Earnings Call Transcript - NOMD Q2 2024

Jason English, Interim Head of Investor Relations

Hello folks, and welcome to Nomad Foods' Second Quarter 2024 Earnings Call. I'm Jason English, Interim Head of Investor Relations, and I'm joined on the call by Stéfan Descheemaeker, our CEO; and Ruben Baldew, our CFO. By now, everyone should have access to the earnings release for the period ending June 31, 2024, that was published at approximately 6:45 a.m. Eastern Time. The press release and investor presentation are available on Nomad Foods' website at nomadfoods.com. This call is being webcast, and a replay will be available on the company's website. This conference call will include forward-looking statements that are based on our view of the company's prospects, expectations, and intentions at this time. Actual results may differ due to risks and uncertainties, which are discussed in our press release, our filings with the SEC, and our investor presentation, which includes cautionary language. We will also discuss non-IFRS financial measures during the call today. These non-IFRS financial measures should not be considered a replacement for and should be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within our presentation represents adjusted figures for 2023 and 2024. All adjusted figures have been adjusted primarily for share-based payment expenses and related employer payroll taxes, non-operating M&A-related costs, acquisition purchase price adjustments, exceptional items, and foreign currency translation charges or gains. Unless otherwise noted, comments from here refer to those adjusted numbers. With that, let me hand over to Stéfan.

Stéfan Descheemaeker, CEO

Thank you, Jason. Nomad Foods delivered another quarter of solid top and bottom line performance. I'm pleased to report that the volume inflection we previously forecasted has come to fruition with volume growth of 1.6% this quarter. This is the first period of volume growth since quarter three 2021, but certainly not the last. Net sales increased by 1.1%, including a 0.6% benefit from foreign exchange as the positive volume growth was only partially mitigated by the surgical price investments we made to drive profitable growth. This marked our 8th consecutive quarter of positive organic sales growth, and we are pleased that we have been able to amplify the top line growth throughout our P&L. Gross margin expanded by a robust 270 basis points on two primary drivers: our team's continued success driving supply chain productivity savings, and our favorable mix, as we are winning our Must Win Battles. This gross margin expansion is funding our reinvestment into driving category growth with a material increase in advertising and promotion this year. But despite this reinvestment, we were still able to deliver 5% adjusted EBITDA growth in the quarter and a 10% increase in adjusted EPS. And while the top line improvement in this quarter has been a bit slower and more gradual to material than we first expected at the start of the year, the evidence that the inflection has now begun and that our investments are generating increasing returns bolsters our confidence in our ability to achieve the profitable volume growth acceleration that our second half outlook is based on. Let me elaborate a bit more on what gives us this confidence. First, while the European consumer remains pressured, the headwinds from the cost of living crisis that they were under have begun to ease. Consumer confidence is inching up, and price sensitivity appears to be lessening, as evidenced by the modest shift we are beginning to see towards premium products. The environment is still challenging, but a bit less challenging than we have seen in recent years. And while it is happening, we are reminded that we play in a great category. As we illustrate on Slide 4, while growth can vary period to period, volume growth for frozen food has generally outpaced total food for the last 18 months. And that relative outperformance has only grown, with frozen food posting a robust 6% volume increase in the most recent period. The early read in July suggests that the momentum has continued. And while we do not show it on the slide for possibility's sake, the story operating outperformance is the same through a value lens. We are leaning in to drive this growth with our retail partners. And on Slide 5 we illustrate a few of these investments. Our advertising and promotion spend rose 30% year-on-year this quarter, as we supported our Must Win Battles and growth platforms. An example of this is in our chicken portfolio where we have been executing behind a full 360-degree campaign in the UK, and we will be bringing compelling innovation under the Birds Eye Chicken Shop brand in quarter three with the launch of new loaded burgers, chicken wings, and buttermilk tenders. This is resulting in strong and accelerating growth in these Must Win Battles. And in Germany and Italy, where chicken is an early development growth platform for us, we have a fully integrated advertising, promotion, and merchandising plan that have been supported by innovations such as the quarter one launch of Chicken Burgers under the Findus brand in Italy and the upcoming quarter three launch of iglo branded stuffed mixed chicken nuggets in Germany. We love this subcategory. It is large, profitable and we have a clear right to win. Our brands, which have legacy heritage in branded fish, have proven that they can extend into branded chicken by relying on the competitive dynamics. We are the only manufacturer investing with this level of advertising and innovation, and the actions we are taking to modernize and premiumize the category are driving revenue and margin growth for both us and our retail partners. Overall chicken platform volume is up double digits year-to-date, and gross profit growth for the platform is outpacing volume and revenues as our premium innovation mixes our margins higher. This is one of many examples we have of our investments bearing fruit, and we're excited about the innovation and distribution expansion plans that we have secured for the second half. It is because of this that we are confident that the positive volume inflection and improving market share performance in this quarter is just the beginning. We will deliver further acceleration and expect our exit rate this year to be especially strong due to the timing of our initiatives. We are confident in our ability to deliver on the reiterated guidance and excited about the momentum that we will build into 2025. With that, let me turn it to our new CFO, Ruben Baldew, to walk through our quarterly results and outlook in more detail. But before I do so, I want to thank Samy Zekhout for all the accomplishments we achieved in getting our company to this point during his tenure as our CFO. I also want to thank him for generously committing his time and energy to ensure a smooth transition. This has helped Ruben hit the ground running, and I'm pleased to see Ruben already making a positive impact on the business.

