Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the DeNom 2019 Q1 sales. At this time, participants are in a listen only mode. There will be a short I must advise you, the conference is being recorded today on Wednesday 17th April, 2019. I'd now like to hand the conference over to your speaker today Nadia Bensalem Nicholas.
Please go ahead.
Thank you very much. Good morning, everyone. This is Nadia Bensalem Nicola speaking. Head Investor Relations of Danone. I'm here with Cecile Cabanis, CFO.
Thanks for being with us for Danone's Q1 sales conference call. As usual, we'll go through the presentation and then the Q And A session. And before we start, as usual, I invite you to go through our usual
Good morning, everyone. Thank you for being here this morning. As you've seen from the press release, Q1 if in a nutshell, it's in line with expectation. It shows good progress and it allows us to confirm our 2019 guidance as well as our longer term goals. If we move to the slide and starting with Slide 3, you remember that in our 2018 and call, we shared with you our 3 priorities for 2019.
And I wanted to give you an update on this. First, with the like for like sales growth at 0.8%. Sales are showing as anticipated, low start to the year, which is resulting a combination of phasing and technical factors, which were already highlighted at the time of the full year results and fully factored in our guidance. All our 3 reporting entities are contributing to growth and the underlying fundamentals of our business are strong. Top line is set to accelerate from this quarter.
2nd, even if it's a sales quarter announcement, on efficiencies just to let you know that we continue to deploy this quarter efficiencies across the We are confident to deliver half of our 700,000,000 remaining expected savings from the 1,000,000,000 protein plan this year. And we will continue to benefit from the continuous adaptation and daily hearing of our organization. Lastly, we demonstrated again this quarter our focus on allocating capital with discipline and actively managing our portfolio to ensure that each of its components participate fully to Denham's value creation journey. This was highlighted last week by the sale of our loss making U. S.
Fresh Food business, has been formed, and this transaction fully participates to both our short term margin improvement commitment as well as our long term value creation agenda. On portfolio management, also, as I mentioned, during the full year call, we are having a very granular approach, and we are active in term of projects portfolio with the continuation of some noncore references, notably in the premium dairy business in Norang. So overall, as I said, this result reflects continued solid execution against our priorities. And it leads me to fully confirm our full year guidance of around 3% like for like sales growth and at least 15% of recurring operating margin. If I move to Slide 4, it will enter now into some details, starting with the usual bridge.
So you see that reported sales are 6 1,000,000,000, up 0.9% in reported terms. This quarter, we had no scope effects The currencies had a minor negative impact of minus 0.2%, including the impact of EIS 29 in Argentina, As you know, we decided to exclude Argentina from our like for like performance from this quarter in order to have a better read of the performance due to the country's hyperinflation. You can see here the impact of the like for like performance in the country in a separate block 0 point 3%, which is in line with the 30 basis points of contribution to the overall growth that we registered last year. Moving to our like for like performance, sales grew 0.8%, driven by value 3%. With volume down minus 2.2%, still penalized by the situation in Morocco.
If we exclude the impact of the Moroccan boycott. Sales growth was 1.5%. If I move to next slide on Page 5, in the in this slide, you can see the underlying performance of each reporting entity in this quarter. So as I said, our screen reporting entities are all contributing to growth this quarter despite a very touch base of companies and in Q1 last year. As a reminder, our Q1 sales last year were up nearly 5% for the company, and up by 14% in specialised nutrition in a period where the boycott in Morocco had not yet started.
Growth is driven in Q1 by value, solidly positive for the 3 reporting entities. This is the result of some and constant strategy focused on profitable growth initiatives. Value growth included price increases, in particular, in the water business in North America. And of course, a positive product mix supported by the premiumization of our portfolios, through innovations across categories, region together with, as I mentioned earlier, some discontinuation of commoditized and profitable product lines. Let's now move to each entity, and I will start with, essential and Dairy plan base.
As we announced, we are reporting for the first time this quarter, essential at dairy end plant based, Novam and International together. At the single, essential and disciplined based entity, which is aligning the reporting with the way we manage the business. So EDP registered a low start to the year in Q1, 0.2%, including the effect of 1 less trading debt that affected, in particular, our fresh activities in both Norham and Europe, It doesn't change the acceleration outlook for 2019, and we expect GDP growth to rebound in the second quarter at more than 2%. If we look at our main geographies, North America posted moderate growth, moderating versus Q4, In an environment where competition is increasing, we remain disciplined on our profitable growth strategy. We continue to pursue value growth.
