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

A very warm welcome to sunny Stockholm, and thank you for joining Cloetta's Q1 Interim Report Presentation. I'm Laura Lindholm, 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 dial in and ask your question live or alternatively post your question through the chat. The chat is already now open for questions. Over to you, Katarina.

Thank you, Laura. I'm pleased to present a quarter with exceptionally strong profitability improvement driven by our broad portfolio. But first, over to the agenda. Today, it looks as following. I will start with Cloetta in a brief, followed by our new strategic priorities and updated long-term financial target that we also shared at our Investor Day at the end of March. And then I will move over to our Q1 highlights. After that, our CFO, Frans, will take you through our Q1 financials. And as always, we wrap up with a Q&A. It's a pleasure to share the incredible journey of Cloetta. Today, Cloetta is Northern Europe's leading confectionery company and has been creating joy through our iconic brands for over 160 years. And our plan is, of course, to continue to do that for at least another 160 years. Founded in 1862, Cloetta has grown from a small confectionery business to, first, a Nordic and now a North European powerhouse in the industry. Our success is built on a foundation of a deep commitment to spreading joy. We believe in the power of true joy, and this belief drives everything we do. We have what we call 10 super brands. They are our most scalable brands, and they account for more than 50% of our total sales. We have operation in 11 countries and have around 2,600 colleagues in Cloetta. In 2024, our net sales reached SEK 8.6 billion and with an operating profit margin of 10.6%. Cloetta is committed to sustainability, and we have joined the science-based targets initiative, and our ambition is to reduce our carbon footprint by 46% by 2030. This spring, we launched Cloetta's vision, and it is to be the winning confectionery company inspiring a more joyful world. This vision is a commitment to excellence, innovation and the joy we bring to our consumers every day. We believe in the power of true joy, and this vision reflects our dedication to this purpose. We have also started to take concrete steps to enable this vision. At the end of April, we also shared a plan to create a more efficient operating structure through changes in our commercial hand group level function, and I will talk more about that later on. Cloetta continues to play in two business segments. It's the branded packed products, which is our products packed in branded bags. The second segment is Pick & mix, a confectionery experience where shoppers choose from a wide variety of candies and create their own individual mix. As individualization is a consumer trend, the whole Pick & mix category is currently growing a bit faster than the confectionery market in general. One of our key strength is our broad portfolio within all confectionery categories. We are the only major company present in all categories, which means we are active in candy, chocolate, pastilles, gum and Pick & mix. Having a broad portfolio gives us flexibility to adapt to different situations and trends. So for example, with the current high chocolate prices, it's, of course, beneficial to be in other categories as well. Our core markets are 5 markets. They are Sweden, Finland, Netherlands, Denmark and Norway. In all our core markets, our brands have been loved by generations, and we have market-leading positions. 81% of our turnover comes from our core markets and 90% of our sales come from outside our core markets. Cloetta is among the top 3 players in our Nordic markets. Interesting fact is that the 3 top players actually differ per country. So in Sweden, it's Cloetta, FATSO and Mondelez. And in Finland, it's Cloetta, FATSO and Orkla. In Denmark, it's Cloetta, Haribo and Toms, while in Norway, it's Cloetta, Mondelez and Orkla. But as you hear, Cloetta is actually the only company that stands on the podium in all markets. We also have a market-leading position in Sweden, Finland, Norway, Denmark and the Netherlands. And unlike the other players, we are strong in many categories. In candy, which is also our largest category, we are #1 or #2 in all core markets. In chocolate, we are very strong in countline chocolates, and in Sweden, we are #2; and in Finland, #3. In pastilles, we are the leader in Sweden, Finland and Denmark. And we are in gum in Finland and Netherlands, and there we are #1 and #2. And we have a clear leading position, as you can see in Pick & mix in the Nordics. And that, in a nutshell, is Cloetta. Now I will proceed to give you a brief update overview of our new strategic priorities and financial targets. For more detailed information, please view the recording of our Investor Day that is available on our website. After I was appointed CEO, I approached the