Ruben Baldew, CFO

Thank you, Stéfan, and good morning everyone. I'm pleased to be presenting here today for the first time as the company's CFO. I joined the organization for various reasons. First, I believe in the frozen food category. The benefits this category delivers, both from a nutritional perspective as well as the positive impact on the environment because of lower waste, align with macro consumer trends. I believe the strong benefits will continue to drive future category growth. Secondly, I believe in the role Nomad has been playing and will continue to play as a category leader with a diverse portfolio that spans vegetables, fish, poultry, and healthy meals. Lastly, I love the quality of its brand, the strength of Nomad's supply chain, and the level of talent among the people at the company. Now that I've been in the seat for nearly two months, I'm even more confident that I made the right decision. As the second quarter results illustrate, I've joined the company at the beginning of an important inflection point, and I'm excited about the contribution I will be able to make to accelerate profitable growth in the quarters ahead while generating outside shareholder value. As you can see on slides 6 and 7, for the second quarter, reported net revenues increased by 1.1% to €753 million. Organic growth improved further to 0.5%, while favorable foreign exchange contributed 0.6% to the quarterly sales. Volume growth accelerated to plus 1.6% year-on-year from a decline of 2.2% last quarter and was partially offset by minus 1.1 price/mix, as we retain the vast majority of the 20.6% price/mix increase we achieved in the same quarter last year while surgically reinvesting a small portion of the prior increase to support growth. In this context, and despite the surgical investment, second quarter gross profit rose by nearly 11% year-on-year, with gross margin climbing to 30.9%, a 270 basis point increase from the year-ago quarter. Let me spend a few minutes on our gross margin performance during the quarter. While pockets of inflation sustained the outside cost pressures seen in recent years have eased, which is allowing the strong mix benefit of our Revenue Growth Management efforts and Must Win Battles to become more evident. Roughly two-thirds of our gross margin expansion this quarter came from mix as we win our Must Win Battles and still our growth platforms. The remainder of our gross margin expansion is primarily coming from our supply chain productivity efforts. Our organization has worked hard to unlock cost savings, and the successes achieved year-to-date are accompanied by a large pipeline of programs that will support future efficiency gains. As Stéfan mentioned, the strong gross margin is giving the organization the fuel it needs to reinvest in our growth flywheel. Adjusted operating expenses rose 15% year-on-year in the quarter as we funded a 30% increase in advertising and promotion while investing in organizational capabilities. Despite the reinvestment, we were able to deliver robust adjusted EBITDA growth of 5.3% and a healthy year-on-year adjusted net income increase of 5%. A lower share count, as we continue to return cash to shareholders, allows that growth to be 10% at the adjusted EPS line yielding an EPS figure of €0.44. Turning to slide 8. Our strong profit performance continues to translate into healthy cash flow, and we have increasingly returned cash to shareholders in the form of our recently established dividend. Year-to-date adjusted free cash flow was €42 million, which was down year-on-year, mainly due to higher working capital needs and cash interest. The timing of receivable phasing was a headwind in the quarter, but one that we expect to reverse as we progress through the year, and the same holds for cash interest expenses, which were more front-end loaded this year and will be a more moderate use of cash in the second half. Turning to our guidance for 2024 on slide 9. We are pleased with our first half performance and are building momentum, enabling us to reiterate our full-year guidance. Our organic revenue growth is accelerating on the back of a powerful volume inflection, and while the organic sales acceleration has taken a bit longer than we expected, we remain confident in achieving our full-year net revenue growth range of 3% to 4%. This revenue outlook implies acceleration in H2, where we will be cycling much lower organic growth than we faced in the first half, while reinvesting our H1 profit over delivery to support this growth. We have line of sight to strong retail programs and distribution gains behind a robust pipeline of innovation, promising growth platforms, and must-win-battles. We will be leaning in during quarter three to strengthen this momentum and expect the returns of that investment to be most evident as we exit the year and build strong momentum into 2025. Despite this investment, we remain confident in delivering our full-year adjusted EBITDA growth guidance of 4% to 6% and adjusted EPS of €1.75 to €1.80 per share. At the US dollar euro exchange rate on August 1st, our adjusted EPS guidance translates into $1.89 to $1.94 adjusted earnings per share and implies 9% to 12% year-over-year growth. We are on track to deliver 90% to 95% adjusted free cash flow conversion for the full year and remain committed to returning capital to shareholders. Year-to-date, we have returned €64 million to investors, up €12 million year-on-year, as we have now returned €45 million year-to-date through our newly established dividend. We declared our third quarterly cash dividend of $0.15 per share last week, highlighting our strong consistent cash flow and our commitment to returning cash to shareholders. I'm pleased with our momentum in the first half. It's a testament to the hard work and dedication of our talented workforce. Our growth strategies are working, and we are even more confident in delivering top-tier top and bottom line growth in 2024. I will now turn the call over to the operator for your questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Andrew Lazar of Barclays. Please go ahead.

