Operating risks
The Swedish confectionery market is characterised by relatively few but comparatively strong grocery chains. Cloetta’s four largest customers account for around 70% of the company’s sales in the Swedish market. International discount chains have established a presence in Sweden in recent years, leading to more aggressive competition in the trade. By launching products under their own private labels, the distributors have also been able to increase their share of the confectionery value chain. Together these factors are creating increased price pressure in the confectionery market, which has also impacted producers.
By serving as an active partner to its customers, delivering high quality products and launching innovative new products under strong brands, Cloetta has been able to fend off competition from other players. In 2009 a new chocolate moulding line was commissioned in Ljungsbro and is now in full-scale operation, which has boosted capacity and improved efficiency. Cloetta thus has a well functioning production system in which efficiency has risen in recent years, partly thanks to new and more flexible working methods, investments and a maintenance programme that is more integrated with production. However, the decreased volumes from contract manufacturing have led to lower capacity utilisation. Internally, Cloetta will optimise production for the current volumes and the contract levels that can be achieved.
Rising raw material costs have led to a sharp increase in manufacturing costs in recent years, particularly for chocolate products. To maintain prices at competitive levels, it is necessary to enhance efficiency in both production and other parts of the organisation. Cloetta has introduced certain price increases toward the retail trade that will be implemented during the coming year and starting in the autumn of 2011.
Of total manufacturing costs, raw materials and packaging make up approximately 60%. The most significant raw materials in terms of value are cocoa, sugar and milk products. The prices of many of the most important raw materials are influenced by factors such as political decisions, rising living standards, speculation on the commodities exchanges, etc. Environmental issues are also having a growing impact on prices in pace with increased alternative use of cultivated crops for energy supply purposes. Cloetta mainly purchases cocoa-based raw materials originating from West Africa, whose cocoa producers account for around 70% of total global production. The political situation in the region has been periodically unstable, which has affected prices. The processed raw materials used by the Group are cocoa powder, cocoa mass and cocoa butter. Demand for the individual components also varies over time, which is reflected in global market prices. By signing long-term delivery contracts, the Group ensures access to raw materials and counters the effects of short-term price fluctuations.
The Group’s long-term goal is to achieve average organic growth of 3% annually over a five-year period. In addition, the Group aims to grow through partnerships and acquisitions.
Financial risks
Cloetta has good liquidity and a high equity/assets ratio. The Group’s financial risks consist primarily of foreign exchange risk, interest rate risk and credit risk. Cash and cash equivalents and short-term investments at 31 August 2011 amounted to SEK 264 million (245).
Cash flow from operating activities for 2010/2011 was SEK 76 million (19). The Group invests excess liquidity in various money market instruments where the risk may not exceed the levels specified in the finance policy issued by the Board. The Group is exposed to different types of foreign exchange risk. The most significant exposure refers to anticipated or contracted cash flows from purchases and sales in different currencies, to the extent that these transactions are not hedged through forward contracts. The largest transaction volume is denominated in EUR . The net outflow in euros in 2010/2011 amounted to EUR –13 million. According to the established finance policy, derivatives may be used to limit the risks to which the Group is exposed. In order to reduce the risk level and currency exposure, Cloetta hedges a minimum of 50% and a maximum of 100% of the forecasted transaction exposure for a period of nine to twelve months forward. The Group does not apply hedge accounting and all derivatives are stated at fair value with value changes through profit or loss. Exchange rate fluctuations also have an impact on translation of the net assets of foreign subsidiaries to the functional currency of the Parent Company. The Group’s policy is to not hedge these net assets.
Credit risk in trade receivables in the Nordic market is limited with respect to the customer structure. In the other export markets where the customer structure and distribution differ from those in the Nordic market, risk exposure is greater. For a more detailed description of financial risks and risk management, see Note 29. In connection with acquisitions, a risk assessment of the acquired unit is carried out as part of the due diligence process preceding the transaction.
Environmental risks
Cloetta works continuously to reduce the environmental impact of its operations through systematic environmental and quality management. Cloetta deems its operations to be in compliance with the statutory environmental requirements and the Group is not party to any environmental disputes. Cloetta conducts operations at the plants in Ljungsbro and Alingsås that are subject to reporting requirements according to the Swedish Environmental Code. These permits apply until further notice. There are no injunctions in respect of the Swedish Environmental Code.
Environmental impact in the confectionery industry arises through water and energy usage, wastewater emissions, raw material and packaging waste, production waste and transports. Furthermore, certain environmental effects are caused by coolants, chemicals and noise. The greatest environmental impact comes from emissions of nutrients and fats into the water and wastewater network.
The Group takes ongoing measures in all facilities to reduce the environmental impact of its operations. A structured and detailed process for measurement, monitoring and action increases awareness of about the effects of different manufacturing processes on the environment and quality, and thereby provides a basis for activities that improve quality and environmental management.
Cloetta is involved in various international organisations aimed at accelerating development towards sustainable production of raw materials such as cocoa and palm oil. Cloetta is also a member of the World Cocoa Foundation which promotes sustainable cocoa growing and the RSPO (Roundtable on Sustainable Palm Oil) which is committed to improving the conditions for production of palm oil in Asia.
A more detailed presentation of the Group’s environmental policy and environmental work is provided in the sustainability report under the heading ”Environmental responsibility” on pages 38–40.