Danone S.A. (BN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Danone 2023 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mathilde Rodie, Head of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for being on this call this morning for Danone's 2023 H1 results. I'm here with our CEO, Antoine de Saint-Affrique; and our CFO, Juergen Esser, who will first go through some prepared remarks before taking your questions in a second step. But before we start, I draw your attention to the disclaimer on Page 35 related to forward-looking statements and the definition of financial indicators that we'll refer to during the presentation. And with that, let me hand over to Antoine.

Thank you, Mathilde. Good morning, everyone, and welcome to our half year '23 conference call. I hope you are all well and safe. Before we dive into the results, let me start with a few words on the situation in Russia. Obviously, my very first thoughts go to all our colleagues there. After our EDP business has been placed under temporary external administration of the Russian authorities. There are, of course, financial implications which we have referenced in our press release this morning, and Juergen will come back to them. Given the sensitivity of the situation, I hope you will understand, there is not much we can say at this stage, other than the fact that we remain focused on people safety and on continuity of operations. Let's now go into the results, starting with a brief introduction on Slide #3. As you will have seen, we closed a solid first half of the year, further building our track record of delivery. This semester like-for-like revenue was up 8.4% with broad-based growth across geographies and categories. Growth was driven by pricing, up plus 9.4%, and resilient volume mix down minus 1.1%. Importantly, we made consistent progress on our strategic agenda in an environment that remains volatile and challenging. The combination of resilient volume mix, continued pricing where needed and high productivity allowed us to expand our margin from operations by 93 bps compared to last year. And this increase in margin from operations give us the ability to further drive our reinvestment journey, which is at the heart of Renew Danone. This first half reinvestments were up 99 bps compared to last year. And we did all of that while delivering on our ambition to moderately improve our recurring operating margin, which was up plus 14 bps versus last year and securing a healthy cash flow at EUR 1.1 billion up by EUR 400 million compared to last year. So I'm happy with the first half of the year. As we keep not only delivering but as importantly as we are doing so in line with our strategy. Let me elaborate a little on this and start with our core now on Page 4. Speaking of the core, there is no better illustration of it than EDP in Europe. We started the transformation of strategic activity at the back end of '22, making it clear that we were not after short-term tactical fixes, but rather aiming at structurally driving EDP back to value creation in Europe. Over the last quarters, we are focused on getting back to category leadership fundamentals. We have prioritized methodically the key demand spaces we want to play in, focusing on health, underpinned by strong functionality, indulgence, kids and everyday nutrition. We started sharpening our portfolios again those 4 spaces with less overlaps between brands, rationalized and more focused portfolios. Having clear streamlines and more focused portfolios enables us to now start reinvesting more assertively in A&P while making sure all of this is also visible to consumer through superior shelf execution. This groundwork is starting yielding encouraging results. It shows, for example, on the Activia, YoPRO and Danone brands. I'll come back to that in a minute. And while we know there is still work to do, I'm now pretty confident in our ability to sequentially improve from H2 onwards and to progressively reconnect with competitive growth in Europe. We certainly have a good example of this with the Danone brand, and I'm now moving to Slide 5. Over the last few months, we have defined a new architecture for the Danone brand tiering and segmenting the brand by occasion, by format, price points and channels. On the one hand, we have strengthened the core of the offering, adapting formats and price points to recover volumes, and obviously operating leverage. But also, and this is important, to drive brand penetration at a time where some shoppers may start feeling the squeeze from inflation. On the other hand, we started developing a range of value-added proposition in Danone from Skyr to Greek with the objective of further building superiority and differentiation, which ultimately drives mix and profitability. This work, which we deployed since the beginning of the year in Spain, is showing very promising results. Their monthly brand penetration has, for example, doubled since the beginning of the year, and obviously, next to Spain, we are in the process of deploying a similar approach in France. Moving now on to Page 6, I'd like to illustrate how we have further boosted our winners in the first half of the year. You have seen these winners several times already, and this is totally intentional. This is a clear through our determination to be very consistent in driving these winning propositions further ahead, building on differentiating science, strong brands and execution. Yet again, our Coffee Creations, Evian and High Protein have delivered strong and competitive performance this semester with strong double-digit growth. And again our Specialized Nutrition business posted a solid and competitive growth at plus 8% in H1. We believe these platforms have more room to grow in and around the cafe category, in premium waters, in high protein dairy. We will continue then -- we will continue expanding them across channels and geographies. This is the case, for example, with our dairy high-protein portfolio as we roll it out in the U.K. as we speak and as we further expand into new segments such as desserts. And I will obviously be remiss not to mention Specialized Nutrition, where we will continue to leverage the full pallet of our portfolio from Aptamil in IMF to Neocate in our pediatric specialties and Fortimel and Nutrison in adults across geographies. Let me finish this performance overview on Page 7 with a brief mention to Mizone. Last year, we told you that we would address our underperformance with method and with courage. It is exactly what we have done with Mizone. We took the time since the capital markets event to do a proper root-cause analysis to understand the reasons of Mizone's under performance. On that basis, the team built a turnaround plan, leading us to dramatically simplify our portfolio now down to 4 SKUs. We have also invested in the superiority of our formulation, making sure Mizone is back to being among the best functional hydration options in the market. And we have delayered our distribution system with the goal to improve in-store execution. All of this, range, product, quality of execution, higher investment, all of this is now starting to pay. Even though we are at the early stages, we see tangible signs of turnaround. Mizone, as you've seen, grew by 15.9% in like-for-like in H1, driven by a strong volume recovery. And the market shares were positively oriented for the first time in a very long time. It is obviously not yet time to celebrate as we have to sustain this performance in the long term, but this is certainly encouraging and something the team should be proud of. Let me finish this introduction with Page 8. Since last year's capital markets event, we have been consistently delivering against our strategic roadmap. This shows in the results you have seen us publish over the several last quarters, but also in the progress we continue to make on our key battles. What we are doing systematically and with confidence is about restoring Danone's value-creation model. And we do it for the long run, not going for short-term tactical wins, but striving for sustainable long-term value creation. On A&P, we are investing more but we're also investing better. We continue to improve the allocation of our resource across geographies, brands and channels, improving our working versus nonworking media ratio. We're also progressively strengthening the quality of our advertisement. I'm sure that you have seen the Evian Live Young advertising and the Danone ads are played in the waiting room of today's webcast. They are great examples of ads that we can be proud of. And there is obviously more to come. Next to A&P, we continue to step change the way we leverage our cutting-edge science and technology assets at the service of patients and consumers. And it is not only about the science assets we have. It is about bringing more discipline in the way we develop and execute our innovations. There too, we are making substantial progress from bringing a superiority imperative in our innovation to delivering fewer, bigger, better and accretive innovation. All our categories are moving to the front foot with a clear focus on developing superior differentiated product supported by strong claims and, in some cases, clinical evidence. And as you also know, our value creation is about making the most of our ecosystem. And here, we are starting to reinvent the way we work and collaborate with our partners. I'm happy to announce that Danone will host by the end of the year its first Partner Summit in a long time. This is a great opportunity for us to learn, to leverage and to expand our reach and impact. So all in all, Danone is starting to move to the next level. All the pieces of our Renew Danone framework are coming together. And despite the volatile environment, we continue to make consistent progress. Expect us to keep at it with determination and with focus. And with that, let me hand it over to Juergen for the financial review.

