Chocoladefabriken Lindt & Sprüngli AG (LISN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Martin Hug, Chief Financial Officer. Please go ahead, sir.

Ladies and gentlemen, it is my pleasure to welcome you to the Lindt & Sprungli Half Year Results Conference Call and Webcast. The presentation and transcript of my prepared comments will be uploaded to our website this morning. The presentation will take approximately 15 to 20 minutes. Following the presentation, I will hand over to the operator, who will then manage the question-and-answer session. The agenda points of the presentation can be seen on this chart and include a detailed review of the first half, an update on the key topic of sustainability, our expectations for the full year and the medium and to long term and a chance for you to ask questions. I would also like to refer you to the disclaimer at the end of this slide deck. Despite an exceptionally difficult global operating environment, with sharply rising costs and the need to implement above-average price increases, Lindt & Sprungli was able to continue its post-pandemic recovery. Over the past years, we have continued to invest in projects that drive efficiency, especially in North America, but also Europe and rest of world. And we can see the benefits of this work. Overall, we are pleased with our progress and are optimistic about our future prospects. I will now take you through a detailed review of these results, starting with the overview of our business performance. Before I begin, those of you who are new to Lindt & Sprungli should bear in mind the seasonal and gift-oriented nature of our premium chocolate business, which is skewed to the second half of the year. However, it is important to remember that first half sales absorb roughly half of our annual fixed costs. As a result, both sales and profitability are always lower in the first half than in the second half. That said, the Lindt & Sprungli Group has made an excellent start to the year. Organic sales in the first 6 months achieved a very positive growth rate of 10.1%. EBIT came in at CHF 255 million, delivering a record first half EBIT margin of 12.2%. This margin expansion was driven primarily by the successful implementation of price increases while still benefiting from longer-term hedges in material costs. Net income was CHF 205 million with a net income margin of 9.8%, again, a first half record. Free cash flow reached CHF 137 million in the first 6 months, a decrease of CHF 67 million over the first half of 2022. The key driver of this decrease was a deliberate decision to increase the inventories in cocoa beans in order to safeguard business continuity and higher CapEx to prepare for future volume growth. Our net debt position, which includes a lease liability of around CHF 415 million, increased to CHF 939 million. This higher -- this is higher than a year ago, when net debt was CHF 667 million. The driver of this net debt increase was our CHF 1 billion share buyback program, which started in August last year and currently stands at CHF 490 million of repurchased shares. It will be completed by mid-2024. Total net sales reached CHF 2.086 billion in H1, which means that for the first time, we achieved net sales of more than CHF 2 billion in the first half. First half sales grew by 10.1% organically despite a tough comparison of plus 12.3% in the same period last year and plus 17.4% growth in 2021. Over the last 2 years, growth in our Global Retail business and also in Travel Retail was disproportionately strong in the first half, driven by the catch-up effect post COVID. Our streamlining for growth initiatives are also continuing to pay dividends in the U.S. where our 2 brands, Lindt and Ghirardelli, both grew organically at double-digit rates. Overall, we are pleased that underlying consumer demand has remained strong despite the price increases we implemented. As we are in time of high inflation and most stakeholders are interested in the net price increases implemented, we are showing you this chart split by price increases on the 1 side and the combination of volume and mix separately. Price increases were at plus 9.3% and much higher than usual. Due to much higher input costs, pricing actions had to be taken in all markets. Volume was slightly negative, offset by a positive mix, resulting in a volume mix impact of plus 0.8%. Positive channel mix impact was primarily driven by the rebound of our own Global Retail channel and the Travel Retail channel. From a product viewpoint, we saw strong results in seasonal and gifting occasions including Lindor. In general, we are seeing consumers trading up towards these occasions, which have a stronger price per kilo and enhance our mix. Reported sales growth was once again negatively impacted by the strengthening of the Swiss franc and also the closing of our presence in Russia. Reported sales in Swiss francs rose by 4.7%. On the following slide, I would like to give you an overview of the sales performance by segment. In our biggest region, Europe, organic sales increased by 8.9%, representing an excellent performance. We delivered positive growth in all European markets and double-digit growth in important markets such as Italy, the U.K., Switzerland, Spain, Eastern Europe and the Benelux region. North America grew by 11.2% with Lindt in the U.S. and Canada and Ghirardelli, all enjoying a very positive first half, growing double digit. Russell Stover also made positive progress in line with expectations. In the