Good morning, everybody. Ladies and gentlemen, it is my pleasure to welcome you to the Lindt & Sprüngli telephone conference we are holding on the occasion of half-year results 2019. During the presentation, I will give some additional comments to the charts that were uploaded this morning to our website. I will guide you through the slides via webcast. The result presentation will take approximately 20 minutes. Following the presentation, I will hand over to the operator, who then will organize the question and answer session. With regards to the agenda, we will talk about performance highlights of the first half 2019, then I will go more into the detail on the P&L, on the balance sheet details for the first half, and then I will give you a short outlook as well for 2019. Then we will do the Q&A.
Let's move on to the performance highlights, starting with the P&L statement. We go first into the overview of the results. Organic growth for the whole group reached 6.2%. As the Swiss franc strengthened mainly against the euro and pound sterling, we achieved 5.4% growth in Swiss francs. Organic growth of 6.2% is in line with our 2019 full-year guidance of 5%-7% revenue growth. Growth in NAFTA is at 7.2% after six months, which is above our guidance of around 4% growth in that region. I'll talk about this later. Europe is growing by 5% and rest of the world between 8% and 9%, which both are on target. We are pleased to deliver again good profit figures that are in line with our guidance. EBITDA is growing by 24.4% on EBITDA margin of 14.4%.
This is partially driven by the impact of the new IFRS 16 leasing standard and the higher depreciation of just below CHF 40 million coming from the new accounting standard. Excluding this impact, EBITDA margin is at about 12.3%. EBIT has grown faster than revenue also, and EBIT margin is now at 7.2% in the first semester, 20 basis points above 2018. Net income increased by 2.4%, and net income margin decreased slightly to 5%. The driver of this decrease is also IFRS 16 accounting change, and excluding the accounting change, net income margin is at 5.3%, which is 20 basis points above last year. As in previous periods, the EBIT figure shown is being charged by non-cash flow amortization of CHF 4 million for the first half, which is CHF 8 million for the full year, related with the Russell Stover transaction.
The set of figures on sales and profitability shows that despite the challenging market, trade, and consumer environment, the trend to premium chocolate is confirmed and continues. Before talking about the balance sheet, we should bear in mind that the IFRS 16 change has led to additional assets and liabilities of CHF 516 million booked on January 1st, 2019. Therefore, we are showing the numbers compared to January 1st, 2019, not December 2018. The reduction of the total balance sheet between January 1st and June 30th is mainly driven by the share buyback. We have repurchased shares for about CHF 330 million in 2019, which brings us to about CHF 455 million for the overall share buyback program. Equity is also shown versus status January 2019.
Compared to December 2018, the equity ratio is dropping by about 4 percentage points, driven by the increase of the balance sheet total by the IFRS change. The reduction of the equity in 2019 is also related to share buyback program. The equity ratio is now at 57.3%. As you can see, we continue to have a very strong balance sheet. The net debt position is also impacted by the IFRS change and had to be restated by CHF 516 million in January. At the end of June 2019, we are now at CHF 781 million net debt, which is CHF 250 million higher than in January, which is also coming from the share buyback. Excluding the IFRS change, net debt would be at around CHF 260 million. Going more into the details on the sales.
For sure, one of the biggest topics for you is the good development of organic growth. Total group reached a very good 6.2% in the first half. This development has to be seen considering the following facts. First, the chocolate markets on a worldwide basis are recovering slightly and show some positive momentum. We had a tough trading environment again, considering the chocolate industry could benefit from lower raw material costs in recent years, leading to price pressure in some markets. Thirdly, we have still cautious consumers in some markets in light of volatile economic and political environment. Good news is that on a global basis, the premium chocolate category was again clearly outperforming the total chocolate market for the total market growth. In the last years, the key topic in discussions with investors and brokers has been Russell Stover.
The organic growth of 6.2% implies an improved performance of Russell Stover. Sales at Russell Stover were positive in the first six months and fully on track to achieve our full-year expectations. The other two U.S. companies, Lindt and Ghirardelli, had a good performance in the first semester, and both have grown faster than the market. I'll give you some more details later in the presentation. Let's move to the sales analysis in Swiss francs for the last five years. We are presenting here the Swiss francs growth in sales over the last five years. Absolute and growth figures include Russell Stover for 2015. In many years in the past, Swiss franc growth has been negatively impacted by the strengthening of the home currency. In the first half of 2019, this has been the case again due to the weak euro and the weaker pound sterling.
Overall, the negative impact has been 80 basis points. Looking at the sales split by market, I would like to highlight the progress made in North America, reaching 35.5% in total sales in the first half of 2019. Another important pillar, Germany, is reaching 16.7%, the U.K. getting to 6.3%. Rest of the world is at about 15% thanks to the excellent contributions, mainly from the new markets, Japan, China, and Brazil. We should bear in mind that as these numbers are shown in Swiss francs, this has also an impact. Details of the drivers of sales growth are shown in the following chart. As a whole group, the volume went up by 5.6%, and on top, the price/mix effect was 0.6%, reaching the organic performance of 6.2%. As you have already seen, Forex had a negative impact of 0.8 percentage points, reaching the 5.4% growth in Swiss francs.
The positive impact from price is mainly coming from the U.S., where we have successfully implemented price increases at Ghirardelli and Lindt. Now moving into the sales analysis by segment. Organic sales growth by geographical segment shows a continued good growth in Europe at 5%. This was also 5.0% in the first half of 2018, so we are at the same level in terms of growth. We had a very good performance in important markets like Germany, the U.K., Austria, and Scandinavia. In the Eastern European markets, Russia, Poland, Czech Republic, Slovakia, and Hungary, we even grew double digit. In all markets, we benefited from the late Easter season, leading to an additional boost in sales in the first quarter. North America is growing by 7.2%, with Lindt U.S., Ghirardelli, and Russell Stover all showing a very positive first semester.
When looking at the performance in the U.S., it has to be taken into account that the U.S. chocolate market growth as a whole slowed down over the last years. The trading landscape has come under some pressure with some channels suffering from the increase in e-commerce. As mentioned before, in this difficult environment, the Lindt, Ghirardelli, and Russell Stover brands are outpacing the market, creating some positive momentum. The sales at Russell Stover are positive in the first six months and fully on track to achieve our full year expectations, which is flat to slightly positive. We have seen a very positive sales momentum with the Russell Stover sugar-free range with stevia extract as a sweetener. The relaunch of the Russell Stover box chocolate Bow Line, which is the core business for Russell Stover, has been a success so far.
