Danone's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Danone ADR (DANOY)

Start Time: 03:02

End Time: 04:50

Danone SA. (OTCQX:DANOY)

Q4 2013 Earnings Conference Call

February 20, 2014 3:00 AM ET

Executives

Franck Riboud – Chairman and Chief Executive Officer

Pierre-André Terisse – Chief Financial Officer

Analysts

Pierre Tegner – Natixis

Warren Ackerman – Societe Generale

James Targett – Berenberg Bank

Liam J. Rowley – Barclays Capital Securities Ltd.

Alex P. Smith – Banco Espirito Santo De Investimento SA

Mitchell J. Collett – Goldman Sachs

Franck Riboud

Okay. So we start. I will let Pierre-Andre explain the figures and the results of the full year, and then after I will try to explain to you how do we want to build Danone, not only for 2014, but also for the future and explain how we are still very confident in our model and in our strategy. And after that we will answer to your questions.

So you have Regis and Pierre-Andre and myself, and I think we have some friends on the other side of the channel. So Pierre-Andre, go ahead.

Pierre-André Terisse

Okay. Merci Franck, so good morning, everyone, sorry, I just move the mike. It’s Pierre-Andre Terisse speaking. I’ll make you go through the results of 2014 before – 2013 sorry, not yet 2014, before I hand over to Franck. Before that I just invite you to read again this Safe Harbor statement and to take it into account. So 2013 result, I will start with a snapshot of the year and the main figures, which you have on the screen.

We’ve delivered sales of €21,299 million, which is a like-for- like growth of 4.8% and a reported growth of 2.1%, an operating income of €2,809 million, which is equivalent to an operating margin of – a trading operating margin of 13.19%, which is down in like-for-like terms by 81 bps, in line with what we had indicated in October. An underlying net income of €1,636 million, which gives an underlying EPS of €2.78, and a free cash flow which is excluding exceptional items at €1,549 million, in fact, it’s excluding the effect of the restructuring in Europe, which is again within the guidance we had given to the market.

Before I go into the details of these figures, I would just like to run you through a few slides which summarize the events which we have been going through this year and which somehow explain all the figures which you are going to see, so I’ll keep referring to it. These events, I will start with Europe, which has been obviously an important factor in our performance of the year.

And with the fact that we’ve been going through, and you know that, a deflationary environment since the beginning of the year – since the beginning of this year, in fact, since the end of 2012. And this has had two effects on our performance. On the one hand, we’ve been going through markets which are extremely weak from a consumption standpoint, in particular in the south of Europe. And at the same time this has created a tax pressure from the various governments, which in turn has had an impact on our tax bill. You will see that our effective tax rate has increased from 27% to 30%.

In this context, we have as soon as the end of 2012 decided to have a renovation planned for our range in Europe and to adapt it to the consumer preference. And you see that in the course of 2013 we’ve managed, thanks for that to gradually re-increase our top line in Europe and to move it from a negative minus 5.1% at the beginning of the year to something which is almost stable at the end of the year, with four divisions covered by this trend. Three of them being positive already today; this is baby, this is medical and this is water.

And one which has been evolving rapidly but remains negative, and this is the fresh dairy. So an important turnaround in terms of trends of sales this year in Europe, which has been accompanied as well by an important set of initiatives which we have taken in order to manage the cost and the flexibility and the organization.

The €200 million cost saving plan which was announced at the beginning of the year and which is basically on track, which will – which has impacted our accounts this year in terms of restructuring cost for an amount of €300 million and has started as well helping our margin for an amount of €30 million in the second part of the year, contributing to avoid that margins go down too rapidly and will, of course, have most of its impact starting from 2014.

On top of that we’ve taken a number of initiatives. You’ve seen them during the year. This is the global sourcing platform for the fresh diary. This is some industrial optimization. And this is to end up an integrity management for fresh dairy i.e. today we have one general management and one team which is in charge of supervising and running Europe for fresh dairy and this of course help us get to initiative like the unified range for Danio which gives mass and size to Europe.

All that is extremely important because of course it deals the Europe for the future of Europe which we want to be more competitive and which gradually from now and we will continue and from 2014 is going to become more powerful and more competitive and going to progressively be and have to the group.

It was important to do that all the more since in 2013, we have also seen renewed volatility on two fronts. On the right side of the chart first and on Page 8 on the side of the commodities and in particular the cost of milk, we expected at the beginning of the year milk up by low single digits, we have seen inflation continuing very strongly throughout 2013 with an inflation which overall has been reaching 10% and in some markets has been exceeding that.

Russia has been reaching 30% inflation on the cost of milk. And from that respect, productivity has been important is going to remain important, pricing is of course something, an element of response which we have initiated as well in some markets, which we take very carefully in the sense that we want to pass but we have to pass, but we want to do it in such a way that it doesn’t break the very strong dynamics that we had.

We’ve seen that in Russia where we have already pay some price increase in Brazil and we are basically going to continue, we are going to continue all the more since the second element of increased cost is on the left side of the chart and this is the volatility of emerging currency, which is translated into additional cost for these markets and therefore is requiring in the same way cost reduction as well as price increase and that’s going to be in the agenda of 2014.

Currencies on top of that have a translation effect on the accounts, you will see throughout the presentation, it’s an impact of about 5% in 2013 from sales to operating profits to EPS and cash flow.

Third element of 2013 is obviously Fonterra, so we now have close 2013 and we know what the final impacts are very close to the one we have been getting in October to use, so sales we have less €370 million sales in the course of the five months from September to December.

In terms of cost, the cost of that has been €300 million and we within this €300 million have identified €200 million which we consider as non-recurring i.e. they will not repeat in 2014 fundamentally and €100 million is roughly 30% margin of the sales and therefore have had a negative impact on midst of negative mix impact on the margin of the group for €100 million, the cash impact is €300 million and no of course we are completely turning to the reconstruction as the element of this business which means to be able to construct it.

The last element is perhaps the most important to summarize the year and again you see its impact in many, many parts of the P&Ls and the financials. This is about battles which we had fixed to ourselves at the beginning of the year as extremely important to win to build a business and we have won them.

Franck will come back on that, but this is the U.S. where we have managed to reach a co-leadership of the Greek segment and therefore strengthening our leadership in the Greek in the sorry – the total dairy category in the U.S., we are in a very positive momentum from a market share and market position standpoint.

Russia is the second important battle, we have now been delivering three quarters of growth in excess of 10%, we have extremely strong dynamics and we have extremely strong innovation pipe, which are going to be – which are already and have to go through the inflation phase which we are facing in this country.

And the last one you see on the right, which I wanted to highlight is aquadrinks. This is an absolutely fantastic success. We have been multiplying by 2.5 on sales in the past five years in aquadrinks. We are running at a pace of growth of 20%. This is Mizone in Asia. This is Bonafont con Jugo in Mexico, Levite in Argentina. And this is really adding to the performance of waters, which in them, by themselves, are extremely steady.

So these four elements are again extremely important because you will find them in many parts of the P&L. They fundamentally explain what you have on the screen now, which is Page 11. And this is the fact that we had a guidance at the beginning of the year which we revised following Fonterra to 4.5% to 5% top line-wise, minus, minus 80bps in margin, and €1.5 billion and €1.6 billion in terms of cash flow. And we are fundamentally meeting this guidance despite a lot of turbulence in the environment, but thanks to extremely positive trends.

I’m turning to the sales growth analysis, so 4.8% for the year organic growth. This is a very balanced one, with 2.3% volume contribution and 2.5% value contribution. And we will see that the value element is becoming bigger as time goes by and we are passing price increase, but very balanced in 2013.

Scope, plus 2.1%, this is the addition of sales of the acquisition of this year. And they are numerous. There is Centrale Laitiere in Morocco of course. Fan Milk is not at full scope so is not entering into that, but that’s an important one as well. I’m thinking as well of Happy Family, YoCrunch, as well as Sirma. So all this is adding 2.4% to the sales of the Group. And the currency at the same time, you’ve seen that before, mainly the Argentinian peso, but also the Brazilian reais and the Indonesia rupee are taking away sales from our important sales by 5.1%.

