Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the half year results for 2018. During the presentation, we will have a question and answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced. I must advise you the webcast is being recorded today, Tuesday, July 24, 2018. I'd now like to hand the webcast over to your presenter today, Martin Hug. Please go ahead, sir.
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 2018. 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 15-20 minutes. Following the presentation, I will hand over to the operator, who will organize questions and answer session. Let's go to the content of today's presentation. The agenda points are the following. First, performance highlights of half year 2018. More detailed P&L and balance sheet details of this first half of 2018. A quick outlook. As mentioned before, we go into the Q&A session. Let's start with the performance highlights for 2018.
First, the P&L statement of the Lindt & Sprüngli Group. We go first into the overview of the results. Organic growth for the whole group reached 5.1%. As the Swiss franc weakened, mainly against the EUR and GBP, we got to 7.7% growth in CHF. Organic growth of 5% is in line with our 2018 full year guidance. Growth in NAFTA is at +4%, which is also in line with our expectations. It is a positive trend after the slight decline in NAFTA last year, mainly driven by Russell Stover. Europe is growing by +5%. The rest of the world between 8%-9%. We are pleased to deliver again good profit figures that are in line with our guidance.
EBITDA, EBIT, and net income all increased at higher rates than sales at levels between 10.8% at EBITDA and up to 12.7% at net income level. The improved EBIT margin of 20 basis points in the group has mainly been driven by the overall lower material expense ratio and lower personnel expenses, which will be explained in one of the next charts. EBITDA margin improved by a strong 30 basis points coming from the higher EBIT margin and higher depreciation. As in previous periods, the EBIT figure shown is being charged by a non-cash flow amortization of CHF 4 million for the half year, 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 a challenging market, trade, and consumer environment, the trend to premium chocolate is confirmed and continues.
Moving to the balance sheet. Equity shown was stated at year-end 2017. The absolute amount decreased by CHF 28 million, mainly driven by the share buyback program which we initiated in April. Equity ratio is now at 63%. As you can see, we continue to have a very strong balance sheet. The net debt position is CHF 50 million higher than at year-end 2017, which is also coming from the share buyback program. We have already bought back around CHF 100 million worth of shares. Compared to half-year 2017, net debt position is improved by around CHF 140 million despite the share buyback program. I will talk about this a bit more in detail on one of the next slides. Going into details on profit and loss statements and balance sheet as well. Starting with sales analysis, five years in Swiss francs.
We present again the sales growth over the last five years in Swiss francs. 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 2018, this has been different thanks to the stronger EUR and the stronger GBP. On the other hand, the U.S. dollar got a bit weaker in the first half. Moving to sales growth organic in local currencies, which for sure is one of the big topics for you, this whole organic growth. The total group reached 5.1% in the first half. This development has to be seen considering the following facts. Number one, chocolate markets on a worldwide basis still showed lower growth figures than some years ago.
Secondly, we had a tough trading environment considering the chocolate industry could benefit from lower raw material costs, leading to price pressure in some markets. Thirdly, we are still cautious consumers in light of the volatile economic and political environment. Good news is that on a global basis, the premium chocolate category was again clearly outperforming 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 5.1% implies an improved performance of Russell Stover. Sales at Russell Stover were only slightly negative in the first 6 months, and fully on track to achieve our full year expectations. Moving to sales analysis markets. Looking at the sales split by markets, I would like to highlight the progress made in Germany, reaching 17.5%.
U.K. getting to more than 6%, as well as rest of the world now increasing to about 15%, thanks to the excellent contributions, mainly of the new markets South Africa, Japan, China and Brazil. One other main pillar continues to be North America, with around one-third of our revenue. Sales analysis, different drivers, is considered on the following chart. As a whole group, the volume went up by 4.9%, and on price mix, we had a positive impact by 0.2 percentage points, which of course led to this 5.1% organic growth performance. As I've already said before, Forex was positive by 2.6 percentage points, reaching 7.7% overall growth in Swiss francs. In a market environment with pressure on prices due to lower raw material costs, it is a positive sign that our price mix remains positive. Going into the very interesting segment information.
Organic sales growth by geographical segment shows a continued good growth in Europe at +5.0%, compared to 6% one year ago, had a very good performance in important markets like Germany and the U.K. We also outperformed the markets in other important European markets such as Italy, Austria, Spain and Scandinavia. In the Eastern European markets, Russia, Czech Republic, Slovakia and Hungary, we even grew double digit. NAFTA is growing by +4.0%, with Lindt USA and Lindt Canada both growing clearly above market and gaining market shares. Also, Ghirardelli grew faster than the market in the U.S. The Mexican business is performing well and we are even putting more focus on that market going forward. When looking at the performance in the NAFTA region, it has to be taken into account that the U.S. chocolate market as a whole slowed down over the last years.
