Cloetta AB
STO:CLA B
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Cloetta AB
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Good morning, and thank you for joining us on the Q1 conference call for Cloetta. My name is Nathalie Redmo, and I'm Head of Investor Relations. With me here today are Henri de Sauvage-Nolting, CEO of Cloetta; and Frans Rydén, CFO. Henri and Frans will take you through our first quarter results as well as provide you with an update with regards to the impact from COVID-19, and we will then move on to a Q&A session.I will now hand over to Henri.
Yes. Thank you, Nathalie. Good to have you on board. And I think everybody can also see that you've updated and modernized the presentation a bit. And I would have wished that, that would have been the only change for today.But of course, since the last update, we are living at the moment in a new world. And also, Cloetta is impacted by that. It's good to say that already, as from week 8, we started with a COVID-19 action team biweekly, which I lead myself with a number of key members from the team to be as fast as possible in adjusting to the new situation.If we then look at quarter 1, we can see that our organic growth went down with 4%. 2.5% was coming from branded, we'll unpeel that a little bit more for you; and 8% came from the pick & mix business, which we'll also explain a little bit more where this is coming from. And of course, that also means, unfortunately, that the 8 quarters of branded growth have now been broken, and Frans will talk a bit more about that.If we look at the operating profit adjusted, we can see that the lower sales volumes gave us also less profit, gross profit coming into the company. We have also been -- seen quite some effects from ForEx, mainly on the Swedish krona and the NOK, and that has been partly offset by cost reductions. I'm very happy that we had that program already in place and that we can speed that up now for the coming months to come.If we look at the free cash flow, Frans will talk a bit more about that, but quite early in the COVID situation, we decided to increase stock levels of critical raw materials and big items so that we could respond to, let's say, government decisions to close factories. And that has been impacting the cash flow, and we'll unpeel that a bit as well.And then we remain our strong financial position. I could fully endorse the decision of the Board of Directors to withdraw the dividend proposal and to see if later in the year we are in a financial situation to pay out a dividend. We can see that the net-debt-to-EBITDA is at the same level as last year at 2.4x.So if we go to an overview, which is probably a bit newer, we have split again the 2 divisions, the branded and the pick & mix, to give you a bit more insight in what is happening at the moment. And bear with me, this of course is total Cloetta, the situation by market can be quite different.But if we start with the branded part, approximately 70% of what we sell in brand is going to grocery channels or grocery-related channels, and 30% is going to other channels. And what can these other channels be? That can be cinemas. It can be travel retail on the airports. It can be do-it-yourself stores. It can be convenience. It can be like these mass merchandisers who are selling a lot of nonfood products, but also some candy.And what we see is that, in particular, with government's decision to keep people as much at home or closing stores, we see across all our markets that in that channel of 30%, there is either a full closure of stores or there isn't demand or the number of shoppers which is dramatically lower. And I think everybody will understand that the travel retail business, which is a sizable business, has completely vanished, the stores which are completely closed, yes? So that is one thing we see.That is partly being compensated by the food channel seeing an enormous uplift in sales in general. We're not in the toilet paper business but for the candy bags business, we see very good growth levels in the food channel. So that's very positive. People are spending more time at home behind the TV, and that is our #1 consumption occasion. So we can see a part compensation of the loss in the other channels.What we also can see is that there is less impulse sales also in this food channel. And what is that? That is, for example, all the product we sell at the checkouts. The checkouts are mainly selling gum, that is Finland and Holland, in particular. But also pastilles, and that's across all the markets. So there's less impulse and there's also less time in the, how do you call it, in the checkout areas because people are 1.5 to 2 meters away from each other.We're taking action. I think we'll unpeel it a little bit more in detail in the latter part of the presentation, so I'll keep that for there. If I then go to pick & mix, the picture is quite different. We've tried to split it on the turnover basis of 2019. You can see that about 36% of our pick & mix business, is not affected by, let's say, government or retail restrictions. And that is mainly Sweden, where all the retail chains have kept pick & mix, let's say, open, yes, so consumers are able to buy pick & mix in Sweden.If we then look at partial closure, we can see that in Norway and Finland, that some retailers out of precaution have decided to close down not only pick & mix but, let's say, all products which are not wrapped or all products where there are a lot of consumers waiting and standing close to each other in front of the shelf. So in Finland, there's either in geographies like Helsinki or our #2 customer who have decided to close down in the same picture in Norway, although not so much for Cloetta.And then we have markets where mainly the government has issued guidance, which the retailers have translated into a full closure of pick & mix, like in Denmark, where apart from one smaller customer, all the other customers have closed down pick & mix due to the fact that too many people were standing too close to each other in front of the shelf. And also in the market of the U.K., cinemas are closed, all the nongrocery stores are more or less closed. So that's also a big impact. So that is one effect we see in pick & mix. So retailers closing down pick & mix shelves, that's one.And the other thing, the second point, is then consumers become uncertain about a lot of things during the corona, but one of the things they are uncertain about is buying products which are not packed. It can be salad. It can be bread. But it's unfortunately also pick & mix that people are saying, well, if it is not wrapped, is there a risk for me if I buy this product.We've worked very hard also with the Swedish food authorities who are reconfirming that there's no risk and that it's perfectly okay to buy that, which is an argument, of course, which is very rational, which we have also used with the retailers and working together with them on increasing the visible hygiene measures in the store. But of course, the emotional part in consumers' minds is more difficult to take away with rational argument. So we see quite a significant drop in consumer demand also in the markets or in the retail stores where pick & mix is still available to shop. And I'll come back to that as well.So this is, I think, quite important also for you to understand. It's a new, new, as everybody is saying. So yes, we see a big uplift in sales of candy bags. In grocery stores, we see a decline in the gum and pastilles categories in general, and then we see a big loss of sales in the other channels. And of course, a pickup in e-commerce. But it's still very small in all countries, but U.K. and the Netherlands. And in pick & mix, 2 things to think about: one is the closure of shelves by retailers, the other one is the consumer