Chocoladefabriken Lindt & Spruengli AG
SIX:LISN
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Chocoladefabriken Lindt & Spruengli AG
Earnings Call Analysis
Q2-2023 Analysis
Chocoladefabriken Lindt & Spruengli AG
Lindt & Sprungli, the renowned chocolate maker, has delivered a solid performance in the first half of the year. Organic sales rose by 10.1%, with net income reaching CHF205 million, marking significant growth despite the ongoing challenges in the global operating environment, such as inflation and supply chain disruptions.
The company has also been engaging in strategic financial management practices. A prime example is the share buyback program, begun in August of the previous year, with CHF490 million in shares repurchased thus far. This move has increased net debt to CHF939 million but is seen as a confident step by the company, indicating a focus on enhancing shareholder value and a strong belief in the company's future performance.
Lindt & Sprungli continues to see positive growth across all its major markets. In Europe, organic sales grew by 8.9%, while in North America the growth was even higher at 11.2%. Particularly noteworthy is the double-digit growth experienced by brands like Lindt in the US and Canada, as well as Ghirardelli, indicating the strong appeal of the company's premium chocolate offerings globally.
On the cost side, Lindt & Sprungli is preparing for slightly higher material costs in 2023, driven largely by increases in the prices of cocoa, milk, and sugar. The company successfully managed cost pressures in the first half through price increases and hedging strategies, but anticipates this will be a continuing challenge into the next year.
Despite the pressure on expenses, the company has managed to keep personnel and operating expenses in check, with only a modest increase in absolute numbers. This control has been aided by efficiency improvements, most notably in logistics in North America, and ongoing investment in the company's brands across all geographies.
Lindt & Sprungli's first-half EBIT margin surged to a new record of 12.2%, a testament to the company's robust sales growth, price increase measures, economies of scale, and an overall strong business model that has remained resilient in a turbulent market.
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Ladies and gentlemen, welcome to the Half Year Results Conference Call and Live Webcast. I am Moira, the Chorus Call operator. I’d like to remind that all participants will be in listen-only mode. And the conference is being been recorded. The presentation will be followed by a Q&A session. [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 & Sprungli Half Year Results Conference Call and Webcast. The presentation and transcript of my prepared comments will be uploaded to our website this morning. The presentation will take approximately 15 to 20 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 this chart and include: a detailed review of the first half; an update on the key topic of sustainability, our expectations for the full year and the medium and to long term and a chance for you to ask questions. I would also like to refer you to the disclaimer at the end of this slide deck.
Despite an exceptionally difficult global operating environment, with sharply rising costs and the need to implement above-average price increases, Lindt & Sprungli was able to continue its post-pandemic recovery. Over the past years, we have continued to invest in projects that drive efficiency, especially in North America, but also Europe and rest of world. And we can see the benefits of this work. Overall, we are pleased with our progress and are optimistic about our future prospects.
I will now take you through a detailed review of these results, starting with the overview of our business performance. Before I begin, those of you who are new to Lindt & Sprungli should bear in mind the seasonal and gift-oriented nature of our premium chocolate business, which is skewed to the second half of the year. However, it is important to remember that first half sales absorb roughly half of our annual fixed costs. As a result, both sales and profitability are always lower in the first than in the second half.
That said, the Lindt & Sprungli Group has made an excellent start to the year. Organic sales in the first six months achieved a very positive growth rate of 10.1%. EBIT came in at CHF255 million, delivering a record first half EBIT margin of 12.2%. This margin expansion was driven primarily by the successful implementation of price increases, while still benefiting from longer-term hedges in material costs.
Net income was CHF205 million with a net income margin of 9.8%, again, a first half record. Free cash flow reached CHF137 million in the first six months, a decrease of CHF67 million over the first half of 2022. The key driver of this decrease was a deliberate decision to increase the inventories in cocoa beans in order to safeguard business continuity and higher CapEx to prepare for future volume growth.
Our net debt position, which includes a lease liability of around CHF415 million, increased to CHF939 million. This higher -- this is higher than a year ago, when net debt was CHF667 million. The driver of this net debt increase was our CHF1 billion share buyback program, which started in August last year and currently stands at CHF490 million of repurchased shares. It will be completed by mid-2024.
Total net sales reached CHF2.086 billion in H1, which means that for the first time, we achieved net sales of more than CHF2 billion in the first half. First half sales grew by 10.1% organically despite a tough comparison of plus 12.3% in the same period last year and plus 17.4% growth in 2021. Over the last two years, growth in our global retail business and also in Travel Retail was disproportionately strong in the first half, driven by the catch-up effect post COVID.
Our streamlining for growth initiatives are also continuing to pay dividends in the US where our two brands Lindt and Ghirardelli, both grew organically at double-digit rates. Overall, we are pleased that underlying consumer demand has remained strong despite the price increases we implemented.
As we are in time of high inflation and most stakeholders are interested in the net price increases implemented, we are showing you this chart split by price increases on the one side and the combination of volume and mix separately. Price increases were at plus 9.3% and much higher than usual. Due to much higher input costs, pricing actions had to be taken in all markets. Volume was slightly negative, offset by a positive mix, resulting in a volume mix impact of plus 0.8%. Positive channel mix impact was primarily driven by the rebound of our own global retail channel and the Travel Retail channel.
From a product viewpoint, we saw strong results in seasonal and gifting occasions, including Lindor. In general, we are seeing consumers trading up towards these occasions, which have a stronger price per kilo and enhance our mix. Reported sales growth was once again negatively impacted by the strengthening of the Swiss franc and also the closing of our presence in Russia. Reported sales in Swiss francs rose by 4.7%.
On the following slide, I would like to give you an overview of the sales performance by segment. In our biggest region, Europe, organic sales increased by 8.9%, representing an excellent performance. We delivered positive growth in all European markets and double-digit growth in important markets such as Italy, the U.K., Switzerland, Spain, Eastern Europe and the Benelux region.
North America grew by 11.2% with Lindt in the US and Canada and Ghirardelli, all enjoying a very positive first half, growing double digit. Russell Stover also made positive progress in line with expectations. In the US we continue to make solid progress on the various projects aimed at further leveraging the Russell Stover business and on our overall streamlining for growth initiatives. These areas include production, merchandising, logistics, procurement and IT.
Bottom line benefits had already started over the last two years, and this has continued into the first half of this year. We expect more benefit to come from these projects in the second half and over the coming years. As explained previously, part of the efficiency savings will be reinvested back into our brands to encourage future growth.
In the rest of the world segment, we also grew above the group average with plus 7.1%. In the first half of this year, Travel Retail recovered strongly while our retail stores in the region performed very well, leading to double-digit growth in the markets like Japan and Brazil. There are many large traditional chocolate markets within the Rest of the World segment, where we see significant premiumization potential for Lindt. As a result, we are convinced that we can maintain double-digit growth in the region over the medium term.
