Chocoladefabriken Lindt & Sprüngli AG

Ladies and gentlemen, welcome to the half-year 2021 results conference call and live webcast. I am Sandra, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing via the relative field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Martin Hug, Chief Financial Officer. Please go ahead, sir.

Ladies and gentlemen, it is my pleasure to welcome you to the Linden Spring Telephone Conference on the occasion of our half-year results 2021. During the presentation, I will provide some additional comments on the charts that were uploaded this morning to our website. and where a transcript of my speech is also available. I will guide you through the slides via webcast. The presentation will take approximately 30 minutes. Following the presentation, I will hand over to the operator who will then manage the question and answer session. The agenda points of the presentation can be seen on this chart and include a detailed review of the first half, an update on the important topic of sustainability, our expectations for the full year for 2022 and in the midterm, and a chance for you to ask questions at the end of the presentation. I would also refer you to the disclaimer at the end of the slide deck. Despite the exceptional and volatile nature of this epidemic, our systems have continued to cope extremely well in the first semester of 2021. You will remember that we decided last year not to fundamentally change our plans, but to continue with our usual advertising investments behind our core brands. This year's first half results are proof that this strategy was the right one and that our brand can rightly be regarded as one of the winners in these difficult times. Over the past 18 months, we have continued to invest in projects that drive efficiency with some tangible benefits already visible. From 2022 onwards, we shall be able to fully leverage these assets. I will now provide the usual detailed review of our results. In summary, the Linton-Springley Group has got off to a strong start in 2021. The organic top line results for the group was very positive with a growth rate of 17.4%. It is fair to say that group sales have almost returned to their pre-COVID growth trajectory. If you compare this year's growth with the first half of 2019, you will see that we grew over the two-year period at a compound annual rate of almost 4%. This exceptional double-digit first-half growth was spread fairly evenly across all three regions, Europe, North America, and the rest of the world. EBIT came in at $138 million, delivering a record first-half EBIT margin of 7.7%. surpassing even 2019's margin of 7.2%. This margin expansion was driven by the sales increase and the positive impact on cost absorption. Net income of 102 million with a net income margin of 5.6%, again a first half record. The tax rate in the first semester was 22%, which by the way is also our full year assumption. Free cash flow reached $228 million in the first six months, an increase of $40 million over first half 2020, coming in at about 13% of total group sales. We had a one-off cash outflow of $43 million from exiting a multi-employer pension scheme in the U.S. Without this one-off payment, we would have delivered an increase of $83 million, roughly equivalent to a 15% free cash flow margin. As expected, we saw a slightly negative impact from CapEx, but are on track to deliver a double-digit free cash flow margin for the full year. Our net debt position, which includes a lease liability of 505 million, increased to 326 million. This is slightly higher than in December 2020, but lower than one year ago when net debt was at 567 million. It is worth stressing at this point that our equity ratio remains strong at 58%, which compares it to 57.2% at the year end 2020. Thanks to the rebound of the business and our healthy top line growth, our balance sheet remains healthy and robust with a strong liquidity position. The total group achieved an exceptionally strong organic sales growth of 17.4% in the first half. This development should be viewed against the following background. The chocolate markets on a worldwide basis have been recovering well and demonstrating very positive momentum. On a global basis, the premium chocolate segment was again clearly outperforming the total market. In all key markets, we continue to gain market share with our core brand franchises, Excellence and Lindor, and with the important Easter business. As above mentioned, we achieved a 4% two-year compound annual organic growth compared to the first half of 2019, which is slightly below our pre-COVID growth rate and below our medium-term target. It should, however, be borne in mind that many of our retail stores were closed during the Easter season and that the global retail business is still lagging 2019. Also our travel retail channel sales are still far from 2019 levels. In the first half of this year, our online business continued to perform very strongly with a high double digit growth. We benefited from the general consumer trend towards online purchasing, but also from our strong strategic focus on this channel over the past three to four years. Our streamlining for growth initiatives are also starting to pay dividends in the U.S., where our three brands, Lindt, Ghirardelli, and Russell Stover, all grew organically at double-digit rates and faster than the market. I will give you some more details later in this presentation. Overall, we are pleased that underlying consumer demand has remained buoyant, and this strong first-half recovery persuades us that future demand for our premium chocolate remains intact. On slide six, we see that Swiss franc growth has typically been negatively impacted by the strengthening of our reporting currency. In the first half of 2021, the negative effect has been smaller than usual with just 0.7 percentage points. Compared to the first half of 2019, sales in Swiss francs are just 2% higher. On slide seven, we see sales in Swiss francs split by market. Please bear in mind that these numbers are shown in Swiss francs. Therefore, the percentages are impacted by currency fluctuations. North America, Germany and France remained our largest markets. Worthy of note within Europe is the UK, at 7.5% of group sales, which has increased its relative size not only compared to the same period last year, plus 70 basis points, but also relative to the first half of 2019. plus 120 basis points. Italy also made a very strong recovery this first half, also suffered the most last year and relative to 2019 is still lagging. The rest of Europe continued its positive trajectory. The rest of the world was the region most impacted by COVID-19 in 2020. At 13.2% of group sales in the first half of 2021, it was able to make a good recovery but was still held back by travel retail. By contrast, we saw a nice rebound in markets such as China, Japan, and Brazil. Details of the drivers of sales growth are shown in the chart on slide 8. The volume went up by 11.2%, and when adding the price-mix effect of 6.2%, we arrive at the organic sales performance of 17.4%. As already highlighted, average annual organic growth over the past two years was roughly 4%, slightly lower our pre-COVID running rate. Important to note, however, is that all this growth was volume driven, while the positive price mix effect this year has merely brought us back to 2019 levels. The positive impact from price mix in the first six months is mainly coming from the channel mix, thanks to the rebound of our global retail channel, as well as lower sales returns and participation in markdowns from supporting the trade sell-through of unsold Easter products. Finally, we had a positive impact from an acquisition in Italy of 0.5%, and as we have already seen, the foreign exchange effect was negative by 0.7%, reaching the 17.2% growth in Swiss francs. We now turn to slide nine, to review the key regional segments. In our biggest region, Europe, organic sales came in at positive 16.4% compared to negative minus 4.9% last half year, representing a very good performance for this region. Europe's two-year CAGR was roughly 5%, identical to the region's growth in the first half of 2019, demonstrating that we have achieved a full post-COVID recovery in Europe. We delivered good growth in all European markets and double-digit growth in important markets such as Germany, UK, Italy, Austria, Russia, Eastern Europe, Netherlands, and Scandinavia. We achieved these results even though in key Eastern markets like the UK, Germany, and Italy, lockdown measures were in place during March and April, and all of these markets suffered from a complete absence of tourists. North America grew by 18.8%, with Lindt US, Ghirardelli and Russell Stover all enjoying a very positive first semester and growing in double digits. Lindt in Canada and in Mexico also grew double digit in the reporting period. The overall region's two-year CAGR was roughly 4.5%, indicating that we still have some upside potential relative to our pre-COVID trajectory. Total chocolate market growth as a whole was very