Danone S.A.
Q2 2022 Earnings Call Transcript

Published: 27 Jul 2022

[Mathilde Rodie:]

Thank you. Good morning, everyone. Mathilde Rodie speaking, Head of Investor Relations at Danone. Thank you for being with us this morning for Danone's H1 release call. I'm here with our CEO, Antoine de Saint-Affrique; and our CFO, Juergen Esser, who will go through some prepared remarks before taking your questions in the second step. And before we start, I draw your attention on the disclaimer on Page 2 related to forward-looking statements and the definition of financial indicators that we'll refer to during the presentation. And with that let me hand it over to Antoine.

[Antoine de Saint-Affrique:]

Thank you, Mathilde and good morning, everyone. Welcome to our half year 2022 conference call. I must say I'm delighted to be with you today for what is a first step in our Renew Danone journey. It has been only a few months since we held our capital market event. Only a few months but as you can imagine much busy months, where Juergen, myself, the executive committee and all Danoners have been moving to the front foot. We have focused our efforts on navigating what is an unprecedented environment, deploying consistently the agenda we shared with you in Evian

[Juergen Esser:]

Thank you Antoine, and good morning to all of you. I hope you are all well. Let me suggest that we go immediately into the financial review starting on page number 9 to share with you the key drivers, which made up for the net sales like-for-like growth of plus 7.7% in the second quarter. From a geographical perspective, Europe delivered another quarter of solid mid single-digit growth consistent with what we posted already in the first quarter. North America as well as the Rest of the World both were accelerating versus the beginning of the year with strong performances across all categories with North America more specifically posting a stellar performance this second quarter with a well-balanced price, mix and volume contribution. The growth momentum in China, North Asia & Oceania did as expected normalized after the first quarter of this year with the China Early Life Nutrition baseline now sequentially becoming more comparable. However, our China zone remained in solid growth also this quarter despite Chinese city lockdowns affecting our Mizone business. Looking at it from a category perspective, EDP delivered a strong quarter of price-led growth, thanks to both dairy and plant-based, while Specialized Nutrition continued its strong growth momentum with our Aptamil brand winning share in many markets. Our Waters business delivered another quarter of strong performance and is now back above 2019 levels in many of our geographies. Moving on to our classical sales bridge on page number 10. You can see that this solid like-for-like performance of plus 7.7% in Q2 was led as expected by price at plus 6.8%. This said, volume and mix contributed again positively up plus 0.9% compared to last year, a solid contribution from product mix. While volumes remained resilient in most markets and the very similar dynamic as experienced in the first quarter of this year. On a reported basis, we benefited this quarter from a positive ForEx impact of plus 6%, mainly thanks to the appreciation of the US dollar against the euro but also of the British pound and of some other Asian and Latin American currencies. We also recorded a slightly negative scope impact of minus 0.5%, mainly resulting from the combined effects of the integration of Follow Your Heart and the disposal of the Vega brand both in the North American zone. All-in-all reported growth stood at plus 14.5% for the quarter, bringing our quarterly net sales to roughly €7.1 billion, up from €6.2 billion in Q2 last year. Let's now have a look at the performance of each zone in more detail starting with Europe on page number 11. Europe maintained a solid mid single-digit performance in the second quarter and as a result delivered for the first half plus 5.4% like-for-like growth with a positive contribution from volume and mix of plus 1.6% and price of plus 3.8%. Recurring operating margin in Europe was down minus 199 bps on the period reaching 13.1%. This decline reflects the impact of high COGS inflation, which could not be fully offset in this first semester despite a step-upped productivity as our pricing initiatives benefited our P&L only starting from the second quarter. From a category perspective, growth in the second quarter was led by Specialized Nutrition and Waters. Specialized delivered high single-digit like-for-like growth with a very good performance of our Aptamil brand and solid growth in our adult nutrition portfolio. Waters was also up high single digit, confirming its sequential recovery while market shares remained resilient especially for the Evian brand. And finally EDP delivered another soft quarter resulting in a low single-digit growth in this first semester. The picture is contrasted country-by-country with a good performance especially at the dairy portfolio in the UK and Poland where we were able to better leverage our differentiated portfolio with brands like Actimel or Activia. On the other side, the situation is more challenging in a number of other countries like Spain, where we have as you know a more structural challenge and where our teams are working hard to design a new and more powerful portfolio strategy and consistent execution plan. Moving on to page number 12 and North America. We delivered another strong quarter, driven by both countries, the US and Canada and are even accelerating compared to the first quarter, resulting in a plus 7.2% growth in the first half of the year. In Q2, as in Q1, this performance was achieved with positive contribution from all aspects, price, mix, as well as volumes. This strong growth was driven by continued momentum across categories and brands. In EDP, coffee creamers, yogurts and plant-based, posted high single-digit competitive growth. In particular, the Oikos PRO and Oikos Triple Zero ranges continued to deliver strong competitive growth, supported by the upgrade of our formulas, our packs and the marketing mix and a solid share execution. Next to Oikos, Activia growth remained strong this quarter, building on the continued consumer interest in immunity benefit and building on core portfolio renovation, a successful A to Z campaign and strong execution. In the coffee space, our International Delight and SToK brands delivered another quarter of strong competitive growth. And finally, in Specialized Nutrition, as Antoine was mentioning, our teams focused their efforts on actively addressing the baby formula shortages in the country. While nonmaterial to our company, this is a great illustration of our ambition into action. Recurring operating margin in North America registered at minus 235 bps decrease to reach 8.1% for the first semester, as we faced some productivity initiatives to the second semester in the context of challenged supply chains. Recent results are indeed encouraging with service levels going up, yet there is still a lot to do to go back to pre-COVID levels. Moving on to page number 13 to China, North Asia & Oceania zone. This zone closed the first semester with revenues up plus 8.3% on a like-for-like basis led by both, volume and mix at plus 6.1% and price at plus 2.2%. Margin reached 32%, up 240 bps, driven by a strong net sales dynamic and the favorable product mix, offsetting the inflation. Let me enter into a few more details of the Q2 performance, starting with China. Infant Milk Formula posted mid to high single-digit growth in a category which is progressing along the lines which we shared with you at our CME. Importantly, we have maintained competitiveness in the market with continued resilient market shares on both Domestic and International Levels. Chinese label grew double digits, while International Labels saw continued growth in our indirect or we can also say uncontrolled channel, which is now representing less than 15% of the segment revenues. The Aptamil brand registered another good quarter and it's worth noting that it was ranked number one brand, as Danone was ranked number one company of its sector during the 18th of June shopping festival last month, the second largest shopping festival in China after the 11

