Half Year 2022 Nestle SA Earnings Call
Good afternoon, and good morning to everyone.
Welcome to the Netflix first off 2022 results webcast.
I have no capellini nestle's investor relation.
Today I'm joined by our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer Francois here.
As usual market, we'd begin with key messages and discuss the full year 2022 guidance.
Francois will follow with a review of the first half 'twenty two to sales and profit figures.
We will then open the lines for your questions.
Yeah.
Before we begin please take note of our disclaimer.
And now I hand over to Mark.
Thank you Luca and a warm welcome to our conference call participants today.
As always we appreciate your interest in our company.
I am pleased to report that our CRO momentum increased during the second quarter and then we reached 8.1% organic sales growth in the first half.
Pricing continued to increase reflecting higher inflation levels for all commodities energy and labor.
As before we made the point of acting responsibly in our price increases.
Real internal growth remained resilient and I'm glad to confirm that all three components of organic growth volume mix and price were positive in the first half.
Continued supply chain issues and tough comparable from the second quarter last year brought our real internal trucks slightly down from first quarter levels.
Demand elasticity is still quite limited and moderate in light of the pricing action, we had to take.
If you like building stacks to measure accrual of consistency over time.
Our two year compound annual organic sales growth rates for each one.
<unk>, 8.1% and a three year CAGR was six 3%.
No small feat.
This has been a year of extraordinary supply chain challenges and input cost inflation.
The situation was difficult before but the war in Ukraine process to a whole new and unforeseen level.
In particular for the food industry.
The development of our underlying trading operating profit margin, both at group and at zone or business level clearly shows that the food industry is not the cause of soaring food prices.
It is much rather impacted by geopolitical and macroeconomic circumstances that are outside of our control.
That said, we're doing everything to address these challenges in a responsible manner always keeping consumers in mind.
Frost level show you later in his presentation that we worked hard from all angles to mitigate the unavoidable impact on our underlying trading operating profit margin.
I believe we handled the situation well under the circumstances and found a reasonable balance between maintaining growth and protecting the bottom line.
Our high single digit underlying EPS development in the first half bears this out.
That balanced approach between growth and profitability will also be our guiding light when it comes to the second half of the year.
In a fast moving environment like this operating management certainly it takes center stage.
Having said that I'm all the more proud that we also saw continued progress with our strategic goals.
Regarding portfolio management, we progressed with the acquisition of a majority stake in Oregon, and the recently announced transactions two by PURA Vida in Brazil, and the better Health company and you sell it.
These transactions helped Nestle health science to round out its global presence in the consumer health and vitamins minerals and supplements space.
Portfolio management for Us goes beyond M&A.
It includes the effective management of our existing portfolio.
Particular through meaningful and relevant innovation and the prompt fixing of any underperformers.
In this context I'm proud to report that we have stabilized our infant nutrition business in China.
Growth in the first half turned positive and we're starting to see improving market share trends.
Outside of portfolio management, we also continue to make progress on other key strategic initiatives, including our sustainability and affordability projects.
This brings me to a key challenge at this time of increasing food insecurity and that is improving access to affordable high quality nutrition.
The combination of the pandemic and the war in Ukraine has wiped out much of the progress over the past decade in this important area.
This is a time when help is needed.
With our long standing presence in developing countries, we see many opportunities to do good and to do well at the same time.
As stressed before we act responsibly when it comes to the pricing of our products.
But we go beyond responsible pricing alone.
We lead the way when it comes to micronutrient fortification.
And in the important task of establishing and scaling up local and more resilient food supply chains in particular in sub Saharan Africa.
Our press release provide specific examples of our recent projects.
Yeah.
Next I would like to comment on our updated guidance for the year.
As indicated in our Q1 conference call our start to the year was stronger than expected.
And we have only accelerated from there.
Based on the strong first half sales performance, we now expect organic sales growth for the full year in the range of 7% to 8%.
This points to a strong second half with similar only slightly lower performance than an H one.
Any caution here is due to the geopolitical and macroeconomic concerns while we are confident of how our products and brands will continue to perform.
Our views on the expected underlying trading operating profit margin have not changed materially from the time of our Q1 call.
Being cautious about the global macro environment, we now expect our full year margin of around 17%, which is the low end of our previously guided range.
All up expectations for the year remain unchanged.
While it is way too early today to discuss 2023 expectations and beyond I.
I would like to assure everyone that we're not expecting a longer term reset when it comes to our underlying trading operating profit margin.
We still see the margin pressure is transitory, while pricing has to catch up with input cost inflation.
As a food company and being committed to responsible pricing the price adjustment did not work quite as fast as in other consumer goods categories, such as personal and household care.
Before handing it over to Francois I would like to make a particular point in recognizing and thanking our associates around the world.
We go through the third year in a row on the external crisis conditions, Youre drive energy and for severance and coping with this situation and making the best of it it's a source of pride and inspiration.
It is a pleasure and a privilege to lead such a committed team. Thank you.
This concludes my prepared remarks, I would now like to hand, it over to Francois.
Look forward to answering your questions later.
Thank you Mark and good morning, good afternoon to all let me start with the highlights for the first half of 2022.
Organic growth was eight 1% pricing increased to six 5%, reflecting significant an unprecedented cost inflation rig was resilient at one 7% the slowdown versus the prior year reflects a high base of comparison in 2021 on supply chain constraints.
Net acquisition increased centers by 1% largely related to the acquisition of the KOL brands of the Bountiful company as well as all getting fortinet.
Foreign exchange had a positive impact on sales growth in the first half.
Total reported sales for the six months West $45 6 billion Swiss francs, but nine 2% increase versus last year.
The highest level seen for more than 15 years.
Turning to the distribution of girls between developed and emerging markets organic growth in developed markets was six 9% based on increased pricing and positive region.
Growth in emerging markets reached 10% with strong pricing and solid read.
Growth was supported by continued momentum for affordable offerings, particularly in a way.
Turning next to the breakdown of <unk> by channel at any girls for retail sales remained robust at $6 seven for some for the first half.
We didnt retail E Commerce sales grew by eight 3% building on 19, 2% growth in the first half of 'twenty one.
Organic growth and outperformed channels reached 29, 6%. We said is now exceeding 2019 levels.