As mentioned before, in this difficult environment, the Lindt & Ghirardelli brands were outpacing the market. We have seen in an earlier chart that sales at Russell Stover were only slightly negative in the first six months, and fully on track to achieve our full year expectations. The management and financial integration of Russell Stover has been managed successfully in the first year, post-acquisition. As always stated, the overall journey of strategic realignment takes between six and eight years. We have also seen that when acquiring and integrating Ghirardelli back in 1998. We are now in the middle of this journey, having acquired Russell Stover in 2014. In 2018, there was no negative impact from the product portfolio change at Russell Stover done two years ago. There was no negative impact with regards to price increases done in 2015, 2016.
The drug channel, which is very important for Russell Stover and Lindt & Ghirardelli in the U.S., did not make any further strategic shifts. Some of the product innovation we launched late 2017, such as the Russell Stover Sugar Free range, are having a positive impact and are performing well. 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. 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 and IT. We expect bottom line benefits from those projects in the next years, which in part can be reinvested in the brand.
In the Group Rest of the World, we also grew faster than the market and above group average, getting to +8.4% compared to 14% in the first half 2017. Growth is coming from basically all countries within this segment. It is great to see that the new markets, South Africa, Japan, China and Brazil, have grown double digit. Included in this segment is as well the distributor business, where we sell to a big number of third parties, distributing our products in smaller countries. Business in Australia was slightly slower than in the years before, as this is one of the markets where competition has been extremely aggressive with promotional pricing. Australia has had one of the hottest summers, which did not help overall chocolate consumption. Overall, this segment of Rest of the World is on track to achieve the full year target of double-digit growth.
There's a clear focus on this geographical segment and its core markets, Brazil, Japan, China and South Africa, we will see positive results in the years to come. Moving from revenue to the different cost elements, starting with material costs. This is adjusted by the change in inventory. It came down to 33.5%, which is 30 basis points lower than in the previous year, and 140 basis points below 2016. The main reason for the decline are benefits from decreases in the cocoa bean prices, partially offset by the high cocoa butter prices and packaging material costs. One big question for the next 12 months remains the development of the cocoa market. The market expects for the harvest season 2017-2018, a surplus of around 50,000 to 70,000 tons. No surplus in the 2018/2019 crop.
That is also the main reason that we saw an increase in cocoa future prices over the last few months. The future outlook heavily depends on the positioning of speculative market participants, who have quite a lot of influence on the cocoa market. For those of you who are interested in more details on cocoa bean and cocoa butter, we have prepared a chart. We can see cocoa bean prices in London are currently trading between 1,700 and 1,800 pounds per ton, and cocoa butter ratio has more or less stabilized at very high levels of 290. This compares when we go back one year now, in July 2017, we can see that one year ago, cocoa butter was at 260, and cocoa bean prices were about 1,500 pounds per ton. We have definitely seen a clear increase here in the last 12 months.
Personnel expenditure, we see an improvement by 30 basis points. We have efficiency gains driven by our global lean program in the factories, combined with benefits from the combined merchandising force in the U.S., one of the strategic projects which I mentioned before, which we have tackled after the acquisition of Russell Stover. Out of our retail concept and double-digit growth in this segment. The retail concept is labor-intensive and means pressure on this cost element. On the other side, of course, gross margins are higher. Going out to operating expenses, a big part here is marketing. This goes slightly up, and there are two main drivers of it. On the one hand, we have seen, again, efficiencies, reducing costs. On the other hand, increased marketing investments. As previously announced, our goal is to invest additional funds in brand-building activities such as advertising.
The lower cocoa bean prices, coupled with a slightly positive price mix impact, have allowed us to do that. The next one is depreciation, amortization, and impairment. As a result of our high CapEx program over the last years to satisfy our volume growth, depreciation, amortization in absolute terms increased in the first half by CHF 8 million to CHF 87 million. The main investments were made in the factories of Lindt, Germany, but as well in Switzerland, Italy and France. The expense ratio increased by 10 basis points to 5.2%. What does that all mean for the operating profit? EBIT figure increased by an excellent 11.5% versus previous year, reaching CHF 117 million or 7% of sales, which is an improvement of 20 basis points compared to one year ago.
The EBIT figure includes a recurring amortization charge of CHF 4 million for the half year, as I mentioned before, which is of course CHF 8 million for the full year, related with the amortization of activated customer relations of Russell Stover under the rule of IFRS 3. Moving to net income, the two lines between EBIT and net income had the following developments. The net financial expenses came in at CHF 6.1 million, which is an increase versus last year. Main driver, higher hedge costs for the subsidiary financing, as well as the negative interest environment. The higher hedge costs coming from the bigger interest rate differential between CHF and other currencies. The tax rate decreased versus last year by 1.7 points to 22.5%, thanks to further tax optimization.
