Cloetta AB

STO:CLA B

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Cloetta Q3 Report 2019. Today, I'm pleased to present Henri de Sauvage-Nolting, President and CEO; and Frans Rydén, CFO. [Operator Instructions]Speakers, please begin.

[Frans Rydén, Chief Financial Officer]

Good morning, and welcome to Cloetta's Q3 Earnings Conference Call and Webcast. As mentioned, my name is Frans Rydén. I'm the CFO for Cloetta, and I'm joined here today by Henri de Sauvage-Nolting, Cloetta's CEO.With that, I'm going to hand over to you, Henri.

[Henri de Sauvage-Nolting]

Thank you, Frans. So we had a strong organic growth quarter. I mean, I think, everybody knows also from the Capital Markets Day, that is our #1 challenge. So pleased to see another quarter of growth. And if you look at the underlying organic growth, which is how we measure ourselves, we take out the currency effect. We have a 4.3% growth in the quarter, and that is very pleased to see in a market which is not always easy. Of course, the operating profit went up to SEK 200 million, a bit better than last year. But obviously, we need also to be able to reap in more of the growth benefits also into the top line, I'll come back on that later.Operating profit fall out and then the profit for the period ending at the SEK 130 million. Cash flow from the operating activities went up to SEK 255 million, and the net debt-to-EBITDA is at the target level of 2.5.If we then look a little bit further into the markets, in the Nielsen market, so these are the markets which we measure. In Nielsen, we could see growth in all of the markets. Of course, the caveat is that Nielsen is not covering the whole out-of-home channels, so kiosks, petrol, the non-retail accounts. But it seems to be that there is growth in the market, which is, of course, a very healthy signal for the total category and for the businesses operating in that market.We have a model where we are estimating pick & mix and also over there, that's our own internal estimate based on our sales, but also the sales of Cloetta branded products we do to others, be it retailers or competitors. And we estimate that also the pick & mix market has been growing in all the markets.If we then unpeel the organic growth of 4.3%, it's split at 3.6% branded growth, and that's now the second quarter in a row that we're seeing branded growth. So the question is probably going to come afterwards, is it now a trend? And I would say yes, probably it is a trend. And of course, we just need to continue to deliver quarter after quarter. But of course, very pleased to see also the profitability, as you know, on the branded business is already at the target -- above the target level. So just getting the brands growth to continue is really going to help us.And also, we have the pick & mix business growing. We had it also last quarter, but of course, then there was a lot of Easter effect. So -- and now there isn't a quarter without these kind of effects, and we see a 6.4% growth. Good performance in mainly all the markets. If you look at market shares, we are still on the MAT, so we're moving annual total, so the last 12 months, we're seeing that we're gaining market share. We also can see that competitors are fighting back. So if we just look at the last 3 months, we only grew in 3 of the 16 categories. Again, in Nielsen only, not taking the other parts of our sales channels into account.If we then go to the core strategy, just a quick update. First block is to drive the growth. Our brands continue to grow. Where is it coming from? There's more marketing spend. There's actually 2 underlying pieces over there. One is that we've increased the absolute amount, I'll come back to that a bit more later on. But we've also, again, being able to reduce the spend on nonworking media and increase the spend on the working media. So -- and that effect is the same as the absolute amount. So in media, which is being seen by consumers via digital or outdoor or TV, we are seeing quite some effect. And also for the Swedish people, I mean, it's not only Läkerol at the moment on TV, it's also Gott & Blandat, the new Plopp and also Ahlgrens bilar, I think, have not been supported for 8 years or so, is now having support campaigns.So that is one marketing. The other one is then the