Danone S.A.

Good day, and thank you for standing by. Welcome to the Danone 2023 Annual Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mathilde Rodi, Head of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for being with us this morning for Danone's 2023 results. I'm here with our CEO, Antoine de Saint-Afrique, and our CFO, Jürgen Esser. We'll first go through some prepared remarks before taking your questions in the second steps. But before we start, I draw your attention to the disclaimer on page 41 related to forward-looking statements and the definition of financial indicators that we'll refer to during the presentation. And with that, let me hand over to Antoine.

Thank you, Mathilde, and good morning, everyone. A warm welcome to our full year 23 conference call. Together with Jurgen, we are delighted to be with you today to share what is a strong set of results. Almost two years after the start of Renew Danone, in a year once again marked by significant external challenges and volatility, we have kept transforming the company at pace and with discipline, making it step by step stronger. And for this, I want to start with a big, big thank you to all Danoners. They made it happen. Now, let's go straight into the results, starting with page three. We close a year of strong growth at plus 7% on a like-for-like basis. As just said, we made good progress on our strategic agenda, and it is starting to yield consistent results. Firstly, it shows with our volume mix dynamic. which is sequentially improving and turned positive in quarter four at plus 0.8% versus last year. Importantly, improving the quality of our growth enables us to connect with a profitable growth algorithm. Better quality growth combined with record productivity on COGS led our margin from operations to increase by 142 basis points in 23. And as we said we would do, we kept addressing some of the competitiveness gaps we had by reinvesting back in our business to the tune of 97 basis points. We stepped up our investment in advertising and promotion, in product superiority, and in capabilities, as you will see later. It is better than it was. But the reinvestment journey to be truly competitive is far from over. And we made sure we do not only reinvest, but also kept improving the quality of our execution in-store, online, on-premise, or wherever the consumer has an opportunity to meet our products. We did all of that while growing our recurring EPS by plus 3.4%. building on a 40 basis point increase in a recurring operating margin, an increase I would certainly not qualify at moderate. Another source of pride for the company is the 2.6 billion euro of free cash flow we generated in 23. Besides being a record level, it is a testimony to our renewed focus on cash and disciplined cash allocation as a driver of long-term value creation. Last on this page, we have just received a AAA rating from CDP for the fifth year in a row. Only 10 out of 21,000 companies got a AAA this year, and even fewer received AAA ratings five years in a row. This is a good illustration that performance and sustainability can feed one another when you take sustainability as a strategic stake. So to summarize, good progress made in 23, a consistent delivery on Renew Danone, and a good set of results. Let me now share with you some concrete example of the progress we made moving to page four. First, as you know, we have been focusing on restoring the fundamentals across the portfolio. starting with our dairy business. Here, we have deeply transformed our portfolios over the past years, first in Norham, then in Europe. We have defined clear swim lanes, we have sharpened our ranges, and clarified the role of each of our brands. We have, until last year, significantly streamlined our SKUs and refocused our innovation, and then reworked the shelves with the retailers. And once the portfolio and the shelves were ready, we started reinvesting. There we see encouraging results. In 23, Noram posted another year of solid growth with resilience of volume mix, led by coffee creamers and Greek yogurts. In Europe, after years of underperformance, the performance is sequentially improving. with a zone ultimately reaching a positive volume mix in quarter four. We are happy with the progress, but we are very clear that this is only the start of our journey toward sustained recovery. So better and more focused portfolios as Derry shows, but also renewed focus on science and on leveraging science with consumer. Our infant formula range is a great illustration of that. We performed well in IMF in 23, and importantly, we delivered competitive growth. By leveraging our science to consistently deliver superior products, and by being uncompromising on perfect execution, we posted good market share gains in IMF across the globe for the year 23. And last but not least, we kept broadening the way we reach out to consumers by further expanding our channel reach. in Away From Home notably, while stepping up occasion-led marketing. Let me give you some examples. Without Pro, we now clearly focus on breakfast and coffee occasion. We partner with leading brands in these fields, like Kellogg's and Ely, and doing so are driving category penetration. In parallel, we kept expanding, as I just said, in the Away From Home channel. Alpro is now in all the big coffee chains in the UK and our premium waters are growing strongly out of home as well. Away from home was the fastest growing channel at Danone in 23, which reflects our focus on enlarging our footprint and strengthening our resilience. So restoring the fundamentals has been and will continue to be a clear focus as there is more mileage we can get out of it. But next to this, we keep adding fuel to a few fires. I'm now moving to page five. Talking about places where we drive accelerated growth, I thought we could highlight three platforms, medical nutrition, coffee creation, and high protein, which are at the same time very different but also very similar in many ways. They all address long-term consumer and patient trends. They are all based on genuine consumer insight, strong product superiority, and differentiating technology. First, let me say a word on medical nutrition. In 23, we grew a high single-digit on a like-for-like basis with both pediatrics and adult ranges contributing. There, we leverage strong brands, leaders in their field. We are differentiated through superior science. Our claims are clear, backed by proprietary science, and at the center of how we engage with healthcare professionals. We're also anticipating the growth of Tumor. We invest in future science and claim. We're also in capacity, like we announced recently in our Opoli and Stanford factories. We also invest in new business models, expanding the journey in post-hospital discharge, as we do in China with the nutrition powder and oral proposition. In our coffee creations, we are building a sizable, profitable, and fast-growing platform in Noram. We grew strong double-digit again in 23 and gained shares with our leading international delight and stock brands. Here as well, we have invested to boost capacity in Jacksonville in the U.S. And for those, and I know many of you who followed the Super Bowl, we had one of the coolest advertising out there featuring Sir Anthony Hopkins. We are starting to do some great advertising again. Last, our high-protein platform is a great illustration of how we become much more disciplined at rolling out and at scaling up our winning proposition. In 23, we launched new formats, new channels, new occasions, and expanded in new countries, as those of you based in the UK could hopefully see everywhere. And the outcome is material, another year of strong double digits and highly competitive growth worldwide. And with these three mixes, and as with many others, there is still a lot we can improve. So we have not yet reached our maximum potential. Moving to page six and speaking of work in progress. We kept methodically addressing our underperforming assets. Starting with my zone, we are confident that we are turning around the business. We didn't only deliver on 23 a very strong growth at plus 14%, but more importantly, our growth was competitive for the first time in a long time. We posted market share gains. All the work done to refocus the range to regain control on distribution, to restage the brand, to refocus on meaningful innovation starts paying off. Indeed, a first good year, but we obviously need to repeat it. We are looking at the 24 high season with ambition to deliver again. In Brazil and Africa, we are progressing on fixing the business models and transforming the portfolio in depth in a very systematic fashion. In Brazil, we discontinued our water business and we licensed out our low-value milk business. In parallel, we focused on value-creating propositions. For instance, we are successfully developing our high-protein platform with Yopro. In Africa, we have been cutting dilutive SKUs, reinforcing our key brands, reshaping our business model, and upgrading our execution. In both cases, the clear priority is to restore profitability step by step. We made our first good step in 23, but we are clear that there is more to do. In our plan based in the US, we see the first benefit of the corrective action we took last year to restore competitiveness reflecting on our market shares. But we are not yet where we want to be. We've reworked our positioning and translated it into another great advertising you might have seen around the Super Bowl. We have further improved our product quality, but also the way we execute with a much clearer focus on key consumption moments and on category penetration. So overall, good progress. Some results already are visible, and obviously, as always, more to do. One thing is clear and probably speaks to the cultural change in the company. We will, as every company does, keep having challenges. This is normal business life. But we now face to them. We go to the bottom of them. We try to address the root cause rather than rush into quick, easy, and often temporary fixes. This is key as we gradually improve the resilience of our model and the consistency of our delivery. Finally, let me conclude this introduction on page 7 on how we have been actively rotating our portfolio over the past two years. As you can see on the left-hand part of the chart, We have exited meaningful parts of our portfolio which didn't fit our strategy and where we didn't see a credible path for value creation within Danone. We signed an agreement to sell Horizon Organic two months ago. We deconsolidated EDP Russia in July last year. We disposed of Michelin and Augustin. We built a value-creative partnership for Argentine waters. In parallel, we've made a few investments, as you can see on the right-hand part of the chart. We acquired an adult medical nutrition business in Poland, specialized in home care services, which is a very dynamic and profitable channel. We invested in several science-based startups that are developing new breakthrough technologies, be it in cell-based dairy or in precision fermentation. We are step-by-step improving the quality of the portfolio with a greater focus on value-adding products, products that are often differentiated through science, or businesses that help us broaden our footprints. be it our geographic footprint or our channel footprint. And there too, this is only the start of the journey. Let me now hand it over to Jürgen for the financial review.

