Cloetta AB

STO:CLA B

Earnings Call Transcript 2019-Q2

[Jacob Broberg]

Good morning, and welcome to Cloetta Q2 Conference Call. My name is Jacob Broberg, I'm Head of Investor Relations here at Cloetta. And as last time, I have Henri de Sauvage-Nolting, our CEO; and Frans Ryd�n, CFO; with me here today in Stockholm. So I'll start with handing over to Henri to start.

[Henri de Sauvage-Nolting]

Yes. So thank you for joining us. Q2 as many of you already were predicting, had strong organic growth and also a slightly improved operating profit. Good to see that organic growth came up to 5.7%, both in the branded and the pick & mix. Also, in the operating profit adjusted we made the step up to SEK 161 million, and then operating profit SEK 159 million and the profit for the period SEK 97 million. Same level as last year. Cash flow very much affected by phasing effect. Frans will come back to that later on. And after the dividend payments, the net debt of -- over EBITDA was 2.7x versus last year, 2.8x.Yes, if we look at the markets and the sixth consecutive quarter now of growth in the branded products. That starts to become a trend, I would say, showing that we are improving quarter after quarter the strength of our -- of the brands. Of course, still a lot of work to be done. And we're just starting on this journey, but of course I'm pleased to see the continuous effect of that also because of this quite spread across all the markets, which of course is also a good sign for the future. So the packaged confectionery or branded confectionery markets grew in all markets, of course, also little bit helped by Easter in particular in the Nordics with chocolates. And also pick & mix grew in all markets, in particular in Sweden. But of course in absolute terms, a lot of growth. So I'll unpack the organic 5.7%, there was 1.4% growth with the brands, and I already said it really starts to show that we get some real traction behind the branded business. And then pick & mix, 18.1%, very good. Yes, a lot of effect, of course, in Sweden of Easter and also in Norway to a certain extent. What we overshadow a little bit here is also the very good work we're doing in the other markets on pick & mix where we're growing. And even in Norway, there were many other contributing factors in, let's say, the implementation or the sales pressure which are leading to this great result. So that is good to see. Of course, we still need to get the average profitability up so that we also can start to earn some money on these increased sales. And market shares in the majority of our business, up, and again another good data point to show that we are strengthening ourselves.If I look at the Cloetta Core Strategy to the strategy which is really focusing on our core business, our core brands and our core markets. Of course, in Q2 we can see that the brands were growing. Pick & mix were growing, but also we can see that brands are becoming stronger. In other words, both getting new buyers into our brands, and shares are growing, and that is good to see. We made another step-up in the working media, the amount of money we spent which is seen by consumers versus the money we spent on the agencies to research or prepare this kind of media. So that as a group becomes much more effective, and we're more out there talking to consumers about our products and our brands. And also we can see that the strategy of doing less innovations and making them bigger is actually also helping to become more successful. There will be fewer innovations, more aligned across the markets are starting to pay off. Yes, then to facilitate the growth, so the work we're doing on things like organization. And this may be the biggest progress also versus a year ago we just had a leadership conference, and now you can really see the top 60 people within Cloetta really working much more together. We call it One Cloetta, and there's many, many examples. There's a few of them coming through in this presentation but that, of course, is really unleashing the value of being part of a bigger company. One example is the Cloetta U.K. We now don't call it Candyking U.K. anymore but Cloetta U.K. They're on the M3 ERP platform of Cloetta which really makes the integration easier, but also they are now fully responsible for all the branded business, which we as Cloetta had in the U.K. and where we have not been focusing a lot on -- and not be very strong in the last couple of years, very tactical. And now is a good plan together with the leadership of marketing in the international markets under which the U.K. sits and really implementing branded products in pick & mix channels and vice versa, working directly with customers. So that is really showing great progress. Also, on the capacity, drying investments is all on time. Actually, we're able to cut some timing on one of the factories by going faster. We're moving to 24/7 production on foam in the Swedish factory to prepare for the sales we can realize over there. And the business units have now also made a 5-year strategic plan by technology and by brand, and that is now being used for the factory network to see okay, where are we going to see the growth in the coming 5 years. So where do we need to increase capacity and coming with the CapEx plan to the Board of Directors somewhere in the second half of this year.Yes, and then on the cost and the efficiencies. The Value Improvement Plan, which we also talked about in the Capital Markets Day, very positively received by the -- what we call the extended leadership, very much focusing on the non-people cost. A lot of different work streams in the way. We set it up together with Accenture in the visibility phase using the ZBB philosophy. And a good traction, very many ideas I would say on how to tackle that. And also on organization, we're looking now at getting more efficiency. And so a good progress. Perfect Factory rolled out now on 6 main lines in 3 of our factories who's starting to also show good initial results. Of course, this is a longer project. And just one year after the summer we'll expand to another 6 lines with very encouraging first results coming out, also showing where we have weaknesses, or in my terminology, opportunities to save cost or to get more efficiency out. And at pick & mix Sweden, we already alluded a little bit on that, a great progress on the sales side, with also 50% of the volume more or less contract-wise have been raised in price without having a huge impact on the volume, a good -- yes, very good progress, I would say. There's a number of larger contracts, which we're now tackling in the second half of the year where we also need to get a more decent profitability level. Let's call it like that. But apart from the pricing, there are other big initiatives going on, so we're also taking quite some article numbers out from the assortments. And you might say, "Well, what is that going to do with EBIT?" Less complexity. That means faster merchandising, means cheaper production cost, less obsolete, et cetera, et cetera. So that is quite good. And also on the merchandising, we're seeing first signs that we get better KPIs and better control over the cost of refilling the shelves in store. Then I hand over to Frans.

