Cloetta AB

STO:CLA B

Earnings Call Transcript 2021-Q1

[Nathalie Redmo, Head of Investor Relations & Communications]

So 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 CEO, Henri de Sauvage; and Frans Rydén, CFO. Henri and Frans will take you through our first quarter results, and we will then move on to a Q&A session. And I will now hand over to you, Henri.

[Henri de Sauvage-Nolting]

Good. Thank you, Nathalie, and welcome, everybody. A few key messages on what we did see in the business in Q1. So it's very pleasing to see that the branded business came back to growth whilst we still have quite some out-of-home channels with a lot less shoppers. Pick & mix was still negatively impacted by COVID although March was a good month, which we'll show you later that, of course, has to do both with the comparator and also that Easter was in March, difficult to calculate exactly the effects of the 2. Also very pleasing to see the progress we're making on the road map to profitability for pick & mix, a lot of pricing and premiumization was done in the last couple of months, and that also starts to show, in particular on the gross margin in that underlying business. Then I'm also very pleased to say that although we are still managing the pandemic, there's a lot of progress on the strategic agenda. And today, we'll talk a little bit more about e-commerce and sustainability, which are gaining traction. A few quarters ago, we talked about our Innovation 2.0 setup. So fewer innovations, the bigger ones. This quarter, we're actually launching quite some disruptive innovations, which will disclose a little bit more about going forward, I can tell you a little bit about the success. Still very good focus on the VIP+, the savings program delivering also on the indirect moving towards a global shared service center in the Netherlands and in Slovakia. So also very good progress over there. Frans will talk a little bit about the refinancing of the group, which we have done, and we also approved an investment into new packaging technology for carton boxes. So with that said, we can have a look at the sales. Of course, I don't like the first bubble, the minus 4.2%, that's still negative, which is not success in my books, but if you then unpeel it, of course, it is very good to see that we are growing the branded business again, which is, of course, a very important part of our total business and something we were consistently doing before the pandemic, and now we're back to growth, so very good. And then on pick & mix, you can see that we're still heavily impacted by the pandemic, both in sales channels, in activation but also in consumer behavior. But that March looked a little bit better. And just to remind you, of course, last year in March, in the second half of March, the pandemic -- actually it was called out as a pandemic and consumers and customers started to react to also the comparator versus last year becomes a lot lower, and hence, we will see like this, a positive development. We internally are constantly looking also at 2019 figures and how we get back to those levels. So next one, please. Important for us and maybe also for you in a highlight, just to see what is happening with consumers across some of our main geographies. And you can see that depending a bit on the markets that there's a lot less traffic in areas like retail and recreation and look at the U.K., I mean, minus 60%, but also the Netherlands, when there's a full lockdown, people are not allowed on the street after 9:00 in the evening. And so let's not only take the Sweden perspective where, of course, we are having a very mild set of measures compared to, let's say, the Netherlands and the U.K. These are markets where we also operate. So you can see that a little bit over here, also transit stations, so that's very much people moving around going to work to work. And again, that's where Cloetta is selling products with the same pattern, that the