Let's move on now to the important topic of costs category by category. We will start with material costs. Material costs, which have been adjusted for changes to inventories, came in at 30% of sales, 150 basis points lower than in 2022. One key reason for the improvement of this cost ratio are our price increases of plus 9.3%, meaning that we achieved a far higher net sales per ton. We still had strong hedges in cocoa and other raw materials in the first half of the year. However, we are anticipating higher costs in the second half.
Looking forward, we estimate that our total material costs will be slightly higher in 2023 compared to 2022, driven by packaging and certain raw materials such as cocoa, milk and sugar. We expect cost inflation to continue into 2024, mainly driven by cocoa and sugar.
I would just like to take a quick dive into our most important commodity, cocoa. Prices for futures -- for cocoa futures in London are trading at their highest level in nearly four decades, a still relatively strong demand, combined with a global shortfall in production and the risk of bad weather in Ivory Coast and Ghana are the key drivers of the high cocoa prices. Cocoa futures prices in New York and London have surged by more than 30% this year, also driven by speculators with very long positions.
At the same time, the Cocoa butter ratio has remained more or less flat in the last 12 months. Most players in the chocolate industry hedge cocoa for six to 12 months. In other words, for most players, the impact of the very steep cocoa future prices increases will only kick in from the second half of 2023. Despite the absolute increase of CHF9 million personnel expenses increased at a lower rate than sales, leading to a cost ratio decreased by 60 basis points. A large part of our personnel expenses is fixed, so the sharp rebound in overall sales has reversed to this economies of scale experienced in 2020, as we predicted at the time.
Operating expenses increased by CHF21 million and the ratio decreased by 30 basis points, driven by lower logistics costs in percent to revenue. Those improvements are coming from various efficiency projects in the area of logistics, especially in North America. Secondly, in line with our high-growth strategy, we continue to increase advertising investments and to invest in our brands across all geographies. At CHF255 million and 12.2% of sales, EBIT set a new first half record increasing by 290 basis points compared to the first half of 2022. The increase of CHF70 million is primarily the result of strong organic growth, leading to positive economies of scale and an improved EBIT margin. At the same time, we were able to increase prices to offset 2023 steep cost increases in the area of raw materials and packaging materials. First half EBIT margin improved mainly in the segments of Europe and North America.
Net income also reached a new first half record coming in at CHF205 million or 9.8% of net sales. Lower net financial expenses helped coming in at CHF4.6 million compared to CHF7.8 million one year ago. This was mainly due to higher interest rates on deposits and no negative interest rates in Switzerland. The tax rate in the first half was 18.3%, which is below our midterm guidance, driven by higher half year profits in locations with tax rates below the group average. We are currently analyzing the impact of the 15% minimum taxation, which was accepted by the Swiss public vote in June 2023. Therefore, it is too early to give a tax rate forecast for the full year 2023. However, we expect 2023 to be an exceptional year and below 20%.
I would like to take you through the bridge of the main cash-relevant developments of the first half. In the period under review, we managed to generate a positive free cash flow of around CHF140 million, which was about CHF60 million less than this time last year. In the face of challenging -- of a challenging and unpredictable crop situation in West Africa, we decided to build up our cocoa bean inventories more than in recent years, leading to an additional cash outflow. Capital expenditure came in at CHF148 million in the first half, CHF27 million higher than last year. This is in line with our revised plans, which postponed certain growth-related investments from 2022 -- from 2020.
We continued the share buyback as planned, and together with regular dividend payments, we have returned around CHF560 million to our shareholders. At the end of the first half, net debt reached CHF939 million. When assessing our net debt, please also bear in mind the ongoing impact of IFRS 16 on our lease liability with a negative impact of around CHF415 million. On a pure cash basis, net debt would be around CHF500 million.
Sustainability plays a key role in ensuring our business success. Lindt & Sprungli has been around for over 175 years now, which demonstrates that we are a long-term oriented company, continuing to deliver exquisitely manufactured high-quality products. The Lindt & Sprungli sustainability plan is our pathway to becoming more sustainable along our entire value chain, demonstrating our commitment for a better tomorrow. This strategy addresses the sustainability issues that are impacted most through our business activities, both from a risk and opportunity perspective.
I'm pleased to be able to share that we have continued to make progress against our commitments across the plan. We are proud of the remarkable progress we have achieved over the past few years. As you can see from the slide, there are a number of key achievements across 2022 and 2023, and I would briefly like to talk you through some of them. Last year, we started sourcing cocoa powder through sustainability programs. We are now sourcing 67% of our cocoa, including beans and butter through sustainability programs. With this, our farming program has massively increased in size and now benefiting over 112,000 farmers.
As part of our engagement to tackle the root causes of child labor in the cocoa supply chain, we committed CHF1.25 million to the Child Learning and Education Facility in Ivory Coast. Beyond cocoa, we also addressed child labor as part of our dedication to respecting human rights. Last year, our Board of Directors approved a new group-wide Human Rights policy, which formalizes our commitment to respecting human rights and establishes a commitment to conduct due diligence.
One of our greatest achievements so far in 2023 must be the publication of our new deforestation policy just a few weeks ago. As a consumer goods company, sourcing agricultural ingredients, we recognize our role and responsibility in addressing commodity-led deforestation in the landscapes we source from. Through our deforestation policy, we set our Lindt & Sprungli aspiration and approach in addressing deforestation in supply chains. Tackling deforestation will also be key for achieving our science-based climate targets by 2030 and 2050.
We have also made further progress on our commitment to define science-based climate targets. We have submitted our climate targets to the science-based targets initiative, and we'll announce the verified targets before the end of the year. With this commitment and our decarbonization road map, we are contributing to the collective goal of limiting global warming to 1.5 degrees.
These are only a few of many great achievements across 2022 and 2023 so far. For more information, I welcome and encourage you to read the 2022 sustainability report. It was prepared with reference to the GRI standards. More information on the farming program is additionally available on the dedicated website.
As I have already mentioned, we had an excellent start to 2023 with a recovery of our Easter business and continued strong growth of our core brands, mainly Lindor. From a channel perspective, Global Retail and Travel Retail both experienced strong double-digit growth rates due to the post COVID catch-up effect. For the second half, we still expect a strong performance. However, we shall face some headwinds in some areas. For example, Global Retail will face a much tougher comparison as it laps the strong results of 2022.
Nonetheless, given a faster than expected recovery in the first half, we are raising our organic growth guidance to 7% to 9% for full year 2023, versus previous guidance in March of 6% to 8%. As we also reached record levels of profitability in the first semester, we have increased our EBIT margin guidance to 30 to 50 basis points from our 20 to 40 basis points guidance in March of this year.
The second half of the year is much more important to our full year profit performance, and we expect significant cost pressures that were not present in the first half coming from raw materials such as cocoa and sugar and also some packaging materials. As mentioned earlier, we plan capital expenditure of around CHF250 million to CHF300 million. Also, we are currently analyzing the impact of the 15% minimum taxation, which was accepted by the Swiss public vote in June 2023. Therefore, it's too early to give a tax rate forecast for the full year 2023, but we expect it to be below 20%.