Andrew Lazar, Analyst

Great. Thanks so much. Nice to meet you, Ruben, and great to hear from you, Jason.

Ruben Baldew, CFO

Good morning, Andrew.

Stéfan Descheemaeker, CEO

Good morning.

Andrew Lazar, Analyst

I wanted to I guess come back to, sort of, organic growth expectations for the back half. I think that's where obviously a lot of the focus will be. To hit the low end of the 3% to 4% organic sales growth range for the full year, organic sales would need to accelerate from call it 0.4% in the first half to more than 5% in 2H, and to the extent that price continues to be a modest drag given some of the surgical reinvestment, it would mean obviously an even greater acceleration in volume to hit that target. And obviously, you saw a nice sequential improvement in volume from 1Q to 2Q. But the full-year guide certainly requires a whole lot more. And I realize you have better momentum, easy comps and some margin flexibility to reinvest. But I was hoping maybe you could come back to maybe a little bit more depth around why you held that range and what gives you that level of visibility to sort of get there.

Stéfan Descheemaeker, CEO

Thanks, Andrew. We can agree that Q2 marks an important turning point in terms of volume. You mentioned a range of 0.5% to 5.5%. Last year in Q3, we were at minus 13%. We improved to between minus 8% and minus 2% in Q1, and then we entered positive volume territory, which is somewhat ahead of what we previously announced. Regarding the gross margin, it's performing well, providing us the flexibility to invest in our top-line initiatives. We see substantial innovation ahead along with new growth platforms in poultry in Germany and Italy that are just starting to gain traction. Additionally, we are significantly increasing our advertising and promotion spending, which will be much higher on a full-year basis compared to before. All these factors combine to create what we refer to as a flywheel effect, balancing pricing changes or specific promotions with innovation, growth platforms, and effective momentum in the category. We believe achieving the estimated range is possible, though reaching the higher end of that range may prove more challenging. However, we are confident that the 3% to 4% target is achievable based on our outlook and the positive results we've seen in July.

Andrew Lazar, Analyst

And then if I heard you right it sounds like a bigger step-up in investment would be 3Q and then you'd expect I guess a further or a greater acceleration in organic top line really in 4Q if I heard that right.

Stéfan Descheemaeker, CEO

That's correct. We're going to keep investing on a full-year basis. However, I think Q3 will still focus on investment, particularly in A&P, supported by strong margins that allow for this approach. Don't forget that ice cream is performing exceptionally well, and Q3 is a good quarter for it. All these factors suggest a strong Q4, which should help us start the next year on a very healthy footing.