U.K. is worse in that sense but also the Netherlands quite bad. And the workplaces, so where people are working again, U.K. very low and the rest more or less in line. So we're tracking this. It's also fair to say that now in the U.K. since mid-April, things are going so well, the society starts to open up. So we get a biweekly report within Cloetta with many more details because this is something we can learn from to see how our consumers and hence, customers behaving when things start to open up again, so we take those lessons and implement them into our other markets. So if we look in at the branded business, first of all, we have made the estimation of the split between the 2 channels. Why is an estimation because some of our customers are serving both channels, and then we have to determine the exact split, which we not always get from them. But you can see between the brackets, what it was a year before. And now in 2020, we can see it went down to 75 -- 25.Last 3 months market data, very important for the mix element. We can see that pastilles & gum markets are still down minus 13%. In Q3, they came up a bit and then they started to go down again. Here, we also have above-average profitability, which impacts our mix within the brand and Candybags still being very positive in the in-home channel, right? So this doesn't say anything about the loss we see, of course, of sales in the 25% other channels. Yes. So the increased candy and chocolate demand is still there. And I would say less import sales is also still a trend. So not so much change here versus the previous quarter. I mean we're doing a lot of things. So the step-up in brand investments in the top 25 brands is happening also in Q1, we spent more in absolute sense. Also in the next quarter, of course, will continue where we had a very low spend last year when the pandemic started. I talked about the Innovation 2.0. We'll talk a little bit further on the e-commerce. The valorization, very important is that all the products we're now or all the innovations we're bringing to the market under the Innovation 2.0. They should have a gross margin, which is higher than the category -- average of that category in the country where we're operating. So that over time, we're also in that way, lifting the gross margin of the group. And the same, of course, with the pick & mix with a lot of pricing quarter-after-quarter coming into play and starting to show in the results. For pastilles and gum, we are working on a strong point of sales program, both in the out-of-home market, but also in the retail to bring those consumers back into the category. And then for Pick & mix, same overview as last time. I mean, what has changed in U.K., I would say, we see at the end of March, early April, we see some of the channels opening up again. Consumer activation, largely unchanged, less price promotions than normal and consumer demand also still very much following what we have been seeing. But there's positive news as well. In April, we do see that the U.K. starts to get into a better place on these traffic lights. If you look at the actions we're taking, I mean, we have higher merchandising per kilo if the volume is less, so we are costing that out towards our customers, which we have been doing. We have some very good activations through cup promotions. That's an idea we have from the U.K. where they're selling not in bags, but in cups, and we're doing those activation now as well in all the Nordic markets were the first ones, really good. The premium CandyKing 2.0 rollout is progressing And then I would say also some really nice barter deals with other companies for the CandyKing brand, where we are then bartering. So we then put those brands onto our fixtures, our bags and then we get -- in return, we get media on the kind of channels they have. So that is also a very effective way for us with limited budgets to get the new CandyKing 2.0 concept communicated. Yes. Frans.

