JDE Peets NV
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JDE Peets NV
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Good morning, and thank you for joining JDE Peet's Half Year 2021 Earnings Call. My name is Nazanine Byetti, and I'll be your operator for the call. [Operator Instructions] The conference call is being recorded. Following the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to hand the call over to our first speaker, Robin Jansen, Director, Investor Relations for JDE Peet's.
Thank you, Nazanine. Good morning, everyone, and welcome to JDE Peet's earnings call related to the financial performance of the first half of 2021. With me are Fabien Simon, CEO; and Scott Gray, CFO. In a moment, Fabien will take you through the operational and financial highlights related to our first half year business performance. After that, Scott will tell you more about the financial performance in the first half. Fabien will conclude today's presentation with our outlook for the full year. And after that, we will be happy to answer your questions.But before we begin, I'd like to direct your attention to the disclaimer regarding non-IFRS measures and forward-looking statements on Slide 2. We would kindly like to ask you to read this information carefully. Our press release was published at 7 a.m. CET this morning. The release as well as the slide deck related to this call are also available for download from the Investor Relations section on our corporate website. A full transcript of this conference call will also be made available in the same section of our website as soon as possible after this call.With that, let me hand over to Fabien.
Thank you, Robin, and thank you, everyone, for joining the call today and for your interest in JDE Peet's. I am pleased to share with you our results for the first half of 2021.Over the last 6 months, we have made good progress against the refreshed strategic framework and priority that we initiated last year and presented at the end of March to the community. Today, I'm not only pleased with our broad-based improved performance but as well by the quality way of its delivery. These results reflect the focus, agility, alignment and hard work of our entire organization that is fully energized by our new purposeful and disciplined growth-led ambition. And I would like to take this opportunity to thank all our teams around the world for their commitment through all the ongoing challenges and complexity that still persist and for delivering this solid set of results.Overall, our organic sales grew by 4.2%. It came from ongoing momentum in In-Home consumption partially fueled by continued lockdowns in the first part of the year but as well by changing patterns of more work from home as the world progressively reopens. We shared at the time our 2020 results our view that it may will take a few years for the Away-from-Home channels to return to pre-pandemic levels. It was therefore important for us to adjust our business model, and we kicked off structural cost adjustment at the back end of 2020. These initiatives are paying off, and the Away-from-Home businesses returned to profitability in H1 while the related sales base remains by and large at the same level as in the first half of last year.The combination of operational leverage, innovation, premiumization and disciplined cost management improved the organic gross profit margin by 26 basis points. The adjusted EBIT increased organically by 0.8% as we reinvested in marketing, innovation and digital capabilities to support and feed long-term growth opportunities. I believe that the positive read of our market share development across our categories shows that these investments are paying off. We also continue to make good progress on our sustainability agenda. In March, we connected EUR 2.5 billion of our investment grade facilities to our sustainability ambitions. That same month, we committed to adopt a climate science-based target, and we are on track to announce greenhouse gas reduction ambition through SBTi in the second half of this year. In manufacturing, our facility in Gävle, Sweden was the first one to achieve in March the PAS2060 certification for carbon neutrality. And in June, all our manufacturing facilities in Europe reached Zero Landfill status for the first time. We also significantly optimized our financial position in the first half. With our strong free cash flow generation, our leverage reduced to below 3x, in line with the commitment we made at the time of the IPO and repeat it since then. We also executed a successful refinancing and inaugural bond issuance that strengthen our debt profile from diversification, maturity and cost endpoints. And our continued operational and financial discipline resulted in 2 additional investment-grade rating from Moody's and Standard & Poor's in H1. So bottom line, all the financial achievements I've just talked about resulted in an increase in our underlying EPS of 12.9%.In a couple of minutes, I will provide you with some examples of how we are gearing up on our disciplined growth ambition through portfolio management, innovation as well as disciplined capital allocation.The other thing that became a [indiscernible] in the course of H1 is inflation as many raw and packaging material but also distribution cost started to see substantial price increases. In a few minutes, I'll come back to this topic and explain in a bit more detail what we are seeing there and how we are managing this especially on the coffee side. Based on the progress we've made in the first half of 2021 and the current expectations we have for the remainder of the year, we are confident that we will reach our outlook for 2021.So let's now go to Slide 6 and take a closer look at our organic growth, starting with the total company performance and per channel. Our organic sales growth versus the same period last year but also on a 2-year stack basis was ahead of our historical trend as we enjoyed continued strong performance in In-Home, at 4.9%, while sales in Away-from-Home were stable compared to H1 2020 as lockdown measures remained largely unchanged in Q1 mostly. The company growth was driven by an increase in the number of cups of coffee and tea sold by continued premiumization as well as by positive pricing.So let's now zoom in on the highlights of our In-Home performance on Slide 7. The strong In-Home growth of 4.9% I just referred to was supported by targeted reinvestment, as anticipated and communicated earlier this year. A&P, for instance, increased by 31% from the same period last year with particular focus on consumer-facing marketing investments that increased by 80% in H1 of this year. The organic growth was well diversified from a geographic standpoint as both the developed and the emerging markets delivered a mid-single-digit growth rate. We did continue to perform strongly on the fastest-growing categories, Single Serve and Beans. That increased by 11%, supported by strong momentum in our aluminum capsule in particular. E-commerce grew by 30% above the elevated growth rate of 58% in the same period of last year already. And when we look at our performance relative to the market, on the right-hand side of the slide, we are encouraged by the positive read across all categories.On the next slide, I would like to share some of the most important developments we've seen in Away-from-Home. So our sales level there remained largely unchanged in H1 at plus 0.7%. And this is really a tale of 2 quarters. On one hand, Q1, still in lockdown, is compared to almost the pre-pandemic Q1 of last year, while Q2 of this year