Jürgen, over to you. Thank you, Antoine, and good morning also from my side to all of you. Let's start the financial review with page number nine, looking at the sales performance of the fourth quarter. We closed the year 2023 with another quarter of solid growth, up plus 5.1% like-for-like, led by all our geographies and all our categories. Before delving into each geography in more detail, let me comment on the performance by category, starting with EDP. EDP delivered plus 4.5% like-for-like growth in Q4, led by Europe, where the work done on the transformation of our portfolio starts bearing fruits. but also led by North America, where we posted another resilient quarter of growth. In particular, our key brands like Actimel, YoPro, Oikos, and International Delights all posted double-digit growth this quarter, while Alpro delivered a good performance up mid-single digit in Q4. We are particularly pleased with the quality of the EDP growth in this fourth quarter, as not only price but also volume mix contributed a positive plus 2% to it. Specialized nutrition was up plus 4.7%, driven by a solid performance of IMF, notably in China and Southeast Asia, while medical nutrition delivered another quarter of strong growth, led by both adult nutrition and pediatric specialties across all geographies. And finally, waters. Waters posted plus 8.5% like-for-like growth in the quarter, driven notably by the strong performance of the Avion brand in Europe, MyZone in China, and Bonafont in Mexico, to name a few. Let's move on to the Q4 sales bridge on page number 10. As Anfan mentioned, delivering balanced growth is at the heart of our Renew Danone business model. And for us, it was therefore very important to close this last quarter of the year with positive volume mix concretely up plus 0.8% versus a year ago. At the same moment, the price effect continued to normalize, reaching plus 4.3% in Q4, down from plus 6.6% in Q3 2023. We are hence leaving this last quarter 23 with an encouraging dynamic, something we want to build on as we get into year 2024. Outside of the like-for-like, Forex and others had a negative effect of minus 4.3%, reflecting notably the depreciation of most currencies against the euro. Scope also had a negative impact at minus 5.8%, mainly resulting from the deconsolidation of our EDP business and Waters Argentina businesses. As a result, reported net sales at the end of the period stood at 6.7 billion euros. And I think I said EDP business, but obviously I spoke about EDP Russia. Let's now have a look at the performance of each zone in more detail, starting with Europe on page 11. Europe delivered a solid quarter, with like-for-like sales growth at plus 6%, while pricing continued to normalize progressively, volume mix was back to positive territory, up plus 0.3%. This was largely driven by EDP, where we start to see the expected benefits from the transformation, which we kicked off in the second semester of year 2022. The team has made great progress in upgrading our portfolio, has been discontinuing a number of non-competitive SKUs, defined clear swim lanes for our brands with a focus on segments like functionality, indulgence, kits, and everyday nutrition. In this fourth quarter, we are particularly pleased with the performance of a number of our key brands, including Actimel, Yopro, and the Danone brand. Having said that, we are obviously just at the start of this strategic turnaround, and there remains still a lot to be done to fully leverage the power of our brands and products. Therefore, our focus will remain on executing our brand plans, reinvesting behind our initiatives to make our recent growth dynamics both stronger and sustainable. Our waters category in Europe delivered a strong quarter led by our global brands Evian and Volvic that registered both strong growth coupled with further market share gains, as well as by the good performance of several of our local brands, such as Givitz Drui in Poland or Harrogate in the UK. Finally, specialized nutrition that delivered a solid performance this quarter. IMF posted a resilient performance in a category that remains momentarily soft, while our medical nutrition portfolio posted strong growth, notably different by oral nutrition and anterior tube feeding solutions. All in all, looking at the full year, Europe posted like-for-like sales growth of plus 5.9%. and the recurring operating margin of 11.5% down minus 75 bps versus last year. Important to note that the profit margins in the second semester were as expected, recovering from the low point end of the first semester, despite the fact that we are accelerating our reinvestment efforts. Moving on to North America on page number 12. North America delivered a solid quarter, up plus 3.1% on a like-for-like basis, led by volume mix, up plus 2.8%, while pricing remained positive at plus 0.3%. Growth was led by coffee creations, where our flagship brands International Delight and Stoke registered another quarter of stellar growth, coupled with market share gains. In yogurt, oil cost continued its strong momentum, especially for its high protein propositions, driven by expanded shelf space and sustained high velocities. In plant-based, we launched initiatives to restore our short-term competitiveness with some encouraging signs of the last weeks of 2023, although we are still far from where we want to be. In parallel to those plans, we started taking action to sharpen our proposition in the category, as mentioned by Antoine, which make us confident in the future of this segment. Looking at the full year, North America delivered plus 5.8% like-for-like growth, with positive volume mix at plus 0.2%, recurring operating margins stood at 10.1%, flat versus last year, in a context where we accelerated the reinvestment behind our brands. Moving on to China, North Asia, and Oceania, on page number 13 now. The zone posted strong like-for-like growth of plus 7.4% in Q4, with volume mixed up plus 4.8%. In China, specialized nutrition pursued its competitive momentum. In IMF, Aptamil posted another quarter of solid growth and continued to gain market shares, thanks to our local