assignment through 4 steps: First, setting the vision; then the strategy; thirdly, to review the structure; and finally, to execute the plans. In June, when I started, I started talking and listening to as many internal and external stakeholders as possible. This was the start to create the vision. In the end of March, we launched the updated strategies. And to support the implementation of our new strategies, we have now also reviewed our organizational structure. Our aim is to establish a framework to ensure Cloetta becomes a more focused and efficient company with improved speed and agility. This restructuring will result in a leaner organization with up to 100 fewer positions in Europe. Additionally, this change will support our journey towards profitable growth as it will yield savings of SEK 60 million to SEK 70 million. To make our plans clearer and easier to understand, we have created a strategic framework. We start, of course, with our vision that we want to be the winning confectionery company inspiring to a more joyful world. Then it comes to our strategic focus areas, and it is actually very much about focus. We need to make choices to create scale. Our first strategic priority is to increase focus on our 10 super brands in our core markets. This approach will help us seize new opportunity and achieve scale. Our second strategic priority is to grow beyond our core markets. We have identified 3 markets with nice potential, which are United Kingdom, Germany and North America, where we will have greater focus going forward to ensure stronger growth. Our third strategic priority is to excel in marketing and innovation. As we operate in an evolving market, we continuously need to be active and responsive to market development. The last year, we have focused on organic growth, and we have not done any significant M&A in the last 7 years. We are now open to explore M&As that fit our strategic goals and make good business sense. If we do M&A, we will accelerate for strategy. There is no M&A included in the plan to reach our long-term financial targets. To deliver on strategic priorities, we need, of course, some enablers. One is an operating model, including the organizational structure that is straightforward and efficient. And of course, what is a company without our people and culture? A black book. This is the fundamental of our company, and our aim is to continue to build strong and efficient team players. Linked to our strategic priorities and vision, we have updated our financial long-term targets. With the great plans we have, we are stepping up our long-term organic growth target and move from 1% to 2% to 3% to 4%. Our long-term adjusted EBIT target will remain at 14%, but we are committed to reach at least 12% by 2027. Historically, our net debt target has been around 2.5x. Considering our consistent achievement of this target in recent years, we have now set a new net debt target, and that is below 1.5x. However, should a compelling acquisition opportunity arise, we may temporarily exceed this, provided there is a clear path to deleverage. And then last but not least, our dividend policy has moved from a payout without -- sorry, within a range of 40% to 60% to minimally 50% of the profit after taxes. So a summary of Cloetta today and what we also presented at the Investor Day. We are the Northern Europe's leading confectionery company with a vision to be the winning confectionery company inspiring a more joyful world. We act on a noncyclical market with stable consumer demand outgrowing underlying fast-moving consumer goods. We have market-leading position in our core market, and we have iconic brand across diverse categories. With a strong and diversified customer base, where we have steady sales in traditional retailers and double-digit growth in incremental channels, we are ensuring a broad market reach and resilience. We are on top of the changing consumer market dynamics. In these rather turbulent times in the financial market, we offer investors a resilient stock in a noncyclical market. And now back to the quarterly update. As previously mentioned, we had a quarter with exceptionally strong profitability improvement driven by our broad portfolio, and I'd like to highlight some key takeaways. So thanks to our broad portfolio, we had another quarter of better profit, and this was achieved despite high continued raw material costs. The profit improved even though Easter was later and affected sales in this quarter. Q1 was down due to phasing of Easter, but we expect clear profit growth in the first half of the year and the second half of the year to be close to our new long-term target of 3% to 4% sales growth. Adjusted profit is 11%, and that is up 1.8% from last year. And we are reaching another successive all-time low net debt over EBITDA, well below our new long-term target of 1.5x. And now it's time for the financials, and I hand over to Frans, who will talk you through the Q1.