witnessed very encouraging effects of reopenings in some sub-channels in the U.S. and in Europe versus what was heavily affected Q2 of last year. Our Peet's store in the U.S., for example, has recorded a positive 83% same-store sales growth in the last quarter with strong recovery as well as -- on traffic as well as increase in the average ticket size.But yes, it is fair to say that uncertainty remains in sub-channels such as offices but as well in some geographies like Asia and Pacific, where many countries announced lately coming back to new lockdown measures.So over the last 6 months, we focused on what we control and what we can influence. We are adapting our business model at pace with structural cost measures that already enabled us to return to profitability this semester but as well by stepping up and leveraging investments in our digital and consumer engagement journey.Additionally, we made good progress on another recent strategic shift, being the acceleration of the rollout of the Peet's Coffee store in China. We reached the 40 store count mark in the course of H1. And we are well on track to deliver in the next 2 to 3 years what we originally planned to execute in the next 5 to 6 years.Let's now switch gears and provide you with an update on the latest development in our business portfolio on Slide 9. I think it's fair to say that over the last couple of years, nothing really happened on the inorganic front. This has been another shift that we resumed at the back end of last year because we know that when it is executed with discipline, this supports further value creation. Between January and July of this year, we sold our Dutch cafe stores, Coffee Company as well as our French brand, Café Privilège. Although not that significant in size for us, these businesses were more a distraction in our portfolio. And importantly, we were not the best home to them. So we are now pleased that they fit greatly with the business model of their new owners, who do have the focus and expertise to develop them further.Next to that, we announced a partnership on liquid coffee with J.M. Smucker in the U.S. and the partnership with Pret A Manger to launch a new range of premium aluminum capsules in the U.K. market. And in June, we announced the acquisition of Campos, the specialty coffee leader in Australia, available in over 600 cafes and present in multi-channels, including direct to consumer, retail and its own couple of flagship cafe.Let's now move to Slide 10, where we can see a selection of our recent innovation. Innovation is another area that we are accelerating across products or packaging but as well on coffee appliances and business model. And here, you see a couple of highlights. Moccona introduced, for example, our first range of plant-based offering specialty mixes for Australia. In L'OR, we launched a bioorganic range which contained 100% organic coffee beans and carries additional certifications. Russia, as an example, with Jacobs, we just launched a range of [indiscernible] flavor premium SKU.On the appliance side, which we presented as well as a further investment area, our Barista machine did win the Red Dot Design Award for espresso machine in the kitchen appliances category. And we launched new machines with new features for both Senseo and Tassimo. On this latter one, I think these are the first new appliances launch in 5 years for Senseo and 3 years for Tassimo.So besides those, we have as well just introduced a Tassimo subscription model in the U.K., which will enable to get closer to the overall consumer journey and decision points.Finally, besides the 2 new partnerships we already talked about, we continue to roll out our very successful partnership model with Illy. And as both portfolio management and innovations will play an important role to deliver our long-term ambition, and I am encouraged with a new pace and the pipeline at which we are [ operating ] now.Now before I hand over the call to Scott, I would like to take a couple of minutes to update you on the topic of inflation on the next 2 slides. So as you have seen in many charts and have heard from many companies over the last couple of weeks and months, inflation is on the rise also for us across a broad range of raw materials, packaging materials and distribution costs. On the right-hand side of this slide, we call out those inputs that are the most relevant for us in this context, and you see the magnitude of the inflation these cost buckets have witnessed. Now let's distinguish the coffee commodity side and the non-coffee side. On the latter, the non-coffee side, a decent part of the impact of the inflation is actually already reflected in our first half year performance, and we are taking all the necessary measures to manage the increasing part to come in H2. On coffee, it's different. And there, we do have some pretty good hedging in place. But given the very specificity of the coffee category, I would now like to move to the next slide and have a look at what happened in the past when the coffee market experience volatility on the commodity side. I think this chart might look complex at first sight, but they're really here to stress 3 key points. And we looked at the last 15 years of coffee commodities, consumer price and consumption in retail of the most sensitive roast and ground category historically.And what does the history told us? Three key things. One, consumer prices closely follow the cyclical green coffee prices on the way up as well as on the way down. Second, over that period of 15 years, the coffee consumption has proven to be inelastic to the consumer price evolution. So in the year, here, you can see in the year 2011, 2012 when Arabica reached the USD 3 per pound. The consumption of coffee in retail was not lower than in previous years despite almost 14% to 15% consumer price inflation. And similarly, the consumption was not higher in the year 2013 than in 2012 when prices went down. And I think this is because coffee in home is an affordable and deeply rooted consumption, I mean, in the daily consumer repertoire. What we know, and the annual Euromonitor don't show here, is there can be a short-term [indiscernible] stocking effect for a quarter or 2. The third thing that the history told us here, you see more quarterly Nielsen data available -- data with history, is that the consumer price increases or decreases tend to follow with a lag of about 2 to 3 quarters of the commodity price inflation.So as a conclusion on Coffee, the answer to the commodity inflation is all about mature pricing discipline on the way down as much as on the way up. And the hedging in place is there to provide the appropriate level of visibility, timing necessary to implement these pricing actions. It is a pass-through mechanism category. And therefore, the indicator that matters the most, the one we monitor is the absolute euro margin per kilo and not just percentage. Again, here, I'm not trying to say that this is an easy exercise to put pricing through. But coffee roasters and retailers have proven to be long term and disciplined in the past both on the price increase and the price reductions. This is our intention this time again, as we have been over the last few years, for instance, passing through all the tailwind to the customers. And while pricing actions could potentially lead to some short-term challenges for a quarter or 2, historically, the innovation power and strong brand equity of the market leaders have been able to secure market share over time.With that, I will hand the call over to Scott, and I will be back to discuss the outlook before we go to the Q&A.
