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spk08: Good afternoon and good morning to everyone. Welcome to the Nestle First Half 2022 results webcast. I am Luca Borlini, head of Nestle's investor relation. Today, I'm joined by our chief executive officer, Mark Schneider, and our chief financial officer, Francois Roger. As usual, Mark will begin with key messages and discuss the full year 2022 guidance. Francois will follow with a review of the First Half 2022 sales and profit figures. We will then open the lines for your questions. Before we begin, please take note of our disclaimer. And now I hand over to Mark.
spk01: Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company. I am pleased to report that our growth momentum increased during the second quarter, and that we reached 8.1% organic sales growth in the first half. Pricing continued to increase, reflecting higher inflation levels for our commodities, energy, and labor. As before, we made a point of acting responsibly in our price increases. Real internal growth remained resilient, and I'm glad to confirm that all three components of organic growth, volume, mix, and price, were positive in the first half. Continued supply chain issues and tough comparables from the second quarter last year brought our real internal growth slightly down from first quarter levels. Demand elasticity is still quite limited and moderate in light of the pricing action we had to take. If you like building stacks to measure growth consistency over time, Our two-year compound annual organic sales growth rate for H1 was 8.1 percent, and the three-year CAGR was 6.3 percent. No small feat. This has been a year of extraordinary supply chain challenges and input cost inflation. The situation was difficult before, but the war in Ukraine brought this to a whole new and unforeseen level, in particular for the food industry. The development of our underlying trading operating profit margin, both at group and at zone or business level, clearly shows that the food industry is not the cause of soaring food prices. It is much rather impacted by geopolitical and macroeconomic circumstances that are outside of our control. That said, we do everything to address these challenges in a responsible manner, always keeping consumers in mind. Francois will show you later in his presentation that we worked hard from all angles to mitigate the unavoidable impact on our underlying trading operating profit margin. I believe we handled the situation well under the circumstances and found a reasonable balance between maintaining growth and protecting the bottom line. Our high single-digit underlying EPS development in the first half bears this out. That balanced approach between growth and profitability will also be our guiding light when it comes to the second half of the year. In a fast-moving environment like this, operating management certainly takes center stage. Having said that, I'm all the more proud that we also saw continued progress with our strategic goals. Regarding portfolio management, we progressed with the acquisition of a majority stake in Orgain and the recently announced transactions to buy Pura Vida in Brazil and the Better Health Company in New Zealand. These transactions help Nestlé Health Science to round out its global presence in the consumer health and vitamins, minerals, and supplements space. Portfolio management for us goes beyond M&A. It includes the effective management of our existing portfolio, in particular through meaningful and relevant innovation, and the prompt fixing of any underperformers. In this context, I'm proud to report that we have stabilized our infant nutrition business in China. Growth in the first half turned positive, and we're starting to see improving market share trends. Outside of portfolio management, we also continue to make progress on other key strategic initiatives, including our sustainability and affordability projects. This brings me to a key challenge at this time of increasing food insecurity, and that is improving access to affordable, high-quality nutrition. The combination of the pandemic and the war in Ukraine has wiped out much of the progress over the past decade in this important area. This is a time when help is needed, and with our longstanding presence in developing countries, we see many opportunities to do good and to do well at the same time. As stressed before, we acted responsibly when it comes to the pricing of our products, but we go beyond responsible pricing alone. We lead the way when it comes to micronutrient fortification and in the important task of establishing and scaling up local and more resilient food supply chains, in particular in sub-Saharan Africa. Our press release provides specific examples of our recent projects. Next, I would like to comment on our updated guidance for the year. As indicated in our Q1 conference call, our start to the year was stronger than expected, and we have only accelerated from there. Based on the strong first half sales performance, we now expect organic sales growth for the full year in the range of 7% to 8%. This points to a strong second half with similar or only slightly lower performance than in H1. Any caution here is due to the geopolitical and macroeconomic concerns, while we are confident of how our products and brands will continue to perform. Our views on the expected underlying trading operating profit margin have not changed materially from the time of our Q1 call. Being cautious about the global macro environment we now expect a full year margin around 17%, which is the low end of our previously guided range. All other expectations for the year remain unchanged. While it is way too early today to discuss 2023 expectations and beyond, I would like to assure everyone that we're not expecting a longer-term reset when it comes to our underlying trading operating profit margin. We still see the margin pressure as transitory, while pricing has to catch up with input cost inflation. As a food company and being committed to responsible pricing, the price adjustment did not work quite as fast as in other consumer goods categories such as personal and household care. Before handing it over to Francois, I would like to make a particular point in recognizing and thanking our associates around the world. As we go through the third year in a row under external crisis conditions, your drive, energy, and perseverance in coping with the situation and making the best of it is a source of pride and inspiration. It is a pleasure and a privilege to lead such a committed team. Thank you. This concludes my prepared remarks. I would now like to hand it over to Francois and look forward to answering your questions later.