This was highlighted in Q1 by targeted price increases, investment in more profitable, smaller format and portfolio rationalization notably with premium dairy, where we discontinued non core SKU representing 10% of this business. Category evolution overall remains unchanged versus the end of last year, which declining yogurt in the U. S, strong momentum for plant based beverage and coffee creamer and a flattish organic milk demand. For your group, the U. S.
Category remain under pressure. We are outperforming the category, thanks to our investment in pocket growth. This includes plant based yogurt continuing to grow double digit. It includes also probiotics with our Activia that it's continuing to post the highest velocity amongst all innovation in the yogurt space. And it'll include low sugar, your growth will essentially launch too good, which is performing well.
Momentum remains strong for coke 6immers, supported by category fundamentals. In plant based, we see dynamics that are similar to Q4, and we have Vega that is down double digit this quarter impacted, if you remember, by the aftermath of an unsuccessful reformulation last year. Overall, the performance of the quarter in the U S was impacted in February by the final stage of our IT system migration and integration with former WhiteWave. This is fully integrated and we expect no further impact on that front. Europe, Europe reaffirmed this quarter, the stabilization achieved at the end of last year, benefited from strong value added innovation momentum and investment in fast growing trends, organic growing at strong double digit probiotics, with the launch of Activia Shot, bringing, especially Italy back to strong growth, undergoing initiative with Activia mix and go expanding into new moment of consumption and no added sugar for presenting almost half of the volumes in the UK.
First, remains under pressure despite good results from Dan and Brown with the successful activation around the 100th anniversary of Benoit. Moving to CIS. CIS registered solid growth supported by the indulgence segment with the local brand Dennis more and by good growth in Ukraine. Alpro has been recently launched and introduced as part of our work revenue synergy stream. In LatAm, Mexico registered strong growth and Brazil posted a 2nd consecutive quarter of positive growth.
And finally, in Morocco, we have said that we are still impacted by the consumer boycott, which are decreasing in line with Q44 2018. And once the base of comparison will unwind, we expect Morocco to grow at a double digit rate. Now if we look specifically at the performance of the plan based business across the globe, Growth continues to be strong and fully supports our strategic ambition and plan based plan in this category. Across the world and segments, plant based posted mid to high single digit growth, still can so delicious are growing strongly. We are expanding silk from its U.
S. Base into Latin America. We took a lot quarter about the acceleration of the rollouts in Mexico that is continuing. Alpro is continuing also to post double digit growth driven by innovations using the full range of plant based gradients and further geographical expansion in 2000 and Central Europe. Looking forward, as I said, we expect EDP growth to accelerate in the second quarter at more than 2% and then sequentially in the second half of the year.
Let me now move growth in Q1, slightly ahead of our expectation. Within this, growth was led by medical which registered mid single digit sales increase and even stronger in pediatrics. Growth in Europe in medical excretion was driven by a strong momentum in Poland and the Netherlands. And the sales in China were up a double digit supported by, aging demographics and by a strong commercial activity on Neuquette. Moving to Early Life Nutrition, growth was as expected negative on the back of decreasing sales in China at around minus 15%, where as expected, the performance was impacted by the very tough base of comparison of Q1 last year, where we grew at, more than 50.50 percent.
There was no surprise in term of Gori, growth slowed down, development by stage and channel mix, further premiumization trend is continuing and the regulation frame is now stabilized and fully enforced. Our expectation in this category remains unchanged for this year and beyond. Moving outside of China, Yalian posted mid single digit growth. This outperformance was driven, in particular, by Southeast Asia. The growth in Europe continued to be impacted by a decrease in optimal sales in the UK versus 2018, while we continue to deploy the recovery plan already highlighted last quarter.