Thank you, Katarina. So for the quarter, we delivered our seventh consecutive quarter with sales above SEK 2 billion, although for the first time in 4 years, a quarter without organic sales growth. And the last time this happened was in Q1 2021 when the sales met largely pre-pandemic quarter 1 2020. So the organic sales are down 1.1%, and there are a couple of contributing factors, which I'll break down for you when we look at the sales by segment. But the one single key takeaway is that sales are lower than last year due to the later celebration of Easter this year. Those sales came back in quarter 2 and we expect continued organic growth for the full first half of this year, as Katarina mentioned. Now beyond organic growth, the quarter was also affected by the sale of the Nutisal brand in early June last year as well as a strengthened Swedish krona. So the SEK 2 billion in sales overall is actually despite those drivers. So moving then to the sales by segment. And in the top half here, the branded packaged. So sales were down 3.4%. And it is the first time, as you can see on this slide, where we have a negative number. So let me spend a bit of extra time on this. So the decline is driven by primarily two things, in part by the Easter phasing, although not to the same extent that it affected Pick & mix. And secondly, in line with our strategy and as also shared in the Investor Day, end of March, we have continued to optimize our product portfolio by taking out lower-margin SKUs, including discontinuing certain contract manufacturing. Now towards the end of the quarter, there were also to maybe a lesser extent, two other things that affected this. And firstly, which is also in line with our strategy is that we held firm on our fair pricing and as a result, saw some lower sales with an important customer towards the end of the quarter, and that has also been the case in the past, that situation has since been resolved. And finally, with all the food price inflation across retail in the last couple of years, it is affecting consumption. And we mentioned here earlier, I think Katarina mentioned, especially in chocolate, and that also did affect our sales, especially towards the end of the quarter. But then for Pick & mix, Pick & mix grew a healthy 4.6%, and that is despite the Easter phasing. And actually, if you look, you can see the Easter effect on the slide. In 2024, Easter was fully in quarter 1. And as a result, you see that quarter 2 was quite soft. And now in 2025, Easter is back in quarter 2. And then just to be clear, in 2026, Easter will be in the very beginning of April. So most of our sales for Easter next year will come again in quarter 1. So this is really just something that's shifting back and forth. Overall, though, for the first half of the year, eliminating the effect of the phasing, we therefore, expect continued profitable organic growth. And on the note of the profit, let's look at this exceptionally strong step-up versus last year in the quarter. So we're very pleased with 11% operating profit adjusted. Now I should say on a reported basis, so excluding the adjustment for comparability, the profit was much, much stronger, over 17% operating profit margin and over 40% gross margin when you look at the numbers. Now this is due to the accounting effect of the decision to not proceed with greenfield project. That discontinuation resulted in -- and we mentioned this in our press release in February, it resulted in a onetime noncash net gain on account of released provisions and reversed impairments, partially offset by some impaired capitalized projects and other borrowing costs, but net SEK 125 million gain recognized in items affecting comparability and SEK 9 million recognized as a cost in the net financial items. So at the back of this presentation, we have, and we've done this before as well, added a table that bridges the reported and adjusted results to make it super clear. Nonetheless, on an adjusted basis, our 11% operating profit was a clear improvement versus last year's 9.2%, so up 180 bps. Now 11% places us just above last year's full year average, which was 10.6%. So the improvement is also versus a softer Q1 last year. So you couldn't really assume now that we made a permanent step-up of 1% to 2% EBIT margin just because we shared a new strategy at the end of March. I mean that would have been quite fantastic. But of course, it will take a little bit longer time than that to implement it. Now the lower EBIT margin last year, as you may recall, was largely on account of the rising cocoa input cost and the inevitable lag that we can get in our pricing. Now the comeback here is then thanks to our continued work with our total portfolio, including the mix and we do have had the ability to take cocoa pricing given our strong brands and leveraging the breadth with respect to categories and across markets. Now in the quarter, profitability was further helped, of course, by the effects of having continued to optimize the portfolio as part of our net revenue management efforts, but also lower promotional