Thank you, Antoine, and good morning to all of you. Let's start the financial review with Page #10, and our top line performance of the second quarter of this year. We are reporting for this quarter a solid performance of like-for-like net sales growth of plus 6.4% with again, all our geographies contributing. Very consistent with our first quarter sales, we are reporting broad-based growth. I would like to especially mention the resilient delivery of our China zone while highlighting also the fact that we are making good progress on our European transformation according to our plan outlined earlier this year. But let me come back to the performance by zone in a minute in more detail. A couple of comments on the performance by category. The growth in the second quarter was supported by the solid contribution of our EDP category at plus 6.2% net sales growth with our High Protein, Everyday Nutrition and Coffee Creation platforms all growing double digit. In parallel, our specialized nutrition category sustained its competitive growth with plus 4.9%, led by further market share gains across most geographies like in China or Southeast Asia, to name a few. Reviewing the dynamics of this category, important to look at the first semester performance with a growth of more than 8%, as this is providing a better view on the underlying dynamics neutralizing the Q1, Q2 phasing effects, which we discussed at length with the first quarter results. And finally, our waters category that delivered another quarter of strong growth at plus 9.6%, notably driven by the Evian brands, growing well into the double digits in Europe, combined with the encouraging momentum behind our Mizone brand in China, growing mid-teens for the second quarter in a row, as Antoine just mentioned. Moving now on to our Q2 sales bridge on Page #11. Our Q2 like-for-like net sales growth of plus 6.4% was composed of a price effect of 8.7% and volume mix down minus 2.3%. On the pricing, we can clearly observe a deceleration versus previous quarters. As you will remember that our Q1 sales were still benefiting from as much as 10% price effect. We are starting in many geographies to lap last year's high price increases, and we therefore, see further reduction of the price effect during the remainder of the year. On the volumes, and as mentioned already, important to keep in mind the calendar related phasing effect between Q1 and Q2 of this year, especially in our SN category, which makes that the underlying volume performance is better understood by looking at our first semester volumes of minus 1.1%, demonstrating the improving resilience in many geographies and categories. Outside of the like-for-like, ForEx had a negative effect of minus 4.3% as a result of the number of currencies depreciating against the euro. And finally, scope effects that had a negative contribution of minus 0.5% due to the deconsolidation of our Waters business in Argentina in December of last year. In total, reported growth reached plus 2.4% for the quarter, bringing our quarterly net sales to EUR 7.2 billion up from EUR 7.1 billion in Q2 of last year. Let's now have a look at the performance of each zone in more detail, starting with Europe on Page 12. Europe delivered a second quarter of solid growth, growing at plus 6.5%, with price up 11.7%, while volume mix were down minus 5.1% as we are progressing with the transformation of our EDP portfolio. From a country perspective, France, Poland and Spain were driving the growth, all of them starting to benefit from a streamlined and repositioned EDP portfolio, as well as from an increased brand and promotional support. In Germany, we have also started to recover by rebuilding listings and distributions after the supply disruptions we had during the past period. The overall dynamics of the last weeks and months make us confident that you would see our volumes sequentially improving, further supported by an increased level of reinvestment. On the other categories, Specialized Nutrition and Waters remained resilient in this quarter, with especially the Evian brands reporting a strong performance over the last months. Looking at the numbers of this first semester, Europe closed the first half with like-for-like sales growth of plus 6.4%, while recurring operating margin declined by minus 232 bps versus last year down to 10.6%. Margins are temporarily down as a result of the portfolio transformation. There's still high inflation and the timing gap of materializing our price increases for prescribed and reimbursed products of our Specialized Nutrition business. With the volume dynamics sequentially improving moving forward, we should have reached now an inflection point for the profit margin of Europe despite the fact that coming quarters we'll see higher levels of reinvestments. Let's now move on to North America on Page 13. North America delivered plus 5% like-for-like sales growth in the second quarter. This quarter pricing started to sequentially normalize after we left the pricing wave of last year, moving from 11% price effect in the first quarter down to 7.7% in the second. Volume and mix dynamics in the second quarter were a bit softer, recycling a high base of comps in some