Our primary focus in the second quarter was on the integration process and factory restructuring activities. During the period, high raw material costs continued to have a negative impact on earnings as implemented price adjustments have not yet had full effect.
In the past quarter, considerable efforts went into the integration process following the merger and into realising the planned cost synergies. Also, the rights issue was successfully completed and an agreement was signed for new credit facilities. In August, as part of the integration process, we implemented staff reductions in the commercial organisation in Sweden and terminated the distribution agreements for Cloetta branded products in Norway, Finland and Denmark. Starting this autumn and winter, our own sales organisations will successively assume sales responsibility for Cloetta branded products in these markets. This means that the integration process is proceeding as planned and that we will be able to realise the earlier communicated cost synergies of SEK 110m (including SEK 45m from closure of a factory in Denmark) by 2013.
During the quarter, it was decided to close the factories in Aura, Alingsås and Gävle as well as rationalising the warehousing operations in Scandinavia. The factories will be closed and the production relocated in order to address the excess capacity in our production structure. The next step is to optimise production between our other factories. At the same time, the remaining factories are being prepared to take over production from the units scheduled for closure. This includes moving and installing equipment as well as ensuring that the products are matched with consumer requirements. Such a production transfer is a time-consuming and resource-intensive process that short term always is associated with certain risks. This work is proceeding according to plan and we will be able to realise cost savings of SEK 100m towards the end of 2014.
The market volume growth was very limited and even negative in several segments and markets during the quarter. This has further intensified competition, resulting in increased campaigning and price pressure. Despite this, we have successfully succeeded in defending our market share in several segments.
The weak market conditions contributed to reducing our underlying net sales by 3.0 per cent, mainly driven by lower sales in Italy and Norway. Sales were also negatively affected by decreased sales to IKEA following their decision to launch own brands. Finally, sales of Cloetta branded products outside Sweden was lower than previous year. Finland and sales “rest of world” had a positive sales development while sales in our other key markets were relatively stable. The declining sales in Italy were mainly attributable to the economic situation in the country while the downward trend in Norway was due to, among other things, a challenging market situation fuelled by our price increases.
Our pricing strategy stands firm. Gross price increases have been, or are being, implemented in all markets to offset higher raw material costs and thereby lay the foundation for the long-term profitability. However, in the short-term, the implemented price adjustments have not had full effect yet due to intensified campaign activities in a relatively stagnant market, which have affected net prices. This contributed to the decrease in underlying EBITA.
Raw material costs remained high during the quarter. We were mainly affected by the high price of sugar. Currently, we do not foresee a relief of raw material costs (except for the cocoa price which has a limited impact on the Group’s earnings). On the contrary, there are indications that some raw material costs could rise further.
Cloetta is in the midst of a restructuring process. The focus is on completing the integration and the factory restructurings, as well as ensuring that price increases offset higher raw material costs. I remain convinced that the successful completion of the extensive change programme will be beneficial for our customers and consumers as well as for employees and shareholders.
President and CEO