spk00: Thank you, Mark, and good morning, good afternoon to all. Let me start with the highlights for the first half of 2022. Organic growth was 8.1%, pricing increased to 6.5%, reflecting significant and unprecedented cost inflation. RIG was resilient at 1.7%. The slowdown versus the prior year reflects a high base of comparison in 2021 and supply chain constraints. Net acquisition increased sales by 1%, largely related to the acquisition of the core brands of the bountiful company as well as Orgain. Foreign exchange had a positive impact on sales growth in the first half. Total reported sales for the six months were 45.6 billion Swiss francs, a 9.2% increase versus last year. This is the highest level seen for more than 15 years. Turning to the distribution of growth between developed and emerging markets, organic growth in developed markets was 6.9% based on increased pricing and positive rig. Growth in emerging markets reached 10% with strong pricing and solid rig. Growth was supported by continued momentum for affordable offerings, particularly in AOA. Turning next to the breakdown of sales by channel, organic growth for retail sales remained robust at 6.7% for the first half. Within retail, e-commerce sales grew by 8.3%, building on 19.2% growth in the first half of 2021. Organic growth in out-of-home channels reached 29.6%, with sales now exceeding 2019 levels. We have continued to address inflationary pressures proactively and responsibly. Pricing has stepped up further and reached 7.7% in the second quarter. We aim at striking the right balance between margin protection and volume growth. The strength of our brands, product differentiation, and leading market position enhances our ability to pass through this pricing. In addition to pricing, we are making full use of other levers such as strategic revenue management, efficiencies, discipline cost management, product mix, as well as portfolio management. For example, in terms of efficiencies, we expect to generate significant savings in 2022 through SKU optimization, recipe and packaging harmonization, as well as the development of new technologies. So far, RIG has remained resilient and we have seen limited evidence of negative elasticity linked to price increases. The two-year RIG average, which has just for COVID-19-related volatility, was 4.1% in the second quarter. This is broadly in line with trends seen over the last several quarters and higher than pre-COVID levels. Volume growth, a key component of RIG, continued to be positive in the first half of 2022 at a level consistent with pre-pandemic times. This volume growth is coming over a high base of comparison last year. Indeed, in the first half of 2021, volume growth was almost four times higher than in previous years at around 5%. We have not seen any material downtrading yet, as mixed as remained positive. Going forward, we may see some negative rig elasticity. Let's now look at the results of our seven operating segments, beginning with zone North America, where we saw 9.6% organic growth. Rig was minus 0.2%, impacted by a high base of comparison in 2021 and supply chain constraints, particularly for Purina pet care and frozen food. Growth was supported by increased pricing, strong momentum in e-commerce, as well as a further recovery of out-of-home channels. The zone saw continued broadband market share gains. By-product category, sales in Purina Pet Care, Nestle Professional, Starbucks out-of-home products, and water grew at a strong double-digit rate. Infant formula recorded double-digit growth, reflecting supply shortages in the market. Baby food also posted strong growth, fueled by new products launches for Gerber, including Soos and Choo, the first edible teasing stick. Frozen food reported low single-digit growth. The zone's underlying trading operating profit margin increased by 30 basis points, excluding the impact of the divestments of Nestle Water's North America brands. The zone's margin development was negative, as pricing did not fully offset significant cost inflation. Shifting to zone Europe, organic growth was 7.1%, driven by increased pricing across most geographies and categories. RIG remained solid at 2.1%, despite a high base of comparison in 2021 and supply chain constraints. Growth was supported by further recovery of out-of-home channels and innovation. The zone continued to see market share gains, particularly in pet food, coffee, and infant nutrition. By product category, the key growth drivers were Purina Pet Care and Nestlé Professional. Sales in water and infant nutrition grew at a double-digit rate. Coffee posted low single-digit growth following a high base of comparison in 2021. Garden gourmet plant-based products saw continued strong double-digit growth, fueled by new product launches. The zone's underlying trading operating profit margin decreased by 140 basis points, impacted by significant inflation, which was not fully offset by pricing and growth leverage. We also remained disciplined on cost control and efficiencies to mitigate the impact of inflation on consumers. Moving now to zone AOA, the zone reported high single-digit organic growth with contribution from all geographies and categories. Growth was driven by increased pricing, further recovery of out-of-home channels, and strong supply chain execution. The zone saw market share gains across categories, particularly in culinary, portion, and ready-to-drink coffee, as well as dairy. By geography, All regions posted positive growth with particular strengths in South Asia, Africa, and Malaysia. By product category, culinary was the largest growth contributor. Coffee and Purina Petcare posted high single-digit growth. Sales in Nestle Professional as well as cocoa and malt beverages grew at a double-digit rate. Infant Nutrition posted mid-single-digit growth with a strong recovery in the second quarter. The zone underlying trading operating profit margin decreased by 90 basis points. Significant cost inflation was not fully offset by pricing and growth leverage. Discipline, cost control, and efficiencies were instrumental in ensuring price competitiveness, particularly for our affordable offerings. Next is zone Latin America, which reported double-digit organic growth. RIG remained strong at 4.2%, building on a high base of comparison in 2021. Growth was broad-based and supported by increased pricing, further recovery of out-of-home channels, and sustained momentum for retail sales. The zone saw market share gains in infant nutrition, pet food, and coffee creamers. By geography, Brazil reported double-digit growth, Mexico grew at a high single-digit rate, Chile, Colombia, and the Plata region also saw strong growth. By product category, confectionery was a key growth contributor, Purina Pet Care, coffee, and Nestle Professional all reported strong double-digit growth. Infant nutrition saw high single-digit growth. Dairy posted mid-single-digit growth, led by fortified meals and dairy culinary solutions. The zone's underlying trading operating profit margin increased by 10 basis points as a result of gross leverage and disciplined cost control and efficiencies. Significant cost inflation was not fully offset by pricing. Turning next to Zone Greater China, organic growth was 2.3%, with a rig of 1.6% impacted by COVID-19-related movement restrictions. Pricing reached 0.7%, turning positive in the second quarter. As a reminder, inflation remains relatively limited in the region. Growth was supported by robust demand in e-commerce channels and continued innovation. infant nutrition returned to positive growth with improving market share trends and was led by a strong recovery in the second quarter for NAN and ILUMA. Categories with high exposure to out-of-home channels and on-the-go conceptions, particularly Nestlé Professional and Ready to Drink Coffee, were impacted by movement restrictions. The zones underlying trading operating profit margin increased by 100 basis points, favorable mix and disciplined cost control more than offset cost inflation. Next is Nespresso, which reported low single-digit growth following 14.6% growth in the first half of 2021. Volume and mix combined are now around 15% ahead of 2019 levels. Growth was supported by continued momentum for the virtual system, a recovery for out-of-home channels and boutiques, as well as innovation. Online sales decreased, following a high base of comparison in 2021, but remained well above pre-pandemic levels. By geography, North America posted