We have continued to address inflationary pressure off proactively and responsibly.
Pricing stepped up fill the unreached seven 7% in the second quarter.
We aim at striking the right balance between margin protection on volume growth the strength of our brands product differentiation and leading market position enhances our ability to pass through these pricing.
In addition to pricing we are making full use of ours, all evils such as strategic revenue management efficiencies disciplined cost management product mix as well as portfolio management.
For example in terms of efficiencies, we expect to generate significant savings in 2022 through our SKU optimization recipe and packaging amortization as well as the development of new technologies.
So far rig has remained resilient and we have seen limited evidence of negative elasticity linked to price increases.
The two year old rig average we charge just for COVID-19 related volatility was four 1% in the second quarter.
This is broadly in line with trends seen over the last several quarters on the hydro is having pre COVID-19 levels.
Volume growth a key component of rig continue to be positive in the first half of 2022 at a level consistent with pre pandemic times.
This volume growth is coming of a high base of comparison last year.
Indeed in the first half of 2021 volume growth was almost four times higher than in previous years at around 5%.
We have not seen any matter youre down trading yet as mixed as remain positive.
Going forward, we may see suddenly get re get STC.
Let's now look at the results of four seven operating segments, beginning with zone, North America, where we sold nine 6% organic growth.
Rig was minus 0.2 persons impacted by a high base of comparison in 2021 on supply chain constraints, particularly for Purina Petcare on frozen food group.
Growth was supported by increased pricing strong momentum in eco mouse as where does it fills a recovery of out of home channels. The.
The zone, so continued broadband market share gains.
Byproduct category, Sams, and Purina petcare necessary professional Starbucks out of home products and water grew at a strong double digit rates.
Infant formula recorded double digit growth, reflecting supply shortages in the market.
Baby food also posted strong growth fueled by new product launches for Gaba, including Susan to the fed.
A diebold teasing stick.
Frozen food reported low single digit growth.
Zones underlying trading operating profit margin increased by 30 basis points.
Excluding the impact of the divestments of Nestle waters, North America bronze zones margin development was negative as pricing did not fully offset significant cost inflation.
Shifting to southern Europe organic growth was seven 1% driven by increased pricing across most geographies and categories.
Rig remains solid at two 1% despite a high base of comparison in 'twenty, one on supply chain constraints.
Growth was supported by fills a recovery of out of home channels on innovation.
The zone continued to see market share gains, particularly in pet food coffee and infant nutrition.
By product category, the key growth drivers were purina petcare unless they professional.
Sales in water and infant nutrition grew at a double digit rate coffee posted low single digit growth following a high base of comparison in 2021.
Garden Gourmet Columbus products, So continued strong double digit growth fueled by new product launches.
Zones underlying trading operating profit margin decreased by 140 basis points impacted by significant inflation, which was not fully offset by pricing on gross leverage.
We also remained disciplined on cost control and efficiencies to mitigate the impact of inflation on consumables.
Moving now to zone AOA.
The zone reported high single digit organic growth with contribution from all geographies and categories.
Growth was driven by increased pricing fills a recovery of out of home channels and strong supply chain execution.
The zones or market share gains across categories, particularly in culinary portion on ready to drink coffee as well as dairy.
By geography, all regions posted positive growth with particular strength in South Asia Africa and Malaysia.
By product category culinary was the largest growth contributor coffee Purina Petcare posted high single digit growth Saturday.
It sounds in this way professional as well as cocoa and more beverages grew at a double digit rate.
Infant nutrition posted mid single digit growth with a strong recovery in the second quarter.
The zone underlying trading operating profit margin decreased by 90 basis points significant cost inflation was not fully offset by pricing and growth leverage D.
Disciplined cost control and efficiencies were instrumental in ensuring price competitiveness, particularly for or thought they bought offerings.
Next is on Latin America, which reported double digit organic growth.
<unk> remained strong at four 2% building on a high base of comparison in 2021.
Growth was broad based unsupported by increased pricing fills a recovery of out of home channels on sustained momentum for retail sales.
The zones, so market share gains in infant nutrition pet food and coffee creamers.
By geography, Brazil reported double digit growth Mexico grew at a high single digit right.
Chile, Colombia, and the Plateau region also saw strong growth.
By product category confectionery was a key growth contributor peering.
Purina Petcare coffee and Miss the professional all reported strong double digit growth.
Infant nutrition saw high single digit growth.
Their REIT posted mid single digit growth led by 45 meals and dairy culinary solutions.
Zones underlying trading operating profit margin increased by 10 basis points as a result of gross leverage and disciplined cost control and efficiencies.
Significant cost inflation was not fully offset by pricing.
Turning next to zone, greater China organic growth was two 3% with a rig of one 6% impacted by COVID-19 related movement restrictions.
Pricing rich, 0.7% turning positive in the second quarter as a reminder, inflations remains relatively limited in the region.
Growth was supported by robust demand in e-commerce channels and continued innovation.
Infant nutrition returned to positive growth with improving market share trends and was led by a strong recovery in the second quarter for Illumina.
Categories with higher exposure to out of home channels on undergo conceptions, particularly knisley professional on ready to drink coffee, we're impacted by movement restrictions.
The zones underlying trading operating profit margin increased by 100 basis points favorable mix and disciplined cost control more than offset cost inflation.
Next is nespresso, which reported low single digit growth following 14, 6% growth in the first half of 2021.
Human mix combined.
Now around 15% ahead of 2019 levels.
Growth was supported by continued momentum for the virtual system, a recovery far outperformed channels and boutiques as well as innovation.
Online sales decreased following a high base of comparison in 2021, but remained well above pre pandemic levels.
By geography, North America posted double digit growth with continued market share gains.
Europe reported a sales decrease following double digit growth in 2021.
All other regions combined reported high single digit growth.
The underlying trading operating profit margin of an espresso decreased by 170 basis points impacted by growth investments behind the rollout of the virtual system and cost inflation.
We continue to invest behind virtual given strong levels of consumer adoptions undersea stems differentiation.
Finally, let's turn to Nestle Health science, the business posted high single digit growth building on two consecutive years of double digit growth.
Growth was supported by innovation geographic expansion and market share gains.
Consumer care posted mid single digit growth with strong contribution from healthy aging products.
