SEB SA (SK) Earnings Call Transcript & Summary

Hello, everyone. Thank you for being with us for this presentation of our earnings for the first half 2022 for the SEB Group. Look, we'll be making this presentation with Stanislas de Gramont. I'll turn it over to him. He's our new CEO since the 1st of July; and Nathalie Lomon, who is our Senior VP in charge of finances. Look, in my introduction, just to remind you that several months ago when we are commenting the earnings for 2021, I was telling you at the time that we had been through a period that was a record-setting, the absolute record in terms of our revenues for our bottom line. And all indicators with the context of the COVID, which ended so much -- so that consumers who are still staying at home a lot [indiscernible] and with volumes that were extraordinary. They helped us to offset literally the inflationary pressures that already were emerging very strongly. This helped us to have this extraordinary bottom line. In 2022, we'll see it started off positively, but given the environment that deteriorated with the background of the Ukraine war and the continuation of inflation. The group, despite this continued its efforts to offset the headwinds, not only working on mix and innovation through increases, price hikes, of course, but also through savings in order to be able to offset so much -- as much as we could headwinds. We'll be doing this throughout year. Let's first take a look at what we did in this first half. I'll turn it over to Stanislas now.

Thank you, Thierry. So with Nathalie, we'll be breaking down what happened during this quarter. This quarter, starting with the first context in the first -- we had a mixed first half. The start of the year turned out to be positive. And we saw during the second quarter a deterioration of the macroeconomic environment with impact on demand, especially in mature countries. When you analyze this, the causes are well-known: inflation, the war in Russia and the Ukraine. But what do we see precisely? There's a fear from consumers regarding their purchasing power. The level of confidence is lower than it used to be. They spend in other services, leisure, travel and also this was why the anticipated and also has a positive effect on our Professional activity, which is strong now, a negative effect on Cookwares, which were the big winners in the previous periods when people are working at home. And also another effect that we see in the press of trade downs that is buying products of a lower range, and we'll come back on them a little later on. Obviously, this demand that was down creates high inventories in distribution. In light of our history in 2021, that was very [indiscernible] our market is one of the beneficiaries of the lockdown periods. When we look at now what it was like in terms of the trend in the markets, now we are using -- we are showing here at the top the SDA market in value in EMEA, including 14 countries over 12 rolling months up until November, December, even January, February. Our trend over these 12 rolling months, we see rises in consumption, which accounts for the fact that we were more upbeat at the end of March than we are today. And we see as from April, May, a decline in the market to a certain extent relative to a 12-month sliding -- it's true for the SDAs and also the pans in [indiscernible], France and Germany, where we saw a blip in November, December. But the trend of these 12 months, March, April 2021, January, March was still rising with a decline in March, April, again. Additionally, I was mentioning historically, traditionally, we talk about upgrading the upmarket that is the established markets rise in terms of value market through innovation, through the improvement of product specs and also through the increase in average board prices. And you see here, the trend period against period of the market shares of established brands in the same EMEA scope in SDA, apart from March and April, where we see a slight slump and a temporary upturn in brands that are more low end or retail or retail-related brands. This is our context. In relation to this, when we see the momentum in the market versus 2019, which is and remains our pre-COVID landmark, in 2020 in China, the lockdowns in the first quarter, in the Western world in the second quarter. 2021 turned out with mixed elements that were very strong due to 2020 that was deteriorated. So when you look with great attention to the trend of the market compared to 2019, we can see that we remain on growth rates, still interesting in a European scope still for the small -- the SDA. So in this context, the sales of the group were mixed in the first half. Across the full half sales, we are 1.6% up with 2.3% down on a like-for-like basis. A slight deterioration in the second quarter, minus 0.4% and on a like-for-like basis, 5.1% minus. ORfA is at EUR 199 million, with ORfA margin at 5.4% against EUR 320 million in the first half 2021, which was a historical record. And this is borne out in the second quarter with a [ ROPA ] at EUR 59 million with a margin of 3.4%. And so also the net financial debt is at EUR 2.447 billion versus EUR 1.850 billion. Nathalie?

