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

A very warm welcome, and thank you for joining Cloetta's Q2 Interim Report Presentation. I'm Laura Lindholm, the Director of Communications and Investor Relations. As per usual, our CEO, Katarina; and CFO, Frans, will first go through our results, after which we will move to the Q&A, where you either have the possibility to dial in and ask questions live or alternatively post your question through the chat. It is already possible to add questions in the chat. Over to you, Katarina.

Thank you, Laura. Today, I'm proud to present our second quarter 2026 results. In this quarter, our Superbrands performed very well and profitability was exceptionally strong. Looking at the first half of the year, we executed fully in line with our strategy and delivered also against all 4 of our long-term financial targets. But first, over to the agenda. Today, it looks as following. For the ones that have not listened to us before, I will start with a recap of our strategic framework and our financial targets. I will today also share an update on how we continue to step up our operating model and are creating a stronger foundation for growth, flexibility and long-term competitiveness. After that, I'll move to our quarterly highlights. Our CFO, Frans, will then walk you through the financials. And as always, we wrap up with a Q&A. I will now briefly walk you through how we bring our vision to life through our strategic framework and then in relation to this, also our updated financial targets. To learn more, please see the recording of our Investor Day 2025, which is available on our website. Our vision really capture what we are all about. It's not just something we say. Our vision is to be the winning confectionery company inspiring a more joyful world. For us, it's a real promise to do great work, to keep innovating and most of all, to bring joy to people every day. This vision is what guides us. It what keeps us learning, improving and leading the way in our industry. We have created a clear strategic framework to guide us forward and right at the center is our vision. Our strategy is about focus, clear choices that will help us scale, grow and make the biggest impact where it truly matters. We have 5 core markets, and that is Sweden, Denmark, Norway, Finland and the Netherlands. And today, around 80% of our total sales come from these markets. Our first priority is to focus on our 10 Superbrands in our core markets. These are the brands where we see the biggest opportunity for growth. By expanding them further, we can reach more consumers, grow faster and build stronger positions in the market. Our second priority is to look beyond our core markets. We have identified 3 markets with strong potential, and that is U.K., Germany and North America. Our third priority is to strengthen our marketing and speed up innovation. Consumer needs are constantly changing, so we need to stay ahead, not only by following trends, but also by helping to create them. We are also open to exploring M&A when they fit our strategy and create value. But let me be clear, acquisitions are accelerator, not a requirement. We do not depend on M&A to achieve our financial targets. To make all of this happen, we need the right foundation in place. That means having an efficient way of working and an organization that supports our strategy. I'll come back to this later in the presentation, and I will share an update on the progress we made in enhancing the operating model. And finally, it all come down to people and culture. They are at the heart of everything we do. Our culture shapes how we work together, and we have now built an organization that is strong, capable and filled with joy. In March 2025, we updated our long-term financial targets to match our strategic priorities and our vision. With a clearer plan in place, we raised our long-term organic growth target from 1% to 2% to 3% to 4%. Global forward-looking inflation concerns a continue to be high, mainly as a result of the ongoing political uncertainty, and we hence expect the societal and political pressure related to food pricing to continue throughout the year. Our long-term adjusted EBIT target is 14% with a goal to reach at least 12% by 2027. As you can see in our report, we're already above 14% this quarter. The uplift is part of our plan to step up investment during the second half of the year, including onetime costs related to our geographical expansion as well as an upcoming Superbrands product novelty launch. Our EBITDA over net debt ratio remains well below our long-term target, also including the effect of the increased dividend. As I also stated the last time, if a strong M&A opportunity appears, we may go above our long-term EBITDA over net debt ratio temporarily, but only if it clearly support our strategy and with a clear deleverage plan in place. And finally, our dividend policy. We're now targeting a payout above 50% of profit after tax. The already mentioned higher dividend last year was in line with the updated long-term target. And now I will give an update about our progress under enhancing the operating model, beginning with a brief recap of what was shared on our Investor Day in March last year. To enable profitable growth, we need to enhance our operating model