[Frans Rydén, Chief Financial Officer]

Thank you, Henri. So first let me just say when I presented Q1 results I used the word despite to describe our results in that quarter given that we had a tough comparator with Easter in quarter 1 the year before, as you probably recall. But now for quarter 2, we are obviously comparing versus a quarter without Easter. So I think it's important that we also keep an eye on the year-to-date to make sure that we see how we're progressing against our financial targets, excluding that phasing impact. Nonetheless, in quarter 2, as Henri mentioned, we delivered organic growth of 5.7%, our first quarter in some years where our total business grew. And branded business was up 1.4%, which brings year-to-date growth to 1%, which is within our targeted range to grow in line with or better than the market [ for funds ] 2%. Pick & mix business grew 18.1%, obviously supported by the strong Easter sales, but as Henri mentioned, also good success in other parts of the business. And of course, everyone anticipated a strong quarter 2, but this also means that year-to-date our pick & mix business is now delivering growth at 1.6%. And is this starting to become a trend? Henri mentioned that. I mean it is great to see that as a total company year-to-date and not just during an Easter quarter, we are delivering now organic growth.Now I would also pause here for a minute on the strengthening of the euro, so the 5.7% organic becomes 7.5% in total growth. Now with that currency effect obviously, course, the top line looks nice but we will also have some tougher conditions further down into the profit and loss. And I'll touch on that as we go through this. Nonetheless, again, a quarter of very stable company performance and now also on the top line.And first, let's have a little bit closer look at the quarterly performance here. So for this quarter, branded represented 71% of our portfolio, and there you see the 6 quarters of consecutive organic growth that Henri mentioned. And at 1.4%, that's pretty much in line with the average of the preceding 5 quarters that we've had. And for the pick & mix business, the remaining 29%, you recall we've been talking about that here, the business is a bit more volatile given that it depends very much on winning contracts versus the branded business is about winning with each consumer every single time. And we have seen that reduction in our sales over the previous quarters was at least the bar was getting shorter and this was getting closer and closer to 0. And now of course, it's great to see that with the big uptick in Q2, we are back in line with prior year and slightly better. Of course, we have also said that as we're taking pricing action in Sweden, we may lose contract and we may have to walk away from contracts as well. So that may, of course, looks different in the future.Coming to our gross profit, we improved by SEK 20 million versus prior year, and this was driven by this very strong top line growth, partially offset by the unfavorable mix given that pick & mix grew much faster than the branded. We also have high cost of goods sold, as mentioned before, this doesn't help on the cost of goods sold. And as you're surely aware, sugar and gelatin prices are up. Nonetheless, gross profit improved versus last year.Now as we look at the gross margin, down 1.4%. Here I think it's interesting to note that gross margin in quarter 2 last year at 38% was the highest we've had for quite some time. So there was a lot of good things that came together in that quarter. If you look at year-to-date 2018 gross margin, which was 36.9%, it's probably a little bit more indicative of what we were performing last year. Nonetheless, we do see a lower gross margin for the quarter, and that's partially driven by portfolio mix following the strong performance of pick & mix