Cloetta AB

STO:CLA B

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to Cloetta's Q4 conference call. I'll now hand the floor to our speakers.

[Jacob Broberg]

Thank you very much and welcome once again to Cloetta Q4 results. My name is Jacob Broberg, Head of Investor Relations. And with me, I have Danko Maras, our CFO and Henri de Sauvage-Nolting, our CEO. And I hand it over to Henri to start. Please go ahead.

[Henri de Sauvage-Nolting]

Thank you, Jacob. You can see our brands and products, that's in the end what this business is about. Lovely brands, lovely products and our goal of course is to bring a smile to your Munchy Moments. Let's see how quarter 4 went. We can see that our net sales came up to SEK 1,643 million. Of course there is the acquisition effect of Candyking in there. The organic growth of the existing Cloetta business was flat 0% and it's good to say that the Candyking business, which is not in the organic comparator grew with 14% in the quarter. If we then look at the adjusted operating profits, we can see that we're nearly flat versus last year at SEK 206 million and operating profit a bit below.However, the profit for the period from continued operations came to SEK 20 million and there's a non-cash impact from a tax dispute, which Danko will try to explain a bit more further down in the presentation. Also cash flow at SEK 305 million was good, but we have to remember that we do not adjust for the Italian cash flow effect over here, which has a negative impact on the like-for-like comparator. Net debt and EBITDA came under our target level and that also means that we are proposing a special dividend of SEK 0.75, very much linked to the disposal of the Italian business. If we then look at the markets, it's again very good to see that all markets except Denmark are showing growth. So the confectionery market is showing growth irrespective what some people are thinking. This is Nielsen growth, which is mainly related to the packed business.On top of that we have the pick & mix business, which is not measured by Nielsen, which we can also see ourselves is growing in sales. Organic growth was flat and we can see that our 2 biggest markets, Sweden and Finland, were in growth. The Netherlands declined only in the quarter mainly due to promotional planning. And as said, Candyking grew 14%, which is really pleasing to see after many years of decline and also that meant that now the full year of Candyking is showing a growth of 1.3%. And again when we look at the Candyking integration, it has been very much our focus in this first year of integration to focus on the topline growth and keep that because that's so important for the Candyking business, but also for our own investment case that we bring those.Growing volumes in our existing factory network. So if we look at the Candyking integration, it's in line with plan. The new integrated organizations are progressing in all markets. We've also decided to exit Poland. That's only a SEK 15 million business full-year 2017, loss making and we did not see an investment case to make that into Poland. The insourcing activities are progressing well, in line with plan. And probably also important to mention that we've renegotiated all contracts from Candyking apart from 1, which is still under negotiation at the moment. Some of them 1-year contracts, some of them 3-year contracts, it's a mix. And the identified savings of SEK 100 million are still standing firm.Then I would like to hand over to Danko to take us into a bit more detail on the P&L.

[Danko Maras, Chief Financial Officer]

