Chocoladefabriken Lindt & Spruengli AG
SIX:LISN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
98 000
113 000
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CHF.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Chocoladefabriken Lindt & Spruengli AG
You don't have any saved screeners yet
Ladies and gentlemen, welcome to the half year figures 2020 conference call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions].
At this time, it's my pleasure to hand over to Martin Hug, Chief Financial Officer. Please go ahead, sir.
Ladies and gentlemen, it is my pleasure to welcome you to the Lindt & Sprüngli telephone conference on the occasion of our half year results 2020. During the presentation, I will provide some additional comments on the charts that were uploaded this morning to our website. And there, a transcript of my speech will be available.
I will guide you through the slides via webcast. The presentation will take approximately 30 minutes. Following the presentation, I will hand over to the operator, who will then manage the question-and-answer session.
The agenda points of the presentation can be seen on these charts and include our response to the COVID-19 crisis, a detailed review for the first half, our expectations for the full year for 2021 and in the medium term and a chance for you to ask questions at the end of the presentation. I would also refer you to the disclaimer at the end of this slide deck.
Before I comment the usual slides showing our financial results, I would like to take 10 minutes to share with you some additional information concerning the impact of COVID-19 on our business and our response to that challenge.
Despite the extreme and exceptional nature of this epidemic, we are pleased that our existing systems, with just a few additional measures, have coped extremely well. Importantly, we decided not to fundamentally change our plans, though we did make a number of tactical changes to mitigate the effects of the pandemic.
First and foremost, we wanted to ensure that our employees were safe and provided all the support they needed at the group level and more importantly at the local level. A central pandemic team in Switzerland, including the CEO and group HR, took charge of group-wide issues, such as insurance and legal, and monitored the latest global medical advice. Group-wide health and safety instructions were defined, and the global supply chain was secured. In parallel, local pandemic teams were set up in each major location whose task it was to monitor closely the latest developments and to make recommendations to their local operators -- operations. A constant flow of information between the central and decentralized teams ensured that best practice was shared. All our factories and retail stores adopted new layouts and additional hygiene regimes that included social distancing, face masks and hand sanitizing.
Similarly, in our administrative centers, we adopted social distancing and limited the number of people in meetings rooms and other areas. In addition, we take the temperature of all visitors at reception before entry. At the peak of the outbreak, close to 100% of all administrative staff were working from home. More recently, as circumstances have allowed, this number has decreased to roughly 50%. Throughout the whole period, we remain fully in control of the day-to-day business. Working from home functioned extremely well, and administrative productivity remained high throughout. Our existing logistics systems required no adaptation or additional measures both for the inflow of raw materials and packaging to our factories and for the outflow of finished products to our customers. Everything worked well without disruption. Likewise, production went smoothly and unhindered by the new hygiene regimes.
Of course, we faced some rather unique challenges in the marketplace and had to balance shorter-term needs with longer-term priorities. We were determined not to neglect our employees, abandon our customers or sacrifice our longer-term objectives. Within that context, we were able to take a number of prudent actions to mitigate certain short-term negative effects, thereby maximizing demand, minimizing costs and optimizing our cash.
To support the ongoing business, we maintained planned growth investments. We even slightly increased our promotion support to help our retail partners sell through Easter products. We maintained our usual high level of product innovation, especially for Lindor and Excellence, as well as the regular renovation of our seasonal ranges. None of our planned new product launches were postponed due to COVID-19.
At the same time, we minimized costs and postponed investments if doing so did not conflict with our longer-term plans. For example, vacancies were not immediately replaced, and budgeted new positions were not filled. Leases were renegotiated with landlords, and expansion CapEx was postponed where it made sense in order to maintain our strong liquidity position. By contrast, we generally avoided layoffs and furloughed the majority of our retail staff. This was a cost that we were willing to accept. All the while and as planned, we have been implementing the restructuring measures in the U.S. that were announced in January. We have even accelerated one of these initiatives, which I will discuss later.
Crisis or no crisis, we decided to continue to invest in our future sales and profitability and in our key brands. In fact, advertising in the first half was slightly higher in absolute terms than during the same period last year. We also continued to invest in projects that drive efficiency, so we are ready to leverage these assets as soon as demand returns.
Last but not least, I would like to thank all our frontline employees for their incredible efforts in maintaining the availability of our products and meeting the needs of our consumers.
On Slide 5, I would like to give you some insights as to how the pandemic has impacted the business on 3 levels: by sales channel, by product category and by geography. You will see that we experienced positive as well as negative trends. An analysis of both is important to understand what can be expected once the pandemic ends.
In the first box, you will see that the negative growth effects have come primarily from channels that were closed and therefore simply unavailable our consumers. The main ones to mention here are our 500 owned stores, Travel Retail, foodservice in the U.S. and the traditional specialist channel in Italy. By contrast, we saw a substantial increase in our sales over the Internet. Although our online sales are still small and were unable to compensate, this increase has demonstrated the future importance of this channel. Indeed, our online business doubled in the first 6 months of 2020.
In terms of categories, we saw considerable growth in self-consumption products as consumers treated themselves at home. For example, the Excellence brand grew double digit. This proves that consumers have stayed loyal to our premium offering even if they have been unable to buy gifts for others.
In key geographies, despite the major lockdown, we saw either modest growth as in Germany, France and in the U.S., wholesale with both Lindt and Ghirardelli or stable sales strengths such as in the U.K. and Spain. In Russia and other Eastern European growth markets, we achieved mid-single-digit organic sales growth, while in Scandinavia we even grew double digit. The resilience of these important geographies makes us confident for the future. The markets most affected by the COVID-19 crisis were Italy and Switzerland in Europe and Australia, China, Japan, Brazil and South Africa in the Rest of the World. The effects differed according to the timing and the extent of lockdown in the various markets. In the U.S., all our stores were closed for an extended period and hence experienced a 100% shortfall during that time. Finally, the Russell Stover brand in North America, with its focus on seasonal items and gifting, was heavily impacted during the Easter season. In June, as the lockdown eased, group sales showed some normalization of trends, which is reassuring for the future.
