Half Year 2023 Danone SA Earnings Call
[music].
Yeah.
Good day, and thank you for standing by welcome to the Danone Twenty-twenty suite Husky every soldier conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will did he an automated message advice and Johan This race two weeks to your question. Please press star one.
One again.
Please be advised that today's conference is being recorded I would now like to hand, the conference of which you speak good state Lottery Laguardia head of Investor Relations. Please go ahead.
Yeah.
Good morning, everyone. Thank you for being on this call. This morning, so that onto 2023 each one.
I'm here with the U S.
Husky and CFO , you'll goodness there.
First go through some prepared remarks before taking your questions in a second step.
But before we start I draw your attention to the disclaimer on page 35.
Related to forward looking statements and the definition of financial indicators that we will refer to during the presentation and.
And with that let me handover to offline. Thank you Mitchell and good morning, everyone and welcome to our House share 23 conference call.
Hope, you're all well and safe.
Before we dive into the results, let me start with assurance on the situation in Russia.
Obviously, my very first suits go to all our colleagues there after all Edp business has been placed under a temporary external administration of the Russian authorities.
There are of course financial implication we show we have referenced in our press release this morning.
Youre doing will come back to that.
Given the sensitivity of the situation I Hope you will understand there is not much we can say at this stage.
And then the fact that we remain focused on people safety and continuity of operations.
Let's now go into the results starting with a brief introduction.
On slide number three.
As you will have seen them.
We closed a solid first half of the job.
Further building our track record of delivery.
This semester a like for like revenue was up eight 4%.
Broad based growth across geographies and categories.
Growth was driven by pricing plus.
Plus nine 4% and resilience volume mix down minus one 1%.
Importantly, we made consistent Hello, guys on Australia, you got agenda in an environment that remains volatile and challenging.
The combination of resilient volume mix.
Continued pricing where needed and.
And high productivity.
Allowed us to expand our margin collocation by 93 bps compared to last year.
And this increase in margin from operations give us the ability to further drive our investment journey, which is at the heart of renewed at all.
This first half investments were up 99 bps compared to last year.
And we need all of that while delivering on our ambition to model it improve <unk> operating margin, which was up.
Plus 14 bps versus last year, and securing a healthy cash flow at $1 1 billion.
By $400 million compared to last year.
So I'm happy with the first half of the year as we keep not only delivering consistently but as importantly, as we are doing so in line with our strategy.
Let me elaborate a little on this and starts with our core now on page four.
Speaking on the call there is no better illustration of it then.
In Europe .
We started the transformation of the strategic activity at the back end of 'twenty two.
Making it better.
We will not have to a short term tactical fixes, but rather aiming at structurally driving edp back to value creation in Europe .
Over the last quarters, we are focused on getting back to category leadership fundamentals.
We have prioritized metrically the kingdom in spaces, we want to play in <unk>.
Focusing on health underpinned by strong functionality.
Indulgence tubes and everyday nutrition.
We started sharpening our portfolio is again those four spaces.
Less overlaps between brands rationalized and more focused portfolios.
Having a clear swim lanes and more focused portfolios enables us to now start reinvesting more assertively in A&P.
While making sure all of this is also reasonable to consumer.
<unk> shelf execution.
This groundwork is starting yielding encouraging results.
It shows for example.
All the activity, all Youll, Peru, and download brands I'll come back to that in a minute.
And while the renewal of their eyes to work to do.
I am not pretty confident in our ability to sequentially improve from H, two onwards, and true Pogos, Chile, reconnect with competitive growth in Europe .
We certainly are a good example of this.
The denim brand I am now moving to slide five.
Over the last few months, we have defined a new architecture for the denim brand Kirin and segmenting the brand by occasion by formats price points and channels.
On the one end we have strengthened the core of the offering adapt.
Adapting formats and price points to recover volumes.
And obviously your operating leverage.
But also and this is important to drive brand penetration.
Time, where some shoppers may start feeling the squeeze from inflation.
On the other end, we started developing our range of value added proposition in the downtown.
<unk> two <unk> with the objective of further building superiority.
And differentiation, which ultimately key mix and profitability.
This work, which we deployed since the beginning of the year in Spain.
He is showing very promising results.
Theyre, mostly Brian penetration as for example doubled since the beginning of the year.
Obviously next to Spain.
In the process of deploying a similar approach in France.
Moving now.
To page six.
July two new states we have.
Further boost stood all winners in the first half of the year.
You have seen.
There is several times already and this is totally intentional.
This is a clear testimony to our determination to be very consistent in driving these winning propositions further had.
Building on differentiating science strong brands and execution.
Yet again, our coffee creations <unk> and high protein have delivered strong and competitive performance of the semester.
Strong double digit growth.
And again.
Our specialized nutrition business posted a solid and competitive growth.
Plus 8% in each one.
We believe these platforms have more room to grow.
In and around the cafe category and premium waters in high protein dairy we would continue them, we will continue expanding them across channels and geographies.
This is the case for example.
Resolved very high protein portfolio.
We rolled it out in the UK as we speak.
And as we further expand into new segments, such as desserts.
I would obviously be remiss not to mention specialized nutrition, where we need to continue.
Continue to leverage the full palette of our portfolio.
From <unk> in IMF, two new Kate.
Our pediatric specialties, and 40 men and mutually so in adults across geographies.
Lets me.
Finish.
This performance overview on page seven.