power we put behind activities and innovation. So the few of the bigger starts to pay off. And of course, Läkerol global relaunch is happening as well in all the markets where we are present with Läkerol, but going out with the same repositioning message, the same TVC, the same outdoor and then local adapted executions from the world's biggest Candy Box in Oslo. To run, we were doing in Läkerol shoots in Denmark. So that is happening as we speak. Of course, that is something we're going to do in the next couple of years. Because these sort of things, they don't last or they don't tend to give an effect immediately. This is building the brand back to its glory.And then we see in pick & mix. I said before, we see growth, which is very good. We also now did a strategic review on how are we going to invest in pick & mix to make really a concept which is going to attract the consumer preference. Because we also see that we need to strengthen the Cloetta pick & mix concept versus all the other ones, which are in the market, so we gain consumer preference or shopper preference is a better word, like we do with our brands. And there's a next phase of pricing coming in as well. Capacity, also with this growth, of course, it puts us in a nice challenge. Although sometimes, of course, we would like to sell more and being able to produce more. But on the capacity, the new drying chambers, pleased to say that is all going according to plan to be up and running next year. We also extended the shifts on the foam production in Ljungsbro to 24/7. So we added an extra shift over there in order to be able to cope with the demand of foam, be it Juleskum or the Mustaschkampen, which we launched to support the Prostate Cancer Foundation in Sweden. So that is in position. And we also just concluded a 5-year plan on the capacity investment. So one of the CapEx is we need to invest in the next 5 years in order to facilitate growth and improve the customer service in all the markets.Another one, of course, on the capacity is the Perfect Factory, which is now after some are being rolled out through the next 6 lines. It's very good and encouraging results where we can see efficiencies going up. But again, this is a longer multiyear program where we need to work hard in order to get the desired results.And last but not least, we also took a decision to implement a new planning tool end-to-end. So from demand planning in the markets all the way down to the factories, replacing a number of older tools, which were not working real-time with each other, which meant that factory sometimes saw the demand from the markets a month too late or later, you could say. So with this, we will be more agile to follow the exact demand patterns in the market. And the first country and the First Factory are going live already in -- towards the end of this year.Then on funding the growth, enormous traction on our VIP+ program. I really think we are changing the culture. I hear more and more people talking about this is the real VIP+ spirit. So I think that is a very positive thing to see. Also having a funnel of savings ideas coming through for the budget process for next year, both in the people cost and the non-people cost.And then on the pick & mix, Sweden, which, of course, is extremely important. The pricing on 50% of the contracts is in, and the pricing on the next 50% is ongoing, and soon to be announced and negotiated with those contracts, which we can start to touch as from next year.We also did a big review of the assortment in Sweden to take out complexity and double items between old Candyking concept and the old Cloetta concept to come to a more harmonized assortment. And we're also improving the merchandising efficiency.So all-in-all, I would say, good top line and in line with where we want to be. On the EBIT, we're making progress. Frans will allude a little bit more to that. But we have ForEx going against us and also the fact that we have to produce so much more. It also comes with extra overtime, extra shift. So we see some money over there spent, but that's a good investment, I think, at this moment in time to fuel the growth, while we're sorting out the capacity constraints. And last but not least, of course, we've also been investing more in media.So Frans, over to you.