Based on the current outlook, we consider this rate as sustainable unless major changes in local tax ruling occur. I would expect a tax rate of between 22.0% and 22.5% for this year. The absolute level of net income is CHF 86 million, an increase of 12.7% versus prior year, and a 30 basis points margin increase over last year. Next key figure, CapEx. You probably remember the CapEx last year was, for the full year, at a lower level than usual, and now for the first six months, we are at CHF 119 million, which is in line with expectations, but higher than last year. We still expect CapEx to reach around CHF 250 million for the full year, which is about CHF 70 million above 2017.
As always communicated, due to timing of the projects, 2017 was unusually low on CapEx, and we expect the number closer to CHF 300 million in the years to come, mainly driven by the build-out of our production facility in the U.S. You have seen this as part of the announcement that we are investing around CHF 200 million in Stratham, which will help, of course, the capacity. We have planned volume growth in the U.S., and we need additional capacity to be able to manage that. Net financial position development, the bridge shown on this chart is giving the details of the main cash flow relevant developments. Given our net debt position, we pay surely high attention to the needed cash generation to reduce the absolute debt level. Net debt increased by around CHF 50 million due to the share buyback program, where we spent around CHF 100 million.
On the other hand, we had a positive free cash flow of CHF 214 million. Depending on the share buyback program, and given today's outlook, net debt will be at around CHF 250 million at year-end. With that, I'm now moving to the next chapter, which is the outlook for 2018 and beyond. The premium chocolate market continues the positive trend. Lindt & Sprüngli has strong global brand and strategic business actions, which will result in continued market share gains. We are further initiating projects to improve efficiency, to have better costs, cost improvement programs. Some of them are already in place, and we will even accelerate some of them, like procurement in North America, where we still see potential to get efficiency gains between the three subsidiaries. Part of these cost savings and efficiency gains, we plan to reinvest, and reinvest in marketing.
The idea, of course, with these brand-building activities, we will be able to get back to 6%-8% on the midterm growth, organic growth. Our midterm guidance is still 6%-8%, and for EBIT, between 20 and 40 basis points. For 2018, we always communicated our plan on organic growth of around 5% and an improvement of the EBIT margin in range of the mid, long-term goal. I think it's probably going to be rather on the lower end of the 20 to 40 basis points for 2018. The guidance is for 2018, 5% organic growth and EBIT margin in line with the midterm guidance, probably closer to the lower end of the range. With that, we now go to the next chapter, which would be the Q&A. I hand over to the operator again.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Star one on your telephone to ask a question. We do have some questions coming through, your first question comes from the line of Jon Cox from Kepler Cheuvreux. Please ask your question.
Good morning, Martin. Jon Cox, Kepler Cheuvreux here. Congrats on the NAFTA sales figure. Looked pretty impressive. I'm just wondering about the loss which actually widened in H1. I know it's not so important given the mix H1/H2, just wondering if you can talk us through, is it really increased marketing behind Russell Stover and maybe the other brands there? A second question, just on the working capital. Thanks for the guidance for the CHF 250 million net debt this year. There was quite an increase in payables in the first half of the year, and receivables also deteriorated. Is there anything behind that specifically? You seem to be implying that that will unwind as we go through the year, given your net debt guidance. Any sort of granularity on that would be great.
Lastly, just on the CapEx, you mentioned this year around CHF 250 million. Obviously, the new spending, you're talking about CHF 200 million for the U.S. plant over three to four years. Should we just be adding CHF 70 million next year and the year after to take into account that increased CapEx there? Thank you.
Sure. Thanks, Jon. Starting with your question on the NAFTA results. Main drivers there, of course, I did not mention that so much in the conference call before. Logistics costs in the U.S. are going up, that's an important piece. At the same time, of course, we have the logistics project going live now in the second half of 2018. Hopefully we'll be able to already get some savings in 2018. For sure we'll get savings 2019, 2020 on that one. In the short run, as everybody else, we have higher logistics costs in the U.S. That's number one. Of course, yes, additional marketing investments are also driving this behind all brands in the U.S. and in general, of course, the rest of the world, but specifically in the U.S. Russell Stover still being slightly negative on the sales performance.