Vitamins minerals and supplements reported low single digit growth, reflecting a high base of comparison on supply chain constraints.
Medical nutrition reported double digit growth with strong sales development for pediatric products Satish.
Satisfies Zen pet grew at a double digit rate with market share gains.
Yeah, So first the patient adoption.
By geography sales in North America grew at a high single digit right Europe saw positive growth, while other regions combined posted double digit growth.
The underlying trading operating profit margin enough Nestle health science increased by 20 basis points gross leverage on acquisitions synergies more than offset cost inflation and growth investments.
Okay.
Let's now look at product categories growth was broad based supported by increased pricing across all categories and market share gains, particularly in pet food coffee and Nestle Health science.
As a reminder, when looking at growth for the first half, we see consumer demand somewhat normalizing by channel.
Categories with greater at home consumption, such as culinary on dairy so software growth of a high base of comparisons but sounds to remain ahead of pre pandemic levels by contrast categories with greater exposure to out of home channels and on the go conceptions such as confectionery on water.
So a strong recovery of a low base of comparison.
Within powdered and liquid beverages coffee, so high single digit growth of a high base of comparison in 2021.
All brands contributed positively to growth with sales of Starbucks cafe ready to drink products growing at double digit rates.
Cocoa and malt beverages reported high single digit growth driven by strong demand for Milo in Asia, and Africa, net squeak in North America, and Mezcal in Brazil.
Yeah.
Petcare reported strong double digit growth driven by continued demand for premium and veterinary products growth was also supported by sustained e-commerce momentum innovation and felt that our market share gains.
Nutrition and health Science posted seven 8% growth infant nutrition saw eight 6% organic growth with a strong recovery across all geographies.
Return to positive growth in China, and improving market share trends.
Growth was supported by continued robust demand for its shipped more products in infant formula. We sell is reaching six summarized on 70 million Swiss francs as well as by healthy snacking products in baby food.
We have already discussed Nestle health science.
Prepared dishes and cooking AIDS. So two 9% growth based on strong sales development for ambient culinary in zone AOA on the robust demand for digital no hot pockets in North America.
Vegetarian and plant based food products delivered double digit growth with particular strength for garden gourmet.
Milk products and ice cream recorded three 5% growth building on the high base of comparison in 2021.
Key growth drivers, where coffee creamers and affordable nutrition offerings, particularly background.
Growth in Confectionary reached 10, 8%, reflecting strong roes for kitkat and seasonal products.
Saturday and water grew by 17, 2% supported by double digit growth for international premium brands and a strong recovery in out of home channels.
Moving now to profit margin by product category.
Other than liquid beverages, so our margin decreased reflecting significant cost inflation on gross investments on espresso, partially offset by increased pricing and gross leverage.
Purina Petcare posted a margin decrease as significantly higher commodity on distribution costs more than offset pricing on gross leverage.
Nutrition and health science, So a margin increase in both infant nutrition and Nestle Health Science, we have already discussed Nestle health science in infant nutrition, the margin increased by 380 basis points to 23, 5% as a result of pricing gross leverage.
We are able to product mix and improved performance in China.
Prepared dishes on culinary products saw a slight margin decrease as pricing did not fully cover significant cost inflation.
Margins in mill products, Unlike scream decreased impacted by higher cost inflation for ambient dairy.
Confectionery and water so margin improvements as pricing on gross leverage more than offset cost inflation.
Next to ease underlying trading operating profit margin overall, our underlying trading operating profit margin for the first half decreased by 50 basis points to 16, 9%.
Gross margin decreased by 280 basis points to 46%, reflecting time delays between cost inflation on pricing actions similar to what we saw in the second half of 2021.
Inflation continued to be significant and broad based across commodity packaging fright on energy cost.
Overall, the impact of cost inflation was around 14% of cost of goods sold in the first half of 2022.
Going forward, we will continue to offset increased inflation through pricing strategic revenue management efficiencies and portfolio management.
Distribution costs as a percentage of sales decreased by 10 basis points, mainly as a result of the disposal of the initially what the other brands in North America.
Marketing and administration and R&D expenses decreased as a percentage of sales by 220 basis points. We saw a significant benefit from sales growth leverage and disciplined cost control. We send is growing by nine 2% on structural costs slightly increasing.
Marketing spend decreased temporarily as we limited promotion and marketing activities in the context of supply chain constraints, particularly in Europe and North America.
We expect to increase our investment in consumer facing marketing spend in niche through 2022 versus <unk> 2022.
At the same time, we continued to optimize our marketing spend by increasing the share of digital media investment, which now accounts for 54% of total media spend.
Moving onto the P&L items from underlying trading operating profit down to net profit.
The restructuring expenses are net of trading items increased by 150 basis points, mainly due to impairments.
Trading operating profit margin was 14, 7% a decrease of 200 basis points on a reported basis.
We recorded lower gains on disposal owns on higher taxes due to one off items in the first half of 2021.
As a result of these movements net profit margin decreased by 270 basis points to 11, 5%.
Moving to underlying earnings per share, which increased by eight 1% in constant currency and seven 3% on a reported basis to $2 33 Swiss francs.
The largest contributor to the improvement was stronger organic growth.
So the share buyback program also contributed one 7% net of finance costs.
The line Ozols, mainly related to income from joint ventures on associates contributed two 1% driven by increased contribution from l'oreal. Unfortunately.
The negative impact from foreign exchange, reflecting currency depreciation of the euro denominated l'oreal income.
Free cash flow decreased from $2 8 billion Swiss francs to $1 5 billion Swiss francs, adjusted EBITDA increased by 0.5 billion Swiss francs of five 8%, reflecting higher state of growth.
The group increased inventory level, almost temporarily due to significant supply chain constraints.
In order to meet strong volume demand, particularly for Purina Petcare on coffee the group increased capital expenditure.
The level of Capex should start to normalize from 2023 onwards.
Excluding the increase in working capital cash generated from operations increased from $7 9 billion Swiss francs to $8 8 billion Swiss francs.
Even by strong organic growth let.
Let me know hand over to Luca will money tells a Q&A.
Thank you Francois with that we move to the Q&A session. We open the lines for questions from financial analysts.
Please limit yourself to no more than two questions. The first the first question is from Celine panel with JP Morgan. Please go ahead Serena.