Andrew Lazar, Analyst

And then last just I'd love to get a better sense of what's happening sort of in the marketplace in terms of the frozen category in your key geographies in terms of consumer behavior, competitive environment with respect to private label where price gaps are, it seems like maybe you've done a lot of work obviously to sort of bring those back to I think what are closer to a more normal range is. But just kind of you mentioned that there's some shifting to premium which is encouraging. A little bit of a better sense on the competitive environment and what you're seeing in terms of consumer behavior. Thanks a lot.

Stéfan Descheemaeker, CEO

It's encouraging to see Europe performing well. There were times in the past when conditions in Europe were less favorable. While the environment remains challenging, we are gradually observing improvements on a country-by-country basis. Overall, Europe, as a global market, is definitely making progress. Additionally, as highlighted in the presentation, our category is advancing ahead of global food trends. We believe frozen food is not only nutritious but also affordable. We are premiumizing our offerings, yet they remain accessible. This category possesses all the attributes of long-term success. With our margins and capacity to reinvest in innovation, particularly in advertising and promotion, we are confident in our strategy. After two interesting years, we are beginning to see some promising signs.

Andrew Lazar, Analyst

Thank you. See you in a couple of weeks.

Stéfan Descheemaeker, CEO

Yes, absolutely. Looking forward very soon, Andrew.

Operator, Operator

Our next question comes from Rob Dickinson of Jefferies. Please go ahead.

Rob Dickinson, Analyst

Thanks very much. Maybe just a question on the volume side, maybe in the markets that aren't doing as well, right? I did hear it sounds like Must Win Battles, which are a decent percent I believe of the business grew volumes 4%, I heard, chicken portfolio double-digit, and then some of the growth platforms maybe around 20%. So, clearly a little bit of a disconnect in some of the focus areas relative to some of the less focused areas. If you could just touch on that that would be great.

Stéfan Descheemaeker, CEO

Thank you, Rob. As you know, our focus has always been on Must Win Battles, which are crucial for us. These first 25 Must Win Battles account for about 50% of our business and contribute significantly to our margins, so that's where we want to direct our investments. We began this approach years ago during our turnaround and have maintained it since. Even in times of crisis, we continue to pursue growth platforms, which will also evolve into new Must Win Battles in the future, such as poultry in various countries. A prime example is the U.K., where the category was valued at €150 million two years ago and has maintained a strong margin. That's our goal. Regarding your question about volume, in the first half of the year, Must Win Battles in terms of volume grew by about 2.6%, compared to a lower figure for the overall business. While we are losing volume in private label, it’s not something that keeps me up at night.

Rob Dickinson, Analyst

Fair enough. It seems that the areas you're focused on are performing well, which then influences momentum in the second half. Could you also discuss the new market and the growth platform opportunity, particularly regarding chicken nuggets in Germany that you mentioned this morning?

Stéfan Descheemaeker, CEO

Yes.

Rob Dickinson, Analyst

I heard you speak previously about maybe there is kind of an outsized opportunity. And we're thinking longer term here, just given even earlier this year you had raised that top line growth algo, right? In the back half, that's even above long-term new algo. And then, as you think forward, okay, if we can stabilize the portfolio win the battles but then clearly there needs to be kind of that other bucket which is what is also driving kind of outsized growth relative to food. So maybe if you could just touch on Germany as kind of a proxy, as to kind of what could happen with chicken entering a new country? Thanks a lot.

Stéfan Descheemaeker, CEO

Chicken is a fantastic category. Currently, approximately €1.1 billion of our sales comes from fish, with around €300 million from poultry, primarily in the U.K., which has great margins. We view this as a promising opportunity for innovation in other countries with low risk, as it's a tested model. With our experience in the U.K., we have supported various countries, particularly Italy and Germany, which rank second and third in poultry sales. We have created a strong innovation platform for poultry based on our U.K. experience, sometimes adapting to local tastes. Italy has progressed ahead of Germany, as anticipated, and our launch there has yielded encouraging results. The situation in Italy differs for new categories since it’s mostly chilled and fresh products. In Germany, the focus is largely on private labels. Our goal is to elevate the category, which benefits us, retailers, and consumers at reasonable prices. Italy has already shown success, and early indications from Germany are also promising.