Our medium-term guidance is unchanged. The group remains confident for 2024 and over the mid to long term in achieving its goal of an organic sales growth between 6% and 8%. In 2024 and thereafter, we expect to deliver an average annual increase in EBIT margin of 20 to 40 basis points. For the next few years, annual CapEx should be around the CHF250 million to CHF300 million level, while the tax rate will increase to about 23% to 25% in the medium term.
Thank you for listening to my presentation and I will now hand over to the operator, who will manage the question-and-answer session. We ask you to limit yourself to a maximum of three questions, so everyone can participate. Please note that written questions asked via the web will be answered by e-mail after the webcast.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jorn Iffert from UBS. Please go ahead.
Thank you. And hi, Martin, I would have two to three questions. We'll take them one by one if okay. And the first question would be, please, on the overall cost basket for 2024 and the expectations of the chocolate industry price increases. Shall we expect a similar level in 2024 versus 2023 in terms of industry chocolate price increases, because lower cost support coming from a packaging or energy? How do you think about this for 2024? That will be the first question, please.
Yes. Hi, Jorn. And great to take one by one, so it's a bit easier for me. So I don't have to remember three or four questions. Yes, I expect it to be a bit lower based on today's costs, right? I mean it can change, of course. Cocoa could go much further up. I mean you've seen a 30% increase over six or seven months. And if this increases another 30%, then my answer will be different, obviously. But if the cocoa bean price and the sugar price stays where it is today, and if all the other important materials such as milk and packaging remain at the same level as they are today, I would expect a slightly lower price increase need across the chocolate industry than what we have seen in 2023, but there will still be cost pressure. And most likely, most or all players in the chocolate will feel this cost pressure and will, therefore, most likely feel a need to adjust pricing.
Thanks for this Martin. The second question would be, please, on the volume slowdown. Can you split volume versus mix would be great?
Sure. So volume was slightly negative. As you know, I think it's important to bear in mind that in the current environment where you see this trade up towards more expensive products within the seasonal range or also towards like monopolies like Lindor, I think it's important to always look at volume and mix combined. So if you look at the overall market, if you look at wholesale Nelson or IRI market, actually, the market overall is down by about between 2% and 2.5%. Lindt in wholesale is down by minus 1.5-ish percent on volume. If you just look at volume and wholesale and sell-out data. I think that's the most important data to look at. And that varies obviously country by country. But overall, we are somewhere in this neighborhood between minus one and minus two and mix is quite positive, driven by channel, but also driven by the product mix where we see the shift. I mean, the season really especially Easter did really well.
Thanks, Martin. And the last question, please, you mentioned it a little bit the premiumization. I mean the chocolate market volumes never have been so weak, I think, in the last 20 or 30 years given the price elasticity. But then we still observe accelerating premiumization, consumer trading up for some product categories. How do you explain this for Lindt?
Look, I think our strategy was clearly in the last three, three years, even during COVID to really invest behind our brands. And I think that was critical that we have not stopped during COVID. We have not kind of only protected EBIT, but we have really thought long term. We have continued to invest in strategically important markets. And I think we can now see the dividends of that. And because of our efficiency projects that we implemented also especially in North America, where we gained significant tailwinds with regards to the EBIT margin, and obviously, some of this we were also able to invest.
So I think it's a combination, right, that during COVID we continued to invest over the last three years, over five years, we invested heavily behind our brands. And we worked behind the scenes on increasing also efficiency. So that also enabled us to even invest more. So for me, that's the key reason why actually we have still been able to grow or to see this uplift towards more premium within our portfolio.
And yes, but we are not immune to price increase at the same time, of course. I mean, I think there's basically no brand out there that is not -- that is completely immune to price increase. So we have also seen a certain slowdown in the first half with regards to volume as the whole chocolate market has seen.
But look, the good news is that we have seen this straight up towards the more expensive products. So the price mix is positive, which for me is a very good indicator. The volume mix is positive, which is a very good indicator.
Yes. Thanks a lot Martin.
Thank you.
The next question is from Jean-Philippe Bertschy from Vontobel. Please go ahead.
Good morning, Martin. The first one is around retail. If you can share with us the sales compared to pre-COVID levels in own retail and in Travel Retail? That will be the first one. And the second one is two markets. The first one, Italy. I do have like 15% growth following 20% last year, more or less. What's happening there? What is really the game changer versus pre-COVID? And on the other side, once again, Russell Stover which is, again, a bit suffering probably with very weak growth. How do you see that and this related to Jorn's question on premiumization? It looks like midterm the prospects for us are not so positive. Thanks.
Let's start with Russell Stover. I mean I'm quite positive on Russell Stover. I always say and always have said, Russell Stover will grow somewhere in the low to mid-single digits, right? And that's where we are as well this year in the first half. So we are exactly where we said we will be. Last year, we grew double digit. We always said that's exceptional. So we are in line with expectations and with our business plan. So I think that's positive news.
In terms of Italy, what is the game changer, we have done a lot of work there. Also in the background in the last two, three years, we have actually merged the organization of Caffarel with Lindt, that's now one Italian organization. So we are tackling there the kind of the traditional trade jointly, which gives really good momentum to do that together. We also acquired our -- the small retail organization there, right, is the Lindt Stores. So we're managing retailer on our own now in Italy. That also gave a boost. So the combination of all that plus, of course, the investments, similar to what I said to Jorn, the investments behind our brands over the last years gives an acceleration within our wholesale channel in Italy well, which is mainly Lindt there, less so Caffarel. Caffarel is more in the traditional trade. So it's the combination of those things.
And then whereas on retail and Travel Retail, at the end of this year, we expect on retail to be above 2019 slightly, probably around 5% above 2019 levels, just store -- same store, right, versus same store. I mean we have some additional stores also. So taking those ones out, just so comparable store growth. And Travel Retail will still be below 2019 actually, by about, I would say, around 10% below 2019.
Thanks for that.
Thank you.
Next question is from Patrik Schwendimann from Zurcher Kantonalbank. Please go ahead.
Patrik Schwendimann from Zurcher Kantonalbank. Hi, Martin. Congrats for the excellent results. I also do my questions one by one. I do have three questions. Firstly, there was a record margin achieved in H1 in Europe, up by 470 basis points to 17.2%. Is this a sustainable margin for future H1 that we have now a much higher margin level also in the future in Europe in H1? That's my first question.
Yes. Hi, Patrik. The driver of the high margin in Europe, I think they are mainly twofold. I mean on the one side, as we had announced, we did -- we had to do price increases in Europe in 2022. It was clear that we did more price increases in North America, a bit less in Europe. In the first half this year, it was the other way around, right? I mean Europe, we had to -- we had kind of catch-up effects in 2022, so we had to do price increases. That has helped our margin in Europe in the first half because we see that good hedges. Those good hedges, they will not be there anymore now in the second half, and we definitely will see a hit there with regards to the EBIT margin or with regards to the raw material costs. And therefore, I would not necessarily expect the same high EBIT margin going forward in Europe in the first half.