but also the euro. As the currency effect is both on net sales and COGS just shy -- a little bit less than half of the gross margin drop that we see, both for the quarter and for the year-to-date, is on account of the ForEx impact. Now the other thing here is on sales and general and admin. Of course, that's also impacted by ForEx, and I want to dig into this a little bit closer on the next slide because actually our cost here is flat versus last year, despite absorbing the ForEx and also increasing our investment in working media. I'll come to that on the next slide. And I'll just finish here first on the operating profit adjusted. It's up versus last year, they are both an absolute and as a percent of NSV. And that's again on account of the strong top line and also cost efficiencies that we will explore a little bit closer on the next slide. Again, partially offset by high cost of goods sold, which includes unfavorable ForEx.So on the sales and general and admin. You, of course, see that as a percent of NSV, we have decreased versus prior year, in line with what you would expect. But the most important aspect here is that last year in quarter 2, we had a gain of SEK 90 million in SG&A. And you may recall that, and we actually had it in the CEO's word as well at that time. So we had a positive impact of remeasurements of the continued earn-out consideration relating to the Candyking acquisition, so that was SEK 19 million. Now it would not be fair to only strip out, so I'm stripping out all the nonrecurring items that we have reported, and then you can see that both for the quarter and for the 6 months, we have net cost savings that basically are offsetting the ForEx. And on top of that, some of those cost efficiencies that we have on the indirect are also in the advertisement area where we are reducing our nonworking spend. And we have been able to invest more in our working media, which is seen by the consumer.I just want to call out here also that the ForEx number here is not the official IFRS number. It's our best calculation that we could do.Now moving on to my last slide on the cash flow. So similar to the top line, one really has to look here at the first 6 months because of a lot of phasing on account of Easter. And if I could direct you to the bottom right on this slide where we're showing the free cash flow. So cash flow from operating activities, net of CapEx investment at SEK 70 million. So that was a clear improvement versus last year. Now out of that improvement of SEK 72 million, roughly half of that relates to just simple reclassification on account of IFRS 16 implementation, and the other half is fairly equally split between higher profit, once you adjust the noncash items, slightly better working capital and lower CapEx. On the Q2 per se, not -- excluding the phasing, I'd like to point out that actually -- because Henri mentioned it earlier about the drying chambers, so in the CapEx number there is a small but first spend here relating to the drying chambers that we mentioned earlier. So that will help in our molded capacity next year so we now actually start having cash out on account of that investment. The other important item here for Q2 is the payment of the dividends under cash flow from financing activities. That's SEK 287 million, and we also repaid some commercial papers. So then when you look at cash flow for the year-to-date under financing activities there's really 3 pieces that you have there. There's the dividend payment. There's again the reclassification of IFRS that helped on the free cash flow. And then there is a slight increase in commercial papers as we are transitioning this quarter into One Cloetta cash pool that will help reduce complexity and also enable us to manage our cash slightly better. And with that note, I'll hand back to Henri.

[Henri de Sauvage-Nolting]

