the note of strong sales, in quarter 4, we continue to invest strongly in the long-term health of our brands, holding at similar levels, as we've said before, as something I also flagged back in Q3. Now we did scale back selectively some of the more tactical promotions to strengthen the bottom line. In total, actively managing our trade spend in the quarter, given the cost pressure gave us what I would call a little bit of a onetime extra help. Now finally, on the mix, I'm also pleased to say that while our pastilles volumes were slightly down versus last year, our efforts here around Läkerol and Mynthon and other brands and helping our customers build better sales in their stores moved in the right direction. And Q4 sales development was better than year-to-date and a decline year-to-date turned into a growth in our biggest markets. And looking at it from a volume perspective, I've commented on this in the past as well. Our Branded package volumes were down about 700 tonnes, but the majority of that was in chocolate. At the same time, our Pick & mix were up almost as much as the package were down. So again, we're pleased to report stable volumes. And again, a result of continued investments in the brands, our fair pricing approach that allows our customers to continue to really attract shoppers. With respect to the Pick & mix segment on the bottom, the lower half of the slide, up 17.3% on those volumes, recording another quarter of highest-ever net sales. Still, for Pick & mix, of course, the concern has long been the profitability. So let's look at that instead. Firstly, profit versus last year, total company. Note here that the first column there shows the much stronger volume mix in the quarter, up SEK 15 million, where year-to-date Q3 had a decline. So this has been turned into positive territory. And obviously, we've spoken about the mix. So despite Q4 volumes actually being softer, it is favorable. Now that extra SEK 15 million brought EBIT margin probably from mid-10% to over 11%, and we are incredibly pleased with 11.3%. The performance brings our full year margin to 10.6%, up about 100 bps versus 2023 and with extra help from the net revenue management you could assume that maybe some of that 11.3% will shave off when we start 2025. Still, there are some points to make here. Firstly, we said we do everything we could to offset the higher cocoa cost and that sustaining year-to-date double-digit margin was a good challenge that we were embracing and I'm happy to say that and we did that also if not factoring in anything extra from managing around the trade spend. So it's promises made and promises kept. Secondly, we have improved our margin 300 bps the last few years, of which about half in the last year alone. So despite the negative effect of compression, what we are doing is working. And importantly, in absolute terms, SEK 258 million in the quarter is our highest quarterly profit ever. And the rolling 12 months or the last full year profit is also the highest ever. That brings us to SEK 910 million on the full year. And as you can see, without any aid of currency translation. So if I'm looking for another good challenge with Katarina, so I suppose the next milestone would be to get to SEK 1 billion in annual operating profit. Now you also see that the price versus cost is favorable here. And speaking of fair pricing, let's understand this by looking at the segments one over the other. So considering then price versus cost and looking at the Branded packaged profit, it is very clear that the total company step-up is not driven by gains in pricing at the expense of our consumers or customers. That said, we are pleased to have, let's call it, buck the trend and show a quarter with profit up on the branded side and that the margin is above 13%. We will continue to focus on margin-recovering initiatives here, be they in pricing, promotional efficiency, accretive innovation in supply chain while continuing to invest in the long-term health of our brands, given that we are still a bit behind where we used to be. Now instead, the Cloetta step-up is again coming from Pick & mix, where we delivered yet another quarter in line with our margin target of 5% to 7%. As mentioned before, we worked for a long time to correct the profitability in Pick & mix and for a long time, a lot of that was not visible externally due to the increasing input cost, but now we have 4 consecutive quarters with profits inside that range, given efficient merchandising, improved product assortment, improvement around fixtures and also pricing have been caught up on top of healthy volume growth. Now moving to the net side of SG&A. So that is, again, driven by salary inflation for our employees, both in services, while marketing spend, we have continued to drive. The country and regional mix of Pick & mix sales also led to an increase in merchandising costs above that of the volume increase, although clearly, as you noted, it has been managed within the overall P&L for the Pick & mix segment. Also in total, we're managing to offset the higher cost in the rest of the P&L. Although the spend of NSV is higher than where we want it to be. And as mentioned also earlier, this is an area where we are now further increasing our focus. I could also mention here that Easter in Sweden is a lot about candy and Pick & Mix. And there now in 2025, that holiday is almost 3 weeks later, into quarter 2 than it was in 2024. And that will affect the timing of the sell-in for Easter, of course, in line with our normal seasonal pattern. It could also affect a little bit on how we spend on the A&P. That said, though, I can flag here that we will step up spend on our core brands also in Q1 2025 to ensure to support the long-term continued volume growth. Then on the waterfall here of 14%, so while our profit is up and our margin is up, including the 300 bps since the pandemic, there is some way to go before our target of 14%, it's partly due to the compression effects of the fair pricing and partly with the need to strengthen the mix in the Branded packaged segment, still given the decision to put greenfield on hold and reassess the project and alternative options. And as we flagged for an Investor Day, I think I will come back to this bridge a little bit later in the quarter. Coming then instead to our cash flow. We are again reporting a very strong quarter. We're delivering SEK 264 million of free cash flow on a profit after tax of [ SEK 158 million ]. So that's a pretty strong 167%. Now you can see that Q4 last year was an even stronger quarter. So let me break this down. Firstly, as you know, there is seasonality in our cash flow where we tend to generate most of it in the back half of the year. And in 2023, about 80% of the free cash flow was delivered in Q4 alone, whereas this year, less than half of the full year free cash flow is delivered in Q4. So it's more -- you get a truer picture when looking at the full year. And there, it is clear that our cash flow is stronger this year, SEK 602 million, up SEK 106 million versus what we did in 2023. Now the free cash flow, of course, and you know this, does not include any of the proceeds from the divestment of the Nutisal brand that comes on top. Part of the improvement is due to the efforts to increase the focus on cash generation and partly is due to the inflation having slowed down somewhat and working capital not increasing despite the increased sales and despite that inventories were not materially down during the quarter. On the CapEx, SEK 44 million is on the lower side of our historic spend due to several contributing factors, is partly phasing of spend and to some extent, as plants affected by the preparation for the greenfield and that the project is under review. Regardless of the outcome of the reassessment, we will revert in the Investor Day with new input around our long-term CapEx expectations. So for my final slide, and I really like ending with this slide. Not only does it make sense being in a way the outcome of the sales and the profits and the cash, but it also tend to allow me to always end on a high note. So again, we closed the quarter with a net debt to EBITDA, well below our target of 2.5, at a lowest ever level of 1.3. And you can see this in the graph to the left, the red line, our leverage consistently trending downwards with a few bumps only for the dividend payment in Q2 each year. Now new for this quarter is that the absolute net debt, so not only in relation to the EBITDA, but in absolute terms is also at an all-time low of SEK 1.6 billion. Thirdly, we continue to have access to a significant amount of additional unused credit facilities, commercial papers, and we have cash on hand totaling SEK 4.3 billion, of which less than half, EUR 160 million are facilities made available for the greenfield now on hold. So for yet one more quarter, I would conclude that our financial position continues to be very strong. And I believe that the Board's proposal for an increased dividend to SEK 1.10 is well founded. And with that, back to you, Katarina.