The second reason is really some of the more mature markets grew double digit, as I had mentioned, right, like Switzerland, like Italy, et cetera. And so that the whole mix kind of also helped us in the profit. So it also depends going forward in 2024 and beyond, how -- which subsidiary is growing, how much. It's more the mature ones, which -- because they are longer out there, they tend to have a higher EBIT margin than the younger subsidiaries, right? So it also depends on that mix going forward. But I would not necessarily expect that level of EBIT margin in the first half going forward.
Okay. Thanks a lot. Then my second question, I mean, regarding the EBIT margin guidance for the full year, this implies a substantial decrease in the EBIT margin for the second half of the year versus the second half of last year. I mean you have mentioned higher raw materials and the marketing spend, but it seems still quite conservative. What is behind this conservative guidance?
It's exactly those two things, right? At the end of the day, we did the price increases early on because we knew that there will be massive cost increases coming from raw materials and package materials and the cocoa bean prices, you have seen that huge increase. So I think it was definitely the right thing to do these price increases. And so that is there. And sorry, can you repeat the last part of the question?
So, I mean just this implies...
EBIT margin, yes. Why it is so low in the second half. I mean it depends how much advertising we will invest as well, right, in the second half. And we are planning to heavy up the advertising spend because, of course, after the price increase, our volume and was not up, as I mentioned before, and our goal is obviously for the second half to have an acceleration from a volume perspective. So we plan to invest heavily in advertising in the second half in some important markets. So that -- those two things really drive that slightly lower EBIT margin in the second half. So yes, it's really higher costs from a material side and its higher advertising.
Okay. Thank you very much. And then my third question regarding the rest of the world. I mean it's still double digit, but probably a little bit below normal expectations. I mean you have mentioned that two markets have been greatly, but was there some slowdown maybe in other markets or some disappointments maybe in Australia, I don't know.
No, Australia grew nicely at high single digits. It was actually -- it's phasing at the end of the day, right? And we expect for the full year still growth in rest of world in the neighborhood between 12% and 14%. So in the second half, we expect growth in Rest of World of around 15%. So it's phasing. It always depends a bit with the supply chains were disordered. It's not sell-out, right? Bear in mind, it's sell-in, so it depends when the orders are coming in from which customer in which country. So overall, we are as optimistic as ever in Rest of World. Because this phasing now the first half was 11%. But yes, I'm optimistic for the full -- optimistic for the full year and also for the second half.
Perfect. Thanks a lot, Martin. See you on Friday.
Thank you.
Next question is from Warren Ackerman from Barclays. Please go ahead.
Yes. Good morning, Martin. It's Warren here at Barclays. I've only got two for you, not three. The first one is, can you quantify the EBIT impact from hedging gains and pricing taken ahead of when the cocoa price impacts? I'm just trying to understand the kind of the timing benefit in the first half and then maybe kind of the assumption for the second half on that front. So just really one on timing.
And then the second one, if I can squeeze in quickly before answering the first one. Just on the volume mix of 0.8% in H1. Can you quantify whether you think vol mix will remain negative in the second half? And do you think volumes remain negative in 2024? Just given, I know pricing won't go up as much next year as this year, but nevertheless, it's still going higher. So I know you're reinvesting, but do you expect that reinvestment to actually drive volume mix positive either in H2 or 2024?
Yes, Warren. Let's start with the first question here. And your -- yes, it was about the impact of raw materials, right, of the hedging, basically. It's so difficult to isolate one effect, obviously. But in general, it's surely unusual, let's say, higher guidance is 20 to 40 basis points that in the first half, you have 300 basis points improvement on the EBIT margin. So typically, you would expect a more normalized development right, I mean because the first half is not so profitable, sometimes it can be a bit more or a bit less than the full year, but normally, you would expect something between, I don't know, 20 and 60 basis points or something right in the first half.
So because it's close to 300, you could say that the positive impact of the hedges is -- yes, is the difference, right? So around 150 to 200 basis points or so. And yes, for volume mix, your volume mix question, right? I mean, first, it was actually positive, right? The combination of volume and mix was positive in the first half, 0.8% plus. So I think that's important to bear in mind. Now for the second half, just in isolation, we expect volume -- it's always difficult to predict volume, but I'm not expecting it to be at minus 1.5% in, let's say, in the sellout. I expect it to be better in the second half, the volume.
So it's a bit difficult to say is it even small growth, is it slightly negative, that's difficult to predict. So I expect volume and mix combined to be about flat in 2023. Mix is always difficult to predict because it depends on various factors, obviously, how is the tablet business going, how is the season going. But overall, I would say volume mix for full year 2023 to be about flattish. And then volume, we are expecting to pick up in 2024. We are really doing our utmost.
As I said, we are investing more behind the brands in the second half. Next year, I'm expecting if the cocoa stays at the current level, we will have to do some pricing most likely. But as I mentioned earlier, at today's cocoa prices, it will be less than this year in terms of pricing. So therefore, the volume impact should be less. So I expect to pick up in volume in 2024.
And just on the reinvestment, how much increase in millions of Swiss francs do you expect in the second half? What kind of quantum of spend uplift? And where is that money going to be going primarily? And what kind of return are you expecting on that stepped-up investment?
Look, we don't disclose really the marketing investment and how much is to have you up.
Okay. All right. Fair enough.
We will invest in strategically important markets in the big markets like in the US, like in the big European markets, et cetera, because there the benefit is the biggest, obviously. We also have some new launches, which we will -- for example, in the U.K., we are launching wafer which should be an exciting launch. We'll spend some money behind that. We will spend behind the Lindor with behind Christmas to make sure that we have a good sell-through. So we definitely spend the money wisely. And with the key goal really to gain household penetration, which then leads again to a positive volume mix, hopefully.
Okay. Super. Thank you, Martin.
Thank you.
Next question is from Siobhan Lynch from Deutsche Bank. Please go ahead.
Hi, Good morning, Martin, Siobhan from Deutsche Bank. I've got three as well, if that's okay. I'm happy to do them one by one. Maybe if I could start with the dynamics that you're seeing in your nonseasonal business. I guess, the more personal consumption bit. I think this had previously been a bit softer with cost inflation. And it sounds like H1 was a bit more driven by the seasonal. So could you maybe just start by talking a little bit about what you're seeing there? Thank you.
Yes. I mean for the last few Nielsen periods, we have seen a softening in terms of the tablets business in general, right? The tablets market has been kind of a bit soft in the last few periods. I would even say in the last couple of years, post-COVID. I mean it was really strong doing COVID. We saw a big pickup -- a huge pickup in self-consumption, right? The bars, the tablet really did well during COVID, 2020, 2021. And -- but 2022 and 2023 became a little bit softer, so negative on volume, right? And actually, over the last few months, there are a few markets where we can see this trend reversing especially on extra-large services -- in our excellence is certain reversing in the trend, not in all markets. This gives us actually some positive momentum and some belief that we can actually see a turnaround there with regards to the volumes as well.
