Jul 29, 2013
Executives
Pierre-André Terisse – Group CFO
Analysts
Jeremy Fialko – Redburn Partners Warren Ackerman – Societe Generale Eileen Khoo – Morgan Stanley Celine Pannuti – JPMorgan Jon Cox – Kepler Cheuvreux Pierre Tegner – Natixis James Targett – Berenberg
Pierre-André Terisse
Okay, I think we are ready. Good morning.
Good morning all to those in the room and to those who are connected over the phone. I am very glad to meet you this morning here in London, again where we are this year again for the second time hosted by Nomura for this presentation of Danone's Results for the First Half of 2013 and let me thank them, Nomura, for this.
So this is Pierre-Andre Terisse speaking. I'm the Danone Group CFO.
I am here alongside Regis Massuyeau here, Marion Cazenave who is at the back of the room and for the last time also Antoine Guttinger. Antoine has spent three years with us.
He will indeed take responsibility of finance for one of our business, which is Evian Volvic Worldwide and I would like to take this opportunity to thank him very much for his significant contribution to what has been a real step-up I believe in the quality of our relationship with you and with investors. I think this has been as well an important driver of the stock performance since his arrival.
I would like to thank him but also to thank you, because you have been, you all buy-side, sell-side analysts helping him develop. And I do encourage you to continue and to do equally so we have assistance for you who is taking on board today with the same spirit, I can tell you of openness and commitment.
So, all the best to the two of you Antoine and Regis in your respective jobs. After these few words of introduction, let me now move to some highlights of H1 performance.
I know that we put it into context before I come back to the numbers in more detail. I’ll start with page four, for those who are following us by video conference, this page shows our key KPIs for the first half and organic growth, which has reached 6% from H1 which is inline or better than our guidance of at least 5% with an acceleration within the first half itself and Q2 which has been higher than Q1.
Trading operating margin has declined by 49 basis points at 13.34%. This, as well is in line with our guidance of minus 50 to minus 30 and consistent with our expectation that H1 will be in the low part of the guidance on the back of Europe.
And last, our free cash flow for the first half was €714 million, excluding close to €14 million of non-recurring cash outs linked to the cost saving plan. So, numbers for H1 are fundamentally in line with our guidance and expectations, but maybe more importantly, for this half and I turn to page five.
We have, during this period of time since the beginning of the year, made a lot of progresses towards our objective to come back to what you have on the right of the screen which is a strong sustainable and profitable growth as soon as in 2014. We’ve done so by following our action plan, in Europe first by completing our consolidation process throughout Europe which will allow yes to start or the implementation this €200 million cost saving plan early in the second half.
We have done through in Europe as well by stabilizing our market share in Dairy Europe and improving our sales performance outside Europe by accelerating in the CIS and North America by investing behind our brands as well as strengthening our presence across our emerging markets through small well-targeted transactions, which I am going to come back on in a minute. So of course, there remains that to be accomplished in Europe.
Now that we have finalized the procedures, we will need to implement the cost savings plan and we will need to relentlessly look for simplification in our processes and to strengthening our competitiveness. Outside Europe, we will need to keep addressing our models to better capture the huge opportunities which we still have in front of us and to manage volatility.
So there remain things to be done, but H1 was definitely an important milestone to what Danone growing strongly, sustainably and profitably. I’ll have a brief look at the sales first and turning page six looking at the dynamics which have basically remained unchanged with a strong growth in the growth markets at just 13.5% like-for-like for sure the business which now represents 62% of our sales and on the other side, Europe which has remained negative at minus 4% like-for-like and now represents less than 40% of our portfolio with 38% of all sales.
Europe therefore has remained negative, but this is some improvement versus the previous half. You can see that on the right of the screen with minus 4%, this is versus minus 4.5% and more importantly, there has been a positive dynamic within the half with a minus 5% in the first quarter and a minus 3% in the second quarter of the year.
We’ve been focusing very much our action during the first half in what we have been setting at our plan as our plan for Europe at the end of last year. This is around the five levers you have the screen.
It’s about the best packaging and we show here some examples with the execution of Bebe Dino Spain or DanUp in Portugal, which have renovated the range with the best products as well and some improvement in the recipe and the formulation of the product. Aptamil in particular in Spain has been renovated and a new very indulgence version of DanUp has been launched in France with Dans Les Sociétés, right price points, but on the bottom-left, this is about finding the right level of price and the right positioning, vis-à-vis consumers and from that perspective Ecolean has been an interesting initiative in Portugal that’s basically launching a very affordable format to consumer in a pouch.
We look for differentiating innovation and one has been the launch of Danio, which is a Greek high protein low fat yogurt here in the UK which is very successful. And last but not least, we have been working on setting up the right organization as well.
The result of all these actions put together at the same time and at different times in different territories is basically following. You can see on the right hand top of the chart, we have stabilized on the value market share and that’s been now for two consecutive quarters in a row.
In some markets, they have even increased. That’s the case of Portugal, but basically the sequential stabilization of our market share is a very important factor, which is not everything, because we continue operating in a category, particularly in Dairy, which has remained negative in most European markets.
But this has clearly helped and you can see that on the left hand side, on sales growth to improve from one quarter through the other. In particular on the back of value, which is the dark grey area, which has gone from strongly negative to less negative, helped by price and again as a result of all these initiatives as well and primarily.
So Europe has been very much about that, but Europe has been about this trend for competitiveness. I think given the complex contest, which we are facing throughout Europe adding the whole process being managed, run and successful in just one half as being a very good achievement.
We are now ready to roll out this plan. Again, I repeat this is for us absolutely key, because we need to make sure of more competitive.
We need to give back some competitiveness to Europe and we need to stabilize margins and that’s a key element of the plan. That will be our key priority in the second half if they continue this plan.
So that’s for Europe and certainly it has been an element of improvement in the top-line of Europe which has contributed to the improvement of the acceleration of the top-line overall. Growth markets, is the second leg of our Group and you can see that growth has remained strong and has even strengthened in part of the world and this is NORAM and the CIS.
And within the half, there has been an acceleration as well between Q1 and Q3 in NORAM and the CIS. Latin America, Africa, Asia and the Middle East has remained strong as well.
I’ll just go with a few elements by division in this market, starting with Dairy. There has been a lot of initiatives during the first half to try and strengthen our position in this division.