Let's now move to the final slide of this special introduction. As we look to the future, we continue to see significant demand for our products, and we are more determined than ever to exploit that unchanged potential. We are confident because we have seen, even under the wake of such extreme external factors, that underlying consumer demand has remained bouyant. In short, for us, the new normal will look remarkably like the old normal.
Over the medium to long term, we are maintaining the focus on our leader programs, on premiumization and on our growth markets. We will continue our clear focus on the successful Excellence and Lindor franchises. The premiumization of Anglo-Saxon markets, notably the U.S.A., U.K., Canada and Australia, and our investment in new growth markets, such as Japan, China, Brazil and Russia, will continue to generate significant incremental business.
In 2020, our investments in brands will be at least the same as in 2019. Our product innovation plans are unchanged and continue to represent an important part of our growth story. Given our geography -- geographic expansion, plans are unchanged as we see advantages in maintaining the pace of expansion in spite of the current external issues.
We see online sales channels as an additional important growth opportunity. By developing an extensive network of its own retail stores, Lindt & Sprüngli has long recognized the importance of alternative channels as a means of generating additional sales and reducing dependency on traditional channels.
Three years ago, we launched an e-commerce project with the aim of generating sustainable double-digit growth this channel -- within this channel over the medium and long term. We are starting to see the first results of this initiative with a doubling of this business over just the past 6 months, which accounts now for about 4% of our total revenue. We have just relaunched the lindt.co.uk website and will relaunch the lindt.com site in the second half. Our click-to-mortar business, for example, with Tesco in the U.K. and sales via third-party platforms such as Amazon and Alibaba are now starting to drive substantial growth. We are still in the early phases of our e-commerce journey. And looking forward, we see enormous potential for the high-value gifting product brands such as ours.
Finally, as you know, we are implementing various initiatives in the U.S. to streamline our operations for growth. Our plans in logistics, retail merchandising and production are well on track and will be implemented as planned this year. In fact, we are bringing forward the closure of the redundant Russell Stover factory to August this year, 7 months ahead of schedule. The retail network closures are progressing as planned and will continue into 2021, as scheduled.
After the special analysis of how we are managing the impact and implications of COVID-19, I will now provide the usual detailed review of our results. The organic top line results for the group was negative 8.1%. As discussed previously, we achieved different results depending on geography, category and sales channel. I'll give you more details in a subsequent chart. EBIT came in at CHF17 million, which means that the EBIT margin was slightly above 1%. This is lower than last year driven by the decline in sales and the negative impact on cost absorption. Net income was CHF19.7 million with the net income margin at 1.3%.
We again had some positive developments on the tax side. Thanks to good progress in our negotiations with foreign tax authorities, the uncertainties with regards to transfer pricing risks could be reduced, resulting in lower current tax liabilities. In addition, the Swiss tax reform announced in 2019 led to an additional capitalization of deferred tax assets in the balance sheet and correspondingly positive P&L impact.
We are pleased that free cash flow reached CHF156 million in the first 6 months, coming in at about 10% of total group sales. Despite the lower operating profit and net income, we saw positive impacts from our proactive management of net working capital and CapEx.
Our net debt position, which includes a lease liability of CHF470 million, increased to CHF567 million. This is slightly higher than in December 2019 but lower than 1 year ago, when net debt was at CHF780 million. At this point, I would also like to stress the equity ratio remained strong at 57.7%.
Despite the challenges to our top line growth mainly coming from closed sales channels, our balance sheet remains healthy and robust with a strong liquidity position even after paying the special dividend in May.
I already mentioned in my introduction the key drivers for half year organic sales growth shown here on Slide 9. But I think that it is worth pointing out how exceptional this year is. It is indeed the first time for more than 25 years that the group has registered negative organic sales. A closer analysis of the reporting period demonstrates that negative impacts occurred in just a couple of exceptional months. In fact, we had a strong start to the year and again a strong June after most of the sales channels reopened.
In most key markets, regardless of absolute trends, we continued to gain market share with our key franchises, Excellence and Lindor. Therefore, it is clear that underlying consumer demand remained buoyant throughout, and this persuades us that future demand for our premium chocolate remains intact.
On Slide 10, we present as usual the sales growth in Swiss francs over the last 5 years. In most prior years, Swiss franc growth has been negatively impacted by the strengthening of our reporting currency. In the first half of 2020, this has again been the case due to the weakening of most currencies compared to the Swiss franc. The overall negative impact was 4.6 percentage points.
Looking on Slide 11 at the sales split by market in the first half, North America reached 35.9% of total sales. Another important feature was Germany attained an 18.2% share with the U.K. approaching 6.8%. The Rest of the World at 12.9% was the most impacted by COVID-19, especially in markets such as China, Japan, Brazil and South Africa. Please bear in mind that these numbers are shown in Swiss francs. Therefore, all percentages have also been impacted by currency fluctuations compared to last year.
The drivers of our sales results are shown in the chart here on Slide 12. Group volume, in fact, declined by just 1.4%, but combined with a negative price/mix effect of 6.7%, overall organic sales fell by 8.1%. As I mentioned above, the foreign exchange impact was negative 4.6%, and this resulted in the 12.7% decline in Swiss francs. The key thing to understand is the dynamic within the price/mix impact. The pricing impact was, in fact, slightly positive, so that the negative impact came entirely from the mix. The negative mix was, in turn, driven entirely by COVID-related effects, in particular the channel mix due to much lower sales in our own retail stores as well as sales returns and participation in markdowns to support the trade sell-through of unsold Easter products.
We now turn to Slide 13 to review the key regional segments. In our biggest region, Europe, organic sales came in at negative 4.9% compared to positive 5% at the half year 2019, representing a better performance than the other 2 regions. We delivered a solid performance in important markets like Germany, France, the U.K. and Spain. In Scandinavia, without a lockdown in key market of Sweden, growth was even double digit. In the Eastern European markets, Russia and Czech Republic, Slovakia and Hungary, we also grew mid-single digit. By contrast, in markets with a traditionally large Easter season, especially Italy, Switzerland and Austria, we suffered significant sales shortfalls. In addition, Italy had to close all its traditional retail stores while Switzerland suffered from a complete absence of tourisms.