solid in the last 52 weeks with growth of about 6%. The Lindt, Ghirardelli and Russell Stover brands were able to outpace this strong market growth, creating positive momentum and market share gains. The wholesale channel was particularly strong as was the important Chirotelli food service business, which was very positively influenced by the reopening of most restaurants and cafes. The extremely positive performance in e-commerce was an important sales driver, and the online channel is a strategic priority for our business worldwide, and particularly in the US. Furthermore, our own retail business showed a very solid performance in 2021, even though we are still below 2019 levels, and so still have some upside potential. Russell Stover's core business is focused on gifting and sharing, mainly during the important Valentine's Day, Easter, and Christmas seasons. The start to the year was very strong with a good Valentine's and Easter performance. Additionally, we saw good sales momentum with the Russell Stover sugar-free range using stevia extract as a sweetener. Also in the U.S., We have continued to make good progress on various projects to further leverage the Russell Stover acquisition and on our overall streamlining initiatives, mainly in the areas of production, merchandising, logistics, procurement and IT. Bottom line benefits have already started to kick in this year and we expect more from these projects in the coming years, which will in part be reinvested in our brands and future growth. We are extremely pleased with our progress in the US and convinced of our strategy. In the rest of the world segment, we have also grown faster than the market and slightly above group average with 18% compared to a negative minus 18.4 in H1 2020. The rest of the world's two-year organic CAGR of negative minus 2% suggests that the region's recovery is not yet complete. This region was the one most impacted by COVID-19, not least of all because we also report travel retail in the segment. In the first half of this year, travel retail continued to be a drag as the first two months of 2020 were very strong. Otherwise, growth came from all countries within the segment. It is particularly pleasing to see that important new markets such as Japan, China, South Africa and Brazil grew in double digits. Also included in this reporting segment is our distributor business, which accounts for sales to a larger number of third parties who distribute our products within smaller countries. Here, too, we achieved double-digit growth. Given that there are many large traditional chocolate markets within the rest of the world segment receive significant premiumization potential for Lindt. As a result, we remain convinced that this region can achieve double-digit growth in the medium term. In the second half of this year, we expect a slowdown across all three regions in the growth rate of the overall chocolate market as a result of tougher comparisons. We will discuss this later when I present our revised full year guidance. Let's move on now to the important topic of costs. Category by category, we start with material costs. Material costs, which have been adjusted for changes to inventories, came in at 33.1% of sales, 220 basis points lower than in 2020 and more or less in line with previous years. There are three factors behind this overall positive development. one sales-related and two cost-related. As explained earlier, our sales volume increased by 11.2% compared to an overall organic growth of 17.4%, meaning that we achieved a far higher net sales per ton, net sales being the denominator of this calculation. On the negative side, we have seen increases over the last six months in the cost of packaging materials and some raw materials, such as milk and certain tropical oils. On the positive side, and as shown on the next chart, cocoa butter prices have come down over the past 12 months, leading to a positive effect to the overall material cost ratio. Looking forward, we believe that our overall material costs will be slightly higher in 22 compared to 21, also driven by additional sustainability costs over the coming years. On slide 11, I would just like to take a quick dive into our most important commodity, cocoa. As ever, the development of the cocoa market remains uncertain. The outlook depends heavily on the positioning of market speculators who have a disproportionate influence on the cocoa market. The market expects a surplus of around 250,000 tons for the 2020-2021 harvest season, but a small deficit of around 15,000 tons for the 2021-2022 crop. The surplus predicted for the current crop is a key reason why cocoa futures have slightly declined over the past three months. By contrast, the living income differential of $400 per ton implemented by Ghana and Ivory Coast, has continued to push overall costs for cocoa beans from West Africa in the opposite direction. Overall, as can be seen from this chart, cocoa bean future prices in London are currently trading at around 1,630, compared to around 1,700 pounds in March this year. At the same time, cocoa butter ratio has declined to about 2.2 compared to 260 one year ago. This is also one reason why our material expense ratio is lower in 21 compared to 2020. Based on our market expectations and including the living income differential, we assume that cocoa bean prices for 21-22 crop will increase only slightly, while cocoa butter prices in 22 may be slightly below 21 levels. Despite an absolute increase of 36 million, personnel expenses increased at a much lower rate than ZEISS. Consequently, personnel expenses decreased by 200 basis points to a new first half record level, record low cost ratio of 25.5%. A large part of our personnel expenses are fixed costs. And so the increase in the overall sales reversed the diseconomies of scale experienced this time last year. The outsourcing of sales merchandising force in the US was the main factor driving further down the personnel cost ratio to below 2019 levels. However, once the global retail business is again operating normally, we expect personnel costs to increase slightly as a percentage of sales. While global retail has a higher gross margin, it also has disproportionately high personnel expenses. Although operating expenses increased by 56 million, the ratio decreased by 110 basis points, driven down by economies of scale from fixed expenses such as warehousing costs. It should be noted that we continued to increase advertising investments and to invest in our brand across all geographies with the objective of emerging from the pandemic as one of the structural winners. Depreciation and impairments remained in absolute terms at the same level as in the first half of 2019 and 2020, returning to 2019 levels as a percentage of sales. The key driver for the increase of depreciation in recent years has been our CapEx program, aimed primarily at satisfying future volume growth. As a reminder, in line with the new IFRS 16 standard effective from 2019, the reporting of depreciation for right of use assets caused a step change upwards. One of our biggest capital investments relates to the Lind factory in Stratum, New Hampshire, in the US, which is going to absorb planned medium-term increases in volume from gaining market share. As already reported, the slowdown in 2020 due to COVID-19 persuaded us to slightly re-phase overall CapEx in that factory, leading to lower CapEx in 2020 and 2021 than originally planned. I will discuss CAPEX in more detail later. The EBIT figure of 139 million or 7.7% of sales set a new first half record, increasing by 660 basis points compared to the first half of 2020. The increase of more than 120 million is due to the factors discussed at length in the previous slides and the result of strong organic growth leading to a reversal of last year's diseconomies of scale. Net income also reached a new first half record, coming in at 102 million or 5.6% of net sales. Net financial expenses came in at 10.9 million compared to 13.4 million one year ago. This was mainly due to the lower US dollar interest rate and related lower hedging costs for subsidiary financing. The applied tax rate was 22%, which is also in line with our full year outlook. Over the medium term, we consider a tax rate of around 22% to be sustainable, assuming no major changes in tax legislation. Of course, we are also closely following the OECD debate around a minimum 15% tax rate, as well as US tax developments. Capital expenditure in the first half came in at 134 million, just 17 million higher than last year. This is in line with our revised plans, which postponed certain growth-related investments in 2020. We now expect capex to reach around 300 million for the full year. As communicated above, we have been refacing capex where appropriate and now expect to spend around 300 million annually over the coming two to three years. As I take you through the bridge of the main cash relevant developments of the first half, my key message to you is that we are focused on cash generation now more than ever. Indeed, in the period under