Thank you, Fabien, and good morning to all of you. Let's go to Slide 14 to take you through a few of the most important financial highlights of this semester. And after that, I'll provide a bit more detail on the segment performance as well as first half year developments related to profit, cash and our financial position. Then I will finish with a quick reminder of our capital allocation priorities.As mentioned earlier by Fabien, our overall organic sales growth of 4.2% was driven by an organic sales growth of 4.9% in In-Home and 0.7% in Away-from-Home. In terms of profitability, our adjusted EBIT grew by 0.8% versus H1 '20 or 5.5% on a 2-year CAGR. And our underlying earnings per share increased by 12.9%. When it comes to cash and debt, one of our top financial priorities since the IPO has been to reduce leverage to below 3x, which we achieved this semester on the back of strong free cash flow generation of EUR 553 million in the first half of the year. Let's now move to Slide 15 to take a closer look at sales. Our organic sales growth of 4.2% was predominantly driven by a combination of volume and mix but with 40 basis points coming from pricing. The negative foreign exchange impact of 3.5% was mainly driven by the appreciation of the euro against the U.S. dollar, the Brazilian real and the Russian ruble. And this, together with a minor change in scope, increased our sales by 0.5% to EUR 3.254 billion on a reported basis. Let's now move to Slide 16 to look in more detail at our adjusted EBIT performance. The 0.8% organic growth of our adjusted EBIT that I just called out was driven by an increase in gross profit, of which we reinvested a meaningful part back into A&P and other SG&A to support our brands and build other capabilities to fuel growth. Fluctuations in foreign exchange decreased adjusted EBIT by 2.3%.On the next slide, Slide 17, you will see an overview of the organic sales and adjusted EBIT performance by segment. Looking at the top line performance per segment, you can see that CPG Europe and CPG LARMEA continued to benefit from the continued strong momentum in in-home consumption and that Peet's top line benefited from continued strong In-Home performance as well as from the positive effects the reopening of the U.S. had on its coffee store network. The slight organic sales declines in CPG APAC and Out-of-Home are a reflection of the impact that restrictions continue to have on their sales performances. In CPG Europe, sales growth was broad-based across countries with particularly strong contributions coming from countries like France, the U.K. and Germany and continued momentum in premium categories like beans, aluminum capsules and other single-serve offerings like Tassimo T-discs. And despite a strong double-digit increase in investments in A&P, and other investments for growth, the organic adjusted EBIT increased by 1.9%, resulting in a 2-year CAGR of 8.9%. With an organic sales growth level of 5.4%, CPG LARMEA delivered a similar organic growth level as in 2020 with particularly strong performance coming from countries like South Africa and Brazil. From a category perspective, growth was driven by roast and ground, instant and single-serve offerings. Organic adjusted EBIT decreased organically by 19.2% in H1 driven by higher A&P spend and other operating expenses. However, on a 2-year CAGR, the organic adjusted EBIT growth was 4.2%. In CPG APAC, various markets entered into new lockdowns in the course of H1 '21 which, in many cases, were stricter than the initial restrictions in 2020, thereby further impacting the Away-from-Home business. As a result, organic sales performance in various markets in Southeast Asia were also in decline. China, on the other hand, delivered strong double-digit performance. The adjusted EBIT decreased organically by minus 14.8% in H1 driven by higher A&P spend to support innovations. On a 2-year CAGR, the organic adjusted EBIT growth was 18.9%. At Peet's, the CPG business continued to deliver solid single-digit organic sales growth resulting in a 2-year CAGR of 18.1%. On the Away-from-Home side, Peet's coffee stores started to see very encouraging same-store sales growth as the U.S. started to reopen, which resulted in an 83% increase in same-store sales growth in Q2, as Fabien mentioned in his opening remarks, while the non-coffee store Away-from-Home businesses were still impacted by low returns to offices and universities. Adjusted EBIT increased organically by 10.8% in H1, largely driven by the recovery in Away-from-Home, which was partly offset by incremental investments to increase household penetration in CPG. Based on the 2-year CAGR, the organic adjusted EBIT growth was 14.5%.And as mentioned before, in most of our Out-of-Home markets, lockdown restrictions remained in place, which prevented the segment from meaningfully growing its sales base in H1. The good news in this semester was that although the sales base was by and large the same as the comparable period last year, the Out-of-Home segment was able to return to profitability as a result of various structural cost measures that have been implemented since the start of the pandemic to reduce fixed operating costs.Now let's take a look at our underlying profit in absolute terms and per share on the next slide, Slide 18. Our underlying earnings per share increased by 12.9% or EUR 0.10 to EUR 0.89 in the first half of 2021. As you can see on the slide, the majority of the increase was driven by operational improvements, which can be split between the increase in organic adjusted EBIT and the structural decrease of our adjusted net financing costs as a result of our deleveraging and the substantial reduction of our average cost of debt following the refinancing and bond issuance we completed in H1. I will come back to our debt structure in a minute. Next to these operational improvements, our underlying profit also benefited from fair value changes of derivatives, which were partly offset by FX losses and by slightly higher underlying taxes. Let me now share a bit more detail on our free cash flow and net debt development. In the first half of 2021, our business delivered a total free cash flow of EUR 553 million, which is almost EUR 120 million more than in the same period last year even after adding back EUR 34 million of nonrecurring payments related to the IPO to the free cash flow in H1 2020 to provide an appropriate comparison. Our cash conversion was 71%. And as you can see on the right-hand side of the chart, it enabled us to reduce our net debt by EUR 430 million as we maintained discipline across all the lines.And on the next slide, Slide 20, you see an overview