[Antoine de Saint-Affrique:]

Thank you, Juergen. And moving to page 23. We obviously feel good about the results of the first semester, but I want to reiterate that we are only at the start of our new journey. We want to remain humble and realistic. There are still lots to do. Expect us together with the executive committee and all the Danoners to remain focused on the consistent execution and the delivery of our agenda. It starts by making our portfolio more competitive, adapting our ranges and mixes to the new environment and getting them even more ready than today for a potential recessionary environment. We are accelerating the deployment of our new growth management across geographies, but we will also work systematically at strengthening the equity and the relevance of our brands. This is where the reinvestment plays an important role and why we are committed to it. In parallel, we will continue to step up the quality of our execution across the value chain. It is about securing quality access to raw and packed materials as much as it is about efficiency in our factories and in our warehouses, but it is also about bringing more rigor and discipline in consumer-facing activities be it in the development and utilization of our marketing assets or in the quality of our on-shelf execution. Finally and importantly, as Juergen alluded to, we will keep the fundamentals of our business making it future-ready. We already started reinvesting in IT and data, but expect us to further upgrade Danone's capabilities in particular in operations and R&I. Let me conclude with once again a message of focus and consistency. Focus on the task at hand and consistency in delivering on our strategic agenda. We closed a strong first half of the year, but expect to -- you can expect us to remain fully mobilized and focused. We are only at the beginning of our Renew journey and there is still much we can do to bring Danone where we want it to be and deliver both on our purpose and on our business ambition. And with that let me hand it over back to Mathilde for the start of the Q&A question.