North America's overall negative 8.2% performance hides positive underlying trends. Lindt U.S.A. and Ghirardelli, in fact, demonstrated good resilience in the wholesale channel with low single-digit growth. Unfortunately, the closure of our U.S. retail store network during most of the first half led to a double-digit sales decline in that channel. Also, the important Ghirardelli food service business was negatively impacted by the closure of most restaurants and cafes.
The extremely positive performance in e-commerce was an important sales driver, but e-commerce is not yet large enough to offset the negative impact from the closes -- from the closed stores. As mentioned at the start of this presentation, the online channel is a strategic priority for our business.
Russell Stover's main business is focused on gifting and sharing mainly during the important Valentine's, Easter and Christmas seasons. The start to the year was very strong with a good performance during Valentine's, but Easter sales did suffer in wholesale, compounding the shortfall from the brand's own retail stores. By contrast, we saw good sales momentum with the Russell Stover sugar-free range using stevia extract as a sweetener.
We have continued to make good progress on various projects to further leverage the Russell Stover acquisition and on our overall streamlining initiatives in the U.S., which are mainly in the areas of production, merchandising, logistics and procurement and IT. We expect bottom line benefits from those projects in the coming years while in part -- which will be in part reinvested in the brands. Benefits have already started to kick in this year. And as mentioned in my introduction, we are accelerating the closure of the redundant Russell Stover factory by around 7 months. Overall, we are convinced that we are taking the right strategic steps for future success at Russell Stover and in the U.S. generally and that we are on the right track.
Overall, in the Rest of the World, we saw a decline of 18.4% compared to plus 8.3% in the first half of 2019. This region was the one most impacted by COVID-19 not least of all because of the poor Travel Retail in this segment. Due to global and local travel restrictions, sales in this channel came to a virtual standstill in the second quarter. As the first market to enter lockdown, China was impacted very early on and most severely, but we have seen nothing to make us doubt our positive medium-term assessment of this market. Brazil and Japan, which has been a focus for Lindt retail store network development, suffered due to this channel being closed during a major part of the first half. South Africa saw a significant spike in COVID-19 cases, and a curfew was implemented across the entire country with very limited commercial activity, all of which led to a decline in sales. Australia was quite resilient in the wholesale channel, representing another positive sign for the future. In the medium term, we are convinced that we will again reach double-digit growth within the Rest of the World segment. Indeed, many of these countries are large chocolate markets with significant premiumization potential for Lindt.
Let's move on now and go through different cost categories, starting with material costs on Slide 14. Material costs, which have been adjusted for changes to inventories, came in at 35.3%, 330 basis points higher than in the previous year and 180 basis points higher than in 2018. There are 2 factors behind this negative development, one sales related and one cost related. As explained earlier, our sales volume declined only slightly, meaning that we did not produce and sell much less chocolate than in 2019. It is simply that we achieved a much lower net sales per tonne, net sales being the denominator in this calculation. On the cost side, we have seen increases over the past 12 months in cocoa bean, cocoa butter and hazelnuts prices, which will have an impact on our full year results. Looking forward, we estimate that our overall material cost to be at roughly the same level in 2021 as in 2020.
On Slide 15, I would just like to take a quick dive into our most important commodity, cocoa. Development of the cocoa market over the next 12 months remains uncertain. The outlook depends heavily on the positioning of market speculators with an overproportionate influence on the cocoa market. That said, the market currently expects a slight surplus for the 2019/'20 harvest season, but a larger surplus of around 300,000 tonnes for the 2020/2021 crop. The surplus predicted for the new crop is the reason why cocoa futures have declined over the past few months. By contrast, the living income differential of $400 per tonne implemented by Ghana and Ivory Coast has helped push pricing in the opposite direction.
Overall, as can be seen from this chart, cocoa bean future prices in London are currently trading at around GBP 1,600 versus around GBP 1,700 1 year ago. At the same time, cocoa butter ratio has more or less stabilized at high levels of 2.60 to 2.70. This compares to a ratio of around 2.70 to 2.80 1 year ago. Based on current market expectations and including the living income differential, we assume that cocoa bean prices for 2020/2021 crop will increase only slightly.
Despite an absolute decrease of CHF42 million, personnel expenses were unable to keep pace with the decrease in sales. As a result, personnel expenses increased by 110 basis points. A large part of our personnel expenses are fixed costs, and so the decline in the overall sales inevitably led to these economies of scale. Given that we expect organic sales growth to recover and normalize in the medium to long term, the ratio of personnel expenses to sales is, therefore, expected to come down again in the future.
Although operating expenses decreased by CHF47 million, the ratio increased by 100 basis points driven up by 2 factors. Here again, we experienced these economies of scale from fixed expenses such as warehousing costs. Secondly, as explained earlier, we maintained advertising investments at a high level and continued to invest in our brands in all geographies with the objective of emerging from the COVID-19 crisis as one of the structural winners. These 2 negative effects were partially offset by the positive impact of lower variable percentage rent expenses in our retail stores and other smaller runoff effects.
Within the depreciation and impairment category, we also experienced these economies of scale as depreciation in absolute terms was at the same level as in the first half of 2019. Key drivers for the increase of depreciation in recent years have been our CapEx program aimed at satisfying future volume growth and the reporting of depreciation for right-of-use assets in line with the new IFRS 16 standard effective from 2019. One of the biggest investments relates to our Lindt factory in Stratham, New Hampshire in the U.S., which is planned to absorb the expected medium-term increase in volume from gaining U.S. market share. Due to the slowdown in 2020, we are slightly rephasing overall CapEx in that factory, leading to lower CapEx in 2020 and 2021 than originally planned. I will discuss CapEx in more detail later.
The EBIT figure remained positive at CHF17 million or 1.1% of sales but was significantly down compared to the first half of 2019. The decrease of nearly CHF110 million is due to the factors discussed at length in the previous slides and are primarily the result of COVID-19 related to economies of scale and the negative mix impact on the top line.