Thank you, Henri, and good morning, everyone. I'll come back to the sales number. If we just move directly into our gross profit for the quarter, you can see that we have delivered SEK 45 million more in gross profit, but we have then a dilution of our gross margin of about 410 basis points. And again I've said this a few times now, hopefully it's becoming clear, it's dilution coming from the acquisition of Candyking. It represents approximately 250 basis points out of the total. And as we start realizing synergies from the factory production, this difference will start yielding and diminishing and come up to the margin that the overall company has in total, but that has yet to come. But that's the core reason for the dilution of the gross margin. We also have some ForEx effect in the quarter that is not only related to euro. So, the pound is still affecting us and U.S. dollars and that in total represents approximately 60 basis points.And the remaining part in the gross profit is supply chain costs that we have booked, which represents approximately 80 basis points. Those are the 3 key ones. And those 80 basis points have also been part of the items affecting comparability so when you look at the difference between operating profit and operating profit adjusted, that's the difference that we are taking out because they're related to one-off supply chain costs.Moving down to the P&L, you can see that we are fairly in line with last year on the operating profit adjusted and the operating profit is about SEK 9 million below last year. The difference between the adjusted and operating profit of SEK 35 million is Candyking integration cost and those supply chain costs that I referred to before. So, we offset part of this obviously. I have done a couple of quarters with our net financial items, but now we are starting to see comparators from last year when we got the benefit from the renegotiated refinancing that we did in Q3 last year.So you can see that we are low at SEK 27 million, but last year's comparator is SEK 25 million. That is the approximation of the sum around the effective interest rate of 1%. Profit before tax, SEK 144 million versus SEK 155 million last year, is just a trickle down of the effects of the operating profit. But then we have one-time charge in our tax line of approximately SEK 82 million, which is non-cash in nature. We will look at how that actually impact us in the future. That depends on the streaming flows, but we are assessing that we can actually reduce the cash effect of this one. But this is a late incomer from us that we received a note from the Slovakian government and we are doing a recognition of evaluation allowance on our differed tax assets that we will dispute strongly. But because we want to be conservative about the booking and the advice we receive, we have actually booked it now in the fourth quarter.And we will come back to you on this point going forward to make sure that we have complete clarity on it, but we feel confident that we have an ability to drive this issue. If I then go back into the sales part, you can see 20.8% is the structural changes in the quarter. We have a slightly negative impact in exchange rate of minus 0.6%, but overall full year the euro has continued to be stronger versus prior years. So, the full-year effect is still there at 0.6%. The organic growth is flat in the quarter, but then full year you are seeing a year of decline of 1.2%. But if we look at the total for the quarter, it's quite a large number of 20.2% and as Henri was saying, a very nice delivery from the like-for-like comparators on Candyking versus last year with 14% growth. So, great work from the Candyking business. On the cash flow, also this point is not unimportant so have to see it in the right light. We don't restate Italy in the cash flow.The cash is what the cash is and therefore, you see cash flow from operations as SEK 406 million (sic) [ SEK 305 million ]. And always in the fourth quarter, the Italian business was cash generating because of the seasonal business. So if we extract that out of the comparator, the cash flow from operating activities is similar to last year and a very good cash flow delivery in the quarter. If we then move down to investing activities, you can see that we have SEK 23 million in total versus SEK 105 million last year. This is the second installment of the payment from our Italian business. So, the SEK 69 million result is the second installment from the business we have in -- had sold in Italy. So if we combine those 2 together, we are at a full-year delivery of SEK 690 million, in the quarter SEK 328 million and those SEK 690 million are to be compared to last year of SEK 567 million. So -- but if you then go in and look at the metrics, maybe I'll just take a moment here to give you an indication of a good cash delivery.Our net working capital as the percent of sales is today 5.5%. So, those of you who have been with our journey know that we have been up to 15%. So, a significant reduction and obviously a part of the disposal of Italy 4 factories and the acquisition of a more asset light Candyking business making a good effect on the capital efficiency. Our CapEx is about 2.4% of sales, which we have as a target 3% and our cash conversion is 83% in the quarter versus 82% last year. So, all metrics on cash delivery are very good and because of that, I'll come back to this in relation to the dividend. But if you go to the next page, thank you, you can see that our net debt/EBITDA has now reached 2.39x. We are below the target level, it sounds like the wrong word. We are better than the target level of 2.5x and this partly then also relates to the one-off effect of the disposal of Italy. Because of the cash proceeds received, we have a lower net debt.So with that in mind, the dividend proposal from the board is originating from two-folded rationale. One is to give an ordinary dividend of SEK 0.75 a share, which is approximately 54% of the normalized net income excluding the effects of the disposal of Italy. And the reason to why we don't increase it is because we simply did not have a good year on our EBIT and therefore, we retain the level at SEK 0.75. On the other hand, there was a good cash proceeds in the end coming in from our disposal of the Italian business. And therefore, the Board will propose an additional SEK 0.75 as a special dividend for this year. That totals SEK 1.50. So, there is an ordinary dividend of SEK 0.75 and a special dividend of SEK 0.75 totaling SEK 1.50.And with that, I stop and I give the word back to Henri.

[Henri de Sauvage-Nolting]