double-digit growth with continued market share gains. Europe reported a sales decrease following double-digit growth in 2021. Other regions combined reported high single-digit growth. The underlying trading operating profit margin of Nespresso decreased by 170 basis points, impacted by gross investments behind the rollout of the virtual system and cost inflation. We continue to invest behind virtual, given strong levels of consumer adoptions and the system's differentiation. Finally, let's turn to Nestlé Health Science, The business posted high single-digit growth, building on two consecutive years of double-digit growth. Growth was supported by innovation, geographic expansion, and market share gains. Consumer care posted mid-single-digit growth, with strong contributions from healthy aging products. Vitamins, minerals, and supplements reported low single-digit growth, reflecting a high base of comparison and supply chain constraints. Medical nutrition reported double-digit growth, with strong sales development for pediatric products. Sales for Zenpep grew at a double-digit rate with market share gains. Palforzia saw further patient adoption. By geography, sales in North America grew at a high single-digit rate. Europe saw positive growth, while other regions combined posted double-digit growth. The underlying trading operating profit margin of Nestlé Health Science increased by 20 basis points. Growth leverage and acquisition synergies more than offset cost inflation and growth investments. Let's now look at product categories. Growth was broad-based, supported by increased pricing across all categories and market share gains, particularly in pet food, coffee, and Nestlé Health Science. As a reminder, when looking at growth for the first half, we see consumer demand somewhat normalizing by channel. Categories with greater at-home consumption, such as culinary and dairy, saw softer growth over a high base of comparisons, but sales remained ahead of pre-pandemic levels. By contrast, categories with greater exposure to out-of-home channels and on-the-go consumptions, such as confectionery and water, saw a strong recovery over a low base of comparison. Within powdered and liquid beverages, coffee saw high single-digit growth over a high base of comparison in 2021. All brands contributed positively to growth, with sales of Starbucks and Nescafe ready-to-drink products growing at a double-digit rate. Cocoa and malt beverages reported high single-digit growth, driven by strong demand for Milo in Asia and Africa, Nesquik in North America, and Nescau in Brazil. Pet care reported strong double-digit growth, driven by continued demand for premium and veterinary products. Growth was also supported by sustained e-commerce momentum, innovation, and further market share gains. Nutrition and health science posted 7.8% growth. Infant nutrition saw 8.6% organic growth, with a strong recovery across all geographies, a return to positive growth in China, and improving market share trends. Growth was supported by continued robust demand for HMO products in infant formula, with sales reaching 670 million Swiss francs, as well as by healthy snacking products in baby food. We have already discussed Nestlé Health Science. Prepared dishes and cooking aids saw 2.9% growth, based on strong sales development for ambient culinary in zone AOA and robust demand for DigiOrNo and Hot Pockets in North America. Vegetarian and plant-based food products delivered double-digit growth with particular strengths for garden gourmet. Milk products and ice cream recorded 3.5% growth, building on a high base of comparison in 2021. The key growth drivers were coffee creamers and affordable nutrition offerings, particularly bear brand. Growth in confectionery reached 10.8%, reflecting strong growth for KitKat and seasonal products. Sales in water grew by 17.2%, supported by double-digit growth for international premium brands and a strong recovery in out-of-home channels. Moving now to profit margin by product category. Powdered and liquid beverages saw a margin decrease, reflecting significant cost inflation and gross investment for Nespresso, partially offset by increased pricing and gross leverage. Purina Pet Care posted a margin decrease at significantly higher commodity and distribution costs, more than offset pricing and gross leverage. Nutrition and health science saw a margin increase in both infant nutrition and Nestlé health science. We have already discussed Nestlé health science. In infant nutrition, the margin increased by 380 basis points to 23.5% as a result of pricing, gross leverage, favorable product mix, and improved performance in China. Prepared dishes and culinary products saw a slight margin decrease as pricing did not fully cover significant cost inflation. Margins in milk products and ice cream decreased, impacted by higher cost inflation for ambient dairy. Confectionery and water saw margin improvements as pricing and gross leverage more than offset cost inflation. Next is underlying trading operating profit margin. Overall, our underlying trading operating profit margin for the first half decreased by 50 basis points to 16.9%. Gross margin decreased by 280 basis points to 46%, reflecting time delays between cost inflation and pricing actions similar to what we saw in the second half of 2021. Inflation continued to be significant and broad-based across commodity, packaging, freight, and energy costs. Overall, the impact of cost inflation was around 14% of cost of goods sold in the first half of 2022. Going forward, we will continue to offset increased inflation through pricing, strategic revenue management, efficiencies, and portfolio management. Distribution cost as a percentage of sales decreased by 10 basis points, mainly as a result of the disposal of the Nestle Waters bronze in North America. Marketing, administration, and R&D expenses decreased as a percentage of sales by 220 basis points. we saw a significant benefit from sales growth leverage and disciplined cost control with sales growing by 9.2% and structural costs slightly increasing. Marketing spend decreased temporarily as we limited promotion and marketing activities in the context of supply chain constraints, particularly in Europe and North America. We expect to increase our investment in consumer-facing marketing spend in H2 2022 versus H1 2022. At the same time, we continue to optimize our marketing spend by increasing the share of digital media investment, which now accounts for 54% of total media spend. Moving on to the P&L items from underlying trading operating profit down to net profit, Restructuring expenses and net other trading items increased by 150 basis points, mainly due to impairments. Trading operating profit margin was 14.7%, a decrease of 200 basis points on a reported basis. We recorded lower gains on disposals and higher taxes due to one-off items in the first half of 2021. As a result of these movements, the net profit margin decreased by 270 basis points to 11.5%. Moving to underlying earnings per share, which increased by 8.1% in constant currency and 7.3% on a reported basis to 2.33 Swiss francs. The largest contributor to the improvement was stronger organic growths. Nestlé's share-buy-back program also contributed 1.7% net of finance costs. The line Others, mainly related to income from joint ventures and associates, contributed 2.1%, driven by increased contribution from L'Oréal and Froneri. The negative impact from foreign exchange reflects the currency depreciation of the Euro-denominated L'Oréal income. Pre-cash flow decreased from 2.8 billion Swiss francs to 1.5 billion Swiss francs. Adjusted EBITDA increased by 0.5 billion Swiss francs, or 5.8% reflecting higher sales growth. The group increased inventory levels temporarily due to significant supply chain constraints. In order to meet strong volume demand, particularly for Purina Pet Care and coffee, the group increased capital expenditure. The level of capex should start to normalize from 2023 onwards. Excluding the increase in working capital, cash generated from operations increased from 7.9 billion Swiss francs to 8.8 billion Swiss francs, driven by strong organic growth. Let me now hand over to Luca, who will monitor the Q&A.
spk08: Thank you, Francois. With that, we move to the Q&A session. We open the lines for questions from financial analysts. Please limit yourself to no more than two questions. The first question is from Celine Panutti, AGP Morgan. Please go ahead, Celine.