[Frans Rydén, Chief Financial Officer]

Thank you, Henri. So as usual, I will start with net sales. And as Henri actually mentioned, Q3 is the first quarter in this year where we're not impacted by the shift of Easter. And we're really pleased to be able to report an organic growth of 4.3%. So our branded business grew 3.6%, and that is the seventh consecutive quarter of year-on-year organic growth. And to the extent of our knowledge, that's the longest run that Cloetta has ever had, and that is obviously great to see. And this also brings our year-to-date growth up from 1% that we had at the half year mark to 1.9% Q3 year-to-date.And for the pick & mix business, obviously, last quarter, we could report that we were finally back to year-to-date growth. It now grew not too far away from twice as fast as the branded business. So at 6.4%. And that's on the back of also healthy volume growth as well as pricing that we have previously spoken about. That takes the pick & mix business now to 3.1% growth year-to-date.So in combination, for the total business, year-to-date organic growth of 2.2%, and that positions us really well against our target to grow 1% to 2% per year, which we believe represent growth in line with or better than the market.Now as in quarter 2, year-to-date, the euro has continued to strengthen, and that has an impact on us. So it boosts our top line, as you can see. But it also hurts us on cost, and I'll come back to that.Nonetheless, our 4.3% organic growth is 5.9% total growth. And year-to-date, it moves us from 2.2% to double at 4.4%. Now that said, despite the currency effect, again, this quarter, I believe that you will find that Cloetta is a very stable business, delivering growth, stable profit and stable cash.Now before we look at the actual P&L, let's take a closer look at the growth split on branded products and pick & mix. And on the top part of this page, you can see that branded accounted for 73% of our sales in the quarter. And also that at the very right-hand side, that 3.6% growth is, by some margin, actually, the best growing quarter that we've seen, over these last 7 quarters.And as a matter of fact, we haven't been able to find anyone in the office who have seen this type of organic growth before. And anecdotally, I know Henri received a text message from the former Board member, just before this call, congratulating on this development.As mentioned by Henri, despite this growth, we are only holding or taking share in 3 of the 16 categories we track, where year-to-date, we're at 15 out of the 16. So what we're seeing here is both the effect of that competition is tough, certainly in this last quarter. But also, of course, that Nielsen who track shares cannot fully cover the market that we are playing in.Now on the lower half of this slide, for pick & mix, accounting for 27% of our sales in the quarter, we see that healthy 6.4%. And for those who haven't been following us, obviously, that looks like a step down versus the 18% growth we had in Q2. But again, that's really the shift of Easter. And I think it's more relevant to compare the 6.4% here to the kind of growth rates we were seeing back in 2017 when those growth rates came from acquiring large new contracts. So now this is really driven much more on a same business organic growth, so quite healthy.At the same time, the branded business, we win with one consumer at a time, and the pick & mix business is much more dependent on gaining whole contracts with retail outlets. And given that we flagged the profit challenge on pick & mix in Sweden, we may have to walk away from some contracts if we can't find common ground with our customers. And so far, we've had broad acceptance on the price increases implemented in July. But of course, half of the contracts are still being renegotiated or will become renegotiated. So that may affect our sales going forward.Now looking then at the profit and loss. So gross profit in quarter 3 improved by SEK 28 million versus last year. That's driven by the strong sales, including pricing that we've taken, partially offset by higher cost of goods sold, which includes the ForEx impact as I mentioned. And of course, you are also aware that commodity costs, like sugar and gelatin prices have been rising over time. Nonetheless, while the gross profit has improved versus 2018, we are not seeing as much flow-through from the top line growth to the gross profit line as we would like to. Because our supply chain network is really stretching itself to meet these higher demands. And also in the CEO word of the report, we're talking about what are some of the things we're doing to address that, including the Perfect Factory program, adding capacity and a 5-year plan to be able to do this in a good way, not just for the next year.Gross profit year-to-date is up by SEK 54 million. Again, this is driven by the strong sales and partially offset by the cost of goods sold.Now if we look at the gross margin, it is down in the quarter by 0.3%. But given that our profitability is lower on pick & mix, as you are certainly aware, and with a really strong pick & mix growth we saw in quarter 3, you would expect an impact on the gross margin, and this is true. But as mentioned, we also have upside from growth and pricing. And ultimately, I would say that the full gross margin decline year-to-date can be attributed to the currency effect. And in quarter 3, the currency effect is actually about 2x higher than what we're seeing us drop in gross margin