through net revenue management, have a supply chain fit for purpose and an effective operating structure. Over the past year, we have made strong progress across all 3 of our strategic priorities. The results are already visible in our performance with net revenue management and our effective operating structure delivering a clear impact. At the same time, we are making strong progress in building a supply chain that is fit for purpose. Together, these priorities are enabling the foundation for sustainable and profitable growth. Today, I will share some more details about how we're ensuring that we have a supply chain fit for purpose meaning that our network is resilient, cost efficient, flexible and built around the demand pattern that we actually have. Alongside this, we communicated at the Investor Day that our strategy was to have a structured approach to make or buy decisions, ensuring that investment go where they create the greatest value. I will go into more detail on CapEx make or buy and the operating structure in turn. To support future growth, we foresee the previously communicated increase in CapEx to 4% to 5% of NSV in the midterm with investment focused on capacity, efficiency and supply chain capabilities. Importantly, these investments are intended to support future growth and are also including continued investment in our repeatable Pick & mix business model. Still, they remain significantly below the previously canceled greenfield project. We also outlined a structured approach to make or buy decisions with our production -- within our production network, ensuring that CapEx is directed to the area where it creates the greatest value. To progress with the make or buy decisions, we have classified our technologies to core, which is technology we don't want to outsource and noncore. We have also agreed on long-term partnership with strategic partners. Together, all these initiatives are designed to create a flexible, stronger and more resilient manufacturing footprint that supports sustainable growth that is aligned with long-term consumer trends while contributing to margin improvement over time. Another portion of the increased CapEx will be invested in the digitalization of our operational planning capabilities, enhancing customer service, inventory efficiency and data-driven decision-making. AI-enabled tools will play a key role in this transformation. We will also continue to invest in process excellence across the business with a strong focus on sourcing, design to value in product development, lean methodologies and sustainabilities. These initiatives help improve efficiency, strengthen competitiveness and support profitable long-term growth. As we shared when we decided to not proceed with the greenfield project in early 2025, opportunities exist in our supply network to compensate for the volumes planned to be produced by the greenfield plant. Our CapEx, including midterm step-up investment is split roughly 50-50 across the portfolio. That balance is deliberate rather than concentrating capital in one single technology, we are investing across other important technologies, such as chocolate, foam candy and pastilles alongside our moulded starch capacity and capability. As also mentioned on the slide and just to recap, the greenfield plant was designed to produce candy only based on moulded starch technology. Our investment priorities remain clear. We are building capacity for future growth and investing in automation and modern equipment to make our operation more efficient, flexible and resilient. This approach gives us disciplined, diversified capital allocation that reduces single technology risk and keeps us aligned to long-term growth. And now a short quarterly update. In the second quarter, we delivered volume growth that was driven by packed branded products, combined with an exceptional profitability. For the first 6 months of the year, organic growth reached 3.8%, fully in line with our long-term target range of 3% to 4%. As expected, growth within Pick & mix was impacted by earlier Easter this year, creating a tougher comparison for this specific quarter. I'm very pleased with the continued performance of our Superbrands across our core markets. We are making strong progress on our expansion agenda, both within and beyond our core markets. In the end of the quarter, we launched Läkerol, our largest pastilles Superbrands in the Netherlands, which is our third largest core market. At the same time, we are finalizing a nationwide U.S. rollout of selected products from 1 of our 10 Superbrands, making another important step in our international growth journey. In July, we also reached a significant milestone by becoming the first company to open a pick & mix concept based on Swedish candy in U.S. retail. Operationally, we delivered an exceptionally strong quarter with efficiency improvements visible across the business and contributing to our strong profitability. Our focus on profitable growth remains intact and achieving our midterm profitability target of 12% at the latest in 2027 remains well within sight already for the full year of 2026. So with that, let's turn to the financials. I'll hand over to Frans, who is more than ready to walk you through our second quarter performance and the strong result of the first half year.