Net income also remained positive, coming in at CHF20 million or 1.3% of net sales. The decline in net income was less marked than for EBIT, thanks to positive developments within financial items and the income tax. Net financial expenses came in at CHF13.4 million, a decrease of CHF1.3 million or minus 9% versus last year. This was mainly due to the lower U.S. dollar interest rate and the related lower hedging costs for subsidiary financing. As already mentioned, we again had some positive developments on the tax side driven by the lower current tax liabilities related to lower transfer pricing risks and further capitalization of deferred tax assets related to the Swiss tax reform.
Looking forward, and based on our current outlook, we consider a tax rate of 21% to 22% to be sustainable over the medium term, assuming no major changes in tax legislation.
CapEx from the first half came in at CHF117 million, at roughly the same level as last year. This is less than planned given that we have -- had decided to postpone certain growth-related investments. We now expect CapEx to reach around CHF230 million to CHF250 million for the full year, which is about the same level as in 2019. As communicated above, we are rephasing our CapEx plans where it makes sense and now expect CapEx to be between CHF250 million to CHF300 million over the medium term.
As I take you through the bridge of the main cash-relevant developments of the first half, please bear in mind the impact of net debt of IFRS 16 and specifically the lease liability with its negative impact of CHF470 million.
At the end of the first half, net debt reached CHF567 million, much lower than the CHF780 million of 1 year ago but higher than the CHF423 million at the end of 2019. Consequently, we are now more focused than ever on cash generation. Indeed, in the period under review, we managed to generate a free cash flow of CHF156 million.
The increase in net debt of CHF144 million was mainly due to the special dividend paid out in May to our shareholders. In total, we returned CHF420 million to shareholders in the period.
Given today's assumptions, net debt should end the year at around CHF350 million to CHF400 million. Before the lease accounting change and on a pure cash basis, our expectation should be for around CHF100 million net cash.
That concludes my review of half year results. Let us now look at future expectations.
For the full year, the group expects organic sales to decline between 5% to 7%, while EBIT margin is forecasted to be around 10%. As additional guidance, and as mentioned earlier in the presentation, we plan CapEx of around CHF230 million to CHF250 million. Of course, everything depends on how COVID-19 develops, which nobody can predict with certainty.
The most important assumptions for our 2020 forecast are that there are no major second COVID-19 waves that require further widespread lockdowns; the majority of our own retail stores remain open from now until the end of the year; the holiday season business comes in at around 2019 levels in most markets; Travel Retail gradually starts to gain some traction, though realistically, sales in that segment will remain far below 2019.
From now on, therefore, we expect momentum in our business to build. The group remains confident over the mid to long term of achieving its goals of an organic sales growth of 5% to 7% combined with an average increase in EBIT margin of 20 to 40 basis points. Consequently, I can now confirm this unchanged guidance.
In the medium term, and as mentioned earlier, we expect capital expenditure of CHF250 million to CHF300 million and a tax rate of 21% to 22%. For the 2021 financial year, as our business bounces back, the group expects organic sales growth to be slightly above these medium- to long-term brackets. We expect our EBIT margin still to be under some pressure next year but back at around 15% within roughly two years from now.
With this, I come to the end of my presentation and hand over to the operator, who will manage the question-and-answer session. [Operator Instructions].
[Operator Instructions]. The first question comes from Warren Ackerman from Barclays.
Martin, it's Warren Ackerman at Barclays. I hope you're well. Three from me. The first one, Martin, you talked about June being more of a normalized month. Are you able to quantify what June looked like relative to April and May, how you exited the quarter?
The second one is you're making the key assumption of no further lockdowns. But if you read in the news, it seems like Miami, Florida, L.A. are going to potentially go into imminent lockdown, so that key assumption could already be out of date immediately. I was wondering whether you can maybe give us sensitivity within your 36% in NAFTA to California and Florida to get an idea of the risk assessments on that key assumption that you're making.
And then the final one is just on margin. You said there will be some negative impact next year on the margin. You've given the organic growth guidance for next year. You've told us what the margin will be, hopefully, in 2022/2023 above 15%. But what about in 2021? You say still under pressure. Could you give us a bit more clarity on what that means relative to the 10% this year?
Yes. Just to write down all your questions to be able -- and not forgetting one of them. So the first one was about June exactly. So of course, it looks very different depending on the markets you look at. We had some markets which grew double digit. We had others which still suffered under a kind of not a lockdown but closed retail stores. So overall, June was somewhere in the mid-single-digit area in terms of growth. But as I say, there were big differences between different markets, but it gave us a lot of certainty that we clearly see a bounce back.
With regards to your question on lockdown or lockdowns, our key assumptions is that it will not be one huge lockdown at the same time where everybody basically is closing down, all retail stores close down for 3 or 4 months, right? I mean we -- obviously, we'll see some lockdowns like the one in Melbourne or the one in California, and that we factored in into our numbers. But we don't expect something similar to happen in those numbers like what happened basically in March, April where everything was closed, right, where all our stores were closed at the same time for 8 to 10 weeks and in some countries even longer. And restaurants were closed, so we lost basically for 2 months our foodservice business in the U.S., et cetera. So some of it is factored in but not the same magnitude as basically we saw in March and April.
Now you mentioned California and Florida. Florida itself is not, let's say, the biggest chocolate market for us within the U.S. because it's -- of course, temperature is quite high. California is a bit a mixed bag dividing between Northern and Southern California. But yes, California, being the biggest state from a population point of view in the U.S. for sure, is an important market for us. And we can see that currently also in retail, right, because retail is really a -- especially for Ghirardelli, quite is an important state. And Disney -- I think some business have even reopened, but we have to see if the tourists will come back because we have 2 stores in Disney, 1 in Florida and 1 in California. And then also, Ghirardelli Square store in San Francisco, it is impacted for sure. But on the other side, we see some very positive momentum in baking and in also foodservice, which is somehow coming back nicely.
And then you asked about the margin for '21. We are not giving a specific guidance for '21 on EBIT margin. But 2020 is at 10% -- around 10%, and when we're saying 2022/'23 at around 15% -- back to 15%. So you can assume that '21 will be somewhere -- be in the middle between the two.
The next question comes from Alain Oberhuber from MainFirst.