here.Going further down to sales, general and admin, we also have an impact due to ForEx, both in the quarter and for year-to-date. And I'm going to break this down on a separate slide that follows this one. And I'm also then going to give an indication of how we ramped up the market investment and how that's reflected in the P&L. Here, I would just point out that, as you see, the sales, general and admin as a percent of NSV is nicely down by about 50 basis points.But before we go to the details of SG&A, last point on this slide, operating profit adjusted, it's stable versus last year, up by SEK 6 million, and year-to-date up by SEK 24 million. The result in the quarter is driven by gross profits from their strong sales, including the pricing that I mentioned. Good cost savings in sales and general admin, obviously, offset partially by the unfavorable currencies. And then we have reinvestment in growth, which is both on the higher marketing spend. But of course, as you understand, also higher merchandising cost to enable that really strong top line growth that we have on the pick and mix business.And year-to-date, it's along very similar note, the strong sale, good cost savings, unfavorable currencies and then reinvestment, both in marketing and in merchandising cost.So operating profit adjusted as a percent of NSV. And what you see here is the currency effect. Both year-to-date and for the quarter, we're obviously favorable, but it's impacting the percentage of operating cost adjusted.So going down a little bit further into SG&A. You will recognize this slide from last quarter. We're sharing the same level of granularity in the details. You can see that the reduction as a percent of NSV, both for the quarter and year-to-date. You can also see that both the quarter and year-to-date are impacted by items affecting comparability. And I want to say a little bit more about here because in Q3 this year, we have less such items than we did last year when obviously, Candyking integration was much more in full swing and taking more effort. While for Q3 year-to-date, it appears as if we have more of these items affecting comparability than last year, but that's not correct. What's driving this variance here is that we had a gain last year. So the increase this year is really just the absence of a repeat of last year's gain and that gain related to remeasurement of the earn-out consideration for Candyking.So netting out the impact of currencies, which we have here shared, and it's not official reported numbers by the way, it's to our best knowledge. What we're seeing going from the right side is that year-to-date, we are flat despite the increase in absolute marketing spend that I mentioned as well as the investments behind merchandising. So the cost efficiencies we are delivering are being reinvested for top line growth. And when you look at the quarter 3 in isolation, you see that the increase in top line through marketing spend and other is coming through much more strongly. We haven't shared before a number for the increase in marketing investment. But I would say here that in absolute spend in the quarter, it's up somewhere between SEK 10 million and SEK 20 million. And then within marketing investments, the increase in working media, which is the spend seen by shoppers and consumers, continue to improve as a percentage of the total spend.So for my final slide before I hand back to Henri on the cash flow. So for the quarter, we are delivering, if I guide you here to the bottom left of the slide, a stable SEK 199 million in free cash flow and that's in my opinion, healthy against the EBIT that we saw on the prior page of SEK 195 million. And it's a stable delivery versus the SEK 206 million we delivered in Q3 2018.Now the slight decline versus 2018 is that despite higher cash flow before changes in working capital, including due to implementation of IFRS 16, that's being more than offset by a softer improvement of working capital this year and higher investment in CapEx. And for the working capital, that is really on account of inventories. Because in quarter 3 last year, as is often the case, inventory declined after the summer. And this year, they did not decline as much despite the strong growth we had because we have purposefully tried to increase our inventory levels to improve the customer service levels that we can provide in these high demand and the fluctuations we're seeing in the market. So that's the only purpose.Now on cash flow from financing activities. In quarter 3, you see this due to repayment of some commercial papers, SEK 49 million and then IFRS 16 implementation. Whereas for year-to-date, I mean, the overall, it's slightly similar to the -- to Q3, stable free cash flow and -- versus last year. I think the other 2 items that are interesting to point out here is that the net -- what actually doesn't impact the free cash flow, but you can see here the SEK 144 million under other investing activities, that's the settlement of the earn-out consideration for Candyking earlier this year. And also under investment activities, we obviously had payments of dividend. And in 2018, that also year-to-date included an extra exceptional dividend payment following the sale of the Italian business as well as repayment of some debt. That said, in 2019, of course, the payment of the ordinary dividend of SEK 1 was an increase versus the payment of SEK 0.75 for last year. And on that positive note of increased dividend, I'll just hand back to Henri.