spend on account of the later Easter, in the sense that a lot of those activities moves now into Q2 together with the sales and with respect that some promotional activities was on hold, end of Q1, pending the pricing negotiation that I mentioned that affected the sales at the end of the quarter, but which have now been resolved. So importantly, the step-up in profitability is not due to any reduction in the investments in our brands. On the contrary, that continued investment enabled our comeback and continued pricing. Let's look at the 2 segments separately. So on the top, the branded package profit is driven by all the factors mentioned on net revenue management contributing to that. Now that said, the Branded Packaged segment profit is, of course, up versus last year, but it's not back to where it once was. And we will continue this work. We presented that also during the Investor Day, how we will drive this. And actually, in the quarter, the expansion of the Mynthon brand, the pastilles, across the Nordic is one example of that effort. And actually, from a volumes point of view, our pastilles volumes grew in the quarter and both pastilles and gum together outperformed the other categories with respect to volume. Now on the bottom half, Pick & mix continued strongly here. Now with the phasing of trade spend to quarter 2 coming on top of the continued journey to strengthen the profitability, that, of course, gave a bit of an extra boost, getting us to almost double-digit margins in the quarter. But importantly, I think this shows why we, during the Investor Day, also raised the margin target from Pick & mix from the prior 5% to 7% to a new 7% to 9%. Now the SG&A, that is up versus last year, and that is in part due to that we actually held back on a lot of discretionary spend in Q1 last year to support the bottom line. The total spend of SEK 484 million is coincidentally exactly in line with the average spend in the last 8 quarters. But then, of course, that also includes items affecting comparability. Nonetheless, Q1 last year was low. And at the time, I spoke about using all the levers to our disposal, so that's what we did. Now we have another year of general salary inflation for our employees and both in services. That, together with the investment in our core brands, drives the increase. Now we also said in Q4 that this was an area where we would now also further increase our focus. And of course, last week, we announced changes to our organizational structure to better align to the new strategy and also with the result of creating a more effective organization, and that will, of course, help with the cost within a fairly short time. Coming then to our cash flow. We are again reporting a very strong quarter. We delivered SEK 199 million of free cash flow, which is just about double of what we did in Q1 2024. The main driver for this improvement is that we've been able to hold working capital fairly stable, even a little bit favorable, whereas last year, working capital increased with a much more significant surge in inflation we had then. On the CapEx side, SEK 32 million is on the lower side of our normal spend due to a number of factors, but this is also in line with what we presented during the Investor Day, where we've held back on some activity, pending out setting the new strategy, but where this figure will rise over the next 5 years to secure the growth and the profit. Now on the very left-hand side of the graph, if you wonder, with the increased operating profit adjusted and the onetime gain in net items affecting comparability, why is cash flow before changes in working capital higher last year? And the answer is because, first of all, the onetime gain, as I mentioned, was noncash in nature, so it doesn't affect this. And also last year, we benefited from a favorable timing on income tax payments. So the underlying result this year is truly better. And of course, the favorable timing on the income tax payments, the taxes have been paid because, as we all know, there's only 2 things certainly in life and paying taxes is one of them, which brings me to my final slide, where we have again closed the quarter with a net debt over EBITDA well below our target, which is, as Katarina mentioned, to now be below 1.5x, and we've done so with a new best ever of 1.1x. Now this leverage benefited both from the higher EBITDA, but also from lower net debt, which is also at an all-time low of SEK 1.3 billion. Finally, as we closed the quarter, we have plenty of access to additional unused credit facilities, commercial paper and cash on hand, including about SEK 1.6 billion in credit facilities related to the greenfield. Now since then, actually it was on April 14, we completed the cancellation of those greenfield facilities. And if I reduce the quarter end unutilized access to cash with that amount, we still closed the quarter with a very healthy access to another SEK 2.7 billion as shown in the table on the right. So again, I conclude. Our financial position continues to be very strong. And with that, back to Katarina.