Of course, if you have a company with certain fixed costs and you have a negative sales performance, it likely weighs as well on the profitability. Those are the key issues. CapEx question. You asked about the CHF 250 million guidance for 2018, and you asked, okay, is it now going to be CHF 70 million more each year? Of course, as part of this CHF 250 million, we always had as well investments in the U.S. in the different plants we have there. Now with this CHF 200 million project in Stratham, it will mean that in the existing plants in the U.S., there will not be a lot of additional investments in the other plants, right? Most of the investment in the U.S. will be in Stratham.
There will be something coming out as well in this CHF 250 million base overall, which we have in 2018, which would have been in all the other factories. I would not expect more than CHF 300 million CapEx. It's a bit early days, of course. As I said, I would expect something more around CHF 300 million, CHF 280 million-CHF 300 million, going forward. For this year, around CHF 250. On working capital, your question, okay, what happened there, payables or receivables? I mean, the main driver there was really in terms of the tax payments, income tax payments. We had a different timing on it. This was something which was the main factor of it. This will be correcting itself now in the second half, I'm not expecting any surprises there.
Great. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Patrik Schwendimann of ZKB. Please ask your question.
Yeah. Good morning, Martin.
Good morning.
You've mentioned that the guidance is still around 5% for the full year, but compared with your outlook in March, I guess you're a little bit more relaxed now than back in March. Is that assumption correct? That's my first question. Second question regarding Russell Stover. You've mentioned that it's still slightly negative. Could you give us your figure in H1? What was the development for Russell Stover? Also what's your best guess for the full year for Russell Stover? Last question regarding the material costs. You had here a tailwind from 30 basis points. What's your best guess for the full year? Thank you.
Okay, sure. You asked if we are more relaxed now than in March. I think Dieter looked quite relaxed in March, actually. I think the 5%, we are always confident that we will get to that. I think this is now a confirmation that we are on a good track. I think especially the NAFTA performance of 4.0% hopefully shows you also that we are really making progress in NAFTA. Of course, particularly with Russell Stover, and that was also your second question. Our figure was negative low single digits for Russell Stover in the first half. I always gave everybody the guidance for the full year that for Russell Stover, we expect something between minus 3 and minus 5 for the full year. I would still say this is the best guidance for Russell Stover. For material costs, you asked about the tailwind.
We have 30 basis points for the full year. I expect roughly 100 basis points. We will still see some benefits now in the second half. Then we have to see what happens next year, of course, with the higher, as you saw on the material expenses, there are higher costs right now, and it depends a little bit on the timing of the hedging. For this year, of course, everything is already booked. In terms of contracts, and I would say around 100 basis points.
100 basis points?
Yes, from the 30.
I mean, the first half was 30 basis points, right?
Exactly. I'm saying for the full year, it will be about 100.
Much more than the second half?
More than the first half.
Okay. Great. Yeah. Thanks a lot, Martin.
Okay.
Thank you. Your next question comes from the line of Joern Iffert of UBS. Please ask your question.
Hello, Martin. Thanks for taking my questions.
Hi.
The first one would be, please, on the organic growth for 2018. I mean, it's around 5%. It's volume-driven, it's strong. You're also benefiting significantly from the reinvestments, from lower raw material costs. Looking at 2019, I mean, this benefit is falling away. Do you think you can reach then the 6%-8% supported by pricing and mix? Second question would be, please, on North America. Can you tell us what was the average selling price development for Lindt in North America and what you observed at your competitors for the first half 2018? The last question.
Sorry, can you repeat that question?
Yeah, sorry. It's on North America. What was the price. The investment in North America was at CHF 200 million. Are you also now starting to produce your own butter or is this not the case with the new facility? Thank you.
Okay. Starting with your last question first. The CHF 200 million investment in Stratham, we will not produce our own cocoa butter. We have, from a cocoa butter perspective, our goal is to be fully sustainable and segregated or traceable by 2025. We do not plan to produce our own cocoa butter. What we will still do is, of course, produce our chocolate mass. We buy butter, we buy beans, we buy all the other ingredients, and then different to most of our competitors, we produce our own chocolate mass for Lindt & Sprüngli in the U.S. No plan to press our own butter. For the time being. Your first question, in terms of organic growth, I mean, you asked about 2019, okay, that the benefit from the higher AMP will be gone.
The thing is, if you spend more advertising consumer promotion in general, so consumer promotion meaning sampling of products in store, so a different way of activating the brand. You don't have an immediate impact normally. Your biggest advertising spend is in the month where you have the biggest sales, in the last quarter. This should normally also have a positive impact, in the future, of course, otherwise you wouldn't spend it. That should definitely be an impact as well in the years to come from this advertising spend, and especially in 2019 as well. Our medium guidance is 6%-8%. Of course, let's now focus first on bringing this 5% home in 2018 and then start speaking more in detail about 2019. Definitely, your question was about having. You somehow said there won't be this benefit anymore.