categories. The growth in North America was notably led by our Coffee Creations business, Antoine spoke about it. It posted strong double-digit growth this quarter, coupled with continued market share gains under the International Delight and Stok brands. Next to Coffee Creations, our Yogurt business also delivered a solid quarter driven in particular by Oikos that registered another quarter of steep double-digit growth and by Activia growing mid-single digits with an accelerated performance in key strategic channels. Plant-based led a particularly high base of comparison, considering the extra sales we registered last year related to supply issues experienced by one of our main competitors. We are at the same moment also clear that we have here still a job to do to reestablish consumer-led competitive growth in the plant-based portfolio. And finally, while our Evian brand posted another quarter of steep double-digit growth, our specialized nutrition category was lapping this last quarter, the shipments realized in the context of the operation Fly Formula last year. The good news here is that our competitive position on our Neocate business, our allergy proposition, remains very resilient, a great base to build upon. Overall, the zone closed a solid semester at plus 8.3% like-for-like sales growth, supported by resilient volume dynamics. Importantly, in North America, our recurring operating margin is improving this semester up by more than 200 points compared to last year, driven by gross margin expansion, something we are happy about and that bodes well for our ability to consistently invest and support our brands over time. Moving to the next page, Page #14 of our China, North Asia and Oceania zone. The zone registered plus 9.6% like-for-like sales growth in the second quarter, mainly driven by volume mix up plus 8.8%. Let me start with China. In infant milk formula, Aptamil delivered another quarter of solid growth with continued market share gains. Our competitiveness in the category remains supported by the combination of the strong brand equity and disciplined execution. We continue to carefully and intentionally navigate the shift of the entire category from old to newly registered recipes a process which will probably last until the end of this year. Beyond IMF, our medical portfolio also posted a strong quarter, with our key brands, Nutrison in adult and Neocate in pediatrics delivering double-digit sales growth. And finally, in Waters, Mizone registered a plus 50% growth this quarter, notably driven by volumes, and more importantly, with market share gains. As Antoine mentioned already, we are very pleased to see that the turnaround of the Mizone brand is underway with encouraging first results from both the renovated core range and the recently launched innovations. Beyond China, our EDP business in Japan posted another quarter of double-digit growth, led again by the Danone and the Oikos brands. Overall, the second quarter led the zone to register like-for-like sales growth of plus 12.4% in H1, mostly driven by volume and mix. Recurring operating margin stood at 30.9%, so down 107 bps versus last year, mainly due to mix effects with the Waters and EDP category, both growing at double digits. But also due to higher investments across the segment. Let me just remind you that all categories in this zone are having an accretive margin profile versus company average. Moving now to Latin America on Page #15. Latin America registered plus 10.8% like-for-like sales growth in Q2 with price up plus 12.9% and volume mix down minus 2%. All countries of the region contributed to this performance with brands like Danone, Danonino, La Serenísima and Danette driving the growth. All in all, Latin America closed the first semester with plus 11.7% like-for-like sales growth. Recurring operating margin stood at plus -- stood at 2.8%, increasing by plus 291 bps versus a very low base of last year. Our business in Latin America has a very seasonal profile, which makes their profit margins higher in the second semester. Having said that, overall margin profile is here not yet at the desired level, and we are taking actions to correct this. An example of those initiatives is from Brazil, where we have discontinued our low-margin water business as well as licensed out our existing milk business under the Paulista brands which will enable us to focus our resources on the more value-added and profitable part of the portfolio. Finally, let's have a look at the Rest of the World zone on Page #16. Like-for-like sales grew by plus 3.9% in the second quarter, led by a price effect of plus 8.2%, while volume/mix was down minus 4.3%. As expected, sales and volumes normalized this quarter after a first quarter boosted by calendar-related phasing effects, especially in Specialized Nutrition. Looking at the quarter more in detail. Specialized Nutrition business posted a good quarter like in Indonesia, where our SGM and Bifilac brands continue to gain market shares, as well as in countries like Thailand or India, where we posted strong performances coupled with market share gains. In parallel, we are making good progress on the transformation of our EDP portfolio in Africa streamlining and