Now regarding our sales and how you break them down, of course, Stanislas -- as you heard now by Stanislas, the performance in this half year concerning our revenues seen organically is a decline of 2.3%, which represents a decline of EUR 81 million. On this slide, I wanted to give you a number of analytical elements of our sales, especially pinpointing these performance elements that are more specific to or nonrecurring. And the first one is about the loss of our -- loss in sales, which is a consequence of the war between Russia and the Ukraine, which represents in the first half EUR 57 million versus last year. So that EUR 57 million loss represents 1.6%. Regarding the scope of the group, as you know, the group also is launching loyalty programs in cooperation with large retailers, and these programs are nonrecurring. And since we had benefited significantly in the first half 2021, it is no longer the case in 2022. So these programs, which, once in a while, beef up our revenues had contributed at the time for EUR 52 million. So the fact of having a few of them this year represents an impact for the half year of 1.4% down in terms of growth. And the last element now, which is more stemming from an estimate is about the loss of revenues in China due to the lockdowns in March -- rather in April and May. This loss should be around EUR 40 million or 1.1% in terms of growth. So restated from the specifics, the sales in the first half would have been higher by EUR 67 million or organic growth of [ 1.8 ]. Now let's go back to the figure that we published. Last year, the group came up with revenues of [ EUR 3.610 billion ]. That's in the first half, and that was last year. And this year, EUR 3.666 billion with the restatements that I've just presented. The currency effect is favorable, which mainly comes from the devaluation of the euro versus the Chinese yuan and against the U.S. dollar for EUR 137 million and no perimeter impact. I present on this slide the detail of this currency effect, currency by currency, the positive contributors, as I indicated significantly are the Chinese yuan and the U.S. dollar. And at the other end of the spectrum, you will find here the devaluation of the Turkish pound. These are comparisons from half year to half year. We see here the strong devaluation of the Turkish pound in the second half of 2021 so much for -- Stanislas.