I think that there will still be a benefit from it in 2019 because it has a long-term impact. In terms of North America, price mix, we have actually seen that competitors have announced price increases. Ferrero and Hershey's have announced price increases. They have not done the price increases yet, but they have announced it for the last quarter of 2018. I think Hershey's from September, Ferrero also in the last few months of 2018. In terms of what has happened so far, for us, price mix in 2018 was roughly flat. Competitors have been very aggressive on pricing, in the U.S. also in most other markets. As I also always announced, our goal is to really reinvest as much as we can in the brand and not decrease prices, which we have done successfully. We are quite happy about that.
Of course, competitors in the U.S., in Australia, in France, et cetera, have been quite aggressive on pricing. If I say pricing, mainly on more promotions or on deeper promotions, bringing average price down.
All right. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Jean-Philippe Bertschy from Berenberg. Please ask your question. Sorry, I might have that the wrong way around, but
The other way around. It's probably better if you call me Philippe.
Jean-Philippe Bertschy. Okay. Thank you. Please ask your question.
No problem. Good morning, Martin.
Hi.
To come back on the guidance for the material costs down 100 basis points for the full year, you're guiding for basically 20 basis points margin improvement. The increase in advertising is substantial because you are able to do very strong volume growth of close to 5% in H1 with marketing costs slightly up. Where are you really investing? I understand the sampling for the TV advertising, but it looks to me like a very high increase in the second part of the year. The second question is with regards to the Stratham investments. I think you as well considering a greenfield project. Maybe if you can explain the rationale behind the investment in Stratham and not going for a greenfield project maybe in the Midwest. If you can as well give sales growth for the Global Retail activities and maybe for France. You are not mentioning that market.
The last one, if you had at all an impact on sales on the back of the drivers strike in Brazil at the end of May. Thanks.
Okay. Writing down all your questions. Let's start with the material costs. You asked basically if you have a massive advertising and sampling cost increase. I think we always mentioned that we would like to reinvest possible benefits from raw material costs. Of course, we have also additional higher costs of operations. I mentioned logistics, in the U.S. especially, but not only in the U.S. We see also higher logistics costs in Europe.
If I remember Martin.
Yes
You had as well this increased costs in the U.S. in H1, but now they're supposed to be partly offset by the savings from Russell Stover or the synergies from Russell Stover or you don't see something?
Yeah, sure. We have to see that still. As I always said as well, if you go live with such a big project of basically managing logistics combined between the three brands in shared warehouses, I normally prefer not to assume that in year one or in the first six months with all the teething problems, et cetera, we will have a benefit. I would not expect in 2018. As any big project, I think you need some time so it runs smoothly again. I wouldn't expect in year one, into 2018, a benefit from that. I'm now assuming higher logistics costs overall because of the much higher logistics costs in the U.S. that everybody is facing. Therefore, that's why I'm saying, hey, guidance is 20 basis points-40 basis points, but it's probably more towards the lower end than the higher end, right?
Okay.
Stratham investments. Okay, why did we not do Greenfield? Why are we doing Stratham? Of course, we have thought about this a lot. We have done calculations left and right. There are lots of different factors that have an influence here. On the one side, of course, what is the best location for transportation to the customers? What is the best location to get the best labor, let's say, qualified labor? What is the best location to be close to your suppliers, to important suppliers such as cocoa butter, et cetera. At the end of the day, after taking everything into account and discussing at length, we came to the conclusion that, for the time being, as well considering the fact that we have a fixed cost basis in Stratham, which we don't have to duplicate in another location.
We came basically to the conclusion that for the time being, the best decision is to not do a new plant, but to rather build out an existing plant in the Northeast, where also a lot of sales are. Two-thirds of the sales in the U.S. are east of the Rocky Mountains, and one-third is west of the Rocky Mountains. A lot of the sales definitely on that side. Basically, this was the key driver. It was a close call, but at the end, this was really what we decided. Okay?
Yep.
You asked about Global Retail sales growth. It's double digit, above 10% growth in Global Retail. We are expecting to open net a bit between 40 and 50 stores in 2018. Still, a lot of the new stores are going to be opened in the second half of 2018, because we typically open stores somewhere in September, October before the high season. That's the most cost-efficient way of managing the business. Overall for 2018, I expect around 450 to 455 stores at the end of this year. You asked about France. It was an okay performance in France. As I mentioned, as one of the countries, France is impacted by a very fierce competitive environment. You are under a lot of pressure from the retailers to decrease prices, and if you don't do that, then you are quickly kicked out, your products are out of the shelves.