spk07: Good morning. Good afternoon, Radha. Thank you, Luca. Good afternoon, everyone. So my first question is on the margin guidance. So you decided to change the guide to around 17%. Just want to understand what has changed. You seem to say that nothing has changed, but you changed the guide. So if you could explain the rationale behind this change, like are you guys seeing more COGS inflation for the second half? And you are as well signaling that margin will recover. So my question there is, if effectively we are now past the peak and if there is a weaker coagulation going forward, whether we should expect to see the margin rising. And my second question, which is probably quite related, you mentioned that pricing has not been as fast in your categories as other categories. How much more pricing do you think you need to pass on? And are we going to see further pricing even into 2023? Thank you.
spk01: Celine, let me try and take a stab at both of these first, and then also hand it to Francois for any additional comments. Let me start on the pricing side, because I feel that between the first half of last year, the second half of last year, and the first half of this year, you see the movie playing out pretty clearly. So we had almost no COX inflation in the first half of last year. We're talking about $250 million. Then it really hit us like a freight train in the second half, where all of a sudden that number ballooned to $2.9 billion. And then, of course, we've also seen additional cost inflation in the first half of this year, but that's also when significant pricing then, which accumulated in the second half of last year and continued in the first half of this year, started to kick in, and give us some gross margin relief. Hence, the majority of the gross margin compression really happened in the second half of last year. There's a bit more gross margin compression. So essentially going down from, what is it, 46.9% second half of last year to 46.0% now in the first half of this year. So not very much anymore going on because the continued inflation got balanced by the increasing pricing that was kicking in across the categories and geographies. So from that situation, and assuming that no other shoe will drop going forward, I think we're seeing a momentary stabilization. There's still pricing going on. You see our gross margin is still impacted. It's not in your best interest to pinpoint now exactly which category and which geography is going to see price increases, but clearly some repairing needs to be done because as you see, the close margin is still quite a bit down from what it was at the half-year point last year. So that'll continue to happen in the second half. Obviously, we need to stay flexible because this is a highly volatile situation. Just think back to the February point in time when we had our full-year conference call and we weren't aware yet of the war and all its consequences on energy costs and inflation. And hence, this is why In an environment like this, it's important to really stay agile and flexible when it comes to our expectations. But overall, I believe that we've handled this well. We've taken the pricing we had to. We kept volume growth positive. And now we'll basically start to repair the growth margin and bring things into a more normalized state. When it comes to the margin guidance, I think all we're doing here is – being more precise on something that we had indicated already around the Q1 call. As you remember, in the full-year call in February, when we described this range 17% to 17.5%, we even described it as rather conservative. But then, of course, that whole new situation with the Ukraine war started to unfold, the significant energy cost inflation and also additional commodity and labor inflation kicking in, And so that's why, as part of the Q1 conference call, I had described that margin guidance already as more challenging. And I think now we're being more precise here around the lower end of that range at around 17%.
spk08: Next question is from Bruno Montaigne at Bernstein. Please go ahead, Bruno.
spk09: Hi, good morning or good afternoon. Now, in terms of down trading. On the one hand, you say you don't see much and you don't mix yet, but looking in a few categories like U.S. culinary, milk products, and ice can be sort of see, do see private label increasing and that impacting your market share. So some consumer shifts seems to be happening already. My question to you is really, do you think this is a normal level of down-trading we're seeing, or are you surprised by how little we've seen yet so far? Given the levels of inflation for consumers, wouldn't you expect it to be a lot more down-trading by now based on previous experience? My other question is about Immune. I know you talked about finding out more patient adoption, but going back a little while ago, I think you had the ambition of that being a billion-dollar brand at some point. Are you still fully on track for making Immune or Palforcia as big a brand as you thought one or two years ago, or are things going slower, or will there be less upside? Thank you.
spk01: Thanks, Bruno. And let me talk about the downtrading first. And it's a good thing that you're pointing out U.S. and frozen in particular, because I do think that this is an area where it's really hard to separate now any negative volume development, whether it's due to supply chain constraints or downtrading. U.S. frozen was one of those areas where we had some constraints on supply. You may have seen in the media we had a very unfortunate factory fire for a place that makes some of our products. So that's why it's hard to read the data at this point exactly how much of that is downgrading, how much of that is due to the supply chain constraints. Do bear in mind that frozen tends to be a fairly good alternative from an economic point of view. So there's not much down trading going on there. And that's why I think we need to see the situation unfold a little further to be able to understand it better. So far, again, it's quite limited. Good example is dairy in zone AOA. You mentioned food and frozen in particular is one other area. We've also seen a bit of that in Europe. But here again, reading exactly what the down trading is and what is the exit from the COVID situation where people spend more time at home and cooking more is pretty hard to read. When it comes to a immune. Look, I think the pandemic has taken a lot longer than anyone expected. Also, when we made that move in the September of 2020, we did not expect that a year and a half later we would still see significant restrictions here when it comes to doctor's office visits and so forth. Clearly, the situation has improved now in the spring. It's much easier now for patients to bring their kids to the oligologist for treatment. And so the real actual launch has only just begun. So most of all, what we've done here with our impairment is reflect that delay. And now what we need to see is basically what is the uptake from here. And that'll give us then a better sense of the path over time. And of course, we'll keep you fully posted on the progress.
spk08: Thank you. Next question is from Warren Ackerman at Barclays. Please go ahead, Warren.
spk04: Yeah, good afternoon, Mark. Francois Lucas, Warren here from Barclays. Hope you're doing well. So two from me as well. First one is on the margin again. I think you had a 220-bit benefit from admin and marketing. I was wondering whether you could help us split that out a little bit, just how much was marketing down temporarily due to the supply chain issues? How much do you expect to bounce back in the second half? And then how much is on the admin cost-saving side, just trying to understand that bucket of 220 pips a little bit more. And I guess the main reason for marketing down is on supply chain. You mentioned it just then, Mark, but any update on where we are overall on supply chains, I guess it's not just a frozen issue. It's also pet food and it's a bit more wide, especially in the U.S. that would be super helpful. And then secondly, on China infant formula, I think you were saying, Mark, you were expecting infant formulas to be positive in H2. So the fact we're already positive in Q2, is ahead of schedule, which is obviously good news. Can you explain a little bit what you've done in terms of distribution, SKU rationalization, and how you've got Illuma and NAND back into growth? And perhaps one of your local competitors has been talking about inventory problems and the birth rate in China, whether you can help reassure on that point as well. Thank you.