But definitely, in the first half, we saw what I said, right? I mean you saw that permanent products like tablets, they did a little bit less well on volume. I mean we also increased prices. So overall value was positive, but in Nielsen, it was negative, and we saw this kind of trade up towards seasons and towards Lindor.
Great. Thank you. And then maybe for my second question, just on the personnel expenses because I know you sort of run through them in the presentation. Are you seeing any pressure going into the second half or into 2024 from wage inflation?
Yes, definitely. Our wage inflation will continue. I mean you see that in Europe but also in the US. So we definitely will see some kind of pressure in absolute values there. And -- so in -- for the full year, the ratio is probably going to be around 20%. And in 2022, it was above 20%. So we see overall a good trend compared to 2022. But looking forward, 2024, 2025, we definitely see some wage inflation. At the same time, we'll grow top line.
So yes, I'm not expecting this to be too difficult to manage with regards to the EBIT ratio coming from -- EBIT ratio impact coming from personnel expenses. I think the biggest watchout are really material costs, right? That's -- the material costs will drive further price increases most likely. It's not coming from the personnel expense from the wage there.
Great. Okay. And then just for my last question, could you talk a little bit about how the Chinese market has performed for year-to-date? I couldn't see any comment on it in the release. Has it been any slower or quicker than expected? And how are you thinking about into the second half? Thanks very much.
We didn't comment on it because China is a market that is heavily tweaked towards the second half or even the last two, three months of the year, right? They have 11/11, and we have the Chinese New Year, which is in January, but we ship basically everything in December. That's why I would not draw any conclusion based on H1 on China. And even if it's growing strong double digit or if it's growing single digit, it is so small volumes and so small values, that it's -- I would not even look at it too much in H1. We should really focus on it in H2. So it's in line with expectations. For the full year, I'm very optimistic on the Chinese business that will grow double -- a nice double-digit number.
Great. All right. Super clear. Thank you very much.
Thank you.
Next question is from Pascal Boll from Stifel. Please go ahead.
Yes. Good morning, Martin. Let's start with first question on pricing. You mentioned that cocoa prices will hit chocolate manufacturers, probably starting H2 and probably everyone needs to increase prices further. However, there are different options. I think there is the increase in list prices, maybe there are also other revenue management measures like smaller packaging. What do you expect how the most manufacturers will react to increase prices from here, especially as the pressure on consumers start to build up again and again and how does Lindt plans to react here?
Very good question. It may be that some -- I mean, we have seen in the past that more mainstream brands they have tended to reduce packaging. We have a global initiative which we call RGM, revenue growth management. So we're looking at all areas of pricing, let's say, primarily, it is around net price, right? I mean it could also be worked together with the retailers to find best ways what should the promotional price be in terms of what drives the category most.
So it does not always have to be a straight price increase, and we are analyzing this market by market. I personally believe, looking at the past, and actually in the past, we did never have a 30% cost increase in cocoa, but even if you had a quite steep cocoa price increase in the past, basically the entire chocolate -- all the players in the chocolate market normally did price increase because it's -- in the short run, it's really difficult to manage. Because if you change packaging, it takes time, right, normally. But it's -- look, it's difficult to predict what the others will do.
But the fact is, I think that there will be pressure on the costs and that either through size reduction or through straight price increases or a different way of approaching the promotions, there will be a way to kind of increase the average prices going forward, because it definitely is unprecedented, right, plus 30 percentage in at least the London futures is at a 40-year high. So this has an impact on everybody.
My second question is on your own retail. I mean, we have seen a double-digit growth in the first half of the year. What is it really driven? Is it just a rebound in traveling? Or are there also other reasons like that your contents are more resonating with consumers? And what do you expect how that will -- how the growth will go from here?
Look, I think it's a combination of many things. I mean first, I think we have a very professional Global Retail organization here in Hilger that works together with the local organizations that are also very professional. So we constantly find new ways of how we can actually even increase our comp store growth. This is a number, we are looking at a lot you know. How are we growing compared to last year, also compared to 2019. We still had a catch-up effect from 2019, right, which we said last year that we were still comparable stores roughly 5% below 2019. And so there was still a catch-up to do, especially now in H1.
So that was very positive. I mean, you have product innovation and we have different measures, also we, of course, also price increases, which also helped the Global Retail. So there are different ways of driving this growth. And some of these retail stores are also in Rest of World markets where we, anyway, have still a lot of premiumization potential, so that also helps. So it's really a combination of many things.
All right. And then maybe my last question on the consumer strength in different markets. I mean, there are some rumors or, let's say, signs that we see a weakening of the consumer in North America, for example. We also hear everyday news on inflationary pressure in Europe. However, it seems that Lindt has really -- done really well in that environment. So would you say that it's only attributable to that effect of premiumization? And you confirm that you still believe that this will continue into H2? Or are there -- is it just the strength of the Lindt brand?
I think it's both, right? I mean we are driving the premiumization. The strength of our brand is driving the premiumization and we are -- with our measures right in the market, be it on the point of sale, be it with retail -- our own retail, be it with marketing investments. Our key strategy is to gain household penetration, so to gain new consumers into our brands. And I think we have done that for the last many, many decades, I would almost say, and we have intensified it over the last few years. We have also intensified it during COVID.
So -- and our product is affordable, I would say, it's affordable luxury. That's also important, right? It's not luxury, luxury like if you buy an expensive watch. It's an affordable luxury. So I think the combination of all those things have also shown in the past that even during be it inflationary pressures, be it during a period of lower consumer confidence. If you look at the last 20 years, in general, chocolate has done quite well because people still want to have this little treat. And Lindt, I think it's really well positioned also for such a -- if the environment was going to worsen even further, we will be prepared for that.
I mean we cannot necessarily see that currently in the US as an example. This consumer confidence that it's going down so much, as you can see in our numbers. So look, overall, we are super confident for H2 and also for 2024 and beyond.
Thank you very much.
Next question is from Bruno Monteyne from Bernstein. Please go ahead.
Hi. Good morning, Martin. My first one is on the sustainability sort of improvements in your report you mentioned. Now I'm sure you're aware about those new European Union legislation landing, and I think more recently, due diligence -- sort of corporate sustainability, due diligence directive. To what extent is way out of your program sufficient with all the latest legislation? Or do you feel the latest European legislation is further raising the bar requiring further investment and efforts from you? So is legislation catching up with you? Or do you actually have to go further in your efforts? And then I'll take that as the first question and take the other one later.
Yes. Look, I mean, good question. The latest legislation is definitely evolving really quickly, and we are starting that. And the good news is, some of the ground work -- a lot of the groundwork we have done over the last 15 years, when we started, for example, on cocoa with our traceability, which I think has always been or has for a long time been quite leading in terms of -- we have built up our own programs, and we have full traceability on the beans already and by 2025 on butter as well. All the cocoa is coming from our Lindt farming programs. And there, we are starting the legislation. And if you have to adjust it slightly, we can do that.