Yes. Thank you, Katarina. And as Katarina said, it's really good to be able to present this quarterly result and also for the first half of the year, specifically given the phasing of Easter, where more of Easter took place during the first quarter than last year, it gives a better perspective on how the strategy launched last year is delivering results. So as I walk you through this, keep a bit of extra focus on the first full half of the year. So starting with our net sales. In the quarter, we delivered strong volume-driven organic growth in the Branded package segment, similar to what we did in the first quarter. So 3.3% growth and that brings the first half of the year to 3.4%. And we're very pleased to be able to share those growth numbers, volume-driven growth numbers. Then for Pick & mix, again, given the Easter phasing, and it's primarily visible here in the segment, we got to look at year-to-date. We grew 4.7% and also that is organic volume-driven growth. And we're very pleased with that growth and especially as we, at the same time, are creating opportunities for very strong growth in this segment through the geographic expansion. So the Pick & mix growth achieved year-to-date is without any material gains from the many initiatives we've spoken about and that we're currently expanding in Germany and the U.S., and we've spoken about other opportunities as well. So that will all be future growth potential and part of the strategy that we launched last year. So in total, volume-driven organic growth of 0.8% in quarter 2 brings our year-to-date to a strong 3.8%, and that is at the upper end of our long-term target to grow 3% to 4%. And of course, very, very pleased with that. Now reported, we grew less, 0.4% in the quarter and 2% year-to-date, and that's mainly on account of the stronger Swedish krona versus the euro. And I'll repeat here what I said in the last 2 quarters about currency effects that companies incurring costs in Swedish krona, in Sweden to make products which are then exported and sold in euro, they will have a challenge when the Swedish krona strengthens. But at Cloetta, we largely sell our products where we make them. The products made in Sweden are mostly sold in Sweden and products made in euro-denominated countries are mostly sold in euro-denominated countries. So the real effect for us is limited and the effect on the reported sales is truly a translation effect. Then moving to the regular page showing the segments over and under. Here, you see Easter phasing quite clearly on the lower half with Pick & mix, but also that this is the third quarter with our Branded package segment stable to growing again after a bit of, called fluctuation in 2025. And another key takeaway here is that not to look too much at those really big growth numbers back in 2023 because that was to a high degree driven by inflation and instead take away that we are back to organic volume-driven growth. And that is a result of the strategy to really focus on Superbrands in the core markets and to, in a more focused manner, grow the markets beyond the core and throughout this support by further step-up in marketing and innovation. So volume driven, it is also profitable. And in this quarter, the profit is truly exceptional. So let's have a look at that. So we are reporting an operating profit adjusted of 14.9%. And some of you might have done a bit of a double take on that margin, given that our midterm target is to reach 12% no later than 2027 and our long-term target is to reach 14%. Now you have to realize that the midterm and the long-term targets are full year targets. And in any given year, we will have fluctuations between the quarter. And even though 14.9% is very strong, it is not the strongest quarter we've ever had. That was quite some time ago, but we've actually, in the past, been at 15.8%. So we've actually had several quarters in the past that were over 14% margin, but that was never enough to reach 14% for the full year. And that's what we're aiming for here. Now still, the year-to-date operating profit margin of 13.9% does position us very well to reach 12%, so the midterm target 2027 already now this year. And we've said before that the target is within sight, but with half a year still to go, it's still too early to declare victory for the full year today. Now what then is driving the strong operating profit margin? That can best be summarized in 3 points. The first and second point is due to a favorable mix driven by our Superbrands and a really strong -- exceptionally strong operational efficiency. And on the latter, that's the efforts we during the Investor Day presented under the heading enhancing the operating model to drive profitable growth. And the slide Katarina shared earlier was exactly about that when she spoke about supply chain. Now starting then with the first one, the mix. There is, of course, a favorable mix element related to the Easter phasing, but that is a temporary thing and it evens out over the quarter. So let's focus instead on what is more permanent, and that is that we have a favorable mix, mainly driven by the focus on our Superbrands in our core markets. And you know that they are more profitable than average, and that is coming through here. And that is a key contributor to that we're having a favorable mix in the segments, in markets, in categories, brands and products. Then the second point on the operational efficiency. So you're already familiar with that we did the reorganization last year, and those savings now carry over. But there is also a very strong performance from a new agenda for the operations team since last year. This is end-to-end from sourcing, production, warehousing, distribution all the way through. And then there's also efforts by the commercial teams on net revenue management, like ensuring there is margin-accretive innovation. And we've shared the new launch on Läkerol more previously, and that is an example of that. Now I'm not going to break the drivers down in detail here. But like with the segment mix due to Easter phasing, some of it is a bit more fleeting and some of it, this has stickiness and builds on the sustained effort we've had to strengthen profitability over time. Now we do say that this is exceptionally strong. And maybe a simple illustrative example would be that in any given quarter, you have, let's say, 10 things that you're working on, 7 will go your way and 3 will have headwinds, so you get a net gain of 4. Now in quarter 2, all 10 went our way. And actually, Katarina has said, I think it was a year ago already at some point that there was a lot going our way right now. And Q2 is probably our strongest example to date of how we're executing on our strategy in a pragmatic and focused way and sometimes all the stars line up. Now I said there was 3 points. And the third point is that in addition to the mix and the efficiency, we have flagged that the