confidence in pick & mix as a category. And we can come back to that later on.So if we then look at the other things we are doing. Again, as said, we have this corona action team. We looked, of course, very firstly at all the safety measures for our employees. So already in week 9, we have put a full travel ban for Cloetta in place. In week 11, we closed most of the offices and got people to work from home. Very speedily resolved, that we have the bandwidth and the VPN connections to our enterprise system that works very smoothly, I must say. And also increased hygiene measures in all the factories. Also as from week 9, we are assessing the situation in our factories and adjusting to the new reality. It's good to mention that all 8 Cloetta factories are still operational.We see, of course, an increased absenteeism, not so much due to the fact that people are ill but mainly because schools are closed, and depending on the country, that's a legit reason for people to stay home if their kids are at home. We see due to our own measures to keep shifts separated, so there's no risk of spreading the disease. If somebody would be ill, that we see a bit of a drop in efficiencies, but customer service levels are good. And maybe the last thing to mention is that we see a delay in our CapEx projects for you. And particularly important, the drying chambers. I'll come back to that.Then we have actions on cost and cash, come back to that as well in more specifics. And then the last part, we are assessing all the time the suppliers. Actually, that's where we started. We looked at all the suppliers of raw material and packing material, categorized them into red, yellow and green, and took additional action, in particular, to secure, already from week 9, that we had the supply of critical raw materials coming from regions which were on the verge of being closed down, like China; or raw materials, which were under threat. And it's good to say that we acted swiftly and thereby we secured a lot of shipments while it was still possible, and we have not seen an impact from that in our supply chain. And we have got some delays from the Italian factories, which we still use from Sperlari, but that's all manageable and not having a big impact.So that program is working. But of course, Frans will allude to that, it has led to an increased stock of both raw materials, pack materials and the main most important SKUs, the so-called A-list SKUs, so that we could also cope with the increased demand in the food retail channel. And we were swiftly in doing that, and that also has meant that we have been able to capture that opportunity by focusing on the A-list SKUs.So having said that, I'll hand over to Frans to take us through the financials, and then we'll come back with a bit more of a strategy update given the new corona situation, to give you a bit more meat on the bone on what actions have we actually put in place to cope with the new reality.Frans, over to you.
Thank you, Henri. So coming to the next page. So as usual, I'll start with the net sales. And I must say, as we closed 2019 year-end and we reported our 8th quarter of consecutive branded growth, that felt really good. And not being able to add another quarter is rather humbling. And as we can see from this slide, branded being down 2.5% and pick & mix 8%, for an overall organic decline of 4%. And as Henri said, we're obviously here seeing the impact of COVID-19 also on our business.Net of foreign currency translation, including that, we declined 2.6%. And so often, while the currency makes the top line look different, it also comes back and hurts us on the cost side. But let us look at -- as we always do, the split between branded and pick & mix. And this time, I'll start at the bottom with the pick & mix.And of course, we flagged already in mid-March that we saw a risk to our pick & mix business as the sales channels that Henri mentioned were being affected. We're taking temporary measures to reduce groups of people in front of our fixtures. But of course, also in the checkout lines, as we all see, whether that is -- or in salad bars or wherever that is. After that, we were able to confirm that this was not just a risk, but it was becoming reality. And you'll see some of that in Q1. But obviously, not all of it as it came at the end of the quarter, and hence, the statement by Henri that Q2 is going to look, of course, really tough.But before going to that really further, I think it's really worth reiterating here, and Henri mentioned it as well. It's very important for us. We follow the World Health Organization and the health authorities in Sweden or wherever that is. And we know that the virus predominantly spreads from person to person, less so via surfaces, and health authorities have told us that it doesn't spread via food and not via candy. Nonetheless, depending on the country, the guidelines or requirements relating to social distancing, it has varied. And it has, of course, impacted our pick & mix sales. For example, in Sweden and Norway, the pick & mix sales are continuing while in Denmark, they were fully stopped.Now even if the retailers would continue now to sell pick & mix in a short period of time, that doesn't mean that the volumes sold would be unchanged versus prior to COVID-19 because, as Henri alluded to, the consumers are also making their own decisions where they want to spend their money and how they're visiting the stores. Now as for the lost pick & mix contract in Sweden, the discontinuation was agreed in quarter 1, and we're working out the details exactly how we will exit that, but that should be towards the end of quarter 2 that we see that.Henri already mentioned a number of steps that we're taking to mitigate this impact, I just want to reiterate that again. Firstly, it's around cleanliness, that we take responsibility for the surfaces that we control in the stores by cleaning them more thoroughly, more often, making sure that our merchandisers wash their hands properly before every store visits, making sure that the spoons are cleaned more frequently, et cetera, and also providing floor stickers to help people separate themselves when they stand in front of our fixtures. And secondly, on the product, we have made arrangements with retailers to replace part or all of the pick & mix contents with finished goods. And we're also taking steps and have started to sell pick & mix prepacked, whether that is in a bigger tub or if it's in a cup. And I think we have later on at least some pictures on this in the presentation.We are mitigating the impact as a result, but it's not going to be enough to offset the impact that we're seeing now over Easter, which is, of course, a really, really big season for us and especially in Sweden. And we are addressing cost in each of the countries where we are present. We've already taken steps to reduce the cost of merchandising, which is primarily the cost of employees that are refilling the pick & mix fixtures.Of course, when the percent of sales is going down, if the number of stores remains the same, you still need to visit all the stores, so it's not an obvious and easy reduction. Also, if we would completely pull out, it would mean that it's difficult to ramp up afterwards. So to the extent where it's possible, we're trying to keep the same number of people employed, but to reduce the number of hours that they work.Moving then to the top half of this on the branded package products. Obviously, again, it's a bit of disappointment with that red bar at the very end of the page. And while we had initially some impacts in the beginning of the quarter in international when COVID-19 was, let's say, limited to China and Hong Kong sales, we, of course, now also see this in Europe, again on account of the impact in the sales channels which have been highly