Now by business, let's see what it was like. So the performance was mixed, starting with the Professional EUR 330 million in sales plus 13.6% versus last year, plus 9.5% organically. And the Consumer one, EUR 3.336 billion plus 0.5% compared to last year. It's a bit more difficult. Let's start with the Professional performance. The Professional business that's for 90%, that's Professional Coffee, as you are aware. Our sales on a half year are solid for the Professional Coffee plus 6% compared to a high history in the second half last year. Remember, we had big deals at the time, 2 big deals in the U.S. in the second quarter plus 6% for coffee, a growth of more than 50% in hotel equipment and also solid growth and ongoing plus 25% for Krampouz business we bought nearly 2 years ago. When you go into specifics of Professional Coffee, remember, in that sector, there are 3 types of businesses. We have big contracts, let's call them deals. We have a recurring one about services, after-sales service, selling spare parts. And also we sell machines to smaller consumers. What is typical in this half, and we mentioned this before, is a very sharp momentum of sales, which are recurring. Apart from the big deals, we said that for the past 5 or 6 quarters, that the lockdown pushed us to diversify our types of clients. This is what we've done now. Apart from the deals, we can generate sales of 25% higher with a dynamic also that is balanced between service-related businesses and also selling machines. Such performance can be found in every geographical region in Europe first with plus 20% sales in the U.S. as well with nearly doubling of sales with Schaerer, excluding deals and also Wilbur Curtis sales, which we bought at the end of 2018, up by 50%. Wilbur Curtis are -- they are selling filter coffee makers and traditional ones. And in China, the last -- that we have a resumption of the rollout of our business with Luckin Coffee after this customer went through some turmoil. On the other side, the consumers are impacted by slowdown demand. The first quarter, we saw it solid at the time. Obviously, there are impacts of the nonrecurrence of the loyalty programs for 2021, 1.6% in growth. That is -- there is also a difference between our sales to retailers, the sell-in and the sell-out due to the fact that retailers want to wind down our inventories. There are some big impacts in our markets. The whole is better than the average and then the total one or rather than the specific in certain markets. And the excellent good news is the half year sales in China, which are organically up by 7% despite the disturbances in the second quarter, especially in April due to the new lockdowns in the major urban areas. So -- and last point, in my introduction, I said that we are looking at our sales relative to the same period in 2019. We are again rising by 13.2% versus 2019. Such business slowdown is particularly strong for the EMEA. And you see that in the Americas, the performance in the half year at minus 2.2% organically with a rise between the first and second quarter, many basic FX that explain this. We are at plus 7% in the first quarter to plus 1.3%. In EMEA, we see sales moving from minus 5 to minus 13 between the first and the second quarter. I noted as well that the events in the Ukraine have an impact. First and foremost, EMEA directly on Russian and Ukrainian sales and indirectly on the other effects on the economies in this crisis. So a few major markets are particularly impacted over the market. In France, it's minus 20% on a like-for-like basis. First of all, it's the impact of huge [indiscernible] 1.6%. That's nearly 1/3 of the losses due to the last year's loyalty issues. We have a slowdown in demand. We have inventories in the retail business, and France had a record year for -- in 2021. Let's not forget that. And that comparative hurts, of course, how we read the figures this year. Russia and the Ukraine, it's about EUR 60 million, the impact on our sales. With the events there with the speeding up of the impact in the second quarter, the [indiscernible] started on 24th of February and is in full swing now in the business. In the second quarter, we are maintaining our business in Russia, but we stopped our advertising there. And we, of course, respect all the sanctions defined by the French and European authorities. And in Japan and South Korea, we see a slowing down of demand due to an inflationary context, which is new. In Japan, in particular, people are less keen on buying. And in Korea, it's more -- it's better for us service -- to be in services than elsewhere. In China, we see the bad news there. Some also good news in China, confirms a good momentum in the half year with the first quarter plus 6.6% versus 2021. First quarter, 10.9% up and the second quarter, plus 1.9%. EUR 40 million would be the impact -- the estimate on the impact. So it was nearly nil on our industrial activity, also on our logistics. However, it disturbs very sharply the online sales and deliveries to homes because it's much more difficult to deliver during lockdowns. We are reassured by a 12% rise relative to last year in June, which does show that as soon as market -- the economy or the country opened up again, we are back with the sales momentum we had in the first quarter. Now Supor outperformed the promotional event of the 18th of June. And such a rise of half year growth is driven especially by the SDAs and by the large kitchen appliances, the hoods and integrated ovens. Now Supor continues to consolidate its positions in China. We've been saying this for several periods. Supor works on innovation. We are upgrading [indiscernible] and extending products and support. Thanks to this quality work, is #1 online in May and June, which -- in cookwares -- historically, listen, we are #2 in the cookware. Now we're in front of EBITDA, and we are historical leaders with a market share twice our first competitor. And that leadership is even stronger in this period. And another point to note, as you know, the retail business in China is being very dynamic and grows very rapidly. In the past few years, we've seen new platforms of online sales, the latest one and the most successful being TikTok. We are leaders on TikTok, and we take full advantage of the development of these new hubs or platforms to develop our business. If we now look at how our products are evolving, so sales per product line, rather, I'd like to make 3 comments. The core business, our cookware, electrical cooking is following the trend, the average trend for the group. The second point concerns home care, vacuum cleaning in particular, that's continuing to grow well on a structural basis. And we're continuing to consolidate our positions. And the third comment, looking at food prep and linen care. Food prep, where we're seeing a decrease of 15%, and linen care up 15%. So when people were at home, they were -- they wanted to buy food preparation devices and were not focused so much on linen care. So we're seeing the real effect of post lockdown on these product categories. Now I'm going to summarize our sales for the first half of the year in terms of geographic areas, and this table works in the following way. On the lines, you have the main areas that we're tracking. In the columns, the first half year 2021, the first half year 2022, the gap between 2022 and '21 and a reminder of the first half year of 2021 on a like-for-like basis in order for you to compare and the gap between -- with 2019, which is our reference year. So I'll start with the bottom of the table. So we have growth of 1.6% of our published minus 2.3 compared to the first quarter. And the first quarter of 2022 is almost plus 10% with respect to 2019. Now if we look at the plus 0.5% on a like-for-like basis, plus 29% last year. And we're at plus 13% compared with 2019 for total consumer. And if we go back to the table, and I'm not going to repeat myself, we have had -- you see all of the performances for the different continents but look at Asia and America. Asia as a like-for-like basis at minus 0.2% compared with plus 57% last year. So a very solid performance. That's plus 4%, plus 15% and for Asia and a minus 2%, plus 7.2%. So the problem is in Europe. We were at plus [ 34% ] in the first half of last year and minus 9% for this year. But we're still plus 6.6% compared to our reference year, which is 2019. So that is our sales activity. Now I'm going to hand the floor to Nathalie to talk about our financial performance.

