Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Half Year Results for 2018. I must advise you the webcast is being recorded today, Tuesday, 24th July, 2018. And I'd now like to hand the webcast over to your presenter today, Martin Hoek. Please go ahead, sir.
Ladies and gentlemen, it is my pleasure to welcome you to the Linden Spring 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 to 20 minutes. Following the presentation, I will hand over to the operator who will then organize the questions and answer session.
So let's go to the content of today's presentation. The agenda points are the following: 1st, performance highlights of half year 2018 then more detailed P and L and the balance sheet details of this first half of twenty eighteen then a quick outlook and then as mentioned before, we go into the Q and A session. So let's start with the performance highlights for 2018. And first, the P and L statement of the Linden Spruill group. We go first into the overview of the results.
Organic growth for the whole group reached 5 plus 1 5.1 percent As the Swiss franc weakened mainly against the euro and pound sterling, we got to 7.7% growth in Swiss francs. Organic growth of 5% is in line with our 2018 full year guidance. Growth in naphtha is at plus 4%, which is also in line with our expectations and is a positive trend after the slight decline in naphtha last year, mainly driven by Rostov. Europe is growing by plus 5% and 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 percent 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 EBITDA margin EBIT margin and higher depreciation. As in previous periods, the EBIT trigger shown is being charged by a non cash flow amortization of CHF4 1,000,000 for the half year, which is CHF8 1,000,000 for the full year, well 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.
Now moving to the balance sheet. Equity shown versus stated at year end 2017, the absolute amount decreased by CHF28 1,000,000 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 $50,000,000 higher than at year end 2017, which is also coming from the share buyback program.
We have already bought back around CHF 100,000,000 worth of shares. Compared to half year 2017, net debt position is improved by around CHF140 1,000,000 despite the share buyback program. I will talk about this a bit more in detail on one of the next slides. So now going into details on profit and loss statements and balance sheet as well. Starting with sales analysis, 5 years in Swiss francs.
We present again the sales growth over the last 5 years in Swiss francs. Absolute and growth figures include Russell Stover for 2015. In many years in the past, Swiss francs growth has been negatively impacted by the strengthening of the home currency. In the first half of twenty eighteen, this has been different, thanks to the stronger euro and the stronger pound sterling. On the other hand, the U.
S. Dollar got a bit weaker in the first half. Moving to sales growth organic and so in local currencies, which for sure is one of the big topics for you, this whole organic growth. The total group reached 5.8% 5.1% in the first half. This development has to be seen considering the following facts.
Number 1, 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 the markets. And 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. Moving to sales analysis markets. Looking at the sales hit by markets, I would like to highlight the progress made in Germany reaching 17.5% United Kingdom 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 1 third of our revenue. So sales analysis, different drivers.
You can see this on the following chart. As a whole group, the volume went up by 4.9%. And on pricemix, 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 CHF. In a market environment with pressure on prices due to lower raw material costs, it is a positive sign that our pricemix remains positive.
Going into the very interesting segment information. Organic sales growth by geographical segment shows a continued good growth in Europe at plus 5.0 percent compared to 6% 1 year ago. We had a very good performance in important markets like Germany and the United Kingdom, but 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 percent with Lindt USA and Lindt Canada both growing clearly above market and gaining market shares.
Also, Tierra Valley grew faster than the market in the U. S. What's more, 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, it is difficult in this difficult environment, the Lindenke and Adelie brands were outpacing the market. We have seen in an earlier chart that sales at Rosselstorfer were only slightly negative in the 1st 6 months and fully on track to achieve our full year expectations. The management and financial integration of ArcelorMittal has been managed successfully in the 1st year post acquisition. As always stated, the overall journey of strategic realignment takes between 6 8 years.
We have also seen that when acquiring and integrating Kirabelli back in 1998. We are now in the middle of this journey having acquired Rosso Stover in 2014. In 2018, there was no negative impact from the product portfolio change at RASOSTOR around 2 years ago. In addition, there was no negative impact with regards to price increases done in 2015, 'sixteen. And the drug channel, which is very important for RASOSTOR and Lint and Kialdell in the U.