affected by the virus. Henri already went through that to some extent, I will not repeat that.And at the same time, I would add that also in the grocery retail, whether that is convenience and grocery, we also sell different types of packaged products in these different channels. So for example, pastilles or chewing gum are, to a high proportion, sold in convenience stores than in grocery retail. And in grocery, it's mostly sold in the checkout lines. And as you know, chewing gum and pastilles are for us profitable products, very profitable products. And because they are proportionally more impacted by the virus, that is also hurting us. Nonetheless, it declined 2.5% versus prior year in this quarter. And we assess that this decline is fully driven by COVID-19.To address this, we have revised our advertisement and promotional spend plans, leveraging learnings from other crisis and from other companies, while at the same time we're keeping a close eye on how the consumer is affected by this unprecedented change. Now we can't go into exact too much details around this because that would probably be a little bit too helpful for our competitors. But needless to say, with our new Chief Marketing Officer, Thomas, since last year or the year before, we have a different organization and readiness to respond with insights than what maybe we had in the past.Moving then to profit and loss. So Henri alluded to that we have refreshed the deck a little bit here, it looks slightly different. But you see here on the top left-hand side, gross profit is down SEK 26 million versus prior year, and this is driven by the lower volumes and the unfavorable ForEx that Henri also mentioned. The volume alone accounts for more than the overall drop. And at the same time, you recall, we took a lot of pricing last year, and we have taken new pricing at the beginning of this year.So we had a rollover effect and we had new pricing coming in, and that was to offset the impact of cost increases from last year and also from the beginning of this year. And we don't see that coming through now to the bottom line because of this new ForEx that's eating all of those increases up. So over time, this should even out, but that will only even out if we take more pricing. And as you know, that's an agreement we have with the retailers that when ForEx deteriorates, we take more pricing. And when ForEx improves, we roll that pricing back, so we will need to do that also during 2020.Gross margin is down 0.7%, again, driven by the ForEx. And here, I was going to say that we do have a favorable mix as the pick & mix business has declined more than the branded business, but not as much as maybe you would imagine. Because of these things that we highlighted earlier, that the sales in Sweden of pick & mix has been less impacted by COVID-19 given the -- let's say, the more limited social distancing rules implemented by government and the fact that retailers are continuing to sell and given that Sweden doesn't have a great profitability on pick & mix, that doesn't help us in the mix element for pick & mix. And at the same time, on the branded business, we do have an unfavorable mix within branded. Again, on account of the lower sales in convenience stores, et cetera, and in the checkout where we sell the more profitable products, gum and pastilles.For sales, general and admin, I will have an additional slide on this. But SG&A, as you can see, has been reduced significantly versus last year. And thanks to that reduction, we are able to keep indirect, as a percent of NSV, in line with last year despite the big top line drop. And on operating profit adjusted, it's down SEK 14 million versus last year. And this, again, is driven fully by the top line drop and partially offset by those cost savings under SG&A. For the margin, we remain in the 10% bracket, like last year, but of course, reduced versus a 10.6% that we had in Q1 last year.Moving then to some more details on SG&A, a similar slide that we've had before. You can see that SEK 19 million reduction versus last year, and that's obviously net of union-agreed salary increases that took effect during last year. So it's a nice strong reduction. And here, the VIP+ program we launched last year has really helped us, not only with respect to what we did last year, which was the benchmarking of cost and that we started to drive very specific actions to reduce those costs -- and we've spoken in the past about restructuring, for example, in Sweden and Holland, but also the transparency we have to cost today. And this has enabled us to manage costs very tightly in the quarter, and we will continue to do so going forward.Now part of the indirect reductions is coming from A&P as well with the top line, but at the same time, the work in media is actually slightly up versus the quarter. So again, we're spending our advertisement and promotional funds more efficiently than what we did in the past. Obviously, a lot of this spend happened already at the beginning of the quarter and towards the end of the quarter. And also now for Q2, we're obviously adjusting our spend based on this new reality. Other than that, I just want to call out the ForEx here is, of course, our own internal estimate and not an official reported IFRS number, but that is, as said, hurting us on that side.Moving then to the cash flow. So with the impact of COVID-19 on the operating profit, that, of course, carries also down into the cash. But most importantly here, we see the change in working capital at SEK 99 million negative. And I think that's where I would like to focus most of this on.So let's start with this. Trade payables and receivables both increased during the quarter, which is how it normally works for us, and I'll explain why. But the quarter end balances are very similar to how we ended quarter 1 2019. So on the payables side, in both years, payable goes up in Q1 as production ramps up after the year-end. And obviously, when we ramp up production, we buy more raw and packs, we have more debt to our suppliers. So that is completely normal.On the receivables side, they're also up in quarter 1 as they are in every quarter 1, and this is very simply explained by the fact that at the end of quarter 1, we're entering into the Easter season and sales tends to be stronger, whereas at the end of quarter 4, the Christmas season has already ended and we have already started to collect on the sales that we did leading up to Christmas. So this is normal and our receivable balances are very similar to where they were when we exited Q1 last year. And I can also confirm here that our overdues remain at the same level as they have before COVID-19, so that is not a concern that we are seeing in our working capital today.The key driver here instead are the inventories, as Henri spoke about, and there's really 3 parts to this. The first one, as you may recall, we started building stock in the middle of last year already to improve our flexibility to cater to demands and also to get ready for new capacity and to be able to facilitate that in 2020. It also would allow us then to in-source product.Now with the high demand of our products that we had leading up towards the end of Q1, we've also further sharpened our inventory management and we created a higher list of prioritizations, which we call the A-list SKUs, for molded candy and for chocolate, to make sure that we deploy our capacity in the best possible way. And then, as Henri said, beginning of this quarter, with the risk of having to close plants on account of COVID-19, we decided to up that further a bit. So roughly, out of the SEK 200 million in increased inventory we see in the quarter, roughly SEK 50 million of that relates to this A-list SKUs. And secondly, again Henri said, when we reviewed our supply chain at the beginning