of our debt evolution and how we have now reduced it by almost EUR 2 billion since the combination with Peet's as our consistently strong free cash flow generation has enabled us to continue our debt reduction post the IPO. In turn, we were able to deliver on the commitment made to reduce our leverage to below 3x as we reached our target by the end of June with leverage of 2.98x.Next to that, as you can see on Slide 21, in the first half of 2021, we have substantially transformed our capital structure by successfully refinancing EUR 6.5 billion of new credit agreements and by successfully executing a EUR 2 billion inaugural bond issuance, both at very compelling terms, as you can see on this slide. Our 2026 bond at a 0% coupon is a testament of the quality of our credit profile.And these 2 corporate actions have resulted in an attractive new debt structure, as you can see on Slide 22. Our average cost of debt reduced from 2.4% before we executed the refinancing and bond issuance to around 1.5% now. We extended our weighted average maturity to about 5 years, and we have no debt maturing before the end of 2023. Next to that, we have doubled our total liquidity to EUR 2 billion as compared to the end of 2020, and we have further diversified our funding sources and instruments. Before handing back to Fabien, I'd like to briefly remind you of our capital allocation priorities as first shared with you during our strategic update meeting at the end of March. Our capital allocation framework guides us as we create long-term value. Our first capital allocation priority is to reinvest in our brands and the growth opportunities within our business. Our second priority is deleveraging as we target an optimal leverage of around 2.5x. Our third priority is to continue to pursue inorganic growth opportunities but always in line with our highly selective business and financial criteria. Our fourth priority is to use excess cash to contribute to shareholder remuneration through stable dividend flows that we expect to sustainably grow over time. And while our leverage is above our optimal leverage of 2.5x, we do not prioritize share repurchases. If you look at the actions we have taken recently, you will see that they are very consistent with our capital allocation priorities. Let me now hand back to Fabien for the outlook before we open the call for Q&A.
Thanks, Scott. And let's now turn to Slide 25 to remind you of our outlook for full year 2021. I think we've made good progress in H1. And although uncertainty and volatility around us are not going to go away, we are confident to deliver the full year outlook that we communicated earlier. I mean these are organic sales growth of 3% to 5%, organic adjusted EBIT to grow in the low single-digit range as we continue to step up our investment for growth while being intentional on managing inflation and navigating the ongoing uncertainty of the pandemic. Our commitment to reduce our leverage to below 3x net debt to EBITDA has already been achieved by the end of June. With that, I will now turn it over to the operator to start the Q&A.
[Operator Instructions] Our first question comes from the line of Jon Cox from Kepler Cheuvreux.
Congratulations on a very solid print there. I've only got one question, but I might end up probably sneak in 2. The first one is just on the pricing. When I use sort of like a coffee model, looking at coffee prices with a lag, et cetera, et cetera, it looks to me that you're going to need to increase prices by about 5% next year, maybe even higher depending on where the coffee price settles. Are you confident in the portfolio and your position to be able to do that? That's the first question.Second question, just on A&P, it's a pretty hot topic within the market. I see that your adjusted SG&A costs were up EUR 61 million. Can we assume most of that is A&P? Or even can you just give us an absolute increase A&P figure?
Let me give it a try, and Scott can build. So let's start with your first point on pricing. As you might understand, we are mindful of not signaling our pricing strategy to competition. And we want as well to, I think, respect the negotiation which are ongoing with our retail partners actually now.But to your point, we are confident that the category has been really having a specific pass-through mechanism that we have been able over the years to exactly match that, and we believe it's going to continue to be the case this time around.And I want to remind maybe a good opportunity here. So we talked about the noncoffee and the coffee inflation. And I know there is a lot of attention now on the recent spike on green coffee. But I think maybe they had been forgotten a bit that if I look at what was the price of Arabica in December last year, I think it was around $100 per pound. But in December of last year, it was already $120. So we already witnessed about 20% of inflation of Arabica, which is something that is, I would say, reaching our P&L in the second part of this year. And we have been taking all the appropriate actions. And despite this inflation, despite the incremental inflation which has been coming through the non-coffee side, we are very comfortable, very confident that we'll deliver our outlook.I think that probably gives you a good hint on our level of confidence on how we are managing with strong discipline on the pricing side but as well on the hedging side our specific coffee commodity inflation.On your second question on the investment side, so we have been indeed communicating during, I would say, our 2020 results as well as during the Capital Market Day that we intend to step up our growth investment level, first, to return to sufficiency level of our existing portfolio but as well to see incremental growth opportunities. And this to ensure we're going to get long-term growth momentum. And we shared that the ambition was to focus mainly on working media, on coffee appliances but as well as digital, U.S. and China capabilities. At the end of H1, we are well on track on our investment level. And you quoted our absolute organic SG&A by EUR 61 million, and the vast majority of that is really on the increase of the investment against our refreshed strategic priorities.I think at the same amount of time last year, our A&P was reduced by 32% or 33%, if I remember it correct. And you've seen that we have increased to 31% already in H1 of this year. For H2, we plan to stay the course, and we expect to continue to increase. And we believe we'll reach to the levels that we have been communicating in the past, which is the one we feel appropriate to support our amazing portfolio of brands and appliances.