Thank you, Frans. And then I would like to give a few highlights related to our current strategic priorities. So as mentioned also by Frans, Frans, I would like to start with an update on the greenfield plant project. So in Q3 this year, we announced that we are putting the greenfield plant project on hold, and this is to reassess the plant and other option. This we did due to the increased risk related to the energy supply, which also impacted on the timing of the planned startup. The project is still in an early phase and the investment are so far relatively limited. So also what is important to understand is that the reassessment is done in the light of everything that has changed since 2022. Our ambition is, of course, to accelerate the profitable growth, and there are opportunities in our network to compensate for the volumes that in the midterm were planned to be produced by the greenfield. We will come back to the result of the reassessment at the latest by the end of this quarter. So and as maybe one can expect, when a new CEO takes over, we have, of course, during the past month in the group management team, been working on what the long-term way forward for us at Cloetta should be. So I really look forward to dive into this topic in our upcoming Investor Day held in Stockholm on the 27th of March. You have all the info you need related to the event on the website, and I really look forward to seeing you there. And by this, this concludes this update, and we now move over to the Q&A.

Thank you very much, Katarina, and thank you, Frans. It's now possible to either dial in and ask questions live or alternatively pose your questions through the chat. So let's first check if we have any questions on the telephone lines. Operator, over to you.

[Operator Instructions] At this time, we do not have any questions. Back over to you.