Also, Russell Stover has clearly benefited from the late Easter in 2019. Overall, we think we are taking the right strategic steps at Russell Stover to be set up for future success. This process has been taking longer than originally planned, but we are on the right track. What's more, we have started various projects in the U.S. to gain further leverage from the Russell Stover acquisition, mainly in the areas of merchandising, logistics, procurement, and IT. We expect bottom line benefits from those projects in the next years, which in part can be reinvested in the brands. Benefits should start to kick in from 2020. In 2019, we have still headwinds from the high logistics cost in the U.S. For the second half, I expect a slowdown in the U.S. as we won't benefit from the late Easter as we did in the first half.
In the segment Rest of the World, we have also grown faster than the markets and above group average, getting to 8.3% growth compared to 8.4% growth in the first half of 2018. Growth is coming from basically all countries within this segment. It is great to see that the new markets, Japan, China, and Brazil, have grown double digit. Included in this segment is also the distributor business, where we sell to a big number of third parties, distributing our products in smaller countries. Overall, all segments are on track to achieve the full year targets, which we communicated also in March. Europe should grow for the full year between 5% and 6%, North America between 4% and 5%, and Rest of the World between 8% and 10%. This guidance by segment is basically unchanged after the first semester with a slight upwards revision of North America.
After having given you an overview of sales, let's move on now and talk about the very important topic, costs, by going through the different cost categories. We start with material costs. Material costs adjusted by the change in inventory came in at 32.0%, 150 basis points lower than in the previous year and 180 basis points below 2017. The main reasons for the decline are benefits from decreases in cocoa bean prices, lower cocoa butter prices, and partially offset by higher packaging material costs. We have achieved this good result by hedging cocoa bean futures quite far out when prices were low last year. One big question for the next 12 months remains the development of the cocoa market. The market expects for the harvest season 2018, a surplus of around 50,000 tons- 100,000 tons, and a deficit of about 100,000 tons for the 2019/2020 crop.
That possible deficit in the coming harvest is the reason that we have seen an increase in cocoa futures prices over the last few months. The future outlook heavily depends also on the positioning of the speculative market participants who have quite a lot of influence on the cocoa market. From the 2020/2021 crop, Ghana and Ivory Coast have implemented a living income differential of $400 per ton, which most likely will make cocoa beans more expensive at the latest from the 2020/2021 crop. For those of you who are interested in the details, cocoa bean future prices in London are currently trading between GBP 1,800 and GBP 1,900 per ton, and the cocoa butter ratio has more or less stabilized at the still high level of 265. This compares with the ratio of above 280 and cocoa bean prices of around GBP 1,700 to GBP 1,800 one year ago.
Moving on to personnel expenses. We see a decrease of 20 basis points. We had efficiency gains driven by our global lean program in the factories, combined with benefits from the combined merchandising force in the U.S. This was partly offset by the continued successful rollout of our retail concept and double-digit growth in this segment. The retail concept is labor-intensive and means pressure on this cost element. Moving to the operating expenses. The new IFRS 16 rules for leasing have a positive impact on the cost category operating expenses, as lease expenses of around CHF 40 million have been taken out and been replaced by higher depreciation related to the capitalized right-of-use assets. Excluding this change, the expense ratio would be just below 30%. Based on the above, the operating expense ratio goes slightly up, driven by two factors.
One, the logistics market in the U.S. has been inflationary over the last 24 months, driven by a shortage of truck drivers. Our new warehouse infrastructure had initial one-off costs in 2018 and to some extent, also in 2019. We will see cost benefits in logistics in the next years coming from the shared network in the U.S. On the other hand, marketing investments remain at a high level. Similar to last year, we are able to reinvest some of the funds coming from lower material costs in advertising and other brand-building activities. Moving to the depreciation, amortization, and impairment. In this cost category, we have an impact of just below CHF 40 million due to IFRS 16. Excluding the accounting change, depreciation will be at around CHF 90 million.
The key driver for the increase in recent years is our high CapEx program to satisfy our volume growth. One main investment is in our lean factory in the U.S. in Stratham, New Hampshire, with the goal to be ready in the next years to absorb the increase in volume and gain of market share in the U.S. Total CapEx in that factory is planned to be above CHF 200 million in the next three to four years. Moving to the operating profit, EBIT, which increased by 7.8% versus previous year, reaching CHF 126 million or 7.2% of sales, which is 20 basis points above 2018.
The EBIT figure includes a recurring amortization charge of CHF 4 million for the first half, which is the CHF 8 million which I mentioned before for the full year, related with the amortization of activated customer relations with Russell Stover under the rules of IFRS 3. The net income, the two line items between EBIT and net income had the following development. First, the net financial expense came in at CHF 14.7 million, which is an increase versus last year, mainly due to the higher interest expenses driven by the IFRS change, but also higher hedge costs for the subsidiary financing, as well as the negative interest rate environment in Switzerland. Secondly, the tax rate decreased versus last year by 1.5 percentage points to 21.0% thanks to further tax optimization.
Based on the current outlook, we consider the rate of 21%-22% as sustainable, still depending on the tax law changes implemented in the canton of Zurich in Switzerland. The absolute level of net income is CHF 88 million, an increase of 2.4% versus 2018 and a 10 basis point margin decrease over last year. This decrease is driven by the IFRS change and the front-loading effect. In other words, we have to book the higher interest expense in the beginning of the lease commitment. This impact will smoothen out over the next years. Net income excluding the change of IFRS would be around CHF 4 million higher or 5.3% of sales, which is 20 basis points above last year. Talking about CapEx now. CapEx is at CHF 100 million, which is slightly below expectations and lower than last year.
We still expect CapEx to reach around CHF 250 million for the full year, which is at the same level as in 2018. As always communicated, we will see increased CapEx in the next three to four years due to the U.S. capacity expansion in Stratham, New Hampshire. It is difficult to predict the exact timing of the CapEx flows due to the timing of the projects. Quite a busy chart on net financial position. The bridge shown on this chart is giving the details of the main cash relevant developments. We also show the impact of IFRS 16 in this chart. It had a negative impact of CHF 516 million on the net debt. Net debt is now at CHF 780 million, but excluding the IFRS impact, as I said before, net debt would be at around CHF 260 million.