These 5.1% is very much skewed towards the second part of the year and if you look at the quarter you will see that it has become 8% in addition. So a major impact from the major translation impact from the currencies, which, if you try to figure out what will be the impact of the currencies in 2014 versus 2013, it would be approximately this one, i.e. we are currently running at level of minus 7% approx on the current spot rate.

Scope remains very much the same as the one we have seen before for the same reason. And then the like-for-like performance of the fourth quarter is plus 2.9%, very much similar to the one we had in Q3 in terms of trends, with two differences. A, the pace of growth and the weight of water, which, being in winter season, is by definition lower.

And secondly, the fact that we are having three months of Fonterra within this quarter as opposed to two months in the previous one. But trends which remain very much the same; we’ll see that in a minute. And in fact we are seeing that now, so 2.9%, 4.2% in Q3, a first half which was running at 6%, a second half which ex Fonterra would have been running at 7%, but this is not the reality. The reality is lower than that, is about 3.5% and the year at 4.8%.

You see very well the trend and everything I’ve been explaining so far in the geographies. You see a Europe which is indeed going up from a minus 5% to a minus 0.4%. And as I said, three, we moved three divisions that are already positive. One is in the process to become. CIS and Noram, a translation of the one battle is the double-digit rate you see on the chart for the past three quarters, with 10.2% growth rate in the last quarter. And in emerging markets, the region we call ALMA, an underlying growth rate which remains extremely strong, with an underlying performance of 13% in Q4, but which is brought back to 2.2% given the events we have been talking about.

I’ll go through each of the divisions now, starting with dairy. And this is a very nice story of recovery. In fact the last time we had a sales growth which was in excess of 5% was the second quarter of 2011 so it’s two years and a half. It’s been a long way, but this progression has been made possible by some improvements in Europe. An improvement in Europe driven by, you will remember at the beginning of the year, Portugal, France, and then later this year Spain, which has really been recovering meaningfully in the last quarter. And now Germany, which, as you know, was one of the black spots and which is improving. So we are really getting a sense of the right direction and this is helping the global equation for dairy.

CIS and Noram, I’ve already discussed that. This is double-digit and contributing. And when I look at the others, Brazil, South Africa in particular, they are as well, they remain as well extremely strong and contributing. The second thing you can note from this chart is that we are clearly moving period or trends in terms of balance between volume and price. The light part is pricing. The solid part is volume. We’ve been going through a peak of volume in the second quarter of 2013.

And since then the inflation of the cost of milk has led us to pass price increase. And you see that the value element is developing and this is going to still be the case in 2014. A lot of innovation for the year and the fourth quarter. A lot of them about indulgence. This is L’Arte dello Yogurt, which is an indulgent Greek in Italy. This is as well Danoninho Ice and Danissimo, coming from Russia. And a lot, on the other end on the Greek side high protein, low fat, with the launch of Danio in many European markets. You see the version in Italy here, and as well Danimals Superstars, a Greek version in the United States.

Waters. Water is a strong and sustained growth story, with again a very balanced growth equation. You see positive volume, positive value everywhere on this slide. This has been as well the case in the last quarter of 2013 with 8.1% growth. This is a model which is working thanks to water based on the European base, which is extremely solid growing, low single-digit but growing, and again the addition of the emerging part and the aquadrinks, which is really adding a lot to the category.

In addition to that we have confirmed this year extremely interesting successes like the one we have in Brazil, where we started Greenfield an operation four years ago. And now that’s become sizeable and profitable and is going to be our new geographies for water. And innovation again, very much in the field of either the mix side on water, the value side or the valorized, with Evian and Badoit limited editions for Christmas, or the aquadrinks.

And you see an on-the-go version of Villa del Sur Levite for Argentina on the screen. Early life nutrition. This is really a year of the two halves, with a very strong performance in Q1 and Q2, 17%, 13.5%. And you see that this performance was driven by the whole of the portfolio. And then in the second half of the year, of course the impact of the Fonterra false alert. We’ve already visited these impacts and I’ll come back on what we are doing later on. The interesting part, and we’ve chosen to use it with some red lines on the chart, is to see that if I take away the two brands which are impacted, the rest of the business is performing well.

After some slowdown in Q3, from 14% to 7%, it has resumed 14% level in Q4. And therefore it means that most of the machine on the dairy division is intact and keeps running very well. This is the case of Europe. This is the case of Latin America, where we keep building interesting position. This is the case of Africa. And this is the case of some of the Asian geographies, I’m thinking in particular to Indonesia. So a very intact baby food business. And now we have to move to the second part.

And the second part is simply how do we manage the impact on our baby brands in the eight impacted countries? So you’ll remember in Q3, we said we have basically two different cases. We have countries, and this is blue bar, which have been impacted but have started recovering already, and we need to keep recovering them as fast as we can. They have kept recovering them as fast as we can. They have kept recovering as we expected. They have reached levels which are 60%, 70%, depending on the brands and the countries in the course of Q4.

And we will keep making them recover in the course of the first, half of 2013. And then we have the second group of countries which, for various reasons, has been specifically impacted. This is Australia, this is New Zealand and this is China, and this is the yellow bar which you see on the screen. And we said that in this case our choice was not to push for an immediate recovery but to do three things. A, to clean the stocks, the inventories at the trade, which had become disproportionately high. B, to make sure we had a safety communication to consumers extremely loud and clear to clean any image issue. And third, to start adjusting the cost base to resize it to the new size of the business.

So this is exactly what we have done in Q4, and the result of that is twofold. A, we have no inventories which are back to the level we wanted them to be. So in terms of number of days, we are at the level of the pre crisis. But B, second impact, we have sold in December in China nothing. And when I’m saying nothing, it means zero selling, but it also means of course that the sellers have continued at the same pace, i.e., 25% to 30%.

So Q4 is definitely a low base in terms of sales in China. We had said that we will start resuming activities to rebuild the brands from January, February. This is exactly where we stand today and where we are going to move. And we are going to move to it with not obviously the idea to rebuild exactly the same thing we had before, but to try and make something bigger and healthier, using different brands. We don’t have only one brand in China. We have Dumex, yes, this is true, but we also have Karicare.

And we are launching a new ultra-premium range with Nutrilon, which is going to be about products and services, so using different products throughout the year and different ranges, and using as well different channels. You see on the top right hand of this chart, the evolution weight of each of the channels. And you see that in particular the ecommerce and the mum and baby stores, which is a specialized distribution, is gaining traction. And this is clearly and element which we are going to use to rebuild our presence in China. So this is on the agenda of 2014 after a year of – last quarter of 2013, which has been used to clean everything.

Last but not least, medical, turning to it, a very solid growth. Again, I repeat, positive in Europe, low single-digit in the context which you all know is difficult context for health activities in Europe. So that’s a very resilient and good business. And element of developments outside of Europe which are strong, in mind China in particular, but also Brazil and now Russia, which becomes as well an interesting part for medical. Innovation as well in this range, with Brazil and China, as you can see, where we are leveraging as well the Danone platform from time to time. And in the middle, some element of leverage of an acquisition we made a year ago called Complan in the UK.

So that’s for the top line. I’m now going to turn to the profitability and cash flow of these operations, starting page 26 with the trading operating income and margin. So the important element on this slide is obviously the number €681 million, €681 million is for 2013 the other operating items, what we call the non-recurring items. And there are two specifically important numbers which support the €681 million. The first is about the restructuring in Europe. We said when we announced the €200 million plan that we would have a total cost of €500 million. We confirmed that. And this year we have booked €300 million in the accounts. So this is part of the €681 million.

The second element of this number is of course the non-current element, which we have identified within the Fonterra case, which corresponds to the cost of recall, which corresponds as well to the cost of communication around the brands to the consumer and which correspond less to some elements of non-absorption fixed cost, given the fact that we have had factories running at zero in the last quarters. If I take that away and I look at the rest, the rest is €2,809 million.