spk01: Thanks, Warren. Let me start on the second one and also give one quick high-level comment on the first one and then hand it over to Francois. So in China, very pleased that you're right. We are about a quarter ahead of schedule. You mentioned one of the steps we've taken, and that is SKU rationalization. I think we had too many products out there where it was not quite clear how the pricing related to each other, and it caused a confusing situation for the consumer. And then a lot of the work happened over the winter and spring, and that is working with the various channels, and as you know, a fairly complex distribution system in China, to really be sure that at all levels in that distribution system, it is advantageous for our retail partners to work with us and to promote our products. And so a lot was basic blocking and tackling in distribution. I think it helps that our new zone CEO for China has a strong background in sales. And so clearly sales and understanding the sales channel is something that is very near and dear to him. He worked for a long time at this business. As you know, his recent assignment before taking the overall Zone China job was with Tai Tai Lei. So he had been out of the infant nutrition business for a number of years when it turned south. But I think he turned his skills to work really fast on this. We made some pretty significant changes, and I think they're paying off. So I believe that the positive trends here, independent of what some other players were experiencing, would also continue in the second half of this year. When it comes to your question on margin and the marketing and admin spend, just one quick high-level comment on the marketing spend. So it is down, and I think Francois mentioned that in his presentation, and I wanted to assure everyone this is not a new strategy. So this is not like years ago when people were almost competing with each other who has the lower marketing spend, and clearly We branded that at the time very much as misguided and were not part of that game. It is a highly tactical, time-limited move at a time when we saw supply chain constraints, and it's built on the very simple notion that you should not promote what you can sell, because in that case, all you do is aggravate consumers when, in fact, you want to delight consumers. And so that's why Francois was mentioning that in the second half, we foresee that situation to change again. But for the first half... against the specifics of what we saw, the significant inflation, supply chain constraints, I think that tactical move has paid off and is absolutely worthwhile.
spk00: Francois, over to you. Yes, thank you, Mark. Good afternoon, Warren. Just a couple of words on supply chain constraints. I think there are three parts to it. The first one is capacity on our side, given that we have seen a significant increase in demand during the pandemic for some of our products. We have a little bit of capacity constraints, as you know, which is the reason why we are accelerating our CapEx program. This applies more specifically to pet care as well as to a certain extent to coffee. So we have a little bit of tension there. We have some tension as well for some food items in the U.S. The capacity constraints that we have are more specifically in the U.S. but to a lesser extent in Europe as well. The second issue that we have in terms of supply chain constraints is transportation, especially in terms of finding trucks, finding truck drivers as well. So this has been a real issue even for sea freight over the last couple of years. It is normalizing a little bit. We see some signs of improvement, more specifically in the U.S., but it has been really extremely tense over the last couple of quarters. And finally, we still have some difficulties here and there, and it changes over time, to get access to some raw material, packaging material. It can be even a small ingredient. So we are really addressing it and tackling it through an increase, which is quite significant in our inventory, which is something that we are driving. We believe that this is the right thing to do to protect our supply for the coming months, and then we will come back to a more reasonable level of inventory when everything normalizes. Okay, thank you.
spk08: Next question is from Patrick Schwendimann at Zürcher Kantonalbank. Please go ahead, Patrick.
spk03: Thank you, Luca. Good afternoon, Marc and François. There was an increase in the net working capital of 3.1 billion in H1. What is your best guess for the full year? A stable net working capital or still an increase? That's my first question. And second question, milk products, coffee and pet care all had a significant margin decline in H1. Do you expect a margin decline in these three divisions to be less severe in the full year thanks to price increases? Thank you.
spk00: So, Patrick, good afternoon. On networking capital, I mean, we have had a significant increase this first half, but it was the case already last year. This is very much related to what I just said in terms of voluntarily increasing our inventory to protect our supply in the coming months, given the tension that we are seeing. I don't think that – we may see a little bit of a further increase, but the increase has already been quite material, so I don't necessarily expect – a very significant increase going forward. The good news, though, is that we are very careful with that. We have not seen any increase beyond the sales increase in receivables, which is really very good. So especially in the context of increasing interest rates, we are extremely careful not to see receivables increasing beyond the increase in sales. You mentioned some categories like dairy and pet care having their margin declining. The main way to address it will be to continue pricing whenever we can, as well as using some of the other levers that we have activated, such as savings. efficiencies and product mix as well or including portfolio management so we will continue acting for it for these categories as we have done for the other one the for example if you look at pet care and dairy this is with coffee the category where we have seen recently the largest increase in terms of input cost inflation with pet care mainly because of grains so the good sign is that we have seen grain pricing stabilizing or even moving down a And milk products and dairy has increased quite a lot. Coffee, as you know, it's almost 50 percent, 5-0, 50 percent increase over the last year, which is not linked, by the way, to the war in Ukraine. It is essentially linked to climatic conditions in Brazil last year with frost and heavy rains.
spk01: Patrick, let me just build one additional notion here. I mean, obviously, you guys follow sport prices and then It's kind of tempting to assume the next day, if the spot price goes down, there's immediate relief for us. But that's usually not the way it works. Just like on the way up, we got some temporary protection through hedging. On the way down, that also causes a temporary delay when it comes to relief. Because even at the time when the prices were quite high and reaching their peaks, since we didn't know whether they would go further or not, we always kept hedging to some extent, which I think is prudent. And hence, when you think about these day-to-day or week-after-week changes, add a bit of time delay until they really provide relief to our margin.
spk03: Thank you, Marc and François.
spk08: Next question is from John Cox at Kepler. Please go ahead, John.