Given our net debt position, we pay high attention to the needed cash generation to reduce the absolute debt level. Net debt increased by around CHF 250 million due to the share buyback program, where we spent around CHF 330 million this year. We returned, in total, CHF 573 million to the shareholder in the first six months. On the other hand, we had a positive free cash flow of around CHF 300 million. Given today's outlook, net debt will land at year-end at around CHF 600 million. Excluding the lease accounting, this outlook would be at roughly CHF 100 million net debt on a pure cash basis. Moving to the outlook 2019. We confirm our mid to long-term growth goal of organic sales growth target of 5%-7%, combined with an average increase in EBIT of 20 basis points-40 basis points.
For 2019 financial year, we expect organic sales growth to be in line with those targets. As I mentioned, I think important, the guidance per segment. For the top line, Europe, 5%-6%, North America, 4%-5%, rest of the world, 8%-10%. With this, I come to the end of my presentation and hand over to the operator to start and lead the question and answer set.
The first question comes from the line of Jean-Philippe Bertschy from Vontobel. Please go ahead.
Good morning. I would have maybe two questions. The first one is in the profit development in North America, if you can share with us, how much was the impact of the investments in logistics and maybe the growth between Canada and the U.S.? The second one is on Switzerland, and it looks from your results that it was a very good growth in Switzerland from roughly mid-single digits, which is a very strong acceleration versus the previous years. If you can put some color on that. Thanks.
Okay. Yeah. Hi, Jean-Philippe. Thanks for the question.
No, thank you.
Second question, Switzerland. Yes, that's correct. Your assumption around mid-single digit. Moving to North America, starting with your question was about the growth in Canada, I think, or, well, you asked about the growth in the U.S. and Canada.
Correct. Yeah.
In the U.S., we grew actually slightly faster than North America on average, and in Canada, slightly less. Definitely the U.S. was driving the growth of 7.2%. You asked about logistics cost, the one-off impact, we don't publish that.
Thanks.
Next question comes from the line of Patrik Schwendimann, ZKB. Please go ahead.
Yeah, good. Good morning, Martin. I also have a question regarding North America. With this 7.2%, you are guiding now 4%-5%. Could you give us a little bit more color? You have mentioned later Easter, but still it seems to me like quite a prudent estimate of this 7.2% because the price/mix effect, I guess, will be a little bit more pronounced in H2 for North America. Second question on the rest of the world, you just have decreased slightly your guidance to 8%-10%. What was the reason here for it? Was it Australia? Again, on the IFRS 16 impact, did I get this right? In H1, it was CHF 4 million. For the full year, we should expect CHF 8 million negative impact on the net profit line.
What will be the impact here on the EBIT line for the full year from IFRS 16? Last question, for the material cost, you had the benefit of 150 basis points in H1. What is your best guess here for the full year? Thank you. Hello?
Yeah, sorry. Yes, I was on mute. I didn't realize. I start with material costs. Material costs, I expect to be roughly at the same level as last year, maybe slightly better, but I would assume roughly at the same level as last year for the full year, the material costs.
Decrease in H2 then. Year-on-year increase then?
No, I'm saying for the full year, the percent sales would be slightly better to the same level as last year. Right? For the second half, it would be higher than for the first half. Is that your question?
Yeah.
Correct. That was your question about material cost. The driver, of course, you have cocoa bean prices, which you can see are going up. Of course, when you look at the trend of the curve, and if you think about hedging, obviously, the longer the lag goes, the more the trend is rather up and down, right?
Right.
For the full year, I think we will have a very good result on material costs because we have been able to really hedge early, and we hedged relatively far out. That's positive from that viewpoint. Probably moving to the IFRS 16 question. That was about the impact on EBIT for the full year, which we expect to be around 10 basis points roughly.
That's about an H1, right?
For net income, you can double the amount from the first half. It will be CHF 8 million total impact.
This 10 basis points was the same impact in H1, right?
Yes.
For the EBIT margin.
Yeah.
Yeah.
Rest of the world, your question, 8%-10%, why we took it slightly down. One big market in rest of the world is Australia, for sure. We are really outperforming in the markets I mentioned. Double digits in Japan, Brazil, China, which are the focus markets. Australia, which is still a bigger share of that market, is growing low to mid single digits, more or less. That's why I'm saying 8%-10% versus the 9%-11%, which we said in March. Yeah, because the 11% is probably a tough one, right? That's why I'm saying 8%-10%. On the other side, I'm saying U.S., 4%-5%, and there you're saying, okay, you're surprised that it's no more after the 7.2%. For sure, the 7.2%, we had some benefit from the late Easter, we had some positive impact there.
For the second half, we will not have that positive impact. It will be the smoothen out sales, the normal trend. In some channels we have also some challenges to, like Rite Aid, for example, the drug channel. Rite Aid, we are not sure about their financial health. Will they go into Chapter 11? Many people think they will, and we are a bit careful there. We still have certain exposure in that channel, which is one of the still big drug channel customers in the U.S. That's why I think, number one, we will not have the positive impact from Easter. Number two, in some channels, there are challenges. There are also positives, of course. We had a promising start with the Bow Line with Russell Stover and also with Lindt & Sprüngli are growing fast in the market.
I would now not assume that for the second half, we will continue this 7% growth. For the full year, I expect 4%-5% in North America.
Price mix will be higher in H2, right?
Could be a little bit higher, yes, in the U.S., because we implemented the price increases in the first quarter, and not for Easter because it was too late for Easter. It's for the everyday products and for Christmas. That's why it could be a little bit higher in the second half prices. We have to see what the impact is on volumes as well, with the price increase. That's always difficult to predict. We have seen now some competitors have implemented price increases also, like Mars, or announced further price increase. Look, it's quite an environment that is quite dynamic. I would definitely not expect the second half to grow 7.2% in North America. That's why, for me, 4%-5% is the most likely scenario for the full year.
Perfect. Thank you, Martin. See you on Friday.
Okay. See you on Friday. Thank you.
Next question comes from the line of Alain Oberhuber, MainFirst. Please go ahead.