review, we managed to generate a positive free cash flow of around 230 million, over 40 million more than this time last year. When reviewing our net debt, please also bear in mind that the ongoing impact of IFRS 16 on our lease liability with a negative impact of 505 million. At the end of the first half, net debt reached 326 million, much lower than the 567 million of one year ago, but higher than the 209 million at the end of 2020. The increase in net debt of 117 million was mainly due to the dividend paid out in May to our shareholders, as well as the start of our share buyback program in June 21. In total, we returned 321 million to shareholders in the period. Given today's assumptions, end-of-year net debt should be around 300 million. Before the lease accounting change and on a pure cash basis, we would therefore be targeting a net cash position of around 200 million. That concludes my review of half-year results. Before we discuss our outlook, I should like to review with you our progress on sustainability. Sustainability plays a key role in ensuring our business success. Our history of over 175 years demonstrates that we are a long-term oriented company that continues to deliver exquisitely manufactured, high-quality products. The Linton-Springley Sustainability Plan, our commitment for a better tomorrow, equips us for external developments and helps us to foster successful collaboration within the company. improve the livelihoods of farmers in our countries of origin, contribute to an intact environment and delight our consumers. These four components and the 11 corresponding focus areas form the framework of our plan. Each focus area covers at least one material topic. As identified in our most recent sustainability materiality analysis, and has a corresponding commitment which we report on annually in our sustainability report. Despite the extreme and exceptional nature of the epidemic, we still managed to fulfill and advance important commitments of our sustainability plan in 2020. Since 2008, The Linden Spring Re-Farming Programme has supported decent and sustainable livelihoods for our cocoa farmers and their families, while fostering sustainable agriculture, conserving biodiversity, preventing child labour and improving communities. Today, we are proud to say that all our cocoa beans are now 100% traceable and verified. In addition, We have met sustainable sourcing targets for Turkish hazelnuts, palm oil, soy lecithin and eggs. In fact, our palm oil has been 100% RSPO certified since 2015. We are now working on sourcing all cocoa ingredients and other raw materials and packaging materials through sustainability programs by 2025. Child labour in cocoa farming is a widespread and complex human rights issue that is deeply rooted in poverty and social cultural factors. We are pleased that by the end of last year, all Linten Springlea Farming Programme cocoa bean farms were covered by our child labour monitoring and remediation system. This includes training and awareness raising for farmers as well as monitoring and elimination of child labour. Our aim is that by 2025, we will cover farmers for all cocoa products. Furthermore, we reached key environmental milestones with more than a 20% reduction in greenhouse gas emissions, as well as a 22% decrease in municipal water consumption per ton of production in our factories compared to 2015. Having successfully reduced emissions from our production facility, We decided as a responsible company to tackle climate change on a broader basis. In May 2021, we committed to define science-based targets for our entire value chain with a long-term goal to reach net zero emissions. We aim to publish our targets in 2023. Over the next two years, we will critically assess our emissions, reportings, for scope 1, 2 and 3 to ensure it is in line with the GHG protocol and develop a roadmap for actions. We will regularly report to all stakeholders, including shareholders, on our progress, including potential actions and required investments. Consumer and customer awareness of waste and plastics has increased sharply in recent years. along with NGO and media attention and the proliferation of legislation globally. So, improving how we source and use our packaging material is another essential way to minimize our environmental footprint. We are therefore proud to announce several new sustainable packaging targets. By 2025, we aim to 1. Source 100% of our pulp and paper-based packaging from certified sustainable supply chain. Two, make at least 50% of all our packaging from recycled materials. Three, continuously and proactively challenge our entire packaging portfolio and strive to reduce packaging materials used. Four, eliminate 100% of non-recyclable plastics and reduce total virgin plastic use by 20%. And five, make all our packaging 100% recyclable and reusable. This initiative integrates environmental criteria in the design process of product packaging while maintaining other aspects such as food safety, quality and cost effectiveness. We look forward to introducing excellent and more sustainable packaging solutions over the coming years. The aforementioned achievements and initiatives are just a few of our ESG highlights. For more details, we encourage you to review the 2020 Lincoln Spring Sustainability Report, which is our main communication on ESG performance. In it, we report on the context, management approach, evaluation, and outlook across all focus areas of the sustainability plan. The report is available on the sustainability section of our website, along with details of our sustainability policies and the Linton Spring Reform Program. That concludes my update on sustainability. Let us now look at the group's financial outlook. We are extremely pleased that in the first semester we were able more or less to re-establish group sales onto their pre-COVID growth trajectories. In the medium term, we expect to reap significant top and bottom line benefits from our ongoing streamlining initiatives in the US. At the same time, we will continue to invest in advertising to stimulate growth and in production to satisfy that growth. And as we look further into the future, we see unchanged fundamentals driving demand for our products. As a result, We will continue to focus on our leader products, such as Lindor and Excellence, on premiumization in developed markets and on expansion in growth markets. We see online channels as an additional important growth lever across all products and geographies. As we look towards the second half of the year, we face tougher sales growth comparisons. And the group now expects low double-digit full-year organic sales growth. This represents significantly increased guidance compared to our previous growth forecast of 6% to 8% in March and is justified given that group sales have recovered sooner than we expected. There is no change to our EBIT guidance of 13% to 14%, though our progress this year to date suggests that we shall now land at the upper end of this range. Although we reached record profitability in the first semester, the second half of the year is much more important to our full-year performance. And we need the flexibility to increase investments in advertising and consumer promotions if we see an opportunity to enhance our growth trajectory. Finally, and as mentioned earlier in the presentation, we plan capex of around 300 million and a tax rate of roughly 22%. Of course, everything depends on how the pandemic develops. Currently, the most important assumptions in our 2021 forecast are that overall chocolate market growth will slow to low single digits. There will be no major new COVID-19 waves that require further widespread lockdowns and travel retail gradually causes momentum. The majority of our own retail stores will remain open from now until the end of the year with an ongoing recovery in like for like store sales growth. Our medium term guidance is unchanged, though we are obviously starting from an improved base in 2021. In light of the strong sales recovery this year to date, The group remains confident for 2022 and over the mid to long term in achieving its goal of an organic sales growth between 5 and 7%. In 2022, we continue to expect EBIT margin to recover to around 15%. Thereafter, we expect to deliver an average increase in EBIT margin of 20 to 40 basis points per year. And as mentioned earlier, we expect capital expenditure to remain at around 300 million and see a tax rate of around 22% for the next couple of years. With this, I come to the end of my presentation and hand over to the operator who will manage the question and answer session. Please note that questions that will be asked via the web in writing will be answered by email after the meeting. Thank you.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handset while asking a question. Webcast viewers may submit their questions or comments in writing via the relative field. Anyone with a question may press star and 1 at this time. The first question comes from Patrick Schwendimann from Zürcher Kantonalbank. Please go ahead, sir.