team that is running a tight control on our inventory and our pricing levels, while the market is still transitioning from old to newly registered recipes. Our medical portfolio registered double-digit growth, proven by both diet nutrition and pediatric specialties. In waters, MyZone delivered another quarter of double-digit growth, led by volumes and market share gains, confirming the progress we are making in turning it around. And outside China, our EDP business in Japan posed another quarter of double-digit growth, led by our functional dairy range, and in particular, by our Activia and Oikos brands. Looking at the full year, 2023 was a strong year for the zone, with like-for-like growth up plus 10.1%, and a stable recurring operating margin at around 30%. Moving on to Latin America on the next page. The zone registered plus 8.1% like-for-like growth in the fourth quarter, mainly driven by price, up plus 9.4%. The performance of the quarter was driven by all geographies and categories. In Mexico, our water brand Bonafont posted high single-digit growth. Next to that, Oikos drove the performance of our dairy portfolio in the country. In Brazil, we progressed on the transformation of our business model towards more value-added parts of the portfolio, deprioritizing less competitive segments and ranges. Growth was driven by the more premium part of the portfolio in here, especially by the UPRO brand, which has been growing steep double digits in this quarter. As a direct result of all the work done in this region, we strongly improved our recurring operating margin in 2023, up plus 247 bps, an encouraging first step towards a profitable business model in Latin America. And finally, on page 15, the rest of the world zone, posted plus 3.5 percent like-for-like growth in Q4. The growth was led by price, up plus 6.4 percent, while the volume mix decreased by minus 2.9 percent. The zone performance was notably driven by the sustained momentum in specialized nutrition, especially in Asia and Middle East. In Indonesia, it's worth mentioning the continuous strong performance of our SGM brand, again, up double digits in Q4, with strong market share gains during the year. And as mentioned by Antoine, we made good progress in strengthening our business model in Africa, building more structural resilience with a focus on stronger and more predictable profits and cash contributions. The good momentum in this region in both specialized nutrition but also in our dairy platform enabled us to improve the profitability in the zone And we closed the year 2023 with a recurring operating margin up plus 155 bps versus last year. Let's now move on to the margin bridge on page number 16. Recurring operating margins stood at 12.6 percent in 2023, an improvement of plus 40 bps versus last year. This strong improvement was firstly driven by our margin from operations, which increased by as much as plus 142 bps compared to 2022 after several years of erosion. It resided from an improved quality of top line growth, as well as from the delivery of a new record level of productivity, enabling us to offset the Cox inflation we continued to experience last year. Leveraging the strong expansion of our margin from operations, we reinvested as much as 97 bps back into our business. We invested, for example, in product superiority and differentiation across the different categories as we strive to offer the best value proposition, either from a quality, taste, benefits, sustainability, or value for money standpoint. However, the bulk of the reinvestment went into A&P to support our brand's visibility and distribution. The new campaigns of Oikos, Stoke, or Silk, which Antoine mentioned, were just launched in the US for the Super Bowl, which are really great illustrations of what is going on here. Moving on to the EPS bridge on slide number 17. Recurring EPS reached €3.54 in 2023, which represents a plus 3.4% increase compared to last year. The main contributor of recurring EPS growth was the operational performance we just went through at plus 8.3%. This strong operational performance was partially offset by a negative scope effect of minus 4.5 percent, mainly resulting from the deconsolidation of our EDP business in Russia. Currency and others had a slightly positive impact, up plus 0.9 percent, and I'm particularly pleased that our continued progress on deleveraging allowed us to largely mitigate the impact of higher interest rates that only had an impact of negative minus 0.4 percent. Moving on to the next page, as Antoine said previously, the focus on cash generation is starting to pay off. In 2023, we registered an all-time record of free cash flow, reaching 2.6 billion euros. It represents more than 500 million of increase compared to last year on the back of a disciplined return-oriented capital allocation coupled with strong improvement in working capital ratios. Our ROIC stood at 9.5%, further improving from the 8.9% of last year. And while we continue to not be satisfied with that level of returns, it shows that we are moving into the right direction with commitment and financial rigor. As a result of the strong financial performance of 2023, we are proposing to our shareholders a dividend of €2.10 per share. which represents a 5% increase compared to last year. And so finally, let's now move on to the next page to discuss about this year, year 2024. The guidance for 2024, which we are issuing today, is fully consistent with the midterm ambition we shared during our CME in March 2022 and is about delivering like-for-like sales growth between 3% and 5%. while improving moderately our recurring operating margin compared to the previous year. 2024 is an important year for us, and we started with confidence in our renewed strategy. We will continue to focus on consistent execution and delivery. In line with our mid-term ambition, we will make it the next milestone to connect with our desired business model, where balanced growth between volume mix and price as well as discipline capital allocation are fundamental for long-term value creation. And with that, let me hand it back to Antoine for the conclusion.