But overall, it is definitely for all corporations that the EU legislation, it is -- it will mean extra work in terms of reporting and some other measures. So it's not like we don't have to do anything, right? It will keep us busy for the next many years probably. It is a lot of additional work for companies like Lindt for sure.
And then on the volume measures, you said -- I think you said minus 1%, minus 1.5% at the wholesale level. Now I'm just trying to think, does it include the volume growth you saw in your retail stores. And if so, would that imply that the volumes outside the retail store, let's say the grocery network are a lot more negative than that? Or does it not include your retail stores?
Now that the numbers I voted there which are sell-out data from IRI and Nielsen, which I think is the best way of looking at it, because you avoid having kind of phasing that you have no phasing to ship something earlier related to the retailer. So if you look at Nielsen, IRI consolidated, the chocolate market overall is down by 2.1% and Lindt is down by about 1.5% on volume. So we are outperforming the market on volume. But again, as I said before, you have to look at it together with the mix because of this kind of trade up to more expensive products in gifting, in Lindor, in seasons. I think it's important to look at the volume combined with mix. And there we are, as we have reported positive 0.8%.
But yes, purely at the volume, we are at about minus 1.5% in H1, and we expect this to be better in the second half. I mean it's really -- I feel like the impact of the price increase that the market is so negative.
Now you did mention that Russell Stover to be your total was in line with your medium-term guidance or expectations, at least of low to mid-single digit. Now in a market with that high level of inflation, I still think it's quite disappointing for Russell Stover to only grow in line with that level. Maybe a different way of phrasing the question is, as Russell Stover will stop losing market share in the US market share, but surely assure on the minimum requirements would want us for Russell Stover to roughly keep market share. So is the losing market share of user in the first half?
Russell Stover is losing a little bit of market share Yes, absolutely. We are doing also price increases in Russell Stover. So we have done price increases, so this should help going forward. If you talk about Russell Stover, it depends a little bit on what product range you look at, right, because we have seasonal items. We have pralines. We have sugar free -- so for example, in sugar fee, we are growing quite nicely. And yes, look, it's -- as we have always communicated, don't expect Russell Stover to grow double digit going forward on a CAGR basis. It is at mid-single digit or so, and that's where we are today.
I remember at the end of last year, you said you had a very good shipping -- sort of shipping in for Russell Stover in anticipation of Valentines and all of that, and you're hoping that sort of 2023 would be the first year where Russell Stover would be like turning a corner. So based on the sell-out you saw from Russell Stover in the first half, -- is it where you wanted it to be? Or is it still somewhat not as good as you were hoping for when you were doing the sell-in at the end of last year?
No, it is more or less as expected.
Okay. Thank you, Martin.
Thank you, Bruno.
Your next question is from Jon Cox from Kepler Cheuvreux. Please go ahead.
Hi. How are you Martin? Thanks for the call. I'm going to ask one at a time as well, so I can shove in maybe five or six. But just to start off, I wonder if you can just talk about the volume developments in different regions. I presume Europe was the worst and North America, maybe not so bad and Asia, probably the best. Is that a fair guess? Or that's...
It's a fair guess. We don't disclose details, but Rest of World was slightly better than the rest of the average.
And then in your own retail, I know historically, the mix in terms of the profitability of the store network has been lower than your wholesale business. Has that changed there? Because obviously, you've been doing adjustments, and I'm just wondering if that's in the overall profit mix or is it still weighing?
It's much closer to the average now than it was a few years ago. So this kind of negative mix, you can almost ignore it now because now we have made significant progress in our global retail with regards to profitability and also driven by the North American store closures, right, which we announced in the beginning of 2020, I think it was. So that has helped as well because we have really gotten rid of unprofitable stores. So if you think about Global Retail, think about how it as a division that is more or less at group average actually in regards to EBIT margin.
Okay. And then [indiscernible], you rather Travel Retail, you're talking about a 10% decline still versus 2019. But in a lot of regions, Europe and North America specifically, you can see passenger numbers and the rest of it are actually in line, if not slightly better, than 2019. Just wondering what's impacting you? Is it the mix may be skewed more to, I don't know, China or the Chinese traveler and they're only starting to come back? Is that the issue for you guys specifically?
That's the main reason, yes. Again, it's as expected. I think we always communicated we expect Travel Retail not to be back in 2023 to 2019 level, but only in 2024. And we are where we expect it to be. I mean it's a nice growth, but yes, we are not quite yet back to 2019.
Okay. And then just on the volume mix, it seems like -- you mentioned earlier in the quarter, Warren, that your mix would actually get worse in H2 or you implied it as you say volume mix would be -- and volume will improve. Just wondering when you're saying that because if it's all the seasonal items doing great and your maybe the mainstream lower part of the daily snacking or whatever is under pressure. But we're going into Halloween, we are going into Christmas. These are the most -- or Christmas certainly is the most important part of the year in terms of seasonality. Are you just suddenly worried people won't be doing the gifts and spending more on Christmas. I'm just wondering why your mix would turn negative in H2?
I mean we had a very positive mix because of the above-average growth of retail in the global -- Travel Retail and also our own retail in the first half and the Easter season, right, which has a lot of Bunny hollow figures, which is quite expensive -- more expensive per gram than a tablet. And in the second half, as I mentioned, we are seeing a more difficult comparable with regards to Global Retail. So Global Retail will not grow as fast as in the first half. So the mix impact there is less positive. And also Easter is more favorable to mix than Christmas overall. So the combination of those two things will lead to, I think, a better volume in the second half, but the mix will not be as positive as in the first half.
Okay. And then just the last one. It's more of an overall -- you guys and the chocolate industry generally probably benefited in terms of that cost environment because soft commodities were generally pretty weak, while everything was just taken off. Now basically the cocoa and the sugar, as you mentioned has have taken off. And I guess, combined, that is close to 60%, 70% in some shape or form of your raw materials and then the other parts, maybe packaging or whatever it may be. Going into 2024, it looks like you guys now have to start really increasing prices to offset that. But you -- there's a certain amount of fatigue from consumers who've been taking higher prices in grocery for the last few years. And now with that sort of inflation levels coming down, maybe it will be more trickier for you guys next year and the chocolate industry overall, given this fatigue coming in, just when you actually need to increase prices?
I mean as you can see in our numbers. I mean, last year and also this year, we have some price increases already. And the key drivers were packaging and milk and sugar. I think now, of course, yes, you are right. Cocoa is now the last one kind of that goes up. Sugar remained high. Milk and packaging is coming down slightly. So if you look into 2024, if it stays as it is today, it's mainly the cocoa that drives the cost up. But on the other side, you have -- hopefully, we have some relief from -- also in energy, for example, right?
So as I said earlier, if things stay as they are today with the cocoa market that GBP2,500 to GBP2,600 per tonne the futures market, if it stays where it is today, I'm not expecting the need to do exactly the same price increases as we did this year. But yes, it will still need price increases from most players, I assume. Even the consumer get kind of worried about it. I mean it's something we have to see, of course. I mean, at the same time, we are investing in marketing and other areas, right? So -- and if you have to increase mid-single digits and if you take that as a percent from your price of chocolate bar. In total, it is an amount that in the past, at least, has been kind of accepted by the consumer.