of the quarter and the risk for disruption on account of COVID-19, we took some actions to safeguard production and we increased the inventories for critical items. Unfortunately, as we sit here today, we've not had any significant production issues. Of course, we're now adjusting our production down based on the sales. But roughly SEK 50 million out of the SEK 200 million increase relate to this increase of raw and packaging that we did. And thirdly then, and this is obvious and as stated as well in the presentation, given that sales have fallen below where we wanted them to be that, of course, has an effect on the inventories, where we're left with more inventories than what we wanted, both on branded and on pick & mix, and especially on pick & mix, of course.Now we're taking actions to reduce these inventories. And I think building the A-list SKUs, heading into COVID-19 and safeguarding supply, was the right decision. It remains the right decision. But we're now really focusing on bringing down these inventories, specifically pick & mix. And we're going to do it by both adjusting production and also how we're focusing on the sell-out on the inventories to get it down to where we want it to be.And then on my final slide on cash flow. Before I hand back, I would say that we've previously mentioned here that leverage is one of our key financial targets, alongside NSV, EBIT and dividend. And this slide, new slide versus before, seeks to capture that. And in the graph you have on the top, on the left side, you can see our utilized credit facilities and issued commercial papers, which is about SEK 2.8 billion. Out of that, SEK 1.7 billion is utilized current credit.And on the right-hand side, you can see that we also have a SEK 1.7 billion in additional unutilized noncurrent credit facilities and cash on hand. So that's enough to cover the left side of utilized current credit facilities. And of course, in addition to that, we have access to further SEK 700 million in commercial papers. So hence, our conclusion is that our financial position is strong.Now you did also see on the previous slide that our CapEx investment had gone up in the beginning of the quarter. So I just want to comment on that as well before looking at the leverage. So we have been increasing CapEx to cater to the increased capacity for molded products, and we've been talking about that for quite some time. And those coming online in Q2 or the middle of the year.Now given COVID-19, our engineers cannot travel and suppliers' engineers cannot travel either, and suppliers sometimes also have challenges in their own manufacturing. So we see here that there will be a delay on both the timing for the start-up of the drying chambers as well as the overall spend on CapEx in 2020. And we can't foresee when the need to keep travel restrictions in place will change and when both suppliers and ourselves can go back to normal operation, but if you assume a return to normal during quarter 3, then the CapEx for 2020 would still be more than what we spent in 2019 given the investments that are already in progress, but it's going to be lower than we envisaged a year ago.Based on this assumption, that it's a gradual ramp-up in Q3, we will probably land more towards 4% of NSV. Again, it depends a little bit what happens on the NSV, which is a lot less than the roughly 7% we would have spent if we wanted to realize everything we wanted to do this year, in line with what we outlined in the Capital Markets Day about a year ago.So returning then to the leverage. Not shown here is that out of the SEK 1.7 billion in current utilized credit facilities, we have an extension option for SEK 1.4 billion, and we're currently discussing with the banks to extend that and whether that we should do it for 1 or for 2 years. So I feel really good about the financial position. And that is then also reflected in the leverage below. Our year-end target is 2.5x EBITDA, and we have stayed well below that at every year-end for quite some time, and we're also below that in Q1 for several years. And in 2020, that remains the same. And it's well below the covenants we have with the banks, which is at 4.Finally, I would say that a little bit more detail, Henri mentioned the cash committee. So we've launched a new internal task force, this cash committee, which consists of a dozen senior managers who have in-depth knowledge of what really ties cash up in working capital. So it's people from manufacturing, from logistics, from procurement, from sales, from finance, et cetera. And similar to the VIP+ program, we're going to leverage best practices from other companies, and I look forward to share more about this in the future.And with that, I will hand back to Henri.
Good. Thanks, Frans. So to conclude it, we thought -- give you a bit of a strategic update. So what is the new situation, meaning for the strategy. And I'm pretty confident to say that the strategy and the strategic direction we have with the 3 focus areas remains unchanged. But of course, the implementation plans needs to be changed because there are things, which, of course, are different now than what we assumed when we wrote the strategic plan for Cloetta, yes? So it remains branded growth, sort out pick & mix and work hard on the cost and efficiency.If I unpeel it a little bit more, the key brands need to be strengthened, and that is our bread and butter. And I think even if after COVID we would get into a recession, you have big trusted brands, either ones which can do very well in such a period. And I have all the experience and figures to prove that. So we are looking, okay, what is the new reality and what are we going to do to capture those trends. And the team is already preparing for those kind of scenarios if that would most likely happen. And we're also looking very much at the big pack strategy to capture all those shoppers who are may be doubtful about pick & mix and make sure they come to the Cloetta brands.We're also looking at the advertising spend. Of course, there's a lot of things changing. Netflix is probably a company you might have invested in. For us, of course, being outdoor, it doesn't make a lot of sense. But having a lot of new focus on TV and social media in those kind of channels, of course, that's where the consumer is watching. And we're moving also money towards candy because we really want to reap the benefits of that increased sales in the grocery channel at the moment.And we're also still making launches fit with our big brands. Also according to the strategy, we are adjusting a little bit the plans for the remainder of the year. But even in Q1, we can see some very good successes with like an Easter foam, which is there in the middle, based on the big success we have with the Christmas foam products across the Scandinavian country. And also some good line extension, the line extensions in a world with more uncertainty are a much safer bet than going into completely new platforms. So that is the kind of adjustment we are doing.If we then go to pick & mix, let's unpeel that a bit. So how do we give consumers the reassurance in-store about pick & mix. So we are placing a 1.5-meter distance stickers on the floor to make sure that people are staying away from each other. We have added hygiene things like gloves and cleaning the scoops more often and also communicating about that.And then we are launching already, since a few weeks, a lot of alternatives to pick & mix in-store. And that's -- I must say I congratulate the team for how quickly they have been able to turn around some of these things. So in the U.K., for example, we're filling the pick & mix shelfs or some of the bigger retailers with completely wrapped products. That's a cooperation we had with them, very much appreciated by the customer.We're also launching