[Frans Rydén, Chief Financial Officer]

Good. Thank you. So as usual, I will start with net sales. In the quarter, our organic sales declined by 4.2% versus last year and then almost the same on account of currencies. Now it is important to recall that in Q1, we are still comparing ourselves largely against pre-COVID sales. So January and February is pre-COVID, and March is partially pre-COVID as the impact was only really starting to be felt towards the end of March. Actually, World Health Organization only declared COVID a pandemic on March 11 last year. It feels like it's been going on for longer, but that's what it is. With that said, we are very pleased to report 2.5% growth on the branded package sales for the quarter, and I'm going to add some perspective to that on the next slide. But also for pick & mix, sales are down almost 23%. This is significant, and we certainly have our work cut out for us to get that business back to a good place. Henri spoke about a number of things we're doing, but I also want to put that in perspective on the next slide. Here, looking at the sales by quarter, top row, starting with the 2.5% growth in our branded package business. So if you exclude the last 2 quarters leading up to the pandemic, then 2.5% growth is the highest growth that we have delivered for branded package sales for several years. It's fair to say that there is some cannibalization on pick & mix. Q1 2020 was also not a very strong growth quarter, including due to COVID, but we are on par this quarter with Q1 2019, which was our best Q1 for branded packaged sales for several years. And this is despite that, as Henri laid out, outlets in our markets are still experiencing significantly reduced footfall. Then looking at the lower half of the slide on the pick & mix business, 23% decline. That is -- and I'm reluctant to use the word, but that is the best quarter we've seen since COVID-19 began. And if you look on the very right, you can clearly see the impact of COVID, with January and February is down significantly, very similar to the prior quarters, were as in March, we grew. Easter do come a bit earlier this year, but clearly, society deals with COVID better now than during the start of the pandemic last year, and so do we. And it is very encouraging to see this partial recovery.So with those, let's call them, green shoots. Let's look closer at the profitability. Starting with Q1 this year, we are providing increased transparency on our results by reporting the operating profit for the Branded package business and the pick & mix business separately. We believe this will help you as stakeholders in the success of Cloetta to better understand our results, our opportunities and challenges. And in a way, Henri teased this already in his CEO word in Q4 and I'm happy to also confirm that we're going to do this consistently going forward, not just during the pandemic. Before that deeper dive, let's look at operating profit drivers for the total business. And as you can see in the graph, the declined versus last year, and that's driven both by the volume loss with associated underabsorption, of course, in supply chain. And then an unfavorable mix within the Branded Package portfolio that Henri also spoke about with refreshment category being harder hit by the reduced mobility of people and the social distancing. Operating profit further declined on account of increased cost of raw material after Q1 last year as well as we have continued to invest behind our brands. It is difficult to underscore enough how important this is for us. We are a consumer-focused company. And after safety and quality, there is no more important spend than communicating with our consumers. And we have some incredibly new products. Henri will have some slides on this but looking at Kexchoklad Vegan, fruit-candy, building on from prior innovations such as plant-based packaging and the 30% less sugar, we're going to further step up in the area of promoting our products to let the consumer know that, hey, we are actually here. Now finally, you don't see too much of those increased costs come into the quarter, only SEK 6 million, as you see there. And that's because of the continued efforts in our VIP+ program, and I'll come back to that on a separate slide. Of course, pricing and other margin-enhancing initiatives that we've taken. So let's then move to the split between the 2 segments. You can see here that the profit from the branded package business declined by SEK 40 million despite the growth. This is driven by several contributing factors. There's the higher investment in marketing that I mentioned. There is also the impact of higher material costs I mentioned, but it's also allocation of its share of the supply chain under absorption due to the overall volume drop. We're obviously using our plants to produce both packaged and that pick & mix products. So that is also impacting us in this segment. I'm also highlighting here that have taken costs in Q1 related to the recall of Easter products made for us by a third party. It does have a significantly sort of -- sufficiently significant impact on the quarter to mention. But as this is work in progress, I'm not going to go into the details on the value. And for the underlying business and looking forward, I think the most important aspect is the negative impact of mix that I mentioned with the reduced sales of refreshment products. Then looking at pick & mix below, you can see that we made a loss in this business of SEK 24 million, and let's triangulate that number a little bit. Firstly, in Q4, we shared that the volume loss due to COVID had pushed pick & mix to a loss of SEK 135 million or as we now report with inclusion of headquarter allocation, It's at loss in 2020 of SEK 154 million. Now you can see in the report that while Q1 last year was already impacted by COVID, most of the 2020 loss came after Q1. Now that makes for an average quarterly loss for the