Thank you, Stanislas. So with EUR 3.6 billion of sales, the group this year had operating income of EUR 199 million. So this is ORfA margin of 5.4%, so down from last year. This is impacted by currency effects at a like-for-like basis. The drop would have been EUR 78 million. If we look at the following slide, which is an important element to understand the evolution of our operating income, if we start on the right side of the table, you see that there's a real currency effect that's been impacting us in a negative way, EUR 43 million. This currency -- negative currency effect is the combination of a positive currency effect on sales. We saw that last year, and this is principally linked to the revaluation of the dollar and of the renminbi. You also know that we have a purchasing base for our products, be they sourced or components for manufacturing, which is very high in these 2 currencies. So the revaluation of these currencies with respect to the euro has an overall negative impact on the group's operating income. And this is what we measure here in the minus EUR 43 million. And if we go back towards the left of the graph, starting with EUR 320 million of operating income in 2021, we see that there's a volume effect that is negative, representing EUR 149 million. This is a decrease in the volumes sold with respect to the first half of 2021, which is a historic year or first half for the group. We also see that there's an increase in the cost of sales, EUR 189 million, the cost of goods sold compared with the first half of last year. This increase is a significant one, and that mainly takes into account the increase in transportation costs. We've been talking about this for a certain number of quarters now. We've seen a constant increase in the cost of maritime transports. And if we're comparing quarter -- half year to half year, this -- the impact is even more important. We also have an increase in the price of raw materials, energy. That's included in the EUR 189 million. There's also an increase in the storage costs and some under-absorption because in our sales volumes but also our production volumes, which have gone down. It's also important to note that the group has again succeeded in offsetting the negative effects, be it the currency or volumes or the increase in the cost of goods sold with price increases. So we managed to pass on price increases to our customers in a successive manner at the end of last year, at the beginning of this year and also during the first and second quarter depending on the geographic zones and the product ranges in order to offset for the deterioration of the cost factors and the decrease in volumes, obviously. So this increase in price is also associated with a positive mix effect. The group is able, as it is used to doing, to adjust its average sales price. We increased prices, but we also enriched our product mix. So this has a huge impact. It represents EUR 366 million in the first half of the year compared with the first half of last year. We also have 2 elements which are growth drivers. We've continued to invest in our growth drivers to ensure the promotion of our products in the first quarter, in the second quarter with a slow down on our growth driver expenditures that took place at the end of the first quarter. But compared with the first half of last year, these expenses are up by EUR 61 million. And we also have seen an increase in our commercial and administrative expenses. This is due to a base effect that was favorable last year that concerns the closing of our shops in Germany, which were closed for almost 6 months in the first half of last year, 5.5 months to be specific. And they're open now, and we also have an increase in administrative costs. This is essentially linked to the expenditures made by the group to modernize its digital platform, be it the digitalization of our back office and also the digitalization to ensure the development of our -- better knowledge of our customers in B2B and also for CRM. What we see basically is that we're able in the first half to totally offset the increase in costs to offset the deterioration of currency, thanks to price increases and the improvement in the product mix that was sold by the group. So moving on to the next slide. Here, you see the change in our growth drivers for the first half year, as I've just commented on this, with important expenditures concerning innovation. This is really one of the drivers, as you know, for the group's growth, especially for its long-term growth. So we're not slowing down on our investment in innovation in order to develop new products and to add functions to existing products. And we also see an increase in marketing and advertising expenses, as I indicated earlier. This is here to support the sale of our products and to help our distributors sell our products. Now from ORfA to net profit, there are some elements. So at June 30, EUR 13 million discretionary and nondiscretionary profit sharing other operating income and expense. Last year, the first half of the year was mainly impacted by expenses due to the closing of a site in Germany and the transfer of a part of the business from that site towards France. There is nothing equivalent in the first half of this year for the group. The financial result is down by some EUR 20 million. The main element that explains this deterioration corresponds to the cost of refinancing our activities in Russia, roughly half the gap, so [indiscernible] refinancing of our activities in Brazil. And there's -- the rest is a technical element with the variation of the valuation of output that was set up to cover our operations and the free shares and the -- for equity in the group. So there's no real impact on equity because of this. The tax expenditures are down. And this is due to reduced operating income and noncontrolling interest. That is the part of revenue that's [ super ] for this. So now I'll talk about the balance sheet. This is presented in a simplified manner. As you can see, there are a few elements that require any comments here other than the change in working capital requirements and the financial debt. So let's talk about operating working capital requirements on the next slide, please. So here, we observe that there's been a big increase in inventory. So we went from EUR 1.455 billion to EUR 2.241 billion in the first half of 2022. We started at the beginning of -- end of 2021, a real proactive policy to reduce stock. The objective was to be able to deal with demand and to absorb the inefficiency of supply chain to not be out of components or finished products. So this is what happened is we see an increase in our inventory. We've also had to deal with the increase, the higher prices for raw materials, components and freight costs, which is taken into account in our sales price and increased transport time for our finished products that are made in Asia and that are intended either for the U.S. or for Europe. This transport time really significantly increased between the 2 periods. So we have good quality stock. It was recently made up. And we were forward thinking in terms of the demand that we would have in the second half of the year. So we have important actions to monitor our cash collection and also the payment conditions that we give to our customers and for suppliers. In terms of receivables, it's stable compared with last year. So both receivables and payables fairly stable compared with last year. So if we look at cash flow generation for the first half year, starting with the ORfA at EUR 199 million, where we reintegrated amortization and employee profit sharing for adjusted EBITDA of EUR 321 million. This was deteriorated by a change in operating working capital requirements, an increase of EUR 636 million year-on-year. Investments in the first half of the year, EUR 164 million. And in this investment amount, I remind you that there's a substantial investment that the group decided to make in France in order to create a logistics platform intended for SDA products that will cover the whole European continent. This is EUR 85 million that was invested. And the expenditures are distributed over 2021 and 2022. And it should be active, should be up and running at the beginning of January of next year. EUR 102 million of tax and interest that were paid out. And the other elements for working -- nonoperating working capital requirements, this included fiscal and social debt. So we have free cash flow, EUR 683 million. And on this last slide, cash consumption increased net debt, which was at EUR 1.5 billion at the end of 2021. And last year, we paid dividends to all of our shareholders, Groupe SEB shareholders, but also minority shareholders in Supor. And there were other elements that impacted debt. This concerns restructuring costs, but also the purchase of shares to cover employee shareholding and also investment in our venture capital vehicle, SEB Alliance. So this led to net financial debt at the end of June 2022 of EUR 2.447 billion. The main financial ratios at June 30, that come from the tables that I just presented. So operating working capital compared with -- as a percentage of sales at 22.3% compared to 14.8% last year. So this is essentially due to the increase in stock levels, in inventory levels. So for 12 sliding months, our net financial debt over equity is 0.7. So net financial debt/adjusted EBITDA, 2.5 at the end of June.