optimizing our operating models and product portfolios. Looking at the first semester numbers, sales increased with a solid rate of plus 7.7%. Recurring operating margin stood at 10.4%, increasing by as much as plus 127 bps versus last year, particularly driven by the progress we made in EDP Africa, but also by the growth of our accretive SN business in the region. Let's now move on to the margin bridge for the first semester on Page #17. Recurring operating margin stood at 12.2% in the first semester, an improvement of plus 14 bps compared to last year which is positioning us well to deliver on our full year guidance of moderate margin improvements. As you can see, we are making tangible progress on establishing the value creation algorithm we are striving for. In H1 and after many semesters and years of erosion, we were able to turn around our margin from operations. That increased by plus 93 bps. This has not only been the result of the sequentially improving quality of our top line growth, but also thanks to another record delivery of productivity gains which supported us in offsetting a material part of the still high inflation we incurred in this first semester. With our margin from operations expanding, we are creating the conditions for continuing our reinvestment journey in an organic self-funded manner. Our step-up in reinvestments in A&P and product superiority and capabilities had a negative effect of minus 99 bps in this first semester. Beyond the pure number, it is the quality of our investments, especially in A&P, but also in R&I that is also stepping up. This is starting to feed our long-term value creation algorithm. Other effects remains relatively minor, as you can see, with overheads before investments continuing to have a positive effect in this semester with plus 7 bps as well as a positive contribution of changes in scope of ForEx and of the organic contribution from hyperinflation countries for a total combined effect of plus 13 bps. Moving now on to the EPS bridge and free cash flow on Page #18. Recurring EPS reached EUR 1.76 in this first semester of 2023, which represents a plus 7.6% increase compared to last year. Main contributor of recurring EPS growth was the operational performance that we just went through. All the other effects altogether basically compensated each other and had an almost neutral impact on EPS. Among others, tax equity accounted [Audio Gap] companies and minorities had a minus 0.7% effect. Where currency and other effects had a positive plus 0.5% effect on EPS growth. Reported EPS stood at EUR 1.7 up plus 48% versus last year, driven by the sharp decrease in nonrecurring costs in this first semester, as we move towards the end of the local first project. On the cash generation side, free cash flow reached EUR 1.1 billion in H1 2023. This represents an increase of compared to last year on the back of a disciplined return-oriented capital allocation and working capital management. Let's now move on to Page 19 to share with you some elements about the year 2023 moving forward. First, on the accounting treatment related to the recent developments in Russia. As we stated in our press release 1 week ago, our EDP business in Russia was placed under the temporary external administration of the Russian Federal Agency for State Property. As a result of this and as per the applicable accounting standards, we will be fully deconsolidating our EDP Russia business as of July this year triggering a cash impairment of around EUR 0.2 billion as well as the recognition of the currency translation difference of around EUR 0.5 billion. Coming back to what we already said on the last quarterly call, we are confident that year 2023 will be the year where we start establishing our desired value creation model as we demonstrated in this first semester. Concretely, we are confident that our volumes will sequentially improve, building on the hard work our teams have done over the last quarters on our portfolio. EDP Europe will certainly be a key driver of it being on track to deliver on the plan we outlined at the beginning of the year. This sequential volume recovery will bring us more operational leverage and will solidify our gross margin expansion which will create the conditions for further reinvestments. Our aim remains to build a business model which is consistently and sustainably creating value quarter-after-quarter, year after year. A quick word then on our guidance 2023 to conclude the financial review on Page #20. Taking stocks of the solid first half of the year, we reiterate today our full year 2023 guidance with like-for-like net sales growth between plus 4% and plus 6% and more precisely expect it to be at the upper range of this [ covenant ]. At the same time, we are confirming our full year guidance for recurring operating margin, which is to deliver a moderate margin improvement versus previous year. This outlook reflects our confidence that our Renew Danone strategy is into action, yielding first results and reflects also our commitment to reinvest into our brands and assets to build the future for the short, mid- and long term of our company. And with that, let me hand it over back to Antoine for the conclusion.