Good morning, Martin. Alain Oberhuber, MainFirst. Congratulations for the strong organic growth. A question regarding the U.S., or several questions about that. Could you give us a pecking order regarding the three brands which grew fastest, and what we could expect in the second half of these three brands, also in the pecking order, please? The second question is regarding the impact of Valentine's Day. How was it there this year? Also into that, why are you this conservative for Russell Stover for the second half? Now, the second question is regarding the butter ratio. Could you give us your view on the butter ratio? It looks like that it's currently stable on a low level. The last question is regarding the store openings. How many store openings did you have on a group-wide level? I guess the store opening is included in organic growth.
Did you carve out what was the organic growth excluding the store openings? Thank you.
Okay. Thank you for the questions. First on about the U.S., you asked about the pecking order of growth. The three U.S. brands, they all grew about the same in the first half. No massive differences there in terms of the percent growth between the three. Your second question was about Valentine's Day, and I didn't totally understand what you meant. I assume if you expect Valentine's Day to be as successful in 2020 as in 2019. If we expect a similar trend. In general, we had good sales growth in Valentine's 2019. We expect again a growth in Valentine's for next year, which will be similar as last year. As you probably are aware, most of Valentine's Day is shipped from us to the customer in quarter four. The sellout, of course, is in quarter one.
Yeah, that's a big question mark now. We don't know yet. We get the orders in the next few months. It's a bit early days to give a clear view on Valentine's. Overall, we think we have a good lineup in Valentine's. It's important for all the three brands, especially important for us as Tobler, who is the clear market leader on Valentine's Day in the U.S. That was about the U.S. questions. You asked about the butter ratio. What is the forecast on the butter ratio? That's always a challenging one. Had you asked me four weeks ago, I was probably more on the bearish side on the butter ratio. If you ask me now, I'm probably more on the bullish side on the butter ratio because of the change of living income differential in Ivory Coast and Ghana.
You should bear in mind that Ivory Coast and Ghana produce about two-thirds of the cocoa in the world. They are increasing their price basically by $400 per ton. If you take it as a percent of the market is in US dollars at about $2,500-$2,600. That's about 15% increase just coming from that living income differential. Of course, it will also have an impact on the other origins. That has also already driven the cocoa butter ratio market slightly up. I'm more on the bullish side here, depending on what we see now on the regular differentials in those markets. I definitely think it's a certain risk that we will see higher cocoa butter ratio. Your last question was about store openings. For the full year, we expect to open about 25 stores.
Net. 25 new stores net. We land at 485 stores in total at the end of the year, roughly. No, we did not carve it out for organicals, but we have a positive comp store growth in our existing stores.
Thank you. Just coming back regarding Russell Stover, why are you so negative then for the second half if all three of these brands grew nicely or similarly in H1? Do you expect a stronger deceleration Russell Stover than with the other two brands?
Look, if we achieve 4%-5% growth, you should bear in mind that the second half is much bigger than the first half, right? To get to 4%-5%, it's still a challenging one. We have still to grow very positively in the second half, right? We shouldn't forget that. I wouldn't say we are negative. I just think we are realistic. That's currently our best estimate. I think the business is going well. As I said, you have to carve out in this first half the late Easter. If you carved it out, you're not at 7.2% in North America. That's important to bear in mind. Be lower. Yeah, that's why we have to be realistic. 4%-5% is our best estimate.
As you probably have seen in the last years, we normally were quite good in forecasting the Russell Stover and the Lindt & Sprüngli businesses in the U.S. in the last two years or so. Yeah, I expect 4%- 5% growth as well.
Okay. Thank you very much, Martin.
I don't know if you answered the question.
Very well.
I think it would be a very positive result if we can grow in North America 4%-5% for the full year.
Thank you.
Okay. Thank you.
Next question comes from the line of Warren Ackerman from Barclays. Please go ahead.
Good morning, Martin. It's Warren Ackerman here at Barclays. There's one follow-up from me. If you do carve out the late Easter in North America, how much lower than the 7.2% would you think it would be sort of ballpark? Are we taking off a couple of 100 basis points for that just to try and get an idea of the second half comments that you're making? Secondly, just around France, your third biggest market. I don't think you mentioned it specifically in the statement. I was just wondering whether you could actually give us an outline. It's been a challenge market for some time. What the organic growth was in the first half in France? What's going on in the market in terms of market share?
Just finally, a bit of a longer-term question just around margins in NAFTA, which are clearly very low, loss-making in the first half. Obviously, there's phasing issues. There's a lot going on, Martin, in terms of CapEx, and in terms of logistics benefits that you're talking about for 2020. I just wonder whether you can just help us think about what the underlying moving parts are around profitability in NAFTA, looking into the back half of this year into next year, and maybe elaborate a little bit around the sort of phasing that you expect on that. That would be super. Thank you.
Okay. First question about the U.S. or North America.
Yeah.
If you carved out the Easter part, you would be around 5%, roughly.
Okay.
Your question about France. We are growing low to mid-single digit in France.
Okay.
Which is also within our expectations. France is a tough market, as you all know. A tough market, especially from a price pressure point of view. All our competitors tend to, or most of our competitors tend to be quite aggressive on price. We try not to be aggressive on price. We do not want to give more promotions. We do not want to bring our list prices down, despite the fact that there is a lot of pressure from the trade. Of course, we also, in a period where you have low cocoa bean prices, you cannot completely ignore the pressure. You sometimes have to give in a bit, but in general, our prices have remained much more stable than the ones of our competitors. Of course, that has, in some ways, almost implicitly like a price increase when others go down in price aggressively.
In this market where it's really very challenging, I think growth of low-to-mid single digit is what we have to expect, what we also communicate to the outside always. That's where we think we will land in France, and I think it's a positive result in France. We should also bear in mind Germany, you didn't ask this question, but that's the biggest market in Europe. I think our strategy to really grow penetration with LINDOR in Germany is working very successfully. We are really pleased in Europe with the 5% growth. Of course, it's a portfolio, where you have different companies. Some are more the top-line drivers, some others are more the bottom-line drivers, the cash cows. France is probably more from the second group. Then you asked about the U.S.
You may have to elaborate a bit more on this question. I'm just answering how I understood it, and then you have to maybe.
Sure
follow-up question. I think I heard the word CapEx in your question.
Yeah.