But of course, it's difficult to tell you know how the consumer will react. In general, more premium chocolate has been less elasticity -- elasticity has been less than for the mass market in the past as well. So I'm not seeing that as the biggest risk for us. I mean, yes, but we have to see.
Congratulations, you guys continue to positively surprise. Thank you.
Thank you.
The next question is from Andreas von Arx from Badar-Helvea. Please go ahead.
Good morning. Thank you for taking my question. I'll try to make it quick. First one is on depreciation. Here that number is clearly lower in the first half compared to the second half of last year and even lower compared to the first half a year ago. Is the CHF128 million total depreciation and amortization kind of the level we should expect for the second half? Or could you give you indication? That will be my first one.
We are expecting the ratio for the full year to come in slightly below last year. I think last year, it was at 5.5%. So we're expecting the overall ratio to sales to be slightly below that.
Okay. That's clear. I think I missed your comments on marketing spending for the first half. I mean what -- given your total operating marketing and distribution expenses are 30 basis points lower as a percentage of sales first half 2023 compared to 2022. I mean if you just look at the marketing spending, was that also down year-over-year? Or was it down in percentage of sales? Any indication would help. Thank you.
We had nice headwinds -- sorry, nice tailwinds from logistics in the first half. So logistics was really the key driver of this lower margin or lower percent on operating expenses to sales. On the other side, in terms of marketing, we spent more in absolute than the first half of 2022. So we had higher marketing investments and lower logistics costs.
Okay. Thank you. And the third one is you're pointing to a lower margin for the second half as compared to a year ago. Given that in the first half now, the margin jump has been mainly in Europe with an increase of 500 basis points. Is it then correct to assume that the reversal will also happen mainly in Europe? And maybe just to summarize again what are the key drivers that just affect Europe? Thank you very much.
Look, it depends a little bit in which markets at the end, we will invest how much, right? Will we invest more in Germany, U.K. versus the U.S.? If you're saying you're having up marketing investments behind our brands to drive volume growth. So that decision, of course, we have already made some decisions, but we are still working on it in the next couple of months. That's why it's really difficult to give you our guidance on these margins. Overall, it's just important to bear in mind, we have quite a cost inflation. As we can see, sugar prices, packaging, milk, et cetera, which we announced already in the beginning of this year in March. And this will come into effect in the second half.
In the first half, we're not seeing it in the material cost margin, but we will see it in the second half. I mean that's the reason why overall in the second half, the profitability will not be at the same level as last year. So it's really -- it is the marketing investments, the strategic investments behind the growth and it is the higher cost in raw materials, mainly.
But there is no mechanical item from the hedging that per se will drive down the margin in the second half that has been driving the margin up in the first half, specifically in Europe. I mean a 500 basis point margin improvement in Europe, is kind of numbers that we do not usually see at a fast-moving consumer goods oriented scope?
No, it's -- I mean it is the combination of price increases with the hedges that we still had. And Europe, if you go three, four years back, pre-COVID was also higher than post COVID right? So there was also some catch-up. And then as I mentioned in mature markets, we grew double digit like Switzerland, like Italy, like the U.K. And as I mentioned earlier, those tend without disclosing now EBIT by subsidiary, but the markets where we've been around for close to or even more than 100 years for some of them, of course, you have a different EBIT margin than in a subsidiary where you have been around just 10 years. So it is really mixed as well. That has helped our EBIT margin in Europe.
Thank you very much. Very clear. Wish you a nice day.
Thank you, Andreas.
The next question is from Faham Baig from Credit Suisse. Please go ahead.
Good morning, Martin. I will keep a very brief and ask three very quick buyer questions. Could you quantify the material cost inflation you expect for the full year? I'll begin with that.
Material cost inflation for the full year. I mean we are expecting actually that our material costs will -- as a percent of sales will come in slightly higher than in 2022 for the full year. Last year, we were at 33.8%. So we expect this full year ratio to be slightly above 2022 overall.
Great. [Multiple Speakers] Just my second question, so you're expecting full year organic sales growth of 7% to 9% with volume mix broadly flat. Assuming you deliver the top end of the guidance, which is 9% and time driven by pricing as you suggest. That would suggest you've taken the entirety of the pricing you expect for the year despite that being higher cost inflation in the second half. Is that a fair rationalization?
Correct. That's correct. Absolutely correct. Yes.
And then the final one quickly. You you've helpfully given us guidance for the full year for Rest of the World top line growth, 12% to 14%. Are you able to do something similar for North America and Europe, please?
I can, of course. Look, first and foremost, our guidance is 7% to 9%. And we said something similar in March, right, when we had the guidance 6% to 8%. Surely, the whole organization here at Lindt & Sprungli is trying to get to the higher level of 7% to 9%, that's for sure, right? But the geopolitical situation, the kind of economic situation, there is a lot of uncertainty. And therefore, actually 7% to 9% as a guidance, but surely everybody will try to get rather than 9% than 7%.
Now if you look at the different segments, we say the Rest of World will probably be in the area of around 12% to 14% or so for the full year. North America will be at higher single digits to 10% and Europe will be in the neighborhood of 6% to 8% more or less for the full year based on today's best estimates.
Thanks, Martin. Really appreciate that.
Great. And that excludes Russia, right, as in the first half, by the way. All right. Any other questions. One more.
[Operator Instructions] The next question is from Mikheil Omanadze from BNP Paribas Exan. Please go ahead.
HI, Martin. Just a quick housekeeping question for me. So do I understand correctly that going forward, you will be disclosing volume and mix together as opposed to price and mix as you used to do before?
Yes, there are two reasons, right? I mean on the one side, we sit here now when we showed a price/mix impact of above 10%, everybody would ask, okay, what is price. So everybody is really interested in the price in this inflationary environment. That's why we decided to show you the price. At the same time, when we look at our portfolio, we are not selling beer or selling a commodity, right? Chocolate or something like that, but we have a portfolio which we manage. So we can clearly see a trade up towards seasons, towards products with a higher sales per kilo. That's why we think it's more accurate in the current environment to combine volume and mix. It gives better information. And that is -- as long as we have this high inflation environment, I think surely it makes sense to continue doing that.
That's very clear. Thank you. And just one more. So on Russia, if I understand correctly, if I look at FY 2022 like-for-like of 10.8%, it was including the negative impact of Russia. And now the headline 10.1% doesn't include it. Sorry if I -- am I correct?
Yes, correct. And we took it out, number one, everybody else reports as we do and number two, Russia is now zero this year, the base is zero, right? Last year, we still had something now based from 2021 and in 2022, now in 2023, it is zero, right? That's why we decided to disclose it. I mean you can see it there, right? But yes, the organic growth of 10.1%. If you excluded Russia, would be around 9.5%. If you included Russia, it be 9.5%. But I think it's the most accurate way of reporting it because it's zero this year.
And the like-for-like guidance is on ex Russia basis 7% to 9%?