Thank you, Jürgen. And moving straight to page 21, and a chart I thought would be of interest to you. It gives a sense of the magnitude of the transformation we have been going through over the past two years and of the breadth of the topic we started addressing to make Danone future-proofed. I won't go through each and every one of the points, but let me pick a few. On the governance front, we now have a genuinely strong Board of Directors, truly international, with a majority of CEOs or ex-CEOs, bringing us the right balance of support, expertise, and of course, challenge. As mentioned earlier, we have started changing some aspects of the culture of the company, appointing world-leading talent at COMEX, putting long-term value creation at the center of the incentive schemes, changing the ways of working for the data owners. We are implementing a culture of performance, a culture of accountability, a culture where we put the problems on the table, and we sold them together, a culture where we consistently raise the bar and start playing to win. As promised two years ago, we started reinvesting in key capabilities, in science and technology, as you could see with the opening of our cyclist center, which a number of you have visited, in better leveraging our partners and suppliers, to co-develop breakthrough products and technologies. In the progressive upgrade of our industrial network, as you have recently seen with the opening of our plant-based facility in Villecontal, or the investment in our medical nutrition facility in Opoli. And obviously in marketing, with the rebasing of our GNC network, also the strengthening of our category capability. Last, as we discussed in the introduction, we kept evolving our portfolio to make it better positioned to deliver long-term value creation. So quite a bit of progress, but obviously still a lot to do. Moving on now to page 22. You might remember the pages on the screen from our capital market event in March 22. At the time, through these three pages, we did three things. We confronted with the reality in a transparent way. We laid out a clear strategy. And we laid out our new business model. By calling out the winners, the underperformers, and the core, we gave very clear and very differentiated jobs to be done to each and every one in the organization. And we allocated targets. resource and capital more precisely and more efficiently. By calling out four strategic pillars and four capabilities, we provided clarity to everyone. And with clarity comes focus and accountability. And last but not least, we committed to a different business model, one that is conducive of long-term consistent and predictable value creation. We now look for quality growth with a volume mix component, which allows for operating leverage and creates the space for increased investments beyond our brands and our capabilities. All that while improving moderately but consistently our recurring operating margin. And we put value creation and ROIC at the heart of business decisions. The strong set of results we share today, but also the continuous progress over the last quarters, are a direct translation of us consistently delivering on Renew Danone. Let me now move to the final page of this presentation. While a lot has been done, and it shows in the results, there is much more we can do. The Renew Danone journey is far from over, and as said, long-term consistency is the name of the game. As Jurgen just told you, we expect 24 to be another year of progress in line with our mid-term ambition. If 24 is about delivering on the strategic agenda, we start also projecting ourselves beyond 24 in the next chapter of Renewbook. We are getting ready to share with you how we will keep progressing with the same regularity and, may I say, with the same discipline over the long run while further strengthening and future proofing down on. Through that effect, we are happy to invite you to our next capital market event in June, and we will obviously communicate all the details in due course. And with that, let me hand it over to Mathilde for the Q&A. Mathilde, over to you.