To conclude, we inaugurated a new plant in the Netherlands to support the global growing demand for IMF. It's a sustainable zero waste facility that will support the expansion of a specialized infant formula products tailored for baby with specific health needs. And I take this opportunity to mention that tailored nutrition was the fastest growing category in our expect an imbalance year for Specialized Nutrition with the Q2 broadly in line with Q1 and an acceleration in H2 on the back of the return to strong growth in year end China in the 2nd part of the year. If I move now to water on Page 11, water performance in Q1 was up 3.9%, confirming the strong fundamental of the industry and supported by improving hydration habits among consumer. We had growth in all regions.
Europe posted moderate growth. It's a period where we have renewed trade contracts and where we were able to pass some price increase. Growth was particularly strong again in Poland, where the category grows at double digit rate, and in Denmark where Aquador innovation in Sparkling Waters is doing very well. In the UK, benefited from some inventory buildup by retailers to prepare for a Brexit. In the U.
S, Evion delivered strong growth as a result of expanded distribution and share gains in convenience store supported by the agreement with KDP. In Asia, top line evolution was solid, thanks in particular to Indonesia. In China, Maison is preparing for the incoming summer season. We recently launched Maison Plus and enhanced version with some vitamin added. Growth was solid in all countries in Latin America.
Bonafont in Mexico was supported by strong category momentum, as well as another successful addition of our consumer activation around gender equality with La Carrera Reyes, that involves 70,000 women each year. Our outlook for 2019 remains unchanged continue to expect solid growth for the full year, which should be pretty stable across quarters. Moving to Page 12. As a wrap up, and as I said in the introduction, Q1 proved to be in with expectations. And looking forward to the remainder of the year, I'd like to reiterate my strong confidence that sales growth and margin are set to strengthen through the year, and it's explained by the following topics.
The first one is the base of comparison that will mechanically be more favorable starting from Q2 with the lapping of boycott in Morocco at the end of April and even more from Q3 as the comps for Early Life Nutrition China is. 2nd, we continue to progress well on our agenda of threatening our profitable growth model, building on portfolio valorizations for pricing mix and innovation as demonstrated again in Q1. Further delivery of efficiencies that I mentioned quickly and benefit from constant optimization of our organization. This will allow us to exit the year, as we said, in Q4, with the sales growth rate consistent with 2020 objectives. And on the margin extension, you have to note that it will be also unbalanced with a stronger contribution in the second half, which will be supported by the positive impact of the sale of Urban Farm on our recurring operating margin, which will contribute to our margin guidance delivery.
And some accounting factors will also impact our margin with a net negative effect that will be concentrated in H1, such as IAS 29, which was implemented starting Q3 last year. So on Page 13, and with all this in mind, we very confident that we are progressing at the high pace towards both our 2020 objectives and 2030 goals. 2019 is an important milestone in this journey, and we are making sure it will be again another year of delivery on our commitments. I'm finished with the slide, and I will now open the floor for your questions.
Thank you. Your first question comes from the line of Warren Ackerman of Barclays. Please go ahead.
Good morning, Cecilia. It's Warren here at Barclays. Two questions from me. The first one, Cecile, just on EDP growth, it was lower than consensus. There's lots of moving parts that you mentioned in your prepared remarks.
I was wondering whether you might be able to be a bit more precise on some of the moving parts. For example, Vega, you said down double digit how much down was that? The IT issue you mentioned France you said was negative. I'm just trying to get my head around all these kind of moving parts, what impact they had on the first quarter on EDP? And then just trying to get your confidence around why the 2% in Q2 and then thinking about the back half, does that accelerate further?
That will be the first question just around EDP. And then the second one, just on back on China, baby, the down 15%. I was just wondering whether you might be able to split that between the direct channel and the indirect channel I imagine the indirect was down a lot more given the cross border e commerce regulation that came into place and over the grace period until March. Maybe you can scope out that for us? And then maybe as we look into the back half, when we should expect the kind of entry into the Ultra Premium Plus in China and whether we should expect some inventory build around that.
So really around China baby, indirect versus direct. Thank you.
Hey, good to have you back.
Thank you. Thank you, Nat. It's going to be back.
So on your two questions, first on EDP, if I take the three main blocks first. As I said, Norham is having a moderate growth that is more moderate than Q4. Europe is, confirming stabilization. And then in rest of the world, we have the impact of Morocco. So we are slightly negative.