Yeah.
Good morning.
Thank you Curt and good afternoon, everyone.
So my first question is on the margin guidance. So you decided to change the guide to around 17% just wanted to understand what has changed she seem to say that nothing has changed but you changed the guidance if you could explain that.
The rationale behind this change and Nick are we I think more cogs inflation and for the second half and you asked about signaling that our margin will recover some of my Christian values.
Effectively we are now past the peak in it.
If there is a weaker commodity inflation going forward.
What we should expect to see the mountain biking, and my second question, which is probably quite related and you mentioned that pricing has not been a fast in your categories as other categories. How much more pricing do you think you need to act to pass on and Andy.
How are we going to see further pricing even into 2023. Thank you.
Okay.
Celine, let me try and take a stab at both of these first and then also hand, it give francois for any additional comments, let me start on the pricing side, because I feel that between the first half of last year. The second half of last year in the first half of this year you see the movie playing out pretty clearly so we had almost.
No Cogs inflation in the first half of last year, we're talking about $250 million then it really hit us like a freight train in the second half where all of a sudden that number ballooned to $2 9 billion.
And then of course, we've also seen additional cost inflation in the first half of this year, but that's also when significant pricing then which accumulated in the second half of last year on continued in the first half of this year started to kick in and give us some cross margin relief.
Since the majority of the gross margin compression really happened in the second half of last year, there is a bit more gross margin compression.
Essentially going down from what is it 46.9% second half of last year to 46.0% now in the first half of this year, so not very much anymore going on because the continued inflation cost balanced by the increase in pricing that was kicking in across the.
Categories and geographies.
So from that situation and I'm, assuming that no other shoe will drop going forward I think we're seeing a momentary stabilization there still pricing calling on you see our gross margin is still impacted it.
It's not in your best interest to pinpoint know exactly which category and which geography is going to see price increases, but clearly some repairing needs to be done because the SEC, but gross margin is still quite a bit down from what it was at the half year point last year.
So battle continues to happen in the second half obviously, we need to stay flexible because this is a highly volatile situation just think back to the temporary point in time, when we had our full year conference call and we weren't aware of yet of the war and all its consequences on energy cost inflation.
Hence this is why in an environment like this it's important to really stay agile and flexible when it comes to our expectations, but overall I believe that we've handled this well we've taken the pricing that we had to we kept volume growth positive and now we will basically start with Panther Cross margin.
Print things into a more normalized state when it comes to the margin guidance I think all we're doing here is being more precise on something that we had indicated already around the Q1 call as you'll remember in the full year call in February when we describe this range, 17% to 17, 5%.
We even describe it as sort of a conservative, but then of course that colon use situations, where the Ukraine War started to unfold the significant energy cost inflation and also additional.
Commodity and labor inflation kicking in and so that's why as part of the Q1 conference call. I had described that margin guidance already is more challenging and I think now we're being more precise here around the lower end of that range at around 17%.
Next question is from Bruno maintain at Bernstein. Please go ahead Bruno.
Hi, good morning, or good afternoon in terms of.
Downgrading on one hand, you say you don't see much at all mix, yet, but looking into Q.
It is like U S culinary no person ice can be sort of <unk> do you see private label, increasing and that impacting.
Market shares as some consumer shift seems to be happening already my question to you is really do you think there is a normal level of downgrading. We are seeing what are you surprised by how little we've seen yet so far given the levels of inflation for consumers wouldn't you expect it to be a lot more down trading by now.
Previous experience.
My other question is about immune.
I know you talked about signing up more more patient adoption.
But going back a little while ago to anthro ambitions without being a $1 billion brand at some point are you still fully on track for making immuno <unk> take it Brian as you towards one or two years ago things going slower or will there be less upside. Thank you.
Thanks, Bruno and Tim Let me talk about the down trading at first.
It's a good thing that you're pointing out U S and frozen in particular, because I do think that this is an area, where it's really hard to separate now any negative volume development, whether it's due to supply chain constraints or down trading U S. Frozen was one of those areas where we.
Had some constraints on supply you may have seen in the media, we had a very unfortunate factory fire for a place that makes.
Some of our products.
And so that's why you know it's hard to read the data at this point exactly.
How much of that is down trading how much of that is M.
Due to the supply chain constraints do bear in mind that frozen tends to be a fairly a good alternative from an economic point of view. So there is not much down trading going on there and that's why I think we need to see the situation unfold a little further to be able to understand it better so far again, it's quite limited good.
Example is dairy in zone AOA.
You mentioned food and frozen in particular, there's one other area. We've also seen a bit of that in Europe , but here again reading exactly what the down trading is and what is the exit from.
The corporate situations, where people spend more time at home and cooking more is pretty hard to read.
When it comes to a immune.
I think the pandemic has taken a lot longer than anyone expected also when we made that move in the September of 2020, we did not expect that a year and a half later, we would still see significant.
Restrictions here when it comes to Doctors' office visits and so forth.
Clearly the situation has improved now in the spring.
It's much easier now for patients to print their kids to the other colleges for treatment and so the real actual launch has only just begun.
So most of all what we've done here with al impairment is reflect that delay and now what we need to see is basically what is the uptake from here and that'll give us a better sense of the path over time of course, we'll keep you fully posted on the progress.
Thank you.
Next question is from the one that came in at Barclays. Please go ahead Warren.
Yeah. Good afternoon, Mark Crosswhite Lucas Warren here from Barclays had good ml. So two for me as well first one is on the margin again I think you had a 220 bps benefits from admin and marketing I was wondering whether you could help us.
Split that out a little bit just how much was marketing down temporarily choose to supply chain issues. How much do you expect to bounce back in the second half and then how much is on the admin cost savings. So I just trying to understand.
That bucket of 220 bps, a little bit more and I guess the main reason of the marketing that is on the supply chain you mentioned that does them up but any update on where we are overwhelmed supply chains I guess, it's not just the frozen issues also pet food and there's a bit more wide, especially in the U S that would be super helpful. And then secondly on China infant Formula I E.
Same Marc you're expecting infant formula to be positive in <unk>. So the fact, we already positive in Q2.