Of course, there is a lot of CapEx, mainly driven by the fact that a lot of the growth, even the one in the U.S., is coming from volume. We have communicated about one year ago that we plan to build out the New Hampshire factory, which is the Lindt factory in the U.S. We have a total of six factories in the U.S., four for us, as Stover, one for Ghirardelli, and one for Lindt. The Lindt and the Ghirardelli one, the one in New Hampshire is actually producing also Ghirardelli products, so it's a shared factory. We are building it out to be ready for future needs coming from the growth of those two brands. It's a program that will go over the next three to four years.
It's a big project to build out that factory and be able to produce more liquor, more chocolate mass, and also more molding capacity, LINDOR, et cetera. That part, I guess I understood that question correctly.
Yeah. You did. Thank you. That was very useful. I was just actually more specifically just looking at the NAFTA margins, which have been down for four consecutive years, and down further in the first half. It sounds like it will be down again in 2019 on 2018, but then a big up in 2020. I'm just trying to get an idea of at what point do NAFTA margins cross?
For 2019, we expect it to slightly go up versus 2018, actually, for the full year.
Okay. Right.
You know why it has come down in the last years?
Yeah.
We have lost Stover volume, and you cannot reduce the fixed costs with the same pace.
Sure.
The cost savings initiatives that we have initiated, the big one is logistics. If you change a logistics network in the way how we changed it with five new warehouses, et cetera, it takes time to kick in, the savings to kick in. I think I already said in March that it will kick in from 2020. From some of the other initiatives like procurement and merchandising, we have already benefits. For the full year, I am expecting a slight increase in the EBIT margin compared to last year.
Okay.
As I said in the call before, we have also reinvested money from the lower cocoa bean price in marketing. We have continuously high marketing investments in the U.S. as well. That's also a part of logistics. It's an important stone of the puzzle, right?
Sure. I don't know whether I can maybe just squeeze one more in, just around your net financial position, Martin. Obviously, that increase is primarily related to the IFRS 16 adjustment on the net debt. You told us that you're almost finished the share buyback, a little bit more to go, but pretty much there. Should we expect, given the underlying strength in the net debt, excluding the IFRS, I think you said two something, CHF 250 million, that it would be a reasonable assumption to assume a further ongoing CHF 500 million buyback?
Nothing has been decided. Nothing is planned right now.
Okay.
We have still to evaluate this. We also should bear in mind next year we have to repay CHF 500 million from a bond.
Yeah
in October 2020. We are assessing the situation, and we have not made any decisions.
Okay. Thank you.
Next question comes from the line of Joern Iffert, UBS. Please go ahead.
Hello, Martin. Thanks for taking my questions. The first one would be, please, on industry pricing. Can you share your thoughts, what you expect would be the industry price increases in North America, Europe, and the rest of the world in the chocolate market in the next 12 months? Second question would be, please, with the potential price increase in Ghana of market price $400+ , are you rethinking about your sourcing more from other regions? If not, when would you start to execute on the price increases here, and how certain in general do you see that this extra charge of $400 is implemented? The last question, product specific, your chocolate cream you introduced a couple of quarters ago. Can you tell us how it's doing and if this can be a good revenue potential for the future? If yes, how much, roughly? Many thanks.
Okay. Industry pricing you asked by segment. It's really difficult, because it's impossible to know what the competitors will do. I heard, and I think you wrote it as well in one of your reports that, Mars is increasing somewhere between 8% and 10%. It's always a question, of course, 8%-10% can be the list price. It doesn't mean that net price also goes up 8%-10%, right? It depends what they do with the promotions. That's what I heard, 8%-10% in Mars. I doubt that for the U.S. in general, it will be 8%-10%, it's a tough one. We have not decided what we will do yet. I mean, we have just done a price increase in the first quarter. We may, of course, reconsider another one depending on your second question, right?
Which you can talk about that later, what will happen with that cocoa market. Europe is a mixed bag, right? You have some markets in Europe which are affected by very volatile currencies like Russia. There, you do constant price increases, basically, depending on the currency, right? You have the more stable markets, which are related to the euro. There, it's a bit more difficult. I talked about France before. In France, it's very difficult to do price increases. You have other markets where it's a bit easier. In Europe, I would not expect massive price increase right now. We have to see what happens. Rest of the World is a bit similar story as Russia. First of all, we are already quite high.
As you can also see in our profitability in the rest of the world, we have relatively high prices in those markets. We have a relatively strong position. Our brand has a strong position to do price increases also if we needed to. Because those markets have so volatile currencies, it's also a bit more normal, let's say, to do price increases than in markets in Europe where you have to negotiate for a long time with the trade so they accept it, right? Because you should remember that we cannot just do price increases as we wish in Europe. We always have to negotiate it with the trade, and oftentimes they don't want to accept it. That's a bit easier in rest of the world. That definitely depends as well on the currency. I cannot give you a number now.
I think in the U.S., you'll probably see the fastest price increases, followed probably by Europe, to some extent, depending as well what happens with the chocolate mass and chocolate liquor. I mean, we are producing it ourselves, we control a bigger part of the value chain ourselves. Your question about Ghana, bear in mind that Ghana and Ivory Coast account for two-thirds of the cocoa market worldwide. Basically, with our market share, it's very difficult not to source from Ghana. I mean, it's a good market for us, good quality. We have our sustainability programs there's no intention not to source from Ghana. We want to continue to source from Ghana. We also source from four other origins, it's not that we just buy from Ghana, right?
We also source from Ecuador, from Dom Rep, Dominican Republic, from Papua New Guinea, from Madagascar, et cetera. Over the next many years, I think we will diversify further. The more we grow, the more we will diversify the origins. That's sure. For now, let's say for the next few years, for sure, Ghana will remain important and also in the future after that. How certain is it that they will implement it? It seems certain. I mean, it's from the 2020/2021 crop, it's from October 2020. It's not in effect yet. From what I know, from what I read, from what I heard from our people on the ground, it seems they will implement this $400. You should bear in mind, the cost of one ton of cocoa is the future market plus, let's say the normal differential, plus this living income differential.