last 3 quarters of 2020 of SEK 44 million. And you sort of have to compare those SEK 44 million to the SEK 24 million loss in Q1 now. So that is arguably already an improvement. The loss is on par with last year despite the volume loss, although as I mentioned, the supply chain underabsorption is shared between pick & mix and branded package products. But I think it speaks strongly for the various margin-enhancing initiatives that we have shared that we would do, and then we have also done, fairer pricing, exiting unprofitable contracts, reducing cost, be it for warehousing or distribution or merchandising or in support functions. Some of the action helped soften the damage in last year, but the full year effect you can only see now in Q1. And then we have taken additional steps during Q1, including further fair pricing initiatives. Ultimately, though, we need the consumers to be picking and mixing, driving scale and efficiency to get back to full profitability. We can then move to that sales, general and admin costs and the continued delivery from the VIP+ program. It's also evident here in the reported financials. Here, you can see that in the quarter, excluding items affecting comparability in ForEx, costs were down SEK 18 million. And I also want to put that into perspective. First, I already mentioned that we increased the investment in marketing during the quarter, so this reduction of cost is net of that increase. It's, of course, also net of the annual salary increases across the market. But secondly, this is a reduction on top of the VIP+ savings we ordered and reported in Q1 2020. And at that time, we could report a reduction of SEK 19 million. So on top of that, SEK 19 million. So this comes, of course, partly from onetime activities like travel restrictions or lower merchandising costs due to lower volumes. But most of these are sustainable VIP+ savings delivered over the last 2 years and also continuing now in 2021. For example, and Henri mentioned that, I'm really pleased to say that this month, actually from April 1, we went live with our new shared service center for accounts payables, which we co-located with our manufacturing in Levice Slovakia, which will help improve how we work on things and enable further harmonization and automation. Now for the nonsustainable savings, some of that will come back into the business as society returns to normal. And most importantly, because of merchandising. But then those merchandising costs will also come with higher merchandising sales and the profit from those sales. So that is going to be a good thing when that happens. Looking then at cash, we had a healthy cash flow for the quarter, and I think there's 2 reasons why I can say that. First, as you know, with the seasonality of our business, we tend to generate our cash in the second half of the year. And at the same time, we did deliver a positively free cash flow already now in Q1, at the middle of the top graph there of SEK 11 million. And that free cash flow is also an improvement compared to last year when we had a loss of SEK 20 million. Secondly, the improvement in free cash flow comes from improved working capital management as well as lower CapEx spend at the installation of the new drying chambers is near completion, which more than fully offset the lower operating profit we had in Q1 2021. As shared earlier this year, we have put in place a Cloetta cash committee to get more focused on cash in the challenging environment, and I'm pleased to see a continued good return on that effort. Now the improved working capital is driven obviously by the absence of last year's buildup of inventories as we were safeguarding our supply chain from disruption due to the pandemic, but that's partially offset by lower payables with -- that correspondent to that inventory buildup and also higher receivables as we finish Q1 sales, much stronger this year than what we did last year. Now the working capital is nonetheless increased in the quarter compared to where we ended last year, and that's because of higher receivables, which is completely normal because the end of Q1, we have Easter sales. whereas end of Q4, post-Christmas, there is very, very little activity. Then as for my last slide, as you know, leverage is one of our key financial targets, alongside sales, EBIT and dividend. And this slide seeks to capture that in our debt position. You can see from the bar chart on the left that our utilized credit facilities and commercial papers totaled SEK 2.3 billion. And then on the right that we have additional unutilized credit facilities, commercial paper is not yet on the market for almost SEK 2 billion. In addition, we held SEK 444 million in cash at the end of Q1, which was a lot, but then we also readied ourselves for the dividend that was paid on April 13. Now that said, as we hold this call, we have finalized the refinancing of our group through our existing club of banks. I had shared at the Q4 earnings call that we expected to have this completed before the middle of the year. And I'm very pleased to share that it has been done so already now, and that we've had very good progress with strong interest from our full banking group to continue to partner with us. For the leverage, our net debt is 2.5x EBITDA, given that the lower profit has pushed us up above our target to be around 2.5. But it's well below the covenant of 4.0. Now coming back to the financing. It consists of 2 loans and a revolving credit facility It will be repayable in June 2023, 2024 and 2025 and each with the possibility of extending for an additional 2 years. This secures our financing and gives us flexibility for the coming years. And in addition, we will continue our existing commercial paper program. We are, as part of that, also reducing the revolving credit facility with SEK 60 million, which provides us some nice savings. And on that positive note, that concludes my part, and I hand back to Henri.