And that’s corresponds to a margin of 13.19%. This 13.19% compares to a 14.18% in the last year, so it’s a 99-basis-point negative evolution which is made of two parts, one is about scope which reflects the lowered an average margins of the acquisitions we have been doing this year

And the second as you see the like-for-like evolution of the margin 81 leaves, and in these 81 leaves you have or you find fundamentally the different factors, I’ve been talking about at the beginning, i.e. the first of them is of course the evolution of the cost of raw materials. And you see the minus 125 – 129, sorry, basis points on the chart which stands for that. So this is primarily the evolution of the cost of milk. The second one is the deleverage effect in Europe. So the fact that we have kept, albeit at a lower pace, but we have kept losing sales, and this has had an impact in terms of fixed cost absorption. And this is shown within the box of 98 basis points.

The last one -- sorry, the third one is obviously the strong top-line dynamics, and you see that on the left. This is the 82 basis point contribution and lesser amount is obviously China with minus 26 basis points. So on top of all these elements which result from the various factors as shown, there is a last one which is A&P, 86 basis points, and which basically reflects the fact that we benefit in our business from a favorable mix effect with respect to A&P. And this is because three changes are happening at the same time.

The first and the most important underpinning that is the fact that we have been moving from a model which used to be extremely relying on the Acti brands in Europe. And that model was extremely high – intensive, sorry, in the consumption of A&P, to a model which is relying on various range of products with a lot of different benefits in the pack, in the recipes, in advertising, but also for different ways of communication. So we are changing model and we are diverting resources to what is working, which is the Danios, Danimals, etc., of this world, which you are seeing.

The second is about geography. We are clearly moving from a Europe which was again extremely heavy consumer of A&P to a model of development in the rest of the world which uses different levers, and in particular is using the packs, different kind of activation and so on. And the third, you see that on the chart. It’s absolutely impressive. It’s about the evolution of the digital. It was five years ago or three years ago it was 3% of our spend.

Today it’s 13% of our spend so it’s been multiplied by four in just three years and it obviously carries different economics. So we have a model of development which is clearly embedding now some favorable A&P evolution. And at the same time we will see later on, which is also requiring CapEx, in order to be able to invest and innovate behind new products.

If I look at the evolution of margins by division and by country, again I would see the same elements, the negative leverage in Eastern Europe and in dairy in particular. The Fonterra impact, which is accounting for 26bps at Group level, but if you have a look at the impact on ALMA, that becomes 65bps. And it’s basically explaining the whole of the 58 basis points.

And an important point, very important point this is inflation management, i.e. the fact that in front of these very strong increases of cost, we have chosen to have an implementation of the pricing in response to that, which is extremely tactic. And in particular with respect to timing, making sure that we are not breaking the very, very positive trends which we have created for the past two years.

If I move from operating income to EPS, the most important element to notice on this slide is the tax €750 million, which is in fact reflecting an evolution of the tax rate from 27.6% to 30%. This is for large part, for the majority due to two French tax measures, the taxation on dividend on the one hand, and on the other the absence of or the reduction of the deductivity of the interest plus a few others.

We think we now can stabilize the tax rate at this level of 30%. Absent from further very significant increase in any other major countries, we expect to stabilize it at 30%. The interest net of diluted shares have been accretive to the EPS and the EPS altogether is landing at €2.78 per share.

On the right side to mention, in front of the €681 million non-recurring operating costs, you have €48 million plus €239 million, which corresponds to capital gain on the movement from equity consolidation to fully control consolidation in Morocco. Therefore a capital gain on the historical side, we are in Morocco before we move to full console.

This I believe shows very well, the main drivers of the evolution of EPS. You have three negative, two positive. The two very positive all the two drivers which are working very well in the group, this is the top line. And, this is the free cash flow generation, which is driving a positive contribution of financial charges and the number of shares. In front of that, you have negative ForEx at minus 5% this year, you have negative contribution of margin at minus 6%. And you have a negative evolution of taxes at minus three points.

Cash, I’m not going to spend too much time on that, except to say that on the right you see that we had an objective on the free cash flow excluding the European plans, so I’ll come back to it in these terms. But after you have some element of cash out on the implementation of the €200 million cost saving plan in Europe. So, minus €121 million in this case, which means that the end cash flow generation is €1.4 billion.

Now on the one we’ve chosen to focus we have fundamentally in 2013 moved from €2 billion to roughly €1.5 billion, €1.6 billion, absolutely in line with the guidance we gave in October. And this is reflecting two factors, one the equivalent of 5% ForEx is €100 million in cash flows.

So we have lost €100 million by translation. And the second one is the impact of Fonterra for about €300 million. So we keep adding a very robust cash flow generation impacting by these two elements. And you see that the drivers we’re using have kept progressing. This is the case of working capital with the positive contribution of €200 million in 2013 to 8%.

And we have kept investing, as I was saying before. These €1.4 billion cash generation has been used two folds. They’ve been used for acquisitions for a total of €1.7 million. So this is Africa with Morocco and Fan Milk. This is China with Mengniu.

And you have seen the second part very recently, which brings us to 10% position in this group. This is Happy Family, YoCrunch, Sirma essentially and this is as well the movements in the puts with minorities.

So, altogether €1.7 billion. And the second, we use is returns to shareholders, through dividends for €953 million, including minorities, and through share buyback at the beginning of the year for an amount of €475 million, which leads us to an increase of the debt of €1.7 billion from €6.328 billion, this increase of the debt has been largely financed and pre-financed in the course of 2013.

We have issued to €0.9 billion of bonds at a rate below 2% and therefore helping and preparing the evolution of the cost of financing for 2014. Nothing much to add on the balance sheet, page 35, yes, page 35 with a modest increase of the total size by 2.5%, which is reflecting the acquisition and contractions coming from the foreign exchange.

I’ll end 2013 with the dividend. So you’ve seen that our EPS in reported terms has declined by about 8%. Notwithstanding that we’ve decided to propose to the general meeting in April to keep the dividends constant at €1.45 per share. We thought it was important not to break he historical track record of increase our stability of the dividend per share. And that shows as well the confidence we have in the cash flow generation capabilities and the capabilities all together of our business.

So €1.05 will be proposed. Since we are not in a period where we are using share buyback and since there are some favorable tax legislation in France, we are going to open the option to our shareholders to elect for the payment of the dividend in shares. And that will be done with conditions, which will be very much in line with market practices. So that’s for 2013, which I end at this stage. I now move with a few indications about on 2014. And everything we’ve seen on 2013 finally sets extremely clear objectives and clear priorities for 2014. And you have then the four on this chart.

If I start with the bottom left part, the first priority will be to keep winning in the CIS and in North America. We have big platforms which are sizeable, which are growing, which are extremely powerful, which have strong dynamics, strong market share dynamics, strong innovation dynamics. We’ll have to cope with the evolution of the market and to continue confirming our leadership in these markets in the course of 2014.

The second priority and the second pillar on which we’ll have the ability to play with or to rely on will be Europe. We have done a number of things in Europe in 2013, which we find basically extremely reassuring and which, including for dairy, will allow us to target for the end of the year stability of the sales and stabilization of the margin.

So for the end of the year we want to go back to stability of the sales in fresh dairy, which, together with the other businesses, will mean that Europe is going to be a help for the Group going forward. And there are a lot of things to keep doing in Europe, we’ll do them.

The third one is on the top right, and this is about growing and navigating ALMA in emerging markets. So why growing and why navigating? Navigating because it’s absolutely obvious that the evolution of the foreign exchange is creating volatility. And that will need to be extremely eyes opened in front of this volatility and to take the right decision to adapt to it, in particular but not only in terms of pricing.

Grow, because that remains a fantastic opportunity for growth for Danone. And many people forget it nowadays because they are seeing the risk side. But this is driving the aquadrinks in Asia. This is driving the aquadrinks in South America. This is driving the fresh dairy in Africa. This is driving the medical in China. This is driving the baby in Latin America, Africa and Asia. And emerging markets will remain, more than ever, a source of growth for the Group.

The last priority is, of course, the one you see on the bottom right of this chart. This is about rebuilding the early life nutrition business in China. In China, Australia and New Zealand, but primarily in China. So you see different bars on the chart and these bars represents various assumption of acceleration of these business. The central one, the central case for us is the blue one. And the blue one means that we expect selling to gradually come back to levels of 60%, 70% versus the pace of the business before by the end of the year. The pink one stands for an evolution which will be limited to 40% and 40% is not far from the current sellout level, which is at 25%, 30%.