Thank you very much. So we are opening the Q&A session with a question from Guillaume Delmasque, UBS.

The first one is on your pricing outlook, because I think negotiations with retailers in Europe are now coming to a close. So I wonder if you could provide a bit of granularity on the price growth you are anticipating for 2024. And in particular, if you expect the implementation of additional price increases, or conversely, if some rollback or maybe step up in promo activities are more likely. And I guess tied to all of this, what kind of level of inflation or potentially deflation are you expecting for your cost of goods sold in 2024? And then my second question is on your reinvestments, because 2023 was the second consecutive year of a marked pickup in reinvestments. From the sound of it, the upward trend will continue in 2024. So my question is, What are the key areas where you're significantly stepping up your efforts? What returns are you already getting on these incremental investments? And I guess, which metric should we be looking at going forward to assess the degree of success of these reinvestments? So any call on that would be helpful. Thank you.

Hey, morning, we'll do a duet with Jürgen on both questions, I'm sure. On pricing, let's be clear. I mean, the first thing is there is no such thing as deflation. I mean, there is disinflation in the market, meaning the increase of prices have moderated, but there is still inflation. I mean, there is inflation on our salary, there is inflation still on a number of raw materials. There is also quite a bit of volatility, some of it linked to geopolitical events. So we expect to have a price component into our growth. Obviously, the price component differs regions by regions because you don't have the same dynamics in each and every of the regions. But we are not in a world of deflation. We are in a world of slowing down inflation. Jürgen, anything?

Maybe two elements. First, good morning, Guillaume. First, inflation, as you saw, came down quarter by quarter exactly as we expected. And we expect inflation to further normalize in 2024. But as Antoine said, there will still be inflation. What is driving inflation is a few elements. It's an element like transport, and everybody talks about what's happening in terms of sea transport. You see oil prices back around $84, $85, which are to be a driver. Antoine was talking about cost of labor, but obviously also the forex is playing a role, especially in emerging markets. And last but not least, let me mention the very high prices today in the market paid for sugar. This is driving inflation also in year 2024, which means, yes, there will be a need to do pricing. It will be much more selective pricing, depending on the category and depending on the region, but pricing will stay positive overall for year 2024.

On your second question on reinvestment, as we said, I mean, we are investing fundamentally in three buckets. We are investing behind the quality of our products. We are investing behind the visibility of our brands. And we are investing behind our capabilities. I think on the first two, the way we look at it is obviously step-by-step-by-step driving product superiority, which is progressively translating into the competitiveness of our mixes in the marketplace. So seeing our step-by-step-by-step progress in our market share performance, and you see some trend of it, but we are not there where I want to be. And the same applies in some ways to advertising. So advertising, we are progressively restoring our ratios of share of voice, share of market. We start much more consistently delivering on or supporting our innovation in the long run. I mean, we had a new story of supporting with a burst of advertising when we launched and then not following up or following through in year two and year three. You've seen something changing in things like YoPro. So internally, we look at product superiority. We look at advertising superiority. We keep tracking, obviously, market share. We keep tracking brand equity. And we are, step by step by step, stepping up both the way we look at innovation, being much more selective. I mean, we reduced our innovation by 30% this year while delivering growth and quality growth. number of launchers, so being much more selective on what we launch so that the return on investment on what we launch is much better. We do the same when it comes to advertising, better qualifying, investing for longer, changing our balance between working and not working. The investment we are making in some capabilities you will see in the longer term. I mean, when you invest structurally into science or to create long-term competitive advantage in medical nutrition, in IMF, that's not something that you do from one day to the other. There are signs that some may track. We publish more. We put more IP on the market. But that's harder to track except for us. So much more discipline, less launches of better quality, rebuilding our competitiveness when it comes to the quantum of our advertising investment, building differentiating capabilities for the long term when it comes to science.

Thank you very much.

Thank you, Guillaume. So the next question from John Cox, Kepler. Hi, John.

Yeah, hi, sorry. I missed your intro. Good morning, guys. Congrats on the figures. A couple of questions for you. Just on the free cash flow, obviously we can't really pass out what the working capital movements were. Can you just talk us through the improvement and whether working capital improvements will be ongoing, i.e., you know, you have negative working capital already, you know, how much further that whole process can go, and maybe talk somewhat about the incentives managers have to ensure that strong cash flow generation continues. And then maybe a second question, just on the capital market event, and it's great you keep going back to, you know, some of the slides we saw a couple of years ago, But clearly, and I think you said last year at that event we had, that you're now growing in line with your categories. You know, should we expect you then to be on the next step of the staircase, as it were, in terms of growth dynamics, and assume that all of that sort of things will be unveiled at the capital market event, namely an increase in that 3% to 5% midterm growth goal, And also, potentially, your margin improvement is going to be more lumpy going forward, given the fact of all the divestments you've done and the reshape of the portfolio. Thank you.

So, let me maybe start with the CME, and Jurgen will take the other two questions. Well, first, we will reveal at the CME what we reveal at the CME, so I'm not going to anticipate on that. I think the important point, John, is one of consistency and discipline. So, it's being able, and that's the model that we have shared with the market. You create lots of value in the long run, by being extraordinarily consistent in the delivery and the quality of your delivery. And making sure that you can repeat again and again and again over the long run that quality and consistency of delivery. So more on that at the CME, but it's a message of consistency, solidity, and predictability over time.

And good morning, John. And on the cash flow, as you say, that's an element of pride going to the next level. In the end, there are three drivers. The first driver is that the cash flow from operating activities has been nicely increasing as a result of the combination of our growth and margin improvement. But as important as that is that capital expenditure remains below 1 billion euros, and we are allocating that capex in a very disciplined, return-oriented manner. A lot of it going into, by the way, capacity expansion Antoine was mentioning before in the US, in Poland, in Turkey on strategic assets. And last but not least, further expanding our working capital, which has been already by the end of last year nicely negative, We have been improving it by another 150 bps with a lot of, I would say, rigorous focus on the different elements. And we believe there are further opportunities here. That's obviously also the result of an enhanced focus of the whole organization on cash flow. And Antoine mentioned that in the prepared remarks that holistic value creation is now on the agenda of all our executives. and so is cash flow, and this is definitely bearing its fruit.

It's a very material part of the incentive of everybody in the organization.