Rob Dickinson, Analyst

All right. Great. Thanks, Stéfan and welcome Ruben.

Ruben Baldew, CFO

Thank you, Rob.

Operator, Operator

The next question comes from John Baumgartner of Mizuho Securities. Please go ahead.

John Baumgartner, Analyst

Hey. Good morning. Thanks for the question.

Stéfan Descheemaeker, CEO

Hi, John.

John Baumgartner, Analyst

Hey, Stéfan. I wanted to go back to Q2 retail data. The quarter started off fairly soft, and then the June data was really strong. Can you speak to any nuances there? Was there something that occurred in the transition from winter to summer where there was a temporary dip in promo activity, your ROI, where maybe you transition from supporting fish testable, and was there anything in terms of shipment timing moving into these new distribution points that started to be realized in the takeaway data as you close the quarter?

Stéfan Descheemaeker, CEO

It’s a combination of several factors. By nature, when we see this change, it isn't just one factor affecting the others. During the first two quarters, we identified opportunities to enhance our margins for further promotional investments, which we have pursued. This can be implemented more rapidly in certain countries. With our extensive RGM expertise developed over time, we can now approach promotions much more precisely from one quarter to the next. This strategy has indeed had a positive effect. Additionally, we are also investing in advertising and promotion, which can take longer to show results compared to promotions alone. However, you've likely noticed that we began increasing our investment in advertising and promotions towards the end of last year and throughout the first quarter. Over time, you will see this start to take effect. Moreover, we have begun to introduce new innovation programs, such as the poultry initiative in Italy. These efforts are gradually ramping up, and that’s what we have observed.

Ruben Baldew, CFO

Yes. Maybe just to build on that. I mean, Stéfan spoke a couple of times on our Must Win Battles. You've also seen our gross margin up 270 basis points. Being part two-thirds of that is a consequence of our strategy to drive profitable Must Win Battles. By the way, Stéfan said, not only for ourselves but also for the retailers and to drive revenue growth management. We've used that to reinvest. And as reinvestment, as you can see, it's mainly in advertising and promotion, but it can also be a bit surgical on the shop and then to your question over the evolution in quarter two. The big drivers for H2, as Stéfan said, are, A, this reinvestment, B, is the distribution gains linked to innovation, and C, is the fact that we have a softer comparator. Like H1 last year was around 8%, H2 last year was below 2%. And you see the buildup of also quarter two. If you look at external data, that also this reinvestment as well, this pushing points gain, and we see a recovery of that more in the back half of this quarter.

John Baumgartner, Analyst

Thank you for that. I have a follow-up regarding Italy and your current portfolio there. This market accounted for the majority of your volume decline before the revitalization efforts you implemented in the fourth quarter. You have made investments in pricing and retail programming. As we approach the second half of the year, how do you assess the situation in Italy? Are you satisfied with the current price gaps and in-store activities? Do you believe further investment is required in Italy at this stage? Thank you.

Stéfan Descheemaeker, CEO

The answer is, yes, we do feel comfortable with what we do. It's been a bit of a reset in Italy. I think as you know, the margins in Italy are among the big on the large countries is one of the best margin overall independently from the category. And so we gave the conclusion, especially during this, let's say, inflationary period, especially in fish, we came to the conclusion, yes, in some fish categories, we were just too high. And well, it's never nice to come to that conclusion. But you have also to be fact-based and that's what we've seen. And despite that, it's very interesting to see that our revenue growth management helped us because then we've been very surgical again in terms of price elasticity, to see what we need to do in promo, in price, in price points in terms of fish, and it has responded extremely well. So at this stage, obviously, it's a very dynamic environment. But at this stage, I don't see the necessity to invest further in price in Italy. And our margins remain obviously quite good. What we've seen is, yes, we're gaining market share and volume and also gaining market share in Italy now P6, which is extremely encouraging.

John Baumgartner, Analyst

Thanks, Stéfan. Thanks, Ruben.

Operator, Operator

The next question comes from Steve Powers of Deutsche Bank. Please go ahead.

Steve Powers, Analyst

I wanted to follow up on the changes we expect in the second half of the year. In previous quarters, we mentioned aiming for a good balance between volume and price mix. As we look ahead to the latter part of the year, do you anticipate revenue growth management through price mix becoming a more significant factor, or will the composition resemble what we observed in the second quarter, which leaned more towards volume?