Thank you very much, operator. So we have quite many questions either sent in by the chat or then actually a few also sent in before we even started. So let's start with the first one comes from Stefan Stjernholm at Nordea. What amounted sales in the U.S. in 2024? Do we have to wait until the CMD for a CapEx forecast for 2025? If not, what do you expect? And then a second question, high-input prices, you compensated in Q4. Can we expect the same in the coming quarters? Or is there a potential to delay the impact?

So I can take that. So first of all, I'd love to share our U.S. numbers. But so far, what we're saying, it's not a big part of our business, but it's certainly an opportunity, and it's a huge market. And where we do have the business there, we are up about 30% in the year of 2024. Now with respect to the CapEx forecast, I think this question was probably before I went through the cash flow. Yes, on the Investor Day, we will provide an updated view on CapEx going forward, which will then, of course, also follow with the decision around the outcome from the reassessment relating to the greenfield. So they sort of go together, obviously. On the high-input prices, can we expect the same in the coming quarters or is there potentially delay in the impact? So I think if you ask me on what will happen on the cost side, I would say that, of course, no one exactly knows what happens on the cost. I think a fair answer to say, I expect that we will be able to continue to manage this in the same way as we have done previously, which is that we are continuing to strengthen our profit in the company. And now there is often a bit of a delay between when costs move up and when the pricing is implemented, but we also have other tools to help manage that gap.

Excellent. Thank you, Frans. We continue with Nordea. Do you expect marketing investments to be up year-on-year also in 2025?

So for quarter 1, yes, we will continue to do that. But also as we've done in prior years, we are quite light on the finger, and we're seeing what happens with the volumes, what our competitors doing. And when we need to push a little bit harder, we do that and then we were holding back, we can do that. But year-over-year, we have been increasing the marketing spend. So if past is prologue, then we will continue also throughout 2025 on a total basis.

Thank you. And then a question from one of our shareholders. How should we think about high cocoa price going forward? When should it affect your margins negatively?

Yes. I mean -- so obviously, we managed this in the quarter, in quarter 4, and we managed this also for the full year. Now cocoa costs have been continuing to go up. But I think, again, the short answer is you should expect that we are able to manage this.

Excellent. And then we have some questions from Danske Bank. Yes, how do you expect cocoa prices to affect Cloetta in 2025. And I think we answered that, nothing to add on that one. We take the next one. What can be done to further strengthen the margin? Is there room for higher prices? And this is referring to the Pick & mix segment.

We continue to work with the Pick & mix and always strive to do it better and improve the margin. But I believe that the greatest opportunity we have now with Pick & mix is to -- we have created a repeatable model, and there are possibility for us to enter into new markets and customers with this concept.

Very good. Thank you. We continue with Pick & mix. In which region is Pick & mix growing the most for you?

So the wonderful thing is actually every country in the Nordic market is growing double digits. So it is really a bit of a trend. And in some ways, as you might have heard, Katarina say in the interview at [indiscernible], it's even in the U.S., you see this. So it is an interesting trend. And it's interesting that we now have a repeatable model, but we can make a decent profit on this that we can then expand with.

Thank you. And then the final question from Danske Bank also related a little bit to the previous one. You're talking about the USA, if you were to choose to invest more in this region, what would the require -- what would that require in terms of investments.

We are in a very early stage in the U.S. And so we are still in an investigation phase. So when we know that, we will come back. But currently, we are investigating how it's looks like.

Excellent. Thank you very much. And operator, just to check, do we have any questions on the telephone lines.

No, we do not have any questions from the telephone lines.

Very good. I think that concludes our Q&A. We take the opportunity to remind everyone of our upcoming IR events. Our next report the Q1 is published on the 7th of May, but before that quite a lot is happening. So the annual and sustainability report is published on the 11th of March, followed by the AGM on the 10th of April. Katarina, of course, already mentioned the Investor Day, and I really share her excitement for this event, and we really hope that many of you have the possibility to join us either physically or digitally. And then our first seminar following the Investor Day will be the Handelsbanken Nordic Small Mid Cap Seminar, which will be held in Stockholm in June. Before we meet again, we, of course, hope that you get the chance to enjoy our products during many, many joyful and memorable occasions. Thank you very much.

Thank you.

Thank you.