Thank you, Juergen. So moving straight to Page 22. Let me conclude with a chart that you will recognize from last year's capital markets event. As you remember, the Renew Danone, our framework, is made of 4 strategic pillars and 4 enablers. Our efforts over the last 18 months are starting to pay off. We have worked hard on restoring the fundamentals but also making significant progress on the enablers of the new Danone from culture, through capabilities, our sustainability, as you've seen from the Danone impact journey and cost competitiveness. This shows clearly with our gross margin churn in green in the first half. This, as you can say, is key to us as it gives Danone the room and flexibility to reinvest. This shows in our commitment to keep investing while delivering healthy cash levels. And while a lot still remains to be done on winning where we are, expanding where we should be, seeding the future and managing our portfolio, this further strengthens our confidence in our ability to drive consistent value creation for our shareholders. With that, let me hand over to Mathilde for the Q&A. Mathilde, over to you.

Thank you, Antoine. So now we're opening the Q&A I don't know if the there's further reminder of the method. I think the first question we have will be from Warren Ackerman from Barclays.

It's Warren here at Barclays. I hope you guys are doing well. Two from me. The first one is on EDP. So we've seen a bit of a slowdown in U.S. EDP on Nielsen. I'm just wondering what's happening in the U.S.? And then on EDP Europe, what's your expectation as we exit this year in terms of SKUs and underlying volumes? I know you gave us that Spanish data point, which is great. But do you have any other data points in other countries that give us the conviction this is real and will come through in the back half? And then secondly, on Specialized Nutrition, can you tell us what the growth was in China Infant Nutrition in the quarter and maybe by channel? And obviously, at the R&D event in Paris, you mentioned 7 new SKUs on Aptamil in China as you push into Ultra Premium. Can you remind us why that's important? And then maybe also why SN like-for-like margins were down 350 bps in H1. Is it related to those launches or something else?