S. Did not make any further strategic shifts. Furthermore, some of the product innovation we launched late 2017, such as the RASOSTO sugar free range, are having a positive impact and are performing well. Overall, we think we are taking the right strategic steps at Wassa Stover to be set up for future success. This process has been taking longer than originally planned, but we are on the right mainly in the areas 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 twenty seventeen. 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. In addition, Australia has had one of the hottest summers which did not help overall chocolate consumption. But overall, this segment of Rest of the World is on track to achieve the full year target of double digit growth. There is a clear focus on this geographical segment and its core markets, Brazil, Japan, China and South Africa, and we will see positive results in the years to come. Now moving from revenue to the different cost elements, starting with material costs.
And 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 20 seventeen-eighteen a surplus of around 50,000 to 70,000 tons, but no surplus in the 20 18, 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. So for those of you who are interested in more details on cocoa bean and cocoa butter, we have prepared a chart. And we can see cocoa bean prices in London are currently trading between £1701800 per tonne and cocoa butter ratio has more or less stabilized at very high levels of 2.90. Dollars This compares when we go back 1 year in July 2017, we can see that 1 year ago cocoa butter was at 2.60 and cocoa bean prices were about £1500 per ton.
So we have definitely seen a clear increase here in recent in the last 12 months. Personnel expenditure, we see an improvement by 30 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. Is one of the strategic projects, which I mentioned before, which we have tackled after the acquisition of Rostersdorfen.
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. So going all to operating expenses, a big part here is marketing. And this goes slightly up.
And there are 2 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 being prices coupled with a slightly positive pricemix impact have allowed us to do that.
Then 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 and amortization in vessel terms, increased in the first half by $8,000,000 to $87,000,000 The main investments were made in the factories of Lindt German, but also in Switzerland, Italy and France. The expense ratio increased by 10 basis points to 5.2%. So what does that all mean for the operating profit? EBIT figure increased by an excellent 11.5% versus previous year, reaching CHF 117,000,000 or 7 percent of sales, which is an improvement of 20 basis points compared to 1 year ago.
The EBIT trigger includes a recurring amortization charge of CHF4 1,000,000 for the half year, as I mentioned before, which is, of course, CHF8 1,000,000 for the full year, related with the amortization of Activate's customer relations of Raussel Stobre under the rule of IFRS 3. And moving to net income. The two lines between EBIT and net income had the following developments. The net financial expenses came in at CHF 6,100,000, which is an increase versus last year. Main driver, higher hedge costs for the subsidiary financing as well as negative interest the negative interest environment, the higher hedge costs coming from the bigger interest rate differential between Swiss francs 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. So I would expect a tax rate of between CHF 22.0 and CHF 22.5 percent for TZ. The absolute level of net income is CHF86 1,000,000, an increase of 12.7% versus prior year and a 30 basis points margin increase over last year. So next key figure, CapEx.
We probably or you probably remember that CapEx last year was for the full year at lower level than usual. And now for 1st 6 months, we are at €190,000,000 which is in line with expectations but higher than last year. We still expect CapEx to reach around $250,000,000 for the full year, which is about $70,000,000 above 2017. As always communicated due to timing of the projects, 2017 was unusually low on CapEx, and we expect a number closer to $300,000,000 in the years to come, mainly driven by the build out of our production facility in the U. S.
We have seen this as part of the announcement that we are investing around $200,000,000 in Stettin, 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. So 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 need of the cash generation to reduce the absolute debt level. Net debt increased by around CHF 50,000,000 due to the share buyback program, where we spent around CHF 100,000,000. On the other hand, we had a positive free cash flow of CHF 214 1,000,000. Depending on the share buyback program and given today's outlook, net debt will be at around €250,000,000 at year end. So with that, I'm now moving to the next chapter, which is the outlook for 2018 and beyond.
So the premium chocolate market continues the positive trend. Linden's friendly has strong global brand and strategic business actions to result 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 3 subsidiaries. Part of this cost savings and efficiency gains, we plan to reinvest and reinvest in marketing.
And the idea, of course, with this bank building activities, we will be able to get back to 6% to 8% on the midterm growth, organic growth. So our midterm guidance is still 6% to 8% and for EBIT between 20 40 basis points. For 2018, we always communicated our plan on organic growth of around 5% and an improvement of the EBIT margin in the range of the mid long term goal. Now I think it's probably going to be rather on the lower end of the 20 to 40 basis points for 2018, but the guidance is for 2018. So 5% organic growth and EBIT margin in line with the midterm guidance, probably closer to the lower end of the range.
So with that, we now go to the next chapter, which would be the Q and A. And I hand over to the operator again. Thank
And your first question comes from the line of John Cox from Kepler Cheuvreux. Please ask your question.