Patrick Schwendimann, Zürcher Kantonalbank. Good morning, Martin. Congrats for the excellent results. I have two questions, if I may. H121 was already 2% ahead of H119 in terms of sales. As a best guess, if the environment doesn't change, would this be a fair assumption to say that H221 could also be slightly above the H219 level? Or is there anything different we should keep in mind? That's my first question. Second question, you are on track for a double-digit organic growth for the full year. Bearing this in mind, the margin outlook seems to be conservative. Is your margin outlook for 21 just a prudent guidance, or is there anything we have to be aware of? Thank you, Martin.

Yeah, thanks for the question. Look, with regards to the growth rate in the second half, we have to bear in mind that we have really fast-growing chocolate markets in the first six months, or actually in the last 12 months. It started roughly in the second half of 2020. Therefore, I really expect to see a slowdown in the chocolate markets, which will impact everybody, you know. We have seen chocolate markets in the U.S. growing between 6% and 8% over the last 12 months. I think this will slow down to low single-digit or even come to a standstill. Therefore, you know, we will have an impact there, I think. We have, of course, benefited a lot from in-home consumption. And, you know, people now in the second half expect them to go out more again to restaurants, et cetera. Therefore, you know, this slowdown in the chocolate markets. I still believe Within the slowdown of the chocolate market, we will outpace the overall market because we see the trend to primarization continuing. Yes, I expect the second half to be slightly higher than the second half of 2019, but just really low single-digit. With regards to the question on the EBIT margin, I don't think it's conservative. You know, we will see in the second half also a relatively slow global retail business. Our stores, you know, lots of our stores, especially in inner city locations, in shopping malls, as well locations that are in touristic areas, they don't see a lot of footfall. Therefore, of course, retail compared to 2019 is still quite slower. And as you also know, retail has a lot of fixed costs. That's why that will still weigh on our profit margin in the second half. That's number one. Number two, as I mentioned, we will, of course, try to continue to invest behind our brands. Also, in the second half, we have a lot of growth potential in the medium to long term. Therefore, I don't think it's conservative. I think we will be at the higher end of 13% to 14%, but I'm not expecting it to be higher than that.