So I'm now going to conclude this presentation by sharing our outlook for 2022. We had a very solid first quarter, and we were -- at the end of the first quarter, we thought we'd see a progressive improvement in the economic context and that we would see growth for the rest of the year. But of course, the second quarter saw a deterioration of the environment in general. And we're anticipating that this environment will continue in the second half of the year. In these conditions, the group has decided to review its sales and operating income that was previously communicated. And so we're talking about 2022 sales stable ORfA margin in the range of 8% to 8.5% for the full year, which corresponds if you've done your calculations to an operating margin in the second half of the year, which should sit at the operating -- level of the operating margin for the second half of last year. So we're continuing to invest. We're continuing to cover all of the inflationist factors through the improvement in our mix and prices as Nathalie spoke about. And we are hoping to come back to our similar operating margin to last year in the second half -- at the end of the second half of this year. We have to take into account additional cost this year, higher than we anticipated at the beginning of the year. In these additional costs, external ones, we are including raw materials, components, freight and, of course, currencies. Everyone can see now that there's been a drop in the euro with respect to the dollar and the yuan. This is going to be a topic in the coming months. And we now estimate the additional cost of EUR 300 million compared with the initial estimated amount of EUR 200 million. So how we're going to manage this? What are the guidelines for managing our business in the second half of the year? We started by setting up the necessary actions in terms of prices and strict control of operating costs. For prices, we are -- we have the ambition of offsetting all of the additional costs that we're dealing with, the additional, additional costs that we're having to deal with. And for the control of operating costs, we want to have OpEx that is comparable to the second half of last year. So we're gradually going to adjust our inventory levels to our business level in the second half of the year. So we'll find balance between the inefficiencies of the supply chain and will -- the determined will that the company has to come back to stock levels that are closer to our historic levels in terms of sales. And of course, we will continue our long-term value creation strategy. Our -- we're continuing to invest in innovation for new products. And we're also working on the development of the company in China on Professional Coffee. And we are determined to ensure that despite our short-term disappointing performance levels that we're going to maintain our heading, and we'll be quickly back up to performance levels that are more in line with our historical levels. So Thierry?