A brief mention to my zoning.
Last year, we told you that we would address <unk> was methods and courage.
It is exactly what we have done in the <unk> zone.
We took the time since the capital markets events.
Harper root cause analysis to understand the reasons of my zones underperformance.
On that basis, the team built a turnaround plan, leading us to dramatically simplify our portfolio now down to four skus.
We have also invested in the <unk>.
Our formulation mixing.
Making sure milestone is back to being among the best functional hydration options in the market.
And we have delayed our distribution system with the goal to improve in store execution.
All of this.
<unk>.
<unk> call each of execution higher investments all of this is now starting to pay.
Even though we are at.
Early stages, we see tangible signs of turnaround my zone as <unk> seen grew by 15, 9%.
In like for like in each one.
<unk> been.
Strong volume recovery.
And the market shares we are positively oriented for the first time in a very long time.
This is obviously not yet time to celebrate as rehab to sustain this performance in the long term, but this is certainly encouraging and something the team should be proud of.
Let me finish this introduction page eight.
Since last year's capital markets events, we have been consistently delivering against our strategy roadmap.
This shows our India results, you've seen us published over the several last quarters.
In the progress we continue to make all of our key battles.
And what we are doing systematically and with confidence.
Restoring downloads value creation model.
And we do it for the long run not going full short term tactical wins, but striving for sustainable long term value creation.
On A&P.
We are investing more but we're also investing better are.
While we continue to improve the allocation of our resources across geographies brands and channels.
Improving our working versus nonworking media ratio, but also progressively strengthening the quality of our advertisements.
I am sure that you have seen.
Our lead.
Zing and the Danone ads are played in the waiting room of todays webcast.
Great examples of ads, we tend to be proud of.
And there is obviously more to come.
Next to A&P, we continue to step change the way, we leverage our cutting edge science and technology assets.
Service of patients and consumers.
It is not only about the science assets, we have it is about bringing more discipline in the way, we develop and execute our innovations.
There too we are making substantial progress from bringing us <unk>.
As shown through delivering fewer bigger better and accretive innovation.
All our categories, all moving to the <unk>, which was a clear focus on developing shipyard differentiated product suite bolstered by strong claims and in some cases clinical evidence.
And as you also know.
Value creation is about making the most of our ecosystem.
And here, we are starting to reinvent the way, we work and Cologuard resolved partners I'm happy to announce that.
Don't know that we host by the end of the year. Its first partner summit in a long time. This is a great opportunity for us to learn to leverage and to expense all reach and impact.
So all in all our Danone is starting to move to the next level all the pieces.
Our renewed then on framework are coming together.
And despite the volatile environment, we continue to make consistent progress.
<unk> key patents or with determination and.
<unk>.
And with that.
Let me hand, it over to <unk> for the financial review.
Thank you Anton and good morning to all of you.
The financials page number 10, and our top line performance of the second quarter of this year.
We are reporting for this quarter as solid performance of like for like net sales growth of plus six 4% with again, all our geographies contributing.
Very consistent with our first quarter.
Are you putting broad based growth.
I would like to especially mention business entity and delivery of our China zone, but highlighting oils to the fact that we are making good progress on our European transformation.
According to our plan our guidance earlier this year, but let me come back to the performance by zone in a minute in more detail.
Couple of comments on the performance by category the growth in the second quarter was supported by the solid contribution of our Edp <unk> plus six 2% net sales growth.
Our high protein everyday nutrition, and coffee creation platforms, all growing double digits.
In parallel our specialized nutrition category sustained its competitive growth is best.
9%.
Led by further market share gains across most geographies leg in China or southeast Asia to name a few.
Reviewing the dynamics of this category important to look at the first semester performance with a growth of more than 8%.
Providing a better view on the underlying dynamics neutralizing the Q1 Q2 phasing effects, which we discussed at length in the first quarter.
And finally about waters Kathy Lee.
<unk> delivered another quarter of strong growth is plus nine 6%.
Notably driven by El brands going well into the double digits and Europe combined.
Combined with the encouraging momentum behind our amazing brand in China growing mid teens for the second quarter in a row as Antoine just mentioned.
Moving now onto our Q2 states, which on page number 11.
Our Q2 like for like net sales growth of plus six 4% was composed of a price effect of eight 7% and volume down minus two 3%.
On the pricing, we can clearly observe a deceleration versus previous quarters.
You'll remember that our Q1 sales that are still benefiting from as much as 10%.
Yes, starting in many geographies to lap last guests high price increases and we therefore see further reduction of the price effect during the remainder of the year.
Undivided units and as mentioned already important to keep in mind the calendar related phasing effect in Q1, and Q2 of this year, especially in Hawaii category.
Which make the underlying volume performance. The performance is better understood by looking at our estimate of a human cell from minus one 1%.
Demonstrating improving resilience in many geographies and categories.
Outside of the like for like Forex had a negative effect of minus four 3% as a result of it.
Number of currency depreciating against the Euro and finally scope effects that had a negative contribution of minus <unk>, 5%.
Due to the deconsolidation of our waters business in Argentina in December of last year in total.
Part of the growth each plus two 4% for the quarter, bringing our quarterly net sales to $7 2 billion.
Up from $7 1 billion.
Q2 of last year.
Let's now look at the performance of each of zoning.
Starting with Europe on page 12.
Europe delivered the second quarter of solid growth growing at plus six 5% of this price up 11, 7% by volume mix were down minus <unk>, 1%.