Alain Oberhuber, Mainfirst. Also three from my side. Regarding the recovery you expect on the organic growth rate, can we expect it will mainly come from price/mix? And if so, which of these factors? The second question is regarding your visibility, in particular regarding the festive season for Halloween and Christmas. Obviously, it's a little bit too early to ask the sell-in already. But what makes you this confident that you have this recovery given the key assumptions you have said?
And the third question is regarding Travel Retail in 2020. As you said, it will remain far below 2019 levels. What was your base case assumption for Travel Retail prior to COVID-19?
Yes. So your first question on organic sales, from where it's coming, so for the second half or for the full year, I should say, we expect volume to be slightly down, as we have seen in the first half. We expect price to be slightly positive. And basically, it's really coming from mix. And within the mix, yes, we saw during Easter the impact from returns and markdowns, but then you should bear in mind that the channel mix is also part of mix. So if our retail business is lower, it has an impact on mix. So a little -- lot was really driven by channel mix, so -- in the first half, and we expect that also still to be the case in the second half, right, that global retail is coming back, yes, but it will still be slightly above -- sorry, slightly below 2019 in terms of the rebound. So yes, it's really coming from the mix, the fact that we see our organic sales to decline by 5% to 7%.
Then your second question was about visibility, Christmas. Of course, at the end of the day, we try to make our assumptions. We also try to you a certain guidance with our best knowledge we have today. I mean these are very uncertain times, and nobody really knows what happens exactly in November and December. But what we can see right now is that orders that are coming in are actually okay. So we already get some orders like in the U.S. And so far, they give us some confidence that the assumption of achieving for the holiday season. So the Christmas plus all the -- the whole season basically between November and December to be flat in wholesale from what we can see right now, it seems to us to be a realistic assumption. And as I said, we get first visibility on Christmas because we get early orders from some customers.
And then Travel Retail, yes, it's down. I mean you're basically asking me about the base case prior to COVID. The base case, right, prior to COVID-19, you mean like...
Correct.
Yes, it would have grown versus '19 in the base case. But now it's down massively, right? I mean we're talking somewhere between 20 -- 1 quarter to 1 period of the sales that we would normally have achieved, right?
Okay.
So a decline of way more than half, right? I mean we are losing 75% or so because there are no -- I mean there are -- nobody -- or not many people are traveling. So it's -- the traffic is really missing, right, in the airports.
The next question comes from Jon Cox from Kepler Cheuvreux.
Back to the margin question. You've mentioned a 10% margin this year, obviously. What is the mix of that in terms of you think is COVID versus the accelerated restructuring you're doing in North America? And I've asked the same question about 2021. Because what is the stock you're just coming back to where you were previously in 2021? Because you think, excluding flare-ups and the rest of it, you'd assume it would be a year more or less in line with 2019 in terms of business. I don't quite understand why you're guiding the margin down. Is it because of the -- still there'll be more restructuring coming through next year? Or you still think there's going to be legacy COVID impacts next year? And what would they be in 2021?
There is some -- maybe you can go on mute, Jon, because somehow there's a background noise.
Sure.
If you could go on mute. Thank you. Thanks, Jon, for the question. So yes, margin, 10%. So you're basically -- your question was why 10%, what the impacts were on that. So, I mean, there are different factors, of course. One, as I mentioned when I was presenting, we're planning to continue investing on advertising because for us, it's important to think midterm and we continue to invest behind our brands. We actually plan to spend even slightly more than in 2019 behind our brands on advertising. So that's one. So with lower sales, of course, that means that the ratio goes up there.
Then the second reason, Travel Retail is a very profitable channel for us. And by sales declining so sharply in there relatively -- in proportion more in profit than in sales. Then the rebound in retail, it will take some time, right, because people -- in our own retail stores, right, people go back, the stores are open again. But it just takes time for things to normalize in 2020 and also 2021. And then we have the -- in Italy, we have this traditional trade channel, which is also quite a profitable channel, which softened in the first half. I think a significant amount of the players there, of the owners of these traditional trade stores, some of them will not come back and will not reopen their stores. So we are losing there also some sales, and we are losing also some profit there. It's also quite a profitable channel. So that's how we get to this 10%, so the main reasons. And some of them continue as well into 2021.
Again, on advertising, yes, of course, we will -- we want to be one of the structural winners out of this crisis. We have high liquidity, so we will continue to invest behind our brands because we are very confident about the midterm. Travel Retail in our plans right now will continue to be low to sales, maybe slightly higher than in 2020 but not much higher. So in this mix, we will continue to have a negative impact from Travel Retail, on the profitability. The same -- exactly the same for Italy, for the traditional trade. I think a significant amount of the stores will not reopen, not even in '21. So we lose that also again, profitability, because it's, as I said, a profitable channel. And then retail will rebound even faster in 2021 than it was in 2020 according to our plans right now, our own retail stores. But we have to see at what level compared to '19 they will really be in 2021. So these are really the key drivers and the key reasons why we think '21 will not just be back to 2019 levels.
I want to just have a follow-up then on the -- so the accelerated restructuring has got nothing to do with additional costs there, which are -- and then just on what's happening in North America. Can you give some rough idea of what you think it may do to your cost base in North America, everything you're doing there either in tens of millions or whatever your way you want to talk about that?
Yes. I forgot to answer this as well because it was one of your questions before, where -- the restructuring, right? So we are not planning additional restructuring right now. We are just planning to implement what we have announced in January. A big portion that we are even accelerating slightly further is the -- this closure of the factory, but actually everything has already been booked in January, right, in the past year basically. But there's no additional negative impact from that.
We will see some positive impact coming from the restructuring. But in the outer years, it will be more than in 2020, 2021. It's kind of a -- because some of the stores, for example, which are not so profitable, we are -- as I communicated early in January, we're not renewing the leases, but it's not all in '20. Some of it is in '21, some of it is in '22. And so yes, there will be a positive impact. It's really difficult to quantify it right now exactly because it's still a bit of a moving target. But yes, there will be no additional restructuring plans right now for '21. So that's not the reason why there's no rebound in '21 to 15%. The reason for that is really -- are the four reasons that I gave you before: advertising, which remains high; Travel Retail; retail, we have to see the rebound; plus the Italian traditional trade.