Is ahead of schedule, which is obviously good news can you explain a little bit what you've done in terms of distribution SKU rationalization, and how you've got alumina and back into growth and perhaps one of your local competitors have been talking about inventory problems in the birth rate in China, whether you could help us reassure on that point is.
Well thank you.
Thanks, Lauren let me start on the second one and also give one quick high level comment on the first one and then hand it over to Francois So in China, very pleased and that you're right. We are about a quarter ahead of schedule.
You mentioned one of the steps we've taken embed as S. SKU rationalization I think we had too many products.
Out there where it was not quite clear how the pricing related to each other and if cost a confusing situation for the consumer and then a lot of the work happened over the winter and spring and.
And that is working with the various channels and as you know a fairly complex distribution system in China to really be sure that at all levels in the distribution system. It is advantageous for our retail partners to work with us and to promote our products and so a lot was basic blocking and tackling and distribute.
I think it helps that our new zones CEO for China has a strong background in sales and so clearly sales and understanding of the sales channel is something that is very near and dear to him. He worked for a long time at this business as you know as recent assignment before taking the overall zelman trying to drop.
Westwood tightly so he had been out of the.
The nutrition business for number of years when it turns south but I think he turned his skills to work really fast on this we've made some pretty significant changes and I think they are paying off so I believe that the positive trends here independent of what some other players. We're experiencing would also continue in the second half.
Half of this year.
When it comes to your question on margin and the marketing and admin spend just one quick high level comment on the marketing spend so it is down and I think Francois mentioned that in his presentation and I wanted to assure everyone. This is not a new strategy. So this is not like years ago.
When people were almost.
Almost competing with each other who has the lower marketing spend and clearly we branded that at the time very much as misguided and were not part of that game. It is a highly tactical time limited move at a time when we saw supply chain constraints and it's built on a very simple notion that you should not promote what you can sell because in that case I'll.
You do is accurate consumers when in fact, you want to delight consumers and so that's why first of all I was mentioning that in the second half, we foresee that situation to change again, but for the first half against the specifics of what we saw significant inflation and supply chain constraints I think that tactical move has paid off and our is.
Really worthwhile.
So over to you. Thank you Mark and good afternoon, Warren just a couple of words on supply chain constraints I think there are three parts to it. The first one is capacity on our side given that we have seen a significant increase in demand during the pandemic for some of our products, we have a little bit of capacity constraints. As you know which is the reason why we are accelerating our capex program.
This applies more specifically to pet care as well as to a certain extent you coffee. So we have a little bit of.
Tension there we have some tension as well in the fall some food items in the U S. The capacity constraint that we have our most specifically in the U S, but to a lesser extent in Europe as well the second issue that we have in terms of supply chain constraints is transportation.
Actually in terms of finding trucks funding truck drivers as well. So this has been a real issue even for sea freight over the last couple of years. It is normalizing a little bit we see some signs of improvement most specifically in the U S. But it has been really a extremely tense about the last couple of quarters and finally, we still have some difficulties.
Iran, There and it changes overtime to get access to some raw material packaging material and you can be even a small ingredient. So we are really addressing eaton are tackling it through an increase which is quite significantly now.
Inventory, which is something that we are driving we believe that this is the right thing to do to protect our supply for the coming months and then we will come back to a more reasonable level of inventory when everything normalizes.
Okay. Thank you.
The next question is from Patrick 20 minutes, you'll hear Kantonalbank. Please go ahead Patrick.
Yeah. Thank you Luca good afternoon, Marc and Francois there was an increase in networking capital of 3 billion in H. One what is your best guess for the full year a stable at Oracle capital are still an increase that's my first question and second question milk product coffee Petcare all had the significant margin decline in <unk>.
Which one do you expect the margin decline in these three divisions to be less severe in the full year. Thanks to price increases. Thank you.
Yeah.
So on that good afternoon on networking capital I mean, we have had a significant increase in this first half, but it was the case already last year. This is very much related to what I. Just said in terms of voluntarily increasing our inventory to protect our supply in the coming months given the attention that we are seeing them I don't think that we will.
Yes, you're a little bit of fulfills our inquiries, but the increase that's already been quite met telling them. So I don't necessarily expect a very significant increase going forward. The good news, though is that when we are very much a very careful with that we have not seen any increase beyond the Senate increase in receivables, so which is really a very good so especially in the <unk>.
Of increasing interest rates, we are extremely careful not to see.
We see demand increasing beyond the increase in sales.
You mentioned some categories like dairy and pet care are having their margin declining are the main way to address it will be to continue pricing whenever we can as well as using some of the other levels that we have activities, such as savings efficiencies and product mix as well, including a part.
Video management. So we will continue acting for each of these categories as we have done until the other one deal. For example, if you look at pet care and dairy dishes with coffee is a category, where we have seen recently is the largest increase in terms of input cost inflation. We spent mainly because of grains, which is a good sign is that we have seen grain.
Pricing stabilizing or even moving down a little bit lately in terms of spot rate and the milk products dairy has increased quite a lot of coffee as you know, it's almost 50% five zero, 50% increase over the last year, which is not linked by the way to the well in Ukraine. It is essentially linked to climate.
Additionally, in Brazil last year with the Frost and heavy rains.
Patrick images that built one additional notion here I mean, obviously you guys follow the spot prices and then it's kind of tempting to assume the next day, if the spot price goes down there's immediate relief for us, but that's usually not the way. It works just like on the way up we got some temporary protection through hedging on the way down.
And that also causes a temporary delay when it comes to relief because even at the time when the prices were quite high in reaching their peaks since we didn't know whether they would go further north we always kept attention to some extent, which I think is prudent enhance when do you think about these day to day or week after week changes.
A bit of time delay until they really provide relief to our margin.
Thank you Marc and Francois.
The next question is from John Cox at Kepler. Please go ahead Johnny.
Yeah. Thanks, sorry about your good afternoon, guys, John with Kepler Chevron.
Francois just a point of clarification did you say the rig would he had negative or you may see negative break on a group basis.
In the second half of the year and then just a couple of questions on that down trading issue because it does look difficult in some of the European market, specifically, where you can see the.
The price differential between some of the private label products in your categories.
It's quite large between 50 and 100% in some cases I was just wondering what you guys are doing and you're watching it and I'm. Just wondering if you give some examples of what you do when you see this sort of stuff.