Logistic, JVs in Russia, clearly, we have a very nice logistic assets and we think it needs to be leveraged and for doing so, we have concluded partnership with a logistic company called Norbert Dentressangle, with a view to progressively open our logistic network to other categories and therefore to reduce cost and to leverage it. So that’s something which over time is going to help Russia keep improving its level of profitability and its competitiveness.
In May in China, you all have in mind the partnership with COFCO and Mengniu. This has led us to buying 4% of Mengniu before the end of this first half and the others that the following one will be completed during the second half.
US has definitely been a key market for us in this first half. Many initiatives taken in, by the way different businesses, but I would – in my comments to dairy for now.
On the Greek segment where we know clear number two which has helped us to position a leader in the market. We have launched two brand extensions, one in the Dips and the really Oikos brand and the real objective here is to create new moments or new occasion of consumption in Activia Greek which has been launched so as to keep all the convenience or the benefit of Activia to be able to have it in the Greek version with the Greek texture.
So these has been two important launches in the first half in Danone in the US for Danone in US and US seems very recently that we are as well concluding a partnership with Starbucks. This is pretty interesting and strategic one.
We basically will leverage the distribution in food stores of Starbucks and their very high quality of digital marketing will leverage as well. The distribution capabilities of Danone in modern retail as well as our technology and know-how in the area of yogurt to create a co-branded product called Evolution Fresh inspired by Danone which you can get it in both channels.
As we move into the coming quarters, this is very exciting because again it covers the yogurt category to many additional Americans this is today and that’s going to create as well an additional brand in our portfolio which again looks very promising and exciting. So US has been of course very important.
One word about Centrale Laitière after having taken a majority stake in February of this year, we have completed the process of increasing our control first by launching a tender offer on the stock market which was compulsory and by getting 2.6% additional. And in addition to that, by concluding options with the current holders so as to get an additional 26.75% by 2014 and therefore this is really becoming a Danone company.
We have started the integration as soon as March. The integration means of the company which was already done further i.e.
stepping up the level of the quality of the products, stepping up the level of marketing finance and strong control and we are very much going through that. So that’s for dairy and as you can see, there is Europe of course, but there is the rest and there rest is working absolutely is showing very, very strong dynamics and is giving us the opportunity to keep improving the portfolio.
Waters, many actions as well. That’s been a very exciting first half for water.
I would mention the new Evian premium bottle called Essence which has been launched in the US and Japan and I am sure it’s going to coming to the Europe soon. I was able to buy one in France from the streets but it appears to be on the exception.
So I hope it will come in a wonderful bottle as well as the partnership with SIRMA which I am sure you have seen which allows us to become a real number one in the Turkish – in the very dynamic Turkish markets and that’s a good news. But most of the efforts though of water during this half has been focusing at Aquadrinks at knocking the potential of the category as you can see at the top of this slide, I will mention two examples.
One is the launch of blue which is the Aquadrinks version launched in India in the region of Delhi and it’s going to complement our positions in Indonesia and in China. It’s in the right part, bottom right part of the screen.
I will mention as well Brazil, which started from zero about four years ago and start being not formally meaningful but more and more exciting. We have completed the portfolio.
We are not formally in water anymore but we are as well in aqua drinks and we are operatively getting penetration in regions away from Sao Paulo. So that’s an area of growth which is extremely important for us.
Baby and Medical have been the object of many initiatives as well. In the case of Medical, I would emphasize from the acquisition of Nutrimed in Brazil which is helping strengthen further an area of medical which is one of the most dynamic i.e.
Brazil and with respect to Baby, we keep progressing step-by-step and that’s very important because it’s building the future. We keep progressing in building our presence in Latin America with very strong performance in Brazil and very strong performance, very good progress in Africa.
And we have been as well making the acquisition when we come back on that and working to expand our range in China. So a word about China, that remains a market which is very good and very important for us.
We are convinced of its fundamentals. We are convinced as well of the needs in this market to be in a very responsible manner and to try and deal sustainable growth and not to be too short term minded.
I have always told you, I think in the last few years, that’s very important for us to as a broad portfolio in China and to be able to offer good quality adequate price products to the consumers. So that’s what we continue doing.
Dumex is one of our local brands and we have been adding to that international brands with Nutrilon and Karicare. We are now fully in Hong Kong with brands Cow & Gate and we are as well been distributed through e-commerce with the performance which remains good and which again we keep looking at with a view of making it not only strong but also sustainable.
So, China has been one of the levels and let me just come back on this one minute, because I don’t think we have had really the opportunity to discuss that. That’s pretty interesting move in the dairy food but food liking category in the US has been for long category which was not growing.
For the past few years now, it’s been very dynamic growing mid-single-digits. That’s on the back of the few companies which has been launching really modernized products with different products or packaging form with different ingredients with organic version and we went through this category which is very dynamic and growing fast by adding a partnership and acquiring in fact the majority of one of the character which it holds Happy Family.
So as you can imagine that’s very interesting for us because it’s our first step in Baby in the US. That’s something which probably will have complementary key with the fresh dairy part and we have to find them.
That’s something which as well can be interesting for us to leverage for the rest of the food businesses in Europe and therefore we’ll be very much looking at that and we are very excited by it. So that’s for sales and as you can see the numbers are very important but what’s happened is in addition more important because we are really progressing and building things.
Margin-wise, H1 has been as well as from sales to two tier momentum. This is absolutely clear, very much the same as last year.
You have on the one side the Europe which is decreasing at 4% in terms of sales and in addition to that, or as a result to that, it’s negative from an operating margin standpoint, that’s minus 220, minus 218 to be precise basis points like-for-like at 14.3% and on the other hand, you have the growth markets growing strongly with margin accretion and that is on the left, but on the back of fueling the growth and trying to catch all the opportunities, we have in front of us. So that creates clearly a two words equation and this is in line with the priorities I showed you before.
We have to leverage and invest on the left and we have to fix another strong on the right. Not a lot of surprise for margin at 10 points in this first half.
We expected moderate inflation of the raw material. It’s been in reality a bit more than what we thought, say mid-single-digits versus low to mid on the milk.