Thank you, Danko. If we then look at the focus areas we have at the moment, no surprise that our main focus is to drive profitable growth; sharper brand plans, more focus on working together across the markets and with the central marketing functions. So, priority #1. The second one is the factory network. As communicated earlier, we'll get this new line in the beginning of quarter 2. All focus is to be up and running because the reallocation of production over the moulding network has been done and we also can see that we have more stable production coming from the moulding network. But of course, we're still using as well some third parties to help us supply until the new line is up and running. Third priority is the Candyking integration, 2 big chunks of course.One is the commercial integration where also in quarter 2 we will go live in most of the markets with the enterprise system of Cloetta so we can start to work as a single back office in all those areas. And the other one of course is the big insourcing activity, which we already started last year, which is ramping up during 2018. And then last, but not least, is the gross margin and cost improvement. Gross margin very much again through supply chain efficiencies, but also mix and then we're working hard on the execution of the cost program, which we also announced before of the SEK 50 million towards the end of this year in run rate, a combination of non-people cost and FTE reductions. If we then look little bit at our strategy into action.We talked about the 8 essentials in the last update, the 8 priorities for the company to start delivering versus our goals. 1 of the 8 essentials is to offer consumers choice and which we've launched now successfully in the Netherlands a range with lower and no sugar products, which is under the Red Band brand. We're doing very well, and simultaneously, we're also in the Choice for You offering more portion control bags, smaller bags and the bigger bags again to give people, in this case particularly parents, also a possibility to work with portion controls. So, this is an example of one of the initiatives coming from the new strategy, which will be rolling out across the markets.And with that being said, we open up for questions.

[Operator]

[Operator Instructions] Our first question comes from Mikael Holm of Danske Bank.

[Mikael Holm, Analyst]

First, a question on the renegotiated contracts that you basically have closed all of them except 1. Could you say something about the price level of today's comparator with what we did see in 2017? That's my first question.

[Henri de Sauvage-Nolting]

That's very difficult to talk about prices. I think that's even probably not legally allowed to talk about the prices. We agree with our customers versus the competition law. But let me say, we are happy with having those contracts. We're also, as said, negotiating the last contract with 1 retailer and of course this is very important for the volume. You can also see that in the projections we're making on the earn-out instrument. So, ship is on course in that sense.

[Mikael Holm, Analyst]

Okay. And also on marketing investments, you mentioned some SEK 15 million higher in Q4 this year than last year. Is that something that should increase in 2018 as well because we have noticed that the level has decreased in recent years?

[Henri de Sauvage-Nolting]

So, what we have said in our new strategic plan is that we want to strengthen our brands and 1 -- only 1 of the things we want to do is to competitively spend behind what we call working media. So yes, we will be spending more, but what is the source of this. There's basically 2 sources. One is to be more efficient with the existing media budget and to move money from non-working media; which means research cost, agency cost, et cetera; into working media, which will then give us a benefit in the strength of the brands. And the other one is that we said okay, we will fund any additional investments in media from cost savings, particularly in the indirect line, on top of the programs we have like the Candyking insourcing and that we will be doing. We will not do it blindly and we'll do it on good justified business cases where we investigate the uplift. That's what I would have to say on that question.

[Mikael Holm, Analyst]

And my final question is just on this somewhat higher production cost due to the thing that happened in Belgium. You mentioned they were higher during the quarter, but is it fair to say that these issues were solved at the end of the quarter and 2018 would be...?

[Danko Maras, Chief Financial Officer]

We could say that after the quarter 2 when we have our new line up and running rand then we can take back all the production, which we had to outsource, but we also can then to optimize again across the factory network. As we explained that we're running on 5 shifts now in most of the factories and sometimes it is better to decide to run in 3 shifts because you pay less. So when we have our line in Turnhout up and running, we will start to come back to the original trajectory of our cost in the moulding network.

[Operator]

Our next question comes from Nick Fharm of SEB Research.

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

I would also like to start to follow-up on the first question here on the call regarding the marketing costs. So obviously I realized you spent some additional money and in addition to that, you're also write that you reduced some campaign activities in the Netherlands and you saw some impact in terms of falling volumes and sales in that market. And it would be really, really helpful if you could elaborate a bit more on the relationship between marketing expenditure and sales growth and what I'm alluring to is also if you could touch a little bit on sort of the structural implications perhaps affecting the markets you're operating in going forward, please?

[Henri de Sauvage-Nolting]

So, there are 2 questions in 1. So if you look at the Netherlands, what we can see there is some promotional phasing to promotions which we used to have in quarter 4 maybe. Now we're in quarter 1, but it's also a conscious choice to actually withdraw a number of promotions where we said well, we don't do that anymore in this channel because it doesn't give us the margin which we would expect from this brand. All this kind of cost are booked in our sales line, right. So if we give discounts to sell product on promotion, you account for that in our sales figures. Then the other question is about the brand support and that sits in the SG&A line so that is media or advertising money, which tends to work much for long-term. So you could say the first effect in the Netherlands; that's the promotional part is short term, the media money is to build a preference for our brand. And that is work which we're doing for example on some of our key brands to reassess the -- well, the position of the brand, why do people like it, how do we communicate that towards people, what is the most effective way to do that. And we are making changes over there, we're also reaping more benefits across the market. If we take a brand like Lakerol for example running across 4 markets coming to the same kind of advertising will cut cost in having 4 agencies rather than 1 and then that money we can use to support the brand meaning money we spend to buy advertising or social media or outdoor or even TV, which over a period of let's say 2 years should start to strengthen the brand meaning the people, are they more preferenced to buy Lakerol as a brand rather than 1 of its competitors.