[Henri de Sauvage-Nolting]

Thank you, Frans. So a few more flavors on the execution of the strategy. So 14% EBIT is really important to start generating also more gross margin. So the Innovation 2.0, which we started 2 years ago, now it starts to deliver -- I would say, these are 3 examples. There are many more of them. The first one very much linked to the sustainability strategy into action is a program where we are introducing plant pack across our ranges and plant pack our plastic materials, either make totally or partly from plant-based material, so not fossil fuel. And that has good traction with consumers who -- yes, we see that as a positive and also gives us a reason to increase prices. The second one is that we are the first one to launch a vegan Kexchoklad bar into Sweden, but also in some other markets. And that's very nice to see that we're so fast. I mean, more or less the same time, we were announcing a global major competitor of ours was launching their intention to launch this as a big piece of news, and we are already on the market and really plays well into a growing interest among consumers for vegan products and of course, again, at a medium price. And then the other one, the last one, I'll mention out of the multiple examples we have is fruit-based candy. This is candy made from 50% fruit. Again, we're the first ones here in our markets to do this and also the first one we think globally with such a high percentage of fruit in the candy, very much linked to several consumer trends of more naturalness, more products made from ingredients people recognize, and also tasting really, really well. I must say, it's a fantastic effort by the, yes, innovation and supply chain and marketing team to bring this to the market. And again, you now see here Gott & Blandat, but we're launching this across markets under the different brands we have in those markets. So I would say quite nice examples of how to increase margin through innovation. Yes. The second one is e-commerce. We already had this as part of our new strategy within Cloetta before the pandemic, which was very -- because we have pockets of accidents, but not one approach. So we put this better in one execution strategy for all the markets with a small team of experts helping the different markets to get going. And on the left, you can see at the kind of growth levels we are seeing, of course, the markets are in different stages of development where the Netherlands is more advanced because you already have e-commerce there for the last 15 years. And the markets like Sweden or even Denmark being a bit behind. But it's very pleasing to see that we see really good growth numbers and also that we are in -- most markets we're outgrowing the market development. And our focus is very much on the omni-channel and pure players in each market to really understand the kind of activation, but also to optimize our shelves. So that's both the digital shelf pack shops, which need to be different, but also an artificial intelligence tool to see how we are being shopped or how our products are being presented in all those e-shops from different KPIs. So really a step up, I would say. And then also specific activations. And in the future, we're also looking at products. And it's very interesting to see the kind of dynamics in this channel also the kind of pack sizes, for example, we're selling. And next to that, we have a strong focus on marketplaces. Amazon across Europe, also bol.com, which is the Dutch Ahold owned Amazon, you could say. And a lot of traction over there. And here, it really shows that if we do things together, we only have to invent the wheel ones rather than each market with limited resources trying to do this themselves. And if you look at the example over here, the shop-in-shop of Jelly Bean, which is doing phenomenally well in both the U.K. and Germany, relatively small markets for Cloetta not with a lot of resources and then being able to do this with the group and then we can leverage that into other markets later on, maybe not even only in Europe. So very, very positive to see. Yes. Also, the sustainability strategy, we will organize something in May to communicate more clearly our total program. I think we talked about the first column in the second one, a very interesting pilot project on the living income module together with some key partners, big global companies and then the reinforced alliance, who really work on cocoa and the farmers in a more direct way using blockchain. We're also starting to look at a feasibility study for a partnership on gum Arabic, which is coming from the sub-Saharan area where there's both social, economic, but also planting of trees and keeping trees in that area as both a deforestation or a decertification countermeasure and of course, giving income to people living there. And then on the footprint, we have subscribed to the climate-based scientific targets. So we're calculating our baseline on that when that is ready, we will set ourselves that target. And we're also very clearly now linking all the 25 supported brands to the sustainability agenda. I mean what kind of sustainability parts are we going to lift into the brand, a lot of enthusiasm in the marketing and commercial units for that. Yes. And then the key business priorities that remain unchanged. I mean, it is to get back the growth of the profitable segments of the branded goods. And we talked about all the actions we're doing over there. The pick & mix business, we need to get back to profit and all the actions we are having our focused on either improving the gross margins of the product or to look at the cost, which is mainly the fixtures and the merchandising. So very good to see the progress of that coming through. And then cost and efficiency. We talked about the shared service center, that's more in-sourcing we're doing, even though it's not that easy with travel restrictions in Slovakia, for example. And then we also decided this investment in carton packaging technology to be ready for the future. And that's also an important part of our perfect factory program to move towards a future which is built on modern equipment and digitalization. So I think that was the last part we wanted to share, and then we're open for questions.

[Operator]

[Operator Instructions] Our first question comes from Andreas Lundberg from SEB.

[Andreas Lundberg, Analyst]

Just on your branded profit or branded package profits, could you share some light on the effect from mix and under-absorption on the earnings decline there?

[Frans Rydén, Chief Financial Officer]

Thank you, Andreas. So we're not splitting it up per se. But I would say that, number one, we've shared before that our Refreshment segment is a very profitable one. And that's, of course, very much hit by the continued COVID restrictions and people's mobility patterns. On the underabsorption, yes, the key point there is that because how we're manufacturing our products, and we're sharing production resources between the 2 segments and sometimes even shipping between plants for further packaging. The volume drop that we're seeing in pick & Mix is also impacting our branded package portfolio.

[Andreas Lundberg, Analyst]

I guess it's fair to assume that earnings would have been down also without any underabsorption effects. Is that correct?

[Frans Rydén, Chief Financial Officer]

You're referring to the branded package business on its own, you mean?

[Andreas Lundberg, Analyst]

Yes, yes.