Okay, thanks a lot, Martin. See you on Friday. Thank you.

The next question comes from Jörn Ifet from UBS. Please go ahead, sir.

Hi, Martin. Thanks for taking my questions. The first one would be, please, on your CapEx and capacity plans. When you have a CapEx run rate of around 300 million, is it fair that you're roughly adding 5% additional volume capacity per year? This would be the first question. The second question would be please Russell Stover. What does it really need to bring the brand towards group margins? Would it be, for example, a 30% increase in sales? Would this be a fair assumption? And the third question is, you mentioned that cocoa butter prices in 22 should be somewhat below 21. Is this a statement you're making on spot prices or is this a statement you make on your hedge prices for 22 versus 21? Many thanks.

Yeah, thanks for the questions. You know, with regard to the capex of 300 million, look, I don't think it's just a math to say so and so much more volume because some of the capex is related to, first of all, to non-production, right? Some of it is linked to IT systems. For example, in the next years, we will also upgrade our SAP systems next six to eight years. Some of it is linked to efficiency improvements. So we invest in getting actually more out of our factories in terms of efficiencies, etc. And some of it is pure capacity, so additional lines. So it's really difficult to make this clear statement it's 5% or it's 2% of volume. As you know, our biggest investment in the last couple of years and also in the next two years will be the build-out of the New Hampshire factory and there we will definitely be able to satisfy our volume growth for the next six to seven years once we have finished the build-out of the New Hampshire factory in the US. With regards to the Russell Stover Group Margin, by when will that be on average? For sure, additional sales is one trigger of that and one important one. But then, of course, there are many other areas where we are working on. You know, we have implemented SAP in Russell Store. We have gone live last year, one year ago. So new systems, new processes bring additional efficiency, additional transparency as well. We can have much better access to information, faster access to information. And that ultimately leads also to improved efficiency. So it's really a combination of additional sales plus an improved efficiency through lots of adaptive processes, etc. With regards to 22, cocoa, very difficult to make a prediction on the cocoa markets as such. It depends a lot on the speculators, but also on the production, let's say, in the origins. So my statement about what I expect was more based on what we see here and what relates to our material costs. So we think, you know, based on the current levels and based on what we have done already, we are not expecting material costs to go through the roof next year, despite the fact that actually packaging costs are going up. But we have definitely a positive development on the butter side, which helps. And then, yeah, and we have some negatives as well on some other raw materials. But overall, I'm not expecting material costs overall to be hugely above 21, slightly above 21, but not hugely above 21.

Thanks, Martin. If I may quickly follow up on the cocoa butter. I mean, it's in particular going into premium truffle, which is strongly recovering, US leader. If you see it in your volumes, I saw that with rising demand and more or less unchanged supply, the butter prices could strongly increase again. But yeah, I see your comments. Is there anything else I need to consider regarding additional capacity for butter coming to the market? What are you seeing at the moment?

No, I mean, the butter is actually not right now increasing. You know, there's a lot of demand for powder. And if there's a lot of demand for powder, they press more beans, and that means that somehow there is almost an abundance of butter. That is what has happened in the last six months. Now, it's difficult to say if this will continue, but in a crisis, you oftentimes have companies that use more powder because it's cheaper, and therefore there is an increased demand for powder. So that has happened. That's the reason why the butter ratios have come down, and they are still down right now at roughly 220%. So they've not really increased a lot so far. Yeah, we will see what happens in the next few months. But overall, I'm positive that, you know, we should have a benefit from that side.