Ruben Baldew, CFO

Yes. Maybe to answer that, it's good to give context a bit on the price mix what happened in the last quarter because I think that will also help looking forward. So a bit of context, and I think it was also followed earlier. I mean, we delivered the volume recovery and the price although it was negative, and it needs to be seen in the comparator last year in quarter 2, we took 20.6% price. Well not only the percentage in absolute terms, that's €144 million. And out of that €144 million, we kind of held 95%. And I think that comes to maybe more important points rather than the context is what we will continue to do in quarter 3 and quarter 4. We will continue to drive positive mix, because again, a big part of our margin increase was a result of us driving Must Win Battles, which have more profitable margins and drive revenue growth management. That is what we will continue to do, and we chose in quarter 2 to say okay some of that we reinvested the shop floor, some of that to 30% advertising and promotion, we invest in advertising and promotion, also we invest in the organization. And the output of that has been clear with what Stéfan said, the minus 13% quarter three volume minus 8% minus 2.1% and now plus 1.6%. And that's also how we will look at that in quarter 3 and quarter 4 to continue to drive margin mix and to reinvest some of that potentially for shop floor and in our brands.

Steve Powers, Analyst

Okay. That's very helpful. And maybe as a follow-on to that Ruben for you. When I talked to Stéfan a few months ago with Samy about your arrival, one of the topics we talked a lot about was revenue growth management and not only the progress made over the past several years but also the potential going forward and really the idea of taking it to the next level. And I think Stéfan can validate, he felt like your arrival was going to be a big catalyst for that. Maybe your perspective on where revenue growth management disciplines are today, as you come into Nomad and what your objectives are over the next couple of years?

Ruben Baldew, CFO

Yes. So let me be clear on the objective is really to continue the great work which was done both by Stéfan and also by Samy on the RGM. And the experience I have here coming from Unilever, a smaller company, but especially Unilever. I would say RGM is a very high level. But as with always with everything you do, there's still opportunities. I think great progress has been made on mix on promotional effectiveness. Now it's also what we looked at surgically to see how we can optimize but there are more drivers of RGM. So what can you do with the overall trade term and optimize there. So we will definitely continue to drive that. I think it's at a good level, but it doesn't mean we're out of opportunities and there are more levers to pull here. That's all I can say after the first six, seven weeks now.

Steve Powers, Analyst

Okay. Very good. Thank you so much.

Stéfan Descheemaeker, CEO

The good news, Steve, is perfection doesn't exist. There is always a way to improve.

Steve Powers, Analyst

Yes, indeed. Thank you very much.

Operator, Operator

The next question comes from Jon Tanwanteng of CJS Securities. Please go ahead.

Jon Tanwanteng, Analyst

Good morning. Hi, Stéfan and welcome, Ruben. And it's great to see the return of volume growth and also healthy margins underneath. My question to you is could you break out what percentage of revenue was must-win products in the quarter? And then following that what is the margin differential between an A-grade must-win product, maybe a B-grade one, and then maybe the rest that you're defocusing – if you could...

Stéfan Descheemaeker, CEO

Yes, Jon, can you do me a favor? Can you repeat the first part of the question?

Jon Tanwanteng, Analyst

Yes. What percentage of your revenue today is must-win products?

Stéfan Descheemaeker, CEO

Okay. Well, as we said, you take the top 25 must-win-battles and they represent just short of something like 50% of our sales. Now if you're thinking you're adding the must-win-battles, we're in the region of two-thirds. It's a never-ending story Jon because when we started this journey, well, there was no must-win-battles. So everything was strategic, which is in and of itself an aberration. And so we started by defining okay, we're going to go with the must-win-battles, the biggest, the largest, the most profitable margin. And so we decided okay, we're going to not get our resources to advertising, promotion, pricing, innovation behind, it's in two-thirds of our business. And then for years what we've seen is this business and surprisingly went up by something like 4%, 5%, which means that the last one-third obviously was zero or even declining, which is fine because it came up also with an improvement of the gross margin. Well, you know what, after six, seven, eight, nine years, if you notice when the two-thirds, the two-thirds is becoming in of itself 90% of the business. And so you have to do it again, and that's what we just did last this year is to take the most profitable must-win-battles and start again from two-thirds to make sure that the resources we have are going to be properly allocated. Well we intend – we think that between this two-thirds and the growth platform this is going to quickly become again 85%, 90%. And then again and again and again I think that's the – what that allocation in action.