So it will mean that we would have in practice not really succeeded to recover this business and the other one is of course the one we are targeting and the one we all hope given the number of initiatives we are deploying. And you see that this is creating some gaps.

All these top priorities has basically driven us to guidance which is as well very clear to us in terms of targets with three elements, the first is top line growth, we expect top line growth to be between 4.5% and 5.5% for the year and with the 4.8% given the conditions we have realized in sorry for the full year 2013, we feel this is absolutely reasonable.

Turning operating margin, we wanted to be stable and we want as well to give our self the flexibility to run the base of the Chinese evolution without putting pressure on the rest of the business and therefore we have built a gap of plus or minus 20 basis points which corresponds very much to the various assumption you have seen in the previous page on the evolution of the Chinese baby and for the rest, we want margin stability, and the last one is free cash flow, we target the free cash flow of €1.5 billion which could be very much in line with this.

This is going to be and that’s absolutely key to understand very balanced given the fact that H1 was very strong and not impacted at all by the loss of sales in China, the business comparison in H1 and you see it here is going to be strong and the base of comparison in H2 is going to be weak and this is going to be true both in terms of sales and margins.

So we expect a tax base of comparison in H1 and we expect as well that from the second half of 2014, from the second half of 2014, we will be back to what is really on our agenda and what is really on our agenda is to be on a strong profitable, sustainable growth.

So that’s what I wanted to tell you about 2014. We’ll probably have time for questions afterwards. And I hand it over to Franck now. Thank you.

Franck Riboud

I will try not to repeat what Pierre-Andre said, but I think it’s important you have also the vision from the operational side not only from the financial side and how are we going to do that, first of all one point on China all the target Pierre-Andre fix are delivered are not based on how are we going to recover the situation in China that’s the reason why we keep this flexibility.

Just few words how are we going to recover the situation in China, I think you need more detail, you need to understand we really trust in the fact we’re going to rebuild China. First of all don’t think we are going to rebuild the same anymore, we are going to build a new one, a better one especially in term of margin because we’re going to launch our Blue House remember the Red House and the Blue House, the Blue House is Aptamil, Nutrilon. It’s more valorized, more expensive with better margin and we are going to use the new channel, the cross border and the Internet and the Baby store.

Just to give you a example, since December we go back to 14% market share, we went down to 12% and as Pierre-Andre explained do makes brand, the basic do makes was not so going up the last few months, so it’s really is this new strategy which is helping us to reveal our position in China and on top of that China the fundamental of China is still very good, we’re talking about going from one baby to two babies hence they are still, still looking for the best product for their child for very simple reason, if you are in China, you have one child, this child is the future of the mother and the father and the four grandparents.

So that’s the reason why the fundamental is there and that’s the reason why we think we can even upgrade the product range we have in China.

That’s for China, if I go back to the Group first thing we still keep this target, we expose last year Danone go back to a strong, sustainable profitable growth. This old model I was used to describe like this. We grow the top line, we improve the margin, so top-line profitable growth. Initially I think 2013 will be the year we can deliver this. If you exclude, which is stupid, but if you exclude the Fonterra accident this Company will deliver something around 7% top line growth, with all the job Pierre-Andre described. That’s the reason why we confirm we want to go back to a profitable top line growth.

And I know about the currency and I know about the raw material. But we have to consider that as an objective. So if you want to understand our strategy, I’m sorry it’s never very clever in Danone, but that’s the reason why we understand, us. If you look at this chart, on one side you have the sales. On the other one you have the margin. And it’s clear that if you look at in term of sales or in term of margin, let say our international business is going perfectly well.

On the other side, margin or sales, you see Europe, we have to fix, we have to work on and it’s exactly what we are going and what I am going to explain to you. So strategy very clear, continue to develop an increase our position and improve our margin and develop our turnover with new products, helping us to fight against the raw material effect because we change the mix by launching products having a better value for the consumer and exactly the same but starting from another point in Europe.

How could we put Europe stable, increasing and margin, but at least stable in terms of sales, because if you are zero in Europe, we leverage 200% this incredible top line growth we have in the emerging countries. So Europe transformation, obviously a lot of innovation, you can see in the bottom. I will not comment everything. I put stupid picture here. It’s Danio.

So Danio is a Greek. It’s an American Greek. It’s not a European Greek. Perhaps it seems totally stupid, but European Greek is an indulgent product, very, very heavy in terms of fat, but very indulgent. American Greek is a diet product, protein. And Danio is a protein product. If you are doing sport in front of your television, you eat Danio if you are hungry, but there is only 2.5% fat in the product. Seems very easy, but not so easy to fix in terms of satiety, in terms of taste, in terms of texture.

And the good news, perhaps you are going to laugh, but if I look upfront, the good news, our competitor Yoplait is launching the same, which is good news, because we want to build a new category. So everybody is spending money and explaining to the consumer, it’s a healthy product you can eat, controlling your – having your weight management under control. On top of that you have some other brands, with some example.

And I will take Actimel, because if you look at the difficulty of the dairy in Europe, basically Spain, France, Italy, Germany, Portugal, and in terms of products, Activia, Actimel, because of the health claim we can’t use. But you will see we have some opportunity to do it. Actimel is doing much more better.

If you look at Spain, plus 3%, but don’t forget that that was minus 15% or minus 20%, it’s exactly the same in Germany. We have a new mix. We add some vitamin. Now we are allowed to claim about health and immunity because of the vitamin. Okay, it’s stupid but we respect the fact that we have to follow that kind of regulation. But it works again. Veloute, it’s just because of the key scope. Veloute is perhaps one of the oldest fresh dairy products in France.

And you can see we can grow double-digit with very basic product, we grow 15% since now one year and a half. And on left, you have the situation in Europe. I will not comment again because Pierre-Andre did it very well. But for us, coming from minus 5% close to zero and Spain was minus, already positive in volume since the last – at the end of last year we are now positive in term of sales. Another example, I will not totally comment, but I’m sure you know this product called Danonino. It’s Petit Gervais aux Fruits for the French. And you can see this small bottle on the right and we just put a sleeve with the head of the dino, stupid. Totally stupid, we grew. Because it’s a kid product, and it’s exactly what we are going to do on all our products, go back to the basic marketing, the basic one, doing this, we do also that differentiation [indiscernible] shelf.

Everybody can copy? Not sure, because it’s quite expensive to change all your machine to deliver this. So sometimes the stupid, basic idea is the best one to protect you from the competition. In the same time you relaunch, you gain some distribution, you improve the quality of the product and the results are totally positive for us. If you look at the core business in France we grew it 15% by doing that kind of marketing.

So just few words on this; Pierre-Andre explained also, on one side we are going to simplify. On the other side we are going to harmonize, which is quite the same. How do you want to reduce? You know that when you are producing fresh dairy you have what you call the white mass, which is a product before the end product. You put some flavor, you put chocolate, but you have the white mass. Even for Activia we have more than 100, white mass all over the world, which is not very efficient.

So we are going to save money by, like in the car business, we are going to use platform to really reduce the cost of our recipe. That what we call simplification. On the other side, to do that we need a central organization. Otherwise everybody try to reinvent the wheel. So we are going to reduce the organization centralize some of them. And doing this becoming much more efficient. In term of simplification, adaptation, new way of purchase, we are not only thinking about milk.

Our main raw material which are milk, food preparation of PET, last year we decide, all of us, to drive Renault car all over the world. And we had Nissan and Infiniti in some countries. We save a lot of money by negotiating a worldwide agreement on this. We decide to launch a competition with the marketing agency, how do we buy the screens, the television spots and we save also lot of money. So Danone was very decentralized. It was not leveraging his size.

So we are going to leverage our size to be more efficient. Innovation. Do we are an innovative company? Yes and no, depend the definition you feel about innovation. For us innovation seems very often to be renovation or how to roll out the success we have in a country, we know it works, we know how to do it and it’s something we are going to accelerate, look at the, and the funny thing or the good thing is, not everything is coming from Europe, many, many things in term of packaging, in term of product, in term texture, in term of advertising.