[A - Mathilde Rodie:]

Thank you. So the first question today is from Jon Cox, Kepler. Jon?

[Jon Cox:]

Good morning. It looks so far so good. Antoine, a couple of questions for you. Just in terms of the guidance for the year 5% to 6% that clearly points to a slowdown in the second half of the year, assuming that the pricing is going to remain elevated, which given you've only just started to push through the prices in Q2 that should be the case. Are you assuming volumes will be negative and -- volume mix will be negative in the second half of the year for that guidance? Second question just in terms of pricing, you're starting to see in the market in some of the supermarkets anyway big differences between branded and non-branded so private label, discounters, et cetera. What are you seeing there in terms of market dynamics? Do you see any concerns you're losing market share at all given all of the -- that -- the second step shall we say of this whole economic cycle we're in where maybe people do start to really aggressively down trade into different areas? And then just the last question on the cash flow, free cash flow. It looked like a miss compared to consensus. You talked about higher inventories. Do you think that will unwind by the end of this year? And so as a result the consensus €1.7 billion free cash flow can last, or do you think it's going to take probably a couple more semesters for that inventory rise to unwind? Thank you.

[Antoine de Saint-Affrique:]

We'll do a duet with that on -- with Juergen. Let me start with pricing because pricing then as a consequence otherwise. We see -- actually we see very different dynamics on different markets. I mean, if you take markets like Russia or Brazil, we see obviously a huge volume elasticity to pricing. You see places like the US or France, you see limited to no elasticity. You see more of it in Spain and Italy. So actually it is a clearly a patchy situation. In the same way, depending on whether your brand is highly differentiated Actimel, Oikos, Aptamil or less differentiated you see very different reaction to our pricing and very different elasticity. So, it is to be honest a bit of an unknown quantity given the broad spectrum of reaction. We prepare for the worst. So, we are extraordinarily disciplined in revenue growth management. We look at our portfolio and we prepare our portfolio in actually a very systematic way to a tougher environment looking at -- I mean the strength of the categories, the strength of the brand, the strength of the portfolio, the sensitivity of some consumers, and doing it region-by-region to make sure that we have a portfolio ready in case things are getting tougher. So, a bit of unknown so far so good, varied reactions depending on the regions. And us focusing essentially on making sure that our portfolio is in the right shape to face an environment in case it becomes worse. And the guidance is reflecting the combination of both the good start of the year, but also the uncertainty are moving forward. So, it's the best of our knowledge.

[Juergen Esser:]

And on the cash Jon, I think the underlying cash generation is very strong for our business also in the first half of this year. As we discussed in Q1, we have been phasing some of the Local First-related cash-outs from Q4 last year into Q1 this year. So, we had to digest this cash-out. On top of that yes, we have consciously taken the decision to increase some of our inventories on the raw materials and finished products and that's paying out. That's paying out because we see that we are doing better in terms of supply chain. We're doing better in service levels especially in North America. And I believe that moving forward that we are going to recover this increased inventory level sequentially. You were talking about how I feel about the consensus which is out on cash and I can tell you that I feel good about it.

[Jon Cox:]

Great. Thank you.

[Mathilde Rodie:]

The next question is from Bruno Monteyne from Bernstein.

[Bruno Monteyne:]

Hi. The reinvestment level of 10 basis points that you're showing in the bridge, now the 10 basis points it seems remarkably small. Is it where you wanted it to be in the first half Antoine, or is it simply the rate of COGS -- stops you from going any faster than that? And the second one is if you look at the US with the problems that the Abbott product withdrawal has had and you're able to supply some more, do you see -- in your discussions with politicians in the US, do you see any challenge at the WIC system change which would allow you to take a stronger position in the US in Infant Nutrition? Thank you.