I wonder if I can just sneak one in. An effective tax rate for this year and effective tax rate going forward, Scott?
Yes, our effective tax rate we do expect to be a little bit lower now for 2021. And we would expect it to be closer to 20% for the year.
And the next question comes from the line of David Hayes from SocGen.
If I can just follow up on that question, first of all, from Jon on the A&P spend. So can you just help us with the math a little bit? 31% up, I know it's In-Home. But if I assume most of the A&P spend's in In-Home, then I guess that's about EUR 40 million increase. So I guess the question is, to your point, just then about the target, I think, you were talking about sort of towards EUR 100 million up year-on-year this year following the lower spend last year. So should we be thinking about sort of EUR 60 million up on in the second half, which would be sort of a EUR 250 million A&P spend number in the second half? Is that kind of the broad math logic?And then secondly, still related, I guess, in some ways, as you've mentioned a couple of times, you've obviously developed these new machines and, I think, look to be a little bit more aggressive with subsidies on the machines. What sort of effect is that having? Is there any kind of metrics you can give us in terms of Tassimo, Senseo or L'OR Barista machine purchases this time -- this first half versus first half of last year?
David, so just a follow-up on the overall investment, it's true that we have been quoting a number which was around EUR 100 million last year, which was towards really advertising, promotions, including the appliance investment you were quoting about, but as well other growth opportunities such as capability build on digital, such as footprint store in China. And this was the overall amount which were -- which we quoted.We believe we are going to be at the end of this year really within the same range. And of course, we're always learning as we put some investment, what is working a bit more versus what is working a bit less. But we are going to remain in the same ballpark. And I think the overall amount was pretty well distributed across, I would say, H1 and H2 overall.On your second question on the machine development, so what I can say here and without signaling too much information, as you can imagine, from a competitive standpoint, is we are clear that as the category got more complicated because consumers are more demanding, in particular, to get better coffee, to get more convenient and more individuals coffee, appliance is playing a bigger role. And we have seen in 2020 the sales of appliance or the growth of the sale of appliance have been almost doubling in 2020, in particular, on single-serve and full automatic machine. And we see actually on the latest read that -- we see the same momentum. And it really suggests to get a continued level of appetite for consumer on that level.We do have great appliance pack we can leverage on. We have Senseo, which is the largest use pack in Europe, which is the most affordable and the most sustainable offer we can provide to consumers. We do have as well Tassimo. And we have our espresso appliance, Barista. And we can as well leverage in the U.S. market on the Keurig system with K-cup. You have seen that we are intentional on launching new appliance. We have a meaningful part of our SG&A increase which has been to see more appliances. I don't want to quote a number, but we feel that we really have in our hands all the assets necessary between the brand but as well as the appliance to be successful in the long term to capture this disproportionate growth we see on single serve.
And the next question comes from the line of Faham Baig from Crédit Suisse.
Can I start by asking you to potentially discuss related developments in the Nespresso compatible capsule category in terms of what maybe L'OR's growth was in H1 and maybe where L'OR share reached in the half as well particularly that -- particularly given that Nestle continues to stress share gains in this segment? So I just wanted to see how L'OR is faring up. And also given Nespresso's pivot towards the Vertuo system, what impact has this had on the Nespresso-compatible growth rate given there are currently no compatibles for the Vertuo machine?
So let me try to -- you have a couple of points. I'll try to answer all of them. So we see a continued appetite from consumers on the Nespresso compatible category, although we are comparing ourselves to already a heavy -- I mean, highly elevated number last year, we don't see a slowdown. And we really believe in the long term of what I would call the classic aluminum capsules that consumers keep asking at a double-digit rate if we look at the beginning of this year. And that's why it's not surprisingly, you might have noticed that the 2 largest players on coffee globally have been announcing meaningful capacity increase over the last 10 months to be able to fulfill this consumer demand.You had a particular question on share. So we don't disclose our share. We have disclosed the share on capsules just to give you a hint, to ease some of the concerns sometimes we hear here and there. If I look at our year-to-date share in the first part of the year, I mean Nielsen-related shares, to see an impact -- potential impact on the share, you have to look after the [indiscernible]. So I think it tells you that we do participate and take our fair share of the fastest-growing part of capsule in a very meaningful way. And we are very, very pleased with that. Then you had a particular question on Vertuo. So I think, again, I'm probably going to be consistent with what I've been saying in the past is, first, I do have a lot of respect for the company that you are quoting behind this coffee appliance. And I deeply believe that only 2 companies do have globally at scale what is now necessary to answer the increasing complexity from the consumer on coffee, and we are one of them.And on the -- I'm not going to comment on an appliance or that is not ours. I think for your question, you should ask the owner of this appliance. But we believe consumer wants choice. They want choice in the type of coffee they want. They want choice in the various brand and appliances. And we feel very comfortable with the plan we have in place, with our capsules, with our Barista machine to secure this growth on the long run.