Okay, I wonder if I could just ask, sorry, just back to the CME event. You said at the start of today's event you would not regard 40 basis points as moderate. and obviously your guiding for 2023 is moderate and you came out 10 bids better than the street. This is what I'm looking at in terms of should we expect a few years of potentially more than the so-called moderate margin improvement just because of what you've done with the portfolio reshape and the shift to higher value-added products, or should we expect you to just keep continuing to keep pumping money into A&P and advertising to drive the top-line growth?

Look, John, also here we are staying just consistent with what we said when we were together at the CME in March 2022. We said the period of 2022-2024, what we are going for is 3 to 5 percent like-for-like growth and moderate margin improvement. And this is what we are sticking for also for this year, 2024. It will be composed of further gross margin expansion with a balanced volume mix and price contribution, sustained level of productivity, and reinvestment because we need to continue reinvesting in order to make this dynamic we are living with 2024 to make it truly sustainable. That is very important for us. The 2024 volume makes positive cannot be a one-off. We want now to go into something which is truly sustainable and competitive from a value creation standpoint and reinvestment is important. So yes, we will stick to moderate margin improvement and any good news we will get in during the year we will reinvest into the sustainability of our business.

Thanks very much.

Thank you, John. So next question from Warren Ackerman, Bathley.

Yeah, morning, everybody. Can you hear me okay?

Yeah. Hi, Warren.

Hi, morning. Morning, Antoine. Morning, Jürgen. Yeah, two from me as well. So first one on China. Can you maybe dive into what you're seeing on the ground in China Infraformula Where are we on the entry into ultra premium? Are you kind of behind the plan on Aptamil with the segmentation? And, you know, I know you're increasing investments in the first half. You've got Nutris coming. Can you maybe just update us on what you're seeing in the quarter volume price mix? Have those local Chinese players being kicked out of the market? Are they still there? That would be useful. Maybe any color on that. on enteral clinical as well, where we are on new product registrations under the new regulation, food for special medical purposes would be helpful. And then the second one, just on EDP, maybe one for Juergen, just can we dive into that vol mix number for Q4, that 2%, and maybe help us, if you can, break that down by Europe, US, and LATAM, and maybe... talk about what you're seeing in edp by channel home versus or in home versus out of home and and and and and on plant base it sounds like you're pretty happy without pro um in europe but i didn't hear much comment on silk in the us so yeah one on china one on edp volmix thanks

Okay, well, let me start with China, Warren. Well, obviously, we are happy with the quality as much as the quantity of growth in China. I mean, the business keeps being extremely strong. Although your question is on SN, I'll come back to it in a moment. I mean, the consistent turnaround of what we have also with MyZone is really encouraging. Getting back to... to your question on Essent precisely. We have launched in quarter three Essentis, which is the first additional layer in the premium portfolio. First indications are really encouraging. As you know, is coming rather towards the end of this year. What we see is a couple of things. The first thing is, as we said last time, I think, we got all the registration we were looking for, and we are in a position where we come out with a portfolio which we believe is stronger. The second point that is probably important in China when it comes to IMF, and I think we said it as well, is we still have opportunities of penetration in Tier 3 and in Tier 4 cities. We have opportunities as the new registration is coming to bear with consolidation of the market because some people didn't get their registration. So it's going to be our own infant milk formula, a multi-pronged effort where we drive our innovation. I mean, we drive our penetration and our distribution. We leverage the consolidation of the market. It's not going to be, by the way, a linear journey. You remember that last year, Shanghai was closed, reopened. So we had a very strong start to the year. So there's going to be a bit of normalization there. But the overall direction is very clear. On adults, we keep growing from strength to strength. I mean, we have, as you know, a pharma license there. We are extremely strong in tube feeding. I think what is interesting, and we said it in the prepared remark, is we are working also more and more on the post-hospital discharge with the nutrition powder, with a number of products, in order to further expand the journey. And having actually in China three legs, really, which is the adult medical, the pediatrics, and what we have in IMF. We see that type of profitability is actually helping us further build the resilience of the business. We keep moving in China. We keep strengthening our business in a very methodical way, being very disciplined on what is international, what is local, being very disciplined, by the way, on our inventories level to make sure that we keep a very healthy business.

And maybe a good morning, Boron, just one element to compliment on China. One of the discussions was about margin levels. You saw margin levels remained stable in year 2023. We had a strong investment in the first semester in order to support the transformation of our portfolio in IMF. Second semester, margin bounced back, and I think that's something also which gives us confidence into the Chinese value creation moving forward. When it comes to your question on On EDP, you have the right. We're very pleased with the last quarter on the category performance, 4.5% growth, 2.5% from price, 2% from volume mix. This is almost entirely driven by Europe and North America and the consequence of the reset of the platforms there and the strong reinvestment during the year. In the U.S., particularly coffee creamers, but the Greek platform really continue to outperform the market, and this is an area of pride. We have been very intentionally reinvesting behind it. In Europe, many of the fundamental parameters are going up, and so are volume mix for EDP in Europe. When you look at the share of shelf, when you look at the rotation on the shelf, All of this is contributing to the fact that market shares have been sequentially stabilizing in Europe, and it has been ultimately contributing to the fact that we also – EDP Europe has been contributing to this good picture of the EDP category overall. When you look at it through the lens of channels, you are – we see positive contribution of volume mix across the channels, but you are right to say that on premise has been contributing the most, steep double digits across the geographies, which is true for North America, which is true for Europe, and is a result of the focus of the team on this channel, which offers great opportunities. And this is true for our yogurt platform, but this is also true for our plant-based platform, especially Alpro in Europe, where we have been focusing on that channel. This is definitely paying back as we speak.