The next question comes from Jörn Iffert from UBS.
The first one is please on a more detailed split between your wholesale and retail channels, which accounts for around 80% of your sales. I mean what was the growth here in the first half 2020? And what is also your assumption here for the full year guidance? And then as a balance, I think I said myself, and for your own shops and for retail, what was the impact in the first half, how sharp the decline was in sales? And what is also your assumption here then for the second half?
The second question is please on your preorders for Christmas. As far as I remember, over the summer, 80% of the volumes are preordered now for Christmas. What is the liability if Christmas turns out to be really bad? I mean is it you're sharing the pain with retail? Or you have to take the products back?
And the last question is, I mean, you have a very strong liquidity and balance sheet. I mean EPS are likely below your initial plans and market expectations due to COVID-19. But is there a willingness in the management and the Supervisory Board to compensate investors with a structurally higher dividend?
Jörn, thanks for the questions. So your first one was about wholesale, retail or -- well, actually, this 80% of the business, if you exclude -- if I understand you correctly, if you exclude retail, Travel Retail, traditional trade, foodservice to taper, it was around 20% that we're under pressure. So it was actually -- the 80% was flattish, and the 20% we lost, you can calculate it yourself, is somewhere between 30% and 40% overall. But the 80% of healthy business was flattish because in there, you have also the Easter business, right? But the Easter of business, of course, was under pressure whilst, as I said in my introduction, we had some very positive numbers in Excellence and also in Lindor. In -- actually in all those categories, we gained market share in most markets. So relative to the market, we have really performed well. And as I mentioned, Excellence, we have grown double digit, which is the typical product that we would consume at home, right? And tablets as a category was also very positive.
So it's really a mixed bag, right? It's huge differences between channels and even categories. But yes, this 80% wholesale, we were flattish. And for the full year, we think we are going to be slightly positive.
Then for Christmas, Christmas is a bit similar ballgame like Easter. So it depends really on the customer and country. You have different market -- markdown policies, different sales returns policies depending on the customer. Even within one country, you can have different policies with different customers.
Of course, at the end of the day, in basically all examples and with all the trade partners, there is kind of an incentive also for the trade partner not to have a lot of markdowns. So it's not in the interest of us and it's not in the interest of the trade to push a lot of volume to the trade that will then not be sold through. Because if there are markdowns, both of us pay for it. And in -- well, in some examples, we pay more. In others, the trade pays more. So it really depends. But there's absolutely no incentive for any party to just push a lot.
So from the trade, we can see some positive thinking about Christmas actually. So that gives us also some -- yes, some optimism that we should achieve these numbers that I communicated. But of course, that all depends on the assumptions that we will not have, again, for 2 months, a lockdown.
And then your last question was about the strong balance sheet. As I mentioned as well, we are trying to make it even stronger. We are really having a lot of focus on net working capital and on free cash flow generation. Now if we will pay a special dividend or if we will do a share buyback or something else, I can really not tell you because, as you said, it's the Board of Directors who will decide that. So we will assess the situation together with the Board of Directors when we have the 2020 numbers. When we have confirmation if we can really achieve those targets, and then we can decide it. But there is absolutely no discussion going on right now, and it's too early now to discuss this.
The next question is from Graham Hunt from Morgan Stanley.
The first question is on your growth investments going forward. I know you said the new normal will look remarkably like the old normal. But I wondered if you could talk a little bit about where this step-up in spend is going in terms of either geographies or channels and if there is a more focus on defending and building share in your existing key markets or if you're leaning into new market opportunities that you might be seeing out of this crisis.
And then the second question, just briefly on Brazil. I wondered if you could give any additional color on what you're seeing on the ground there at the moment and what you're penciling in for your recovery expectations there under the current guidance for this year and beyond.
Yes. So first question on growth investments, where this is really going. Of course, we are trying to have some investment in most strategic markets. We are particularly focusing, if you look at the big markets, on the U.S. because there, it's -- the U.S. is the biggest market. At the end of the day, it's -- 20% of the worldwide chocolate market is the U.S. So a lot of the spend is going there. We have also 3 brands there. And as I mentioned, we even saw some growth in wholesale with Lindt in globally. So we are going to invest behind those brands in the U.S. for sure going forward again. But then also in other growth markets, especially where we don't have a big retail operation, where we are building up the markets with our own wholesale. Like Russia, for example, we also plan to continue to invest. I mean so it's one of the top 3 chocolate markets. In the U.K., we continue to invest. It's a very important strategic market for us. So really behind in the growth markets.
And then also Europe. As usual, we also plan to continue having a good performance in Europe. So in Europe, not necessarily having up -- so much investment, just trying to keep it on a high level. So the heavy-up would be more in this -- in the one -- in the markets where we see significant growth, I mean, going forward.
So Brazil, yes, it's a big chocolate market also. It's one of the top 7 chocolate markets. It's a market where we have chosen the strategy to go into this market with our own retail stores. We have about 45 own retail stores right now. And unfortunately, most of them have been closed during most of the time. And for half year, you can imagine if during the half of the first half, it was closed, it's down by like 50% or so-ish. At least that's the retail part. And then we also have a wholesale business, right? So it doesn't mean that Brazil as a total was down by so much but just in retail.
And then Brazil as such, we still continue to believe that it will be slow. Even though the stores have reopened, a lot of the stores have reopened actually in Brazil, some of them are now closing again. So it's a bit up and down. But we expect for the second half, let's say, also a negative sales performance in those stores. So we will be somewhere between 25%, 30% for the full year minus in retail in Brazil. So I wouldn't say it's a very bullish assumption there because we try to be realistic. And it's an emerging market. It's an emerging market. And at the same time, they are basically really suffering almost -- most there. So yes, we have -- that's more like our assumptions.
And next question comes from Patrik Schwendimann from ZKB.
Patrik Schwendimann, Zürcher Kantonalbank. Martin, regarding the price/mix effect, what's your best guess estimate for H2 for price/mix? Then second question, did I get you right that you were expecting for the second half of the year a slightly positive wholesale business? And third question, what are your expectations by region for the full year organically?
Sorry, can you just repeat the second question quickly?