Congrats on the NAFTA sales figure, it looked pretty impressive. But I'm just wondering about the loss which actually widened in H1. I know it's not so important given the mix H1, H2, but just wondering if you can talk us through, is it really increased marketing behind Russell Stover and maybe the other brands there? Just on the and then the second question, just on the working capital. Thanks for the guidance the $250,000,000 net debt this year, but 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, but any sort of granularity on that would be great. And then lastly, just on the CapEx, you mentioned this year around $250,000,000 Obviously, the new spending, you're talking about $200,000,000 for the U. S. Plant over 3 to 4 years.
Should we just be adding $70,000,000 next year and the year after to take into account that increased CapEx there?
Sure. Thanks, John. Starting with your question on the Netstar results. So main drivers there, of course, we did not or I did not mention that so much in the conference call before. Logistics costs in the U.
S. Are going up. So that's an important piece. At the same time, of course, we have the logistics project going live now in the second half of twenty eighteen. And hopefully, we will be able to already get some savings in 2018.
For sure, we'll get savings 'nineteen, 'twenty on that one. But in the short run, like everybody else, we have higher logistics costs in the U. S. That's number 1. Then of course, yes, additional marketing investments are also driving this behind all brands in the U.
S. And in general, of course, rest of the world, but specifically in the U. S. And whilst the stores still being slightly negative on the sales performance, of course, if you are have a company with certain fixed costs and you have a negative sales performance, it slightly weighs as well on the profitability. So that those are the key issues.
Then CapEx question, you asked about the €250,000,000 guidance for 'eighteen. And you asked, okay, is it now going to be $70,000,000 more each year? Of course, as part of this $250,000,000 we always had as well investments in the U. S. In the different plants we have there.
Now it is €200,000,000 project in Sweden, 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? So most of the investment in the U. S. Will be in the in the in the in the in the $250,000,000 base overall, right, which we have in 2018, which would have been in all the other factories.
So I will not expect more than $300,000,000 CapEx. It's a bit early days, of course. But I as I said, I would expect something more around $300,000,000 $280,000,000 to $300,000,000 going forward, but for this year around $250,000,000 Then 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. So this was something which was the main factor of it.
So this will be correcting itself now in the second half. So I'm not expecting any surprises there.
Great. Thank you very
much. Thank you.
Thank you. Your next question comes from the line of Patrick Schwendeman of ZKB. Please ask your question.
Yes, good morning Martin. 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 have mentioned that it's still slightly negative. Could you give us your figure in Atron? What was the development for AFSO store? And also, what's your best guess for the full year for AFSO store? And 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. So, you are if we are more relaxed now than in March. I think people looked quite relaxed as well in March actually. And I think the 5%, we were 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 naphtha performance of 4.0 percent hopefully shows you also that we are really making progress in naphtha. Of course, particularly with rasustovo and that was also your second question. Our figure was negative low single digits for Aspen Store in the first half. And I always gave everybody the guidance for the full year that for Aspen Store we expect something between minus 3% and minus 5% for the full year. So I would still say this is the best guidance for Assel Stove.
And for material costs, you asked about the tailwind. We have 30 basis points for the full year. I expect roughly 100 basis points. So we will still see some benefits now in the second half. And 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.
But for this year, of course, everything is already booked. And in terms of contracts, and I would say around 100 basis points.
100 basis points?
Yes, compared to.
I mean, in the first half of 30 basis points, right?
Exactly. And I'm saying for the full year, it will be about 100 basis points.
So much more than the second half?
More than the first half.
Okay. Okay. Great. Thanks a lot, Martin.
Okay. Thank you. Your next question comes from the line of Jern Youssef of UBS. Please ask your question.
Hello, Martin. Thanks for taking my questions. The first one would be please on the organic growth for 2018. I mean, it's around 5% volume driven, this is strong, but you're also benefiting significantly from the reinvestments from raw raw material costs. Looking at 2019, I mean, this benefit is falling away.
And do you think you can reach them to 6% to 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 twenty eighteen? And the last question Sorry, can you repeat that question? Yes, sorry.
It's on North America. What was
the price
on the investment in North America with the $200,000,000 Are you also now starting to produce your own butter Or is this not the case with the new facility?
Okay. So starting with your last question first. The $200,000,000 investment in Stratham, we will not produce our own cocoa butter. But we have from a cocoa butter perspective, our goal is to be fully sustainable and segregated or traceable by 2025. But we do not plan to produce our own cocoa butter.