The advertising you have now on this Danio product, Danio being a Greek launched in the U.S. and in Poland. The advertising campaign with this Muppet is coming from Poland - and in Poland the advertising campaign with this Muppet is coming from Poland. So here also we are more efficient and we rollout the best practices we are in the company, in term of product, in term of packaging I already explained and obviously by stretching also our categories like with an incredible success in the water division with the aquadrinks or like Danio in the dairy one.

Best services we are also looking how could we do business leveraging the strength of our brand by selling product differently, the best it’s a small example, but it’s a good example the one for Evian in Paris, when you know that one of the main reasons for the consumer not to buy package water is because you have to carry the pack. So we organized something to deliver at home Evian. The dairy. I told you about I have to recover the situation, we are really positive feeling about the fact we are starting to deliver this recovery.

But we have two continents, and I’m saying continents because they are not countries, Russia and U.S., and these two continents give us the time to recover the situation in Europe. And as Pierre-Andre said, we are very successful. He said we catch the core number one position with Trobanet [ph] in the Greek business, which make Danone U.S. the best ever market share we have. And it is very important because since many years I explained to you that we want to become category captain in the U.S. and we will reach it if we are the clear number one, which is now we really improve this situation especially in Walmart.

So where the potential is, first of all the consumption per capita. As you can see it’s increasing, not very quickly because the Greek really cannibalize the rest of the product. But it’s moving up, which is exactly our objective. With the Greek, because I got always the question one day that we’ll stop, okay, why not that we’ll find something else. And you can see that we are not talking Greek, a single product. Greek is an ingredient for us. Greek ideal protein. And we develop this protein positioning, not only on the Greek product, we launched Activia drink. We launch Danimals Greek. We launch Light & Fit Greek. So our ability to fight or to resist or to continue to develop is due to the fact that we are leveraging all the segment with the protein ingredient.

We’ve also good news on Activia. I’m not sure if I’m allowed to disclose this, but I will do it. We just get the authorization from the FDA with three health claim links to Activia, to the digestive system, which will help us again relaunch without the Greek vision, the core business of Activia. And you have also YoCrunch, which is a very interesting product for us, as you can see we put a core brand YoCrunch with M&Ms, which help us to develop the category on kids or let’s say indulgent product, healthy indulgent product.

And obviously we are going to give to this organization or the strength of the Danone U.S. organization. CIS, mainly Russia. I’m not going to talk about Ukraine this morning, but Russia. Ukraine is – everything can happen. So we have this trouble with Fonterra. Obviously Ukraine is much more smaller, but we have to deal with this and I will come back on that later. So CIS, we are even much better than the plan we expect when we took over Unimilk.

And if you look at on the right part of the chart, you have five brands. Three of them belongs to Danone, Russia, they are the top five brand in Russia, and the best one, the biggest one, the fastest growing one is the local one, Prostokvashino, with the cat and the blue stripes. The good thing also on top, the number three and number five are from Danone, the ex-Danone company, so much more valorized than the local one.

So we find the way to valorized Prostokvashino and relaunch very strongly our very, very premium brand in Russia. The consequence you have in the left side of the chart, we grow top line and we grow also the operating margin in country where the price of the milk is booming. But you can imagine the strength of this brand and the way we can transfer to the consumer the impact of the milk increase, and you can see already the recent innovation that we just launched and obviously we have a huge plan.

Just for information, Actimel is not on the chart, but Actimel in Russia is growing 17%, 2013. Fresh dairy product again. We have only one target develop the category, develop the category, develop the category with this strategy called one year ago today? Why one year ago today because if I take the U.S., for example, it’s one year ago to year as an average. I’m exaggerating a little bit, but let’s say one per week which is more than one per year, if you calculate well. So how are we going to do that? With all the new product we just present.

But also with the relation we can have with the trade in the U.S., especially people like Walmart or Publix, all that kind of people to explain how they have to extend the shelf, how they have to give us more space on the shelf because it’s good for their – for them and it’s good for us and it’s good for the category. So more new product we launch more space we have, better it is for the category.

Water. I’m smiling because I remember the question a few years ago about water, and stupid division we have to sell. Yes, why not? Except that if you can look at this chart, it’s the successful ball of the Danone Group. And it’s very easy to understand. First of all, an incredibly strong and very good execution in term of marketing, when you look at the evolution of Badoit, Evian, the communication of Evian, very efficient. We put on air two weeks the Evian Communication. It’s more than 200 million contract on Internet for free.

And it’s exactly something we are going to roll out with the other brand in the other division. The thing very easy to understand, we have 70% in the emerging market, 30% in Europe, the business itself is growing in Europe. The plain water itself in Europe is growing. Small product like Salvetat is growing double-digit. Evian is growing. We are going to relaunch this. Here Volvic is growing also. So plain water in this beautiful part of the world called Europe is growing. So we are not damaging this incredible double-digit growth, we have with water in the rest of the world.

Having said that, on top of that we have another engine, the aquadrinks, and the aquadrinks are growing incredibly strong. You have the figures. And I can tell you that I think nobody really understand why we have success in the aquadrinks. Aquadrinks, it’s a brand, very often a mineral water or spring water brand with less sugar, natural flavor and the right answer to the consumer. Very often the right answer to the mother of the consumer. For obesity issue and so on and so on. But to do it, the kitchen, to build that, is not so easy to understand. I’m sure we will have some illustration of that in the future from our competitor.

One example with the aquadrink or the effect of the aquadrinks for us, it’s in term of how do we bring the aquadrink to the consumer in term of channel of distribution, in term of advertising, how to connect the consumer with this new category because it’s clearly a new category. And obviously within the aquadrinks we have an incredible success called Mizone, not the one we sell – we sold to the Japanese, the one we keep in Indonesia and in China. To give you an example of what we are doing with Mizone, which is called Midong in China, this brand will reach €1 billion turnover soon in China, growing at an average 40%. We have the same in Indonesia, growing double-digit but less because the positioning in Indonesia is Mizone like an istonic product.

You’ll see what it – like Isostar or perhaps Red Bull, which is good niche, but a niche versus the positioning we have in China. We are going to launch the Chinese positioning in Indonesia. Why in Indonesia? Because with the volume we have with water, we can leverage the organization. And now just emerging, we didn’t launch already aquadrinks the juice. Because we grew up with the aquadrinks, for example, in the UK. Volvic juice is growing double-digit.

Same in France with this, my favorite product, is strawberry one. So we didn’t launch that in Indonesia, we didn’t launch that in China, we didn’t launch that yet in Brazil. We have in Mexico, but we still have a lot of country we can rollout this best practice. New countries as you know we already very strong in North Africa. We, as Pierre and I said we even consolidate our position with Morocco, which was just a company we were minority shareholder since 50 years, 60 years.

So, as you can see we’re – we can be very patient. And we have another very strong position in South Africa. South Africa is very important for us because that’s the place we develop new product with less milk, ambient because we export them in center of Africa, in the Sub-Saharan Africa.

I’ll not come back on the Fan Milk. Or perhaps just to explain Fan Milk is, it’s a one country company [indiscernible] in Africa, you have a so-called big company, between €100 million and €200 million turnover the average big size for Africa in our businesses. And you have many countries around for Fan Milk it’s Ghana, Nigeria, Togo, Burkina, Benin, Cote d’Ivoire.

And the key thing for us the company like Fan Milk, which is not exactly fresh diary. It’s more a fresh or ice fresh dairy and some juices. But the distribution system, the road to market is key and very develops to more than 31,000 sellers, of which 25,000 now basic of sellers. And that’s the way they develop the capillarity of the distribution channel for us. I’m sure we can imagine to leverage this organization. We have many other initiatives as you can see in term of, in the different businesses. YoCrunch I already explain.

Starbuck you don’t have to consider Starbuck as a new channel for us. It’s much more than a new channel. As I’m used to say within the Danone organization it’s my Facebook, it’s my Google, why because every morning in the U.S. 17 million consumer have already paid their breakfast and go in Starbuck where they are just evangelize. People explain to us coffee, health and now they’ll explain to them fresh dairy product and remember one year ago year ago today?