Yes. So summarizing. Yes, 3 main priorities, and if we look at the branded growth, I would say, goods, yes, another quarter of growth, 1.4%. Branded EBIT of course already above the 14% target we have. So just motoring on and keeping the growth levels up there is very important, and as I said, good traction with our brands. I'll show 2 examples later on. And on pick & mix, it's still, of course, a hard battle in particular in Sweden to get the margins up. Good to see that with all the good preparation also our customers understood that we cannot continue with the loss-making situation, so 50% of the contracts done, also some other general price increases due to sugar prices and ForEx. So that's across the whole portfolio being done in Sweden. And then in the H2, we have a number of larger contracts which we're going to renegotiate on the same basis in pick & mix. And next to that, a lot of things happening, as I said, on merchandising and assortment. Candyking U.K. well, actually we should call it now Cloetta U.K., that's the new company name, being integrated not only on the ERP system but in all our processes in, be it marketing, sales force, costing, branding, et cetera, et cetera. So good to see. And now we've reduced cost. Already mentioned that the ERP program has started. Also good to see that the actions we took last year are also paying off in lower indirect or SG&A cost, as Frans was just showing. So that's important. The Perfect Factory to really create capacity and also bring the efficiency and the material usage in our main plants up to scratch, not to be underestimated as the efforts we need, what we are doing. And we need to do over there also on things like maintenance programs to live in a new world where our lines are fully occupied in the big plants, and there is less forgiveness if you have problems. So the reliability has to go up quite significantly. And good to see that also the working media has increased. We also now have a new media director who joined us and a new CMI manager really looking at all the contracts we have with our agencies and questioning why do we pay this in this country, and that has never been done before. So there's more money, I would say, to be gained over there as well. Yes, then 2 big things. One is the L�kerol relaunch, which will come in September. Really good to see how this, first of all, has been done across markets with 1 brand manager for L�kerol, and not anymore market by market with a lot of cooperation between the markets, a lot of sharing of ideas, common platforms, common toolkits for implementation. And that all will lead then to moving L�kerol more towards what we call a permissible treat. So a small treat, sugar-free, very sophisticated. So that's what we also can see that people are, playing back, had a sophistication of taste. As you can see, a little bit on the right, you can see we're using for the Swedish share business, a little bit more sustainable licorice is using. So that's showing signs of the strength and the taste of the products. So that level of sophistication should also help us to modernize the brands quite a lot, communicate these sophisticated flavors in that way. And it's a big relaunch, 360, as we call it, so both above and below the line in store to also get further growth in this category. We already have category growth in pastilles but of course, we want to pick it up. And also the profitability on L�kerol is good so that can really help us in our EBIT targets. Yes, and another one which we have been talking about with some of you is the self-scanning in the check-out zones. So we see more and more across Europe that retailers are moving to self-scanning, and they're also complaining, or saying yes, that is good from a cost point of view. We don't need to have check out but then we lose the impulse sales. And again a good example of One Cloetta. So the main market's coming together, developing a number of different concepts, which we then took out to retailers, said, "Hey, this is how we think you could still capture those impulse sales on self-scanning checkouts." That is more what you see there on the left bottom picture than how it looks in reality. You can see on the right -- on the right top, you can see that before our self-scanning checkout without any impulse products, and then next to it you can see that we are having an impulse point of sale at the self-scanning checkout. And actually very much like retailers that we're proactive, we're also not only talking about our own products, we're then taking a category view. So also in the markets where we have no chewing gum, we can offer them chewing gum as in -- as a solution as well. And I would say, through the example of how do we partner with retailers in helping them to grow the category and also a very good example of how we use the collective knowledge within Cloetta across the markets to be more -- yes, more knowledgeable you could say in these kind of areas with retailers. And that was it for presentations, and we can now open up for questions.

[Operator]

[Operator Instructions] The first question on the telephone lines is from Nick Fh�rm from SEB.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

My first question would be -- thanks for a good presentation and lot of very interesting details, but still, my first question would be if you would estimate the calendar impact, the reported 5.7% organic growth rate for the quarter. That would be helpful, please.

[Henri de Sauvage-Nolting]

Yes. I'll -- Frans, you'll take that?

[Frans Rydén, Chief Financial Officer]

Yes, sure. So yes -- so I mean it's not an exact science, but we would say it's roughly SEK 30 million to SEK 40 million, is the impact.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes, yes. Very clear. And second question is actually relating to the pick & mix segment. And I was hoping that you could update us a bit on your stores now that you have sort of revisited all the -- in particular the Swedish contracts and sort of the outcome and the expected impact from renegotiations on worse case.

[Henri de Sauvage-Nolting]

Yes. I mean, the -- as I said, we have gone out in March with the price increases on pick & mix, then we have finalized all of them in the -- how would we call, concept sales. Few larger contracts to be done now in H2, but with the price increase also in conjunction with a general price increase across the whole portfolio. So also the branded part is based on currency and sugar price, of course, not moving favorable to us. And -- but we have lost a few customers, single customer or groups of customers, but they're much less than what I anticipated when we went in. So that's very positive, of course. The pick & mix volumes though, difficult to say a real impact because of course you have to look at this maybe a few more months because some of these customers they might say, "Okay, I accept this price increase," but they start looking and shopping around, and looking at what our competitors are offering and they might come back and say, "Hey, I found somebody else who is still willing to do this cheaper." The effect of that is still to be seen, but so far it has not had a major impact on our underlying volume in Sweden. So that -- then of course, also good to see a little bit of a sidestep that's an essential theme together where the countries are becoming stronger and stronger in actually understanding pick & mix and helping retailers on how to grow this category based on consumer and shopper insights. And that of course, ultimately, should be the reason why they want to do business with us and not with somebody else.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

But just to be very clear -- thank you, Henri. Just to be very clear, I mean if any one of those customers, that I assume are unprofitable, actually come back and say, "Hey guys, we found another supplier," I guess you would just thank them and move on. Right?