U.S., we continue to make solid progress on the various projects aimed at further leveraging the Russell Stover business and on our overall streamlining for growth initiatives. These areas include production, merchandising, logistics, procurement and IT. Bottom line benefits had already started over the last 2 years, and this has continued into the first half of this year. We expect more benefit to come from these projects in the second half and over the coming years. As explained previously, part of the efficiency savings will be reinvested back into our brands to encourage future growth. In the Rest of the World segment, we also grew above the group average with plus 7.1%. In the first half of this year, Travel Retail recovered strongly while our retail stores in the region performed very well, leading to double-digit growth in the markets like Japan and Brazil. There are many large traditional chocolate markets within the Rest of the World segment, where we see significant premiumization potential for Lindt. As a result, we are convinced that we can maintain double-digit growth in the region over the medium term. Let's move on now to the important topic of costs category by category. We will start with material costs. Material costs, which have been adjusted for changes to inventories, came in at 30% of sales, 150 basis points lower than in 2022. One key reason for the improvement of this cost ratio are our price increases of plus 9.3%, meaning that we achieved a far higher net sales per ton. We still had strong hedges in cocoa and other raw materials in the first half of the year. However, we are anticipating higher costs in the second half. Looking forward, we estimate that our total material costs will be slightly higher in 2023 compared to 2022, driven by packaging and certain raw materials such as cocoa, milk and sugar. We expect cost inflation to continue into 2024, mainly driven by cocoa and sugar. I would just like to take a quick dive into our most important commodity, cocoa. Prices for futures -- for cocoa futures in London are trading at their highest level in nearly 4 decades, a still relatively strong demand, combined with a global shortfall in production and the risk of bad weather in Ivory Coast and Ghana are the key drivers of the high cocoa prices. Cocoa futures prices in New York and London have surged by more than 30% this year, also driven by speculators with very long positions. At the same time, the cocoa butter ratio has remained more or less flat in the last 12 months. Most players in the chocolate industry hedge cocoa for 6 to 12 months. In other words, for most players, the impact of the very steep cocoa future prices increases will only kick in from the second half of 2023. Despite the absolute increase of CHF 9 million personnel expenses increased at a lower rate than sales, leading to a cost ratio decreased by 60 basis points. A large part of our personnel expenses is fixed. So the sharp rebound in overall sales has reversed to this economies of scale experienced in 2020, as we predicted at the time. Operating expenses increased by CHF 21 million and the ratio decreased by 30 basis points, driven by lower logistics costs in percent to revenue. Those improvements are coming from various efficiency projects in the area of logistics, especially in North America. Secondly, in line with our high-growth strategy, we continue to increase advertising investments and to invest in our brands across all geographies. At CHF 255 million and 12.2% of sales, EBIT set a new first half record increasing by 290 basis points compared to the first half of 2022. The increase of CHF 70 million is primarily the result of strong organic growth, leading to positive economies of scale and an improved EBIT margin. At the same time, we were able to increase prices to offset 2023 steep cost increases in the area of raw materials and packaging materials. First half EBIT margin improved mainly in the segments of Europe and North America. Net income also reached a new first half record coming in at CHF 205 million or 9.8% of net sales. Lower net financial expenses helped coming in at CHF 4.6 million compared to CHF 7.8 million 1 year ago. This was mainly due to higher interest rates on deposits and no negative interest rates in Switzerland. The tax rate in the first half was 18.3%, which is below our midterm guidance, driven by higher half year profits in locations with tax rates below the group average. We are currently analyzing the impact of the 15% minimum taxation, which was accepted by the Swiss public vote in June 2023. Therefore, it is too early to give a tax rate forecast for the full year 2023. However, we expect 2023 to be an exceptional year and below 20%. I would like to take you through the bridge of the main cash-relevant developments of the first half. In the period under review, we managed to generate a positive free cash flow of around CHF 140 million, which was about CHF 60 million lesser than this time last year. In the face of challenging -- of a challenging and unpredictable crop situation in West Africa, we decided to build up our cocoa bean inventories more than in recent years, leading to an additional cash outflow. Capital expenditure came in at CHF 148 million in the first half, CHF 27 million higher than last year. This is in line with our revised plans, which postponed certain growth-related investments from 2022 -- from 2020. We continued the share buyback as planned, and together with regular dividend payments, we have