Many thanks.

The next question comes from John Cox from Kepler-Chevreux. Please go ahead, sir.

Yeah, morning, Martin. Thanks very much for taking the questions. Yeah, a couple for you. You mentioned Maybe just on the overall market, you mentioned the U.S. may be growing six to eight, you know, slowing down. Just wanted to just give us your outlook or where you think the sort of the rest of the world business is and also where you think the premium part is. Is it just a couple of points above the mainstream market? So just so we can sort of like try and get an understanding of the potential market share gains you have with 17% organic. That's the first question. The second question, Just on your own retail and also travel retail, which obviously is not functioning as it was in 2019, can you tell us where your sales were in H1 just compared to 2019 roughly? I guess travel retail was maybe around 20% of 2019, but your own retail was probably back up to 80%, 85% or something like that. And then just the last question, you know, back on the raw materials, there's a lot of, you know, market chatter about this. You don't seem overly concerned because of, you know, maybe the positives on the cocoa and, you know, the cocoa butter side of the equation. Just wondering on the sort of like logistics, energy and packaging, is that you think, you know, the way things are going, that that will be a double digit, you know, increase, you know, next year? And obviously then that's been offset by the cocoa part of the equation. Thanks very much.

Okay, let me start with your last question on raw materials. So we definitely see a massive inflation, especially on packaging. And, you know, depends a bit still what will happen in the next few months. But definitely on the packaging side, we will probably see close to double-digit increase in costs. We also see a big inflation, especially in the U.S., on labor. It's difficult to find labor, and therefore, of course, costs go up. So we definitely see quite a, let's say, some pressure on the cost side. Yes, let's say in our particular situation, we have an offset to some extent, at least, coming from cocoa butter, and to some extent also, let's say, from cocoa beans, which are still at attractive levels, let's say, compared to the last years. So our main raw material is really not going up massively, right? So that helps a lot, obviously. But still, overall, I'm still expecting overall material expenses to go slightly up. So we may, as our competitors, we may also have to think about price increases, et cetera. I mean, that's still something we are working on. And I'm sure our competitors as well. But there is definitely a lot of cost pressure. I don't want to leave here the impression there is no cost pressure. So there is cost pressure from everywhere with the exception of cocoa, basically, right now. With regards to your second question, yes, global retail was in that ballpark. You mentioned 80% to 85% compared to 2019. And travel retail is down by roughly 70% to 80%. That is also correct. So definitely still some pressure there. And if you look at retail, of course, it depends on the location of the stores. It depends on the country. I think the ones that probably work best are outlet malls, which are, let's say, have outside space where people can walk outside from one store to the next one. And the most difficult ones are, for sure, the ones that are in very touristic locations. And then there are many, many others in the middle, let's say, between those two extremes. And then your first question around market share gains. You know, as you have seen in North America, we have grown around 15 to 17% depending on the subsidiary. And the market has grown around half that. So definitely we have benefited from the market growth, but also from the fact that we have seen quite some nice premiumization happening. So we have definitely gained market share in the U.S., And in North America, you know, 20, 30 basis points or so. And the rest of the world was actually the area where, you know, compared to 2019, we have not seen a full recovery yet. You know, in the rest of the world, we have the entire travel retail. We already talked about that. But we also have two relatively big countries with Japan and Brazil, which are quite retail focused. So they're First of all, it's not part of the market share, so it's difficult to say. Nielsen, it's not captured, so it's difficult to say exactly what that meant for the overall market. But yes, so rest of the world, some gains, but difficult to measure or to see really exactly Nielsen.

Okay. I want to just come back on the price component in the first half, six points. Should we assume a similar level in the second half of the year? I guess that will be the case, just because you can annualize those price increases. And then I guess we will still see some next year, and then you'll take a further decision whether to do a bit more, pending what happens on the raw material side. And as part of that, how difficult are you finding it, talking to the retailers to increase prices, or are they pretty... The fact you've managed to put on six points pretty easily, this is the biggest figure I think in at least a decade when I'm looking back through the file. How easy is it to actually do this with retailers?

It's difficult to do price increases always. Depending on the country, in some countries it's more difficult than in others, but in general it is difficult. Bear in mind that, let's say, a lot of the first half benefit price mix is coming from the mix as well, where we have lost last time massively because of the channel mix, right? More retail has recovered versus 20, so that's a big important part of the price mix. So it's not necessarily pure price increases. Let's say if you look at the full year, where we are guiding for low double-digit growth, about half of that, so 50% of the of the growth rate will be coming from price mix, I think, right now. So if the growth rate was 10%, price mix would be around 5% and volume around 5% for the full year. That's currently the estimate. And then for next year, I think if you talk about price increases, you have different ways of doing price increases. You can really increase the list price to the retailer or you can change your promotional price, you can change your promotional mix, you can change The volume on deal, you have different ways of doing that, right? So the goal is really to increase the average price. You don't necessarily need to do list price increases to do that. But list price increases are in general difficult. I think it's a bit easier in this environment, which is very inflationary and lots of other consumer goods companies are also increasing prices. So it may be slightly easier. What definitely is easier for us as a premium player that a price increase is more accepted by the consumers. because it's more difficult to exchange a lint product against another brand. I think that's definitely an advantage, the acceptance by the consumer.