[Antoine de Saint-Affrique:]

So, Bruno on the investment level, you need to deleverage actually. Don't forget that we've stopped absolutely all investments in places like Russia or Ukraine. We restarted actually investing in absolute -- more in all the geographies where we are. We're even going to further accelerate moving forward. So, it's not a matter of COGS, it's actually focusing on where we have the right assets, focusing on where we have the right service, defocusing in the places where actually it doesn't make sense we are committed not to invest. So, it's more the reflection of our choices than anything else, but we are committed to investments as I said and you will see more of it coming forward. So, no ambiguity there. On the US, the only thing I can say is we have been moving forward extremely fast. We have been working extremely closely with the US authorities to help in a crisis that is both a human crisis and a political crisis. Will it create goodwill for us? Well, I hope so because we did a jolly good job. How does this -- or how will this goodwill translate? Well I have absolutely no clue at this stage. But we do the right thing and we try to do it consistently.

[Bruno Monteyne:]

Thank you.

[Mathilde Rodie:]

The next question is from Pascal Boll, Stifel.

[Pascal Boll:]

Yes. Good morning. I have a question regarding the mix effect. Can you give us some more color on volume mix? What was the mix effect for EDP Specialized Nutrition and Waters in Q2? And what do you expect, how the mix will continue in H2. Further, can you give us some more light on market share developments and also for the different brands? Also when we look at plant-based in the U.S., because your examples usually are Evian, but what is with the other brands and...

[Antoine de Saint-Affrique:]

Hey Pascal, I'll take the market share -- sorry go on.

[Pascal Boll:]

No. Sure, go ahead please.

[Antoine de Saint-Affrique:]

I'll take the market share and Juergen will take the mix. Altogether, if you look at aggregate, we are making progress on market share. So direction of travel is not bad. Still we have a number of things we need to improve. So market share actually of plant-based is doing pretty good in the U.S. We are doing very well in Waters. We are doing extremely well in Specialized Nutrition. The picture is patchier in other categories. It depends on countries. And there are still a number of things that we need to improve. So altogether the direction of travel is good, but not every -- and all together as a -- we are winning share but we need to keep improving in a number of places which is why I said the, we focus on solving unsolved issues for a long time. We'll do it thoroughly try to do it diligently but do it for the long-term. So all-in-all on average moving in the right direction, but then with the spread of very good news and the plant-based in the U.S. is actually looking good and things we need to improve. And we will work at improving step-by-step.

[Juergen Esser:]

And on the mix question Pascal, what you have seen in Q1 is consistent with what we have seen in Q2, a strong mix contribution and strong mix contribution in each of the three categories. In Specialized Nutrition because of what Antoine explained before which is that Aptamil is contributing and growing very fast and especially our innovations which we have been putting in the market over the last 12 to 24 months this is definitely helping us to drive product mix in the Specialized Nutrition segment as well as the fact that our Special Pediatrics portfolio is outpacing the total Special Nutrition category. Waters, very clearly small format outpacing large format and we were discussing about the fact that our emerging markets are coming back Indonesia, Mexico with mobility coming back. We have been discussing earlier the fact that we are also growing well in Europe and here we really talked a lot about small format which is really helping us on the mix side. And in EDP, the brands we have been mentioning earlier which is Activia especially in U.S. in the U.K. and a few other European countries, Actimel across all the geographies our coffee creamers our coffee ready-to-drink coffee STōK, our Oikos ranges in U.S. and in Japan all of those are more premium ranges. And all of those are outpacing the EDP category, so that also has been helping us in Q1 and in Q2. And so when you look at that, I think it bodes well for the perspective of the quarters to come.

[Mathilde Rodie:]

Thank you, Pascal. The next question is from Jeremy Fialko, HSBC.

[Jeremy Fialko:]

Jeremy Fialko, HSBC here, a couple of questions from me. First one can you talk a bit more about pricing? Can you talk about kind of how much more pricing you think that you need to implement in order to offset the cost inflation, and also what the most recent price increases you implemented have been? And then second question, could you go into a bit more detail on the EDP volumes? So they were down 3% in the quarter. Can you talk a little bit about kind of where that volume weakness was concentrated and maybe a little bit of an outlook on that for the second half? Thanks.