We also had that to some extent in a limited way. We definitely are adamant that we do want to keep the prices as stable as possible in France as well. In France, we basically had a growth, which is positive. It was low single-digit growth, basically in France. We believe considering the environment which we are in France, that's a good result.
You asked about the strike in Brazil. Yes, there was a strike, of course, and yes, in the short run at least, there was a small impact for everybody. Because products could not be delivered on time and in full to all the retail stores, be it in chocolate, be it in other products. For the full year, we will not have any major impact because of that. It was a short-term thing which we were able to manage successfully, and hopefully it will not happen again.
Excellent, Martin.
Thank you. The next question comes from the line of Alain Oberhuber of MainFirst. Please ask your question.
Hello, Martin. Alain Oberhuber, MainFirst.
Hi, Alain.
I have two questions. The first is regarding these sourcing projects where you highlight that your efficiency will improve significantly. Could you highlight a little bit more, give us a little bit more explanation what all these projects are? Second question is-
Sorry, do you mean merchandising here? Merchandising or which one do you mean?
Merchandising and sourcing as well. In the press release, you mention also the sourcing.
Okay. Yeah, sure. Yeah. Okay.
The second question is regarding rest of the world, which was a little bit disappointing, obviously, given that you guide still for the year 12%. Do you expect then a strong recovery in Australia to achieve this 12% organic growth for rest of the world for the full year 2019, 2018?
I'm starting with your last question, rest of the world, 8.4%. Guidance is, I wouldn't say exactly 20%, I'm saying double digits. Above 10%. Yes, we expect Australia to recover. As I mentioned, on the one side, we had very aggressive competition on pricing. On the other side, we had extremely hot summer. We think we have really good activities in place in Australia, to basically recover and to get to a good, I would say, low single-digit growth, roughly, in Australia. We will have, I think, a very good year in the second half in Japan. Japan is really going well, with new stores. Also our overall business in Japan performing quite well. Then the distributor business, we also expect it to be very positive. If you think about Latin America, where we don't have a subsidiary, it's basically everywhere, but in Mexico and Brazil.
We have an excellent opportunity still. If you think about countries like Argentina, Chile, Colombia, Peru, even Central America as well. Then also if you think about markets in the Middle East, Saudi Arabia, if you think about South Korea in Asia. Then of course, the ones where we have subsidiaries also, China, with our online approach is really growing extremely nicely. Absolutely true. Australia is the one, it's the biggest one, of course, in this group of countries. Has been a bit slow now in the first half, but yes, we expect Australia to accelerate, and we expect the rest of that group to do extremely well. That's why we think we will achieve the double-digit target there of at least 10%. In terms of the projects, yes, merchandising.
The merchandisers in the U.S. are, we have our own employees who make sure that we are never out of stock in the different stores. We have merged those ones between Ghirardelli, Lindt USA, and Russell Stover. We have now one retail team that makes sure that they are going from stores to stores, Walmarts, Targets, Walgreens, et cetera, and make sure that all the 3 brands-- the same employee basically goes to one Walgreens and makes sure that the 3 brands are always represented in a perfect way on the shelves. That's the main goal of that project. Number one, to be actually better at the point of sale in terms of your presence, in terms of you not being out of stock.
If you have the same person going to one Walgreens and works on the three brands, it's much more efficient than if you had three people going to that same Walgreens, one for Ghirardelli, one for Lindt, and one for Russell Stover. You have much less transportation time between the retailers thanks to this project. You save money because of that, and you are actually able to extend coverage. In terms of sourcing, procurement, this is an initiative which we started actually a few years ago with packaging, and I think we have still leverage in the U.S. and also in the rest of the world to work together on projects to go even into other categories where we are now not managing it that closely yet, like certain indirect costs, et cetera.
It's a plan to have even more focus on that going forward in Europe and also in North America. If you think about North America, it's one-third of our sales. It's a lot of raw materials, packaging, and as well, indirect costs that we can manage and that we can manage combined in a similar way, as I mentioned, merchandising. Just leveraging the volumes of Russell Stover and Ghirardelli and Lindt. I don't know if this explains your questions.
That's fine. Just regarding SAP, have you now implemented fully SAP as well with all the three different divisions in the U.S.?
We have initiated the project with Russell Stover. Russell Stover still runs on a relatively old system. This was not the absolute first priority because first priority in 2014 was really to get the reporting up to speed, and then secondly, mainly focus the organization on what is the right strategic positioning of the brand, what is the right product portfolio, et cetera, what are the right price points. This is work that is ongoing, of course. Now as a next step, we said because SAP project always absorbs energy, and you want to make sure that you have really the right people on the ground and have the right project team. We have started the SAP project at Russell Stover six months ago.