We’ve covered that through pricing through additional supply. So this is what we expected and we have kept covering it as well through productivity with a number of productivity in the first half of this year which has been €254 million, so very much in line with the €500 million target we have for the year.
We keep moving not only on making productivity one year after the other but we are also trying to find systems which are going to make us more efficient overall and year-after-year and I will mention the example of the global sourcing organization for their dairy division which is being set up and as we go, as we move from what provides some benefits margin-wise to this division and to the Group. We are not only working on margins, but we are working on efficiency on the rest of all the other elements of the equation and in particular we are trying to take advantage of our very strong and unique cash negative cycle and cash capabilities.
To make the difference to A, by focusing on CapEx for our Group, by investing in CapEx to grow the business either because we need to add capacity because we want to use CapEx as a way to be a differentiation and that’s a tool which we’ve been very much using during this first half. Secondly, by working on the working capital for the rest of the year and you see that the rest of the word is still an area of progress which is very significant.
We have been working and we’ll keep working on it. There has been a significant progress made in US actually in Danone CIS now in particular the size and we’ll keep working on it.
We’ll keep working as well on stabilizing and making sustainable tax rate which has gone up very significantly from last year to this year and through the additional French tax from 26.7% to 38.3% and again, we are working to avoid as much as possible double fixation and make these 20% sustainable which we believe is going to be and all that of course is approaching in the freight environment which remains volatile. But this is something we have now been used for many years.
So, all of that, I mean these pluses and minuses surprise positive negative is basically not making us diverge any from our priorities. It gives us, thanks to very strong business dynamics.
The possibility to confirm our guidance, obviously on sales growth with sales growth of at least 5% for the year which given the first half result is going to be pretty much achievable I must stay. Trading operating margin, minus 30 to 50 BPS which means in effect that the margin of the second half is going to be at least at the level of the first half and probably better.
So that’s what we are looking for and that’s the free cash flow excluding exceptional items which we view as being around €2 billion for the year. So that’s really what I wanted to tell you about the business dynamics which lie behind the figures.
I’ll now go through them and try to give you some additional elements before we move into Q&A and Antoine will tell me about the timings, okay. Okay, I am okay.
Key growth H1, you’ve all seen them maybe to remind so €11 billion of sales, which is up 6% like-for-like 5.6% reported, margin at 13.34%. I’ll come back on that and EPS which is at €148 I think this is absolutely in line with consensus and with our expectations and free cash flow of €700 million.
So sales growth analysis, for the first half, you see that on top of the 6% like-for-like which is equally split or almost equally split between volume and value, at least in a balanced manner, we have a negative currency impact and positive scope impact. Negative currency comes from the weakness of some emerging currencies versus a year ago.
This is the peso, Argentinean. This is the Brazilian Real; this is Indonesian Rupia this is to some extent Ruble as well.
All that has created a negative currency effect of 2.5% which we expect is the currencies were to stay where they are today to become 5% for the second half of this year, for the second half. Scope and others is positive 2.1%, this is very much reflecting the addition of Centrale Laitière for the American operation for the first four months of the year and obviously the impact on this also going to be bigger and volume value are both positive for like-for-like sales.
On the quarter therefore you see very much the same. The same on currencies with negative 2.6% in Q2 and a scope which has been stronger because obviously we have included Centrale Laitière and that’s only for an amount out of six for three months out of three and therefore this has a bigger impact on the quarter.
Volume as you see has strengthened. It’s moved up from 3.5% in the first half to 4.5% in the quarter only and therefore there is a positive volume dynamic and value as to that 2.4%.
That’s interesting because it shows that we are very much in positive dynamics after three quarters in a row, last year where we delivered 5% supply and growth. We are now progressively taking up to 5.6% in Q1, 6.5% in Q2 and you’ve seen the dynamics for it is coming from i.e., a pace of decline which is reducing in Europe.
An excellent quarter in the CIS and in North America which has exceeded altogether 10% growth and continued mid-teens growth in the region which we call ALMA which stands for the emerging markets really. And you see that’s geographically on the deceleration, I don’t want to say, call it as Europe which is attributable both to better dynamics and to when they are more in Q2 versus Q1 which has helped.
So technical and real factors. CIS and NORAM really stepping up and this has been the case of both of them.
CIS has made its first growth above 10% seems to be a merger of Unimilk and Danone and ALMA which has remained very dynamic. Volume value is almost a nice occupation across the different balance depending on the divisions, but two-thirds volume, one-thirds price and mix, that’s really the way we see sustainably the aggression of the Group in Q2.
I’ll move into Dairy first. So a very good quarter in CIS and NORAN, again exceeding 10% growth with better trends versus Q1 in both geographies, both NORAM and the CIS.
In dairy, taken in isolation as well the rest of the world i.e. the emerging markets is doing well.
Brazil, in particular continue being the strong energy for growth of the Group, for the others, and we see some first signs of stabilization in Europe with base of comparisons which from now are going to get easier. Part of the equation, as being in Europe, the adjustment of portfolio which I have described to you before are the fact, we are, in Europe, I repeat trying to adjust but we proposition to as a consumer by adding products with better value-added, better formulations, better packs but as well price positioning, which is more fits into what European consumers are looking for.
And this has led to a negative price and mix of 1%. This has led us well to positive volume growth, to the next generation volume growth which has gone from 0.5% to 3.6% now.
A few points about that, when I am talking of price and mix, the negative I am talking of Europe exclusively, I am not talking of the rest of the geographies which have remained positive from that 10 points. Second thing is for those who are in mind reset at 2008, 2009 we are not at all talking of things of this 92.
We are not talking full of things of the same form first of all, because we are not talking of price cuts or very significant promotion. We are talking of an adjustment more like the one I just described to you and we are not talking of the same magnitude in the sense that this minus 1% are even likely to further and what’s your food expect for the grocers to – it seems to stay around that also gradually improves but not to go to the level which we have seen for the reset which went down to minus 4% or 5%.
Okay, so that’s the dairy equation which is obviously showing that we are taking a lot of actions in Europe on that. A lot of innovation, I am not going to come back on that.
I just think our issue is to go to Mexico and have a lot of chilly to try and drink then I guess, because that’s going to help you very nice holidays in this country. Water, continued strong performance and the weather has not been precisely very nice.
But I think what you see here is demonstrating that the reliance of water to the Western European business is far less important than it was in the past. Asia, on Aquadrinks has kept outperforming.
