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Edited Transcript of WES.AS earnings conference call or presentation 19-Jul-19 8:00am GMT

Half Year 2019 Koninklijke Wessanen NV Earnings Call

Utrecht Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Koninklijke Wessanen NV earnings conference call or presentation Friday, July 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christophe P. J. Barnouin

Koninklijke Wessanen N.V. - CEO & Member of Executive Board

* François de Gantes

Koninklijke Wessanen N.V. - CFO & Member of Executive Board

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Conference Call Participants

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* Alan Vandenberghe

KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst

* Anna Patrice

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Fernand de Boer

Banque Degroof Petercam S.A., Research Division - Research Analyst

* Reginald Leonard Watson

ING Groep N.V., Research Division - Research Analyst

* Robert Jan Vos

ABN AMRO Bank N.V., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for holding, and welcome to the Wessanen half year results 2019. (Operator Instructions)

I would now like to hand over the conference to Mr. Barnouin. Please go ahead, sir.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [2]

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Good morning, everyone. Happy to present you today the H1 result for Wessanen. I'm joined today -- I'm here today with François de Gantes, our new CFO. François joined us mid-May, was the CFO of Naturex and will be appointed as Executive Board member officially on the EGM of the 29th of August. Now if I come back to the H1 result on Page 2.

The fundamental -- the key information is that we have been growing own brands, like, 0.5% on a like-for-like basis. We have as well the addition for EUR 1.4 million of an acquisition, which is Abbot Kinney at the beginning of the year. And we have a little positive impact, quite marginal, of EUR 0.4 million, and we have, as well, a further reduction of the private label and distribution business.

In Page 3, if I focus on the Q2 now. In Q2, we have a better result in terms of growth. Our own brand like-for-like are growing plus 4.4%. It was minus 3.2% in Q1, and as well, a further reduction of private label distribution business, no impact on currency.

If you go in Page 4, in the EBIT margin development. If you go to the orange line, which is 2018 and '19 first half, we are now at 10.4% in H1 versus 8.7% a year ago. It's mostly driven by phasing of A&P, meaning, A&P that we are going to spend in the second half versus the first half. These always have a little volatility, depending on our activity plan on the phasing of A&P. That explains the difference.

I'm going to give you more color in term of our own brand, growth and activity now as of Page 5. Important for us, we have on Bjorg, in Page 5, a good Q2 balancing a weak Q1, and that's leading for -- to a small growth in H1. We have now a new campaign and more promotional events. Clipper has been continuously growing at double digit in Europe. Even if we have been affected in the U.K., the total of Clipper is growing double-digit all over Europe and as well as in international markets. But there, which is our bond in organic shops in France is going down out of, let's say, a channel slowdown on some external factors.

If I go to Page 6. Alter Eco, which is our own brand in organic and fertile coffee and chocolate, is doing very well and continues to grow. We have a very, -- we have a decent and strong recovery in the U.K. On the back of Kallo, which is very good news for us because the U.K. is quite important for us. On the contrary, we have a negative development of Isola Bio in Italy because of the specialized tide shrinking.

If I go to Page 7. We have growth of Allos, our main point in HFS. So we have the channel of organic shops in Germany, which has well adjusted now to the development in supermarket, which is now back into more -- with the high growth, and we have good result on Allos that's based on key innovation and activation. Zonnatura, which is our (inaudible), is declining, to be honest, with less support on our side. And Abbot Kinney, which is our last business that we acquired, has been launched all over Europe and is growing double digit.

Now Page 8. You have some example of the key innovations that has been launched in Bjorg in Q2, generic, helping the brand to regain growth.

Page 9. You just have a summary, the tagline of our new TV campaign, which is aimed at proving that Bjorg is more than organic.

Page 10. You have an example of what we mean by strong activation in France and stronger (inaudible), which is even better than that, more shopping shop.

Page 11. You will have some example of our key innovation on Allos, which has made the success of the brand.

And Page 12. You have some IDs of old campaign we have been doing all over Europe to support people.

I hand over now to François on the financial review.

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François de Gantes, Koninklijke Wessanen N.V. - CFO & Member of Executive Board [3]

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Okay. Well, good morning to everyone, and thanks, Christophe. So I would like to outline on the financial side, so on Page 14, 3 key elements. So one is exactly what Christophe mentioned, basically on EBITE, an improvement or better performance on EBITE, based mostly on the phasing of the A&P, which is going to be higher in the second half of the year. On the second part, it would be on the line of the exceptional items. As you remember, last year, we booked some impairments on Gayelord Hauser. And this year, we have only 2 key elements that we wanted to mention. It was one, the disposal of a piece of land in France for a positive of EUR 1.7 million, and the second one is linked to the cost incurred based on this -- on the offer, on the public offer that is ongoing. And then the third element, I would like to outline is basically the effective tax rate, which is stable at 30%. And just as a reminder, the tax rate is based on the average of the local entities -- of the local -- of the average rates of the local entity.