And so the price component there would be maybe three or four points, something like that?

Next year.

Add this year, this year.

No, this year, so far, year to date, it's really low single digit. The majority of the positive impact is coming from mix. I'm expecting the price increase this year to be relatively a small one. And for the full year also.

And then into next year, maybe that price component will be a bit more yet. Yeah. Okay. Great. Thanks very much. Well done on the figures. Great, great set of figures.

Thank you. The next question comes from Harry Hall from Bernstein. Please go ahead.

Hey, good morning. Thanks for taking my questions. So you said that you can continue to increase advertising and brand investments during pandemic so that you could sort of emerge as a structural winner. So what's actually a long-term payoff of this if you're leaving your longer-term guidance unchanged? And then my second question is, you obviously had a great performance in e-commerce. How do you see this evolving as the rest of your channels like own stores and travel retail open up?

Sorry, I didn't understand the second question. Can you repeat it, please?

Sorry, so You've obviously done really well in e-commerce, but how do you see this evolving as the rest of your channels open up, like travel retail and the owned stores? Do you think that this is going to have an impact on e-commerce, or do you think it can kind of continue its current trajectory?

Okay, so let me start with the long-term payoff of advertising. I mean, that's always a good question, right? Because It's obviously more difficult to measure one-to-one the impact of, let's say, $1 spent in advertising compared to $1 spent in promotion. It's more difficult to measure that. But let's say for you as an investor, I think to grow 5% to 7% in the medium term, it's very important to spend a certain amount of money behind our brands, of course. You have seen in 2020 where we did kind of a counter-cyclical thing where we have it up advertising while starters probably put on a break. I think we see now the impact of that. So we also believe that if we were able, for example, in the second half, thanks to efficiencies, et cetera, to have it up on advertising investment, you know, to hopefully be, you know, not at 5% growth, but at six or six and a half in the future. Do you know what I mean? So let's say if you're saying five to seven, there's still a relatively wide bracket of two percentage points. So obviously we are trying not to be at 5%, but higher than that. So the idea is really that, to accelerate. And so that's really the payoff. And then on e-commerce, again, I would say here, travel retail, probably not a big impact. On retail, it depends a bit. Again, I would say in touristic locations or also factory outlet malls or general outlet malls, not such a massive impact depending on the location. Sometimes you can, of course, have an impact, let's say, in your normal grocery channel, right? If you are on Tesco.com with Lindt and somebody buys you on Tesco.com, you may lose that sale to some extent at least in wholesale. But if you look in the general itself, right, in the brick and mortar. But if you look at the UK numbers, and UK is the country with the highest e-commerce percent, let's say in Europe, in our business, and I think in general in food, if you look at our performance in the UK, you know, it proves actually that e-commerce is for us rather an accelerated than the country in terms of the growth trajectory, right? Because in the UK, despite the fact that over the last five years the consumers are buying more and more online, Our numbers still look very good, you know, market share numbers, our sales numbers, you know, we have grown double digit over the last years in this environment. So I actually think it's not slowing us down for sure. To what extent it accelerates our overall numbers, you know, I could not give you the exact answer to that. But I personally think it's rather positive than neutral, for sure not negative.

The next question comes from Pascal Bohl from Stiefel. Please go ahead.

Yes. Good morning, everyone. Hi, Martin. I have two questions relating to the margin. First of all, concerning the U.S. business, the margin was heavily impacted by the restructuring the last few years. Now with the progress in the restructuring and with the high sales growth, should we expect there a significant improvement for the full year? And secondly, looking a little beyond 2021, now you start with the high growth from a higher base in terms of sales, and you still confirm the 15% EBIT margin. Should we expect there an update soon due to operating leverage and other effects?

So first question, US margin. Yes, we have seen that year to date we are roughly at a profit margin of zero, so we are more or less breakeven there. I expect for the full year to be at around 10% in North America, EBIT margin. So definitely getting into a positive momentum, you know, I think the streamlining for growth initiatives that we launched two years ago are definitely paying dividends, plus all the Good work, I think, that the local teams do in terms of streamlining the supply chain, streamlining the merchandising force, streamlining IT, streamlining procurement. We have currently a project in the U.S. where we look at all our costs, really, and we negotiate contracts, et cetera. So a lot of really good work is being done locally. That leads us to this around 10% EBIT margin in North America in 2021, full year. Then for future EBIT margin, no, I'm not expecting to give sooner higher guidance than 15% for next year. As I mentioned earlier, I think we would rather accelerate, try to accelerate growth, try to accelerate even advertising, consumer promotion, and really try to invest in the long term rather than showing a higher EBIT margin.

Thank you. Very clear.

Next question comes from James Target from Bloomberg. Please go ahead, sir.

Hi. Good morning, Martin. A couple questions from me. Firstly, just on the margins, you've talked about accelerating advertising expenditure, a marketing expenditure a couple of times. Could you give us some indication of the size of the increases that we're seeing year on year? Maybe in terms of percentage of sales, we get an idea of just how big this increase is. has been and might be expected to be going forward. And also you mentioned the restructuring efficiencies in the U.S. and the annual 10% U.S. margin target, but how much of that is coming now do you expect to come from the efficiency savings? And then just a quick follow-up on the chocolate market growth. I wonder if you could just give us a figure for what you think the European chocolate market was growing today. in H1 and if you expect to see the similar slowdown as in the U.S. in H2. Thank you.