geographic expansion will come with some start-up costs in the second half of the year. And we will share more about that later on in quarter 3. But as a result of that, we're flagging already now that in quarter 2, we have held back on some investments that were planned for the quarter to help pay for those onetime strategic investments in the back half of the year. Now the result for the full year would be the more, let's say, representative result for our ongoing business. So I basically say don't expect 14-plus percent margin in the second half of the year, but do feel really good about our ability to reach 12% for the full year and in a repeatable manner with the strong start that we've had. And before I move to the view by segment, a quick comment for those who want to look at the gross margin year-to-date. Remember to look at the adjusted margin, and you have that in the comments in the report, given that in quarter 1 last year, we released provisions related to the canceled greenfield project, leading to a favorable item affecting comparability and that boosted the gross profit that year. So on an adjusted basis, so like-for-like, the gross margin is up versus last year, not down. Looking then at the segments over and under, you see that both segments margin benefited from the exceptional step-up. Branded package is up over 3% in the quarter and 2.6% year-to-date and Pick & mix on the lower half is up over 3% in the quarter as well and 2.9% year-to-date. So all incredibly solid numbers, exceptionally good in line with what I just shared. Now specifically for Pick & mix, it's well above the target to be between 7% to 9%, but we nonetheless believe that the targeted long-term range is the appropriate range to continue to drive profitable growth in the category as well as geographic expansion in line with the strategy. For the Branded package segment, looking then at the year-to-date, even if you shave off a bit of that compensation we received for the supply quality deviation, that was in quarter 1. It's about 40%, and it's another step closer to the over 50% pre-pandemic level margin we used to generate in this segment. So it's an exceptional result for the quarter, and we will continue to seek to further strengthen the package margin and over time, return to the level where we were before the pandemic. Then moving to SG&A. Now here, the variance year-over-year, both for the quarter and for year-to-date is primarily driven by the absence of the provision for severances we took in quarter 2 last year after we had announced the reorganization. So the net SG&A, excluding that, is flattish both in the quarter and largely for the full year-to-date. And that is as the savings previously confirmed to us to be in the announced range of SEK 60 million to SEK 70 million on an annual basis is fully offsetting investment for growth on top of regular annual inflation affecting salaries and various reporting costs. Those investments, despite holding back a bit for the second half of the year, includes, of course, the geographic expansion beyond our core markets. You're familiar with the Candyking store in New York. That store is already profitable on the bottom line, but of course, it generates the SG&A cost. There's also the organization step-up in North America. We're doing something similar in the U.K. as well as the support of our Superbrands. So I already mentioned in the quarter 1 earnings call that there would be a further step-up of advertisement in quarter 2, and I can confirm that these figures include higher spend on A&P than last year. So cutting A&P is not driving the step-up in profit. Now as also mentioned in quarter 1, the change to the operating structure in 2025 has not only aligned the organization better to execute on the new strategy, as again, evident from the quarter's result, but also permanently lowered the SG&A baseline and offsets the stepped-up investments. So overall, SG&A costs are held in check. Then on to the free cash flow. So in quarter 2, we generated SEK 86 million in free cash flow, and that's SEK 94 million better than last year. Now Easter phasing also plays a part for cash, and it would be more fair to talk about year-to-date. And then I'm happy to share that also year-to-date, we did better than last year. So year-to-date, we delivered SEK 230 million in free cash flow, and that's SEK 39 million more than last year. So meaning we continue the favorable development on account of the focus on both profit and working capital. Now the year-to-date improvement in free cash flow versus last year was expected, and that's primarily driven by the strong operating result, while working capital and CapEx separately and in total remained fairly stable versus last year. I also want to say that CapEx in the quarter, you see SEK 40 million here. That's on the low side versus what we've communicated earlier, where we said we will rise CapEx to 4% to 5% of net sales over the next 5 years. And I want to comment on that. So this is in line with what Katarina just confirmed. We still expect to increase the spend on CapEx to 4% to 5% of NSV over that period of time. But within that period of time, the step-up will only really start to be visible for next year. That said, what we are spending money on this year is part of the total expected CapEx and is part of implementing those plans. And that brings me to my last slide, which is on net debt or debt and leverage. And we closed the quarter with a net debt over EBITDA of 0.8x. So that's well below our target to be below 1.5x. And that's, of course, driven by both the strong cash flow and improved earnings. 0.8x is slightly higher than where we were in quarter 1 this year, but it always goes up in Q2. You can see it in the graph on the left-hand side there, given that we distribute the dividends in quarter 2. And 0.8x is actually 0.6x lower than Q2 last year and it is the lowest ever leverage we've had for a quarter 2. And our net debt is also the lowest ever we've had for quarter 2 of SEK 1.2 billion. And that is despite having distributed our highest ever dividend in the quarter, SEK 401 million, that's SEK 1.40 per share, up 27% versus the year before. And in cash outflow, net of total return swaps, SEK 398 million. And finally, we have plenty of access to additional unutilized credit facilities and commercial papers, which together with cash on hand totaled SEK 2.7 billion. So number one, we have continued to secure resilience in a changing world. And number two, we do have the financial strength to act on business opportunities fast. At the same time, while we have strategic financial flexibility, it will not change the fact that we have a pragmatic approach to investing in our business or even M&A as described numbers of times previously. And on that note, I conclude that our financial position developing in line with our set targets remains very strong and hand back to Laura.