Thank you, Stanislas. Thank you, Nathalie. I'm now going to hand you the floor for questions. So firstly, for our operator to give you instructions.

[Operator Instructions] First question from Mourad Lahmidi from BNP Paribas.

That are contained in the second quarter despite the much higher dollar and the yuan, I guess, the hedging has protected you in the second quarter. Does the rise of the dollar, will it not be more significant in terms of a negative impact in the second part of the year? And on the first part of 2023, same question for the yuan. And my second question is still bearing upon the EBITDA bridge in the rise of the cost of goods, could you give us a rough estimate of the breakdown of the effect of the input cost, raw materials, et cetera, versus absorption? What was the most significant factor between these 2 elements?

Nathalie, it's for you.

Yes, as a matter of fact, the impact or I would say, the devaluation of the euro versus the other, the 2 currencies is fairly limited in the second quarter because the group has been hedged. As you know, we have a hedging policy for the midterm, and our hedging positions are put together with the maximum deadlines over 18 months on a rolling way. But starting the year, we want to have a hedging level that is not necessarily 100%, but fairly satisfactory, so that it limits the impacts of changes in currencies over the period. It will be the same situation, I would say, for the second part of the year. Also, we started to put in place hedging positions for 2023. Some of them were put in place, of course, just when it was with the euro-dollar around [indiscernible] and renminbi whose value at the time was widely higher than [ 7 ] and what -- compared to what we have today, the fact we're putting in place these hedging policies on a rolling and long-term basis enables us to have enough time and latitude to adjust our prices, our mix and therefore, not be impacted immediately by changes in currency values. Look, I think I answered the first part of your question. Now with respect to the deterioration of the cost of sales in the EUR 190 million, which are on the bridge, there are EUR 80 million that we allocate to transportation costs, especially of maritime transport with deteriorations where there is a transport hike due to sort of this organization of the supply chain in this field. We are also impacted by price hikes, which are coming from the rise of the oil brand, the [ petroleum ] brand and the index that is passed along on the prices of maritime transport. Now the other factors are a bit less impactful. However, if you take into account raw materials, purchases, we have about EUR 50 million there, also an increase in our storage expenditures and EUR 10 million in [indiscernible] absorptions.

Next question from [indiscernible] from SG.

Yes, Marie-Line Fort, Societe Generale. I have several questions. First of all, what kind of currency effect would you expect in the second part? Should there be a similar impact for the coming future? I know it's difficult to make some forecast. More strategically, will you reconsider your commercial strategy? You have increased fairly sharply your prices. You have increased the mix. You launched products with average prices fairly high. And in Europe, it seems to be off compared to the current demand in terms of commercial strategy. Therefore, are you considering to reposition your products and have a strategy that promotes slightly lower prices for your products? I have also a question about the volume effects, which is fairly negative in the first half on the ROPA, which shows a decline in production. Do you think production manufacturing should pick up in the second part?

I'll answer your first question and your third question as well. So on your first question, the currency impact on our sales in the second half year as it stands now, it should be around EUR 100 million. But again, given the current state of affairs, and your second question now, in the ORfA bridge, we are on sold volumes and not product-related volumes. So it's important to note that and to pinpoint it because the difference between the 2 depending on the meaning you have can be found positively or negatively and now [indiscernible] inventories. Yes, we expect lower sold volumes in the second half of the year. Having said that, a positive effect for the full year related to the price hikes and the mix being more enhanced and all the actions we're putting in place to protect the margin of the group.

Let me take the second question on the commercial strategy.

Thank you, Nathalie. So [ Mr. de Gramont? ]

Yes, we will not change our commercial and product strategies. It's not that we are not looking at what is going on in the market, but actually for more than 20 years, the group has been working on all its businesses through upgrading innovation, opening new categories or improving product performances and product specs. And it confirms -- I mean, it's working. So we don't see any need, therefore, to mark down, to go down in our brands. So there are price moves which are unheard of in Europe, especially in terms of the swings. But we are quite confident about our ability in passing along the fair value and price to consumers. Therefore, we will not change our price/mix strategy based on short-term events. Hey, let's not forget that the basis for comparison when you look at performances in Western Europe, we compare to 2021. That turned out to be extremely dynamic with over consumption of our products that we might have underestimated or undervalued. And when you look at the trends of our product ranges compared to 2019, look, we are still in double-digit growth in a very dynamic growth context. So we want to remain cautious. We want to maintain a strong direction in terms of growth drivers around renovation, innovation and the creation of value. And that's it. So we will let our strategy remain unchanged. We have 3 questions now. The first one, in terms of the 28% rising inventories, how do you break down the volumes and the value and inflation, by the way? Nathalie, perhaps?