returned around CHF 560 million to our shareholders. At the end of the first half, net debt reached CHF 939 million. When assessing our net debt, please also bear in mind the ongoing impact of IFRS 16 on our lease liability with a negative impact of around CHF 415 million. On a pure cash basis, net debt would be around CHF 500 million. Sustainability plays a key role in ensuring our business success. Lindt & Sprungli has been around for over 175 years now, which demonstrates that we are a long-term-oriented company, continuing to deliver exquisitely manufactured high-quality products. The Lindt & Sprungli sustainability plan is our pathway to becoming more sustainable along our entire value chain, demonstrating our commitment for a better tomorrow. This strategy addresses the sustainability issues that are impacted most through our business activities, both from a risk and opportunity perspective. I'm pleased to be able to share that we have continued to make progress against our commitments across the plan. We are proud of the remarkable progress we have achieved over the past few years. As you can see from the slide, there are a number of key achievements across 2022 and 2023, and I would briefly like to talk you through some of them. Last year, we started sourcing cocoa powder through sustainability programs. We are now sourcing 67% of our cocoa, including beans and butter through sustainability programs. With this, our farming program has massively increased in size and now benefiting over 112,000 farmers. As part of our engagement to tackle the root causes of child labor in the cocoa supply chain, we committed CHF 1.25 million to the Child Learning and Education Facility in Ivory Coast. Beyond cocoa, we also addressed Child labor as part of our dedication to respecting human rights. Last year, our Board of Directors approved a new group-wide Human Rights policy, which formalizes our commitment to respecting human rights and establishes a commitment to conduct due diligence. One of our greatest achievements so far in 2023 must be the publication of our new deforestation policy just a few weeks ago. As a consumer goods company, sourcing agricultural ingredients, we recognize our role and responsibility in addressing commodity-led deforestation in the landscapes we source from. Through our deforestation policy, we set our Lindt & Sprungli aspiration and approach in addressing deforestation in supply chains. Tackling deforestation will also be key for achieving our science-based climate targets by 2030 and 2050. We have also made further progress on our commitment to define science-based climate targets. We have submitted our climate targets to the science-based targets initiative, and we'll announce the verified targets before the end of the year. With this commitment and our decarbonization road map, we are contributing to the collective goal of limiting global warming to 1.5 degrees. These are only a few of many great achievements across 2022 and 2023 so far. For more information, I welcome and encourage you to read the 2022 Sustainability Report. It was prepared with reference to the GRI Standards. More information on the Farming program is additionally available on the dedicated website. As I have already mentioned, we had an excellent start to 2023 with a recovery of our Easter business and continued strong growth of our core brands, mainly Lindor. From a channel perspective, Global Retail and Travel Retail both experienced strong double-digit growth rates due to the post COVID catch-up effect. For the second half, we still expect a strong performance. However, we shall face some headwinds in some areas. For example, Global Retail will face a much tougher comparison as it laps the strong results of 2022. Nonetheless, given a faster-than-expected recovery in the first half, we are raising our organic growth guidance to 7% to 9% for full year 2023, versus previous guidance in March of 6% to 8%. As we also reached record levels of profitability in the first semester, we have increased our EBIT margin guidance to 30 to 50 basis points from our 20 to 40 basis points guidance in March of this year. The second half of the year is much more important to our full year profit performance, and we expect significant cost pressures that were not present in the first half coming from raw materials such as cocoa and sugar and also some packaging materials. As mentioned earlier, we plan capital expenditure of around CHF 250 million to CHF 300 million. Also, we are currently analyzing the impact of the 15% minimum taxation, which was accepted by the Swiss public vote in June 2023. Therefore, it's too early to give a tax rate forecast for the full year 2023, but we expect it to be below 20%. Our medium-term guidance is unchanged. The group remains confident for 2024 and over the mid- to long term in achieving its goal of an organic sales growth between 6% and 8%. In 2024 and thereafter, we expect to deliver an average annual increase in EBIT margin of 20 to 40 basis points. For the next few years, annual CapEx should be around the CHF 250 million to CHF 300 million level, while the tax rate will increase to about 23% to 25% in the medium term. Thank you for listening to my presentation and I will now hand over to the operator, who will manage the question-and-answer session. We ask you to limit yourself to a maximum of 3 questions, so everyone can participate. Please note that written questions asked via the web will be answered by e-mail after the webcast.