[Frans Rydén, Chief Financial Officer]

So I mean, yes, there's just a couple of things that are impacting that. I think one is, when you're comparing to last year, the other one, if you're just thinking about sort of where we're coming off from, when we executed last year. So we have also -- well arguably a onetime event here with the Easter Egg recall. So that's, of course, impacting us. We have stepped up the A&P, but that's -- there's more to come. And as you see, there's a lot of activities that we've launched now, so into Q4. So we would have dropped even without the underabsorption because of the mix and because of the Easter Egg recall, that's correct.

[Andreas Lundberg, Analyst]

Okay. Got you. And also, I think you touched upon a little bit, but on markets that have opened up recently. What you see when it comes to both consumer activation and consumer demand?

[Henri de Sauvage-Nolting]

Yes. So that's -- it is early days because that has happened, I think, last week in the U.K. opening. And U.K. for us is, of course, a market which is -- I don't want to say different, but our business is different. We have a lot of pick & mix over there and much less branded sales and no candy bags in that sense. But what we have seen in the U.K. is that people are really coming back to the high streets. And that is very important because we have a few very big customers like Wilkos and Poundland who saw very low footfall -- they were opened with very low footfall. And of course, when people are back in the street shopping in those kind of places, we can see that sales also are coming back over there. So that is something, of course, to translate then into other markets that we will see the out-of-home channels coming back. So for us in the Nordics and the Netherlands, there's more kiosks and those kind of places. Then cinemas in the U.K., which is also a very important channel. Cinema in leisure is not open yet. That's going to happen in May, but I would expect a similar kind of effect. And then it's too early yet to conclude on what is happening in the supermarket channel. And I also do not expected that will go very fast. So I mean that pick & mix sales within the supermarket channel when restrictions are being lifted, it will not immediately explode, I would say, back to the 2019 level as communicated earlier, that will take several quarters before we'll be able to get people completely back into pick & mix. But we're following it to get a detailed report with all the consumer insights on a biweekly basis and are then drawing our learnings from that for the other markets. And we're, of course, happy to share that next quarter.

[Andreas Lundberg, Analyst]

And one on the online channel, does it differ? I mean does your profitability differ versus your traditional channels? And also, how does it work? Or what's the differences between when it comes to marketing, merchandising? Do you share that more or less with your sales channels versus the traditional model, for instance?

[Henri de Sauvage-Nolting]

Of course, we don't have any merchandising in these e-commerce channels. And then the marketing, I would argue, I mean, you do that for the brand, no matter where it is being sold. So we're not allocating our marketing cost to a supermarket or a kiosk or a swimming pool or an e-commerce channel. I would say that's the same for all of them. And then some of the omni players, of course, are our regular customers like ICA or Albert Heijn who have both retail stores and e-commerce. And then there are pure players like, let's say, Amazon or -- sorry, or MatHem and then the marketplaces with Amazon. Yes, it is a mix of everything. I think it's too early to say, which is above or below or at par in marketing. We also are learning. We're seeing that we're selling different kind of packs in these places. I mean like in Jelly Bean, we're selling actually our biggest selling SKU with the big pot. So that is the, let's say, 1.5 and 2-kilo pot. So it is also a mix difference very clearly in that channel, which also impact profitability.

[Andreas Lundberg, Analyst]

Okay. And lastly for me, at least, on this new investment plans in the carton packaging technology, what you expect to get out of that?

[Henri de Sauvage-Nolting]

Well, a few things. I mean modern lines with higher efficiency, so we're able to produce more, but also lower cost due to the fact that we'll have higher output with the same number or even lower number of operators. It's also making us future-proof that we are able to keep on supporting this packaging technology, which actually is quite important because we can see that there's more and more discussion about plastic. So we are able to sell candy products in carton like we have Lakerol or Zoo or Tutti Frutti in expanding markets in Eastern Europe and in Asia, that's also an important future growth model. And it will support our perfect factory program because we are also replacing in this -- with this investment a number of very old lines with modern technology, which is able to perform at a much higher level with less waste, more flexibility. In this case, we're also going to do a portfolio harmonization where we're going from something like 24 different boxes to -- well, something like 4 boxes in total. So harmonization, which will then bring us further improvements on the buying of the cartons, less complexity, less change over time. So there's a lot of benefits actually coming from modernization of these packing lines.

[Operator]

Our next question comes from Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, Research Analyst]

Yes. So I have a couple of questions. The first one is, what is the reason that you allocate an underabsorption costs to the package business? Is it because it's just too difficult to sort of split out?