Europe has remained soft, that you are seeing on the back of poor weather conditions, but with market share gains and that’s important to emphasize and the market share that reaching below, have been growing notable in most of all markets. You all know the Baby&me Campaign which is tremendous success again and for the rest we’ve been focusing in expanding the range in our Aquadrinks not only in the countries where we are pushing them very hard to develop i.e.
Asia, China, Indonesia, but off of Mexico very much and Brazil, but also in some other countries like Poland and Spain. Baby, outstanding dynamics again.
I think it was clear for everyone that Q1 was a good exceptional because of the positioning of Chinese New Year but also because of the strong sales from Europe to Asian markets which has remained in place. So we keep having the performance which is made of A, strong underlying demand trends which would probably put Baby at 10% around plus or minus and the element of over performance which is the 3.5% which you see on top to make it short and broad which corresponds to the fact that we still see a demand from Asia for European products which is strong.
I accept that’s some interesting too, it’s long-term, we see China and Asia as markets with very strong and sustainable growth profile, but we also see some ups and downs building and there has been intrusion of that in the new flow in the last few weeks, we are definitely prepared territory and managing it. Outside Asia, again to flag the very strong progress we’ve made in some geographies and in particular in Latin America, in Brazil, we were basically nowhere four years ago.
We are progressively building market share. And on back of the sustainable business we keep having double-digit growth but very, very strong double-digit growth.
I’ll end up with Medical for the sales part which has delivered a soft performance for this quarter, a 12.7% top-line. This reflects a dual trend again.
Very strong growth, double-digit growth outside Europe and that Europe which continued to be under pressure of the reimbursements. We know what the answer to it is, we know it’s ex-OTC and we keep developing it in just days’ time and therefore we expect the performance of H1 overall to remain in the same for probably the rest of the year and meanwhile of course we keep working on the development of a few other products which we want to be in the appropriate manner in several markets.
And we keep adding of course, offers whether you could differentiate from consumer. So that’s for the sales, I am going to quickly go through the margins now.
You know this table. It shows the total operating profit of the Group which is €1,184 million for this first half.
This is made of two series of elements, one which is called a trading operating income, 1.475 and the other operating items with negative €291 million, which obviously be sure is very strong, because it corresponds to the cost, the first provision for the booking which has been booked for the cost as €200 million cost saving plan. So out of this €290 million this is the vast majority.
Out of that, the trading operating income therefore is €1,475 million and that gives a margin of 13.34%, which is down 51 BPS in reported terms with some scope elements negative and this is due to the addition of Centrale Laitière, primarily which margin is below the margin of the Group and with some positive elements of freight because the depreciation of currencies has been in average on business is with the level of margin than these average level of the Group. But the bulk of it is obviously like-for-like and this is I think a very important slide to understand again where we are coming from and going to.
If you look at the same for the full year, you will see something which is very similar with pricing and mix and leverage for growth altogether which is indeed providing leverage wherever we have growth we have leverage and this is true in the US, this is true in Brazil, this is true in the CIS, this is true in many, many places. In front of that, we’ve had higher than expected input costs but a significant portion of that has been erased by productivity and the important factor has been the deleverage which you see under the current other costs.
The deleverage of Europe which continues to hurt the Europe and Western European margin. So, of course, this was expected during the first half, because we knew we will have to go and negotiate with the unions the modalities of the cost-saving plan, but now we will have to take action to stick to that with a perspective of stabilizing European margins by the end of 2014 and therefore having the ability to go back to profitable growth overall in the Group by 2014 overall.
By division, it’s very much corresponds what I said, i.e. what has been weighing on the Group has been Fresh Dairy in Europe and then for logically you find negative margin evolution in Fresh Dairy and in Europe.
Water, we have been doing some specific investments in Latin America to develop and fuel the business and therefore you have a negative number which you find in ALMA as well. Baby nutrition has continued to be very strong with 43 BPS margin development.
CIS and NORAM as well has been very strong, Russia and the Danone business, while the Medical Nutrition business has been recovering a bit, even though the top line was not excellent from a level of margin that’s through which was pretty low. So all that gives you a minus 49 BPS.
If you would go from operating income to net income, the two first columns show you the underlying part and then you have the non-current items. I’ll start with the non-current items where you have the minus €291 million which are essentially the cost of the plan.
The €200 million saving plan. Below there are two elements which correspond to the acquisition of Centrale Laitière in Morocco, A, we have disposed off a holding we have been having for long in Ona which then became SNI and that’s being giving us a capital gain of €52 million on the top of financial expenses and, B, on the net income of affiliates, we ask for a continuation net gain as well as on the disposals of the minority stake of Centrale Laitière before we reacquire the majority.
So, Morocco is giving you most of the positive elements we should see and which altogether allow us to have non-recurring items which are positive by close to €100 million. This is the non-recurring part.
If you look at the recurring part, you will see an increase in the financial expenses, which basically you will find the reverse. Some of the opposites of the counterparts in the number of shares and therefore this is neutral to positive to the EPS, in fact positive to the EPS and income tax which is increasing by €50 million and that’s three to four points of effective tax rate, I’ll come back on that.
And other lines which are not – very significantly for net income which is going down globally €911 million to €873 million. On taxes, we are moving up from 26.7% to 30.3% underlying.
This is reflecting essentially two things. A, the tax on dividends of 3% in front which has been established in front, and B, the litigation of the deductibility of the financial interest which is a feature again, so altogether that made our tax rate jump to 30% from now and in the absence of any dramatic or very significant additional measure in our key countries.
We expect to be able to maintain these rates at this level. So underlying net income growth from €911 million to €823 million, the fully diluted number of shares is decreasing as well.
So the minus 4 at the top is mitigated by a plus two in the middle to give you a minus two at the level of fully diluting underlying EPS from 151 to 148. And you see that this line is predominantly explained by currencies with a minus 2.5 which is basically the one you add to the level of sales.
Scope effect is flat and the like-for-like effect is basically flat. So, it means that ex FX we are stable in terms of underlying EPS on the back of margin and tax for the most of it.
Cash Bridge, from a trading operating income of one being €275 million. Taxes payment has been important as well, €400 million.
