Taking actions to mitigate the impact of COVID-19 as the previous sales recovery transitioned into a new slowdown during the quarter.
Since early March, the COVID-19 pandemic has had a significant impact on our business. In this unique and challenging situation, we have managed to maintain business continuity while prioritizing the health and safety of our employees, customers, and consumers. In connection with our third quarter report, we indicated that we may see gradually improved pick & mix sales and profitability levels, provided that the COVID-19 situation did not change significantly. However, our sales channels as well as consumer behavior were impacted due to the subsequent second wave of the pandemic, and the sales recovery seen during the third quarter instead transitioned into a new slowdown. Given the worsening situation we have taken various measures to mitigate the mpact. Our ability to act swiftly and decisively, combined with our strong brands and resilient categories, has allowed us to navigate through this challenging market environment while aintaining focus on the future.
Developments during the fourth quarter
Sales for the quarter decreased by –14.9 per cent, of which organic growth accounted for –12.3 per cent and exchange rate differences for –2.6 per cent. Sales of branded packaged products decreased organically by –3.6 per cent, as an increased demand from grocery stores was more than offset by a decline in other sales channels such as entertainment and travel retail that have either closed or seen a reduction in the number of shoppers. Sales of pick & mix declined organically by –35.9 per cent during the quarter, driven by a lower in-store activation and consumer demand. The decrease in the adjusted operating profit is attributable to lower sales volumes as well as under-absorption of costs due to lower production. The operating profit was further impacted by increased marketing investments, more than offset by continued strong cost control.
Agility in challenging times
This has been a year defined by the COVID-19 pandemic, with many related challenges. I am pleased that despite this we have managed to maintain focus on the future by keeping the momentum in the execution of our strategy. We have continued to implement new pricing as well as accelerated several cost-saving initiatives. To support our growth agenda, we have increased our marketing investments behind our key brands, whilst improving our media efficiency. During the year we also launched our new sustainability agenda. Since disclosing the loss generated by the Swedish pick & mix business two years ago, we have taken a number of margin-enhancing initiatives which would have brought the Swedish pick & mix business to break-even by the end of this year. This would have been a first step towards building sustainable profitability. However, given the significant volume loss due to COVID-19 the effect has been delayed by around one year. Furthermore, as COVID-19 has impacted sales significantly across all markets, and with the high share of fixed costs in the pick & mix business model, the total Cloetta pick & mix business generated a negative EBIT of approximately SEK 135m in 2020, compared to a profit in 2019. Rebuilding our volumes is critical for recovering the profitability in pick & mix. To actively rebuild the volumes, we have successfully worked with our customers to ensure that the previously closed pick & mix fixtures remain open. The next step is to support our customers to fully reinstate consumer activation as the suppressing effect of the pandemic gradually eases. In 2021, we will accelerate the launch of the upgraded CandyKing offering, with increased emphasis on hygiene, to regain the consumer confidence. Consequently, during the quarter we have also renegotiated and extended a number of pick & mix contracts to become profitable. During the quarter, our VIP+ cost program continued to deliver reduced SG&A costs, including through the execution of the previously announced reorganization in Sweden. Since 2019 the VIP+ cost program has enabled more than SEK 130m in reduced SG&A costs, half of which are one-off savings due to COVID-19 and lower volumes. Approximately SEK 30m of the cost savings has been reinvested into strengthening our brands and marketing capabilities. We will continue to drive our VIP+ cost program in 2021 to improve our underlying cost structure. We delivered strong cash flow in the quarter, as the shortfall in operating profit was offset by favorable working capital movements. This, combined with the solid financing of our business operations, enables the Board to propose a dividend of SEK 0.75 (0.50) per share for 2020, bringing the average dividend for 2019 and 2020 combined within our target range. The proposal takes into consideration current market conditions and a continued priority to retain a solid balance sheet. We remain focused on growing Cloetta organically, in line with or better than the market, and at the same time reaching an EBIT margin, adjusted, of at least 14 per cent. Looking ahead, we will continue to pursue our strategy whilst adjusting our implementation plans to a constantly changing market environment. I am confident that Cloetta remains well positioned to continue to create value.
Henri de Sauvage-Nolting
President and CEO