I think with the transformation of our Edp portfolio.
From a country perspective, France, Poland, and Spain, we are driving the growth all of them starting to benefit from our streamlined and lead position Edp portfolio.
As well as from an increased brand and promotional support.
In Germany, we are also.
We've also started to recover by rebuilding listings and distributions after the supply disruptions we had during the past period.
The overall dynamics over the last weeks and months make us confident that you would see our volumes sequentially improving.
Supported by an increased level of investments.
On the other categories specialized nutrition and water remained resilient in this quarter.
Especially the <unk> brand to reporting a strong performance over the last months.
Looking at the numbers of this first semester Europe closed the first half with like for like sales growth of six 4% by our recurring operating margin declined by minus 232 bps versus last year down to 10, 6%.
Margins are temporarily down as a result of the portfolio transformation, there's still high inflation and the timing gap of materializing of our price increases.
Prescribed in the reimbursed product of our specialized nutrition business.
We had a volume dynamic sequentially improving moving forward.
In short half of each now an inflection point for the profit margin of Europe .
Spite affected coming quarters with the higher levels of investments.
Okay.
Let's now move on to North America on page 13.
North America delivered plus 5% like for like sales growth in the second quarter.
This quarter pricing started to sequentially normalized after we left that pricing waves of last year moving from 11% price effect in the first quarter down to seven 7% in the second.
Volume and mix dynamics in the second quarter were a bit softer.
We are cycling a high base of comes in some categories.
Growth in North America was notably led by our coffee creation business <unk> spoke about it.
Posted strong double digit growth this quarter.
With continued market share gains under the international delight and stock grants.
Next to coffee creations, our yogurt business also delivered a solid quarter delivering in particular by a cost that could just another quarter of steep double digit growth and by activity ongoing mixed mid single digit.
Accelerated performance in key strategic channel.
Plant based lifted, particularly high base of comparison, considering the extra let's say, it's really just that last year related to supply issues experienced by one of our main competitors. We at the same moment also clear that we have he is still a job to do to re establish consumer less competitive growth.
The plant based portfolio.
And finally.
While our <unk> brand posted another quarter of double digit growth.
Our specialized nutrition category was lapping this last quarter the shipments realized in the context of the operation flight from last year.
The good news here is that our competitive position.
Our neocart business, our LNG proposition.
That is a great base to build upon.
Overall, the zone closed a solid semester at plus eight 3% like for like sales growth.
Funded by resilient volume dynamics importantly in North America.
Our recurring operating margin is improving this semester up by more than 200 points compared to last year.
By gross margin expansion.
We are happy about it it bodes well for our ability to consistently invest and support our brands over time.
Moving to the next page page number 410.
Our China, and North Asia, and Oceania Awesome.
The zone of digital plus nine 6% like for like sales growth in the second quarter, mainly driven by volume mix up plus eight.
Okay.
Let me start with China.
In infant milk Formula Uptime, we delivered another quarter of solid growth with continued market share gains.
Our competitiveness in the category remains supported by the combination of the strong brand equity and.
And disciplined execution.
We continue to carefully and intentionally navigate the shift of the entire kathie Lee from oil to newly registered <unk>.
<unk>, which will probably last until the end of this year.
Beyond <unk>, our Medicare portfolio also posted a strong quarter.
Our key brands nucleus zoning of diodes at Neocon, and pediatrics, delivering double digit sales growth and finally in waters.
<unk>, plus 50% growth this quarter, notably driven by volumes and more importantly, with the market share gains.
I mentioned already we are very pleased to see that the turnaround of the <unk> brand is underway.
Encouraging first results from both the <unk>.
Innovative core range.
Recently launched innovations.
Beyond China, our <unk>, our edp business in Japan posted another quarter of double digit growth.
Led again by the downtown and the OE customer brands.
Overall, the second quarter led to zone to which is the like for like sales growth of plus 12, 4% in each one.
Mostly driven by volume and mix recurring operating margin stood at 39% down 170 bps.
Yes, mainly due to mix effects with the water and Edp <unk>, both growing at double digits.
Due to higher investments.
The segments, let me just remind you that.
All categories in this zone are having in the credit margin profile versus the company average.
Moving now to Latin America on page number 15, Latin America registered plus 10, 8% like for like sales growth in Q2 with price up plus 12, 9% in volume mix down minus 2% oil countries of the region contributed to this performance with brands like done done done.
Nino lost any FEMA and the net driving the growth.
All in all Latin America close to <unk>.
Mr with plus 11, 7% like for like sales growth.
Cutting operating margins to the plus stood at two 8% increasing by plus 291 bps.
Low base of last year.
Our business in Latin America is a very seasonal profile, which makes their profit margins are higher in the second semester headings.
Having said that.
Overall margin profile is not yet at the desired level.
And we are taking actions to correct this and.
An example of those initiatives is from Brasilia.
We have discontinued our low margin waters business.
As well as licensed out our existing medical business under the policy.
Which will enable us to focus our resources on the more value added and profitable part of the portfolio.
Finally, let's have a look at the rest of the zone on page number 16.
Like for like sales grew by plus three 9% in the second quarter led by a price effect of plus eight 2% by volume mix was down minus four 3% as expected sales and volumes normalize this quarter after first quarter boosted by calendar related phasing effects, especially.
Specialized nutrition.