[Operator Instructions] The first question is from Jörn Iffert from UBS.

Martin, I would have 2 to 3 questions. We'll take them one-by-one, if okay. The first question would be, please, on the overall cost basket for 2024 and the expectations of the chocolate industry price increases. Shall we expect a similar level in 2024 versus 2023 in terms of industry chocolate price increases, because lower cost support coming from a packaging or energy? How do you think about this for '24? That will be the first question, please.

Yes. Hi, Jörn. Great to take one-by-one, so it will be easier for me. So I don't have to remember 3 or 4 questions. Yes, I expect it to be a bit lower based on today's costs, right? I mean, it can change, of course. Cocoa could go much further up. I mean, you've seen a 30% increase over 6 or 7 months. And if this increases another 30%, then my answer will be different, obviously. But if the cocoa bean price and the sugar price stays where it is today, and if all the other important materials such as milk and packaging remain at the same level as they are today, I would expect a slightly lower price increase need across the chocolate industry than what we have seen in 2023, but there will still be cost pressure. And most likely, most or all players in the chocolate industry will feel this cost pressure and will, therefore, most likely feel a need to adjust pricing.

The second question would be, please, on the volume slowdown. Can you split volume versus mix? Would be great.

Sure. So volume was slightly negative. As you know, I think it's important to bear in mind that in the current environment where you see this straight up towards more expensive products within the seasonal range or also towards Pralinés, like mono Pralinés, like Lindor. I think it's important to always look at volume and mix combined. So if you look at the overall market, if you look at wholesale deals or IRI market, actually, the market overall is down by about between 2% and 2.5%. Lindt in wholesale is down by minus 1.5-ish percent on volume. If you just look at volume and wholesale and sell-out data. I think, that's the most important data to look at. And that varies obviously country-by-country. But overall, we are somewhere in this neighborhood between minus 1% and minus 2% and mix is quite positive, driven by channel, but also driven by the product mix where we see the shift. I mean, the seasons really, especially Easter did really well.

Thanks, Martin. And the last question, Martin, you mentioned it a little bit the premiumization. I mean the chocolate market volumes never have been so weak, I think, in the last 20 or 30 years given the price elasticity. But then, we still observe accelerating premiumization, consumer trading up for some product categories. How do you explain this for Lindt?

Look, I think, our strategy was clearly in the last 2, 3 years, even during COVID, to really invest behind our brands. And I think that was critical that we have not stopped during COVID. We have not kind of only protected EBIT, but we have really thought long term. We have continued to invest in strategically important markets. And I think, we can now see the dividends of that. And because of our efficiency projects that we implemented also especially in North America, where we gained significant tailwinds with regards to the EBIT margin, and obviously, some of this which we were also able to invest. So I think it's a combination, right, that during COVID, we continued to invest over the last 3 years, over 5 years, we invested heavily behind our brands. And we worked behind the scenes on increasing also efficiency. So that also enabled us to even invest more. So for me, that's the key reason why actually we have still been able to grow or to see this uplift towards more premium within our portfolio. And yes, but we are not immune to price increase at the same time, of course. I mean, I think, there's basically no brand out there that is not -- that is completely immune to price increase. So we have also seen a certain slowdown in the first half with regards to volume as the whole chocolate market has seen. The good news is that we have seen this straight up towards the more expensive products. So the price mix is positive, which for me is a very good indicator. Sorry, the volume mix is positive. The volume mix is positive, which is a very good indicator.

The next question is from Jean-Philippe Bertschy from Vontobel.

The first 1 is around retail. If you can share with us the sales compared to pre-COVID levels in own Retail and in Travel Retail? That will be the first one. And the second one is 2 markets. The first one, Italy. I do have like 15% growth following 20% last year, more or less. What's happening there? What is really the game changer versus pre-COVID? And on the other side, once again, Russell Stover which is, again, a bit suffering probably with very weak growth. How do you see that and this related to Jörn's question on premiumization? It looks like midterm, the prospects for Russell Stover are not so positive.

Let's start with Russell Stover. I mean, I'm quite positive on Russell Stover. I always say and always have said, Russell Stover will grow somewhere in the low to mid-single digits, right? And that's where we are as well this year in the first half. So we are exactly where we said we will be. Last year, we grew double digit. We always said that's exceptional. So we are in line with expectations and with our business plan. So I think that's positive news. In terms of Italy, what is the game changer we have had, we have done a lot of work there. Also in the background in the last 2, 3 years, we have actually merged the organization of Caffarel with Lindt, that's now 1 Italian organization. So we are tackling there the kind of the traditional trade jointly, which gives really good momentum to do that together. We also acquired our -- it is small retail organization there, right, is the Lindt Stores. So we're managing retailer on our own now in Italy. That also gave a boost. So the combination of all that plus, of course, the investments, similar to what I said to Jörn, the investments behind our brands over the last years gives an acceleration within our wholesale channel in Italy as well, which is mainly Lindt there, less so Caffarel. Caffarel is more in the traditional trade. So it's the combination of those things. And then, whereas own retail and Travel Retail, at the end of this year, we expect own retail to be above 2019 slightly, probably around 5% above 2019 levels, just store -- same store, right, versus same stores. I mean, we have some additional stores also. So taking those ones out, just store comparable store growth. And Travel Retail will still be below 2019 actually, by about, I would say, around 10% below 2019.