Maybe two small additional points to your question on Silk. As I said in the prepared remark, we see the first positive impact of the adjustment and the reinvestment we've made with the stabilization of shares. Is there more to do? Yes, there is more to do, which is why we've relaunched both the advertising platform. We are pivoting towards something that is much more occasion-based and benefits-based. So the journey is on. Our first signs are encouraging, but the journey is not over. I think the other thing, so that you have the whole moving part, is in the rest of the world, actually, we've been extremely sharp in getting back to profitability, cutting what wasn't working. So you remember that in places like Morocco, we moved from 17 brands to below 10. Priority there was not volume mix. Priority there was to restore the integrity of the P&L and step by step by step making it more profitable. So it gives you a bit of a sense of the various moving parts.

Okay, thank you both.

Thank you, Warren. So next question from Pascal Ball, CIFED.

My first question would be on the gross margin. Should we expect in 2024 kind of a step-up increase because you face some tailwinds on the raw mat side, or should we look more for a gradual recovery in 2024 and then also thereafter? And then my second question is, I mean, as a sponsor of the Olympic Games, I think that will be a significant amount you spend on that. What is your expectations that will have an impact on the different divisions and also from a geographical point of view? Thank you.

Hey, Pascal. We'll do a duet on actually probably on both. Let me start with the Olympic Games before we go to the gross margin. Olympic Games obviously is very much centered on France. We are sponsored in France of the Olympic Games. It's being leveraged in other countries through some local agreements, so supporting the local Olympic team. As everything we do, we try to do it with an eye on return on investment. So we do it in a very disciplined way. I think it will help Certainly, I hope this sells in France, and we have quite a bit of vibes in France. We are doing things jointly with other sponsors like Carrefour. It will help the brand equity, and you might have heard of the protein products we developed for the athletes. developed in Saclay, produced in Ferrière, on the table of the 13 million people that will have meals with our products. So, good business altogether, good business for brand equity in France, and an overall positive vibe. Do I expect it to be an absolute game changer in our overall dynamic? No, it's an important building block. It will help our equity. It will help our business in France. It's being done with return on investment in mind. So happy with the way it's being managed. Disciplined, not overdoing it as well. On our gross margin, I'll defer to Jürgen. The name of the game is again step-by-step-by-step progression, driven partly by mix, partly by doing a good, good job in productivity, partly by conveying or translating into price what we cannot absorb through productivity. We are not in a boom-and-burst approach. We are in regular, regular, regular progress.

Yeah, the only element to add on the gross margin, I mean, two years ago, what we said is that the financial algorithm we are aiming for is a balanced volume price mixed growth to drive operating leverage to allow for reinvestment while expanding our margins. And I think 2024, in a way, is exactly on that on that approach. I think a good example of how operating leverage can work on gross margin in 2023 is when you look at our waters division and the margin of the waters category, which have been responding very well on improved volume mix quality, and is exactly what we want to drive in 2024 for the totality of the portfolio.

Okay, thank you, Pascal. So next question from Bruno Montaigne, Bernstein.

Hi, good morning, Antoine and Jürgen. You reiterated the 3% to 5% organic growth for 2024. Now, clearly the level of hyperinflation contribution materially stepped up in quarter four and is nearly 3% and a lot higher than it was when you issued the medium-term guidance. So when you're making that 3% to 5%, There must be an underlying assumption of how much hyperinflation will contribute to that for 2024. Could you just comment on that? Then the second thing is, Juergen, you made it quite clear that, you know, we're talking about the improved cash flow generation and free cash flow generation, big step up in 2023. When I look at your slide 37, this is a very big contribution, about 600, 700 million euros from other components of net income with no cash impact, which seems to be the Russia deconsolidation. If Russia deconsolidating gives you such a big cash balance sheet impact, can you really still claim then that the cash flow generation is up year on year if you sort of take out the funny account or the complex accounting around Russia? Thank you.

Good morning, Bruno. Look, on your last question. What we have been doing on Russia with the deconsolidation in July is to impair the totality of the assets we had in the balance sheet, around 700 million euros. This has obviously zero cash impact, so there's absolutely no connection between the impairment we needed to do on the Russian asset and the great result on cash delivery of 2.6 billion euros. 2.6 billion euros are really the result of three elements, which is the operational delivery through growth and profit margin increase, a capex, which is under very good control, return-oriented, and a very good expansion of our working capital, which is driving this cash flow, and which is a very good base to build on for the years to come. When it comes to hyperinflation, I'm not sure what is the source of the 3% you are quoting, but there are three elements which are important. First, We are accounting for hyperinflation outside of the like-for-like, which is aligned to market practices and is exactly what our peers are doing. But what is more important is that the way we look at value creation moving forward and the way we have been setting the guidance is to look at a good combination between volume mix and price because this is going to drive gross margin and profit margin and ultimately cash, which is the matrix we are looking for. Thank you.

Thank you, Bruno. So next question from Charlie Higgs.

Hey, Antoine. I hope you're both well. I was wondering if you could comment on North America, the performance in Q4, and specifically just the pricing decelerating to 0.3%. What are the moving parts behind that, particularly when you put it in the context of the The North American margin 10.1%. It looks like there's quite a lot of reinvestment in H2. And can you maybe just high level comment on the health that you see of the North American consumer? We've heard quite a few negative messages coming out from peers over the last month or so reporting. Thank you.