Warren, we'll do as per usual [ I do it with ] Juergen will -- I'll take the first one, and Juergen will probably take the bulk of the second one. In the U.S., we are actually quite happy with the performance of EDP. We have Oikos that is going from strength to strength. So high protein range is doing super, super well. We have a good, good performance of Activia. We saw a slowdown, and this is what is also reflected in the market shares of the Danimals, which is our more affordable kids range, where we saw some elasticities after the last price increase. I mean this product is targeted toward a modest part of the population. So that is something that we are in the process of correcting, but by and large, the dynamic of our EDP U.S. is a good one. In Europe, I mean, we showed the Spanish example for -- I mean for a number of reasons. I mean, the first one is, as you would recall, we had a large number of years of underperformance in Spain. And the team there for the last number of months, have done a work that is exemplary and which we leverage in other places. By doing in some ways what we had done in the U.S., creating very clear streamlines making sure that there is a proper segmentation, a segmentation that is not only by brand and by benefits, but by our price points so that we can tackle the various levels of the market being quite aggressive actually at an entry point, but aggressive not only on price, we are aggressive also on the benefits we offer so that we have a value proposition that is differentiated. By the way, supporting it with advertising. If you haven't had the opportunity to look at it, it was short with Danone employees. Super cool. And this model that is now proven and has a real impact on penetration in Spain, also a real impact in the way we start discussing with some of the key distributors or retailers in Spain. This model we are deploying into other countries. We have a good or a solid performance in France. Where things are moving in the right direction as well, but still more to be done. You will have seen, if you are in the waiting room, the advertising we put on here in France which is a recreation of something that worked in the past done to the taste of today. We are there to externally auditing something here like here on the streamlines. And on the reclaiming the fact that Danone yogurt is not a yogurt, it's a Danone. So testing and proving in Spain, moving next to our friends, doing the same architecture work in places like Germany reclaiming our product superiority around Activia, also reframing our product portfolio in places like the U.K. So we are just deploying, I mean, country after country the method that we have put in place. On China, I hand over to, Juergen.