It’s our category. So for me it’s more than television it’s much more stronger efficient advertising campaign than the classic one. And that’s the reason why try to met where the shoots and explain to him health and these are not in that. And we decide to make this worldwide joint venture. On top of that in some country. We also list Evian water and some other product having build to very nice goodwill with Starbuck.

Another example, the one in red efficiency, Norbert Dentressangle is a Logistic company and we’re not going to buy build the trucks whatever in the emerging country we are going. We asked our main supplier Dentressangle to come with us and to build for us the logistic which help us to save a lot of money and be very efficient. Perhaps, another one in the green China with Mengniu. Because I read in some newspapers they don’t learn; they continue to join with forces in China. Because we’re convinced that Mengniu with COFCO behind, is going to be the head of the milk product in China. And I don’t know why but I think it’s a good idea to join forces with the strongest Chinese company.

On top, I don’t think we will have the time, the money and the strength to build and to fight in China alone to build the diary category. I think its real good idea to join forces with this people in their country. As I said, this chart is linked to the New Zealand accident we had. I’m saying New Zealand. I’m saying Fonterra. I’m not saying China, because it’s definitely not a Chinese story. It’s a Fonterra, New Zealand story.

And clearly, we can say it’s not our fault, okay, which is true, but in the same time we have to look at our supply chain. We have to look at how do we buy product. Obviously we saw nothing in this accident because there was nothing. But even having said that, I think we have to build a strategy how to fix the milk supply, how to fix the PET supply, how to deal with all these issues we can really have in different country, especially in the emerging country. So that’s the reason why we are going to work very strongly on all our organization.

On top of that we will continue to work the same way. We continue to think that the culture or DNA of Danone is a good one. And we are going to continue to build a unique model to do business, with ecosystem, with Danone communities with Dan’Cares, all this element we have which are really building the culture of the company.

To conclude, I will speak a little bit about the governance of the Group, because if you want really to control – not to control, but have the right board now, you need minimum one computer to think about the future between ladies and man independent, dependent, after 12 years no more independent and so on and so on. So we take care of the Board.

As you know, we have two Board members, now you don’t know, you know for one, the Japanese one, and there is another one, you know very well Jacques Vincent. He will retire from the Board, so we will ask to two new Board member, we will propose two new Board members to come with us. Gaelle Olivier from AXA, based in Singapore, knowing incredibly well Asia, speaking Japanese, in charge of the risk in this part of the world for the AXA company.

And on the other side somebody we know very well Lionel Zinsou. He was in charge of our grocery business 10 years ago. He spent 10 years in London before going to I think Rothschild and PAI after. He knows very, very well everything and everybody in the food business every companies. So I think it’s going to be agreed that for us to have these two people joining us.

Pierre-André Terisse

I think you don’t have the picture. Now you have. Thank you.

Question-and-Answer Session

Franck Riboud

Okay, so we now move to questions, we have some time to take them. Yes, so mikes are there. Questions in the room?

Pierre-André Terisse

Question out of the room?

Franck Riboud

So let’s switch to the second question.

Pierre-André Terisse

We have one.

Franck Riboud

Yes, question from Pierre.

Pierre Tegner – Natixis

Good morning. Pierre from Natixis. Thank you for taking my questions. I have three. The first one concerning the dividend payment. Pierre-Andre, you say that in my understanding that you are not crediting some share buyback for the medium term. Is that a good way to understand the dividend payments, through optionality with shares? That’s the first question.

The second one is on CIS and Noram, you have some margin decline. It’s natural, that’s why that you have some. Is it equally balanced between CIS and Noram this year? And the last question is that due to milk inflation in Russia do you expect some margin improvement in CIS this year? We know that you have many leverage with portfolio management and with the mix, but what’s your view for the medium-term on margins on CIS? Thanks.

Franck Riboud

Yes, I’ll take them. Starting with the scrip dividend and the share buyback, we have already said that we did not found very logical to be at the same time buying back shares and proposing to pay the dividend in shares which is in reality issuing shares or putting shares back to the market.

So every time we are in a period where we are making some share buyback, we don’t propose this reception and we have not proposed details of this share recently since mid year approximately we have start an initial buyback at the Group level because we have decided to engage in the number of acquisitions which we have given priority to share buyback with no surprise.

This has brought the debt at a level where no share buyback is useful anymore to deleverage the company because the company is leveraged, the way it will be [indiscernible] but the way it should be. And if I try to protect myself this is going to be the case for the coming 12 months, so for the coming 12 months we are not going to make share buyback and therefore we are not seeing share buyback anymore, hence when we look at the dividend we consider we can open the option of a dividend payment who are in shares relate to shareholders, hold them on since there is one specificity which is the fact that you paid a tax on dividend, you pay cash and you don’t pay it, you have shares.

And as you are seeing the increase of our tax rate this is clearly a matter, we need to be careful about respecting the row but taking advantage of the row and since this is neutralizing any possible dilution basically it means that we can average to shareholders, this is what we are going to do, again we have strong expertise as far as share buybacks we have no plan to do in the coming months and then for the following years, we will see we will always used it very consistently as a way to de-lever the company went in favor so if it comes back it will be on the table again.

With respect to CIS in North America you are right to say that the margin evaluation has been altogether down slightly which is in reality I think two different trajectory, CIS has been up and the U.S. has been down. The U.S. has been down after several years of significant increase of margins in good and in the year where the inflation of the cost of milk has been higher than what we expected at the beginning.

And we have decided in the case of the U.S. not too immediately press price increase but to keep managing our portfolio and beyond the group better before we opened the space to act differently in the coming in 2014, so it’s a typical example where we manage that entirely. The U.S. has the margin level which is above the average of the division, it will continue medium term increasing we just take the time to make the price increase when it is at the time when it’s relevant vis-à-vis the dynamics of volumes.

And the same goes with the CIS, so CIS has been up not as much as we wanted again because we have been facing an inflation of the cost of milk which has been up to 30% in reaction to that we have prices increased, we have in 2013 some price increase and in 2014 as well we have been touching 6% price increase beginning of February and that will not be sufficient to us said the current of the cost of milk, so there would be more to come on the table.

In doing so in sequencing the price increase in Russia we have managed to do one thing which I believe is extremely important and this thing is keeping the volume up.

Volumes has been for the year – including after passing meaningful price increase, they have kept being up, not by – not by 10% but by 1%, 2% and therefore again this is not breaking the dynamics which we are being putting in Russia, in the CIS and we will continue, I believe this is consistent we already keep increasing the markets in Italy, we also have of course significant feel of productivity in this country which we need to continue it is working in distribution and as Franck mentioned with the partnership with Dentressangle but also in other areas, so we continue managing it in a very micro manner but consistently with our medium term objective.

Pierre-André Terisse

I just want to add something on the things between price of milk and price consumer price because I don’t want everybody imagine that if you have a price milk increase you transfer to the consumer the famous pricing power. Basically how are we doing, and that’s the reason why we postponed in the U.S. and we didn’t do everything in Russia in term of pricing increase, because the best way to answer to that situation is first of all you can reduce the promo – the promotion, price reducing, which is a price increase somewhere, if you reduce the promotion.

The second we play the mix and you have seen all the new product we launch and launching new product we even – we obviously try to launch new product with higher price, means a better of sales, which help us to improve the margin. And after that we have the productivity, but as you can see a productivity plan which is never finish.

The periodicity plan – the timing of the productivity plan is not always the timing of the price will increase, so you have to consider that in few years. And after that we do the price increase. So that’s the reason why I think we – that the way we manage the situation. But it’s true that in the U.S. being in the battle of Greek it’s much more clear to wait to be co-leading or leading.

If you are number three, number four you are noting in a good position. We were at number two, now we are number one, call number one. And we are going to launch new product with the Greek with a better price so we will play the mix to increase price also.

Franck Riboud

Another question from the room.

Pierre Tegner – Natixis

Just to follow up on tax. The 30% you are guiding for this year, is it including any payment of the dividend in shares or?

Pierre-Andre Terisse

Sorry what I am say this that we think 30% is sustainable plus or minus everything so the dividend payment in shares is going really to be a positive on top of that and may be or the negatives coming from the government in various places. So it’s more gap which I think pretty.

Pierre Tegner – Natixis

Okay.

Pierre-Andre Terisse

Questions from the phone. Who’s first?