Yes. Look, we don't publish numbers with regards to advertising, so I can unfortunately not answer your first question. We don't give out these numbers. With regards to the chocolate market growth, I expect for the second half of Europe to also be, let's say, flat to low single digits, similar to the U.S., So we definitely expect a slowdown for the second half as well as for next year. So very similar picture in North America as in Europe for that.

And in terms of the US cost efficiencies?

Yes, look, at the end of the day, it's a combination, right? A lot is also leverage, right? Operating leverage, but let's say for the efficiencies, and we also said that, you know, we did Two years ago, we announced these initiatives of a restructuring cost of about $80 million, and then we said the payback is about five years. So it means that about $15.15 million per year is coming from those efficiency projects. So that would be roughly, against the original base, would be roughly 100 basis points per year.

Okay, so there's no change in that expectation?

No, no change.

And if I could just come back on the brand investments, I know you don't give the essential sales or the absolute level, but is there anything you can tell us about in terms of the magnitude of the increase year on year?

No, really on this one, on many things we give guidance on numbers, but on advertising I can unfortunately not tell you. Okay, thank you. Thanks.

Thanks. As a reminder, if you wish to register for a question, please press star and 1. The next question comes from Jean-Philippe Berchi from Fontobel. Please go ahead, sir.

Good morning, Martine. The first one is to come back on the pricing. You were saying it was like low single digits. How does it compare to your competitor? And a similar question related to pricing. Are you not benefiting as you have like a high proportion of cocoa butter versus your competitors with palm oil. The second one will be on ESG. Nice to see your increased efforts. And the question is, how much are you investing towards 2025 in order to reach those targets? And the last one will be three in one. Basically, if you can give us a feedback on your launch of your Halo Vegan in Germany. How is baking developing? I think it was still positive versus very strong companies. And last but not least, China, where you had, I think, your first tea vegetating. What is the feedback on that one? Thanks a lot.

Okay. Look, pricing of competitors, I mean, sometimes, of course... You can read that Hershey or whoever has increased prices and oftentimes this article they refer to list price increases, so if you then go one level lower and you check, in Nielsen for example, usually the overall price impact is less than what let's say is announced in advance because oftentimes then they are spent back some promotions and things like that. Competitors overall look very similar to us in 2021. I'm expecting an acceleration of this. So I'm expecting definitely, in general, food companies to increase prices in the next six to nine months. So I definitely expect a higher number going forward. Also, not only this price increase, but really implemented price increase. Cocoa butter, yes. To some extent, we are benefiting there more than others, for sure, because palm oil or coconut oil has actually increased a lot in price. So I cannot speak for the others, of course, but if you have less cocoa butter in your recipe but more palm oil, for sure, your cost of goods will increase by more than what I mentioned in our case. And now, of course, this can quickly change and cocoa butter may also go up. I mean, we have been lucky from that side. And I'm expecting it to go back up at some point in time again. So definitely would agree with you that we are benefiting there more than others. Sustainability costs overall for the next five to ten years, you know, it's probably going to be overall somewhere between two and two and a half percent of sales overall, right? Not in one go, but little by little increasing to a number like that by 2030. We still, and a lot of that is actually coming from the greenhouse gas initiative and those net zero targets, right? And because we are working on that in the next two years and we publish in 23 what the goal is, it's very difficult to exactly know over what period this will build up and how the roadmap will look like and how quickly the costs will kick in. But I'm expecting something like that in the next 10 years to come our way, right? Somewhere between two and two and a half percent of sales. sustainability overall then another question was vegan around vegan that's going well so far you know it was a relatively small range of products in the bars area you know chocolate bars and it has gone well we are looking at extending that range because there was really a very good answer from consumers mainly in germany so far but i think look i i think it's also in the future going to be kind of a niche market for sure but a niche market which I think makes sense to try to explore and to test, right? So we definitely are working on that. Then I think another question from your side was baking. If I understood it correctly, you had a question on baking. Baking was fantastic last year. You know, everybody in the US, because our baking business is especially big in the US, I mean, lots of people staying at home, baking at home. So the demand for baking chocolate went up a lot, plus 30% or so. But if you look at the current Nielsen data, the baking market is really going down, the same that it went up last year. So we are basically back to where we were in 2019 with regards to the market. So it was really just a temporary increase, which we also expected. So definitely down in baking in Ghirardelli this year because of that. But still on a good trajectory overall, you know, if you look at the long-term run rate. And then China, yes. I mean, China, we have had advertising not on TV, but in just online digital advertising. And that's going well, you know. I mean, we have seen a very positive momentum in China. Actually, also last year, our business in China has almost been unfazed by COVID. So we've always been able to grow double-digit. despite the fact that, especially in the beginning of 2020, the virus hit quite hard in China. So really happy with the business in China and the performance there.

Thank you. Mr. Hu, so far there are no more questions from the phone.

So no more questions. So thanks a lot to everybody. Yes, it was a pleasure to present to those numbers, as you have seen. I think we have had a very good first half. Now we are all focused on the second half, of course, to try to make this forecast happen. I wish you all a wonderful day and a very nice rest of the summer. Thanks a lot.

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