Looking at the quarter more in detail specialized nutrition business posted a good quarter like in Indonesia, Our STM and <unk> brands continue to gain market share.
As well as in countries like Thailand, India, where we posted strong performances, coupled with market share gains.
In parallel we are making good progress on the transformation of our Edp portfolio in Africa.
Streamlining and optimizing our operating model and product portfolios.
Looking at the first semester numbers.
Sales increased with a solid rate of plus seven 7%.
<unk> operating margin stood at 10, 4% increasing by as much as plus 177 bps versus last year.
Clearly driven by the progress, we're making Edp Africa, but also by the growth of our liquidity and business in the region.
Let's now move on to the margin bridge for the first semester on page number seven chemo.
Recurring operating margin stood at 12.
2% in the first semester on improvement of plus 14 bps compared to last year, which is positioning us well to deliver on our full year guidance of moderate margin improvements.
As you can see we are making tangible progress on establishing the value creation I agree with them we are striving for.
Which one of the many submit the NDA that the erosion, we were able to turnaround of our margin from operations.
That increased by plus 93 bps.
It has not only been the result of the sequentially improving quality of our top line growth.
Also things to another record delivery of productivity gains.
<unk> supported us in offsetting a material part of the still high inflation being cured in this first semester.
With our margin from operations, expanding we are creating the conditions for continuing our investment journey in inorganic self funded minto.
Our step up in Reinvestments in A&P and product superiority capabilities had a negative effect of minus 99 bps in this first semester.
And beyond the pure number.
Quality of our investments, especially in A&P, but also in F&I.
Stepping up.
This is starting to feed our long term value creation I agree with them.
Other effects remain relatively minor as you can see with overheads before investments continuing to have a positive effect. In this semester is plus 70 bps as well as a positive contribution of changes in scope of four weeks end of your organic contribution from hyperinflation countries.
For a total combined you picked up.
Moving now onto the EPS.
Bleach and free cash flow on page number eight.
And I think cutting EPS reached $1 76 in this first semester of 2023, which keep within the plus seven increase compared to last year.
Maintain main contributor of recurring EPS growth were the operational performance that we just went through.
The other effects altogether basically compensated each other.
And had an almost neutral impact on EPS, among others takes equity accounted companies and minorities had a minus 0.7% effect.
While currency and other effects had a positive <unk>, 5% effect on EPS growth.
Reported EPS stood at $1 70.
Up to plus 48% versus last year, driven by the sharp decrease in nonrecurring cost in this first semester as we move towards the end of the look the first project.
On the cash generation side free cash flow reached $1 1 billion and <unk> 2023. This represented an increase of around 400 million euros compared to last year on the back of a disciplined return oriented capital allocation and working capital metrics.
Let's now move onto page nine Tina.
To share with you some elements about year 2023 moving forward.
First on the accounting treatment related to the recent developments in Russia.
As we stated in our press release, when we go our Edp business in Russia was placed under the temporary external administration of the Russian Federal agency for States cooperative.
As a result of these and as per the applicable accounting standards, we will be fully deconsolidation, our edp, Russia business as of July <unk>.
Tweaking triggering a cash impairment of around <unk> 2 billion as well as the recognition of currency translation difference of <unk> 5 billion.
Coming back to what we already said on the last quarterly call here.
We are confident that <unk> thousand 20, <unk> start establishing our desire to the equation, whether as we demonstrated in this first semester concretely.
Confident that our volumes will sequentially improve bid.
Building on the hard work our teams have done over the last quarters our portfolio Edp.
<unk> certainly be a key driver of its been on track to deliver on the plan we outlined at the beginning of the year.
Sequentially volume recovery, we bring us more operational leverage and solidify our cost margin expansion, which will create the conditions for further investments.
Our aim remains to be the business model, we just consistently and sustainably creating value quarter after quarter.
Yes.
A quick word.
Our guidance 2023 to conclude the finished the review on page number 20.
Taking stock of the solid first half of the year, we reiterate today, our full year 2023 guidance with like for like net sales growth between plus four and plus 6% and more precisely to expect it to be a range of discover them.
At the same time, we are confirming our full year guidance for recurring operating margin, which is to deliver moderate margin improvement versus previous year.
This outlook reflects our confidence that our revenue done our strategy is interaction yielding first reserve and reflects also our commitment to reinvest into our brands and assets to build the future for the short mid and long term of our company.
With that let me hand, it over back to Antoine for the company.
Thank you.
Youre doing so moving straight to page R 22 lets me.
To conclude.
With a chart.
You will recognize.
Last year's capital markets event as you remember the renewed framework is made all four strategic pillars and four enablers.
Our efforts over the last 18 months are starting to pay off we have worked hard.
Restoring the fundamentals, but also making significant progress on the enablers of renewed our own culture.
<unk> capabilities are.
<unk> ability as <unk> seen from the downturn impact journey.
And cost competitiveness.
This shows clearly all gross margin turning green in the first half.
This as you're going to say it is key.
To us as it is done on the room and flexibility.
To reinvest this shows our commitment to keep investing.
While delivering healthy cash levels.
And while not still remains to be done on winning where we are expanding where we should be seeding the future and managing our portfolio.
This further strengthens our confidence in our ability to drive consistent value creation for shareholders.
With that let me hand over to <unk> for the Q&A about yields are material.
Thank you Antoine for now we are opening Q&A.
I don't know if any for the remainder of the first question we have will be.