Operator

Warren Ackerman of Societe Generale, please go ahead.

Warren Ackerman – Societe Generale

Good morning Pierre-Andre. Good morning Franck. Good morning Regis. It’s Warren Ackerman here at SocGen in London. Also three questions, the first one for Pierre-Andre. Could you just be a bit clearer just on when you say unbalanced for the delivery of top line and margins, just to help us, could you give us an idea just on H1 2014 organic growth and margin, just how unbalanced or asymmetric you’re talking about? I mean previously you’d said on the margin 150 bps unbalanced between H1/H2. Is that still your thinking?

And then secondly, just on China baby, I’m just wondering whether you could give us a bit more color as to what your exit market share was in Q4? And when you’re planning to introduce Nutrilon, what’s the timing of that super-premium launch? And is there any update on the kind of investigations that you’re doing internally with regard to the promotional practices and have been coming out during the course of 2013 in China? And then just finally one for Franck, is your tube-feeding business within medical core or non-core? And maybe if you could give us an idea of how big tube-feeding is as a percentage of the overall medical revenues. Thank you.

Franck Riboud

Okay, Warren its not three questions, it’s a correction of questions organizing, but we will try to address them and start with the last one may be because this is the most difficult we won’t make any comments on these question. No comments at all. I will get back then to the first question about the unbalancing, yes, I mean basically teams have not really move teams are the end of last year i.e. the level of unbalancing should be approximately three points on the top line and the level of unbalancing on the margin should be 150 to 200. I am saying 150 to 200 because obviously the main elements of construction of this €150 million to €200 is China. But on top of that we may have some phasing on the pricing elements as we have explained for Russia and for the US. So, 150 bps to 200 bps rebalancing on the margin and 3 points on the sales.

Warren Ackerman – Societe Generale

The average is 5 point for the year so 3 points unbalancing would be to in H1, and then 8 in H2 is that the way to read it?

Franck Riboud

Yes, you are correct expect that you are saying 5% and we are saying 4.5% to 5.5% and I am saying you are around 2%, around 3% sorry which would be a 2.5% as well, but so yes fundamentally you are doing well, you are just not taking exactly the right regions. And I would pass the mic to Frank for the last question.

Pierre-André Térisse

Normally you will know more and then Pierre-Andre is answering. So market share, I’ll give you three figures, our market share in China end of 2008, was around €19.19, July was 13% July end of July our market share was around 19%. And October we were around 12%. Today we are already 14% and again the thing that means we regain market share having not recovered the situation with Dumex. But again you have to understand what I explain about the channel we are really growing incredibly strong in the cross border business, the official one, in the Mama stores, baby mother store, and especially in Internet with mostly company called Alibaba we are very close.

And within this new channel, we already have the Blue House, but the plan will be now we have Dumex the basic one, we are going to launch in a few days a new Dumex with new packaging with new ingredient basic mainly in hypermarket, supermarket. And in April we are going to launch Dumex International. International because the mother are still looking for product coming from outside and the Blue House is already at Aptamil, Nutrilon. is already launched in Hong Kong.

And I think you will have to wait through Q2, Q3 to see the big launch of this in China. So the plan now, not for the end of the year the plan, that the process is very soon, and very quick that’s all I think.

Warren Ackerman – Societe Generale

Are you sure there isn’t anything happening on that? I saw that Mead Johnson yesterday filed an 8-K saying that they had infringed on promotional practices. I’m just wondering whether the two cases that we’d seen in 2013, is there any kind of update or any kind of investigation what’s happening internally in China?

Franck Riboud

Well I mean there are two sides from a legal standpoint first of all, this is closed. So there has been no legal consequence and the case have been closed from an internal control standpoint as you know well in France, and as we said, it’s a [indiscernible] so we are doing what we have to do, but this is purely internal work.

Warren Ackerman – Societe Generale

Okay, thank you.

Franck Riboud

You are welcome. And other questions from the phone?

Operator

Question is from James Targett of Berenberg. Please go ahead.

James Targett – Berenberg Bank

Good morning. A couple of questions from me. Just firstly, could you give us an idea of what you think your input cost inflation for 2014 is looking like at the moment? And obviously you mentioned you’re delaying with the price increases in North America, but I just wondered what you think about your, the outlook for pricing to recover costs in Europe in 2014. And then secondly, back on infant formula in China, just in terms of pricing I just wondered where your pricing came down to on average by the end of last year and where you’re expecting it to recover to if you look at your plan for recovery in 2014? Thank you.

Pierre-André Térisse

Pierre-Andre speaking. On the last one, there was no major revolution of pricing beyond what had been done just after summer, and after everybody basically on the market put price down, so we have been putting price down and then no subsequent evolution, the way we see things and I have said that already at that time, is that, there is a minimum which is at least as important as price and this element is mix. And behind all the product which Franck talked to you about, you can read clearly that mix is going to be a positive for us going forward and we play very much with that.

So that’s for the pricing and mix element in infant formula in China. With respect to input costs, what we are expecting at this stage is, mid to high single-digit inflation of the cost of milk. As we have seen last year this can move pretty rapidly, but this is the best assumption we can have at this stage, assuming fundamentally that there will be no correction back from the levels we have seen so far.

And with respect to – and, sorry, this is obviously going to lead us quite some price increase in different markets, as a last-resort measure, but to have some price increase in different markets. And it obviously will have to be the case in Europe as well, where we are clearly today in a much better position than a year ago, because as you have seen again, there has been a lot of renovation in terms of product lines. There has been inversion in the market share trends, and we are much more solid to go through this exercise now than we were a year ago. And I think that’s it for these questions. Are there any other?

Pierre-André Terisse

Yes.

Franck Riboud

Okay.

Operator

Our next question is from Liam Rowley of Barclays. Please go ahead.

Liam J. Rowley – Barclays Capital Securities Ltd.

Hello. It’s Liam Rowley from Barclays. Just two questions again from me. Your guidance on the margin is clearly for like-for-like development. I’m just wondering whether, given you had an extra 20 bps headwind from, in 2013 from M&A and FX, whether you could give any sort of color round what that headwind might be in 2014?

And then secondly, you mentioned briefly that the FDA granted health claims in the U.S. for Activia. Could you give any idea of what those claims are and whether there’s any chance of getting similar claims in Europe? Thanks very much.

Franck Riboud

No, no. We just have the result of the FDA to us, so we are looking how we can translate this health claim within an advertising, proper advertising to the consumer. But it’s still in process, so I can’t disclose anything on that. In Europe nothing move. It’s still the same ambience except that I think you will see a new advertising campaign for Activia, respecting the rules but really say, talking about – how you say [Indiscernible]

So we have to wait a few weeks. We have a new advertising campaign. But nothing change in terms of rules. And nothing will change, so we are doing our job differently.

Pierre-André Terisse

But the advertising is very exciting

Franck Riboud

Yes.

Pierre-André Terisse

Teasing. On the other questions, Liam, which is about the margin scope and FX evolution traditionally we don’t have much FX impact on the margins, so I will not expect significant improvement next year, but slightly negative effect, a few bps maybe. On the scope we had of course the full year effect of the integration of the acquisition this year. But at the same time there is one transaction which is going to be accretive from a corp standpoint, sorry, and this is the set-up of the JV with Mengniu, which is going to balance it. So I would not expect altogether any meaningful scope impact on the margin in 2014.

Liam J. Rowley – Barclays Capital Securities Ltd.

Thanks very much.

Franck Riboud

Welcome. Another one.

Operator

Our next question is from Alex Smith of Espirito Santo. Please go ahead.

Alex P. Smith – Banco Espirito Santo De Investimento SA

Yes, hi. Good morning. I’m just wondering if you could talk a little bit more about the European dairy business and some of the performances by the key individual markets, what the trends have been. It sounds like Italy, Germany are still in a pretty sharp decline, perhaps what your plans are there. How Portugal is going, how Spain is going? And then I think you said you intend to stabilize that business in 2014. Is that a year-end target, i.e. Q4, or can we expect to see the business back in growth by the end of the year? Thanks.