If I concentrate on North America on your very specific question regarding IT impact, it's around EUR 10,000,000, a bit less than EUR 10,000,000, that was impacted to the quarter. Then if we look at the different blocks, you know, that we've been impacted by 1 day sale, both in Europe and Norham. In Norham, we have discontinued around 10% of the premium vary of nonprofitable SKU. So this is also a factor. And overall, for your group, the category is negative, but we are outperforming the category.
As I said, the momentum is strong for coffee creamers and on plant based, we have the same dynamic that we've seen in Q4. So this is overall, what we've seen. And then we had another quarter of fresh food, because we sold it, last week. For the 2% acceleration, I think part of it is that the mechanical effect will lapse So we will have an automatic acceleration, whether we are talking about the trading day the ISIC disruption or the Moroccan boycott So it will accelerate. If you look at the growth of Q1 in EDP outside, the impact of Moroccan it's already 1.4%.
So we are very confident to reach more than 2% growth in the Q2. Coming to your question on China. So China is minus 15% and fully expected. Overall, indirect was more negative. For sure, it it weighed more into the overall performance.
And then we continue to see in term of category and in term of channel mix, the same trend that we discussed in Q4. So today, the indirect direct, it's still around 36% we continue to push on lower Tier cities into extending distribution. And as you know, we have a lot of opportunities in growing more premium because we have only started last year with, upcoming premium. So overall, there has been indirect steep decrease, which was the main driver of the negative in Q1, knowing that, direct were also impacted because last year was the time where we were building the channel at a very fast pace.
Your next question comes from the line of David Hayes at Societe Generale. Please go ahead.
Thank you. Good morning, all. So 2 for me, if I can. So just on plant base, the Alpro or ex U. S.
Business, I think you quoted growing in double digits, which is very similar to last year. I just wonder whether you can talk about how you expect that to accelerate moving forward? You obviously outlined this very long term plan for plant based sales to grow around about 15%, 16% compound annual growth. So are we looking for that to step up? And does that expect Or do you expect that to step up in terms of growth rate through the year?
And then secondly, just on the pricemix in the quarter. I know you put mix in with that price number unlike some other of your peers. So I just wonder whether you can give us an indication of how much of that price mix was price and how much would be mix, if you were to break that out? Thank you so much.
Thank you, David. So on Al for the acceleration of a growth will come from, 2 things. The first one is that We really continue to expand into geographies. I mentioned that, we were starting the expansion in Central Europe and 1000 Europe. We are starting in Russia, which is a very big country.
So we will continue to and hence, overall, the expansion of Alpro into territories where it's not. And the second thing is around Address and Sierra. You remember, we, for example, last year, launched an ice cream, which is working very well in Europe. And there are some other opportunities in term of address and fee. So we are fully confident on the building of our plan based plan, looking at our ambition that we mentioned last year in the investor seminar of 5 and this is the way we will continue to expand.
And this is Alpro, but as you know, there is also silica delicious that we are extending outside of Norham into Latin America. And on your question, around the mix mix are positive in, of course, in Specialized Nutrition, we have a negative mix because of the country mix and given the performance of of China. But overall, if we take the different, activities, it repeats mostly mix and it's both products and countries. On water, it's more price than mix and the Lomi is mainly due to a negative country mix. And on socialized nutrition, we have a positive product mix on crediting up, which is compensating a negative countries.
So that's, overall, the details.
Thank you. Your next question comes from the line of Martin Deboo of Jefferies. Please go ahead.
Morning, everybody. Cecilia, it's just a very quick question on Earthbound, particularly in terms of what impact it might have on full year margins. I mean, I guess the question I could reasonably ask you, I kind of It was a very profitable business, but was it breakeven or was it loss making?
So earthbound was a loss making business. And as I said, it would indeed be favorable in term of margin, which means that it fully contributes to our guidance of margin for the full year, If you remember, in the full year 2018, I said there are 3 elements for margin: value growth, efficiency and portfolio management. So this is one of the elements of improving margins. So it's a loss making business. It's around EUR 400,000,000 net sales, and we'll come back in H1 on the detail impact.
Okay. Thank you for that.
Thank you. The next question comes from the line of Alicia Faury of Investec. Hi, good morning, Cecile. Just on the margins still. I was wondering if you could perhaps give us some examples or some color around how the organization is adapting deliver the margin guidance.