Working capital has been negative as we are with negative mix issue, but also some seasonality issue. CapEx has been reasonable for the first half €454 million which is slightly above 4% of our sales and that gives you a free cash flow which is €740 million before the cash out non-recurring corresponding to the €200 million cost saving plan.
Again, as I told you, we keep working on the cash, working capital, we certainly have lot of opportunities in emerging markets and we’ll keep working on it. CapEx as I said, in previous slide will remain low in the first half.
It will accelerate in the second half as we have many projects which we need to procure. This cash flow has been used essentially for two things.
A, to pay dividends and buyback shares, that’s a total of €1.4 billion for the first half and B, for different M&A transaction. On top of the put option constellation which took place at the very beginning of the year and that’s something you knew already.
And the conclusion of the production with respect to Centrale Laitière, which I told you during this presentation, on top of that, we had cash out for Morocco, for China with the acquisition of the 4% stake in Mengniu, but also at Turkey and therefore we have been investing some early during this first half to reinforce the quality of the perimeter of the Group. So the total change in net debt was negative €2 billion which brings the debt to €8.2 billion.
Still very, very much in line with what we have as target and what the targets are for credit rating. For the credit rating, in fact we had some movement at the end of December, and we’ll be using that share buyback, dividend and acquisition.
We know from a metrics perspective that’s a level which is very much the one we should be at. In terms of balance sheet management, we have been buying back share.
So, you know that already in the month of April, 2.3 million shares to be exact and we did have at the end of June 49 million of treasury shares representing 7.8% of the company’s share capital. We have been canceling some of them.
This has been decided by the Board of Directors in order to get some ability to buy again and as a result of that, our share capital has decreased and it’s now amounting to 638 million shares now. So that’s really what I wanted to say about this H1.
Let me repeat the outlook. Considering everything I said, we confirm our 2013 objective, sales growth of at least, 5%.
Trading operating margin which will be for the year between minus 50 and minus 30 in the free cash flow excluding exceptional items, that’s around €2 billion, again the very, very – the most important takeaway from me in this first half is that we are on track. We are on track with the objective, which you have on the right of the screen which is to go back to strong sustainable profitable growth and the whole of H2 will be dedicated to complete the actions and keep being in this trajectory.
That’s for me. Thanks very much for your time and patience.
This has been a bit long today and we’ll take some questions now.
Operator
(Operator Instructions)
Pierre-André Terisse
First who can pick up the mic? See that works.
Jeremy Fialko – Redburn Partners
Jeremy Fialko, Redburn here. I have two questions.
First of all, can you talk about European Dairy, what you think the prospects are of your sales actually sequentially increasing in that market or do you think that sequentially stable is where you are going to be in the second half? And then also on the second half margin if you can talk through some of the moving parts here.
So, obviously, you've got some of your savings coming through, but at the same time you've got input cost pressure and you've got the impact of the price reductions in the Chinese Baby food market. So if you could talk about some of those and what you think the prospects of the H2 margin being a better outcome than the first half?
Thanks.
Pierre-André Terisse
Thank you. At the end of the day, the goal in EU there is to find some growth.
I am not saying that our objective is to grow again by even mid-single-digits. At least, not immediately, that would be unreasonable; our first goal is to stabilize businesses and then our second goal is to start growing them again.
There is one example which has taken place in H1 which has been very much in line with that i.e. Portugal has first stabilized and then growing.
It’s been growing in the second quarter or so. I told you already when it has stabilized in the first quarter that I was very careful with that and I want you to make sure that we have confirmation of it.
We have had it during the second quarter and I would tell you that I need to have confirmation of that but basically it’s going in the right direction. So I think what we’ve done in Portugal works probably stable only in Portugal for what it is, but it is giving us an indication that we can probably grow this business low single-digits.
But it takes time and not all the countries we follow at the same pace. So, the UK is clearly doing well.
It’s a bit of an exception and then if you take the others, there are some in which we have find our improvements, some others in which we have less time for improvement and we need to keep them progressing overall. If you look at H2, I would not expect them to grow, overall.
And so take them altogether. I would expect them to stabilize sequentially and therefore comparing to bases which are better to show an improvement in reported performance or in like-for-like performance.
On the margin of H2 and in the elements you’ve mentioned are indeed going to be present. I can’t predict exactly what the evolution of the input cost is going to be.
It seems that there has been some stabilization which is good. But we need to keep monitoring it.
The savings, we’ll do everything we can to have it fast, but at the same time, we want to make sure that we are setting up solutions which are going to be here for good and then for last for not only this year but next year and the following one. And there is indeed this price reduction in China which will have some impact, but manageable impact on the overall Group equation.
I think, if I take all that into account, I am not willing to be more precise that what I said, and what I said is that we would be next to at least at the same level of margin at H1 and we are obviously trying to get more than that and for sure the savings are going to be an element of it.
Unidentified Participant
Warren and then I. Warren?
Warren Ackerman – Societe Generale
Good morning. Warren Ackerman, SG.
Pierre-André just having on the Chinese theme, obviously it fell on this in the last few weeks. I was guessing how should we think about modeling this.
If I assume China is at a 20% overall, maybe and pricing down on average 10%, you said 5% to 20% is slightly 10% average, should we then think about another minus 3% price mix impact from China maybe from Q3 onward. Would that be a sensible way of thinking about that and then more broadly, if everybody is bringing down pricing on average 10% in China, and there are some companies are more, some companies are less, but what do you think volumes do, do you think volumes increase as formula becomes more affordable or do volumes kind of not react because the number of babies born is the same high.
What is the kind of volume elasticity of the lower pricing? What’s your best guess?
I know it’s early days, but if you can give us any kind of high tier on that, I think it would be helpful. And then secondly, just coming back to this other COGS line on the margin bridge down, 135 basis points.
I was a bit confused about that, because if I look at the European margins which were down I think 120 basis points, like-for-like, now Europe is roughly 38% of the Group, if I kind of close that up that would be something like the minus 40 BPS impact from other COGS. So I was wondering how you get to the minus 135, is that just your deleveraging or are there other things in the other COGS line that would be helpful?
Thank you.
Pierre-André Terisse
Now start with that maybe, it’s essentially that there is some elements as well of fuel addition because you all have seen that on the right of the same chart, you have a positive 47BPS of A&Ps, if I am not mistaken, but it reflects the fact that we are not looking at investing in our markets the same way or the simplistic way, which is to be by just looking at A&P. When I present you a chart with before that, I am telling you that we are investing in packaging to make the packaging more effective.