[Frans Rydén, Chief Financial Officer]

I mean that's part of it. I think it's also a fairer way of doing it. If you imagine that we have a production line, which is producing products that may both be sold in pick & mix and in branded packaged. So obviously, when the volume goes down, it makes the whole line less efficient, so it impacts the volume across. And in terms of the difficulty and you're spot on there because you might even have an instance where these products are then shipped to another plant where they may be packaged. So at the production line, it might not even be clear exactly if this product will land in pick a mix or in the bag later on, so it wouldn't be possible to do it. But I think the simple thing, it's because of the shared technology and shared use of resources, it is fair to allocate it based on the volume.

[Nicklas Skogman, Research Analyst]

Okay. Good. And then was there any negative impact from input costs in the quarter? And how do you see this developing going forward?

[Frans Rydén, Chief Financial Officer]

Yes. So basically, we had -- yes, there's an impact, if you will, on -- but maybe it's more of a phasing impact where commodity costs went up last year, and we saw less of that in Q1. But against that, I think where -- what we're seeing now in Q1 is that's fair going forward because that's more of a comparison to last year or not the run rate. So I think we are in a pretty good place now.

[Nicklas Skogman, Research Analyst]

Okay. So if we look at the factors impacting the packaged business in Q1, you have the underabsorption, the pastilles chewing gum negative mix effect. They should all be in the comparables in the coming quarters, right?

[Frans Rydén, Chief Financial Officer]

Well, so I mean -- so again, it depends, of course, what happens now in Q2. If we continue to see an opening of size and higher sales than that underabsorption, of course, will come down. The mix should be improving. Input cost will, of course, be as they are.

[Nicklas Skogman, Research Analyst]

Yes. I just mean in Q2, Q3, Q4, you already had the underabsorption and the negative mix in packaged, right? Last year?

[Frans Rydén, Chief Financial Officer]

Yes. Yes, of course, yes. I mean you have to keep that -- looking at this, Nicklas, bear in mind that when you do it by quarter, recall that we were very clear last year as well about the shift of some of these costs between Q2 and Q3. So you just have to bear that in mind when you think about quarter versus quarter results.

[Nicklas Skogman, Research Analyst]

Yes. I will do that. And then the product recall that impacted this quarter, will there be any costs related to that in Q2 as well, or?

[Frans Rydén, Chief Financial Officer]

No, we believe that we're fully and appropriately provided for that.

[Nicklas Skogman, Research Analyst]

Okay. So it's net-net positive sequentially then, is my take. Anyway, finally, I'm not an expert on this field yet, but your vegan Kexchoklad, could that be considered a plant-based product? Is it right?

[Henri de Sauvage-Nolting]

Well, it's vegan, right? So that means no dairy and vegan-based. I mean...

[Nicklas Skogman, Research Analyst]

Yes. Okay. Good. But have some other vegan products already, don't you?

[Henri de Sauvage-Nolting]

Yes, we do. We do. And it's a growing interest. So this is not going to be the last one, and we're working as well in different markets, on different brands towards vegan. So that is also...

[Nicklas Skogman, Research Analyst]

Do you mind sharing how much of your sales are vegan and maybe in 2020?

[Henri de Sauvage-Nolting]

Yes, like we can, we would, but I don't have that figure here in my head, but it's certainly something we are on that trend, but it also, of course, has to -- yes, it has to fit the consumer and the consumer is our boss, that's at least how we say and how we think and how we act. And it cannot go at the expense of quality and because it is, in the end, the second moment of truth is when you put the product into your mouth after you bought it, and then it also need to taste really well. So it's -- I would say it's important, but it's not the holy grail. It's not that if we move everything into vegan that it will suddenly sell twice as much. It's like proper marketing, we look at consumer trends, at segments, how big they are, where the consumers are interested. And in Kex, for example, this is a, of course, article, which is very big in Sweden with a lot of different target groups, so then it makes a lot of sense to do this, and we can do it as well with a fantastic taste. So that all fits together.

[Nicklas Skogman, Research Analyst]

Sounds good. One final question, now I remember. The -- you talked about the lower cost for merchandising in pick & mix. I seem to remember that in previous quarters, you have sort of said that it's been difficult to adjust that cost base considering the drop in pick & mix. Has that changed, or?