So what we will still do is, of course, produce our chocolate mass. So 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 and Quiradell in the U. S. So no plan to press our own butter for the time being.
So your first question in terms of organic growth, I think you asked about 2019, okay, that benefit from the higher A and P will be 1. 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. So your biggest advertising spend is in the month where you have the biggest sales, so in the last quarter. This should normally also have a positive impact in the future, of course, otherwise you wouldn't spend it. So there should definitely be an impact as well in the years to come from this advertising spend and especially in 2019 as well.
So therefore, our mid term guidance is 6% to 8%. Of course, that's now focused first on bringing this 5% home in 2018 and then start speaking more in detail about 2019. But 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, pricemix, we have actually seen that competitors have announced price increases.
Ferrero inversions 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 is from September, Ferrero also in the last few months of 2018. So now in terms of what has happened so far, for us price mix in 'eighteen 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. So we are quite happy about that. But of course, competitors in the U.
S, in Australia, in France, etcetera, have been quite aggressive on pricing. And if I say pricing mainly on more promotions or on deeper promotions, so bringing average price down.
All right. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Jean Philippe Vontobel from Borsch. Please ask your question.
Sorry, I might have that the wrong way around, but it's not the way around. Okay.
To come back on the guidance for the material costs down 100 bps for the full year and you're guiding for basically 20 bps margin improvements. 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. So where are you really investing? I understand the samplings for the TV advertising, but it looks to me like a very high increase in the 2nd part of the year. The second question is with regards to the Stratham investments.
I think you were 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. And if you can as well give sales growth for the global retail activities and maybe for France, you are not mentioning that market. And the last one, if you had at all an impact on sales on the back of the drivers' strike in Brazil in at the end of May.
Thanks. Okay. Just writing down all your questions. So let's start with material costs. So you asked basically if you don't have or if you have a massive advertising and sampling cost increase, I mean, 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. And 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
may, Martin, you have all these increased costs in the U. S. In H1, but now they're supposed to be partly offset by the savings from Russell's Tower, all of the synergies from Russell's Tower or do you see something?
Yes, sure.
I mean, we have to see that still. I always say that, well, if you go live with such a big project of basically managing logistics combined between the 3 brands in shared warehouses, I normally prefer not to assume that in year 1 or in the 1st 6 months, with all the teething problems, etcetera, we will have a benefit. So I would not expect in 2018, I don't know, as any big project, I think you need some time to sell it once smoothly again. So I wouldn't expect in year 1 into 2018 a benefit from that. So I'm now assuming higher logistics costs overall because of the much higher logistics costs in the U.
S. That everybody is facing. And therefore, that's why I'm saying, hey, guidance is 20 to 40 basis points, but it is probably more towards the lower end than the higher end, right? Then Stratham Investments, So, okay, why did we not do greenfield? Why are we doing stratum?
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, a qualified labor?
What is the best location to get be close to your suppliers, to important suppliers such as cocoa butter, etcetera. So 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 base cost basis in Streatham, 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 pick out an existing plant in the Northeast where also a lot of sales are. Twothree of the sales are in the U. S. Are east of the Rocky Mountains and onethree is west of the Mountains.
So a lot of the sales definitely on that side. And so basically, this was the key driver. It was a close call, but at the end this was really what we decided. Okay? Yes.
Then you asked about global retail sales growth, it's double digit, above 10% growth in global retail. So we are expecting to open net a bit between 14, 50 stores in 2018. Still a lot of the new stores are going to be opened in the second half of twenty eighteen, because we typically open stores somewhere in September, October before the high season. That's the most cost efficient way of managing the business. So overall, for 2018, I expect around 450 to 4 55 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 have 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. And we also had that to some extent in a limited way, but we definitely are adamant that we do want to keep the prices as stable as possible in France as well. So 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, in France, that's a good result.
And then you asked about the spike in Brazil. Yes, there was a spike, of course. And yes, there was in the short run at least, there was a small impact everybody because products could not be delivered on time and in food to all the retail stores, be it in chocolate, be it in other products. But for the full year, we will not have any major impact because of that. So it was a short term thing, which we were able to manage successfully.
And hopefully, it will not happen again.
Thanks, Vincent.
Thank you. The next question comes from the line of Alain Oberhuber of MainFirst. Please ask your question.
Hello, Martin. Alain Blueber, MainFirst.
Hi, Alan.
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?