Yes. We see a breakdown, which is fairly -- well, which is more due to the volume effect. About 60% or 67% is due to the -- comes from the volume effect in terms of the increases of inventories. The rest is due to value and transit.

We have another question pertaining France. Minus 20% in France with a strong base effect. Could you compare the sales of France compared to 2019, especially in line of the momentum of the group?

Yes, let me take this question. Let's start with the small domestic appliance minus 11% in the half and plus 11% compared to 2019. These are figures at the end of April, might be a bit lower. I think we are around 5% or 6% of growth versus 2019 with respect to the French activity. And in relation to our momentum in the group, it's neutral or slightly better than Western Europe.

Are you foreseeing an increase in the promotional activities from retailers after the summer in order to reduce their inventories?

There are some temptations there. What we see from our retailers now it's more about lower traffic. And from that standpoint, when people don't go to stores, bringing down prices is less efficient or less relevant. We will see pressures on prices. They are included into our assumptions related to our forecast for the second half.

There's another question. Do you think that the decrease in volumes is not a reflection of the fact that the prices have increased too much? And is it -- if it comes from the product mix, price effect is not the contrary to what you said about the markets?

Well, now you're mixing everything, but thank you for that question. It's very relevant. In the mix effects, you have 3 types of mix effects. You have the product mix with the categories, you have the geographic mix and also the distribution channel mix. When we're developing our direct-to-consumer business online or in the retail shops, we sell at price levels that are higher. And so it has a very positive mix effect on our business. We can observe in certain categories, the categories for which we don't necessarily have a lot of innovation, that's what we call the core market categories. There's a higher tension on the mix there than for versatile vacuum cleaners. And we're seeing an increase of the mix effects, so an increase in the value of our products, the loss of market share for established brands in this period or for 2 periods. If we look at the medium term, we're in categories and markets where the valuation is quite constant over time.

I don't see any other questions for now. The price/mix effects is very important in the half year. Can you break down and tell us the price effect in this mix?

So the pure price increase other than the -- and removing the improvement of the product mix, this represents 50% of the amount that we see here.

Well, I don't see any other questions by telephone. Are there any questions coming in?

I was wondering if the additional costs that you're anticipating in the second half of the year, how much is this linked to the effect of having high inventory levels in the first half of the year, so you still have product in your inventory. So can you shed some light on this?

[ Mourad ]. So we have stock rotation pace that's quite quick. But what's going to happen in the second half of the year is that we're going to continue to slow down production. And so in our estimates for our annual revenue, there'll be the [ SEB-absorption ] effect because our industrial tools will be less used in the second or the last part of the year. So less industrial efficiency, and this will be seen in the cost of sales in the second half of the year, representing roughly EUR [ 15 ] million. Did I answer your question?

Yes. That was clear.

Expect to enjoy any benefit from falling commodity prices in China, steel, aluminum or is it largely held on H2? Again, for you, Nathalie.

So there are 2 hedging methods for our -- the group's exposure. So as concerns the purchasing of raw materials for Europe or the U.S., we have hedging policies on the market, so medium-term hedging. So there's really nothing to be expected in that part of the business. In China, we have a hedging mix on firm purchases. And in that part, yes, there could be some upsides in the future, but we have to bear in mind that what will be made in the second half of the year is made with raw materials that have already been purchased -- have already been sourced. Are there any other questions?

Yes. The following questions comes from Marie Fort at Societe Generale. I have another question concerning the driving forces. So are you going to continue investing in your growth drivers to the same extent in the second half of the year?