pre-packed Candyking boxes. So these are then assortment mixes, which we are launching in a plastic top or in the plastic cup so that people can still choose their favorite mix under the Candyking brand. And then if we try to bring people into the Cloetta branded, we're also then putting big packs of Cloetta or even tops with Cloetta products in the same area.Of course, that's only good if the fixtures are still open, that is the first point. So where we have closed fixtures like in Denmark and some places in Finland, we are rebuilding those fixtures into branded products, and that's the picture you can see here on the right. It's a picture from Denmark, where you can see on the top, still the Candyking shelf and the bottom, but the plastic bins have been taken out and we have replaced that completely with Cloetta products.And also, the retailer is giving us that space and feeling that they also need to help us in these times, where they took the decision to close down pick & mix. So very good to see. And again, very entrepreneurial behavior in this case. It was Denmark who came up with the idea to rebuild those shelves. And of course, that helps us to bring those consumers over to our brands and not to competition.Then we're also working on what we call the reignite phase, and that's basically 2 things. Again, when retailers are opening again and we are in constant dialogue, in particular, in Finland and Denmark about when do they open up if they use those floor stickers and maybe showing the travel or the direction from left to right on the shelves. We need to have a package ready for them so that their shoppers are then coming back to these shelves.And the second thing, a little bit more longer term, how do we regain the trust of shoppers who were doubtful about pick & mix due to the COVID situation, either in the coming months. But also, of course, when the whole COVID is behind us and hopefully we found a medical solution to this, there will still be -- according to my personal expectation, there's still work to be done to bring shoppers back to pick & mix. And that's what we call the reignite plan, which is basically based on the work we had already going on, on the Candyking 2.0 concept. You remember that's the new concept also showing more quality, demanding a higher price, how do we adjust that concept to bring in the trust factor hygiene more.With all of this impacting us, we do not expect that our plan to get the Swedish business to breakeven will play out. So that is a forward-looking statement which we made so far, but we pulled that back because we need to find out how exactly this business is going to operate in the coming quarters. So that's -- the ambition is, of course, still there, but there are so many things which have not changed that we need to recalculate when the situation is a bit more stable.And then the last one, of course, is the cost and efficiency. So Frans already talked about the pick & mix cost, I'll not talk about that. The Perfect Factory program is still very much working. So that's on our strategic direction, where we're investing in. But of course, some countries like Slovakia are completely closed off, same with Belgium, so the Perfect Factory team cannot go there. But we are finding creative entrepreneurial with operators working in virtual teams over Skype and sharing that kind of information between the sites. And it's good to see that at least there's a lot of enthusiasm.I expect that the program will slow down because they are also things which need to be done by central resources. When we talk about process parameters or settings, that will be difficult. But the Perfect Factory program is alive and kicking. And that also, for me, is a signal that it is not a top-down exercise, but that in the last 6 to 8 months, we have really been able to bring the operators and engineers in the plants, on the lines where we're doing this, on board with the program and that there is enthusiasm.Frans talked about the cash committee. And also I'm really happy that we had the VIP+ program going. We try to speed it up, not only for the merchandising but also the reorganizations we were planning, the nonpeople costs we're planning to take out, and that is only more relevant in the situation where we are right now. And that, I think, was the last one on the strategy. And then we go a little bit into, okay, what do we now expect? I think we try to be as clear as possible in a very uncertain situation. But on the branded packaged products, we really expect the demand to be lower in the second quarter, yes? And again, where does it come from? That's the 30% of the nongrocery channels, which are either completely closed, like in the U.K.; or see an enormous drop in shoppers, like in Sweden. And then next to that, there's the mix difference that we see, candy bags going up, chocolate being fairly stable, but pastilles and gum being down in grocery.Pick & mix, there can be 2 things happening to get back to normal, and I don't think that it's very realistic to forecast now that, that will all happen in Q2. And of course, the first thing is retail is opening up pick & mix. I think we can see some of that in Q2. And of course, we actively work to reassure retailers, but it's -- yes, it's a very unpredictable situation whether that will happen or not. But that's the first big determining event we are working on. And yes, we are already in Q2 and there's 2 more months left, so it will not have a very big impact on Q2. And then the other one, of course, is longer term, and that is when shoppers start to regain trust in pick & mix. And I think in order to get there, we will need to be out of this COVID-19 situation. And there's daily talk about where you can get it and what is dangerous, and that is not going to happen in Q2.With the top line being heavily affected, we will see an impact, of course, on the gross profit coming in from sales. And we also, as Frans alluded, on the ForEx, of course, we are planning further price increases, but it has been so violent in both the SEK and the NOK and then the British pound is up and down. But according to how we work with the trade, is that we need to have at least 3 months on a lower level before we can announce a price increase. And then the price increase in general, on average, has a 3-month negotiation time.Of course, we'll try to break those rules. But it's not, of course, a very easy situation because there is a lot of fear about the economic recession and where the prices should be going up, so there will be a lot of resistance in that. And then on the positive note, I think we have a good cost program, both on reducing the merchandising cost according to the lost volume, but also on the VIP+ program on all the items which we are -- which are nonmerchandise, be it nonpeople cost or people cost.And as Frans already alluded to, capital expenditure, we think there will be a delay or we know there will be a delay. That's not good. But I will try to focus very much on the drying chambers, which, to a large extent, are coming from Italy, to see if we can not only get them shipped. I mean that seems to be possible, but there's all the installation and the technical work around that which then either needs to be on a distance or as soon as possible as the countries of Slovakia and Belgium are opening up for visitors again.So we will -- and we can promise you as well that we will do press releases when there are important updates during the quarter, so that our owners and analysts get, also during the quarter, updates of things which are happening, which could potentially change the outlook. And that's, I think, we've tried to do under Q1.So I think that was our presentation. A bit longer than normal, but these are not normal times. So with that, we would like to open up for questions.