[Henri de Sauvage-Nolting]

Yes.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

So I guess that my question is really do you -- should we still expect, sort of, Candyking Sweden to be breakeven, say, on an annual basis somewhere this year or the next year? I guess that's the plan.

[Henri de Sauvage-Nolting]

What we communicated also in the Capital Markets Day is that the run rate by the end of next year should be both breakeven. And that is very clear, and also we are willing to take the risk with these volumes. We've gone out -- first of all, I've never seen a business becoming long-term successful when you're selling your products with a [ book ]. Yes, so that's actually very, very simple. Also we don't -- we're not desperate for those volumes because we have good organic growth in our branded business. We've got good organic growth in the other pick & mix business. We still have in-sourcing opportunities, as we said, from Candyking suppliers and from other third parties. So it's a good position to be in, and we can definitely make that call.Yes, over here we're always focusing very much on the pricing, and of course, that is the -- also may be the most difficult one to get that right. But I'm also very pleased to see that the team, and as a new leader for the pick & mix Sweden team, very structured program they have developed. It's also about the assortment efficiency, the merchandising and the warehousing and distribution. And I'll not give you exact details, but the effect of that on the P&L is not to be underestimated. And in merchandising, we have now much better tracking on merchandising cost per store, merchandising cost per kilo so that we can also benchmark that with the other countries. And of course, you need to look at the size of the country. But we're really starting to pull this together as one pick & mix business under the leadership of Niklas and really starting to get best practices from 1 country to the other, which never happened in Candyking and not in Cloetta either. And there's quite some benefits to come from that as well next to the price increase.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Final question. Would it be okay to assume that you had some volume growth in the, sort of, calendar adjusted organic sales that you delivered this morning for the quarter?

[Henri de Sauvage-Nolting]

Sorry, what do you mean with that?

[Frans Rydén, Chief Financial Officer]

You mean if we have excluded the Easter effect, would it still be growing? Is that the question?

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

No, no, no, you will clearly still be growing excluding the Easter effect. My question is, is there -- is it only price and mix? Or is there also some volume growth in the organic sales somehow?

[Henri de Sauvage-Nolting]

Yes, absolutely. There's a lot of volume growth in here. We don't disclose, but there's a lot of volume growth in here, hence also the -- could I say stress we put on our supply chain to produce that. And there's a lot of volume opportunities, and not only in pick & mix but also in the branded buys and that is one of the reasons, for example, that we also took a decision to go to 24/7. That means that we're going to produce 24 hours a day, 7 days a week on one of the main lines in Ljungsbro in Sweden in order to create the capacity and not having to invest in CapEx. And that is not coming from pick & mix. It's pure the volume growth we are seeing in the branded business, and not -- of course, Easter was important, as Frans alluded to it, but we should not underestimate that also in the other markets we're having good traction on the branded business and on pick & mix.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I have a follow-up question from the web from [ Matthias Ledernot ]. In fact, he asks about how big a part of the pick & mix contracts are loss-making today and the remaining term of these contracts?

[Henri de Sauvage-Nolting]

That is a little bit dangerous to communicate because my competitors might be listening as well, and they would love to hear that. So I think even from a competition law perspective, I would not be able to answer that in that detail. There are loss-making contracts, there are also contract which are marginally at 0% EBIT. And you can always question how do we allocate the cost to all of these contracts, both merchandising and central cost. I mean the whole thing just needs to lift up and marginally loss-making or marginally profitable contracts, there's actually not such a big difference. I mean that needs to lift up to a higher level both on the price and on the cost. And that's the journey.

[Operator]

Okay, and the next question from the telephone lines is from Stefan Stjernholm from Nordea.

[Stefan Stjernholm]

A follow-up on the Candyking. Is it fair to assume lower losses year-over-year already from Q3?

[Henri de Sauvage-Nolting]

Sorry, I didn't catch that.

[Frans Rydén, Chief Financial Officer]

Can you repeat that Stefan, please?

[Stefan Stjernholm]

Yes. Is it fair to assume lower year-over-year losses for Candyking from Q3?