Ryan I Coleman from Barclays.
So our inherent Barclays.
Because of the demo.
Two from me the first one is on Edp.
So we've seen a bit of a slowdown in the U S CDP or Nielsen I'm, just wondering what was happening in the U S and then on Edp Europe .
What's your expectation as we exit this year in terms of <unk> and the underlying volumes I know you gave us that Spanish data point, which is great. But do you have any other data points and other countries that give us. The conviction. This is real and will come through in the back half and then secondly on specialized nutrition can you tell us what the growth was in China infant nutrition in the quarter.
Ah maybe by by channel.
Obviously at the R&D event in Paris, you mentioned, the <unk> <unk> mill in China as you push into ultra premium can you remind us why that's important and then maybe also by <unk>.
And like for like margins were down $3 50 bps in each one as it related to those launches or something else. Thank you.
Hi, Warren.
As per usual the jets was youre going on that I'll take the I'll take the first one in yoga and will probably take the bulk of the year.
The second one or in our in the U S. We are.
Actually quite happy with the performance of <unk>.
Of course, this is going from strength to strength.
So a high protein wrench is doing super well.
Good good performance or.
Okay.
We saw a slowdown and this is what it is also reflected in the market shares of.
Animals, which is our more affordable all kids range.
Well.
We saw some elasticity as after the last.
The price increase.
This product is targeted towards a more modest fourth of the.
<unk> of the population so that is something that we are in the process of correcting.
But by and large the dynamic of Edp at U S.
Is a good one.
In.
Europe .
We should be we should finish example for fundamental reasons I mean, the first one.
As you would recall, we had a large number of years of underperformance.
In Spain.
And the team there.
The last numbers of months of building work this is exemplary and which we leverage in other places.
Doing in some ways, what we had done in.
In the U S <unk> streamlines.
Streamlines.
Making sure that there is.
Popular Sigma Sigma addition that used not only by brand and by benefits book volume.
This points so that we can.
That'll do it.
Values or levels of the market.
We are being quite.
Quite aggressive actually at Hudson entry points, but progressing boltonia on price more aggressively also on the benefits we offer.
So thats, we have a value proposition that is differentiated by the way of supporting it.
If you haven't had the opportunity to look at it was short.
Unemployed Super cool.
In this model that she's now our proven as a real impact on penetration in Spain with <unk>.
We are impacting the way we are still discussing with some of the key.
Distributors or retailers in Spain. This model, we are deploying into other countries or.
Good or solid performance in France.
Things are moving in the right or Dodge in as well.
Or two more to be done you will have seen us through our annuities the advertising on the air in France, which is early creation of something that.
Working with John to the taste of <unk>.
<unk>.
We already have two extraordinary auditing is holding on the on the streamlines and reclaiming.
The fact that.
Dannon yogurt is not to your growth.
It should then on so.
Testing and proving in Spain.
Moving next to all France during the same architecture work in places like Germany, reclaiming public shipyards.
And actually our <unk>, our public portfolio in places like the.
Like the U K. So we are just deploying our in country after country.
<unk>.
The method.
Yes.
In place.
On China, I'll hand over to yogurt, yes, good morning of overland in China and on the overall specialized nutrition margins on China on <unk>. So you saw China second quarter very good delivery in specialized nutrition, almost plus 7%.
Contributions from all of the segments, including IMF with good contribution from IMF.
This number clearly outpacing the market the market continues to be soft in the moment.
When it comes to the channel contribution.
Our quality of our controlled tenants contributed to get growth uncontrolled further declining.
So we're now clearly below below 10%. So we are I would say continuing.
What we have been starting a many many years ago. So very solid performance in a moment, whereas we know the oil cut is shifting from.
These two new recipes.
We have as you know.
Quite a few exciting innovations in the pipeline first wants to enter markets towards the end of yesterday are not yet in the market.
Which means that the market share gains we've yet to date delivering are still with the portfolio you know now, which we have in the market.
For many years.
On your second question was on overall margins of specialized nutrition. So you are right that the margins are down in this in this first semester is not so much.
Linked to the performance of China.
Obviously with the element of it is because there are two drivers basically they're the first drivers of investments into innovation NTIC China.
The other part of the World.
The other element, which puts temporary pressure on the margins of this estimate the fact that in Europe .
A part of our portfolio, which is growing.
Friction and reimbursements and ear price increases taken time between six and eight.
18 months to materialize into our P&L. So this this.
This will materialize over the coming quarters in our European P&L and so what you can expect is that the margins of specialized nutrition in H two will be superior to the one of H one.
Confident that we can maintain and sustain the margins of <unk> globally speaking.
This level, where they are today.
Okay. Thanks, guys.
Thank you Mohan. So next question is from.
Then Matt from UBS.
Thank you mentioned.
Good morning.
You are good.
Couple of questions for me please.
First one is on <unk>.
Racing.
I mean at this stage do you expect that you will have to make some downward adjustment to your prices during the back half of the year and here I'm thinking in particular of.
Edp.
Because in the scanner data, we see private label gaining shares we see promo activity is still below the levels of 2019, and then looking at your gross margin development at the group level, but also your recurring operating margin into ETP. It seems as though you've clearly reached an inflection point so does it.
Make price adjustments inevitable in the second half of the year.
Particularly in the developed world.
And then my second question is on auto I'm going back to the strategy roadmap.