And if I could ask a follow-up, not to my question but to a question asked earlier with regards to raw material and pricing, I just want to maybe better understand the low single-digit guidance that you've retained for organic EBIT. So I guess at the time when you set this guidance in March, you anticipated a certain sales growth trajectory that you've kept as well as the A&P reinvestment of around EUR 100 million. But since then, clearly since then, there has been increased raw material pressure, be it in coffee, where I presume you're likely to be hedged this year, but also, as you suggest and per chart in the presentation, in the sort of non-coffee road maps as well and quite significantly so. So which you said has already begun to hit your P&L, and I'm sure the impact will be greater in H2 as other consumer companies have suggested as well. So I guess the question is what is the offsetting factor to this COGS inflation that allows you to maintain the low single-digit increase in EBIT that you're guiding for?
So we have had, I would say, some anticipation already at the end of last year on some of the inflation. I've been talking earlier about Coffee, which has been already increasing by 20% during that time horizon with some lag in our P&L because we have some good hedging in place. But we anticipated some inflation not to the extent of what has been happening. And it is -- we have been doing last year, a couple of changes. You might have seen beyond, I would say, the underlying strategic shift, we as well have some short-term program in place to be, I would say, a bit more aggressive on resetting our cost structure on Out-of-Home but as well to launch a more disciplined approach to our cost management. And this is paying off in the first half of this year already. You saw that despite all these inflations, we have more than offset the input cost with cost management, with operational leverage from mix and with pricing. We will continue to do that in the second part of the year.If I look at our Away-from-Home business, for instance, we have been unfortunately had to make redundant a couple of hundred associates. So all the measures we have been taking are really structural, and we know we still have some opportunities. And we have already well activated quite a broad-based cost agenda program.
And the next question comes from the line of Jeremy Fialko from HSBC.
Jeremy Fialko, HSBC, here. Just a follow-up question on the sort of single-serve question. When your main competitor was asked about this on their conference call last week, they said that the growth have been driven more by usage rather than machine penetration. So I just wanted to get your perspective on the growth that you're seeing from single-serve. So the degree to which the machine penetration has gone up, which sounds like it's been pretty good from what you're saying, the degree to which growth has come from usage and then how happy you are that the usage numbers could be maintained or whether they might sort of fall off a little bit as people go back to the offices. And then there's some follow-up question on the single-serve part of your business. Is the extent to which your H1 numbers were sort of limited due to capacity constraints and whether actually, as some of the new capacity comes online, that can give you a further leg of growth because of the fact that actually you're not able to keep up with the demand at the moment?
Yes. Thank you, Jeremy, for your questions. So let me start with the first one on the appliance part. So the data we have, I think on the latest one we have from [indiscernible] of their In-Home panel data, shows actually a combination of both. One, a meaningful increase on single-serve appliances, and I have been quoting a bit earlier we have been seeing double-digit growth rate of the appliance sale.And the question is it all about incremental consumers, sometimes it can mean what we hear some consumer having now 2 appliances at home, 1 on the [ opposite ] side, 1 on the main kitchen. Sometimes it's about replacement of machines. But when you reach that level of magnitude, it's for sure an overall increase of In-Home penetrations.It is fair that we have seen as well on what we track on the key appliances about a 10% increase on the usage per appliance. So it's really the combination of both at least on what the data tell us. And it's true that we have been announcing very quickly at the end of last year a significant capacity increase because we were taken a bit by surprise actually during the pandemic about the surge of the consumer demand for aluminum capsules. And actually, we've been very pleased that we have been taking these decisions because the momentum has not slowed down in H1. And now in July, as we talk now, I'm very, very happy that [ half ] of the incremental capacity that we have been talking about, is already commissioned. And I think the team has been doing a spectacular job to operate that at a faster pace than historical level. And this was really in the middle of a pandemic crisis, which was not easy to get either the suppliers or the engineer really on site. But despite these constraints, we've been able to be even slightly ahead of what we thought on this capacity increase. And we do have the remaining part to come in the next 6 to 8 months, so which means now we are very pleased that we are unconstrained from a capacity standpoint.
And the next question comes from the line of John Ennis from Goldman Sachs.
I've got another question on coffee pricing. So I appreciate it's, as a whole, not a very elastic category. But I guess by nature guiding for organic sales growth to be in the range of 3% to 5% medium term, you will be assuming the volume mix dips if pricing has to step up into a mid-single-digit range to mitigate inflation. I guess is that a fair conclusion to jump to? Or would you expect growth to overshoot in high inflationary periods? And then related to that, where do you think the elasticity is highest by region even if it is inelastic as a whole? And then my second question is on the LARMEA and APAC regions. I just wondered if you could explain the margin movement in LARMEA and APAC in a bit more detail as they obviously fell quite a bit year-on-year. And how should we think about the phasing of investments into the second half? Was the reinvestment, for instance, skewed to the first half in these regions? Or was it overly representative for the full year? Anything you could give there would be helpful.
Let me give a crack at it, and Scott will probably take the second point. On the elasticity, so we have been sharing how, I would say on an annual basis, we don't see any impact really on inflation on consumption. But we said as well, it can take some time, a couple of quarters to adjust either because we see some pantry loading or there are some negotiations on pricing.But then why no change on the top line outlook? I think there is -- there are a couple of reasons. First, we should not forget we are still into an uncertain moment on the Away-from-Home business. I am of the opinion that September will be a moment we are going to have a better read on this channel post vaccinations as well post summer on how people travel around as well as kids returning to school, people coming to office and what will be some of the steer from large companies. So that is the first one.On the second point, I talked about the inflation, which we have already seen since end of last year on Arabica. And this was already built in on our original organic growth target for the year, which we see happening in the second part of the year. As far as the further spike on coffee price is happening or will be happening, this always happen with the lead time of 2 to 3 quarters so not much really of an impact for this year. But then when you are right is, at the moment, we are, I would say, being exposed to much higher inflation as a normal run rate. It is not abnormal to see during this moment of time a bit of a higher role that pricing is playing on the growth equation. But I don't see that being beyond what we have been talking about for H2 of this year. And as far as next year is concerned, I think we'll first focus on this year, and we'll see when it's going to be a good time to have a bit more read and sharing on the various components of our future growth outlook.