[Henri de Sauvage-Nolting]

Yes, I think that is a fair assumption, right? I mean if we're going to bring this back to black figures, it is not going to be one big bang in, whatever, September 2020. It's quarter after quarter that there are activities coming into the business and then the ultimate into the customers, and even to, what, consumers. So yes, we are planning for continuous improvement, yes. And of course some things are coming sooner than others. Some of them we'll have to do in steps. And the pricing will be not be something which will all be done this year. We need to work on that for next year as well, and then it doesn't stop either. So yes, I think you are fully right to assume that.

[Stefan Stjernholm]

And then can you just comment on the EBIT for Candyking for the first half of this year compared from last year?

[Henri de Sauvage-Nolting]

No.

[Stefan Stjernholm]

No. But it will start to do this on Q3. And then another question on marketing spend. If I remember right, the marketing spend looks quite high versus in Q3 and Q4 last year. What can we expect from the second half of this year?

[Henri de Sauvage-Nolting]

Yes. I mean if I show you the example of L�kerol, which is one of our bigger brands also going across all markets then I think a fair conclusion would be that we're going to spend quite significant amount on that, so that the spend will go up on the working media, let's call it like that. And I -- my own estimate is that we will not be able to compensate this increase in the working media with even more savings on the nonworking media because we're already progressing quite a lot. And a lot of the low hanging fruits on the nonworking media have been found. And now also over there, it is contract renegotiations with the agency. It's with the media buying companies, but it will take a bit more time. I think they will come more into fruition next year. So yes, I would say you should be able to expect a step up in marketing -- net marketing investments for Q3, Q4. But that's of course also something we monitor ourselves quite closely, both on the budget but also on the efficiency of it, and whether it works or -- and it delivers against the targets we set for the marketing. So it is one of these things where we can accelerate or not. And we -- like last week we took a decision on quarter plan that lower sugar, which is doing really well to increase, like, the net marketing investment to get even more traction on that in this specific country. And that's why we work with marketing investments.

[Stefan Stjernholm]

I see. And are you willing to share with us a range of this increase year-over-year?

[Henri de Sauvage-Nolting]

No, that is too detailed. Again, we'd not like our competition to know exactly the amount of money we're putting in, then they can do some marketing mix modeling themselves and see how they could compete with us. But it's going to be a step up. And at this time the effect you will see in the P&L, of course, is then the net effect of the increase in the working media and the decrease in the nonworking media. And that is still something which is challenging to forecast really that precisely. So even if I would like to, it's something we monitor month by month. But overall, there should be an increase. And then of course on the indirect parts in the SG&A, we'll continue to look for savings and also with the VIP Plus program coming on board so that now we're able to get saving as well to offset investments at least on the full year. But you're right, that should lead to higher L�kerol growth which should lead to better gross margin and gross profit coming in.

[Operator]

And next question is from the line of Mikael L�fdahl from Carnegie.

[Mikael Löfdahl, Research Analyst]

Yes. First just a clarification. You mentioned the Easter effect that you estimated to be, I think, you said SEK 30 million to SEK 40 million. Was that correct? And was that on a group level so also for the branded packaged family or only for pick & mix?

[Henri de Sauvage-Nolting]

No. I'm referring to pick & mix impact here.

[Mikael Löfdahl, Research Analyst]

And I guess there is an impact also on the packaged side. Would you...

[Henri de Sauvage-Nolting]

No. I would say -- so I think in Sweden, there's a little bit of impact but in the other markets it's very little. And in some market it's absolute absent in the markets outside of Sweden, I would say. Then it's actually more chocolate, branded chocolate part which you can see with Easter eggs and things like that, and we are not playing in that segment. So very limited I would say, maybe even sometimes negative because people are moving their purchases more to chocolate eggs away from regular candy. So it's mainly a Sweden thing, and then that is in Norway also on the pick & mix part. And for the rest I would not assume big impact.

[Frans Rydén, Chief Financial Officer]

Yes. I mean I would add as well for family with children maybe they -- when they get the Easter egg with pick & mix candy, then they won't get the bag of Gott & Blandat for that weekend. So...

[Henri de Sauvage-Nolting]

Yes. But I mean in Sweden, the Easter egg contains candy. In the other countries the Easter egg is a chocolate egg wrapped in aluminum foil, like in Holland or in Finland.