What we don't know is what will happen with the normal differential, which is also about $400, right? One ton of cocoa, the net cost is actually, if the market is CHF 2,500, it's CHF 2,500 + the living income differential plus the normal differential, it brings you to CHF 3,300. It could also be that the other differential will come under pressure. We don't know that yet. It's too early days because we are not really buying 2020/2021 crop yet. I think the conclusion here is anyway that the cocoa beans and also the cocoa butter will get more expensive. Will become more expensive. The big question is a bit how much more expensive? I think with a brand like Lindt, we have the possibility to increase prices in general more than a more mainstream brand, right?
We have put a lot of money behind our advertising, that gives us a little bit more, I would say a bit more power to increase prices with the consumer. With the trade it's the same, right? It's always tough, I think the consumer accepts a price increase from us a bit more and our elasticity is a little bit lower than with a mainstream brand. Your last question was about the chocolate spread. We have launched it mainly in Switzerland, in some other small markets, globally on retail as well, in all our retail stores. In retail, it works really well. It's one of the top 10 selling products. I would still say it's a niche product because we have to see. It's much more expensive than if you take some of the competitor's products, we have to see. So far so good.
All right. Many thanks, Martin.
Thank you.
Next question comes from the line of Jon Cox, Kepler Cheuvreux. Please go ahead.
Good morning, Martin. Jon Cox, Kepler Cheuvreux here. A couple of questions for you. Just going back to Patrik's question about the operating margin and the impact of IFRS 16. You were saying that on an underlying basis, your margin expansion was just 10 basis points in H1. I want to just get clarification that was the case. That's the first question. Just going back to the margin question. Obviously, your North American EBIT margin not long ago was around 13%. Just wondering how we should think about if and when you would get back to there. Also, what would this mean for maybe the rest of the world and Europe, where potentially you maybe over-earned a little bit in terms of profitability in the last few years, and would you now start to reinvest again in the rest of the world and Europe?
You'd actually see a margin decline there, maybe offsetting the improvement in the U.S. or North America to keep to that total 20-40 basis points margin expansion. Is there a chance we may even see an acceleration of margin expansion on a group-wide basis over the next couple of years as North America finally recovers, and everything seems to be moving along pretty well there. Third question, just on the buyback. You said the buyback will be completed by the end of the month. That gives you a week. You still have CHF 45 million to go. Nothing I can see so far on the second trading lines today. Do you still think it's realistic to finish that program by the end of this week, or do you think actually maybe it will go into maybe August or September?
Just a last one on Russell Stover. You talk about the Bow Line doing well. Maybe you can just tell me, I thought it was the copper box which was launched earlier this year and has been doing quite well, or is the copper box part of the Bow Line range? I get a bit confused with all the different ranges and all the things you're doing at Russell Stover. Just a bit of a clarification on that Bow Line. Maybe you can just say, I know the boxed chocolate is a relatively big proportion of revenue. Can you give us a rough idea, and then how much is that Bow Line of the boxed chocolate? You can just give something to our clients in terms of the improvement in Russell Stover, and here's an example. Thanks very much.
All right. In no particular order, I will jump around a bit. Buyback, maybe it was my misunderstanding as you say completed. I mean, at the end of July, it's over. If you have bought back CHF 455 million or CHF 500 million, it's over, right? Because we don't buy from August. That's how it has been set up. That's how it has been authorized as well. You always have to get together with the bank here from the authorities, you need the go-ahead as well. We had the window till end of July. It will be finished if you buy CHF 455 million or CHF 500 million. That doesn't make a difference. At the moment, how things stand, I think it will end with the CHF 455 million, which is 2.9% of the equity. That's on that one. Your second question was on the EBIT margin.
Of course, yes, it's probably not where we want it to be. Last year, I think it was around 8%. As I mentioned before, in one question, we believe it will be better this year than last year for the full year. When will it be back to 13%? Good question. Difficult to say. It always depends on many things, of course. We see some positive impacts from logistics, as I mentioned. We will see some positive impacts from operating leverage. On the flip side, of course, it all depends a bit how much do we want to invest in the brand there, in the brands, I should say. We have three brands in the U.S. That also needs some investment, of course.
Hypothetically, if the other two segments stayed flat, if you want to grow 20 basis points per year, you need to grow about 80 basis points per year in North America, roughly. It's about 40% of the business. It's even slightly less. It will be about 30 basis points. That's just hypothetically because we also think, in some of the other markets, we can make progress, right? Look, we evaluate that. There are different pieces each year, then we have to decide where do we want to allocate the advertising money, et cetera. I think at the moment, it's important that a brand like Russell Stover, which has lost relevance over the last years, that we continue to put some money behind it, that we continue to put some innovation behind it, of course, that costs some money.
We are in here for the long run. We always said, in the long run, we are doing the right things. We are trying to think really in the long run, not just the next six months. Yeah. Obviously, investment in advertising has also some impact on the bottom line, for sure. I cannot predict exactly by when we will be back to 13%. What we want to achieve internally, we want to make steps forward in the right direction each and every year in North America. I think this year we should be able to make some progress versus last year. Your question about Russell Stover Bow Line, yes. It's maybe a bit confusing. Bow Line, it's the core of Russell Stover. Somehow it's the core product. It was a white box before in different sizes. Now it's still white.
The cover is still white, but on the side it's copper. We launched it three months ago. This is really the big number one line for Russell Stover. It's close to CHF 100 million in revenue. We will see in the last quarter, mainly, how the consumer will take the relaunch. We have seen some positive signs already. In the last quarter is when really most of that product is sold. Yes. The second big innovation in the last two years has been the sugar-free range, as you know. There, the relaunch worked. We are positive there. We have relaunched now actually also some bars of sugar-free Russell Stover chocolate bars. That's the latest innovation. Yeah, as I said, in the last couple of years, we are really going through this whole product portfolio, line item by line item.
What we have not relaunched yet is Whitman's, which is another brand, which is also boxed chocolates. That's still the same box. We have not relaunched that one. Apart from that, we have really touched most of the products. Either we have taken some out of the portfolio or we have worked on the packaging, we have worked on the content, on the recipes, et cetera, over the last four years. I hope that answers.
Yeah. No, definitely. It's been really helpful. On the everyday range, the bags with the sort of individual pieces of chocolate in, that's still going and still going well? I know that was probably about three years ago, at the time you seemed to be quite satisfied with that. Is that still okay?
It's okay.
The everyday range? Yeah.