Next question is from Patrik Schwendimann from Zurcher Kantonalbank.

Patrik Schwendimann from Zurcher Kantonalbank. Martin, congrats for the excellent results. I also do my questions one-by-one. I do have 3 questions. Firstly, there was a record margin achieved in H1 in Europe, up by 470 basis points to 17.2%. Is this a sustainable margin for future H1 that we have now a much higher margin level also in the future in Europe in H1? That's my first question.

Yes. Patrik. The driver of the high margin in Europe, I think, they are mainly twofold. I mean on the 1 side, as we had announced, we did -- we had to do price increases in Europe in 2022. It was clear that we did more price increases in North America, a bit less in Europe. In the first half this year, it was the other way around, right? I mean Europe, we had to -- we had kind of catch-up effects in 2022. So we had to do price increases. That has helped our margin in Europe in the first half, because we see that good hedges. Those good hedges, they will not be there anymore now in the second half, and we definitely will see a hit there with regards to the EBIT margin or with regards to the raw material costs. And therefore, I would not necessarily expect the same high EBIT margin going forward in Europe in the first half. The second reason is really some of the more mature markets grew double digit, as I had mentioned, right, like Switzerland, like Italy, et cetera. And so that the whole mix kind of also helped us in the profit. So it also depends going forward in 2024 and beyond, how -- which subsidiary is growing, how much. It's more the mature ones, which -- because they are longer out there, they tend to have a higher EBIT margin than the younger subsidiaries, right? So it also depends on that mix going forward. But I would not necessarily expect that level of EBIT margin in the first half going forward.

Okay. Then my second question, I mean, regarding the EBIT margin guidance for the full year, this implies a substantial decrease in the EBIT margin for the second half of the year versus the second half of last year. I mean, you have mentioned higher raw materials and the marketing spend, but it seems still quite conservative. What is behind this conservative guidance?

It's exactly those 2 things, right? At the end of the day, we did the price increases early on. Because we knew that there will be massive cost increases coming from raw materials and packed materials and the cocoa bean prices, you have seen that huge increase. So I think it was definitely the right thing to do these price increases. And so that is there. And sorry, can you repeat the last part of the question?

So I mean, just this implies...

The EBIT margin, yes, why it's low in the second half. I mean, it depends how much advertising will invest as well, right, in the second half. And we are planning to heavy up the advertising spend because, of course, after the price increase, our volume and was not up. But as I mentioned before, and our goal is obviously for the second half to have an acceleration from a volume perspective. So we plan to invest heavily in advertising in the second half in some important markets. So that -- those 2 things really drive that slightly lower EBIT margin in the second half. So yes, it's really higher costs from material side and its higher advertising.

Okay. And then my third question regarding the rest of the world. I mean, it's still double digit, but probably a little bit below normal expectations. I mean, you have mentioned that 2 markets have been greatly, but was there some slowdown maybe in other markets or some disappointments maybe in Australia? I don't know.

No, Australia grew nicely, high single digits. It was actually -- it's phasing at the end of the day, right? And we expect for the full year still growth in Rest of World in the neighborhood between 12% and 14%. So in the second half, we expect growth in Rest of World of around 15%. So it's phasing. It always depends a bit with the supply chains, what is ordered. It's not sell-out, right? Bear in mind, it's selling. So it depends when the orders are coming in from which customer in which country. So overall, we are as optimistic as ever in Rest of World. Because this phasing now the first half was 11%. But yes, I'm optimistic for the full -- optimistic for the full year and also for the second half.

Next question is from Warren Ackerman from Barclays.

Martin, it's Warren here at Barclays. I've only got 2 for you, not 3. The first one is, can you quantify the EBIT impact from hedging gains and pricing taken ahead of when the cocoa price impacts? I'm just trying to understand the kind of the timing benefit in the first half and then maybe kind of the assumption for the second half on that front. So just really one on timing. And then the second one, if I can squeeze in quickly before answering the first one. Just on the volume mix of 0.8% in H1. Can you quantify whether you think vol mix will remain negative in the second half? And do you think volumes remain negative in 2024? Just given, I know pricing won't go up as much next year as this year, but nevertheless, it's still going higher. So I know, you're reinvesting, but do you expect that reinvestment to actually drive volume mix positive either in H2 or '24?