Jon Tanwanteng, Analyst

Got it. No, that's helpful. And then I was just wondering on the margins in each of those categories and maybe a little bit further. As you go through the year, did you expect most of the margin contribution to be from the improving mix there or underlying margin improvement? Or is it just volume leverage off of all of that?

Ruben Baldew, CFO

Yes. In the second quarter, we saw significant benefits from our product mix. It's also important to note that the impact of inflation is becoming clearer, thanks to the efforts of our supply chain team in factories and logistics. These benefits would have been more apparent in the first quarter if not for the inventory revaluation, and we will continue to pursue these mix advantages as well as supply chain improvements. Currently, we have a strong understanding of our cost outlook, having covered about 90% of it. Although inflation has eased, there are still some areas to monitor, particularly with certain products. We will keep focusing on enhancing our mix and leveraging supply chain contributions, and we might strategically use some of these benefits for shop floor investment, promotions, or to enhance organizational capabilities.

Jon Tanwanteng, Analyst

Great. Thank you. And then last one, if I could. Are you expecting to regain share in the back half just given the growth of the category being as strong as it is?

Stéfan Descheemaeker, CEO

Yes, we are focused on our must-win battles, and while we are committed to regaining market share, it will require more investment in this area compared to others.

Ruben Baldew, CFO

Yes. And to build and that's driven by our ability to invest linked to distribution gains.

Jon Tanwanteng, Analyst

Understood. Thank you.

Stéfan Descheemaeker, CEO

You're welcome.

Operator, Operator

Our next question comes from Peter Saleh of BTIG. Please go ahead.

Peter Saleh, Analyst

Great. Thanks for taking the question. Good morning to everyone. I did want to ask, if you could just elaborate a little bit on your comments on the European consumer in general. It sounded like there are still pressures, but those pressures have eased. And that just seems like a little bit of a tone shift from maybe what you heard a quarter or two ago, and the modest shift to more premium items. Can you just elaborate on what you're seeing and maybe what's changed for the European consumer over the past couple of months?

Stéfan Descheemaeker, CEO

Well, I think again, without being too macro, because you have a lot of different situations. But overall, what we see is well, interest rates are going down a bit. That's one thing. Inflation obviously easing, especially in Europe compared to the US. And well, I think it has immediately an impact in terms of consumer confidence, especially with the let's say the most important items like food, for example. So we've seen this. But again, I think we've calibrated our worst in the right way which is improvement but it's less challenging than the word we're using, because we're not fully out of the wood yet. But let's say because people have to digest something like a 20% inflation. So that's nothing – nothing, sorry. But at the same time, yes, ahead of us, ahead of what people see. Obviously, salaries are increasing in the meantime. Salaries are always coming after the first inflation. So people are seeing this, and as they see their disposable income improving in that way. That's the situation overall that we see in Europe. And again, with the category that is doing well during these uncertain times.

Peter Saleh, Analyst

Understood. And then can you just give us an update on what you're expecting for inflation for the balance of this year? I believe you're probably mostly contracted at this point for the rest of this year. Any thoughts on early for 2025 at this point?

Ruben Baldew, CFO

Yes. As I mentioned, we are now covered around 90% to 92%. We have a clear view of what to expect this year. We will continue to enhance our mix and supply chain efficiencies and consider the best investment strategies in relation to supporting our growth model. It's still a bit too early to provide insights for 2025. As Stéfan mentioned, the significant inflation increases are mostly behind us, but there are still areas where we are observing inflation. At this time, it's premature to comment further on that.

Peter Saleh, Analyst

Thank you very much.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to Stéfan Descheemaeker for closing remarks.

Stéfan Descheemaeker, CEO

Thank you very much for joining today's call. As we promised at the beginning of the year, our growth strategy is gaining momentum, as demonstrated by the positive volume increase this quarter and our commitment to boosting organic sales growth in the second half of the year. This positions us well to maintain momentum in 2025 and achieve strong growth both at the top and bottom line, while we continue to return cash to our shareholders. I appreciate your time and look forward to connecting with many of you in the coming days and weeks.

Operator, Operator

Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.