[Antoine de Saint-Affrique:]

Yeah. So we'll do a duet. We can start with pricing and probably do a duet on the volumes. On the pricing, as you've seen we've taken pricing I think the number is plus 6.1%, in a way that is broad based. The way we look at pricing is much more than pure pricing. You look at, obviously, the increase in your list price. You look, obviously, at the way you manage your promotion. You look, obviously, at the way you cascade your trade terms and the balance of your trade terms. And you look at our pricing, not as a single thing that you apply across your portfolio, but you apply to it the filter of the relevance of your product, the strengths of your product, the channel in which it plays. So it's really in some ways artisanal and science. It's a very, very precise market by market. We have been taking prices extremely fast in the market where you can take market fast and in waves. So you take -- I mean you look at North America, I think, we have over seven waves of increases in different bits and pieces, of price increase. That is alluded by the way the trend is working. In our emerging markets, you can go very, very fast. You do that through the traditional trade. In Europe or in some countries we are in the second. In a number of countries, we are already in the third wave of price increase. And we will keep driving our prices where we think it is to protect our business, but we will do it also in a way that is protecting our competitiveness, because you don't want to price yourself out of the market. Obviously, taking pricing is never a simple discussion. So we have, in some cases, some pretty robust discussion. But we hold our ground when we think we have to hold our ground. So, so far so good. Right mix of driving the pricing in a very sophisticated way and in a way that also makes sure that we don't price ourselves out of the market. Juergen, do you want to talk --

[Juergen Esser:]

Yes. Good morning, Jeremy. On the EDP volume dynamics, as you said, there have been volume mix down minus 3%. Reality is that this is mainly due to the Rest of the World zone. And within the Rest of the World zone, to a -- largely linked to the performance in Russia, where volumes are double digit down. We see also volumes under pressure and this is in consistency with the Q1, I would say, in a few other more emerging markets like Brazil or Turkey. While in the more mature markets, North America and Europe, volumes have been in most areas and in most countries really resilient. Obviously, in Europe, in a few countries, like in Spain, a bit more under pressure. But, overall, it's really due to what we are seeing in emerging markets.

[Antoine de Saint:]

Yes. This being said and Juergen said it in his remarks, there are countries where we still need to do a groundwork to upgrade our business and we discussed about Spain. We are -- certainly, we can do much better. Parts of the portfolio in France, parts of the portfolio they are doing very well, but a part of the portfolio that we still need to improve. And it's going to be a journey it's not going to be resolved overnight, because of the quality of the mix, the quality of the positioning. And we will do that properly.

[Jeremy Fialko:]

Okay. Thank you.

[Mathilde Rodie:]

Thank you. The next question from John Ennis, Goldman Sachs.

[Antoine de Saint:]

Good morning, John.

[John Ennis:]

My first question is on the Specialized Nutrition division. I guess, the volume mix of 9% was much stronger than a lot of people expected. Can you maybe help allocate a bit more of that by country or region? And was there anything notable that we should be aware of from a phasing perspective? And then related to that, do you need to take more pricing in this segment or do you expect volume mix to really be the main growth driver for the remainder of the year? And then, my second question is, again, coming back to EDP. Can you give us the breakdown between plant-based volume mix growth and traditional dairy volume mix growth? And, I guess, I'm particularly interested to hear how your Plant-based volume developing in the US, given some of the supply chain challenges you've called out in the past. Thank you, very much.

[Antoine de Saint:]

So, we'll do again a duet on both questions. On the Specialized Nutrition, the key message is, it's a broad-based growth. So we are -- I mean, we are doing extremely well in China. But we're also doing very, very well in all other geographies and that's, I think, an important message. It is a pretty balanced growth. Juergen on Specialized...

[Juergen Esser:]

Now on Specialized Nutrition to the point of Antoine, it's really not only about China where you have seen that we have a very solid performance and now on a much more comparable base, but also in Europe where we have seen in many countries signs of stabilization even the category returning to soft growth. In that environment you have seen that Aptamil is really posting a very good performance, including winning shares in many of its markets. And here the additional A&P we have been putting behind the campaign since the beginning of the year is really paying back. And so -- and at the same moment I think that's also important. We are boosting the Special Pediatric solutions across also all the categories. So there's absolutely no phasing effect. We are very carefully managing stocks. And that's true for China as well as outside of China because this is the way to manage price, the way to manage margins.