Yes. Warren, in China and on the overall Specialized Nutrition margins. On China maybe firstly, you saw China second quarter of very good delivery in specialized nutrition, almost plus 7%. Contributions from all the segments, including IMF, so we see good contribution out of -- from IMF to this number. Clearly outpacing the market as the market continues to be pretty soft in the moment. And when it comes to the channel contribution, clearly, our controlled channels contributed to growth, uncontrolled channels, further declining. So now clearly below 10%. So we are, I would say, continuing what the dynamic we have been starting many, many years ago. So very solid performance in the moment where as we know the whole category is shifting from old recipes to new recipes. We have, as you know, quite a few exciting innovations in the pipeline. First one is to enter market towards the end of the year. So they are not yet in the market which means that the market share gains we are today delivering are still with the portfolio you know now, which we have in the market since many years. On your second question, Warren, on the overall margins of Specialized Nutrition. So you are right that the margins of special nutrition are down in this first semester. It's not so much linked to the performance of China. It has only with the element of recipes because there are 2 drivers basically. They are the first drivers of investments into innovation and recipes, China being part of it, but also Europe and the other part of the world. The other element, which has put a temporary pressure on the margins of this first semester is the fact that in Europe, we have part of our portfolio, which is going through prescription and reimbursement. And here price increases take a little bit of time between 6 and 18 months to materialize into our P&L. So this will materialize over the coming quarters in our European P&L. And so what you can expect is that the margins of Specialized Nutrition in H2 will be superior to the one of H1, and we are also confident that we can maintain and sustain the margins of SN globally speaking, at this very attractive level where they are today.

Thank you, Warren. So next question is from Guillaume Delmas from UBS.

A couple of questions for me, please. The first one is on pricing. I mean at this stage, do you expect that you will have to make some downward adjustments to your prices during the back half of the year? And here, I'm just thinking in particular of EDP because in the scanner data, we see private label gaming shares, we see promo activities still below the levels of 2019. And then looking at your gross margin development at the group level, but also your recurring operating margin in EDP. It seems that you've clearly reached an inflection point. So does it make price adjustments inevitable in the second half of the year, particularly in the developed world? And then my second question is Antoine going back to the strategy road map. I mean you are still in the fixed and seed phase as per the slide you were showing at the CMD in March last year. But based on the progress you've made so far in establishing the desired value creation model, do you think you could enter the second phase, which is the accelerate phase as early as next year? And if so, I mean, how should we think about this acceleration? Is it being able to do consistently 4% to 6% like-for-like sales growth? Or is it being able to do a little bit better than moderate margin expansion going forward?

Thank you. I'll start with the second question. I will probably do a duet with Juergen on the first one. I think you you've seen from the results, as you heard also from us, we are happy that we are making good progress on the fixed and our seed part of our agenda. It has been now a number of quarters where we are delivered consistently and consistently not only in terms of our numbers, but also in terms of the make of the numbers. So reinvesting behind our brands, doing the right thing in terms of productivity striking the right balance and keeping a rather resilient volume or mix dimension. So yes, indeed, we are making good progress which gives us the confidence that we are heading into the right direction. Before moving to something that is more ambitious, we need to keep delivering consistently on the transformation of our business. I mean, all of you have told us over the past year that -- or past years that we were too fast in moving to the next phase. We are delivering consistently on a model that is a value creation model. So are we preparing the next phase? Yes. Do I want today to discuss the next phase No, because we need to continue to deliver and to consistently improve the model. So are we active in the background? Yes, we are. But the focus and especially the focus inside the company has to be consistently delivering and strengthening the model all the time because this will deliver a very significant value creation. So yes, we are working on it. No, we are not ready to disclose it because there is still more work to do on the basics and more opportunities, by the way of growth and value creation. On pricing, we'll do a duet with Juergen. I mean, well, the first -- I mean, the first thing is when we are doing what I was explaining a minute ago in terms of streamlines and segmentation. It enables you to move from a discussion that is a broad-based pricing discussion to a discussion where some SKUs have a role to play to be fighters some SKUs are driving premiumization. So you start being much more sophisticated in the way you play. By the way, using our promotion rather than pricing. Because inflation is still there. It's lower, not on everything, by the way, but it's still there. So it is getting also much more sophisticated in the model through segmentation, through promotion and through very clear streamlines on the various elements of our mix. Juergen?