And second question is Do you mean merchandising here, merchandising or Merchandising
and sourcing as well. In the press release, you mentioned
also the sourcing. Okay. Yes, sure. Yes, okay. And the
second question is regarding Rest of the World, which was a little bit disappointing, obviously, given that you died 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 2018?
I'm starting with your last question, rest of the world, 8.4%. So guidance is I wouldn't say exactly 12%, I'm saying double digits, so above 10%. Now 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.
So 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. And then also if you think about markets in the Middle East, Saudi Arabia, if you think about South Korea in Asia And then of course, the ones where we have subsidiaries also China with our online approach is really growing extremely nicely. So absolutely true, Australia is the one is 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. So 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.
And we have merged those ones between our daily Lindt U. S. And Ross and Stoner. We have now one team, one retail team that makes sure that they are going from stores to stores, Walmart, Target, Walgreens, etcetera, and make sure that all the 3 brands so the same employee basically goes to 1 Walgreens and make sure that the 3 brands are always represented in a perfect way on the shelves. So that's the main goal of that project.
Number 1, to be actually better at the point of sale in terms of your presence, in terms of you not being out of stock. But then of course, if you have the same person going to 1 Walgreens and works on the 3 brands, it's much more efficient than if you had 3 people going to that same Walgreens, 1 for Gjerardelli, 1 for Lindt and 1 for Rostov. So you have much less transportation time between the retailers, thanks to this project. So 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 not managing it that closely yet like indirect, certain indirect costs, etcetera. So it's a plan to even have even more focus on that going forward in Europe and also in North America, if you think about North America, I mean, it's onethree of our sales.
It's a lot of raw materials, packaging and as well in our cost that we can manage and that we can manage combined in a similar way, as I mentioned, merchandising. So just leveraging the volumes of Brussels Dovre and Gerdauen Lait. I don't know if this is
your question. That's right. Just regarding SAP, have you now implemented fully SAP as well with all the 3 different divisions in the U.
S? We have initiated the project with RASOSTO. RASOSTO still runs on a relatively old system. And this was not the absolute first priority because first priority in 2014 is really to get the reporting up to speed. And then secondly, mainly focus the organization on how do we have to what is the right strategic positioning of the brand, what is the right product portfolio, etcetera, what are the right price points.
I mean, 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 in the ground and have the right project team. So we have started the SAP project at Rostov like 6 months ago. But if you want to take these kind of things, approach it in a very method there's a lot of methodology. In a company of that size, it takes a couple of years.
So it's really planned to be done by 2020. And then the other two brands may follow, but we have to still decide on the timing on that one. But the idea, of course, is to have one system in the U. S.
Great. Thank you very much, Mark.
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 for me. I think most of them, my main ones have been asked. And just firstly, I'm wondering if you've given 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? And 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 looking are putting through price increases in from the second half. Do you expect to put through similar price increases yourself? And do you think that the deflation or the sort of flat pricing, the price pressure you see in some of the European markets like France, I think they will persist into 2019?
Then finally, just very quickly, I think you mentioned that the summer, 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 good weather conditions here?
Okay. I'm starting with your last question. In Europe, of course, yes, you have a whole summer and probably most of us are happy about this, not so much if you want to sell chocolate. Now 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, right, between July August or June August or September, it's typically the lowest sales anyway.
Indifferently, we have very hot summer or colder summer. Of course, this is different in Australia, where the summer really falls right in the middle of the chocolate season. So that definitely has an impact, right? So we also, yes, the hotter summer, it has a bigger impact than Europe in general, I would say. Now moving to your question on retail double digit growth.
Yes, we were double digit our growth. Com store, we don't disclose comp store growth. But as I always said, our comp store growth is positive. And it's our goal to further improve on it. So if one day our store growth speed of store growth or additional stores slows down, we don't have a negative impact, of course.
But comp store is positive. We would not approve a new store if we do not expect it to have a positive comp store. And we are approving all new retail stores in the head office, and we are looking at this in detail at the numbers, profit numbers and sales numbers. Pricing outlook, 2019, big early days again. Of course, our competition has moved quickly, but let's bear in mind, our aggressive in pricing.
If you think about the U. S, we have some price increases in the last 4, 5 years, more than once. And it's something we are analyzing, of course, but no decision has been taken right now. There are also different ways of bringing pricemix up, right? You can have positive impact by even focusing more on products with a higher average price, etcetera.