Yes. And in regards to your second question in terms of the margins on APAC and LARMEA, of course, it's a snapshot in a moment in time. I mean, APAC is one of the regions and, notably, we've talked about in terms of our strategic priorities being China but also as a focus region overall. And in the period, with our step-up in terms of total SG&A across A&P but also other areas within SG&A to build capabilities and to support the innovation, we had increases there in the period versus the prior year. So that's on APAC.On LARMEA, we also had higher A&P and also an increase in other operating expenses in the period. And that is also a market where we talked about that we also had taken some pricing in the period as well, and we continue to be very price disciplined as well. And sometimes the input cost lags a little bit of the timing on pricing, but we continue to take price there. But in the period on snapshot, we had a margin decrease in LARMEA. So that's the main drivers between those 2 regional evolutions of the P&L.
And the next question comes from the line of Tom Sykes from Deutsche Bank.
Just first, to further the point on price elasticity and the pricing potential, is there a little bit more pricing power and the tail of the business in the smaller brands than we may expect? Or is it just -- is it better in the larger brands? Or in some of the smaller regional specialist brands, is there a bit more pricing power there, please?And then just on the Out-of-Home or Away-from-Home, as that is recovering and what's happening to the at-home consumption, do you have the right geographic overlap at the moment between those countries where you are seeing a reopening and, therefore, maybe a little bit of a headwind in some of the at-home consumption? Is that something that you said to get a better read in September, but is it something that affected Q2, and you're then expecting that gap to narrow a bit in the second half of the year? Or should we think of that as a little bit of a headwind to volume growth, which is, as you said, maybe offset a little bit by pricing increase?
Thank you for the 2 questions. So the first one on the pricing elasticity, so is it the same level of pricing power across portfolio of brands? I think it's not a one-size-fit-all answer, I believe. And you have multiple [ ingredient ]. So first, obviously, the more you go into the premium territory, the least the brand usually are exposed to commodity inflation because you have more added value. So of course, there is a bit less usually requirement to do some pricing. And you might argue, is it pricing elasticity, pricing power? I don't know how to qualify that best. But for sure, they are usually a bit less export on a short-term basis. But on the other side, when you are confronted with a big inflation, we should not underestimate that for a lot of geography, price point matters a lot. I'm thinking about emerging market in particular. And it's where sometimes you would see that getting really a portfolio of brands with [indiscernible] price point is very important, and it's where you see overall a much more pricing power than what you could think originally.And I would say at the end, where we feel we are in a very good position, and heart of our strategic belief is, to answer the broad-based consumer needs, you need to have a portfolio of brands. If things came to worsen consumer things, okay, the overall price point of coffee at home is EUR 0.07. So it's very affordable, but maybe the more premium one is a bit more expensive. If they would decide to track down on which type of product they will consume, we are in a fortunate position is we have a portfolio of offer across price points. Worst case, there could be some reallocation of consumer within our portfolio, while a lot of other players are positioned in one area of the business. So we feel we are in a pretty good place with very, very strong premium offer where there is very big tractions but as well a portfolio and some very affordable products.On the second question on Out-of-Home and Away-from-Home, I think if I look at where are the center of gravity of our Away-from-Home business is, it's mostly in Europe and in U.S. And it is where, I would say, there is, from the read of Q2 at least, a much better, I would say, level of optimism of what reopening effect could look like. So I would tend to conclude indeed that I believe we are well positioned with reopening when it's going to happen in these 2 territories, at the same time, because we have a higher market share even on this geography In-Home than Away-from-Home. When consumers will still spend a bit more time than pre-pandemic to work from home, we'll benefit from that as well. So all in all, I feel we are in a pretty good place, indeed.
Maybe just a quick follow-up, and I wasn't -- didn't perhaps quite understand your previous answers on what the level of operational leverage you saw actually was within the Away-from-Home business. At the moment, what sort of incremental margins and conversion could we perhaps expect in the Away-from-Home business as that recovers over the next 12 months, please?
Yes, what we have been communicating on that one is because we believe there will be some enduring effect on the Away-from-Home side, that we had to work on our cost structure a bit deeper than what was originally worked on. And our agenda is based on the ambitions to recover our absolute profitability that we had pre-pandemic on the Away-from-Home, although with possibly a slightly lower revenue. And we give us 2023 as a target to reach that, so which could leave indeed a bit of some operational leverage in the meantime.But again, here, we want to be cautious. We see nobody knows what will be the pace of recovery. I recall well when we communicated our results last year, we were seen as a bit conservative. Today, what we see is actually our assumptions for H1 has been proving pretty accurate. And we want to remain a bit cautious on that area, which is still uncertain.
And the next question comes from the line of Reg Watson from ING.