Now if you go on Page 15, the net debt, basically, net debt development. So we started with last year, I mean, at the end of December, with a debt of EUR 48 million. And basically, if we compare apple-to-apple, we would end up with a net debt of EUR 41.4 million this year, because as you see, we have included the IFRS impact in the last column of the EUR 21 million, and out of those EUR 21 million, there was EUR 19.7 million that is based on this IFRS 16 treatment. The other 2 things I would like to outline is basically the payment of dividend of EUR 14.7 million (sic) [EUR 10.7 million], which basically represents EUR 0.14 per share. Then the other thing is the good performance of the operating cash flow since the beginning of the year.

Now if you go to the following page, on Page 16, it's just a reminder of the guidance that had been given at the beginning of the year. So basically, overall, we confirm the guidance that we had. So we expect a low-to-moderate growth. And just as a reminder, low to moderate means 1% to 3% on the own brands. Then the EBITE is expected to be in the range of 8% to 9%. So that we confirm. Tax rate around 30% is still in line with our expectations, and the overall capital expenditure would be around 10% to 12%. Of course, the other elements are also confirmed. So no surprises, basically.

So now I hand over to Christophe for the slide.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [4]

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We would like to give you -- to finish this call and before the question, just a quick update on the current public offer. So you might have seen that the offer has been formally launched on 11th of July, which means that the offer period started on the 12th of July and will end on 6 September. The offer price is EUR 11.36 per share, which has been adjusted from the EUR 11.50 to reflect the dividend we paid earlier this year of EUR 0.14. Wessanen, both Supervisory Board and Executive Board, support the transaction, and we recommend the shareholder to accept this offer and to know that the work council of Wessanen have responded with a positive advice to the offer. There will be an EGM on 29th of August, which everyone will be able to ask any questions that they want. And the consortium made of PAI and Mr. Jobson will declare the offer unconditional assuming that the cost -- the acceptance level of 80%, of course, subject to the EGM approving some postclosing restructuring. And that's it. That ends our part. We are now opening the floor to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

There's a question from Mr. Fernand de Boer, Degroof Petercam.

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Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [2]

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If you are reiterating your guidance and you have solid cash flow and a very healthy net debt, I still cannot see why it should be delisted.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [3]

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Fernand, good morning to you. If I look at the micro position in term of growth and the amount of effort I need to do in the next years, it comes back to the recommendation we issued earlier this year. We were welcoming -- we respond positively to the offer that is made to make sure that we have long time ahead of us, to reinvest in many parts of the business, and we will do whatever we need to do on the portfolio to make sure we have a good future.

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Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [4]

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But you are going to lever up to 6x. So you have no financial room to invest. Well, at this moment, you are very, very healthy financially and all the room. So I cannot see it. But okay, I think this is an endless discussion. It's -- so never mind.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [5]

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Yes. So I think we had that discussion together some time ago.

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Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [6]

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I think it's disappointing for those who supported you at EUR 12, EUR 13, EUR 15, even bought at EUR 16, and EUR 17. It's quite disappointing for them. It's okay. They can still decide not to (inaudible).

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [7]

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Look, Fernand, I'm not going to comment. At the end of the day, I've explained that how (inaudible) is detailed in the offer memorandum and then the shareholders, we tender their share or not.

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Operator [8]

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(Operator Instructions)

The next question is from Mr. Robert Jan Vos, ABN AMRO.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [9]

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Maybe the point is to say, but I agree with Fernand. I also have 2 questions. The first one, there's a specific reason because it didn't have the last year, at the half year. Why the working capital investments were so high, close to EUR 10 million? And second, when I look at the last slide, your update on the public offer, the offer period ends on the 6th of September. You have now planned Q3 update for, I think, it's the 18th of October. Is it fair to conclude that you will not issue the Q3 results anymore as a public relations company? Could we conclude that? Those are my questions.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [10]

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Sorry, sorry, I was in mute. Capital investment, we have launched a series of project, but what -- because I have as investment, global investment, closer to EUR 7.4 million and EUR 10 million. So what -- where do you find your -- basically, your number of EUR 10 million?

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [11]

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No, I was referring to working capital.