In terms of the second half, did I get this right that you were expecting a slightly positive growth for the wholesale business for H2?
Yes. That's correct, yes. The pure wholesale, let's say, yes, slight increase.
Yes. So that decline of roughly 3% to 6% in H2 is, again, coming from retail, Travel Retail, foodservice?
Correct. And also for price/mix, we expect a similar, even slightly -- of course, the numbers will be slightly lower in terms of negativity. But if you take the middle of the minus 5% to minus 7%, minus 6%, even in there, we would expect a negative volume, slightly negative volume, right, for the full year also, minus 1%, minus 1.5%-ish. And within -- and price/mix similar as well, let's say, the difference, right? And it's really, again, the mix, right? So the picture, not changed dramatically for the full year compared to what we see now in the first half.
But slightly better than this minus 6.7%, right?
Yes, exactly because the wholesale, let's say, will be slightly better as well, right? So it's probably minus 4.5% or something like that. And then you asked about guidance. Well, it's not really -- I mean, it's just our best case right now. So for Europe for the full year, somewhere between minus 3% and minus 6%. For North America, somewhere between minus 5% and minus 8%. And for Rest of the World, somewhere between minus 14% and minus 18%. Yes, that's our [indiscernible] more or less only slightly, yes.
Maybe just one additional question. The overlying business, did I get this correct, is 4% of your sales now?
That's correct, yes. It was up from 2% to 4%.
The next question comes from Jean-Philippe Verci from Tobal [ph].
I have one, a follow-up on your guidance. And I'm still struggling to understand why, based on your assumption, you're still going for negative volume both in H2, knowing that Christmas is a very strong business. As for Easter in H1, it was heavily affected. And when you see that the own retail stores, Travel Retail and foodservice were closed for the biggest part in H1, in H2 there is a gradual reopening or recovery. So why you're like so negative on the volume growth.
And the second one would be on Italy. If you can give some color. Probably sales were down 30%, 40% there. If you can give some color on how the traditional trade has been behaving and what you expect into H2.
Yes. So your first question was about why negative volume in second half. Yes, whilst we will see some improvements in some of the channels, we still think even in the second half, we will not be obviously back at the same level as in '19. For example, if you take our own retail stores, our assumption right now is that we will not be back to the same as in 2019. The rebound will take some time. They are roughly at somewhere around 80% of the '19 levels, more or less, in the second half.
So that's our assumption, right, because we obviously don't know. Nobody really knows how the consumer will behave during Christmas in our own stores. Because with social distancing, et cetera, you're logistically not able to transact so many -- or perform so many transactions as you can if there's no social distancing, right? So if there is still social distancing, there will be an impact on the store throughput in November, December during the Christmas season, where you have a lot of people going into the stores. So that's why we assume basically there a -- that the rebound will take some time in global retail. And so that's one of the reasons why -- that's one of the key reasons apart from Travel Retail, which is kind of obvious, why we have those numbers in the second half slightly negative. Yes.
And then your other question was about traditional trade. So what -- just in general, what we expect from traditional trade in Italy going forward? Is that correct? So -- yes.
Yes. Exactly. And the sales decrease overall for Italy in H1, I guess, like -- something like minus 40% organically.
So traditional trade is -- as I mentioned, is an important part of the Italian business, but it's a business that has been in decline as well in recent years because you have lots of the small stores just struggling because traditional trade is obviously -- sorry, the modern trade is getting stronger and reopening more outlets, et cetera. So the traditional trade even before COVID-19 was declining as a market between 5% and 7% before. And we were a bit better than this, but still for us also, this was a declining business before. But now the COVID crisis accelerates this basically. At the same time, we have a ray of success. We have built up -- we have started to build up 10 years ago a very successful business in modern trade in Italy, and this is really a nicely growing business.
So Italy as such for the second half, we expect it to continue slightly negative, especially driven by this traditional trade, but we expect an improvement here. And in modern trade, we have also gained market share in Italy. So relative to the market, our performance is actually quite good in Italy. It's really the special circumstances that this specialty channel is still quite important in Italy. But strategically, in 10, 20 years, this channel will continue to decline. That's why we have really looked at other avenues to sell our products many years ago. Those are impacted much less.
And my assumption for a sales decrease of 40% in H1 for Italy, is that accurate?
It's more or less correct, yes.
Your next question comes from Faham Baig from Crédit Suisse.
One sort of broader question. I guess this crisis is different to the one we saw in 2009 in that you have a global crisis, the global financial crisis, that is preceded by a health crisis, and I just wanted to understand in the surveys and the consumer response and questions and answers you're seeing. Has there been a change in view from consumers when it comes to consuming what would be indulgent but relatively high-sugar product items in confectionery? And relating to the financial element, are you seeing any down-trading in your larger markets within confectionery or not? Or is this something that we need to look out for when going into FY '21?
Second and third questions are relatively quick. What would be your best guess for full year tax rate given some of the moving parts you've had in the first half? And thirdly, on online. It's a growing business. But when you compare to potentially other FMCG categories, it's still a very small proportion. I guess one of the difficulties you've had with confectionery historically has been on the distribution side and ensuring that part of quality remain up to scratch when it's delivered at home. What element or what areas of improvements are you sort of driving in order to improve the distribution in the online trade to further accelerate that channel?
Okay. So coming to your first question about the change in view of consumer during COVID and if there -- you can see some down-trading, what we can really see is that we are gaining market share, one, and we are losing sales in channels which were basically closed, as I mentioned, like traditional trade, like global retail, our own retail stores, like also Travel Retail, which was almost closed into a standstill. At the same time, we can see -- we have seen at the same time that our Easter business, for obvious reasons, was suffering -- seasonal and gifting, which gifting is one of our key strengths -- was suffering because there were less family gatherings, et cetera, during Easter. So it was also kind of because the occasion did not happen, not because people did not want to buy our products. And at the same time, we saw our business, which was consumed at home like Lindor and Excellence, really having fantastic results, especially on the Excellence side, where we grew double digit.