[Henri de Sauvage-Nolting]

No, I don't think it has changed. We have reduced it. But what we said in the previous quarters that it is difficult to rightsize the merchandising cost when we do not know yet how the volumes are going to be post, let's say, society opening up. We can see that we talked a little bit about the U.K. and how things are bouncing back. I mean we have taken the decision to rightsize our merchandising in the U.K. with the kind of loss we had over there. And you can see the kind of impact of the mobility in the U.K. and also understand that's probably one of the markets where pick & mix is the most hit. If we would have done that last year, we would not have been able to grow that business now in March, and we certainly would not have been able to do that in April when society is going back. So what we said is we need a little bit more of a stable situation to rightsize the merchandising in each of the markets. Well, having said that, we have just concluded a big benchmarking across all the markets on the merchandising cost to see and learn from each other, I mean, who has best practice in merchandising, be it route planning, be it efficiency of filling, efficiency of cleaning, efficiency of ordering, et cetera, et cetera, and then trying to bring all those lessons across the group to lift everybody to a higher level. And there are interesting differences, let's call it like that, and opportunities to further streamline the ways of working in merchandising and how we work with merchandising. So that is certainly not the last time we talk about merchandising cost in this call, I would say.

[Operator]

[Operator Instructions].

[Henri de Sauvage-Nolting]

Good. We have a few questions here on the screen. The first one I would ask Frans from Stefan.

[Frans Rydén, Chief Financial Officer]

So Stefan had 2 questions here. One was on the gross margin last year and how to think about that impact this year. I think probably this question came at the same time as Nicklas. But just to be -- so basically, so last year, we had SEK 35 million in cost that spilled over into Q3. So when you think about the comparator that you have to keep that in mind. This year, we're not going to have any movements like that. I mean there's always a little bit of phasing between quarters, but there is nothing significant impacting from Q4 going into Q1, nor is there between Q1 going into Q2. So that's one piece. The other question from Stefan was about the Easter sales, and Henry touched on it very briefly. So basically, there's 2 pieces here. One is that Easter has moved by 8 days. But the other aspect of this, which makes it very difficult to really untangle is that at the end of Q1 last year, at the end of March, sales really dropped incredibly the course of COVID because that was really the first time it really hits us. And untangling what is because of the phasing and what is because of COVID, it's difficult. I mean we've looked at this by week, almost by day. But I think a fair way of looking at it would be to say that, in 2019, when we had a similar shift of Easter, we estimate that, that was roughly SEK 30 million to SEK 40 million that were shifting. And I would say now we're talking about roughly half of that now. So somewhere SEK 15 million, SEK 20 million is probably the benefit of the phasing of Easter in Q1 this year.

[Henri de Sauvage-Nolting]

Good. Then I'll -- I can confirm to Nicklas that it is plant-based. So you can now tell all your friends to buy Kex vegan because it's plant-based. So just to confirm that fact. Then we have a question from [ Trojan Trading ]. Yes, the opening of Cineworld in the U.K. will have a positive effect on pick & mix. Yes, we are in dialogue, of course, with all our customers together with them. We also said we'll wait 1 week after the opening to see what kind of footfall they are getting into the cinema because pick & mix is, of course, also something you want to have fresh and it needs to have a certain rotation for the concept to be fresh. But that's a big segment, cinemas leisure are 1 of the 3 pillars on which the U.K. business is built: One is High Street; second one, cinema leisure; third one is, let's say, the more traditional supermarkets, the way we know it here in the Nordics. So that's absolutely a fair observation that, that is a very important step forward for the U.K. Can I comment on Karkish buying shares in Cloetta? No, I can't really. I mean, they are a competitor, on one hand, on the other hand, they are a third-party producer. Remember that we sold our Italian business to them, and they seem to have an investment strategy where they are purchasing shares in companies. They know very well. But I mean, there are real underlying reasons, I would say you need to ask them. Then -- yes, that was the last one, I think, from the screen. Any other ones on the audio?

[Operator]

There appears to be no further registered questions from audio.

[Henri de Sauvage-Nolting]

Good. Well, then I would like to thank everybody for their attention and wish you a good day.