spk10: Yeah, thanks very much. Good afternoon, guys. John with Kepler Chevro here. Francois, just a point of clarification. Did you say that RIG would head negative or you may see negative RIG on a group basis in the second half of the year? And then just a couple of questions on that down trading issue, because it does look difficult in some of the European markets specifically where you can see the price differential between some of the private label products in your categories is quite large, between 50 and 100 percent. in some cases, I'm just wondering what, you know, what you guys are doing and, you know, you're watching it and I'm just wanting to just give some examples of what you do when you see this sort of stuff, you know, do you act strategically? Do you start building bigger packs, you know, less expensive ingredients, start selling more to Aldi and Lidl and these, and these sort of guys just to get a feel for, you know, how you, how much you guys are in control. If there is a massive shelving and consumer spending in the autumn of some, people think anyway, particularly in Europe. Second thing is really just on the agri commodities and a bit what Patrick was saying. You can see some of these agri commodities rolling over, although on the other side, other costs are going up. I wonder if you guys just have a rough thought already for 2023 on the inflationary pressures, or do you think by that time, you know, with all of the moves you're making, everything will be more or less offset? Or do you still think you'll be price increasing going into 2023. And Mark, my apologies, just the last one. You guys seem incredibly relaxed, and we all know you're a quality investment, and the results speak for themselves, and the lack of margin pressure compared to some of your competitors. But what is worrying you at night at the moment? Because you do seem relatively relaxed about the whole environment. Thank you.
spk00: John, good afternoon. Let me take the question on rig. First of all, the good news is that our rig was positive in H1, both volume and mix, and with levels that we were experiencing for both items at pre-pandemic times, which is rather good news. And once again, on a very high base of comparison. We are doing our best in order to preserve positive rig in H2. And there are some good news there because the base of comparison will be a little bit easier in H2, just in H1 2021. We had a rig of 6.8%, which was incredibly high. And then, once again, I mean, we were positive on that very high base of comparison in H122. The base of comparison last year was more favorable, although still high, at 4.2%. So we have, to a certain extent, a 2.5 percentage points lower base of comparison in H2. So it will depend as well on other factors. I mean, we face other supply chain constraints, for example, in H2. It's still difficult to say. But so we are doing our best in order to preserve our rig into positive territories, both volume and and mix just one word on agricultural commodities for 2023 that's too early at this point in time i mean we are really working very actively to learn properly h2 and the full year we don't necessarily have views because it's highly volatile so we can have some views on through hedging and so forth but still too early to assess what it will be in 2023 there is one item though that we know beyond agricultural commodities, which is salary and wages, we know that there will be a stronger impact in 2023 over and above what we saw in 2022, which was still relatively moderate.
spk01: And, John, just building on Francois' comment, first let me just reiterate the last point. So it's too early to speculate here on commodities or energy prices in 2023, but the labour component, at least when it comes to key economies in Western Europe and North America, I think that's a pretty sure thing that we have to prepare for higher labor cost levels there. And you do that, obviously, also with automation wherever you can and squeezing efficiencies out of the system. But at the end of the day, it may also then result in some pricing at that time. But we'll revisit that as we look at 2023. You mentioned the consumer behavior, and yes, of course, we're watching very diligently how the consumer continues to make do with the situation. And then tactically, you listed some of the items, and those are the ones. I mean, larger pack sizes, special promotions, and really trying to make the cost offering as competitive as possible. Do keep in mind that private label supply chains are feeling the pinch, too, when it comes to... their cost inflation, and also some of them are still experiencing some bounce back problems from the times of COVID. Remember, those private labor supply chains tended to be more exposed and with large players. And so, yes, we've seen some come back, but not quite as much as the price differential would suggest. So that's something we watch actively. And then on your high-level question, let me give you a high-level answer, and that is starting with the onset of COVID. And that's why I'm making such a big deal of the third year under external crisis conditions. You had a situation that is so fast moving on a number of things, the consumer pricing, purchasing preferences, category preferences, and then switching to inflation and supply chain problems that usually a large company's systems are not really set up for that. I mean, we were geared up like everyone else in business, for smoother evolving situations and hence basically three years ago two and a half years ago you had to switch off the autopilot and go into what I call hand steering and that is tiring because you really have to scan all the major data points literally manually outside of normal review systems and budget cycles and what have you and really try to stay as nimble as you can because you don't know which shoe might drop next and so It's these unknown unknowns that keep me most worried, and then how to be ready to recognize them and react as quickly as possible when they do happen. But you're also right when you detected a certain level of being relaxed, because I do think, looking at this first half, we did achieve a very, very good balance and compromise here at a time of significant volatility, and I think we are positioned quite well to bring home a successful 2022 and also positioned well as we look at 23 and beyond. And I hope that came through.
spk08: Thank you. Next question is from John Ennis at Goldman Sachs. Please go ahead, John. Hello, everyone.
spk15: I know it's a very busy day, so I'll stick to one, please, on Nespresso. And again, I appreciate it's just one quarter of negative rig, but do you think that this is driven by less consumption per customer, or are you starting to see... an unwind in Nespresso users or weaker retention rates? And I guess if it's largely consumption per customer, do you think that that's just COVID normalization as people consume more coffee out of home again? Or is there an element of partial down trading there as well? Would be interested to hear your thoughts on Nespresso. Thank you.
spk01: Let me take a first crack and then hand it to Francois. Let me just say that other than a particularly tough quarter last year, with amazing volume. You know, I'm not aware of anything negative here. I think the company is doing very well. I think mixes stayed pretty much at levels that we've seen, so at least there we're not seeing elements of down trading. And clearly, against one of these peak quarters where people were still pretty much tied down at home, it's pretty hard, you know, to show growth over and above that. But let me hand it to Francois for more details.
spk00: John, I can provide you a little bit more color. So last year we had a double-digit growth in H1 of 14.5%, which was extremely high. So if you look at a two-year stack, which probably provides a better idea, Nespresso saw strong growth of 8.6%, which is good. And, you know, even I think a good indicator is where are we against the pre-pandemic level. If you look at Nespresso sales in 2022 in the first half, they are 21% higher on a constant exchange rate versus a pre-pandemic level, which is a 6.6% three-year CAGR. So we don't see really any slowdown. It's just that we had an exceptionally high first semester and second quarter last year. So it's going to normalize, by the way, because the comps are much easier as far as H2 is concerned. So no specific worry and no negative mix, for example, either.
spk08: Thank you. Next question is from Pascal Buhl from Stiefel. Please go ahead, Pascal. Yes, good afternoon.
spk06: Regarding your high single-digit growth in coffees, Can you give us some better sense of the price-volume mix for Nescafe and Starbucks, just also in comparison to Nespresso, where we have seen a negative rate? And then my second question, Chairman Paul Bouquet mentioned in a recent interview that divestitures are not completed yet. What are areas that undergo current devaluation?