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François de Gantes, Koninklijke Wessanen N.V. - CFO & Member of Executive Board [12]

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Okay. Sorry, sorry, sorry. Okay. The working capital, it's indeed, EUR 9.8 million of variation versus last year. So basically, you have to start with, on the receivable side, a much higher working cap based on a very high level of sales in the month of May, mostly in Bjorg, which is creating, of course, an inflation. And then the second one, you have a little bit more of inventory. Basically, we had anticipated some of the Brexit impact, and we had overstocked or overput some additional inventory on that side, which is going down slowly. And then on the part of the payables, we used to have very high payables, so that we have reduced to make sure that we would basically be aligned with sustainability aspect that we had, meaning that we are paying a little bit more on time to suppliers. So the impact at the end of June is -- that was indeed, EUR 9.8 million, but what we expect over the year is to have it more seasonal impact than anything else.

And the second question that you have is on Q3 announcement. So we have left the date, we will be -- we don't know yet depending on the outcome of the process. It may well be that there will be no information, but it may well be that there might be an information on Q3. We will deliver it as it -- I'm not sure on how that process is going to completely end up. We will be just -- we would be preparing everything like if we were going to communicate on the 18th of October. We don't know yet, but we will do as we shall do. And we are preparing, in any case, something so that we might communicate. So that totally depends on the outcome and closing mechanics of the offer.

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Operator [13]

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The next question is from Anna Patrice, Joh. Berenberg.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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I have a few questions. First question is on the

(technical difficulty)

reiterated the guidance for the full year. But just to understand, how do you see the shop development at the larger deals in France? Are you happy with the shop allocation? Q3, you had very easy comps, so Q3 should be quite good. So it seems like there could be also, in theory, if you are regaining market share at the shelf that there could be upside potential in the top line growth this year? That's the first question.

Second question, on the margin development, you're saying that most of it was because of the low A&P. So you have EUR 5 million better earnings for EBIT development. What was the decrease in A&P? And is it structural? Or is it just a timing impact? And you expect to spend EUR 5 million more in the second half of the year? And it will bring me also to the full year guidance of 8% to 9%, because if you were at the low end of your guidance, it implies that H2 profits should decline by more than 40%. So what do you see as a driver behind such a strong possible decline in profits in the second half of the year. And then for the time being the last question, if I look at the Page 17 of the presentation, you're saying that the offer unconditional subject also to approving post-closing restructuring. What is this post-closing restructuring?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [15]

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Good morning, Anna. The -- if I am happy with the current trading, I would say, not so much because my H1 is still, as your point, 0.8% of own brands. So basically, what we observe is that the market conditions are more or less the same as we had in Q1 and we had in the second half last year. So regarding quarter, you're right, is that Q3, we do anticipate some costs, and Q4, we do anticipate that it will be a very difficult situation and because of very high Q4 last year. So overall, I'm at 0.8% on own brands year-to-date. We have a guidance between 1% to 3%, which shall be there. Okay? And the volatility by quarter might happen. Regarding the margin difference, which is your second question, the A&P, it's -- we are not getting A&P, we have faced that differently, which will have an impact as well on your third question, that's why we believe that 8% to 9% we will confirm that target in term of percentage of EBIT because we are going to spend that money more in the second half, maybe in Q3 instead of early Q2. That's one part explaining why we would go from 10.4% to 8% to 9%. And the second part, which, last year, second half, we cut a lot of cost, not only A&P to make sure that we were delivering profit at the end of 2018. Okay? So which this -- like people, we didn't hire or something that is we are doing to -- this time, we are doing what we shall do. And your next -- your last question was on the post-closing restructuring mechanics. It relates to the fact that in the event where the acceptance level of the offer is above 80% and below 95%, yes, restructuring or liquidation mechanics, which allow the majority shareholder to basically to go from 80% to the squeeze out. Every detail is in the offer memorandum, but that's what it means. That's what it means. It relates to the -- basically, the detail and the techniques on how to move from -- we declare the offer unconditional result. PAI charge the option, we declare the offer unconditional as soon as they cross the line of 80%, and there is this post-closing restructuring measures that allow them in the Dutch rules to go up to squeeze out, basically. That's what it means.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Okay. Understood. And if you can comment a little bit more on what's going on in France? And how your market share or your shelf space is developing in France? Could you give a bit more details here, please?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [17]

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I have in the same situation as last year, basically. I have a lot of push on private label. I'm containing small bonds better than I did last year, but I have a lot of push even further on private labels, which is quite an aggressive part. So I'm still having the same issues that I used to have last year. We're just starting to respond as of the end of Q2, with a new campaign, a new promotion that we'll continue to defend our share.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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And so when we look at the growth in Q2, it means that it's mostly driven by volumes and you still invest in pricing?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [19]

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Correct.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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And are you providing split, how much will be volume? How much will be pricing?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [21]

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On the total French business, I could not. But we have a price erosion of roughly, in France, 1% and the rest would be volume.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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And if you think what you can do differently when you are listed and unlisted? Is it that you want to go more aggressively? Is it that you want to do more M&A and to leverage more? Or what can you do differently to address the issues?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [23]

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Probably, what I will do differently is

(technical difficulty)

on the business heavily month-after-month, quarter-by-quarter. Maybe clean up a little bit my portfolio, even if it has some turnover or erosion. Of course, how I can fill that moat, but it's mostly about regaining growth on

(technical difficulty)

approach a little part of my portfolio.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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And supporting heavily, this is from full promotions or from marketing through...