We are investing in recipe to make the recipe more effective. All that has impact from COGS and costs and depreciation and that’s part of the affects you can see on the minus 235 BPS.
So part of it is essentially and we have not qualified the way we presented usually not to trouble too much things, but part of it is effect investments behind our brands. Now, this only a fraction of it, the big maturity remains what I said from what you commented, I would just say two things, A, that Europe is more than 38% from the operating income 10 points.
It is 38% in sales but more in terms of operating income, B, in Europe you have, part of the portfolio which is growing and part of the portfolio which is not growing and part of the portfolio which is not growing is deleveraging a lot that’s there in Europe and basically when you see Dairy in Europe – Dairy, negative 128 and Europe negative 118. In Dairy, you also have the US branded and the CIS which are growing which means that Dairy Europe is deleveraging more than what you see on total Dairy and that's impacting Europe.
So, I know if I am getting it clear to you, but it needs basically that in Europe we have businesses which have grown in Dairy these are very obvious examples. And this is why for us and I keep repeating you, I know there is nothing new just the fact we are still in negotiations, but I keep repeating that putting in today’s these cost saving plan is absolutely essential and that’s going to be the big objective of the second half, but we are definitely committed to it.
So that’s for the negative 135 and the confirmation from me that the big majority of it comes from the deleveraging of Dairy in Europe. On China, I think I did during one of the conferences this spring say that, and even during Q1 that we fundamentally are and as we have a reason to be positive about the prospects for growth in China because there is demand, because people are having more money and therefore are willing to get more premium and better quality products.
Because we are extremely well established in China, because we’ve been acting in a very responsible way all along including at the time of the melamine crisis where we chose not to increase our price when there was not enough for too much demand on the market. So, for all these reasons, I really see no matches not to be positive and by the way you will have seen that besides this particular case or this business we are trying as well to step up our level of presence in China and be more involved at all levels of the society.
Now, because this is on the one hand very sensitive for obvious reasons. This is our key in China and because there has been a development in the market, we sometime has directly has going in all directions.
We are today entering the phase of blending I would say of this market. So there has been that and that’s probably going to come down.
But if you had asked me six months ago or one year ago, I would have told you this is the case. So it doesn’t change fundamentally anything to our vision of the Chinese markets.
It doesn’t change anything to the fact that we think we need to be present local, abroad, we need to be present with international brand, local brand, we need to be present with what we call blue house, red house which is a scientific positioning or an emotional positioning, answering the mother's needs. We need to be present alongside the authorities to help them deal with the matter of public health and by doing all that we will keep making this category attractive long-term.
So, I am sure, I am absolutely clear it doesn’t help you to – the performance in the coming quarters. I just think about when I say, to me the central thing is that, not only China but worldwide, the fundamentals of Baby has been since the acquisition of Numico recurringly at the level of 9%, 10%, 11%.
I think this is the core of it and around that there can be plus or minus a few points but that’s basically.
Warren Ackerman – Societe Generale
I mean, on the skimmed milk powder, I think you said before that you’re hedged until the year end on the powder side, is the pricing is coming down in China, but your import costs are going up on powder. Does that mean that profitability of China Baby, but we’re also well above the average.
Is that’s something that’s going forward what the top-line may still be interesting that the profitability of the category structurally starts to come down a bit? Would you – how do you think about that?
Pierre-André Terisse
I think it will keep, I mean as long as, I think it will keep reasonably interesting I would say and the second thing is that this is absolutely and we say that on a repeated manageable for the Group and I basically go back to the question of Dairy, between this and this and this, and between all these elements, what I am saying is that H2 margin target for us at least 50 and we are trying to get a bit more taking also this into account.
Eileen Khoo – Morgan Stanley
Eileen from Morgan Stanley. Two questions Pierre-Andre.
The first one is just a bit of a follow-up on China. I mean, you talk about the impact was manageable.
One of your competitors said last week at the industry bring down promotional spend in China in order to manage margins if need be. Will you agree with that view?
And also can you update us on what your actual underlying volume growth was in China in the second quarter? The second question is on CapEx and A&P, where has the increase in A&P focused on?
Pierre-André Terisse
On the left when I look at the growth, we’ll be delivering in the rest of the world last year and look at what we have been delivering this first half it’s been in both case double-digits. It’s in 13.5% this first half.
I think it’s been probably the same number of something we are raising enough for the full year next year. So, as you can imagine we are in many areas reaching issues of capacity which we do anticipate by the way and we have the CapEx in front of.
This is all the Aquadrinks, basically very much in Asia but also in Latin America. This is as well the water in Asia, which we keep growing and you see the Aquadrinks, but do not forget that there is water and water is for instance keep growing very much in Asia.
This is Baby overall and I think overall everywhere. We are, sometime in a situation of capacity shortage.
So we have to increase it, this is the US, you’ve mentioned it for the time being we have a pipe which we think will allow us to keep increasing our capacity on the Greek side this is Russia. Russia development has been very strong, I would say in certain regions, volume-wise and there has been some regions in which we have achieved not 10% growth, but 20% growth.
So you can imagine, given that this is essentially volume driven. It requires more capital expenditure.
So there is a number of areas. There is not only one point of focus, there is number of areas in which we have to invest.
We did very carefully very mindfully, but at the same time, it’s important as we keep with this dynamics and the good thing is that our cash generation capability allows us to cover it. So, it’s not like we would have been having problem of cash and therefore would be a bit struggling to find cash to fuel CapEx.
It’s not the case. So our cash profile gives us this facility.
A&P, I mean, the same thing, so we kind of being saying depending on the countries, but basically, building the brand plus Prostokvashino, keeps the important, that’s very important for us, building the brand Sirma in Russia is important for us. Keep building brands in Mexico in Water in a context which has become, well that’s one year now.
More competitive, it is important. Building Blue in India is important.
So, there are a number of areas in which we have done it and at the same time we also need to be able to spend less A&P in the places where we think the opportunities are going to react the same way. China, I mean, in a market which is really booming, there is obviously a lot of competition and a lot of promotion and a lot of many things.