So we are analyzing and we will make a call in the next few weeks, but no decision has been made taken. Europe is a good one as well. I think especially in countries like France, we'll more likely see flat pricing actually. We have not seen anybody move either. If they move, it's in the other direction, not up, not down.
So I'm cautiously I'm 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 rest of the world. I mean, we are really doing an analysis for all the markets what we should do, And no decision has been taken for us.
But yes, overall, I don't 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 Bozet of UBS. Please ask your question.
Good morning, Mr. Hook. I just have a follow-up question on your debt guidance you have given before. You said you expect around €250,000,000 fore end 2018. And you earlier with the full year results guided to a leverage of close to 0 by the end of 2019.
Is this still correct? And 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're asking for
a debt guidance now for end of 'nineteen. 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 0?
Yes. I think you said that before.
You said that in with
the full year results in March.
Yes. We said we are around 0. And that is if you look at the numbers that's 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 €405,000,000 If you look at the long term average before last year, we're at around €250,000,000 give or take. So 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.
Yes, yes. Because with the full year numbers you said, you expect around $214,000,000 normally, but 2018 is also expected to come in above average?
Maybe slightly higher, but they were not close to where we were last year because last year we had really much lower CapEx. So last year we had $180,000,000 CapEx, this year $250,000,000 ish. So that alone is $70,000,000 right? And you're already down from the $400,000,000 to the $330,000,000 And then it depends a bit on the inventory buildup at year end, depending a little bit on Easter, etcetera, how quickly we build up inventory. So 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 4, how much ships in quarter 1? How exactly are we managing the warehouses? In the U. S. As well, you know where we have now joint warehouses.
What does that mean for the inventory position as such? So there are different factors which are a bit difficult to predict right now. But definitely below last year, I believe, and maybe a tick higher than last year, but than the year before, sorry, than the long term average. But I wouldn't expect a super high number this year, as I said.
Okay. Thank you.
Thank you.
Thank you. Your next question comes from the line of Faham Bey of Credit Suisse. Please ask your question.
Hi, Martin. Three quick questions
for me
please. Now the U. S. Seems to have been driven by your lint 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.
So there's clearly been some sort of turnaround. Could you talk about that? Secondly, could you remind me whether your retail stores business is now still margin dilutive or margins EBIT margins are now in line with the group? And thirdly, just a philosophical question. I noticed in Italy, you've now launched a sugar free product.
Is this now beginning of a rollout of sugar free products across geographies given consumer demand?
Thanks for the questions, 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 point brand in the U. S. Of the 3 brands. And I think we talked about that well 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, so Lindor Excellence and of course as well the Seasons, but really clear focus on Lindor Exelos. And if I say focus, I also mean within Lindor you could have probably 25 different flavors. And either you try to roll out everything everywhere or you try to really focus on Lindor milk, Lindor assorted and maybe 1 or 2 more. And try to have probably more than 1 phasing in the shelf. And that has been the strategy and I think it was executed very successfully in the marketplace.
So 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. So those were some of the key drivers, focus on core and some investment behind the brands. Now we delivered margin, we don't disclose. I always said we are slightly below the average, but not that far away.
So we are happy with the development. It's going in the right direction. And I already said that in one of the questions before. All the additional stores we open is there is quite a detailed process if somebody wants to 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.
So you have to have your control mechanism quite spot on to be able to manage your profitability. Then your question about sugar free product. Yes, in Italy there is a small amount of sugar free product being produced. And we have all this also out in Australia. I mean, it's mainly 2 products, milk 1 and a higher cocoa content 1.
And we have now to see how it performs. There is not now clear strategy to say this is now our next key franchise. We are more a bit opportunistic on this one. And 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 seasons.
And I think we have done this successfully in the 1st 6 months and we will focus on the same now in the 2nd 6 months.
Thanks, Martin.
Thank you. And your last question, it comes from the line of Patrick Schwenderman of ZKB. Please ask your question.
Hi, Martin again. Just two follow-up questions regarding Europe and North America. In Europe, you had plus 5% organic growth in H1. What's your best guess here for the full year? And the same question from North America, which had plus 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. So I would still say combined between Europe and NAFTA, we will be somewhere between 4% 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%.
So Europe above 5% then and maybe in open quarter or 5%?
I think both combined the 2 are between 4% and 5%.
But that's a best guess, maybe some exploration in Europe and some slowdown in North America?
Could be, yes.
Okay, great. Nice work, 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 for everybody for participating in the conference call. And of course, thanks for all the interesting questions. And 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.