If you want to take these kind of things, approach it with a lot of methodology, in a company of that size, it takes a couple of years. It is really planned to be done by 2020. Then the other two brands may follow, but we have to still decide on the timing on that one. The idea, of course, is to have one system in the U.S.
Great. Thank you much, Martin.
Thank you. Your next question comes from the line of Fintan Ryan of Berenberg. Please ask your question.
Good morning, Martin.
Hi, Ryan.
Just a few questions from me. I think most of my main ones have been asked. Firstly, I'm wondering if you've said that the retail stores grew double digits in the first half. I'm wondering, could you give us a sense of what like-for-like sales growth is in these stores? Do you have any ambition for at least to have positive like-for-likes within the retail store base? Secondly, just in terms of the pricing outlook for 2019, I know you mentioned that some of your competitors in the U.S. market in particular are putting through price increases in from the second half. Would you expect to put through similar price increases yourself? Do you think that the deflation or the sort of flat pricing, the price pressures you see in some of the European markets like France, will persist into 2019?
Finally, just very quickly, you mentioned that the good summer in Australia last year, obviously the Australian summer impacted demand there. Given the current weather conditions in Europe, are you seeing any impact of demand from the good weather conditions here? Thank you.
I'm starting with your last question. In Europe, of course, you have a whole summer, and probably most of us are happy about this. Not so much if we want to sell chocolate. In some way, you could say the good thing is, in this month, it's not typically the high season for chocolate. In the European summer months, between let's say July and August or June and August or September, it's typically the lowest sales anyway, indifferently if we have very hot summer or a colder summer. Of course, this is different in Australia, where the summer really falls right in the middle of the chocolate season. That definitely has an impact, right? We also have the hotter summer, it has a bigger impact than in Europe in general, I would say. Moving to your question on retail double-digit growth.
Yes, we were double-digit, our growth. We do not disclose comp store growth. As I always said, our comp store growth is positive. Our goal to further improve on it. If one day our speed of store growth or additional stores slows down, we do not have a negative impact, of course. Comp store is positive. We would not approve a new store if we do not expect it to have a positive comp store. We are approving all the new retail stores in the head office. We are looking at this in detail at the numbers, profit numbers, and sales numbers. Pricing outlook 2019. A bit early days again. Of course, our competition has moved quickly, but let us bear in mind our competition has also been very aggressive in pricing in a period where we have not been aggressive in pricing.
If you think about the U.S., we have some price increases, in the last four or five years, more than once. It is something we are analyzing, of course, but no decision has been taken right now. There are also different ways of bringing price mix up, right? You can have a positive impact by even focusing more on products with a higher average price, et cetera. We are analyzing, and we will make a call in the next few weeks. No decision has been taken. Europe is a good one as well. I think especially in countries like France, we will more likely see flat pricing actually. We have not seen anybody move either. If they move, it is in the other direction, not up, but down. I am cautiously, I am not too optimistic about our competition doing price increase in Europe.
Again, as part of the whole analysis we are doing for the U.S. and for Europe and for the rest of the world. We are really doing an analysis for all the markets, what we should do, and no decision has been taken for us. Overall, I do not expect competition in Europe to move very fast.
Okay, great. Very clear. Thank you.
Thank you. Your next question comes from the line of Alexandra Steiger of UBS. Please ask your question.
Good morning, Mr. Hug. I just have a follow-up question on your debt guidance you have given before. You said you expect around CHF 250 million for end 2018, and you earlier, with the full year results, guided to a leverage of close to zero by the end of 2019. Is this still correct? The second question is free cash flow generation. You have earlier guided for above average free cash flow also for 2018. Is this still true? Thank you.
You are asking for a debt guidance now for end of 2019. It's a little bit early days. I think if I understood you correctly, you asked me if end of 2019 it will be at zero.
Yeah, I think you said that before. You said that in with the full year results in March.
Yeah. Probably we said we are around zero.
That is, if you look at the numbers, unless something unexpected happens, which always can happen, I would still confirm that.
Okay.
Yes. Now, your free cash flow guidance question was for the full year, for 2018?
Yes, correct.
I always said last year was extraordinarily high, right? Because we were at CHF 405 million. If you look at the long-term average, before last year, we were at around CHF 250 million before tax. For this year, I would expect something closer to the long-term average than to the number last year. Last year was really exceptionally high.
With the full year numbers, you said you expect around CHF 240 normally, but 2018 is also expected to come in above average.
Maybe slightly higher, but we were not close to where we were last year. Last year we had really much lower CapEx. Last year we had CHF 180 million CapEx. This year CHF 250-ish. That alone is CHF 70 million, right?