Franck Riboud

On last part, yes, that’s what I mean. In the last month obviously Q4 of 2014 indeed, you’re right. And for the trends I will leave it to Franck to

Pierre-André Terisse

If you look at Europe, the trends, we can speak about all the countries, but honestly the priority is France, Spain, Italy, Germany, UK, Portugal. That’s the main country. If I take the smallest one, Portugal, we are already growing double digit in Portugal. If I look at Spain, we were growing in volume and now the end of the year we are let say zero –zero price in term of value that the reason why we said it’s going to be, I don’t think the end of the year, but we are going to increase the growth of the dairy division all along 2014 year.

I look at France, France was not really declining. That was always between minus 3, plus 1. But I think France will be the last one to really recover the situation not only because of the global environment in France but also because of the price of all you have between the different retailers in France. But at the end France now accounting for 8%, 9% at the Group level so that’s the reason why we fight a little bit with our friend from the retailers especially to pass our price increase and listing new product, and so on.

That’s the reason Germany is really link on the Actimel situation because in Germany, if you remember well, we have mainly two products, Activia and Actimel. That was the shortest range we have in this European country. Actimel is doing much more better, not yet positive, but let’s say minus 3, minus 4. So I think we find a right way to communicate and the right way to reach the consumer.

So having said that, if you go back to all the new product and the -- I know that the difficulties -- I’m giving example where we are going 15%, 20%, 12%, but at the end we are still not growing because we have the best business to refurbish, we have to fight against the decline of Actimel, which was much more important in the [indiscernible] which impact also the mix of the European country.

So that’s the reason why we have a huge plan of innovation with product like Danio. But before the weight of Danio will compensate the weight of Actimel five years, six years ago, that will take time. But we are -- we really have the felling, that we know how to handle this, and as I said we have some very nice example, which shown us that we are going in the right direction. But it’s not rocket science, it’s our basic business, our basic marketing, our sales force, the way we animate the shelves. So, nothing very scientific, but really working.

Alex Smith – Espirito Santo

That’s very helpful. If I can just ask a follow-up on European dairy margins, I wonder if you could say whether the margin trend in H2 and or how that trend compared to H1? Is the margin trend beginning to stabilize? Is it getting worse? It’s just a little bit obscure because of all the movements in North America, I guess.

Franck Riboud

I mean, I want to be specific in terms of guidance on that. Now it’s absolutely clear that our goal through the work on the cost base through the dynamics of the top line is to stabilize emergency margins in Europe, and that we are getting close to it. Now whether or not it’s going to be Q3, Q4, H2 December the beginning of the following year [indiscernible], I don’t want to guide on. But that’s the kind of frame we are talking about stabilizing margins and obviously the stabilization of the top line is one of the key conditions for that. All the work we are doing on the cost is another condition, so we are getting close to it.

Alex P. Smith – Banco Espirito Santo De Investimento SA

Okay. Sorry, I meant H2 for 2013 versus H1 2013, was the dairy margin in trend better in Europe?

Franck Riboud

Again, I don’t want to comment into that kind of level of details.

Alex P. Smith – Banco Espirito Santo De Investimento SA

Okay. Thanks.

Franck Riboud

Okay. We’ll take one more questions.

Operator

The question is from Mitchell Collett of Goldman Sachs. Please go ahead.

Mitchell J. Collett – Goldman Sachs

Hi, there. Three questions please. Firstly, A&P. You say in the full year release that it contributed 86 basis points of margin improvement. I think in the first half it was 37 bps. So that implies a pretty meaningful contribution to margins in the second half. Could you perhaps give a bit more context around that? I know you’ve given the three reasons why it’s changing overall, but why was the second half much better than the first half?

And then do you think that those three reasons why A&P as a proportion of sales is coming down will continue for the medium term? Secondly, you obviously gave some color on input costs for next year going up mid to high single-digit. Can you give us a bit of context by region, where you think input cost rises will be greatest?

And then thirdly, you said you didn’t put through all of the input cost inflation in pricing in the U.S.. Was that a strategy that your competitors followed as well or were you perhaps price-leading in that market? Thank you.

Franck Riboud

No, essentially in the U.S. everybody followed the same strategy, so it was not an isolated case. I think the dynamics of the market, the requirements for capacity on the Greek, and at the same time the fall of the rest of the category, brought the category into that. Now priorities are going to become a bit more comprehensive from now.

On the input costs, I’m not sure I would like to break it down by regions. The only thing I can say is that, it’s obviously very strong in some specific markets, and I have running mine which is Russia. We’ve been running and we keep running at inflation rate of about 30%, in some other markets, where there has been a devolution of the currency this is clearly not helping either, so emerging markets are a little bit stronger.

And then I will not go further than that. But it’s very consistent. It’s emerging markets which are suffering most and at the same time, this is the good news, it’s also the place where we have the greater flexibility in terms of price. With respect to your questions on A&P, I’ve been struggling to explain everyone that we are not milking the business with our A&P, because the natural reaction of many financial people in front of an A&P reaction is to think that we are cutting to achieve our margin target. And it’s absolutely not what’s happening. Just a few examples for you to have this clear.

We are running a level of A&P on sales, which is higher in markets where we have a strong development like Russia, like the U.S., like China. Sorry, we are running with a level of A&P on the can, which is lower in these markets than it is in Europe. So we are spending more in proportion of sales in Europe than we are spending in market in which we are developing fast, which to me means that we have no question of overall spending, but more a question of allocation, hence the fact that we are trying to take it very dynamically.

And when I said out of the three factors that there was one which was geographic, I meant it, i.e., we have such a strong growth in markets outside Europe then I cannot imagine that we are spending below what we should spend. We are spending what we spend and we are generating 10% growth in emerging markets and 10% growth in North America and into CIS.

And then the question becomes Europe, because we used to have a model, which was, as I said, extremely heavy in terms of A&P, which was a model of Acti brands with health benefits and the TV ads. And this model is basically going down and we are replacing it with a model which is more comprehensive in terms of milk. Why because we are spending money on the pack.

So we’re investing actually money that will be able to produce a pack of your growth which is going to different from the competition, differentiating. We are spending the money on the recipe to have more taste and better taste for the consumer. We’re spending money on the design; we’re spending money on the brand activation through digitals, which is becoming, in the case of water, for instance and incredible and unbelievable level.

And basically what we are doing is to trying to re-shift the money spent where it is more efficient and where it is more adapted to the current product range we have and to the needs of this product range in terms of going digital. So, that’s why has been trying to put these slides just to feel a bit beside me that’s doing business in the food business, in dairy, in water, is asking for as I put money in A&P and I have advertising on TV and I grow, because the world is not this animal at all. It has become far more complex and what we are looking at is efficiency.

Again, the counterpart of what I’ve been saying about the A&P, which is positively therefore contributing to our model. Is of course the evolution of the margin on one-hand, gross margin and these as well the evolution of the CapEx. Because one of the things we’ve been doing in Europe, for instance, in the past few years has been to invest in our new lines in order to be able to produce new product and this is what is helping now the top line of Europe to progressively recover.

Is that going to last? I would suspect to that’s a trend which we’ll keep seeing. At what base, i.e. is it a base of the full year or the base of H2? I don’t know the base of H2 you just have to remind that China is of course playing a role now. Because we’ve been moving a bit the pieces of the advertising and the A&P we had in Asia following the Fonterra crisis. If I look at the rest, simply put, I have less A&P, if I follow your reasoning that might apply ex-Fonterra.

Perimeter is higher in the second half. So if this is what I have to do. And more than, pleased to continue doing it, so all that to say that yes its going to continue contributing, yes it’s a level which we control, we have consciously in mind and we activate. And this is part of the reacceleration story of dairy in our portfolio.

Mitchell J. Collett – Goldman Sachs

So is there any region or business area in particular that had lower A&P to sales in the second half than the first half?

Pierre-André Terisse

Well, I told you Asia for the reasons which are linked to the BABY ASIA crisis.

Mitchell J. Collett – Goldman Sachs

All right, thank you.

Pierre-André Terisse

All right. We’ll stop here. I just want to thank you very, very much for your presence by phone or physically and we’ll see you on the road. If you have more questions, I’m sure you have, we’ll take time with you. Thank you. Have a good day.

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