Yes, Warren. Let's start with the first question here. And your -- yes, it was about the impact of raw materials, right, of the hedging, basically. I mean so, it's difficult to isolate 1 effect, obviously. But in general, it's surely unusual, let's say, if our guidance is 20 to 40 basis points in the first half, you have 300 basis points improvement on the EBIT margin. So typically, you would expect a more normalized development right. I mean, because the first half is not so profitable, sometimes it can be a bit more or a bit less than the full year, but normally, you would expect something between, I don't know, 20 and 60 basis points or something right in the first half. So because it's close to 300 basis points, you could say that the positive impact of the hedges is -- yes, is the difference, right? So around 150 to 200 basis points or so. And yes, for volume mix, your volume mix question, right? I mean, first, it was actually positive, right? The combination of volume and mix was positive in the first half, 0.8% plus. So I think that's important to bear in mind. Now for the second half, just in isolation, we expect volume -- it's always difficult to predict volume, but I'm not expecting it to be at minus 1.5% in, let's say, in the sellout. I expect it to be better in the second half, the volume. So it's a bit difficult to say, is it 0 or is it even small growth, is it slightly negative, that's difficult to predict. So I expect volume and mix combined to be about flat in '23. Mix is always difficult to predict because it depends on various factors, obviously, how is the tablets business going, how is the season going. But overall, I would say volume mix for full year '23 to be about flattish. And then what volume we are expecting to pick up in '24? We are really doing our utmost. As I said, we are investing more behind the brands in the second half. Next year, I'm expecting if the cocoa stays at the current level, we will have to do some pricing most likely. But as I mentioned earlier, at today's cocoa prices, it will be less than this year in terms of pricing. So therefore, the volume impact should be less. So I expect to pick up in volume in 2024.

And just on the reinvestment, how much increase in millions of Swiss francs do you expect in the second half? What kind of quantum of spend uplift? And where is that money is going to be going primarily? And what kind of return are you expecting on that stepped-up investment?

Look, we don't disclose really the marketing investment and how much is to have you up. We will invest in strategically important markets in the big markets like in the U.S., like in the big European markets, et cetera, because there the benefit is the biggest, obviously. We also have some new launches, which we will -- for example, in the U.K., we are launching wafer which should be an exciting launch. We'll spend some money behind that. We will spend behind Lindor, we will spend behind Christmas to make sure that we have a good sell-through. So we'll definitely spend the money wisely. And with the key goal really to gain household penetration, which then leads again to a positive volume mix, hopefully.

Next question is from Lynch Siobhan from Deutsche Bank.

Martin, Siobhan Lynch from Deutsche Bank. I've got 3 as well, if that's okay. I'm happy to do them one-by-one. Maybe if I could start with the dynamics that you're seeing in your non-seasonal business. I guess, the more personal consumption bit. I think, this had previously been a bit softer with cost inflation. And it sounds like H1 was a bit more driven by the seasonal. So could you maybe just start by talking a little bit about what you're seeing there?

Yes. I mean, for the last few Nielsen periods, we have seen a softening in terms of the tablets business in general, right? The tablets market has been kind of a bit soft in the last few periods. I would even say in the last couple of years, post-COVID. I mean, it was really strong during COVID. We saw a big pickup -- a huge pickup in self consumption, right? The bars, the tablets really did well during COVID, 2020, 2021. And -- but 2022 and 2023 became a little bit softer, so negative on volume, right? And actually, over the last few months, there are a few markets where we can see this trend reversing especially on Excellence -- in our Excellence services, certainly reversing in the trend, not in all markets. But this gives us actually some positive momentum and some belief that we can actually see a turnaround there with regards to the volumes as well. But definitely, in the first half, we saw what I said, right? I mean, we saw that permanent products like tablets, they did a little bit less well on volume. I mean, we also increased prices. So overall value was positive, but in Nielsen, it was negative, and we saw this kind of trade up towards seasons and towards Lindor.

Great. And then maybe for my second question, just on the personnel expenses. Because I know you sort of run through them in the presentation. Are you seeing any pressure going into the second half or into 2024 from wage inflation?

Yes, definitely. Our wage inflation will continue. I mean, you see that in Europe but also in the U.S. So we definitely will see some kind of pressure in absolute values there. And -- so in -- for the full year, the ratio is probably going to be around 20%. And in 2022, it was above 20%. So we see overall a good trend compared to 2022. But looking forward, '24, '25, we definitely see some wage inflation. At the same time, we'll grow top line. So yes, I'm not expecting this to be too difficult to manage with regards to the EBIT ratio coming from -- EBIT ratio impact from personnel expenses. I think, the biggest watchout are really material costs, right? That's -- the material costs will drive further price increases most likely. It's not coming from the personnel expense from the wage there.