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [25]

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A lot of promotion and marketing.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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Okay. And then maybe the last question. When you say that there is a lot of things happening, there was a push from the private label. And you said you do have very good cost structure, would it make sense for you to benefit from this push of private labels and also to do more on the private label side or not?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [27]

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I didn't understand the last question.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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Okay. So you have lots of competition from private label, but you also have good production setup, if the private labels want to come to you saying, can you produce for us for the private labels, would it be interesting for you, given that you're already quite cost efficient?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [29]

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Strategically not, because I'm not -- strategically not because it's all about the capital I will invest to do that. And today, I have occupation of -- the occupation height of my old factory is around 80%. So I'm not going to invest more capital to do private label, definitely not. And then in some part, I have a very competitive -- quite competitive sourcing, and in different parts, I have -- I still rely on third-party producer for half -- larger half of my business. So strategically

(technical Difficulties]

I need to push that. Maybe make a selection on the bond that I will need to push and let the other go.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [30]

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Would it make sense to -- instead of selling to the private equity to try to find a strategic buyer, so that you are combined stronger against the private labels?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [31]

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No, the strategy is the same. I need to push my bond. I have decent bonds. My market condition has changed. I need very strong push to regain that growth, and that what matters.

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Operator [32]

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The next question is from Mr. Watson, ING.

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [33]

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My question is a follow-up of Anna Patrice, but I promise not to take as long as she had. It's just where I need to ask for not the activation which we have for Q2. I have actually had the -- I'm sorry

(technical difficulty)

whether this is what we explanation that A&P is like in Q2 and that you will see heavier spend in the second half of the year.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [34]

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Good morning, Reginald. My A&P is weaker than last year in H1. My activation plan are strong in May and June. So it is...

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [35]

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But if that is not showing up in the EBITE margin for May or June. Do we not see that booked until the third quarter?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [36]

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I don't understand what you mean?

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [37]

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Because sometimes, for example, it may be that after a year of activation and you get rebate to the gross book, [do you only] take the rebate after the subsequent quarter?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [38]

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No, no, no. So...

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Reginald Leonard Watson, ING Groep N.V., Research Division - Research Analyst [39]

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Everything...

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [40]

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No, no, no. So government tight terms are very well differentiated here. Government tight terms are on the 12 months in our book. So there's no -- no one is playing with this. Promotion are specific to the update, but they are paid when the activation is done. So media is paid when the media has been -- when you are on air. Our promotion is booked, when that thing is happening.

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Operator [41]

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The next question is from Mr. Alan Vandenberghe, KBC.

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Alan Vandenberghe, KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst [42]

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It's again regarding the guidance on the EBIT margin that you're guiding for. If I make back-of-the-envelope calculations and taking the middle of the range that you provide, it implies that you are -- that 2H EBITE margin could land around 6.6%, which means a sequential drop of around 400 basis points half-on-half. Isn't that a bigger -- if I understand that the phasing of A&P is important and that there can be switches from one quarter to the other. But if I look back in history, I have not seen shifts like this in the past. So a 400 basis point drop in margin, is that really realistic? And therefore, shouldn't your -- couldn't narrow your EBIT guidance for the full year a bit and skew it more towards the upper end of the range?

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [43]

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Good morning, Alan. No, you're absolutely right on your assumption. That would mean more or less 6% or 7% -- 6% to 7% EBIT -- 7% EBITE. That's what we are exactly on our plan in P&L. You need to know that we sell slightly more in H1 than in H2. Just for you to know. We don't have a -- it's mostly -- sometimes it's 52:48 because if you look at -- it depends on the year on the activation. But -- so we said slightly more, but slightly more is already EUR 6 million of gross profit from one after the other half just because of sales volume. And then you have an effect, as we discussed, on the A&P mostly.

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Operator [44]

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(Operator Instructions)

There are no further questions.

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Christophe P. J. Barnouin, Koninklijke Wessanen N.V. - CEO & Member of Executive Board [45]

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Okay. Thank you all for your presence today. Thank you very much, and I wish you a great summer.

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Operator [46]

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Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for joining, and have a very nice day.