spk00: Pascal, let me just take the beginning of the question. So we had attractive growth level in coffee in H1, 6.9%, which there again came over an exceptionally high base of comparison in 2021 because it was 10.7%. If we look there again at the two-year stack, we have a growth which is at 9% in H1, so very high. Encouraging. We had positive contributions from our three main brands, Nescafe, Starbucks, Nespresso. We gained market share across most segments, geographies, and brands. And to be more specific in your question, so pricing stepped up, obviously, almost 6% in H1. But at the same time, RIG remained resilient and was positive, around 1%, over an exceptionally high base of comparison last year, because the RIG last year in H1 was at 12%.
spk01: And Pascal, on your second question regarding divestitures, I think Paul's comment is spot on. I think over the years, you've always seen us do divestitures where we feel that certain parts of the portfolio are no longer a good fit or don't offer great prospects going forward. And I think we've been quite active for a number of years. As you know, for example, 2019 was one of these years where We've seen more divestitures than acquisitions. I'm glad to see the picture swing back to a net positive situation now. But obviously, we will continue to evaluate the entire portfolio. And as I mentioned in my prepared remarks, there are some parts that we actively go and fix because they're incredibly core to us. And there are others over time where we may actually conclude that we're not the best owner going forward. And so that, to me, is part of the ongoing portfolio management and We'll be very diligent in that regard.
spk08: Next question is from Jeremy Fialco at HSBC. Please go ahead, Jeremy.
spk02: Hi there. A couple of questions from me. First of all, is there any way you can estimate what you think the impact of the supply chain constraints was on your volumes during the period? And perhaps one other way of looking at it. Can you tell us what your customer service levels are at the moment relative to where they would be, let's say, in kind of ordinary circumstances? And then the second question is on pricing. Have you generally been pricing up kind of in line with your competitors? Are there any areas where you've, say, priced earlier than your competitors and they haven't followed or potentially the reverse of that? Thanks.
spk01: Jeremy. We'd love to be helpful, but unfortunately, both of these are quite sensitive when it comes to competitive signaling. So on supply chain, yes, of course, we do track by retail partner very, very closely our on-time and full and order flow rates and so forth. But this is not something that we would want to disclose here publicly and publicly. Suffice it to say that these levels are not at the pre-crisis levels. I think that's a fact, not just for us, but also for other key players. And it's simply the consequence of these supply chain issues that everyone feels the minute you visit a supermarket or try to buy something else. So we're working hard on repairing those. As I mentioned, there were a few internal homemade issues as well, like, for example, the fire at our Hot Pockets facility in the U.S. There was, of course, something that was totally unforeseen, act of God, but nonetheless, it supply chain constrained us additionally in that frozen food area this spring, and we're working really fast to repair that, of course, and bring it back into operation. And same for pricing. Again, Obviously, pricing will need to continue to fully catch up. I think the consolidated numbers bear that out, but it would not be in your best interest now that we point out exactly where that happens by geography or category.
spk02: Any examples where you think that you have priced and the competitors haven't followed so far, or nothing that you can point to?
spk01: Unfortunately, that one is also a little bit sensitive, competitively speaking, but Do keep in mind, I mean, people don't always do this at the same time. And so that's why, I mean, obviously, that would be not the right way to handle it. Everyone does their own decisions, and some people do it sooner, others do it later. So, again, I can't be helpful on that. I'm sorry.
spk08: Thanks, Jeremy. Next question is from David Hayes at Societe Generale. Please go ahead, David.
spk14: Thanks, Luca. Good afternoon. So two for me, one on the second half costs and one just to clarify something on the HPC comment you made earlier. So on the second half costs, I think you talked about 14% inflation in COGS first half. Can you give us a number for the second half or certainly whether it's higher or lower given where you are with your lock-ins on input costs, et cetera, for the second half? And then similarly on the marketing costs, I think you said in the presentation that sequentially it will be higher. but will it also be higher year on year in the second half? And then the second question, at the risk of being very ignorant here, but I'll ask anyway, you mentioned it being slower to get pricing in food than HPC. I just wonder what the dynamics are in that. Why is that occurring specifically? Thank you.
spk00: David, let me take the first part of the question. For H2, we expect to have a relatively similar rate increase in terms of input cost inflation as a percentage of our cost of goods, maybe marginally higher, but pretty similar, especially so that we have seen things plateauing and normalizing. As I said earlier, we start seeing a few agricultural commodities pricing going south, but, I mean, on the other hand, we have energy prices moving up, but it starts to plateau to a certain extent, bar any changes in the coming weeks and months. On marketing costs, I mean, we confirm the fact that we expect to spend more in H2 than in H1, I don't want to comment necessarily on last year. It's too early at this stage. So clearly we will raise our investments in marketing in H2 this year over H1.
spk01: And David, on the slower pricing, I think on food it's pretty evident that we're talking about a necessity here, and especially for the food players that do have an extensive presence in emerging markets. Yes, sometimes pricing does make the difference between a consumer going home hungry at night or being able to afford the product. And so affordability and access to food is a key theme. Obviously, with the food players that are more focused on fully developed markets only, in particular North America, you may not see that to the same extent. But even there, of course, at the lower strata of society now, affordability and food insecurity are key issues, and that's something to watch. But so clearly, household care and personal care products are, for the largest part, a bit more dispensable if needed. And hence, you know, the price in there doesn't have the same social implications as for food.
spk08: Thanks, David. Next question is from Tom Sykes at Deutsche Bank. Please go ahead, Tom.
spk12: Yeah, thanks, Luca. Good afternoon, everybody. Firstly, just on the topic of VMS and consumer in health sciences. Could you maybe allude to what the organic growth level is in the Bountiful Company brands that you acquired, please, and particularly in some of the more generic sort of multivitamin areas and whether, I think you alluded to some supply chain constraints there, but do you expect that to be in positive growth organically in the second half of the year? And then just on pet care, you're obviously increasing demand some of the capacity there. Are you allowed to say how much the capacity is going to increase by and what the sort of demand dynamics versus the capacity constraints are there, please?