[Antoine de Saint-Affrique:]

We're choosing our performance. On EDP and specifically on plant-based, I'll give you a qualitative answer because as you know we don't go to that level of detail not because we don't want, but because also lots of our competitors are not publishing there. And I don't want to open the -- everything I mean to the eyes of the market. In North America, you've seen we delivered a good growth. So things are going in the right direction, but we are not at the end of the journey. I mean, we have a great campaign with milk of the land on almonds. We are in the process of resetting other parts of the ranges. The adjacent segments are continuing to grow very nicely. So all-in-all, I mean there is a good momentum, partly helped by the way by a competitor that was a challenge so we need to also acknowledge that. But the direction of travel is good, more to do with the restage of oats that is coming. Europe, the picture is more patchy by brand by segment by country are doing very well in parts of Southern Europe more challenged in some of the historical countries. The market is -- post-COVID, which is one thing. I think, the second thing which is probably less apparent to you is we are also working at our portfolio and we are rationalizing a number of things that are looking good from a top line standpoint, but not really making any sense from a value-creation standpoint. So there we are working at both ends. On the one hand making -- I mean our business more competitive in driving the market. But on the other also are cleaning the house and rationalizing our portfolio so that we keep creating value in that category.

[John Ennis:]

Okay. Thank you very much.

[Mathilde Rodie:]

Thank you. The next question Celine Pannuti from JPMorgan.

[Antoine de Saint-Affrique:]

Good morning, Celine.

[Celine Pannuti:]

Yes. Good morning. Good morning, Antoine, Juergen and Mathilde. Thank you for taking my questions. So my first one is on China Specialized Nutrition. Has there been any impact from lockdown that you benefited from? And then, I think, one of your main competitors is having -- is cleaning up inventories and been talking -- warning from -- about a weak market. So can you talk about whether you've done quite well? Are you gaining share? Are you happy with your inventories and overall with your stocks there? And what do we expect to see from the changes to regulation if you are ready for that I think, starting next year? My second question is on COGS inflation. You reiterated mid-teens. We've seen some of the price point for aluminum even some of the milk prices rolling over. Can you talk about whether that could be a help at some point in the second half or is it more of a 2023 numbers? And then lastly, coming back I think to Jon question he asked you about the volume. You were quite -- you were cautioning about volume mix potentially being negative for the year. H1 is ahead. Can you update us on what you expect for the year now?

[Antoine de Saint-Affrique:]

Good. I'll take the first one, Juergen will take the COGS and one of the two will take the volume mix. On China listen on lockdown we didn't benefit from lockdown. The only way we really benefited from lockdown is more from an image standpoint because we're in a place like Shanghai was totally locked down. So people were delivered foods by their government at the bottom of their housing. We managed to get into the basket and the team was incredibly creative to find ways to make sure that Aptamil was reaching the people even during the time of lockdown, which got us quite a nice publicity on the social networks in China. So not material from a volume standpoint, but are keeping building the image of us being a contributor to the health of China and to the people in China. On your question of one of our competitors and inventories, you'll recall that when we described what we believe to be the strength of our business in China, we talked obviously about the strength of the brand we talked obviously about the strength of science. We talked obviously of the fact that we are a digital-native company with extremely advanced tools speaking to the Chinese. We talked about being a Chinese-embedded brand. But one thing we talked about as well is the discipline by which we manage inventories. It links back to our ability through our data mining intelligence, artificial intelligence to be very good at predicting the market. But it goes also with an iron discipline in the way we manage the different channels or the price structures and all the rest of it. And the result of that is what you see in the performance which is a good competitive platform that's based on a very healthy base. So actually, our ability to manage channels and pricing is one of our competitive advantages.