You're already down from CHF 400 to CHF 330. It depends a bit on the inventory build-up at year-end. Depending a little bit on Easter, et cetera, how quickly we build up inventory. Those are a bit the question marks what happens really on the balance sheet, right? Especially driven by the season, Easter, Valentine's, how much ships in quarter four, how much ships in quarter one.
Okay
how exactly are we managing the warehouses in the U.S. as well, where we have now joint warehouses. What does that mean for the inventory position as such? There are different factors which are a bit difficult to predict right now, but definitely below last year, I believe. Maybe tick higher than last year, than the year before, sorry, than the long-term average, but I wouldn't expect super high numbers this year, as I said.
Okay. Thank you.
Thank you.
Thank you. Your next question comes from the line of Faham Baig of Credit Suisse. Please ask your question.
Hi, Martin. Three quick questions from me, please. The U.S. seems to have been driven by your Lindt business. Could you talk about the turnaround the business has seen? Because in 2016, 2017, if I'm correct, it was registering 1% organic growth. There's clearly been some sort of turnaround. Could you talk about that? Secondly, could you remind me whether your retail stores business is still margin dilutive or EBIT margins are now in line with the group? Thirdly, just a philosophical question. I noticed in Italy you've now launched a Sugar Free product. Is this now a beginning of a rollout of Sugar Free products across geographies, given consumer demand?
Thanks for the question, Faham. Starting with the U.S., yes, we had a fantastic start to the year with Lindt. It's the Lindt brand in the U.S. As you can see in Nielsen, it was the strongest foreign brand in the U.S. of the three brands. I think we talked about that in the past. We clearly said in 2018 and going forward, we are, again, going to focus more on the core. On our core key franchises, basically, LINDOR EXCELLENCE. Of course, as well, the Seasons, but really clear focus on LINDOR EXCELLENCE. If I say focus, I also mean within LINDOR, you could have probably 25 different flavors. Either you try to roll out everything everywhere, or you try to really focus on LINDOR Milk, LINDOR Assorted, and maybe one or two more.
Try to have probably more than one facing in the shelf. That has been the strategy, and I think it was executed very successfully in the marketplace. That would be, for me, one of the key drivers, coupled, of course, with the investment behind the brands as well. As we said, we were able to leverage a bit lower material costs with slightly higher spend on advertising as well. Those were some of the key drivers. Focus on core and some investment behind the brands. Now, with the [diluted] margin we don't disclose, I already said we are slightly below the average, but not that far away. We are happy with the development. It's going in the right direction. I already said that in one of the questions before. All the additional stores we open is basically there's quite a detailed process.
If a country wants to open a new store, which is checked for financials and for performance, and we are really careful when we open new stores. Because, of course, if we are in a new store, you normally cannot get out so quickly. You have to have your control mechanism quite spot on to be able to manage your profitability. Your question about Sugar Free product. Yes, in Italy, there is a small amount of Sugar Free product being produced. We have rolled this also out in Australia. It's mainly two products, a milk one and a higher cocoa content one. We have now to see how it performs. There is not now a clear strategy to say this is now our next key franchise. We are more a bit opportunistic on this one.
We see how the results are, and depending on that, we take it from there. Overall, our strategy is still to focus on LINDOR EXCELLENCE and the Seasons. I think we have done this successfully in the first six months, and we will focus on the same now in the second six months.
Thanks, Martin.
Thank you. Your last question, it comes from the line of Patrik Schwendimann of ZKB. Please ask your question.
Hi, Martin, again. Just two follow-up questions regarding Europe and North America. In Europe, you had +5% organic growth in H1. What's your best guess here for the full year? The same question for North America, which had +4%. What's your best guess here for the full year? Thank you.
I would say North America, you had 4, you said it. I think we have slightly more tough comparables in the second half in North America compared to the first half. I would still say combined between Europe and NAFTA, we will be somewhere between 4% and 5%, as we guided in March. I think maybe Europe is going to be slightly above and the U.S. maybe more. I think Europe is going to be still a bit higher than that, on this range, 4% to 5%.
Europe above 5% and maybe North America below 4%.
Combined, the two are between 4% and 5%.
Mm-hmm. As a best guess, maybe some acceleration in Europe and some slowdown in North America.
Could be, yes.
Okay, great. Thanks a lot, Martin, and see you on Friday.
Okay, see you on Friday.
Thank you. There are no further questions on the line, sir. Please continue.
Okay. Thanks to everybody for participating in the conference call, of course, thanks for all the interesting questions. Looking forward to speaking to you in the near future. Thank you very much, and have a wonderful day.
Thank you. That does conclude our webcast for today. Thank you all for participating. You may all disconnect.