I'd like to touch on this elastic demand issue because when I look at CPG LARMEA, clearly, you had good organic growth, but you didn't feel confident enough in elasticity of demand to push pricing up to compensate for the depreciation of the currencies in LARMEA. So that's the first question. And then the second question is, given that this is the last official opportunity we have to communicate with you until March next year, could you please give us some indication on what kind of operating leverage you expect in '22? Because clearly, this year, you've highlighted the increase in investment behind the brands. And that is why your EBIT growth is slower than your anticipated top line growth. But should we anticipate that for '22, we could see EBIT growth in line with organic top line growth?
So let me first start. Reg, thank you for your question. On the emerging market side, I think the point we were trying to make was really a question of time on your questions. But maybe I can take a bit the opportunity to share a bit what we see on emerging markets. So I think overall, if I look at the first part of the year, I think they have been proving quite resilient, and you've seen the mid-single-digit growth rate. And it was on the back of modest volume growth but much more pricing and mix, as Scott has been talking about. But again, there are, like always, some differences in this part of the world.I think we see -- you were quoting LARMEA. We see Latin America, Middle East, Eastern Europe are performing pretty well, getting close to historical level with a bit more pricing playing a role, but it's really a question of time. And we are very, very comfortable there. In Asia, we're still to be very optimistic on China, and it continues on a nice trajectory in particular when we see on the trend which is happening online and on the premium side. But for other parts of Asia, Southeast Asia in particular, it's a bit more difficult. And as we talked about it last time, it's an area where coffee is not an essential good, and it is a place which is quite hit now by the global pandemic crisis. There is a bit of a different level of infrastructure support. And we have been in slight decline in this part of the year. I think it's going to take a bit of time before it's recovering. But I know it's a part of the world which I think have been used to go through a crisis and which will recover over time. On your second question, I think you were talking around probably a frequency of our communication as much as some guidelines. On the frequency of the communications, we've been very disciplined on communicating on a 2-year basis, I would say, because there is, in particular, the specificity on coffee, and you can't have much read on a quarter-on-quarter basis. But it doesn't mean that we remain silent to give update on the business. We have been proving that in March, where we have been communicating in between, I would say, a semester, some update on our strategic progress and priorities. And we'll continue to do similar exercises in the future.You asked a question specifically about future outlook. We remain committed to our mid- to long-term guidance that we have been communicating. As far as H2 in particular and all the detail of it, I think it's a bit too early to talk about it. As I've said, we first have to focus on managing well the second part of the year, see how the Away-from-Home business recover, and we'll get a better read over the next couple of months than what we could do now.And as we've said, we have a good visibility, good level of security in front of us with some of the hedging we have in particular. And in due course, we'll communicate and articulate more the detail of our expectations for 2022.
Okay. Can I just come back to your observations about the emerging markets, where you're confident and where, to quote you, that it's a question of time. Are you implying then that any currency depreciation that you're suffering now can be earned back through price increases just in a more steady fashion than the immediate depreciation of the currency that you suffered?
Yes. I think you're probably quoting it right. Yes, we are confident that -- and actually, I even believe that pricing will probably come faster than the pace of the volume mix recovery. And we feel comfortable there. And it's what the story has been telling us on the emerging market.
We're now approaching the end of the call, so we'll take the last question from the line of Martin Deboo from Jefferies.
It's Martin Deboo of Jefferies. I'll try and keep it brief. Fabien, on Slide 11, you've made some useful comments on hedging, which I didn't quite understand. What can you say about your current hedge position in Coffee? Are your hedges running out that you need to move into the market to take pricing? Or are they more long lasting? And I suppose the related question is, is your philosophy of pricing in H2 that you will build up for price alone to recover inflation? Or are you expecting to recover inflation through a combination of pricing and offsetting cost savings?And one quick question or clarification on what you said to David Hayes. Did I hear you say you expect to increase A&P this year by about EUR 100 million? Those are the questions.
Martin, so let me give a crack at the various questions. So somewhere about hedging and committee, the development of green coffee price depends on a wide range of factors, I mean, whether macro development or even market speculations. And that's why our role is not to predict how the coffee market may or may not develop but to manage the volatility with great discipline and good protection with our hedging. We are not intending to create shareholder value from speculating of coffee, getting it right 1 out of 2 or [indiscernible], but really by driving sustainable growth from underlying quality demand and innovation propositions to customers and to consumers. That's why we do have good hedging in place, and we are very disciplined. We are well hedged for this year. It's something we've not -- maybe I have not communicated, but we are disciplined to the extent to which we need time to be able to get the pricing through and which is a specificity of the coffee industry.I take a good note on the comment you made on -- from -- as a follow-up question from David, and I believe I have well answered to that question, which we will keep the costs on investing behind A&P as well as some other capabilities such as digital or emerging markets. And the overall investment on the year across all of these buckets, including appliances, I forgot, sorry, will really, we believe, will be around this EUR 100 million mark investment.So to the last question. So what I would -- I would like to conclude by reiterating that I believe we have made good progress against our refreshed strategic framework as well as against our financial outlook and commitment for 2021 by delivering a solid set of results, which show improved performance across all our key metrics but have, importantly, been delivered in a quality way. And the volatility, the uncertainty and the ambiguity that the world is confronted with needs us to stay humble and nimble, but it reminds us as well that we are fortunate to operate in the coffee and tea category, which is resilient with many possibilities ahead. And at JDE Peet's, we are committed to play our part into these possibilities and deliver a quality and sustainable long-term growth. And we know this is what creates predictable and higher shareholder returns over time. So thanks again for joining us today. And Scott, Robin and I look forward to speaking with you in the next day ahead. Stay well, stay safe and have a great rest of the day.
This concludes our conference call. Thank you all for attending. You may now disconnect your lines.