[Operator Instructions] Our first question comes from the line of Mikael Löfdahl from Carnegie.
Yes. So first, a question on the cost side. Is it possible to quantify more? First of all, the cost savings that you have done that came through on a year-on-year basis on the SG&A side in this quarter, the roughly SEK 20 million, when were they sort of carried out? When are they in the comparisons on a year-on-year basis because this was sort of old measures, I assume?And secondly, is it possible to quantify going forward how much you can actually save on SG&A, including the reduced marketing spend and so on? Is it possible to give a number? I guess it will not be -- you will not be able to keep the SG&A ratio to sales intact, that is.
Well, maybe on the first question, I would say, I mean, there's 2 things, arguably, that you really see come through on that number. The first one is that we, of course, already took action in 2019 to reduce costs. And then, of course, you have the effect of that in Q1 without any further steps being taken. We've talked about -- when we published previously earnings releases, we spoke about the restructuring in Sweden and we spoke about the restructuring of the sales organization in Holland, et cetera. So of course, that's part of that in there.Number two is that actions that we've taken within the quarter. And some of those were immediate in the sense that earlier, as Henri said, or let's say by February, we had already suspended travel. And that's, of course, a saving from that point of view. But also with granularity that we have to cost now, we also could make decisions to hold back third party spend, we were holding back on filling vacancies, et cetera. Some of that is a sustainable saving, maybe some of it is more of a freeze, which eventually will come back.And then on the merchandisers, then recall that the sales were really starting to come down towards the end of the quarter. So the merchandising savings, you don't really see a lot of that in Q1. That is much more what will come in Q2 now as we're seeing that reduced volumes. And then actions, as I mentioned, have been taken in all the countries. And there is a reduction, but it's difficult to reduce those costs at the same rate as the sales are coming down because you still might need to visit the same number of stores. It's just that each store sells less product. Henri?
Yes. Maybe on the A&P, we've just done a thorough analysis of both the past behavior of competition and consumers in 2009, you could say, '08, '09, '10. And have put that on top of our own media strategy, which is now new because we have worked with the new media agency to see what is the best way to support our brands and what is like the competitive level we would need for our top 30 brands in order for them to keep on growing.So I would say there's a plan now, which we have built to reflect the new media consumption pattern. So I already talked briefly about that. So less out-of-home, more TV, more social, but also a shift between the categories. And one of the things we could also see from the analysis of the last economic crisis, but that actually our competition did not decrease A&P -- or advertising spend, if any, they even went up even though the -- we expect the tariffs of advertising to go down because, of course, there's quite some companies in airlines or restaurants, travel who are pulling down their spend.So the plans are being made, but we also need to keep supporting our brands if we want to capture on the growth on the -- in the grocery channel in particular. And that is also important because during such a situation, you can also strike the wrong balance and then what we can see from market modeling studies is that it will take you like 3 to 4 years to actually build that back, and that would be the wrong decision as well.
Okay. But so on a quarter-to-quarter basis compared to Q1, you cannot give any more explicit guidance on SG&A that you, for instance, expect it to be reduced by another SEK 20 million quarter-on-quarter or something like that, that is not something you can provide?
No. Because I would say the situation is also so uncertain about customers opening up or not opening up on the pick & mix. The volume we will see now in the coming, let's say, 3 to 4 weeks post-Easter, what is the accept growth. Because of course, in the last 2 weeks of March, when this really started to hit us, and then the first 2 weeks of April, even the first 3 weeks of April, there's, of course, this whole Easter effect coming through as well are the figures we can then look at because there are no Nielsen figures, they are very much impacted by that. So we need also to find out, in particular for the merchandising cost, what is the new normal situation, what is the base we're going to work from. That's quite a big impact.I think the only thing we can say is that we had a plan for this year to make further savings, and we have upped the targets for all the functions and countries to the highest level, what we call the stretched targets on the cost savings for the nonmerchandising costs, had to see what we can do extra given this situation.
Okay. And you cannot say how many people have been laid off or if you have carried out furloughs? And if so, how -- in what percentage size of the staff? Not something like that, that we can build our estimates from.
We have all reviewed it yesterday, but it also changes more or less week-by-week. And I -- yes, I don't feel comfortable to discuss that over here, also with the fact that our competitors could be listening in on that. But yes, be assured that we try to strike the right balance to reduce those costs as quick as possible, indeed by using furloughs in those countries where we can. Reducing to 0 third party merchandising, which we use as a flexible tool around this. But the balance needs to be between the cost on the one hand, and on the other hand, the fact that we still want to service the stores in such a way that the customer and the shopper, of course, are still happy with the pick & mix offering.And as Frans and myself maybe as well we're alluding to, at the moment, that a retailer wants to open up again, we can't say, okay, well now you have to wait for 3 months because we have no people left, we need to start recruiting and training. And to find that balance right is something which we discussed twice per week in the crisis COVID team I'm leading, so it has a lot of attention. That's maybe the only reassurance I can give you.
Okay. One more on sort of current trading. Can you say something about the volumes for pick & mix and for branded packaged products in April so far? And especially then during the Easter period, how big of a decline have you actually seen?
I think it's -- I don't think we should give figures on April because we haven't also communicated that. But I mean if you listen carefully, you can say, well, January and February were quite unaffected. And actually, most of the loss started to happen in March and maybe even to the latter part of March. So if you would say, well, if that is the case and then the loss is basically the loss in 2 weeks, and I would then extrapolate that over a 3-month period for the next quarter, I think you can probably get some sort of a sense for yourself of what kind of bandwidth we're looking at. Because as we said, Jan and Feb were quite okay or quite normal, it all started to happen in March, in particular, when the channel started to close down, both on the branded but certainly also on the pick & mix.