Thank you very much, both Frans and Katarina. It's now time to open the Q&A. Moderator, do we have any questions from the line?

[Operator Instructions] At the moment, there are no questions registered.

Thank you. Then we will take the ones from the chat. So the first one is from Stefan Stjernholm at Handelsbanken. Less contract manufacturing had a negative impact on sales in Q1. Was this a temporary impact? Or can we expect an impact also in the coming quarters?

If I take that one, no, it's not a temporary impact. This is basically overseeing the contract manufacturing agreements and noting that the profitability was not at the level that we expect, and we have exited those contracts. So that will carry through, for sure, unless we would get much more profitable contract manufacturing offers, that is...

Very good. And then can you quantify the negative Easter impact on sales and EBIT in Q1?

Yes. So actually, we did this once before. So the last time where we had this kind of a shift, except when it happened during the pandemic years when the numbers were very difficult to read, that was in 2019 when it shifted this far. And at that time, we talked about basically up to SEK 40 million. Now of course, we've seen a lot of growth since then. So we're talking about around SEK 40 million to SEK 50 million now in Swedish krona that shifted between the quarters. And I'm giving you a range because it's not an exact science how much that is. But what we can say with confidence is that it is a phasing and that for the first half of the year, we will see continued clear profitable growth.

Very clear. And then the last one from Stefan. We know that on group level, sales in the U.S. is fairly limited, but can you comment on your development and growth in the country in Q1?

Yes. As I said, it is confirmed. It is still very limited. And we can't really comment on it because it's still small. But we are -- actually last week, we were setting up our first store with CandyKing and the Pick & mix concept. And now we're going to see how that develops. And if it goes very well, we will, of course, continue to roll this out. But the demand is still there from the Swedish candy in the North America.

Very good. Thank you, Katarina. And then operator, I think we have Adrian Elmlund from Nordea on the line.

Yes. Please go ahead, sir.

Can you hear me?

Loud and clear.

Very good. Happy to see the results. I have a couple of questions here. Firstly, could you elaborate on the reduction of SKUs that you have done? Does this mainly affect packaged products? Or what does the split here look like? Is this also something that we can continue to expect in the coming quarter?

Okay. Maybe I'll take that one. So I think there's 2 types of reduction. When we talk about reduction of SKU here, we're predominantly talking about on the branded packaged side that we're cleaning that up. But obviously, within Pick & mix, there is a constant revision of the assortment. And that has always been part of the journey to drive profitability there. But here, when we talk about rationalization, it's on the branded package side. But of course, all of these actions also take place keeping an eye on if there's an effect from the Pick & mix side.

Right. And is there more to come sort of say?

Yes. I mean it's -- as any good FMCG, this is something that you should do as part of your regular maintenance. Now of course, what we have said with the new strategy, stronger focus on the super brands, stronger focus on specific markets outside the core markets, et cetera, we are intensifying the work here, both to get, let's say, a rationalized portfolio, but also to harmonize more across it, which drives its own efficiencies and reduces complexity in supply chain, which increases your capacity to produce volume. So there's a lot of aspects of this, and we will continue to pursue that.

Right. You also mentioned some increased marketing costs in the quarter. Is it possible for you to quantify this increase? And how should we think about marketing costs throughout the rest of the year?

So actually, when we closed Q4, I did flag that we were going to step up on the marketing expenses, and we did that. I don't think I actually gave a number for it. But as you can see on the SG&A increase, a fair chunk of the SEK 30-odd million increase there relates to marketing, let's say, somewhere between a third and half of that. We will continue to support our brands in an important way, specifically as there is an effect on consumers on multiple years of rising prices. It's not just for Cloetta, it's across the marketing category. And then we see that investing in the brands drives consumer preference, that drives sales, that helps our customers, the retailers and that then generates sales for us. So that's definitely something that we will continue to do.

Then another question here on production capacity. Could you remind us the plan that you have for investing in capacity and in your factories, contract, perhaps outsourcing production? Like when are you feeling bottlenecks, et cetera? How should we think about that going forward?

I mean the first thing, of course, that when we announced the decision not to continue with the greenfield project, we also shared that we had identified a number of different options to solve for both capacity and savings and sustainability, which was, let's say, the three things that the greenfield project aim to solve for. And that includes then a mix of investment in our own production facilities as well as using contract manufacturing. When we had the Investor Day, I pointed to that over the last 5 years, our spend on CapEx as a percent of NSV was around 3%. With the greenfield over the next 5 years, it would have gone to 8%. But now based on the assessment we've done, we're saying that it will be between 4% to 5% of NSV in the next 5 years, and then it will drop down to, let's say, more normalized 3% to 4% going forward. Now exactly what the options are and which is our preferred options, that is not something that we are ready to disclose yet.

Thank you very much. We do not have any questions in the chat, no new ones. Do we have any new questions from the lines, operator?

There are no more questions at the moment.

Thank you very much. That then concludes our event today, and we now take the opportunity to remind everyone of our upcoming IR events. Our next report Q2 is published on the 17th of July, but before that, quite a lot is happening. You can meet us physically at Handelsbanken Nordic Small and Mid Cap Seminar in Stockholm in the beginning of June. And then on the 12th of June, DNB Carnegie is hosting a plant visit to Ljungsbro in Sweden. Before we meet again, we, of course, hope that you get the chance to enjoy many of our products during joyful and memorable occasions. Thank you very much.

Thank you.

Thank you.