Hey Charlie, you probably remember that North America was the first place where we took very steep price increases. The market is much more active. This is where inflation started at a higher level. This is where we took the first price increase. This is also the place where we see the fastest normalization. So, interestingly, what you see is an inflation that is going down in quantum and a makeover growth that is actually shifting from something that was mainly price-driven to something that is much more balanced between volume mix and price, which, frankly speaking, is the right equation, back to what Jürgen was saying a minute ago on the leverage then you can get out of your asset. If you look at the price or the sentiment of the consumer in North America. In some ways, I mean, the first thing is North America is still quite dynamic, actually. There are plenty of things happening there, plenty of things happening in the market, plenty of innovation happening. So it remains a surprisingly resilient and vibrant market. I think the second thing, which is actually not only North American, but that is quite universal, is our consumers are making active trade-offs. So it's the same consumer that will buy an iPhone 15 at a very, very high price and will go on things where they don't see value to the lowest possible price. So the name of the game for us, and that's why we are investing into the brands, that's why we're investing into science, that's why we're investing into innovation, The name of the game is drive the value and uniqueness perception of our mixes. So that whenever they do a trade-off, they do a trade-off because we make a real difference. And this is where, when you're in foods, the quality of your brands, I mean, what it delivers from a perception standpoint, but what it delivers from an experience standpoint, the taste signature, the personal experience, the small trade is giving you, is making a huge difference. So, market is still quite dynamic. Consumers are much more actively trading off between what they like and what they don't like. That is very clear. Quantum of inflation is definitely going down, although they are still a bit of inflation, and because this is where it started the earliest, but slow down the fastest, the make of our growth has changed. But within that context, I mean, the balance, we are happy with it.

Yeah, and I would say when you look at the overall P&L and the algorithm, plus 2.8% volume mixed growth is a very good figure. Obviously, this is also translating into operating leverage, so gross margin is obviously reacting on the very good number. It's not yet translating into margins, underlying margins, because we are investing for growth to set the right platform for 2024. Perfect.

Thank you very much.

Thank you. So next question from Céline Panutti, JP Morgan.

Thank you. Good morning, everyone. Good morning, Antoine and Jürgen. My first question is on the portfolio changes and capital allocation. So, Antoine, you mentioned, I think, in your introduction the progress that has been made in terms of turning around the portfolio, rotating, you said. Are you happy now where you are? And is it more about now investing into new M&A potential? And I think free cash flow was quite good. We see that net debt rate DDA is coming down, and I presume there will be as well the cash inflow from disposals. So could you talk about your priority in terms of capital allocation? And then my second question is on specialized nutrition. There's been quite a volatile quarter by quarter between volume positive, negative, and then pricing. Can you talk about for that division in 24, especially in the light of potential price rollback. Thank you.

Good morning, Céline. I'll take the first one and Jurgen will take the second one. So yes, indeed, we had on the one hand very, very good focus on cash flow and deleveraging the company. On the other, we have been doing a very disciplined job at rotating our assets. Such journeys are never over. So, I mean, we are going now more into just keeping optimizing as we go. I mean, do we have more degree of freedom where we are today? Yes, we have. Could we be a bit more proactive in looking outwards? Yes, we will, keeping in mind and making sure that our leverage remains very healthy, that we have a clear focus on ROIC so that we remain very fiscally responsible.

Yeah, and I think on SN, I believe, when you look at the full year of SN, going around 6%, this positive volume mix, I think it's just another testimony of the strength and resilience of that catch with us. You cannot look at it quarter by quarter because that's the business where you need to look more on the mid-term trend. But when you look at it from a competitive standpoint, we are very pleased. We are winning share across the geographies within IMF in the different markets. Also in medical, where we had another stellar performance this year, Antoine mentioned it in the prepared remarks, growing high single digit. with a very, very positive outlook in front of us. So we are very pleased overall. You see margins also coming back in the second semester of the year, traveling nicely above 20%, which I think can give us confidence in the positive contribution of that category also for 2024.

Thank you, Céline. Next question from David A. Jeffrey.

Hello. Good morning. I didn't hear my name, and apologies. So two questions for me. I apologize. I missed some of this. I missed the beginning of the call. But firstly, on SKU rationalization update, and then secondly, on water regulation compliance. So on the first one, SKU rationalization, just so we can confirm, it feels like the SKU rationalization reconfiguration of portfolio, EDP-wise, is done in Europe and the U.S. It's still ongoing in the fourth quarter. in the rest of the world, and that continues into the beginning of 2024, but is done by, let's say, halfway through this year. Is that a good summary of where the SKU configuration is at this stage? And then the second area on water... regulation compliance. We've seen one of your peers have some issues around their practices with their water offer in France. They've announced today that they're going to have a wide overview of practices on water compliance across other markets. I just wonder whether you have looked at that at all from your perspective that you've done an audit on that area that you feel confident that there's no such risk for you to have to assess how you've been approaching the water production process moving forward. Thank you so much.

Hey, David. On water, I mean, on water, obviously, I want comments on competition. There are very strict regulations. We are very strict control. We are being controlled. So there, I mean, I am not really focusing on that. On the SKU rationalization, we have done the bulk of the work, and now we are getting into just... making sure that we don't grow back SKU, making sure that we just launch and remove SKU, so maintain the right level of discipline. I think we ended the bulk of the work in Europe towards the end of 2003. quite a bit of the work also in the emerging markets. There's probably a bit of a tail in the rest of the world, but the bulk of the work is done. Now it is about getting back into the discipline where we don't re-proliferate. In some ways, I mean, SKU complexities like hairs, I mean, you need to cut them on a regular basis, otherwise they grow naturally.

Thank you very much, and with that, We'll end the Q&A for today. I know some of you have some more questions, but the team and I are available all along the day to answer any other questions you might have today. Thank you very much.

Goodbye. Bye-bye. This concludes today's conference call. Thank you for participating. You may now disconnect.