I mean, you are still in the fixed and seed phase aspirate. This slide you were showing at the CMT March last year, but based on the progress you've made so far in establishing the desired value creation model.
Do you think you could enter the second phase, which is the accelerated pace as early as next year.
And if so how should we think about this acceleration is it being able to do consistently 4% to 6% like for like sales growth or is it being able to do a little bit better than moderate margin expansion going forward. Thank you.
Thanks.
Sure.
I'll start with the second question I will probably do a <unk> on the on the first one I think as you as you well as you've seen as you've seen from the results or have you heard also from us.
We all have to make.
Good progress on the sheets and seeds.
CD part of our agenda.
It has been no.
There are quarters, where we deliver consistency and consistently not only in terms of numbers will soar in terms of the make of the numbers.
So reinvesting.
Behind all brands doing the right thing in terms of.
Productivity striking.
Derived balance in keeping all of our resilience volume mix dimension. So.
Yes, Indeed, we are making.
Good progress.
Which gives us.
The confidence that we are heading into the right direction.
Before moving to something that is.
More ambitious.
We need to deliver.
Delivering consistently on the transformation of our.
This.
All of you have told us over the posture that saw patios.
We were too fast and moving to the next phase.
We are delivering consistently on the on the.
On the on the model, which is a value creation model. So.
I'll repeat <unk> into the next phase.
Yes.
Do I want to discuss the next phase because we need to continue to deliver and to consistently proves the model. So all reactive in the background, yes, we are but the focus and especially the focus inside the company has to be consistently delivering and strengthening.
The mobile all the time, because this will deliver a very significant.
New creation.
So yes, we are working on it no we are not treated.
Disclose it because.
<unk> are there still more work to do on the.
Basics and more opportunities by the way.
Growth and value creation.
<unk> or <unk> or <unk>.
Joe again.
Sure.
Okay.
The first I mean, the first thing is when the ore.
We are doing water was explaining a minute ago in terms of streamlines and segmentation.
<unk> enables you to move from.
Discussion that she is a broad based pricing discussion.
Two a discussion well some skus have a role to play to be <unk> <unk>.
Skus are driving our premium position.
So you're still being much more sophisticated.
In the way you play by the way using our promotion.
Rather than our pricing because the inflation is too there it's laura.
Not on everything by the way, but it's still down so it is good Cmos who are much more sophisticated in the mobile.
Segmentation through promotions will be Ikea streamlines all.
The various elements of Omics yoga, yes, just to build on what <unk> was just saying when we took price need to talk inflation inflation was still high and Dymista.
It will be decreasing as we can.
Go through the next quarter, but there will be still inflation, which will be fed by cost of labor by some agricultural ingredients like sugar at <unk>.
Mig and especially in Europe .
And so what we would see is indeed, the price effect is sequentially coming down you have seen that 10% Q1 $9 in Q2 and that we have.
Price effect to a lesser extent in the next two quarters in front of us.
Pricing will stay positive.
Pricing the normalized that is the first very important.
Element when it comes to.
Towards year to impact it will have on our topline and our bottom line very important that we have created the conditions over the last quarter and you can say almost over the two year for Reinvestments.
And the investments will help us to restore volume growth to go back to the balanced growth model, we are aiming for.
This balanced growth model continued to deliver gross margin expansion because the gross margin expansion you saw in H. One is not only the consequence of the improved quality of growth.
Further improve but also of the productivity gains we have beyond industry norms.
When Ed by the fact that starting to fix the underperformance.
That is true for Europe that is true.
Parts of the World. So there are several drivers, which we made deliberate continue to expand our gross margin to say a few investments.
And to deliver the margin expansion, we have committed to.
Thank you very much.
Thank you used the next question.
Pascal <unk>.
Yes, good morning.
Hi, everyone.
First question would be on your SKU rationalization plans you have discussed at length over the last couple of quarters.
You always said that this will.
And by the end of Q2 can you confirm that or will.
That has a negative impact also for the following quarters.
Then maybe on free cash flow can you be.
Elaborate a little bit more on what you mean by capital allocation. How did for example, capex change year over year and maybe also on the networking capital impact for example, what happens to inventories did you need to build more.
In that semester.
And.
And finally on cost could you give us some more detail on what was the cost impact in <unk> year over year and what you expect.
Absolute amount rich too.
Hey morning Pascal.
I'll take the first I'll take the first one.
I mean youre going to take.
<unk> and <unk>.
And the third.
SKU rationalization as you remember we started the SKU optimization.
Quarter three last year, our each was in full force by the end of quarter four.
Or what are you will see us.
Indeed progressively over the course of.
<unk>.
We will lap the.
SKU optimization and towards the end of video and we should be on the.
On the base that she is a normalized base.
Big or significant SKU.
Amortization once you said doubts.
We then told also are but thats less of a one off issue.
Into.
Disciplined we will keep.
Our skus and we will keep our skus under control.
So we are we grew into a dominant rhythm or pruning, but she is going to be more of the normal course of business. So to your initial question, yes progressively over the course of.
H two.
We will lap.
Through significant SKU rationalization and all we are entering into a more normalized where we are I mean as part of keeping our portfolio healthy.
The oil is performing Skus, we challenged the return on our capital investors and all we dive nuclei.
Our our portfolio by the way without giving up on shelf shelf, which is.
All the secrets of.
Managing this and on that yes.
Yes.