[Henri de Sauvage-Nolting]

Very good. Thank you, Frans. So concluding, very consistent, maybe a bit boring. The 3 main priorities we're working on, we're focusing on the company. Number one being the branded growth. Why? It has already above average EBIT contribution. That's why it's so crucial. So branded sales at 3.6%, really good to see. We're investing more in media, on top of the efficiencies, we are still getting out of the move from nonworking to working media and thereby strengthening the brands or even being able to invest in brands, which have not been invested in for the last couple of years. Also good to mention is that, at the moment, we're executing the so-called media pitch. So we're going to one media agency for total Cloetta away from market-by-market approach, not only to get a better deal, but also to get more professional in how we work with media. Yes, one thing which is going to become now really important is pricing in all the markets. Of course, with Sweden, it's the ForEx. Next the raw materials, with the raw materials, like Frans mentioned, sugar prices, gelatin prices, in particular, are really going up, and that needs to be put through to prices towards our customers, who then can decide what they do towards consumers. So that's a big piece of work which is going on.That second part is pick & mix. How do we fix Sweden pricing, really important. And while we're doing pricing, of course, we also can see that raw materials and ForEx are working against that. So that means we just have to do even more pricing, and that is under execution, assortment rationalization I talked about and then really good work going on, on how to differentiate the Cloetta, we call it Candyking concept versus competition. Good endorsement in the Board of Director on -- directors of that direction. So I think every quarter, we get more insights, more understanding. And now also really good proposals, which are being tested in Sweden on different concepts to make a stronger USP for the Candyking brands.And then the third one is how do we reduce cost and drive more efficiency? So the VIP program, I talked about the Perfect Factory, really good progress to see on those 6 lines. Also improvements in both in capacity, which will later on then being able to capture when those lines are run more efficiently with the extra drying cabinets, which are coming in. So we also can dry more, and we don't have to stop because they are full. It's also the usage of raw materials. But there are also, of course, in the Perfect Factory other elements like labor inflation in certain markets and certainly in Slovakia, which we need to offset with savings. And then for the first time ever, a really good 5-year bottom-up plan from the market by technology or what we're going to sell in the next 5 years in order to reach our financial targets, and translating that into a capacity plan, both internally and externally with third parties and what we then need to invest to either debottleneck or buy new technologies so we can start to face that on a 5-year basis rather than year-to-year.So that's the presentation for today. And now we want to open up for questions.

[Operator]

[Operator Instructions] We have our first question from Mikael from Carnegie.

[Mikael Löfdahl, Research Analyst]

Was it Mikael at Carnegie?

[Henri de Sauvage-Nolting]

Yes, that's you.

[Mikael Löfdahl, Research Analyst]

Okay. So first of all, could you -- is it possible to give us some more guidance regarding the marketing initiatives? And perhaps, in Q3, how much of the marketing increase was more of a onetime event in terms of Läkerol and the rebranding, or what you like to call it of Läkerol? And how much is expected going forward from that?

[Henri de Sauvage-Nolting]

Yes. So there's a few elements to that, Mikael. I mean, of course, when you start with the relaunch, like we did now in Q3 in all markets, you want to really make a big bang, right? So we are heavy in Q3. So that also has been driving the absolute amount. And then well, you know us by now. I mean we are not allowing the market to spend more in absolute sense if we are not really, really sure that they've scrutinized the nonworking media to the last krona, to the last euro. And that, I think, a little bit to our surprise, has gone much better in this quarter than what we initially thought. So we get more bang for our bucks, and thereby also diminishing the need maybe to go up with the -- with the absolute media amounts.Now having said that, we are going to continue with the support on the brands. But then quarter-by-quarter, it's going to pan out a little bit different and probably also in the way you look at it. I mean, first of all, you need to look at last year's spend, of course, in the different quarters and compare it with that, where, if I remember well, Q3 last year was not one of our highest media quarters. But Q4, for example, if that is your question. I mean there's -- in general, that's quite an expensive quarter with Christmas coming, there's a lot of extra companies going on there. So it's normally not the most efficient quarter for us to really be big. Because, I mean, the -- every second of media, you could say, is more expensive.And so going forward, I would say that the trend is going to be that we are going to support the brands in a competitive level. And we'll make those step-ups step-by-step also because we -- it's a bit also in line with the savings we are able to generate because that's also very clear the way Frans and I want to manage it that we create savings. And then we see what is -- now what is the best return on investment for that.And then I think the media has picked up the Läkerol a lot, but let's not forget that there are a lot of other brands, which we -- big brands, which were becoming more and more professional in how we manage and support them. So we're supporting Gott & Blandat minus 30%. At the moment, we're having 2 new Plopp Kaka, the tablet launches, which we are supporting. And as I said, Ahlgrens bilar, which is a big brand for us that have not been supported in Sweden in media for the, at least, the last 5 years. And also, that is with the old slogan happening.And then, of course, in the other markets, we have in Finland, Sisu, which is also a pastille which is really doing well, which we are supporting and also in the Netherlands and other main market. Those are in Norway, for example, we are supporting the bottom line at minus 30% as part of the cost savings we are doing. So step-by-step, but we will try to do it not that it's dramatically hitting one quarter. That's probably the best way to answer the question. Anything to add Frans, or?

[Frans Rydén, Chief Financial Officer]

No, I think, that's fair.

[Henri de Sauvage-Nolting]

Yes.