Like strategically do you start building bigger packs.
Less expensive ingredients start selling more to Audi a little niece and he sort of guys just to get a favorable fair.
How you how much you guys are in control if there is.
Massive shelving and consumer spending in the autumn of some.
People think anyway, particularly in Europe .
Second thing is really just on the the Agri commodities, what Patrick was saying you can see some of these accurate commodities rolling over.
On the other side other costs are going up I Wonder if you guys just have a rough for already for 2023 on the inflationary pressures or do you think by that time, you know with all of the moves you're making everything will be more or less offset or do you still think there'll be price increasing going into into 2023 and marks.
My apologies just a last one you guys seem incredibly relaxed and we all know your quality.
Investment.
And the results speak for themselves and the lack of margin pressure compared to some of your competitors, but what what is worrying you at night at the moment, because you do seem relatively relaxed about the whole the whole environment. Thank you.
John Good afternoon, let me take the question on rig first of all the good news is that's all rewards for the T V niche one both volume and mix and with levels that we were experiences are experiencing for both items pre pandemic at pre pandemic times, which is rather good news and once again on the very high base of comparison.
We are doing our best in order to preserve positive originates too and.
There are some good news there because the base of comparison will be a little bit easier in niche to just in H. One 'twenty 'twenty. One we had rig of six 8%, which was incredibly high and then once again I mean, we were positive on that very high base of comparison in niche 120 to the base of comparison last year.
More favorable or do those need high at four 2%. So we have to a certain extent to two 5% the.
215 percentage points low well base of comparison in niche too.
We are so it will depend does weight on those affect those I mean, we will we face.
Supply chain constraints for example, in our image to the still difficult to say, but so we are doing our best in order to preserve a rig into positive territory as both volume and the mix just one word on the agricultural commodities for 2023, that's too early.
At this point in time I mean, we are really working very actively to learn properly edge two and the full year are.
We don't necessarily have used because it's highly volatile. So we can have some views on through hedging and so forth, but are still too early to assess what it will be in 2023. There is one item, though that we knew Bianca.
Agricultural commodities, which is salary and wages, we know that there will be a stronger impact in 2023 over and above what we saw in 'twenty, two which was still relatively moderate.
And John just building on <unk> comment first let me just reiterate that last point. So it's too early to speculate here on commodity or energy prices in 'twenty three but.
The labor component at least when it comes to key economies in Western Europe , and North America, I think that's a pretty sure thing that we have to prepare for higher labor cost levels down and you do that obviously also with automation wherever you can and squeezing efficiencies out of the CIS.
But at the end of the day. It May also then result in some pricing at that time, but we'll revisit that as we look at 'twenty three.
You mentioned, the consumer behavior, and yes of course, we're watching them very diligently and how the consumer continues to.
Make do with the situation and then tactically you listed some of the items and those are the ones I mean, a larger pack sizes special promotions and really trying to make the cost offering.
As competitive as possible do keep in mind that private label supply chains are feeling the pinch to when it comes to their cost.
Inflation and also some of them are still experiencing some bounce back problems from the times of Cobra to remember those private label supply chain has tended to be more exposed to them with large players and so yes, we've seen some come back but not quite as much as the price differential would suggest so that's something.
We watch actively and then are you a high level question let.
Let me give you a high level answer and that is starting with the onset of Covid.
And that's why I'm, making such a big deal the third year on the external crisis conditions.
You had a situation that is so fast moving.
On a number of things the consume our pricing purchasing preferences category preferences, and then switching to inflation and supply chain problems that usually a large companies systems.
Not really set up for that I mean, we were geared up like everyone else in business for smoother evolving situations enhance basically three years ago, two and a half years ago, you had to switch off the autopilot and go into what I call hand steering and that is tiring because you really have to scan all of the major data points.
Literally manually outside of a normal review systems and budget cycles, and what have you and really try to stay as nimble as you can because you don't know, which you might drop next and so it's these unknown unknowns that keeps me most for it and then you're getting of how do we are ready to recognize them and react as quickly as possible.
When they do happen, but you're also right when you detect it.
Certain level of being able to laugh because I do think you know looking at this first half we did achieve a very very good balance and compromise here at a time of significant volatility and I think we are positioned quite well to bring home a successful 2022 and also position us well as we look at 'twenty, three and beyond and I hope that came through.
Thank you.
Next question is from John Ennis at Goldman Sachs. Please go ahead John .
Hello, everyone I know, it's a very busy day, so I'll stick to one place on the espresso.
And again I appreciate it's just one quarter of negative break, but do you think that this is driven by less consumption per customer or are you starting to see an unwind in the espresso uses a weaker retention rates.
And I guess, if it's largely consumption per customer do you think that that's just COVID-19 normalization as people consume more coffee out of home again or is there an element of partial down trading there as well with <unk> your thoughts on the spread side. Thank you.
Let me take a first crack and then hand, it to Francois and let me just say that other than a particularly tough quarter.
Last year with Amazing volume I'm, you know I'm not aware of anything negative here.
I think the company is doing very well.
Thank our mix has stayed pretty much at levels that we've seen so at least there we're not seeing elements of down trading and clearly against one of these peak quarters, where people were still pretty much tied down at home.
It's pretty hard to you know to show crop open about that let me, let me handle the falling spot for more details.
Can provide you a little bit more color also last year, we had double digit growth in niche one of 14, 5%, which was extremely high. So if you look on a two year stack, which probably provides a better idea misprice all saw strong growth of eight 6%, So which is good and you know even I think a good indicator always where we oh.
Against the pre pandemic level, if you look at Nespresso sellers in 2022 in the first half with about 21% higher on a constant exchange rate versus the pre pandemic level, So which is a six 6% three year CAGR. So we don't see really any slowdown. It's just that we had an exceptionally high.
First quarter first semester on second quarter of last year, So it's going to normalize by the way because the comps are much easier as far as etch tools is concerned so no specific worry and knowing they get to <unk> mix for example, either.
Thank you.
Next question is from Pascal boiler from Stifel. Please go ahead Pascal.
Yes, good afternoon regarding your high single digit growth in coffee and it gives us some better sense of the price volume mix or an efficacy in Starbucks I'm. Just also in comparison to next breath of where we have seen a negative Rick and then my second question Chairman Paul Bouquet.