You should bear in mind, strategically, the positioning of Russell Stover is around gifting and sharing. Products tend to really be the bigger ones that are around this theme of gifting and sharing. I think those bags, you could now say, "Okay, I buy a bag and I share it at home," it's not 100% in line with this gifting and sharing. I think it's a tactical initiative. It's a good initiative. It's still out there. I think it will also remain out there. It's not one of the biggest ideas, I would say, of Russell Stover. It's an important one tactically, we can also have some sales in the months where we don't have the seasons. It's not a big portion of the sales, let's say. It's okay.
Okay. Sorry. Just one follow-up then. On an underlying basis, do you think your margin for the year as a whole will be at least 20 basis points higher on an underlying basis?
When you say underlying basis, you mean like excluding the lease?
Yeah, excluding the IFRS 16 impact, because you've said that actually, if you included it is only 10 basis points in H1, but for the full year-
We are guiding now 20%-40%, including this change.
Yes.
We have to see during the year. It's always a bit of a question towards the end of the year, how much do you want to invest in advertising and how much do you want to It depends a bit how the things look towards the end of the year. Right now, the 20 basis points- 40 basis points, the guidance is including this impact. You're basically asking me if we get to 30 basis points, right? Indirectly.
Yeah.
I cannot confirm that right now. The guidance is 20 basis points-40 basis points. It's tough. It's tough to get to the 20 basis points-40 basis points. It's tough because there's a reason why Mars is increasing their price by 8%-10%, as an example. I assume logistics costs are high in the U.S. It's a fact. There is a lot of inflation there. Then on top of that, we have these one-offs from our new network. It's tough.
Great. All right. Congrats on the organic sales growth. I think most of us almost fell over when we saw that 7%+ from North America this morning. Thank you.
Thank you.
Next question comes from the line of Faham Baig, Credit Suisse. Please go ahead.
Hi, Martin. Thanks for the question. Two from me as well, if that's okay. Can I please go back to the U.S.? 8% growth, or circa 8% growth in the U.S. compares to about 1% in 2018 and a decline in 2017. Clearly the market, albeit to your point, has accelerated very slightly, but it's nowhere near the 8% that you've recorded. The scanning data we have available to us doesn't suggest that your growth would've been that high in H1. Now, is there some sort of sell in versus sell out difference that we should be aware of? Would you highlight particular channels where you've grown or any distribution benefits? Just to give a bit more context on the very high performance in a relatively low growth market would be very helpful.
Staying on NAFTA a second, I believe from last year, Mexico is now included or reintroduced, I should say. What percentage of the division would Mexico be today? That's my first question. Then going on to Europe, I think you mentioned there has been a deceleration, but as another participant alluded to earlier in the call, Switzerland has turned around quite nicely. What countries would you suggest have performed slightly less well compared to last year? That'll be very helpful. Thank you so much.
Okay. Thanks for the question. Maybe starting with the easiest one, Mexico. It's really small things, but of course we have big plans there. It's about 1% or so, around 1% of net sales. It's still relatively small. It's growing double digits, but of course, it still needs some time to get to a size where it has a big impact. You also mentioned around 8% growth in the U.S. You know why? I mean, the market, you're right. According to Nielsen, the last number I can remember was around 2% market growth in the U.S. last 52 weeks, maybe 2.2% or so. Look, there are different reasons, right? One I always say, not all channels are covered in Nielsen or in IRI. That's an important one to bear in mind. There are lots of channels which are not.
I mean, sure our retail stores are not covered. E-commerce is not covered. Lots of club channels are not covered, like Costco, BJ's, et cetera. Some of the convenience stores, some of the grocery stores in the U.S. are not covered. It's always difficult. It's not really 100% correlated always, right? As you can see now as well. You also had the Easter impact, as I mentioned before, so the underlying growth excluding Easter is not 8%. We should bear that in mind. That's why I'm also guiding for 4%-5% for the full year. You probably remember some of the logistics issues we had last year. That also led to some restocking in the first quarter.
In general, you have customers who just, at year-end, for example, they have a low inventory, and then in the beginning of the year, they go again to a higher inventory. Sometimes you have this impact, right? This whole destocking, restocking impact to some extent can also be a reason. I would say it's those three, right? One, not all channels covered by Nielsen, so it's not that 100% correlated. Easter, much later, which is important for us in the U.S. with Russell Stover and Lindt especially. Some destocking and restocking and of course then also some distribution gains. As usual, our sales forces are really trying to not only find new customers, but also get more products onto more Walmart outlets or Walmart stores, right, as an example. Or Target, et cetera. It's probably those four things.
You asked me about which markets grew less than last year. That's also a good question. Canada grew double digits last year. This year it's not double digits so far here today. As an example, still positive growth as per Nielsen, close to 5% growth in Canada. What else? Maybe some European markets, but it's not really in general. France is one, as we discussed before. It's still a tough market, France. You should bear in mind, Switzerland grows faster, but Switzerland in total sales is not so big. It's very pleasing to see that we have a good result there, but it's not a huge percent of the total sales, right? In general, I would say we are in similar territory as last year in most countries. It's not massively different. The big uptick is really from the U.S.
Would you say the U.K. is still growing double digits or has there been a slowdown there as well?
Yes, it's almost double. It's between 9% and 10%.
Okay. Thank you.
Next question comes from the line of Andreas von Arx, Baader Helvea . Please go ahead.
Yeah, good morning. In the press release, you mentioned that you were particularly pleased with the Lindt U.S. brand development. I assume that's above 7.2% organic growth. Could you give here some examples of what has driven that? Was that Easter products? Was it LINDOR? Was it specific channels, specific clients? Second question, I think you indicated in North America that you have increased marketing budgets probably over-proportionally. Has that been the case in all regions or have you redirected marketing spending into North America? From the outside, one could draw that conclusion. Of course the second question would be why would you redirect marketing budgets from other regions to North America when this is your lowest margin region? Third question, just a small one.
In the cash flow statement, you have quite a significant increase in provision value adjustment and pension assets from CHF 20 million to close to CHF 40 million. Could you provide some detail on that one? Thank you.
Okay, let's start with your question. Your question was about Lindt U.S., right? What drove the growth there? You should bear in mind that in the U.S., as I said in the beginning, the growth is coming from all the three brands, and they grow in a similar pace. Lindt U.S. particularly, for Lindt, the U.S. is really a LINDOR market. LINDOR has a big portion of the sales share. If LINDOR works well, then in general, the Lindt U.S. business works well. In the last years, we have started to focus even more on our core products within LINDOR with the trade. If you think about a display, secondary placement in a Target store, for example, we are more and more going into the direction where we really put maybe top sellers on these displays.