Yes. Okay. On the CapEx side, you mentioned -- I think it was percentage of sales and what you had in mind there. But in absolute numbers, what was the budget going into 2020? And again, can you mention any number what you expect it to be now, given what you're seeing right now? I know that it's merely a delay, so it can obviously come during the second half of the year, but I guess it requires some planning as well. So CapEx for 2020, do you have a number to give me?
Of course, I have a number, but I don't want to give it -- you a number like that. I think what I would do rather is to repeat what we've said before. So this is really in the public domain, right, plus what I said earlier. So if you recall, originally, when we laid out the strategy that we have now been following for quite some time, at the Capital Market Day we said that as a company we had not really grown organically. And in the categories, et cetera, where we maybe had growth, that arguably came from acquisitions, which didn't require any CapEx.And now we -- with our new strategy, we would require a step-up on our CapEx spend, both for that but also to modernize and automating the plants as part of the Perfect Factory program, as well as a step-up, obviously, in overall IT as we modernize the company on that side and pick & mix rack. So there was a whole piece there. And we said, roughly, we said over 2019 and 2020 on an average, we should be spending roughly about 5% of sales over those 2 years.Then, of course, last year, we spent much less than that, and you know we spent SEK 178 million last year. So if we would be around 5% over 2 years, it would have required us to spend maybe SEK 450 million or so this year, at 7% spend this year. That was based on what we already told you. And what I said now is that 7%, let's say, roughly around 4%, and then you can do the math on that. But I don't want to give you the exact number because then I'm also telling you what my sales forecast looks like down to a fairly detailed number. But roughly, that's where it is.The other piece, I just wanted to add because I think the question, from my relatively short period in the company, but that I think came up both in Q1 and Q2 last year and I think that it's part of the question you already asked, is usually, so what's the Easter effect as a result of Easter taking place at a different date year-on-year? And now, of course, in 2020 now, Easter is a little bit earlier than what it was in 2019. So let's say, if there was no COVID-19, surely you would have expected a little bit more sales in Q1 on account of that Easter effect and a little bit less in Q4.So obviously, when you think about Q1 and the drop, let's say, on pick & mix, let's say roughly SEK 3 million, and that happening towards the end of the quarter, that's actually a bigger number because you should have seen an uptick because of the Easter effect. Hopefully that -- and I know you look at it that way, and that probably helps.
Okay. Let's go to other questions because there might be other questions as well, and it's already 11. And of course, you can always...
Yes, sure. Could I just add one final on the inventory side? Is there any risk...
Come back, Mikael, to -- if there are more questions, right?
Not right now.
Not right now. Okay. We have 2 open here. So let's do those 2, and then we'll open up for new questions.So I think the first question is -- I think it's a misunderstanding, a 30% decrease in sales for branded products in the sales channels where you sell such products.No, that's not what we said. We said we have -- for the branded products, we have 2 sales channels. Well, we have many more, but if we really simplify it, we have 2 sales channels. One is what you call the [ grocery-related channels ], that's the grocery trade. They do 70% of our sales for branded. And then the other one for the channel is all the rest together is 30%, yes? And in the 30%, we see a strong decrease of sales.We have not communicated how much the sales were down, but that's -- and that's a result of either those shelves being completely closed down, like in the U.K. or IKEA in some countries, or this many -- a stark drop in the number of shoppers in those channels. So the -- it's 30%-70%. And in the 30%, we see a strong decrease. And then in the grocery trade, we see an increase mainly in candy. Stable to -- not growth as well on chocolate, but we see a decrease in the more import-driven products like gum and pastilles.And then there is a second question: Could we comment on the current inventory risk -- sorry, inventory levels and the risk for write-down.At the moment, we don't see a risk. But of course, we need to closely manage that. I'm perfectly confident that on the branded products, given the fact that we have the demand everywhere that we will sell that, of course, with the pick & mix stock we need. And we have plans in place to mitigate the high stock level given the fact that, of course, pick & mix sales are so much down, and some products, like for Denmark, we are not able to sell. So that's why we're working so hard with the retailers in Denmark to convince them to open up again. That's probably the way to describe this. Frans, I don't know if you have...
Yes. I think it's fair. I mean, again, we have to remember that there's, let's say, 1/4 of this increase is raw and packaging, we will use that. Let's say, 1/4 of this is A-list SKUs...
We'll use that.
I think those will sell. Then we have other packaged products, and then we have the big pick & mix component, which we're now working hard on getting rid of. Now within there, of course, you could say maybe some of these products are, let's say, more Easter-focused products, the foam bunny. Then obviously, what we're doing is we're focusing specifically on those to make sure we can sell those earlier. But we have also increased our provisions in line with our policies and the review we do in case of there will be some write-offs. So we have already covered for that in Q1 results.
So is there any more question on the 0-1?
There are no further questions registered on the phone.
Then we take -- yes, back...
Back to Nicklas.
Back to Nicklas. Was it Nicklas? Or was it Mikael?
Mikael. Mikael.
Mikael. Yes, Mikael. Yes, exactly. Mikael, are you still there?
Actually, I got the answer was -- the question was on the inventory side, if there was a risk.
Ah, right.
So I got it answered.
Great. Anybody else?
[Operator Instructions] We do have a question from Michel Keusch from Bellevue Asset Management.
Just a quick follow-up question actually on your guidance. Because when you're talking about significant decline in operating profit in Q2 and you also talk about the significant decline in sales, so obviously significant on both sides. So it's difficult to see whether margins could be going down more or less. Now I understand from your comments that, obviously, you cannot cut the merchandising costs as much as the decline in sales for obvious reasons.On the other hand, I was not sure to understand your comment on the A&P. If this could be going down, maybe more than decline of sales and be compensating. Just to understand if -- to what extent the margins themselves could be in a way protected? And obviously, if sales are going down 15% or 20%, then the EBIT is also growing 15% to 20% down, so also significant, but at least margins being more or less stable. Or whether we have to expect a decline -- or a significant decline in margins as well because of those elements of costs that cannot be compressed during that period.