I said that we have very different situations in China, very dynamic economy. And we're going to continue to invest because these investments have a quick return on investment and is significant in terms of its impact on sales, market share and margin. For the other geographic zones for the group, we're considering aligning or adjusting our investment level to the very high investment level that we had in the second half of 2021. So if you're going to make forecast, this is a very high level. It's a historic high level in the second half of 2021. It won't be more than what we spent last year. In any case, this reflects that in the first half of the year, we doubtless continue to invest on the performance expectations for the second half of the year that did not come to pass. And so we want to rebalance our investments according to what we will generate in terms of business activity. So for the second half of 2022 should be equal to the second half of 2021. And moreover, the way in which we're looking at the second half of the year is that we're going to do the same work on volumes, price, product mix, absorption of inflation on the top line on gross margin. And then we'll bring down our expenses compared with 2021, and this should allow us to achieve a level of operating margin in the second half of the year at 10% to 11%, which is comparable to what we had last year.

Thank you. Let me just add in terms of our operating margin that was mentioned at 8% to 8.5% in our information, we have to take into account 80 basis points linked to currency. Today, we are seeing a strong weakening of the euro compared to the dollar and the yuan as we said earlier. So this has a very positive effect on our sales, a negative effect on our operating income. And so by definition, a major impact on our operating margin, but this is not a structural deterioration compared with the rates that we normally have.

We don't have any other questions. Stanislas, would you like to make a last comment?

Yes. Thank you, Thierry. I just wanted to say that we're really focusing on the management of this year and on the achievement of the guidelines, the guidance that we're proposing today. There are complicated market conditions today, and we're seeing some negative impact on our business. We're continuing our path, and we're staying focused on the excellent work that's been done in terms of managing prices, product mix and the introduction of innovations, a strict discipline on our operating costs, a lot of work done to reduce our inventory levels in order to come back to a more balanced inventory level. In terms of our need to serve the market and our need to reduce our working capital requirements, both will be taken into account. And we'd like to thank you for your trust for following us, and we hope that we'll see you again in September for our third quarter results.

Oh, apparently, there were some other questions by phone.

First of all, at this stage, do you feel that you're maintaining your market shares? Or are you losing any? And in this picture, in your view, what are the good news, if any?

Could you specify the second part of your question, what kind of picture?

The picture of these earnings. You mentioned that in China, you were becoming #1, I believe.

Yes. Okay. Sorry. Yes, I think that our market [ share ] in Western Europe at the end of the period is eroding EBIT, is going down a bit. Well, we don't have the figures yet. The panels we have are at the end of April and May, with perhaps slightly stronger impact in France due to the weight of the major supermarkets, hypermarkets and the [indiscernible] and commodities products. I think for Europe as a whole, this drop will be very slim. It could be impacted here and there by customer reactions on price hikes, but we don't see any strong trend of any decline or eroding market shares that would be meaningful. Now the good news, well, I spoke about China. The excellent good news coming from -- on this half year is in China, which quarter after quarter, half year after year, confirms its resilience that even in markets that might be a bit lackluster, we can have better margins. And we can adjust to the distribution networks, which are changing very quickly. TikTok, that didn't exist 18 months, that's 10% or more of our business. So we have an ability in China in adjusting to the new developments of distribution levels and to be ahead of the -- in terms of upgrading and innovation, the other excellent piece of news is the Professional business. We entered 2020 in a professional situation where our customers were closed and the most retailers that bought our products, well, stopped strongly their purchases. We had good news on the resilience through services and through the small customers who continued more or less in different regions to consume. We sharply developed our portfolio of clients and diversified strongly that portfolio. And today, we are back at levels which will reach the highest levels in the next 3 to 4 quarters much stronger because now we have a portfolio that is more diversified. We have a service business that is stronger than before the lockdown. And hopefully, the deals will pick up again when all the major supermarkets and retailers trusted us will have, again, some investments ready. So these are the 2 excellent pieces of news. China, that's about 25% of the group's sales. Now the Professionals, that's over 7%. So all in all, about 1/3 of the group is in excellent position. Am I answering your question?

Yes. I'll see you in 3 months, Thierry.

Thank you very much. Any other question? No?

Will you please wrap up the conference today, sir?

Look, Stanislas has summarized the situation quite well. So we want to continue on this trend, which through the product mix and innovation and sometimes through price hikes, we will offset headwinds, which, as we said before, which will be higher than what we foresaw. We feel we are in a position to offset them in the second half of this year and therefore, have earnings in the second half pretty close to what we had last year, like with sales. So we'll meet you again in 3 months' time, and we thank you for your attention. Thank you.