Thank you very much, Katarina, and thank you, Frans. It is now possible to either dial in and ask questions live or alternatively post your questions through the chat. We already have quite many questions in the chat, but let's start with the telephone lines. Lorenzo, over to you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Stefan Stjernholm from Handelsbanken.

Stefan here. Can you hear me?

Yes, we can.

Yes.

Congrats to impressive margins in the first half of the year. But it would be helpful to give a range or some flavor to the expected uptick in marketing spend and one-off costs for the second half, if that's possible to say?

Well, I think in a way, the strongest indication of the range of step-up, and it's not only marketing, there's also organizational cost given the geographic expansion is the fact that we are saying that the 2027 target of 12% is remains within sight and in a good way. And I think I actually explicitly said don't expect 14% in the back half of the year. So obviously, we're aiming for 12% on a full year basis. So that means sort of gives a bit of an indication of how various factors would affect the back half of the year. A&P is one of them. Indirect is another one, as we said, for investment. But of course, there's also commodity movements, and we have a fair pricing policy where, of course, we adjust our pricing when commodities move. So I think it's -- the best answer I can give is to sort of look at the totality of that for a full year basis.

But if we assume 12% for the full year, that implies some 10% for the second half. That's quite a step-up. Yes. Fair enough. I did do my calculations and try to solve that one. It's obviously, much talk about the U.S. and the expansion there. But also, if I remember right, there was a pilot -- Pick & mix pilot in Germany launched in the first quarter. How is that developing?

Yes, it is going very well. So we are still -- we are in a dialogue. Of course, this is something we do in partnership with the retailers. And we usually have a couple of months data where we're looking into and then we roll into more stores. So now we are on 5 stores. So we continue to roll it out while the performance is doing well.

So you are in 5 German stores now with the concept?

Yes, yes.

That sounds good. Yes, to make -- be sure, it wouldn't go into the U.S. and the nation rollout, you said it was a selected number of SKUs. I interpret that, that is packaged. Is that right?

Yes, that's right, Stefan. That's right.

Thank you for the kind words about the report as you open the question.

The next question comes from the line of Nicklas Skogman from Nordea.