Yes. Just to build on what Antoine was just saying, when we talk price, we need to talk inflation. Inflation was still high in the first semester. A little bit decreasing as we go through the next quarter, but there will be still inflation, which will be fed by cost of labor, by some agricultural ingredients like sugar but also by milk and this especially in Europe. And so what we will see is indeed that the price effect is sequentially coming down. You have seen that 10% Q1, 9% Q2, and we will have price effect, to a lesser extent in the next 2 quarters in front of us, but pricing will stay positive while pricing will normalize. That is the first very important element. When it comes to the impact it will have on our top line and our bottom line. Very important that we have created the conditions over the last quarters and you can say almost over the last 2 years for reinvestments. And those investments will help us to restore volume growth to go back to the balanced growth model we are aiming for. This balanced growth model will continue to deliver gross margin expansion because the gross margin expansion you saw in H1 is not only the consequence of the improved quality of growth, and this will further improve, but also of the productivity gains we have beyond industry norms as well as by the fact that we are starting to fix the underperformers. And that is true for Europe, that is true for the other parts of the world. So there are several drivers which we make that we will continue to expand our gross margin to self-fuel the investments and to deliver the margin expansion we have committed to.

The next question from Pascal Boll, Stifel.

Yes. First question would be on your SKU rationalization plans you have discussed at length over the last couple of quarters. You always said that this will take an end by the end of Q2. Can you confirm that? Or will that have a negative impact also for the following quarters? Then maybe on free cash flow, can you elaborate a little bit more on what do you mean by capital allocation? How did, for example, CapEx change year-over-year and maybe also on the net working capital impact? For example, what happened to inventories? Did you need to build more in that semester? And then finally, on cost, could you give us some more details on what was the cost impact in H1 year-over-year and what you expect in an absolute amount for H2?

Pascal, I'll take the first one and I -- I mean, Juergen will take the second and the third. On the SKU rationalization, as you remember, we started the SKU rationalization in quarter 3 last year. It was in full force by the end of quarter 4. So what you will see is indeed progressively over the course of H2, we will lap the SKU rationalization. And towards the end of the year, we should be on the base that is a normalized base for the big or significant SKU rationalization. Once you said that, we've entered also but that's less of a one-off, if you will, into a discipline where we will keep our SKUs under control. So we'll go into a permanent rhythm of pruning, but which is going to be more the normal course of the business. So to your initial question, yes, progressively over the course of H2, we will lap the significant SKU rationalization. And we are entering into a more normalized where we are -- I mean, as part of keeping our portfolio healthy, we prune the less performing SKUs. We challenged the return on our capital investors, and we drive the clarity of our portfolio, by the way, without giving up on our shelf which is all the secrets of managing this. And on that, Juergen.

Yes. And just to say that when you look back at Page 17 of our full year presentation, we totally confirm what we showed you at that time which is the evolution of our EDP European volume sequence with volumes recovering from now onwards. On free cash flow, EUR 1.1 billion, a good number, EUR 500 million more than last year. Two drivers, first driver, definitely being what I said -- what I call disciplined CapEx and working capital management. CapEx, EUR 300 million, I would say, a very return-oriented approach at the same level as last year, well below the cap we have set ourselves. Working capital moving into the right direction on several elements on receivables, particularly. But also on inventories, we are starting to make a good job. And Pascal, on your last question on cost and COGS. I think the element which is worth noticing is that you see that we are able to offset now more than 1/3 of the cost inflation by productivities because we are delivering more than industry norms in terms of productivities. This is really becoming a competitive edge. And so already as of today, more than offsetting a 1/3 of the inflation, and that will be an even larger part moving forward.

Thank you, Pascal. Next question from Celine Pannuti, JPMorgan.