And in a recent interview that at West shirts are not complete yet what are areas. That's on the gold currency devaluation.
Okay.
This is Karen let me just take the beginning of the question. So we had attracted gross level and caffeine etch, 169%, which then again came over an exceptionally high base of comparison in 2021, because it was 10, 7%. If we look there again at the two year stack, we are a growth which is at 9% in each one.
So very encouraging we had positive contribution from upstream and bronze Mcafee Starbucks Nespresso, we gained market share.
Ross most segments geographies and brands.
To be more specific in your question, so pricing stepped up obviously almost 6% in each one but at the same time, we remain resilient and was positive of around 1% over an exceptionally high base of comparison last year, because the rig last year and each one was at 12%.
And Pascal on your second question regarding divestitures.
St. Pauls comment is spot on and I think over the years, you've always seen us do divestiture is where we feel that that certain parts of the portfolio are no longer a good fit out on to offer <unk>.
Great prospects going forward.
And I think we've been quite active for number of years. As you know for example, 2019 was one of these years, where we've seen more divestitures and acquisitions I'm glad to see that picture swing back to a net positive situation now, but obviously, we will continue to evaluate the entire portfolio.
And as.
As I mentioned in my prepared remarks, there's some parts that we actively go in fixed because they're incredibly core to us and they are of us overtime, where we may actually conclude that we're not the best owner going forward and so that to me is part of the ongoing portfolio management and we will be very diligent in that regard.
Next question is from Jeremy for alcohol at HSBC. Please go ahead Jeremy.
Hi, there a couple of questions for me first of all is there any way you can estimate what.
Do you think the impact of the supply chain constraints was on your volumes during the period and perhaps one other way of looking at it can you tell us what your customer service levels are at the moment relative to where they would be let's say you can kind of ordinary circumstances and then the second question is on pricing.
Have you generally been pricing up kind of in line with your competitors are there any areas, where you say price do you think your competitors and they and they haven't followed all that actually the reverse of that thanks.
Mam, we'd love to be helpful. But unfortunately, both of these are quite sensitive when it comes to competitive signaling. So on supply chain. Yes of course, we do track by retail partner very very closely our on time in full and order fill rates and so forth, but this is not something that we would want to.
<unk> disclosed publicly and suffice it to say that these levels are not at pre crisis levels and I think that's a fact not just for us but also for other key players and it's simply a consequence of these supply chain issues that everyone feels the minutes you know you visit a supermarket or trying to buy something else.
So we're working hard on repairing those as I mentioned there were a few.
Internal homemade issues as well like for example, the fire at our hot pockets facility in the U S. There was of course.
Something that was totally unforeseen act of God, but nonetheless, it our supply chain constraint is additionally in that frozen food area. This spring and we're working very fast to repair that of course, I'm, putting it back into operation.
Same for pricing again.
Obviously pricing will need to continue to fully catch up I think the consolidated numbers bear that out but it would not be in your best interest now that.
That we pointed out exactly where that happens by geography or category.
Any any examples of why you think that yeah, you have prices of competitors haven't followed stay soft or nothing that you can point to.
Yeah. Unfortunately that one is also a little bit sensitive competitively speaking, but do keep in mind.
I mean people don't always do this at the same time and so that's why I mean, obviously.
That would be not the right.
Way to handle it everyone does their own decisions and some people do it sooner other do it later, so again cant be helpful on that I'm sorry.
Thanks, Jeremy Our next question is from David as at Societe Generale. Please go ahead David.
Thanks, Good afternoon, so cheap I mean, what are the second half costs and a one just to clarify something about the H P. C comment you made earlier on the second half costs.
I think it's about 14%.
Shinnecocks first half could you give us a.
A number for the second half of uncertainty, whether it's higher or lower given where you are with this with your logins on input cost et cetera for the second half and then similar on the marketing costs. I think you said in the presentation that sequentially it will be higher.
But it will also be higher year on year in the second half and then the second question at the risk of being very ignored here, but I'll ask anyway, you mentioned it being slower to get pricing in food and HBC I just wanted to walk the dynamics on that why is that occurring specifically thank you.
David Let me take the first part of the question for Etch tool, we expect to have a relatively similar.
Increase in terms of input cost inflation as a percentage of our cost of goods may be marginally higher but pretty similar especially you saw that we have seen things a plateauing of normalizing as I said earlier, we start seeing a few agricultural commodities pricing going south but on the other.
Energy prices moving up to but it starts to plateau to a certain extent barring any changes in the coming weeks and months.
On marketing costs I mean, we confirm the fact that we expect to spend more in niche to the niche one I don't want to comment necessarily on last year.
It's too early at this stage, but so clearly we will raise our investments in marketing in etch tools. This year, although each one.
And David on the slower pricing and I think on food, it's pretty evident that we're talking about a necessity here and especially for the food players that do have an extensive presence in emerging markets, yes, sometimes pricing does make the difference between a consumer going home hungry at night or being able to afford the product.
So affordability and access.
To food is a key theme obviously with the food players that are more focused on.
Fully developed markets. The only in particular North America, you may not see that to the same extent.
But even there of course at the lowest tradeoffs society, now affordability and food insecurity or key issues and and that's something to watch.
But so clearly household care and personal care products are for the largest part of bit more dispensable if needed and to.
Since you know the pricing doesn't have the same social implications as pet food.
Okay. Thanks, maybe the next question is from Tom Sykes Deutsche Bank. Please go ahead Dana.
Yes. Thanks, good afternoon, everybody firstly, just on the topic of.
CMS and consumer and health Sciences.
Could you maybe talk the organic price level is in the <unk>.
Bounce for company brands.
A quiet place and particularly in some of the more generic to the multi vitamin areas and whether you think he related to some supply chain constraints that but.
Do you expect that to be in positive Grace organically in the second half of the year and then just on Petcare Yo Yo of increasing.
The capacity are you allowed to say how much the capacity is going to increase.
Bye.
What the sort of demand dynamics versus the capacity constraints Oh that place.
Yeah.
Tom on the VNS. So we are very excited about the category, which of course is good opportunity in the opportunities in terms of growth. If we look at our growth in the first half it was in the low single low single digit level, but it follows a very strong growth last year actually it was more than 20%.