Maybe three or four years ago, we have even put maybe 10 different products on a display, as an example. Now we are focusing more on the top two or three sellers, for example, LINDOR milk, LINDOR assorted, and then maybe one innovation, as an example. This strategy has really worked well in the last years, this strategy of more focus on the key products. That's one of the key drivers. Generalized, I think, we are more or less playing the same channels as we have always played. Like two or three years ago, you remember that the drug channel especially came a bit under pressure. I mentioned Rite Aid before, which is under pressure in my view, is struggling financially, and we are being cautious there.
Walgreens and especially CVS, they took away some of the chocolate from the checkout points, but actually when you do now store checks in the U.S., you will see that they have put it back. Usually at the checkout points, you have again chocolate. To some extent, this may also have helped. I think that the channel mix has not changed dramatically. It's similar. Of course, sometimes you have a bit of a new customer or you're pushing to more distribution points, but no big change there. You had a question about advertising funds. If we have redirected massively advertising funds into North America, that's actually not the case. We are, of course, benefiting from some lower raw material prices. We have been able to continue to invest behind our brand, and we are doing that also in Europe.
We are doing that also in the rest of the world. It's also important in rest of the world if you think about market in overseas. In China, for example, it's more digital there, of course, less TV advertising, but it's also very important in those markets to invest money. The answer is no, basically, to your question there, if we are now just investing the bulk of the money in North America. Your question around the cash flow statement. This is basically coming from higher provisions for pension liabilities due to the lower interest rates. Okay.
Okay. The balance sheet impact is around CHF 10 million, and that impact is around CHF 20. I guess the other is then just minor effect.
Yes.
Thank you.
Thank you. Have a good day.
Next question comes from the line of John Ennis, Goldman Sachs. Please go ahead.
Good morning, Martin. Just a few follow-ups from me, please. The first was on the retail expansion. Could you give us how many stores you've opened in the first half relative to the 25 target you gave for the full year? The second question is on the Easter impact. You gave it for NAFTA. I just wondered if you could give it for Europe as well, how much of the European growth was impacted by Easter timing. I have a third question on working capital. You talked about higher raw material cost expectations going into the second half of the year. I just wondered if you could give us some guidance on what impact that's likely to have when it comes to working capital outflows. A quick one on NAFTA margins.
I wondered if you could help quantify the magnitude of the logistic headwind you're expecting this year in 2019. Thank you.
Just writing down the questions. One second, please.
No problem.
Okay. In terms of the first question, how many stores have we opened in the first half? It's about 10. As I mentioned, that's net. Sometimes you close a couple off and you open.
Yeah.
That's the net number.
Okay. Thank you.
For the full year, we said about 25, right?
Yep.
There are still 15 to come for the second half. Easter, how much is Europe impacted? The impact is less in Europe than in the U.S. That is always depending on the, how should I say, the shipping pattern. The U.S. is such a big country, you tend to deliver Easter earlier. In Europe, most of Easter is always delivered in the calendar year in which the Easter is happening. If it's early or late, you don't tend to ship in quarter four. Because the U.S. is such a big country, you fly from East to West Coast seven hours, you really start to deliver to your customers early. If Easter is early, it means that you deliver more in quarter four of the year before, right?
Yes
a year where it's late, right. That's one impact. The second impact is just if you have more weeks to sell, right. You have two impacts of a late Easter, right. You have more weeks to sell. In the U.S. particularly, you also may have a shift of sales between quarter four and quarter one, right. You have those two impacts. I would say in general, the shift of Let's say that you have more weeks to sell, again, depends heavily on the climate, right. It's really difficult just to know exactly how much you have an impact. In Europe, I would say in general, no big impact.
Okay.
It's really mainly in the U.S. Raw materials. Your question was about working capital outflows in the second half. I would have to check that. I cannot tell you on top of my head now.
Okay.
What I can tell you is overall on the P&L, overall material costs will be slightly below or at the same level as last year, right? For the full year as a percent of sales.
Yeah
Second half it will be a bit higher than this in the first half. We are historically at a low level, so we'll have a relatively good second half on this one as well. Logistics headwinds. We normally don't quantify one-offs because we don't want to find excuses for not hitting our EBIT margin or something like that. We tend not to quantify it. We don't show EBIT as EBIT before logistics and EBIT after logistics impact, et cetera. We just have one EBIT number. That's why we don't quantify this impact, and we don't quantify either right now what the positive impact will be next year. Definitely the biggest impact negatively was last year, when we opened the five warehouses, when we had extra one-off costs therefore, and when we had headwinds. This year, the headwinds continue with inflation.
Logistics is expensive in the U.S., it's getting even more expensive. We are still also in the middle of this new network organization closing the old warehouses. Also in 2019, to some extent, we still have extra costs because of that, because we still have some excess capacity which we are subletting, which we are selling, et cetera.
Okay, understood. Thanks, Martin.
Thank you.
The last question from the phone is from Pierre Tegnér from Oddo BHF. Please go ahead.
Good morning. Thank you for taking my question. I had two. The first one was on the difference between late Easter season. Your answer has been very clear. My second question is much more a question of clarification around the growth in the North American market because if I understand well, during your prepared remarks you said that all three U.S. brands grew at the same pace. In the press release you are specifically mentioning the Lindt U.S. Is it possible to have a better view? Are Russell Stover, Ghirardelli and Lindt growing all in the range of 5%- 7% or is there a clear difference between Lindt and the two other brands? Thank you.
There is no big difference. They are all in a similar, around the same level where you have the overall U.S. You have a bit of a positive impact. This is one-off from Easter, which Russell Stover is benefiting most because their Easter season is the biggest. There is no massive difference between the three.
Okay. Thank you. Clear.
There are no more questions at this time.
Okay. If there are no more questions, I would like to thank everybody for your time. I think it was a very interesting discussion. It's very good questions. Thanks for everybody who asked questions. If you have further questions, please don't hesitate to contact either me or Susanna directly. Again, we are happy to answer any follow-up questions. Thanks a lot for your time and have a great day. Thank you.