[Mikael Löfdahl, Research Analyst]

Okay. And another question on the organic growth for the pick & mix segment in the quarter. I guess the price hikes of roughly 50% of the Swedish volumes, that should have been supportive for organic growth. Is it possible to strip out the price versus volume in the quarter of the 6.4% in growth?

[Henri de Sauvage-Nolting]

Yes. So the volume in Sweden is actually down because we are taking a high price increase. But as I said before, we've also lost a relatively small percentage of the contracts because of that, and we're willing to do that because we cannot continue with negative margin or negative EBIT on the Swedish pick & mix business. So if you take that one into account at volume down price up. If we look at the other markets, we can see actually a lot of penetration going up. So we're selling more out of -- per store. And that is a combination of penetration, but then -- and also some pricing, which we have taken -- in nearly all the markets, we've taken pricing and then the market specifics. I mean, in Norway, we work a lot with the retailer over there and also with extra display solutions, which the Norwegian team developed for the Norwegian retailer in the U.K. retailer, #1 retailer went back in the promotional depth and they saw that, that didn't really work. There was also less shoppers coming to the store, which actually is quite a nice thing to see, right? How important pick & mix is for a business to bring people in. So after a quarter, they are now reverting back during Halloween. And so it's -- yes, it's a bit of a mix, of course, by market. But in general, it is good organic growth.

[Mikael Löfdahl, Research Analyst]

Okay. Also, on the renegotiation of contracts, I guess, the 50% that you have renegotiated, that has been implemented now.

[Henri de Sauvage-Nolting]

Yes.

[Mikael Löfdahl, Research Analyst]

But I would have assumed that you would have continued to renegotiate contracts during Q3, but it sounds like you will do that in Q4. Is that right?

[Henri de Sauvage-Nolting]

Yes. Because the nature of this -- I can't be specific because, of course, that would be unfair as well to our customers. But the nature of these contracts is you make a 2- or a 3-year contract, and then they are fixed. And so contractually, we are bound by this contract that the prices are fixed. And what we're doing is we're basically saying, well, this is a bit of a specific situation. But then we need to break up the normal contract. We basically tear up the contract. And of course, and there we need to balance the relation with the retailer. We've made a contract, whatever, 2 years ago, when do we rip that up. And we also need to think about the totality of our business because all these retailers are not only buying pick & mix, they are also buying our branded business. So that's a cautious balance we are looking at and we're discussing that. And I think we get good understanding for our situation. But those contracts are -- yes, that is starting to be renegotiated. Although once we have renegotiated. And then the third part, we haven't really talked about, they're also then in bulk items. So these are, let's say, loose Cloetta bulk products from small cakes to small -- to Gott & Blandat or small Plopp, which we're selling to retailers who have their own concept or competitors who have their own concept and also over there, of course, we see cost increases and margin being either too low or even negative. And that also is a big part to raise in price.

[Mikael Löfdahl, Research Analyst]

Yes. Okay. It's -- and also, in regards to these renegotiated contracts. I guess, one problem before was that they didn't take into account raw material prices and so on, I guess, that's why you had so low profitability on many of them. And now you're mentioning the raw material prices and that you may need to raise prices even further to compensate for it.

[Henri de Sauvage-Nolting]

Yes.

[Mikael Löfdahl, Research Analyst]

For that. But is that now built into the 50% that you have renegotiated, so it shouldn't be any major...

[Henri de Sauvage-Nolting]

I don't want to tell you because that my competitors would love to hear that how we're doing that. But let's say, it's correct. I mean, of course, we see that both ForEx and raw materials are fluctuating. So we need to find ways to compensate that during the duration of a contract.

[Mikael Löfdahl, Research Analyst]

Yes. Okay. Just more sort of long-term question here. To reach your 14% margin target, if you were to look at the gross margin, where it is right now, what is required in terms of gross margin improvement to reach the 14%? Have you -- is that something you can share? Or...