Mr teach for them on a comparable basis.
The bumpy food company acquisition. So the fact of growing low single digit of almost 20% last year. So there again on the double digit on a two year stack that means that we are on a strong double digit growth. So very happy with that we had some supply chain constraints, but.
It was manageable, but it would help us probably to go a little bit further I think that most of them will probably disappear in the second half of 'twenty two.
And let me just add to that Tom I mean, clearly when we think about the exit here from the Covid pandemic.
Our initial views last year, when we were thinking about the deal in the spring of 2021 what worse. Okay. So we were pretty much convinced that at some point there was going to be a negative number as we exit the worst part of the Covid pandemic, so coming out with positive growth I think is quite an achievement and our consumer research indicates.
That people do continue to have a high interest in personal health and boosting the immune system I think those items continue to be very much high on the agenda of everyone and so that bodes well for the category.
Thank you.
Yeah.
Yeah.
Next question is from Jeff Stent that exact please go ahead the jetson.
Okay. Thank you and good afternoon.
We expect you to call it specifically on me, so poly and realizing it Chris but I think it would be helpful. If you could maybe just.
Nine days or some sort of parameters around where you can see that health interests thoughts.
Thank you.
Okay.
Jeff could you clarify the question a little bit not sure exactly where you're headed.
Okay sorry.
Consumer health, what does that mean for you you know what it is.
What is in your definition of consumer health and what would you see as being outside your definition of consumer health. If you could just sort of remind us you know.
How do you see that playing field, which is obviously an area you said that you could have been interesting.
Happy to do that and sorry, I didn't get it the first time, so look very clearly when we say consumer health.
We're not talking everything from toothbrushes to sunscreen, we're talking about nutrition based solutions and so this is about adding essentially the micro insurance and macro trends that people may lag due to illness or H or special conditions.
And I'm also trying to find congestion based solutions to specific health problems. So it is something that gets processed by the digestive system and its related to metabolism. We're not interested in broad based soup to nuts portfolios I think there was nothing of the past.
Okay. Thank you very much.
So next question is now from James targeted There America. Please go ahead James.
Hello, Good afternoon.
Good afternoon, everyone.
You mentioned that price elasticity levels are still relatively moderate but I just wonder if you could comment on any difference you are seeing or expect to see between your retail channel business and add Alfa pain and also obtain your premium and mainstream portfolio.
And goes up further.
And then my second question.
Just I guess sort of clarification on the rig outlook for second half of the year do you expect to see any.
Material benefit from retailer inventory rebuild as your supply chain pressures moderate thank you.
Yeah.
So James on the out of home versus retail I think one interesting development in particular in North America, but also in Western Europe is that of course out of home gets hit not only by all of these are commodity increases, but also suffered a lot from labor shortages and labor cost increases and so if eating in.
<unk> has always been the cheaper option compared to eating out.
Nearly that gap continues to widen now and so clearly the best way to tighten your belt financially speaking is to eat and more and I think that plays into our retail strength out of home business. We're seeing of course, a significant bounce back after the COVID-19 restrictions.
But nonetheless, you know.
I think eating in.
And so building.
Building on that Homebase Revolution that we talked about in our full year conference call that has some runway as people pursue more flexible work styles when it comes to location remote working.
Continues to be a key theme for at least part of the work week and so all of that plays into our hands when it comes to both the food and the coffee offering.
Francois.
Maybe just let me complement the price elasticity. So once again, we have not seen a really clear evidence of it today, but it's less a function of channel, it's probably more a function of our position in the market maybe more of a position a function of the categories, where we play as well. So whenever we are clear leaders like pet care and in coffee and so forth.
We don't really see elasticity whenever we have a less leading position whenever we arent categories. Because it is more of a function of categories categories. We're price sensitive and nurses are stronger on like dairy. It is a little bit we may see in the future a little bit more elasticity, but once again less a function of channel more of a function of categories.
Our leadership position.
Yeah.
Thanks, James It was also a question on affordability and the premium that maybe Uh huh.
On a more premium east traditionally category, where you have limited elasticity.
So which should be the case and even if you look historically in previous crisis I mean, there is literally elasticity.
Same applies to certain extent to affordability because either central products, So probably where we may see a little bit more elasticity is more in the mainstream segment you had a question as well should we benefit from a retailer.
Building inventory actually I wonder whether it is not a little bit the opposite that we have seen in the for example in North America recently.
But there is no evidence in my opinion that a.
Retailers are building inventory, but he said we're doing so we would certainly benefit from it.
Next question is from Pineda go net of Morgan Stanley . Please go ahead Peter.
Thank you very much would you expect pricing taken so far to stick, even as input cost prices ease off and could you. Please explain what drove the strong 11% pricing in North America and my second question is can you. Please share with us your expectations for global food price inflation faced by consumers through the next 12 to.
Six to 12 months and whether that might impact consumer disposable incomes at some points considering the resilience of demand so far thank you.
Yeah.
P. No. Good afternoon, we have noise returns that the pricing that we have put through for the time being will not stick them on as Mark said earlier, we have intention and you've got to go even a little bit fills out because we have not fully reflected whatever we have received so far I would say, so far anyway without being specific by category or geography.
Most of our competitors are deep follow them all pricing given that we have leading positions. So as a category captain as a category leader, usually we have taken initiatives and in the very vast majority of cases. These are competitors that have followed Mark said it I mean, it may take a little bit of time. So I don't think that there is a new risk of.
Of you know all of pricing put through so far not are not staying on the seeking the meta I'll use more can we do more and we believe that there is probably a steep supposed to do a little bit more.
On global food inflation.
Could it hit a disposable income it could potentially but I think that is there is a we enter into a recession was fills or economic and financial constraints for consumer we are probably in a in an industry food, which will be hit last uneven. If we look at the last example, which is a 2008 crisis I mean, we continue to go.
We continue to have a positive rig where we suffered a little bit more easing mix because there is always a risk of down trading which is something that we're monitoring very closely and so far we have not seen clear evidence of it but once again something we are monitoring very closely.
Thanks, Seth Thanks, Pinard and will come to an end of our session. Today. So thank you very much for your interest in ethylene as usual if you have further questions don't hesitate to contact our investor relation team.
Thank you and we look forward to talking to you in Q3.
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