So, yet part of the normalization of the market probably is going to be through the more fair level of promotional intensity, so that’s a level which is going to compensate the price action. But in fact it’s not compensating, it’s growing with it, in the sense of having the markets in a more normal shape, better balance between volume and value and not only driven by mix and price which we all know long-term is not a thing which is sustainable.
And on the growth, I will not make comments. We keep growing well.
We kept growing well in this market in the second quarter. We are not growing to the sky but generating very good growth level, sustainable.
Yes, we’ll take some questions from the phone.
Operator
We will now take a question from Celine Pannuti from JPMorgan. Please go ahead.
Celine Pannuti – JPMorgan
Yes, good morning. I have two questions.
My first one is on the dairy market. First of all, can you talk about what is your pricing outlook in dairy specifically?
And the other question I have on dairy, if you could give us a bit of a flavor whether there was a difference in the double-digit performance between CIS and NORAM? And whether in NORAM, what's the market?
We've seen that there has been a lot of promotion, are you seeing that continuing in the marketplace or was that just a – one of your competitors having a quarterly promotion there? And my second question is on emerging markets which for you have remained very strong.
Some of other staples are talking about the slowdown and obviously some countries like China, Lat Am have been mentioned, obviously you are in specific categories, but I would like to have your comments regarding that. Thank you.
Pierre-André Terisse
Welcome I hope I will answer appropriating your questions, because I am not sure to have taken everything. But if I don’t, on the second question maybe, first which is the emerging markets and the slowdown, I think the nature of our business, the fact that we have been present in a lot of these markets are relatively short period of time not hundred years or more like some of our competitors.
It puts us in a situation where we have more potential and where probably where we have ranges which are more adapted to the current generation. That’s adding to the fact that we are – our portfolio we generally speaking are not only premium but going from affordable to premium, is the probably the reason why we are indeed in neither of the markets you have been mentioning.
So not in China, not in Brazil, not in the CIS, not in Indonesia, and in all these markets we’ve not seen slow down what Economist cover was showing this week. It doesn’t mean that it’s not going to impact us at some stage, but for the month we are still performing well in the market and I think it has to see with what I said before.
Maybe there is something which we have seen however and that’s a bit more volatility. Not in the big markets, but in some smaller markets, Egypt for instance, it’s clearly a difficult market.
Argentina, which is a large market, but it’s a market which we said repeatedly was difficult and it’s becoming increasingly difficult as we go. And the operation of the currency which I’ve been talking to you about, I mean international Brazil and so on, that’s not impacting us, somehow still it's impacting the number.
So no slowdown for us, maybe it will come, but I think we have a model which is a bit different, a bit more volatility and we have to live with this. But, I mean again from what I’ve shown, I think this is manageable.
On the Dairy, I understood most of your questions was about CIS, NORAM and in NORAM about the promos. So I’ll try to answer this.
The performance has been good in both markets. CIS and NORAM, in CIS I mentioned that we have some regions growing at 20%.
Overall, we’ve been growing double-digits in the second quarter. We’ll keep building the brands and that’s very important.
We’ll keep building Prostokvashino with Sirma. We’ll keep building as well the Danone brands Activia and Actimil.
Actimil has been positive in these markets which is one of the few frankly speaking in Dairy. The team is really doing a good job.
They keep working as well of course on productivity, which is allowing them to keep fueling the business. A lot of this performance has been volume-driven.
Now it’s going to be for spot price driven, because you probably know that the inflation of the cost of milk in Russia has accelerated and that we have taken price increase in fact at the end of July by a few points and we’ll take – at the beginning of July and we’ll see whether or not, we need to take some more in the coming months. So it’s likely that the performance is going to move from being volume-driven to value-driven.
We are trying to control very much this equation. In a context in which we have significantly changed the portfolio and the organization of the company since its acquisition in 2010 and therefore we feel much less vulnerable than we were at that time.
But CIS is basically doing very fine gaining market share as well. North America.
It’s been doing well. It’s been delivering a strong performance, high single-digits.
The market has become, you are right, a bit more competitive. That’s not something which is a surprise.
There has been many of you telling me that there is going to be a price war in the US at the beginning of the year and I think we – I consistently answered that. So it’s difficult to expect the price war, but it was likely that we will get some more promotional intensity and that’s what we have been seeing in this first half which has not prevented us from developing and growing nicely.
We don’t take that to fundamentally change, so we think there is going to be probably a bit more promotion going forward than there has been in the Greek segment for the past few years now.
Celine Pannuti – JPMorgan
Good, thank you so much.
Pierre-André Terisse
You are welcome. We have two others on the phone before we come back to the room.
John, I think was the next one?
Jon Cox – Kepler Cheuvreux
Yes good morning Jon Cox with Kepler Cheuvreux in Zurich. Congratulations on those top-line figures.
They look very impressive indeed. I have a couple of questions for you.
The first one just on cash flow generation, you are talking about a negative geographical mix impacting your cash flow generation. Should we think this will be an ongoing factor i.e., potentially results may actually start to improve next year in terms of profitability and you’ve got the growth, because all of the growth is coming from emerging markets, the free cash flow generation will fill going forward one way as good as it has been in the past or is there a seasonal impact, because obviously you are committing to your €2 billion free cash flow target?
That’s my first question. Just on the second question, you gave the infamous guidance once upon a time just on margin, splitting the world into the Western Europe and CIS, US and emerging.
At that time, you are talking about Western Europe coming down 200 to 250 basis points, whereas CIS and US would come up 100 to 150 and the rest of emerging by 50 to 100, what has changed, because basically, what you are delivering doesn’t look anything like those former targets. Is this the fact that Europe is probably not quite as bad as you expected in terms of the compression on the margin and the rest of the world isn’t so good or are you using the fact that Western Europe isn’t quite as bad to actually spend a lot more in marketing in emerging and CIS than the US to drive this impressive top-line growth?
Thank you.
Pierre-André Terisse
You are welcome. So, interesting questions.
On the negative working capital first, is it going to stay? The answer is, no.
The answer is no because we do expect the negative mix on. We do expect to improve the performance of Western Europe and therefore the mix is going to be playing less against us.