spk00: Tom, on VMS, we are very excited by the category which offers good opportunities in terms of growth. If we look at our growth in the first half, it was in the low single-digit level. But it follows a very strong growth last year. Actually, it was more than 20% restated on a comparable basis for the bountiful company acquisition. So the fact of growing low single-digit over more than 20% last year, so there again on a two-year stack, that means that we are on a strong double-digit growth. So very happy with that. We had some supply chain constraints, but it was manageable, but it would have helped us probably to go a little bit further. I think that most of them will probably disappear in the second half of 2022.
spk01: And let me just add to that, Tom. I mean, clearly, when we think about the exit here from the COVID pandemic, our initial views last year, when we were thinking about the deal in the spring of 2021, were worse. Okay, so we were pretty much convinced that at some point, there was going to be a negative number as we exit the worst part of the COVID pandemic. So coming out with positive growth, I think is quite an achievement. And our consumer research indicates that people do continue to have a high interest in personal health and boosting the immune system. I think those items continue to be very much high on the agenda of everyone. And so that bodes well for the category.
spk08: Next question is from Jeff Stent at Exxon. Please go ahead, Jeff.
spk11: Thank you and good afternoon. I don't expect you to comment specifically on the sort of Hallyan rumours in the press, but I think it would be helpful if you could maybe just remind us or put some sort of parameters around where your consumer health interest starts and where it ends. Thank you.
spk01: Jeff, could you clarify the question a little bit? I'm not sure exactly where you're headed.
spk11: Okay, sorry. I mean, consumer health, what does that mean for you? You know, what is in your definition of consumer health? And what would you see as being outside your definition of consumer health? If you could just sort of remind us, you know, how you see that playing field, which is obviously an area you've said that you do have interest in. Thank you.
spk01: Happy to do that. And sorry, didn't get it the first time. So look, very clearly, when we say consumer health, we're not talking everything from toothbrushes to sunscreen. We're talking about nutrition-based solutions. And so this is about adding essentially the micronutrients and macronutrients that people may lack due to illness or age or special conditions. and also trying to find nutrition-based solutions to specific health problems. So it is something that gets processed by the digestive system and is related to metabolism. We're not interested in broad-based soup-to-nuts portfolios. I think those are a thing of the past.
spk08: Thank you very much. So next question is now from James Target at Berenberg. Please go ahead, James.
spk13: Hello, good afternoon everyone. You mentioned price elasticity levels are still relatively moderate, but I just wondered if you could comment on any difference you're seeing or expect to see between your retail channel business and out of home, and also between your premium and mainstream portfolio as pricing goes up further. And my second question, just I guess a clarification on the rig outlook for the second half of the year. Do you expect to see any a material benefit from retailer inventory rebuild as your supply chain pressures moderate? Thank you.
spk01: So, James, on out-of-home versus retail, I think one interesting development, in particular in North America but also in Western Europe, is that, of course, out-of-home gets hit not only by all of these commodity increases but also suffers a lot from labor shortages and labor cost increases. And so if eating in has always been the cheaper option compared to eating out. Clearly, that gap continues to widen now. And so clearly, the best way to tighten your belt, financially speaking, is to eat in more. I think that plays into our retail strength. Our out-of-home business, we're seeing, of course, a significant bounce back after the COVID restrictions. But nonetheless, I think eating in and building on that home-based revolution that we talked about in our full-year conference call, that has some runway as people pursue more flexible work styles when it comes to location. Remote working continues to be a key theme for at least part of the work week. And so all of that plays into our hands when it comes to both the food and the coffee offering. Francois?
spk00: Maybe, James, let me complement. The price elasticity, so once again, we have not seen really clear evidence of it today, but it's less a function of channel. It's probably more a function of our position in the market, maybe more a function of the categories where we play as well. So whenever we are clear leaders, like in pet care, in coffee and so forth, we don't really see elasticity. Whenever we have less leading position... Whenever we are in categories, because it is more a function of categories, categories where price sensitiveness is stronger, like dairy, it is a little bit, we may see in the future a little bit more elasticity. But once again, less a function of channel, more a function of categories and leadership position.
spk08: Thanks, James. There was also a question on affordability and premium, maybe Francois.
spk00: On premium, it's traditionally a category where you have limited elasticity, so which should be the case. And even if we look historically in previous crises, I mean... There is little elasticity. The same applies to a certain extent to affordability because these are essential products. So probably where we may see a little bit more elasticity is more in the mainstream segment. You had a question as well on should we benefit from retailers building inventory. Actually, I wonder whether it's not a little bit the opposite that we have seen, for example, in North America recently. But there is no evidence, in my opinion, that... retailers are building inventory, but if they were doing so, we would certainly benefit from it.
spk08: Last question is from Pinar Ergun at Morgan Stanley. Please go ahead, Pinar.
spk05: Thanks very much. Would you expect pricing taken so far to stick, even as input cost prices ease off? And could you please explain what drove the strong 11% pricing in North America? My second question is, can you please share with us your expectations for global food price inflation faced by consumers for the next six to 12 months, and whether that might impact consumer disposable incomes at some point, considering the resilience of demand so far? Thank you.
spk00: Good afternoon. We have no evidence that the pricing that we have put through for the time being will not stick. And as Mark said earlier, we have the intention anyway to go even a little bit further because we have not fully reflected whatever we have received so far. I would say so far anyway, without being specific by category or geography, most of our competitors did follow our pricing, given that we have leading positions. So as a category captain, as a category leader, usually we have taken the initiative. And in the very vast majority of cases, competitors have followed. Mark said it. I mean, it may take a little bit of time. So I don't think that there is any risk of, you know, our pricing put through so far not staying and not sticking. The matter is more, can we do more? We believe that there is probably still space to do a little bit more. On global food inflation, could it hit disposable income? It could, potentially. But I think that if we enter into a recession with further economic and financial constraints for consumers, we are probably in an industry of food which will be hit last. And even if we look at the last example, which is the 2008 crisis, I mean, we continue to grow. We continue to have a positive rate. Where we suffered a little bit more is in mix, because there is always a risk of downtrading, which is something that we are monitoring very closely. And so far, we have not seen clear evidence of it, but once again, something we are monitoring very closely.
spk08: Thanks, Pinar. We come to an end of our session today, so thank you very much for your interest in Nestle. As usual, if you have further questions, don't hesitate to contact the investor relations team.
spk01: Thank you, and we look forward to talking to you in Q3.
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