So from what I can see, I can rather see an acceleration. In the example of Excellence, people who have been working from home, they can maybe not go out to a cinema or to a restaurant, so they buy an nice chocolate and they buy a chocolate with high quality. And they -- we can -- we'd rather see an increase in the demand on this side, right?
So how I assess right now the crisis, it's really -- the decline in sales is really mainly coming from channels that were not available to the consumer and not because the consumer has decided not to buy high premium chocolates.
Then for the tax rate for 2020, it will be -- I guided it to 21% to 22% for the future. Now in 2020, it will be slightly better than that because of the impacts we have now seen in the first half.
And online in general, your other question, we have to really talk about online. We have to look at the different areas online. We have the click-to-mortar. So the tesco.co.uk, for example, or the sales base or Ocado. And then we have to look at the platform separately, right, like Amazon or Alibaba and then our own e-commerce. So the biggest channel of sales is actually in the first 2, so click-to-mortar and the platforms. And our own e-commerce is a smaller part of the total online sales.
And the logistics problems, let's say, if you want to call it like that, or challenges, they are more focused on our own e-commerce. So lindt.com. And there in general, we have also good results, and we are finding also good ways of accelerating that. As an example, in many markets, we have used our own stores for pickup. So consumers were able to order products and then they could pick them up in our stores. So click and collect.
So yes, it's still a small portion, if we look at these 3 pillars of online, but we can see definitely this growing very fast. And as I mentioned, we have started the big project for all these 3 pillars 3 years ago. So it's -- kind of the kickoff the project is unrelated to COVID-19, but now, of course, it is helping us tremendously now in 2020 to offset some of the shortfalls we have seen in retail.
Just going back to one of the first question with regards to how -- is there an intention as part of your innovation pipeline to maybe launch more sugar-free variants, stevia variants just to maybe grow with additional customers or keep some of the customers that are worried about their health, which seems to be increasingly the case?
As you know, in the U.S., this is quite probably the biggest market in terms of share of sugar free as part of total chocolate, right? It's still relatively small there as well. And there with Russell Stover, we are quite big. We have like 60% of the sugar-free market in the U.S. It's small, of course, as I mentioned before, but it's still -- it's a nice part of the business of Russell Stover. And they have actually -- over there, they have launched a bar, a sugar-free bar, chocolate bar, because so far we had the bags, right, the sugar-free products, but now we also have a bar with different chocolate-free bars.
And then another nice innovation if you don't want to seat a lot of sugar is Excellence 100%, which is also, of course, free of sugar, right? Or then also Excellence 100% cocoa orange. So it has some orange flavor as well, but they are all -- both of them are around 100%. So zero sugar. So definitely, yes, we are looking at this, and it's part of consumer demand.
We have also recently announced the launch of Hello vegan tablets in Germany. So we're in the vegan area. Now those -- they are not sugar free, but they are also another type of consumer trend that we are trying to follow where we see the opportunity, of course. So yes, we are also looking at those things.
The next question comes from John Ennis from Goldman Sachs.
Martin, two from me, please. The first is on the top line guidance again of 5% to 7% sales declines. I guess what strikes me a little bit on it is that you're not forecasting much of an improvement until the Christmas period really when you then expect flat sales. So between now and November, you effectively have a very similar run rate of declines implicitly to the 1.8% that you've just delivered. I guess why is there limited improvement between the 1H and the start of the Christmas period, particularly in the context of you saying that June was maybe slightly better? Is that because June, you would consider to be maybe a bit of a blip and not a good indicator of the actual rate? So a bit of color on that shape would be helpful.
And then my second question is on the margin performance in 1H '20. Could you maybe help bridge the performance and give us the proportion of the CHF110 million EBIT decline that was down to global retail and Travel Retail, please?
Yes. So in terms of -- your first question is related to the top line. And so no big improvement, you say, in H1 versus H2. I mean yes, at the moment, we are still assuming, as I mentioned earlier, especially in global retail, that the rebound will take time. Even if all the stores are open, we are assuming that it will not be back to the '19 levels in terms of revenue. So that will take time even though June was positive and we had some positive momentum there because we are trying to bring some innovation on the market like ice cream, et cetera, as well. But yes, it will -- retail will take some time to rebound. Travel Retail will be the same as in the first half. And the Italian traditional trade will also continue to suffer.
I think foodservice in the U.S., we have to see what happens because as it was mentioned earlier on by Joe, I think California is on lockdown, for example. Florida is on lockdown, so some of the restaurants there are also maybe closing again. So also in foodservice, we are obviously not assuming that we will be right back at '19 levels. Really it's -- June there has been promising on foodservice in the U.S. So a lot of the reasons why we have basically negative sales in the first half, they are not just going away in the second half.
If you look at the pure wholesale then, there I'm -- as I mentioned as well before there, we think we will be okay actually, in a good shape in the second half, but even slightly better than the first half depending on the Christmas season, of course. But there, we should really be able to be at flattish, maybe even slightly positive. So yes, it's a very similar story to the first half. And then your -- 1 second, please. So your second question is from the -- about the EBIT, where the shortfall is coming from. So it's -- roughly half of it is coming from retail and the other half in the rest.
And that should apply from -- on both counts.
Your next question comes from Corinne Gretler from Bloomberg.
I actually just have one, and it's about the ICI report that you may have seen that said that child labor increased in the Ivory Coast cocoa farms during lockdown. I just wanted to ask if you've taken any specific action to mitigate that. And then also, what kind of risk might that pose for chocolate demand, if at all?
Yes. Thanks for the question. We have actually our farming programs, Lindt, and we are sourcing our cocoa beans in Ghana, in Ecuador, which are our biggest markets, and also in Dom Rep, Madagascar and Papua New Guinea. We're actually not sourcing cocoa beans out of Ivory Coast. So from that viewpoint, we are doing our utmost to make sure that the farms from where we get our cocoa beans takes no child labor. We therefore have implemented this Lindt farming program, and we are really tracking this together with our partners. So -- but Ivory Coast, no, it's not really where we buy any cocoa beans. Okay? So I assume we go to the next question, if there are other questions.
Mr. Hug, it was the last question.
Okay. So thanks to everyone for your patience, for taking the time. And yes, have a fantastic day and stay healthy. Thanks a lot.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.