[Henri de Sauvage-Nolting]

Yes. I mean, it's a mixed bag, of course, also holds over there. So if we say that we have -- that we have good gross margins and hence, also EBIT on the branded business, of course, there is big differences between both categories and within -- and between countries. And so there are other things going on, again, difficult to share in a public call, but there are other things going on where each market or each country of Cloetta, they have very clear strategic rules, that was something which we did not have before, everybody was treated equal by market. I mean, either they need to grow more or they need to improve their gross margin or at least bring their indirect down there. On the branded business, there are very strong agendas to drive gross margins up in those areas where we're below par. And then, of course, the whole pick & mix also over there, the growth -- it starts with a good margin because if pricing is too low, then you see that first in gross margin. And then when you look at your merchandising cost and your depreciation of the fixtures, you get into negative EBIT like we have in Sweden. But I mean, it started already with the gross margin. And that is mainly a Sweden issue, but also in some other markets, we can still see improvement steps, and that's why it is so important to invest in a concept, which is really stronger than anything else because that also helps us to take that pricing.Yes. And then last but not least, of course, if you then go into the supply part of the gross margin, and we're in a luxury position, you could say that we have so much volume. We're a little bit stressed at the moment to produce all these volumes. We can bring that down by debottlenecking or investing in specific capabilities had to make that volume in a more efficient way than there should be -- or there will be a good contribution, like we shared on the Capital Markets Day from the supply chain as well in our 14% EBIT journey. So it basically all hangs together. Maybe Frans wants to add something?

[Frans Rydén, Chief Financial Officer]

Yes. What I would add to that is, yes, on the one -- yes, it's a starting point. We have a lot of things that we are looking at that would help us improve our margins. Where we have to be just a little bit careful here is that if I use a very specific example, if we take a contract in pick & mix, where we provide the merchandising services, then, obviously, we need a higher gross margin from that contract than if we close a contract where the retailer will manage the merchandising themselves. So we shouldn't lock ourselves really into the gross margin, but its well worth to lock ourselves into the EBIT margin.

[Mikael Löfdahl, Research Analyst]

Okay. Just a final question. On the tax rate, is it possible to -- now it was a bit higher, at least reported in this quarter. Is it possible to give a guidance of where you expect the tax rate on an annual basis to be going forward?

[Frans Rydén, Chief Financial Officer]

Yes. Yes, that was great. Yes, actually -- so this quarter is fairly similar to prior quarters. It should be around 24% to 26%. What you're actually seeing is that in Q3 last year, we had a onetime effect because of a -- that pertain to taxes between Germany and Holland. So we saw there a very low effective tax rate in Q3 last year, actually. And what we're seeing this quarter is back to normal.Super. Thank you so much, Mikael.I have a question here as well that's coming over the webcast from Stefan Stjernholm at Nordea. And he is first asking also about marketing spend in Q4 versus Q3. And I think, along the similar lines to what Mikael did. So I think we will -- if that's okay, we'll stay with the answer that Henri has given on that question.Question #2 here is at -- is relating to the earnings impact from ForEx on EBIT, both in quarter 4 and for the full year in 2020. And for quarter 4, of course, we cannot give forward-looking statements, and also where the ForEx will land in quarter 4, that I don't know. But what I can share, and we had given you sort of an inclination to this, when we looked at the SG&A, and we could see that we're taking a hit in SG&A in the quarter of SEK 8 million on ForEx and year-to-date SEK 25 million. And at an EBIT level, year-to-date, it's a little bit higher than that, but it's still low double digits, let's say, around SEK 10-ish million. And year-to-date is... [Technical Difficulty]

[Operator]

[Operator Instructions] Gentlemen, we haven't any question by phone.

[Henri de Sauvage-Nolting]

Okay, good. Well, then, I want to thank everybody. I mean, it's a continued journey. We're on the road to 14%. Very pleased to see that we have a very good organic growth in this quarter. It also shows that the strategy we have is starting to work, but we're not going to sit still. Of course, what we will continue to do is to find ways that we get more of this NSV or sales growth to fall through to both our gross profit and our EBIT because we are committed to get to the 14% in the midterm.So thanks for your attention. And see you soon in the markets.

[Frans Rydén, Chief Financial Officer]

Yes. I also like to thank everyone for the call today, and wish you a good weekend, whenever that comes to you. Thank you very much. We'll close the call.

[Henri de Sauvage-Nolting]

Yes.

[Frans Rydén, Chief Financial Officer]

Goodbye.