And just to say that when you look back at page 17 of our full year presentation totally confirmed what we showed you at that time.
Is the evolution of our ADP European volume sequence visit volumes.
From now onwards.
On free cash flow of $1 1 billion or a good number $500 million more than.
Last year two drivers first Ivo.
<unk> been what I said, what I call, a disciplined capex and working capital management.
Capex 300 million.
I would say very return oriented approach.
At the same level as last year, well below the cap, we have set ourselves working capital moving into the right direction on several elements.
On receivables, particularly.
And so on.
Inventories, we are starting to make a good job and the Pascal on your last question on the cost of Cogs I think the element, which is worth noticing is that you see that.
We are able to offset no more than one third of the cost inflation by productivity, because we are doing more than industry norms in terms of productivity.
Is really becoming a competitive edge.
So already as of today more than offsetting inflation and that will be.
Larger part moving forward.
Thank you.
Thank you Ken next question on selling turnkey Jpmorgan.
Alright, Thank you from J P. Morgan I think you call my name.
Good morning, Matt yield Antoine and yoga.
Two questions from me first on Edp is it does it also understand how gross margin progressed, because clearly EBIT margin.
A nice increase.
And when you think about.
Ed do you IDT of what you presented I think it was on slide five where everyday nutrition and value added proposition I presume.
Higher gross margin.
Would it be possible just to understand what percentage of your total.
Our portfolio is now in these higher value added proposition.
And whether in an environment, where things could be.
Difficult for me to.
Economic standpoint, you could still maintain good.
Balance between the two sides of the portfolio.
And whether that changes that.
Value proposition I presume higher gross margin it changes your view on the midterm profitability.
The portfolio and the second question is on Latin America.
Judy just mentioned that in the presentation I just wanted to understand.
What drove this amit being negative in the quarter.
And we've seen that you've gone from a loss to a positive profit in the region. What should we expect in terms of the data in Iran. For this region. Thank you.
Bullswool citizen.
Sure.
Ill take question, two and part of three in Yoga and we'll take a question one I mean, if we go back to the slide five of the.
The presentation actually it goes back to your architecture your portfolio.
And how do you make sure that you do do allocate holds to the values parts of your portfolio.
Having something.
<unk>.
Lower gross margin.
<unk> <unk> at the bottom of the segmentation and by the way driving penetration and volume.
Has an impact on the leverage of your factory and he's helping the rest of your mix. So we are we have restarted new king at the values overall.
Both from a consumer standpoint, both from an economic standpoint.
All the various components of the of the portfolio and both all working together.
<unk>.
There is plenty of room, and we see lots of healthy growth.
Value added proposition.
Because the other distinctive positioning because they are adding perceived value.
For the consumer while at the same time, Danone and multi yogurts.
At one year, you've seen us great value for money increases do penetration of all the brands in their category.
<unk> has also a positive impact in terms of factoring your traditional therefore as an overall impact on the P&L and so management of portfolio.
Is the name of the game, which obviously are not rule impact, which is our I mean the draw.
Driving profitable profitable model when it comes to our <unk>.
Edp, maybe you want to complete our yogurt on Edp before we get to Latin America.
Maybe on Edp, maybe just on the profitability and coming back to what you say sitting on the costs.
Gross margin and Opex budgets as you can see <unk> had for the total company cost categories. We have now reached an inflection point of gross margin as well as the perfect market.
The same for our global dairy category.
And this is driven as I said by the fact that we are fixing the underperformers and that.
Having more quality into our top line growth.
It also means that when we took a look at our overall European profitability.
At an inflection point, maybe we'd see the gross margins and profit margins, increasing as we are going into the second part of the year for Latin America more precisely yes, I think the team is doing a great job increasing the profit margin, yes from a low base.
<unk> and to some extent inorganically.
You're talking about Brazil, where we gave up.
10% of our portfolio by discontinuing what us business.
Licensing out of our existing business.
And.
On top of that we can expect the extra margin to look even better because we have a bit of seasonality in that business, which make the profitability.
Cute towards the second semester. So we are well on track I would say totally in line with what that's why this thing on managing our underperformance across the different regions.
Yes.
Yes.
Next question from Jay.
Yes, Dan.
That makes sense.
Good morning.
Thank you for taking my question very quickly just on Russia.
I see youre going to be consolidated.
Yes.
Paul.
The Russians.
If they're a little bit beyond DDP.
<unk> actually taken.
The entirety of the business.
Just clarify exactly what's happening and that's exactly what would be the consolidated that'd be great. Thank you.
So Jeff.
While the Russian authorities of Dong <unk> foods, our PDP business.
Under a <unk> administration.
Of all of our agents.
Ocean state pumps suspicion, so edp business.
Okay. That's clear thank you.
Okay.
Okay next question.
Cohen of Morgan Stanley .
Alright, Thanks, Michelle and good morning, guys.
Just two questions from me.
Can you talk about any shifts in consumer behavior, you've seen over the last quarter by region I know volume mix was weakest in Europe , but some of that I'm sure. Some noise from the transformation program. So if you could breakdown in terms of what you see by region and category that would be great.
And then the second question just overall on your margin progression and <unk> two versus each one just trying to think what could drive upside to your margins from here and what your clients are in the second half. Thank you.
So.
I'll take the first one and.
Doing well.
And one should look at <unk>.
<unk>.
First as you said I mean, they are very different on a region by region.