[Juergen Esser:]

And good morning, Celine. When it comes to COGS and inflation, it's true that we closed the H1 exactly in line with what we thought, exactly at mid-teens level and with the drivers packaging milk and transportation. And it's true that we are monitoring very closely the situation which is extremely volatile. Now you're right that some of global commodities and also the transportation in the US is showing recently some signs of stabilization. While on the other side -- this on one side is still very volatile and we see that some other indexes like on energy gas or cost of labor are continuing to rise. So net-net, uncertainty remains still very high. It's very complex to make a precise forecast. And so therefore, we are maintaining our best estimate for the -- to be a cost inflation around mid-teens. And this is the way we are animating our business. In front of that, we will steadily focus and agile focused because we step up further productivity in the H2 versus the H1 and H1 has already been record. Focus, as we continue to drive the product mix very hard, as we describing earlier on this call. And at the same moment agile in the way we manage pricing and promotions doing further a round of pricing if the inflation should continue to rise and to promote back. In the moment, you will see inflation plateauing, but everything with the intention, I would say to protect the healthy financial equation as much as leveraging strong competitiveness. And this is also linked to the way we have been articulating our full year guidance in terms of top line, because obviously the way volumes are going to behave in the year to go will be a direct consequence of the way -- will be executed which really is a direct consequence of the way inflation is going. So there's a lot of uncertainty over the next couple of quarters and semesters. And this is why we have articulated the guidance taking stocks of the first good six months of the year and staying very consistent in the way we are looking into the midterm.

[Antoine de Saint-Affrique:]

Celine, that's why we prefer midterm guidance, not either quarterly or half year guidance. And as you know this is where we are heading to.

[Mathilde Rodie:]

We have one last question it's going to be David Hayes from Societe Generale.

[Antoine de Saint-Affrique:]

Hey, good morning, David.

[Mathilde Rodie:]

Hello?

[David Hayes:]

And this is just the half one. Just following up. Hello. Can you hear me?

[Antoine de Saint-Affrique:]

Yeah.

[Mathilde Rodie:]

Yeah.

[David Hayes:]

Yeah. Sorry. Two and half. Just quickly following up on Celine's question on China inventory levels. Clearly, you're saying you're more on top of the inventory you feel . But do you see any risk going into the second half that that leading competitor is going to have to discount quite aggressively to try and rebase its inventory levels? Is that something that we should be thinking about or do you not think it affects you? And then the two questions are just one on portfolio management, it's gone pretty quiet on that. Is that still ongoing review? Is anything specifically that you're looking at in terms of what needs to change in the portfolio? And then I guess kind of related you talked about rationalization of brands and sales lines. Is that something that's been ongoing in the first half, or has that had some volume negative effect that starts to fall away through the year, or is it very marginal still and doesn't really make any impact on the numbers? Thanks.

[Antoine de Saint-Affrique:]

So, I mean, in China, we are -- I mean, we don't see something somewhere coming when it comes to competitors managing inventories and all there is to it. I mean, we keep focusing on the relevance of our brands driving our mixes doing things in a disciplined way. Normal course of competition. So I don't see people starting to hurt us that way. Portfolio we haven't been so quiet actually. I mean, we have announced what we were doing with our Danone Waters in Argentina. We announced the next stage in our menu. So it kept us actually quite busy. And obviously, we are busy on continuing the full work we said, we would do. So not only we are working, but we have been delivering actually in May and June and we will keep. So, there the things are moving in a disciplined way and we announce things when we have to announcing. Juergen, do you want to take rationalization?

[Juergen Esser:]

Yes. Rationalization, I mean, we already announced a couple of quarters ago that we were cutting the tail and we have been quite disciplined in organizing that. I would say the supply chain changes we had over the last quarter have reminded us on the importance in doing that. And then we talked today about the fact that service levels in the US are largely bouncing back. It's also thanks to the fact that we have been really refocusing on what we call our hero SKUs. So in that sense we are continuing on that road, which also helps us to be extremely disciplined in the way we are managing innovations and the rotations in our SKU portfolio. We are doing that all with a mindset obviously to maintain or increase our share of shelf. And this is the way our teams are animating that project and so far so good.

[David Hayes:]

Thank you.

[Mathilde Rodie:]

So, with that we conclude the Q&A.

[Antoine de Saint-Affrique:]

So, once again, thanks for joining us a bit earlier. I know a number of you have to rush to the next one. So, good luck with the rest of the day. I'm looking forward -- we are looking forward to seeing you all in the coming days and weeks. And if not enjoy rest and summer break. As we said, we are happy with a strong start of the year, but we remain focused and disciplined. It's only a first step and there is still lots we need to do and we will focus on that moving forward, and on that good day everyone.