Yes. I think it's -- if I take the A&P question, one more time. I'm not saying that we're not looking for adjusting the A&P to be more or less in line with a certain percentage of turnover. And then we look very much at the turnover of the branded business. And in that, of course, we're looking at freeing up as much money as possible to working media, so we can support the growth of those product groups which are growing, and where there's a lot of consumers from pick & mix now wondering what are we' going to buy instead. But I think that is more what to expect. That we'll keep to try the percentages have -- very much on where we have been and where we have been communicating where there would be, and no significant changes on that.What we're not going to do is take enormous cuts in the spending on the support of the brands. Because as we also previously communicated, we will adjust the spend towards the channels which are, at this moment, very relevant and also for the brands, which are relevant. But it is also for the midterm, it is important on the organic growth journey of Cloetta, which we have been communicating about to have the right brand support for these brands. That's probably the only thing I could say on A&P.And then on the margins, of course, there are a lot of different factors, like I tried to explain. So of course, the supply chain efficiency on lower volumes, which we need to recalculate. And of course, we're very busy also looking at in-sourcing, can we substitute some of these volumes with more in-sourced products, which is difficult because we cannot travel so we cannot match products. And we have the whole ForEx element, be my guest to give an estimate on that for the next 2 to 3 months. But of course, we're working on pricing, but I think I explained to you the delay on that.And then, of course, we have the mix effect as well. With less of the profitable products coming in, the country mix in pick & mix, so relatively okay in Sweden and less okay in, let's say, a profitable market like Denmark or U.K. And so there's quite some elements impacting the gross margin. And then, of course, the cost element, where I think I'm quite okay with all the plans we've seen so far on adjusting the merchandising cost to a lower level to reflect the new reality and then all the VIP+ cost savings coming in. Yes, that's probably repeating maybe a little bit more concrete where we are.
And when you say that's -- obviously, in Sweden, this is where you're impacted the least when it comes to the pick & mix business, but at the same time it's also where you have to delay now your expectations of the breakeven level for this year. So why would that be the case?
So then maybe I should -- in Sweden, we do not see any governmental or customer actions to reduce the -- or to close the shelves due to social distancing. So that's, of course, what we've seen in Denmark, what we've seen in the U.K. But the consumer demand in Sweden on pick & mix is quite significantly down as well. And those figures are a bit different market-by-market, but it's not a few percent, let's say it like that, it's more than that. And again, the way to maybe get an estimate on that without doing forward-looking statement is to look at the Q1 pick & mix sales in total and then try to say, well, most of that came in March. So that is then probably where we are. That's the kind of level where we are at the moment.
Yes. And just one last point, which was not clear to me. In terms of the mix impact, I mean, I understand your comments that within the branded business, obviously, there is a negative mix impact because of less gums and less pastilles and so on. And within the pick & mix business, the fact that Sweden is not as impacted, it's obviously not as bad. Let's say, the mix impact is not as negative within the pick & mix because of the Sweden situation.But however, at the group level, since there is such a big difference in the performance of the pick & mix and the branded business, there should be a positive mix impact at the group level from this difference in profitability and also knowing that you discontinued contracts, which were very profitable and so on. So this is something I had difficulty understanding.
That's all right. Yes, on group level, it's just like that.
Yes. And this is what -- I mean -- this is what I also said, we do have a favorable mix but it's not maybe as big as you would have thought given these additional insights that we're sharing with you here, with the negative mix within branded and the negative mix within pick & mix. And if at end you were referring to, let's say, the contract here we're talking about, do recall that the agreement has been during the quarter exited. But we haven't actually exited the contract yet, that will happen towards the end of quarter 2 instead.
But there's much more detail on this in the -- I think for comparison reasons in the Capital Markets presentation from -- was it last year now, right?
Yes.
Yes, because there we also unpeeled a little bit more the profitability levels between the different countries. And I think over there, you can see that pick & mix in total has an EBIT level of, what did we say, around...
It was -- we said 2% to 3%.
2% to 3%, yes. And that -- but that Sweden on its own was making a loss in that year of minus SEK 60 million.
Which means everyone else was making a profit.
So everyone else is making a profit. And what we now are saying is that actually Sweden is least affected market, but it's also the market with the least profit or actually negative profit better than them. But still -- and that the markets where we make a relatively better product, still not enough, are the ones which are most impacted. And that's what we mean with the country mix effect within pick & mix.
And added to this as well, which I think you have on your list there, of course, is the ForEx. So obviously, the Swedish krona has lost a lot of value against the euro. And we're buying pick & mix from outside of Sweden. We're doing it at the euro currency. So that is also hurting our ability to bring that business back to black by end of this year as originally thought.
There are no further questions registered. I hand back to the speakers for any closing remarks.
Yes. So thank you for this relatively long call. We really felt that we tried to give as much underlying information about the state of the business, what do we see from a consumer and customer's perspective, how are we doing in our supply chain. And on the suppliers' side and then also looking forward at Q2, remainder of the year, what are the kind of movements which we are seeing if we're extrapolating, let's say, what happened in March.Simply said, it's growth of candy in grocery, it's decline in the nongrocery stores and the pick & mix business being unevenly impacted by government decisions across the portfolio. But in general, a number of consumers or shoppers being scared or being skeptical to pick & mix, which leads to the consumer demand fallout. And then on each of those areas, we feel we have action plans in place to address those as much as possible.And then last but not least, when things are moving on and there is substantial information to be shared, we will come out with press releases to update you. Good. Thank you very much.
Thank you. Have a good weekend.
This now concludes our conference call. Thank you all very much for attending. You may now disconnect your lines.