[Mikael Löfdahl, Research Analyst]

Okay. Because I would have been assumed slightly higher than the SEK 30 million to SEK 40 million actually for the group. But nonetheless, just one more on this Swedish pick & mix and the turnaround process here. First of all, you spoke about the timing and when we should expect positive impact. And I guess all of these 100-plus contracts that you have been renegotiated -- renegotiating now, I guess, the price increases -- are they in effect as of that date or is it like...

[Frans Rydén, Chief Financial Officer]

1st of July.

[Mikael Löfdahl, Research Analyst]

Sorry?

[Henri de Sauvage-Nolting]

1st of July.

[Mikael Löfdahl, Research Analyst]

1st of July for all those. Okay. And secondly, when you speak about your ambition to reach breakeven by the end of next year, when you just think about it now, if you have raised prices to a reasonable level already by the 1st of July for half of the volumes, just reaching -- first of all reaching breakeven seems like a very cautious ambition, given what kind of possibility you have in the other countries for pick & mix. And secondly, the timing as well. I mean, of course, things can happen, and you can lose contracts on the way. But if everything works out, I would assume that you are planning to make money and the timing seems a bit cautious also. Is there something to comment on that?

[Henri de Sauvage-Nolting]

Yes, there is. Because I think you guys are overestimating the effect of the pricing on the bottom line. And that's why I also alluded to the other factors we are addressing like warehousing -- to warehouse is still -- the whole distribution, to stores maybe versus central, and all merchandising efficiency we talked about and also the assortment, yes. And that is also very important factor in the profitability journey because we need -- in some areas, we need to come in, let's say on a cost level, which is also competitive versus our competitors because we will not be able, from where we are right now, to just take pricing to solve our own internal inefficiencies and ask our customers to pay for that when our smaller competitors do not have these kinds of cost disadvantages and would be able to offer them more or less the same service for a lower cost. Yes, so it is not just a matter of pricing, and it is also not just a matter of pricing once, which we now have done with half the volume. Well, we need to come back with another round of pricing, and it's actually also a little bit more complicated than what we are just talking now. I mean it's not just -- the contract is also the balance between our bulk sales and the sales to other channels and then the individual contracts and how we get that pricing right. So there will be more rounds of pricing in order to get this right. And that's why the timing is not so optimistic in that sense because, as we also said in the Capital Markets Day, I mean the simplest decision would have been to just delist the whole pick & mix business, and the problem would have been gone. And we said now strategically, this is such a big segment. It's so important in confectionary. We're going to keep this business and bring it to profit, and then we're going to grow it as well. And that's why we need to be a little bit more -- we need to be a little bit conscious as well about the world around us, and that we're not pricing to mask around internal inefficiencies.

[Mikael Löfdahl, Research Analyst]

Okay. And -- but is it fair to assume that if -- let's say that you reach breakeven in Sweden -- and I know all these high allocate costs and everything, I mean that can be done differently. But would a breakeven business with the current cost allocations that you have, be -- still be positive for you on a group level? I guess you fill the factories with volume and then production and so on. I guess there are other benefits from having a big pick & mix business in Sweden. So may be a breakeven is good for you anyway.

[Henri de Sauvage-Nolting]

No. I mean I would not stop with breakeven. I mean I think we need -- we first say, okay, we put the stick in the ground and the timing, we would just discuss to get the pick & mix business in Sweden in black figures. How do you say it in English? Hell or high water, we will get there. By that time, we will also have a much better position, I think, on things like category visions, category drivers, different concepts for different channels so that we can also start to work with our customers on how to grow the category and how to attract shoppers with pick & mix, et cetera. And that should allow us, I would say, to bring the Swedish profitability on pick & mix to the kind of average level we have in other markets. So the journey is not stopping. And if we get there then I would agree with you, then it starts to contribute to the overall, let's say, EBIT journey of Cloetta. I mean, of course, making it breakeven, that's already 1% EBIT, right, versus last year. But it should be a bit more than just breakeven.

[Mikael Löfdahl, Research Analyst]

And you mentioned of course there is a risk that some of these who have accepted the price hikes now will come back and feel differently in a few months' time. But have you so far seen any activities from your competitors? I guess they are listening now to what you are doing and the mighty opportunities to either raise prices themselves or take volumes?