Great. Okay. And then just for my last question, could you talk a little bit about how the Chinese market has performed for year-to-date? I couldn't see any comment on it in the release. Has it been any slower or quicker than expected? And how are you thinking about into the second half?

We didn't comment on it because China is a market that is heavily tweaked towards the second half to even the last 2, 3 months of the year, right? They have 11/11, and we have the Chinese New Year, which is in January, but we ship basically everything in December. That's why I would not draw any conclusion based on H1 on China. And even if it's growing strong double digit or if it's growing single digit. It is so small volumes and so small values, that it's -- I would not even look at it too much in H1. We should really focus on it in H2. So it's in line with expectations. For the full year, I'm very optimistic on the Chinese business that will grow double -- a nice double-digit number.

Next question is from Pascal Boll from Stifel.

Let's start with first question on pricing. You mentioned that cocoa prices will hit chocolate manufacturers, probably starting H2 and probably everyone needs to increase prices further. However, there are different options. I think there is the increase in list prices, maybe there are also other revenue management measures like smaller packaging. What do you expect, how the most manufacturers will react to increased prices from here, especially as the pressure on consumers start to build up again and again and how does Lindt plans to react here?

Very good question. It may be that some -- I mean, we have seen in the past that more mainstream brands they have tended to reduce packaging. We have a global initiative which we call RGM, revenue growth management. So we're looking at all areas of pricing, let's say, primarily, it is around net price, right? I mean, it could also be worked together with the retailers to find best ways what should promotional price be in terms of what drives the category most. So it does not always have to be a straight price increase, and we are analyzing this market-by-market. I personally believe, looking at the past, and actually in the past, we did never have a 30% cost increase in cocoa, but even if you had a quite steep cocoa price increase in the past, basically the entire chocolate -- all the players in the chocolate market normally did price increase because it's -- in the short run, it's really difficult to manage. Because if you change packaging, it takes time, right, normally. But it's -- look, it's difficult to predict what the others will do. But the fact is, I think that there will be pressure on the costs and that either through size reduction or through straight price increases or a different way of approaching the promotions, there will be a way to kind of increase the average prices going forward. Because it definitely is unprecedented, right, plus 30 percentage in -- at least the London futures is at a 40-year high. So this has an impact on everybody.

My second question is on your own retail. I mean, we have seen a double-digit growth in the first half of the year. What is it really driven? Is it just a rebound in traveling? Or are there also other reasons like that your contents are more resonating with consumers? And what do you expect how that will -- how the growth will go from here?

Look, I think it's a combination of many things. I mean first, I think we have a very professional Global Retail organization here in Kilchberg, that works together with the local organizations that are also very professional. So we constantly find new ways of how we can actually even increase our comp store growth. This is a number, we are looking at a lot you know. How are we growing compared to last year, also compared to '19. We still had a catch-up effect from '19, right, which we said last year that we were still comparable stores roughly 5% below '19. And so there was still a catch-up to do, especially now in H1. So that was very positive. I mean, you have product innovation and we have different measures, also we, of course, also price increases, which also helped the Global Retail. So there are different ways of driving this growth. And some of these retail stores are also in Rest of World markets where we, anyway, have still a lot of premiumization potential, so that also helps. So it's really a combination of many things.

All right. And then maybe my last question on the consumer strength in different markets. I mean, there are some rumors or, let's say, signs that we see a weakening of the consumer in North America, for example. We also hear everyday news on inflationary pressure in Europe. However, it seems that Lindt has really done really well in that environment. So would you say that it's only attributable to that effect of premiumization? And you confirm that you still believe that this will continue into H2? Or are there -- is it just the strength of the Lindt brand?

We, I think it's both, right? I mean, we are driving the premiumization. The strength of our brand is driving the premiumization and we are -- with our measures right in the markets, be it on the point of sale, be it with retail -- our own retail, be it with marketing investments. Our key strategy is to gain household penetration, so to gain new consumers into our brands. And I think, we have done that for the last many, many decades, I would almost say. And we have intensified it over the last 2 years. We have also intensified it during COVID. So -- and our product is affordable, I would say, it's affordable luxury. That's also important, right? It's not luxury, luxury like if you buy an expensive watch. It's an affordable luxury. So I think, the combination of all those things have also shown in the past that even during be it inflationary pressures, be it during a period of lower consumer confidence, if you look at the last 20 years, in general, chocolate has done quite well. Because people still want to have this little treat. And Lindt, I think, it's really well positioned also for such a -- if the environment was going to worsen even further, we will be prepared for that. I mean, we cannot necessarily see that currently in the U.S. as an example. This consumer confidence that it's going down so much, as you can see in our numbers. So look, overall, we are super confident for H2 and also for '24 and beyond.