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

So what's your key message here, Henri? Is it that you're not that concerned that you spent that money you didn't get any organic growth in the quarter, but we should expect that money to generate some medium-term support for organic growth rates? Is that what you're saying?

[Henri de Sauvage-Nolting]

You could say that you have lagging indicators and spending in media is always going to the long-term investments. You can see, we do see that when we evaluate our brand strength. We have areas where we are very strong, but also areas where we have to improve. They're always lagging. And then on the sales investments, you can see that basically in the month, in the quarter when you're investing or not.

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

And I guess the true question here is of course if we -- I understand perfectly that you have deliberately decided to quit certain campaigns and volumes, which are obviously less profitable. But if you adjust for that and you look at their organic growth prospects, why is it that the trend has been fairly sluggish over the past year and more importantly, what do you think will be the drivers for you to return to growth in 2018?

[Henri de Sauvage-Nolting]

That's basically 2 questions in 1. Of course we have as a company an organic growth challenge. I mean we also are stating as 1 of our objectives that we want to grow just above market growth and we have not been able to do that. And if you look at 2017 given the strength we had on our production facilities, the problem has been aggravated. You could say that we're now seeing quarter 4 at least that we are more back to where we were before the fire, but the challenge on the organic growth is still a challenge and that's also why it is our first priority. Then when you say well, how are we going to address that? Well, it's very simple. It's by having stronger brands and having more consumers who like us and the second part is customers here because in the end it's customers who are selling our brands. So, that's the whole new strategy is built around these 2 pillars with many activities, which is probably a little bit too detailed to talk about it today. But it is about strengthening brands because we focus on consumers, customers who like to sell our brands because they see they're strong and there's a good offtake. And then the fourth pillar is cost because these things could potentially mean that we have to invest in those brands so that money has to come from our own costs. So, that's why we're focusing on that. It's no rocket science, but that's overall what we are doing.

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

But long story short, do you expect to drive organic growth by increasing costs in 2018 onwards?

[Henri de Sauvage-Nolting]

No, that's not what I said. I said we will reduce our indirect cost, right, so that the cost of offices, people, travel, et cetera, and we'll use part of that money to invest in our brands. And also where I would like to have that money because it's much easier to move money around when you have it in what we call advertising media than if it sits in indirect cost.

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

Final question. Could you give us some idea of the part of Candyking in Poland in terms of 2017, I don't know sales and maybe EBIT or losses before interest and taxes. Just to get a feel for what type of...

[Henri de Sauvage-Nolting]

At full-year 2017 was SEK 15 million and it came at a loss. And we looked at the price points of pick & mix versus the packed business and we could not see that we were able to turn this around in a decent time frame. So, we decided to exit that market.

[Operator]

Our next question comes from Mikael Lofdahl of Carnegie.

[Mikael Löfdahl, Research Analyst]

First on organic growth. First, just to be clear how you calculate the group's organic growth. I guess Candyking is completely excluded from that growth so the organic growth within Candyking is not included in the group, that is taken out as structural growth, is that right?

[Henri de Sauvage-Nolting]

Correct, yes. So, 0% organic growth means the business we had last year in quarter 4 excluding Italy of course versus the business we have now. And if we make the comparator on Candyking, if that will be the next question, Candyking in quarter 4 grew with 14% versus their quarter 4 last year when they were not owned by Cloetta.

[Mikael Löfdahl, Research Analyst]

Okay. Next on organic growth, could you say something about packaged versus pick & mix organic growth in this quarter?

[Henri de Sauvage-Nolting]

Well, what we have said is that as from quarter 1, we will start to state a P&L or at least on the topline for packed versus pick & mix. And that's also the way we're starting now to manage this business that we look at it is if we have 2 divisions because also the value drivers in those 2 divisions are so different. So as from quarter 1 report, we will communicate on the topline between packed and pick & mix.

[Mikael Löfdahl, Research Analyst]

But you cannot say something about Q4, how it looked?