The China market is two or <unk>, the China market reopen when it comes to.
Mobility.
So all you are.
Chinese consumer which is.
If we consider all absolutely passionate about our science team absolutely passionate about ads.
Good value.
And reacting to are two very strong mixes.
Very much a continuation of what we've seen for a long time.
China with the close at the very beginning of the year of the opening of the.
Of the of the markets.
If you look in.
Europe actually there is no such thing as.
Consumer in Europe .
We are the degrees of Inflations are very different country by country I mean, you see.
What's happened in the UK or in.
Poland is very different from what happened in <unk>.
<unk> take an example.
These are efficient and therefore, the degrees of consumer actions or very different.
What we are seeing these being said a couple of things.
Whenever you have a very strong bond with very strong benefits or consumer tend to be very loyal.
And full of those brands.
When the brands are less differentiated or places, where the ones always differentiate too.
You saw.
I mean.
Greater competitiveness of private labels are seeing what we have seen recently in.
Europe , and we've seen some of it.
So in.
In the U S as a.
Tailing off of the growth of our private label, which we saw as well as productivity was taking a lot of alto or smaller brands. So there was also a bit older.
No.
Cleaning of the market so too.
So to speak in.
In the U S for very very long time, there was no oil price or sensitivity.
So no your cautionary action, we saw bit more consumable action in.
In the last quarter and once again deshawn shifted at all.
Category.
By category.
Which constituted.
<unk>.
Greater weight in some channels with discount and in clubs argues very well while some other channels.
These are less well, which by the way is not fully captured bye bye.
Nielsen because they don't they don't properly <unk>.
Clubs, so that you don't.
Doug that you don't you don't see.
In the rest of the World is damaged depends I mean, Turkey, and Argentina are in Ohio.
Hi, Phil.
Inflation.
Sure.
Other places I mean literally place by place by place by place.
So I mean.
That's the beauty of having by the way with a strong team in every country, which is you adapt.
Your pricing and your position to each of the country to make sure that you I mean all of it.
On the margin question, Russia, Yes.
Yes, we do also expect in the second semester the cost margin to expand on the bake off though as we said the further improving quality of our topline growth volume sequentially. The covering the back of continued productivity on the back of further progress in managing our underperformers.
All of this will contribute.
We may face a bit less favorable other geo mix and category mix, however, but overall LTV.
Positively driving our gross margin so the DVD again in the position to significantly leaned into our business confirming our intention to deliver moderate margin improvement and if the inflation should come.
Down a bit faster than what we expect.
Any good news into the business to be in the future.
Thank you.
Thank you Ashwin and then last question.
Jon Cox Kepler.
Yeah. Thanks, Thanks, very much guys, Jon Cox Kepler Chevron.
A couple of questions.
Maybe first of all for and so on just on the.
The aggregate for the year I think there was some people assuming you may just change the wording a little bit on the four to six for this year consensus is already above six youre reiterating four to six just wondering.
If you see something coming up that may be we don't expect because you are talking about volumes, probably accelerating in H two even if pricing comes down slightly sequentially.
Incidentally.
I know, we don't want to talk about your the next step in.
In the financial report today.
You mentioned that the 4% to 6% is in line with medium mid term targets.
I think originally you were talking about three to five.
Currently and obviously, you've had inflation and the rest of it. So it is a question on the on the top line.
And then maybe one for yoga and just on the free cash flow side of the equation.
Very decent result vas.
Just wondering what you think about full year can we think about maybe towards two 5 billion free cash flow for the year and I'm wondering is this really like a new baseline for you guys because.
You are talking about higher margins have hit bottom and everything is going to get better if you're looking at free cash flow margin.
It was 10% plus a few years ago and there were.
Around 7%, 7% range, just wondering should we expect that to sequentially improve typically.
Danone actually have negative working capital should we see.
A return to that and just an add on Russia, you took them out of the impairments et cetera. At this point 7 billion would that be would there be any more.
Just wondering if you see that 7 billion being everything in terms of exiting Russia Derrick. Thank you.
Hey, Joe.
On your first question no I don't see on the horizon.
You don't see.
I mean the.
We said we would be in the upper.
Part of our guidance, we slightly changed.
We slightly changed.
The wording as I'm sure you have.
And this is a reflection of.
And the fact that our <unk> reached.
And so essentially over time will positively or normalize while we'll see some of the volume and our niche kick.
Kicking in so.
Indeed, actually we changed a little bit.
It would be in the upper part of the guidance and no. We don't see staying on the horizon that you don't see.
Just on the on the <unk>.
Free cash flow, yes, I think a good start of the year as you say I think we're making progress.
Really managing our return oriented capital expenditure management, but also as you say managing better and better our working capital, which is negative and which is more negative today than it was.
<unk>.
Our goal, which bodes well for the future.
Growing our company, we don't give guidance on free cash flow.
But we want to expand and accelerate our cash conversion cycle moving forward on.
On Russia.
200, 700 million I think it's fair to say that.
Not expect a material change on that.
Yet we are booking that into the thick of domestic equities are currency related.
Aviation, but.
That should be basically.
Great. Thank you.
Okay. So now the Q&A. Thank.
Thank you very much everyone for attending the call.
We remain available to answer any.
Follow up question you might have.
Thanks, everyone.
Here soon.
One place or the other take care bye bye take care of it.
Yeah.
That does conclude our conference for today. Thank you for participating you may now disconnect.
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