Next question is from Bruno Monteyne from Bernstein.

My first 1 is on the sustainability sort of improvements in your report you mentioned. Now I'm sure you're aware about those new European Union legislation landing, and I think more recently, due diligence -- sort of corporate sustainability, due diligence directive. To what extent is way out of your program sufficient with all the latest legislation? Or do you feel the latest European legislation is further raising the bar requiring further investment and efforts from you? So is the legislation catching up with you? Or do you actually have to go further in your efforts? And then I'll take that as the first question and take the other one later.

Yes. Look, I mean, good question. The legislation is definitely is holding really quickly, and we are starting that. And the good news is, some of the groundwork -- a lot of the groundwork we have done over the last 15 years, when we started, for example, on cocoa with our traceability, which I think has always been or has for a long time been quite leading in terms of -- we have built up our own programs, and we have full traceability on the beans already and by '25 on butter as well. All the cocoa is coming from our Lindt farming programs. And there, we are starting the legislation. And if you have to adjust it slightly, we can do that. But overall, it is definitely for all corporations that the EU legislation, it is -- it will mean extra work in terms of reporting and some other measures. So it's not like we don't have to do anything, right? It will keep us busy for the next many years probably. It is a lot of additional work for companies like Lindt for sure.

And then on the volume measures, I think, you said -- I think you said minus 1%, minus 1.5% at the wholesale level. Now I'm just trying to think, does it include the volume growth you saw in your retail stores. And if so, would that imply that the volumes outside the retail store, let's say the grocery network are a lot more negative than that? Or does it not include your retail stores?

No. The numbers I quoted which are sell-out data from IRI and Nielsen, which I think is the best way of looking at it, and because you avoid having kind of phasing -- that you have no phasing, because sometimes we ship something earlier or later to the retailer. So if you look at Nielsen, IRI consolidated, the chocolate market overall is down by about -- by 2.1%. And Lindt is down by about 1.5% on volume. So we are outperforming the market on volume. But again, as I said before, you have to look at it together with the mix because of this kind of trade up to more expensive products in gifting, in Lindor, in seasons. I think it's important to look at the volume combined with mix. And there we are, as we have reported positive 0.8%. But yes, if you look purely at the volume, we are at about minus 1.5% in H1, and we expect this to be better in the second half. I mean, it's really -- I feel like it's the impact of the price increase that the market is so negative.

Now you did mention about the Russell Stover, you thought it was in line with your medium-term guidance or expectations, at least of low to mid-single digit. Now in a market with that high level of inflation, I still think it's quite disappointing for Russell Stover to only grow in line with that level. Maybe a different way of phrasing the question is, is as Russell Stover will stop losing market share in the U.S. market share, because surely, on the minimum requirements, would want this for Russell Stover to roughly keep market share. So how is the losing market share of Russell Stover in the first half?

Russell Stover is losing a little bit of market share, yes, absolutely. We are doing also price increases in Russell Stover. So we have done price increases, so this should help going forward. If you talk about Russell Stover, it depends a little bit on what product range you look at, right, because we have seasonal items. We have pralines. We have sugar free. So, for example, in sugar fee, we are growing quite nicely. And yes, look, it's -- as we have always communicated, don't expect Russell Stover to grow double digit going forward on a CAGR basis. Right? It is at mid-single digit also, and that's where we are today.

But I remember at the end of last year, you said you had a very good shipping -- sort of shipping in for Russell Stover in anticipation of Valentines and all of that. And you're hoping that sort of 2023 would be the first year where Russell Stover was like turning the corner. So based on the sell-out you saw from Russell Stover in the first half, -- is it where you wanted it to be? Or is it still somewhat not as good as you were hoping for when you were doing the sell-in at the -- maybe end of last year?

No, it is more or less as expected.

Your next question is from Jon Cox from Kepler Cheuvreux.

Yes, Martin, thanks for the call. I'm going to ask one at a time as well, so I can shove in maybe 5 or 6. But just to start off, I wonder if you can just talk about the volume developments in different regions. I presume Europe was the worst and North America, maybe not so bad and Asia, probably the best. Is that a fair guess? Or that's...