[Henri de Sauvage-Nolting]

No, we haven't really disclosed that for Q4.

[Mikael Löfdahl, Research Analyst]

Okay. In Norway, could you say something? Is it possible to say how much volumes were impacted by some sort of inventory buildup ahead of the sugar tax in Norway?

[Henri de Sauvage-Nolting]

Yes. So we saw -- here I come back to your previous question. So we saw very little impact on our packed business, but we saw an impact on our Candyking business in Norway where customers were buying more in December in anticipation on the sugar tax introduction as from the 1st of January.

[Mikael Löfdahl, Research Analyst]

Okay. And do you think we'll see a similar decline in volumes in Norway as we did in Finland?

[Henri de Sauvage-Nolting]

We don't know yet how this will pan out and that is to be seen in quarter 1.

[Mikael Löfdahl, Research Analyst]

Okay. Otherwise Norway, you mentioned before on the pastilles side mainly that you've lost market share in an overall declining market. You don't mention that in Q4. How has that progressed and I guess that's part of where you have put some more marketing spend in work as well?

[Henri de Sauvage-Nolting]

Yes. We're focusing very much on getting the basics right in the pastilles business in Norway, which -- and I don't want to disclose too much because my competitors could be listening as well. But it is basically focusing very much on the core business, on the core products, which are strong, recognized and very much liked in Norway and that means both getting better distribution, but also getting more promotional and as we call it floor space or display pallets out on the floor and we see -- we see that -- whether that works. So, that's -- however, that's again something which will take place during the whole of 2018. And then I already mentioned that we're looking at the brand positioning of Lakerol and how we can work together across the 4 markets to get more cutting through advertising based on joint consumer insights and that's something which will also be implemented during 2018.

[Mikael Löfdahl, Research Analyst]

Okay. Final question on the tax, just I didn't really catch what you said. How much of the reported tax was one-off related to Slovakia, was it SEK 82 million in the quarter?

[Danko Maras, Chief Financial Officer]

Yes, that was correct.

[Mikael Löfdahl, Research Analyst]

And going forward, could you say something then given this revaluation then of deferred tax assets, how in the future -- could you give some guidance on tax for 2018 as your business looks right now?

[Danko Maras, Chief Financial Officer]

We continue to say that we work on the 24%. And clearly if you remember perhaps with the Italian business included, it was higher because there was a lot of non-deductible tax expenses from Italy. So, we think we can work on an objective of 24% and this event that we were booking in Q4 is really a one-time event that we will work hard on trying to eliminate.

[Operator]

And our next question comes from Nicklas Skogman of Handelsbanken.

[Nicklas Skogman]

Could you say anything about the contribution from Candyking to EBIT in the quarter, both sort of the underlying contribution, but also any synergies you've reaped so far?

[Danko Maras, Chief Financial Officer]

It's Danko here. It's still too early to see the synergy realization. As you know, we've talked about majority of that coming in now as we start into '18, '19. So, the contribution from Candyking on the profit level is relatively minor and it doesn't deviate too much from what you are familiar with from the previous periods and the contribution is yet to come.

[Nicklas Skogman]

Okay. And the impact from the fire on EBIT, do you have sort of an estimate from that -- for that?

[Danko Maras, Chief Financial Officer]

We are still in assessment of it. We have booked premium from an insurance on or let's say the discount of EUR 0.5 million or SEK 5 million in the exceptionals. But then you have these knock-on effects that are difficult to determine now and it's better that we come back to you when the issue is closed and then we can give you an impact of it in total.

[Nicklas Skogman]

Okay. But were they smaller in the quarter than you perhaps thought a couple of months back?

[Danko Maras, Chief Financial Officer]

Yes. It's moving in the right direction and that's the point that Henri also was saying. It's great to see that the team, even though there is a lot of strain in the supply chain network, are actually becoming more and more effective on the remaining part, but some costs you cannot avoid. Third-party costs are not as low as our own internal costs for obvious reason because we have our fixed cost to cover, but we are gradually coming out of that. And out of those 8 factors we have today, we can get a better utilization when we move it in and therefore also lowering the cost. So, let us come back on this point a little bit more when we have clarity on the total when the line is in.

[Operator]

[Operator Instructions] As there are no further questions at this time, I'll hand back to our speakers for the closing comments.

[Jacob Broberg]

Okay. We'll then just say thank you very much from Cloetta and the Stockholm, Solna office. Have a good day. Thank you and goodbye.