Correct.
Very clear. Thank you.
That was -- any other questions? Or was that your question?
We have a follow-up question from Patrik Schwendimann from Zurcher Kantonalbank. Please go ahead.
Patrik Schwendimann from Zurcher Kantonalbank. Just three quick follow-up questions in terms of the net financial results. This was better than expected. What is your best guess here for the full year? Then second question, net working capital. what's here, your best guess for the full year increase as you have seen last year?
Sorry, can you repeat the second question? Sorry, because I was just talking to my colleagues here quickly. Sorry. The second -- I got the first question. Can you ask the second one once more?
Sure, Martin. Net working capital increase, what is your best guess for the full year, a similar increase as we have seen last year or more limited increase? And last question, we have seen this Russia impact in H1. In the second half of the year, there won't be any impact? Or was there still some sales in the second half of last year in Russia? Thank you.
Yes, here we go. So in Russia, the Russia impact in H2 is stays nothing, because we didn't have any sales in the second half last year. So from that viewpoint, you can ignore that. In terms of the financial expenses, that was the other question from you, right? And then the net working capital. On the net working capital, what I can say is it depends a lot what happens with inventory, right? I mean we have it up massively our cocoa bean inventory because it is risky not to hold enough inventory at the moment, right, because there are certain issues with the crops in West Africa. I mean that's also one of the reasons why we basically saw the increase in the prices, right, in the futures prices.
So we have -- really have quite much heavier cocoa inventories or along cocoa inventories. And it depends how we assess over the next six months. Therefore, it's really a bit a challenge to give you a net working capital forecast for the full year. What I can say is in terms of free cash flow, our midterm goal is, of course, to be double digit as a percent of sales for free cash flow. Depending on what we do on the cocoa beans, we may be slightly below the 10% for this year. It really depends on that. But for the midterm, I'm very optimistic that we will get to the double-digit free cash flow to sales ratio.
In terms of net financial expenses, we expect them for the full year to be slightly worse than last year, actually, by about CHF4 million because hedge costs go up because of the higher interest rates and especially the ones in -- outside of Switzerland, right? So that's the key driver of it. So some of the benefits we saw in the first half we won't see in the second half.
You said CHF4 million worse than last year for the full year?
Roughly, yes.
Okay. Perfect. Thanks a lot Martin.
Thank you.
We have a follow-up question from Warren Ackerman from Barclays. Please go ahead.
Hi, Martin. It's Warren here again at Barclays. And again, apologies, I missed the start of the call. You may have gone over this, but is actually happening on the ground in West Africa and particularly the Ivory Coast because it looks pretty chaotic from what I can see with these torrential rains flooding a lot of the farms and the fact that the Ivory Coast is sort of making certain restrictions around futures contracts. I'm just sort of thinking about this from a kind of a supply shock point of view. We are sort of seeing processing across different factories way down.
So are you able to shed some light as to what's happening in terms of availability of supply because we're also reading about multi-decade lows in inventories. Are you going to be able to get a hold of -- can you just maybe talk about your visibility on supply and what you may be seeing on the ground? Thank you.
Yes, absolutely. I was in Ghana in November myself. I mean definitely, there are few things going on. I mean, first and foremost, in the last few years, we had bumper crops, right, in West Africa. So super high crops. It was always clear as in all agricultural crops, you normally have kind of peaks and troughs. So it's kind of not that unexpected that we see kind of a downward trend with regards to the supply situation. It always depends on the weather pattern. As you may have heard, El Nino which is a better phenomenon in the Pacific Ocean in front of Peru and Ecuador comes into play also every 10 years or so. And there is now La Nina kind of a possible El Nino, which means that seasonality temperatures go up by a few degrees, right? And that leads to more rainfall in Peru and in Ecuador, but leads to normally actually -- well, it always depends on how it shapes out. But normally, in the past, if you had this El Nino, it led to less rain in West Africa. It led to kind of, therefore, less than ideal rainfall pattern, and that led to a lower supply.
And at the same time, it depends a bit what happens with the grindings, right, what happens with the demand. In the last couple of years, we had a higher demand and supply will be -- that would be also the case for 2023, 2024, we will see. And because we had a higher demand than supply, yes, the stock level at the moment overall, right worldwide compared to the crop is at about third, about 33%. I mean, still 33%, right? So it's still a cover of about four months. Overall, so it's not a problem, right? I mean, I'm not that worried about that. But still, we want to be on the safe side, and we want to go long on cocoa beans just to be sure that we don't have any disruptions. And I'm quite happy that we -- that even if, of course, from a pure financial point of view, free cash flow gets a bit impacted by it.
But we believe it's a temporary thing and that will correct itself over the next three years again. So I'm not overly worried, but -- with regards to the supply situation. But of course, this led to a huge price hike. I mean, 40-year high in London. -- that is definitely unprecedented, and we will see if this goes further up as well. I mean it may be speculators also came into this market. It's a market that is not so liquid compared to coffee or oil. So if speculators come in, it also drives the market further up. So yes, I mean, we are watching the situation. We are we have had a good coverage, that's good news, right? I mean, physically and also for future point of view, that's why you see relatively okay material cost as a percent to sales of 30% in the first half. But yes, it's something to watch.
So when would you need to kind of re-hedge or when -- so just to be clear then on your inventory position, it's good that you've got long cocoa beans, but how much -- how do you have sorry…
We don't disclose that because we don't want to tell our competitors what we do. So yes, but look, we -- as you have seen, we are confident to increase our guidance for the full year to 30 to 50 basis points. So at least in the short run, it will not impact us. But yes, from 2024, as I mentioned, as most of the players in the chocolate industry, there will be a lot of cost pressure from the cocoa and most likely, we may see additional price increases coming.
I'm just slightly surprised that you're saying that pricing is going to be lower next year than last year when it seems like the cost pressures could be higher. Just I'm not sure how this would be.
What is lower? And what is low, so I didn't get it -- what is lower?
You're saying that the rate of price increases will be lower in 2024 than 2023. But then it seems to me like the actual costs given cover potentially could be even higher in 2024 than 2023. So why would the pricing be lower year-on-year?
Yes, it depends because cocoa is not the only one, right? We also have milk, we have sugar, we have packaging. We have energy. We have wages. I mean, there are other things that impact our overall cost of goods. So it -- I mean, milk prices have come down, package and material costs are rather on the down trade. I mean it's really sugar and cocoa that remains high. So it's kind of a mix of different things. Some have decreased, but others have steeply increased. So the net of it may mean for many that hopefully, it will be a bit less.
But look, that's status today, right? If the cocoa bean market increased another 20%, then we have to release it, and it's a very dynamic market. So look, we have to absorb it and then we have to make the right decision.
Okay. Got you. Thank you, Martin.
Thank you.
There are no more questions at this time.
Great. So we are done. Thanks a lot. It was good probably to have us shortly a slightly shorter script, so there was a bit more time for questions. Thanks to everyone once more for your questions, and have a wonderful day. Thank you very much.