[Henri de Sauvage-Nolting]

I will not answer it directly. But normally, what you would see within FMCG is that the #1 in a certain market takes the first step to raise prices, and particularly in an environment where price is so sensitive like in retail and certainly also in pick & mix. So I think we've done the right thing to go out with this price increase. And then normally, the smaller players they can follow. That's then their decision. They follow or they try to, how do you say this, to take advantage of it and try to get volume. Now we do this not by coincidence but also in a time frame where sugar prices are going up, and of course the Swedish krona has weakened, and a lot of this candy is also being produced outside of the -- outside of Sweden. I don't know what our competitors are doing on an individual basis and certainly not on an individual store basis. But of course, the fact that we're not losing that many contracts is probably, of course, is signal to me and to you that probably our competitors are not having these similar problems. Let's call it like that, and they take the opportunity to follow and at least not to cut their prices.

[Mikael Löfdahl, Research Analyst]

Okay. And final question for me on the synergies with Candyking or the insourcing of production of their assortment, and how that is progressing. And I know that you've been having some bottlenecks within the drying capacity and so on. But I think the last guidance you gave was at around half of the total SEK 100 million in synergies were to be realized in 2019 to 2020. But that there would probably be a lag now because you need to invest in this capacity. So in this quarter -- or where are we in this remaining, let's say, SEK 50 million or SEK 45 million or something like that? Where are we, and how would you see the timing of those synergies coming through?

[Henri de Sauvage-Nolting]

Yes. I mean it's -- I think you said the right thing, so there is around SEK 40 million still to be insourced in benefits on the molding. We are constrained, and the insourcing, every time we need to put it next to selling more organic growth on branded products and what do we want to use the capacity for. And of course if there's more profit to be made from the organic growth before we have the extra capacity of the drying chambers then obviously, we are making the right business decision if that is more profitable. Then of course, there's a lot of other technologies where we still have capacity from hard/boiled candy or the chocolate products, the Lonka products, the jellybeans, et cetera. And there, we are still having insourcing benefits during the year because we took some of these product in -- not on the 1st of January but during the year of 2018. And those benefits will come. And then there are also some smaller, still, indirect savings which are coming in. Take for example the U.K. business going live. I mean they have another third-party provider for their ERP system. Of course, those costs are going out. And so we are on track, but the insourcing of the molded part and it will speed up again after we install the extra drying chambers. But yes, it is a continuous balance between organic growth and more insourcing.

[Mikael Löfdahl, Research Analyst]

Okay. But is it fair to assume of the remaining SEK 40 million, more than half of that would come 2020, then, if that's fair to assume?

[Henri de Sauvage-Nolting]

Yes. That, I think, is a fair judgment.

[Operator]

And there are currently no further questions registered on the telephone line. So I'll hand the call back to the speakers.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I actually have 1 final question here that you mentioned that you have a cost disadvantage against competitors in pick & mix. I would assume this is a scale business and that you are one of the bigger players in the market. First of all, is that the right assumption? And what would you say is the main reason of the disadvantages, and what is your goal to shift it into advantages in the future based on scale?

[Henri de Sauvage-Nolting]

Yes, I think that's a very good conclusion. I mean it is a scale business. Yes, we definitely have scale, of course, in the production versus buying this third party. But then on the merchandising part, we have competitors who also have a lot of other products, which they're merchandising in-store, yes, and that we don't necessarily have a scale benefit. But I think we need to look at ourselves and we need to look at the business we acquired. It was just not in a very good shape, yes, and the merchandising efficiency and the merchandising control in Sweden -- sorry, that was Sweden I'm talking about now again. We just did not have good control over the merchandising cost and the route planning and the time spent in-store and the merchandising cost per kilo. And that is now all getting under control, and we just need to bring that to the level where our competitors are working. Of course, we don't have exact numbers on how they are doing this, but we can see it, which is our own on benchmark that we're benchmarking our own countries on things like merchandising cost per kilo. We can see there's still some more gains to be done. And the fact that we have 2 warehouses still for pick & mix. Yes, I don't think any of our competitors will have 2 warehouses. We have the old Candyking warehouse and we have the old pick & mix warehouse of Cloetta. And that also needs to be joined to one to get scale benefits.

[Jacob Broberg]

Okay. With that, I would say thank you for today. And have a good afternoon and a good weekend when the weekend comes. Thank you, and goodbye.

[Henri de Sauvage-Nolting]

Thank you.