But more importantly, as I told you, we have decided to take specific actions with respect to the working capital of emerging markets and we did not wait in fact for this first half to do that, but for the past two years, we’ve been working on that for instance which we have been bringing from a negative cash flow position to positive cash flow position and then to a negative working capital. But then we still have things to do, but I think, or you would recognize that we have the track record which allows us to be pretty confident in our ability to do it.
This is the case for Russia, but there are other countries as well which gradually as they have grown, have taken more importance and we need perhaps to be a bit more aggressive in the way we manage working capital. I am talking of – I am thinking of Latin America, I am even thinking of the US and we need to be pushing a bit more on that.
So there is no fatality. The sure question is, are you going to sustain the pace of growth of free cash flow which you have seen between 2009 and 2010 where it has been basically almost doubling the answer is, no.
But, working capital is going to keep being a very important tool in the profile of the Group and in the development of the Group and definitely this is not something which is negative, which is going to remain in place in the medium term. On the margins, there is two elements.
I would say that, there is no fundamental change basically, things are going where which is not so surprising. CIS keeps being very robust and in the US we had very strong and probably non-sustainable step-up last year.
And we’ve been clear since the beginning of the year that probably that we’ll need to consolidate at these levels before they can keep going on and this is consistent with the fact that the market is becoming a bit more promotional. So nothing to worry about, the performance is very robust and there remain a growth driver, not only of top-line but of margin medium term, just this year and in particular during the first half, we will be having dynamics which are not the same as last year.
For the rest of the world, as I told you, we have been very much during the first half working at €15 but also actually in the other geographies. The rest of the world for us and the emerging one in particular remains made of many engines which are generating profitable growth.
This is itself an engine which is generating profitable growth and I think you would see during the second half that this is absolutely true looking at multi-half basis. So in other words, you should not draw conclusions from this in terms of ability from the emerging world to generate margins.
The engines are absolutely working very well. As for Europe, we need to improve the situation.
It was certainly improvement in the first half which was not really due to fixing the deleveraging, but more to the fact that the Baby business was particularly strong in the first half. But we will need to attack the Dairy part which is obviously the core of it and the most important part of it.
Jon Cox – Kepler Cheuvreux
Right, very helpful. Thank you
Pierre-André Terisse
Thank you. Next one on the phone and then we’ll go back to the room.
Operator
We will take a question from Pierre Tegner of Natixis. Please go ahead.
Pierre Tegner – Natixis
Good morning everyone. I have a question on working capital requirement as a follow-up to what you said and another one on Aquadrinks.
On working capital requirements, are you referring to a negative mix effect geographically, due to the fact that you have less fresh dairy business in emerging markets i.e., excluding CIS and NORAM? Or are there specific elements that structurally explain the fact that you have working capital requirements less optimized than elsewhere?
And secondly on Aquadrinks, could you remind us what is the weight of Aquadrinks? And could you come back on the rationale of keeping Aquadrinks versus your strategy of healthy foods to the larger number of people?
Thanks.
Pierre-André Terisse
Because Aquadrinks are healthy. I mean, I’ll explain a bit on it.
The working capital and mix, no it's not a factor of their impact. If you look at the working capital in percentage of sales, you will see that it’s very much the same now between Baby, Water and Dairy, there may be one point of difference, but nothing major.
The only one which has a different working capital profile is Medical. So, that’s another question of business, that’s really a question of geography and perhaps it’s a question of priority as well, because when you grow 20%, 15% when you brands develop, when you have new things to address, you focus less on improving your working capital, because you have many, many other things to do.
So, I am not saying that there is no growth and it will be the right time for us to focus on working capital, but maybe as a transitional initiative we need to focus a bit more on these markets which have been growing very fast, which keep growing very fast, but we need to make some changes to allow that this is generating as well more cash and coming back in terms of profile – to the profile we have in Europe. So it’s more a question of geography and profile of growth than a question of business.
Aquadrinks, 30% of our water sales and I was not kidding really when I was saying that it’s healthy. In most case, people buy it, because it does provide at the same time taste, plus the assurance of healthy spring water or mineral water, plus a very low content in sugar.
So of course you could argue with Aquadrinks are containing more sugar than water and therefore that this is best for health, but it’s a relative question. A lot of our consumers are taking Aquadrinks not really to replace water, but because they want to have something more exciting and at the same time they want to drink something which contains less sugar than the alternatives they are facing every day or they are making every day in the stores and this is why Aquadrinks is really at the heart of the health strategy of Danone.
It’s really consistent, it’s because, it provides an opportunity for people to keep drinking nice things, but in a healthier manner that’s – than more traditional soft drinks. I hope I am convincing.
I am fan anyway of drinking that all the time and not too bad, joking.
Pierre Tegner – Natixis
Okay.
Pierre-André Terisse
.
James Targett – Berenberg
It’s James Targett from Berenberg, just a question on – two questions on Europe actually. Just looking at margins first of all.
So you talk about wanted to stabilize, aiming to stabilize margins in Europe next year. I just wanted if you – a lot of that’s coming from cost savings obviously.
If we look at the gross margins in Europe, what sort of timeframe looking at product mix changes and pricing, do you think it can stabilize the gross margins in Europe? And then, secondly on – just on the impact on the extra trading day equal for Europe as well.
Pierre-André Terisse
Sorry, the impact of?
James Targett – Berenberg
The extra trading day in Europe, if you could quantify that, if relevant?
Pierre-André Terisse
Well, I mean, it basically explains first year the progress was from minus 5 in Q1 to minus 3 in Q2. You will have 2 points of improvement and half of that is due to the trading day.
The rest will be organic performance if I may say, I think gross margin-wise, that’s going to take a bit more time than just 2013. We’ll need to have a look at it.
We’ll need to see improvements meaning no increase of the gross margin, but some first result in terms of stabilizing gross margins as soon as next year and then we’ll continue – we’ll need to continue working, but it’s clearly something which is for now. The choice we’ve made is really to first simplify the business, chase costs in terms of overhead organization and at the same time to reposition the portfolio.
Once we’ve done all this – these two things stabilize the portfolio in Europe – sorry- the operating margin in Europe will need as well. That’s very clear to work on the gross margin.
Okay, we'll have to stop. Thank you very, very much for taking the time.
It’s late in the season. For those who go on leave, have a good vacation, especially for the French who take very long ones and for the others good luck and we’ll be back in September.
Thank you.