That's clearly one of the factors you called out there, but some color would be helpful. And then on the margin, you mentioned H1 would see a more significant drag from a current from the application of the accounting change. Are we to understand that margins will still be up in H1, if you could just comments on that? Thank you.
Yes, margin will improve in H1. The comment I was making was say that it will improve less than in H2, especially on a reported basis, given a certain number factors that I quoted in the presentation. Then on your question of margin improvement from Sean, you remember, maybe, but I will come back on that, that in the full year call, we mentioned 3 initiatives. The first one is to complete the synergies between the medical nutrition and the Early Life Nutrition business and to really combine into one single entity. So this will bring some efficiencies.
And then we are changing our regional footprint to remove a layer. So that will also contribute to the overall efficiency. And finally, we are studying the next generation of what should be the business services for the next 5 to 10 years, but this is still understood. And then we have a local initiative everywhere on how we can optimize the organization. So it's not a big a big operation.
It's really optimization in each part of the organization locally regionally in order to make sure that we continue to improve our efficiency.
Thank you. And the last question comes from the line of Jan Marco Ferro of MainFirst. Please go ahead.
Thank you. John Marco from MainFirst. Just two questions for me, please. Also one in respect of IRFOUND. Do we have to expect those impairment in relation to this disposal as it was loss making.
And the second question is more also in respect of Morocco course, you will face now a low base, but on the other side, how is the consumer sentiment and especially with social media developing at the moment?
Thank you for your question. So on Earthbound farm, yes, we will have an impairment. So in terms of net nonrecurring loss, it will be around $100,000,000. It will be the results of the impairment of the assets and the loss on disposal, which will total to a $200,000,000 loss and it's compensated by a positive tax effect of around EUR 100,000,000. So the net impact will be around 1,000,000 of dollar, and it will be booked into H1 accounts.
Then on Morocco, yes, there is a mechanical impact from the boycott. But we are seeing a good signs on consumer sentiment. And there has been some very encouraging development towards some innovation that we did with a very nice performance also of the net and the innovation that we did, you remember, in alve skin milk, is working well. So we are seeing a good sign in our ability to continue to improve growth and continue to regenerate the overall momentum that we, we lost. And there are no more noise really on social media
Our final question comes from the line of Guillaume Del Bank of America. Please go ahead.
Good morning, Cecile. Two questions for me, please. The first one is on Brazil. Because you mentioned in your prepared remarks that Q1 was the 2nd consecutive quarter of positive like for like sales growth there. So is it fair to say that you've now turned a corner in Brazil?
And should we expect some further acceleration going forward above and beyond the easy comps you'll be facing in Q2 when you were also affected by the truck driver's strike. And then my second question is on pricing EDP because in the press release, in the outlook, you confirm high single digit milk price inflation, so very much in line with what you were seeing in February. But do you think it will require some pricing actions, this year? And what kind of impact would you expect on your volume performance as a result this potential price increases?
Thank you for your question. So in Brazil, indeed, Q1 was the 2nd consecutive quarter of growth after several quarters of steep sale decline. We still have volume that are declining, and we continue to progress in the the portfolio towards more liberalized products. Comps will have a favorable impact in Q2, and top line acceleration will come also from our initiatives in increased innovation momentum, which are really addressing the local relevancy with smaller more affordable format and also the introduction of a plan based offering in the country. So, this is for Brazil, on the EDP pricing, there has been, as I mentioned, some competitive pricing fees in NOM, in the Q1.
We've been able to in the trade negotiation, especially in France, to pass some positive net net, we don't expect much more from pricing for the rest of the year. And we are really focused rather on mix and premium innovation. Now in very specific inflationary country, if We need 2. There might be some, but today, this is what we have. And then quarters on, compensating milk inflation, it's pricing, but it's also, what I said around every time we innovate, we need to make sure that we innovate with, gross margin that is accretive to the overall volumes, so putting the high price at the time of innovation.
Then we have also efficiencies and productivity, which are a big fact in compensating for inflation.
Thank you very much.
You. I think there's no more questions. So, we wish you a great day and the team is here if you have any further questions.
Thanks. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.