Q3 2019 Earnings Call
Good day and welcome to the Monopolies International third quarter 2019 earnings Conference call. Today's call is schedule to last about one hour, including remarks I'm on the lease management and the question and answer fashion in order to ask your question. Please press the star Keith followed by the number one on your Touchtone phone at anytime during the call I'd now like to turn the call.
For two Mr. shift then left Vice Vice President Investor Relations for Mandalays. Please go ahead Sir.
Good afternoon, and thanks for joining us with me today, our dark Vanda Bush, our chairman and CEO and Lukas I remember our CFO .
Today, we set out our press release and presentation slides, which are available on our website modeled leaves international Dot com forward slash investors. During this call will make forward looking statements about the company's performance. These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details are forward looking statements.
We discuss our results today, unless otherwise noted will be referencing our non-GAAP financial measures would you just for certain items included in our GAAP results. In addition, we provide our year over year growth on a constant currency basis, unless otherwise noted.
You can find the comparable GAAP measures to GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.
In today's call Dark will give you an overview of our results as well as a progress update against our strategic priorities, then Luka will take you through the financials and our outlook.
Well close with Q and I.
With that I'll now turn the call over to dark.
Thank you ship and good afternoon everybody.
We are pleased to report another quarter of strong topline growth.
Continuing the momentum of the first half of the year.
As you know a year ago, we launched our new strategy, which intended to accelerate our growth by focusing on the consumer.
<unk> operational excellence and building a winning girls culture.
Today's results are proof that this strategy is working well and that's been making progress against our goal to create attractive long term sustainable growth.
So, let's take a look at the quarter in more detail.
We are reported revenue growth of 4.2% in the third quarter.
Which confirms the strength of our snacking fundamentals around the world.
Well as the leadership role that our portfolio of global and local brands plays in snacking.
The growth was high quality and driven by good balance Oh volume mix and pricing.
He was also broad based geographically.
Hey, Mark in emerging markets grew.
6.6% or 5% X Argentina.
And we are encouraged by what we are seeing in markets, such as Russia, India, China smell the southeast Asia.
Our developed markets grew 2.9%.
Europe reported strong volume driven growth in key markets like Germany in the UK and into U.S.. We saw continued revenue growth and share gains, which was driven primarily by biscuits.
Our strategy to invest more in our growth initiatives is paying off resulting in solid operating income growth.
Our adjusted Dps growth was 10% for the quarters and we're also pleased with our year to date cash flow of 1.2 billion.
As we look across our business units, we are seeing everything that our strategy is creating the basis for sustainable future growth.
This is driven by a renewed focus on the consumer which is informing everything we do.
And it inspires and also motivates our teams.
So while the entire organization is focused on driving topline growth, we remain true to our culture of cost discipline. So.
So that we can ensure that topline growth generates attractive <unk> dollar growth.
This focus is leading to impactful growth initiatives across our business in key markets in key channels as well as on a local and global and solid global brands.
For instance, we remaining in growth channels in bolt developed and developing markets.
In the U.S. this means capitalizing on growth opportunities like discount and club alphabet.
Well in China, we achieved new distribution milestones this quarter.
We reached 1.5 million outlets with our biscuit products and 1 million outlets for our gum.
And in E. Commerce. Another example, this means a continued global expansion through our partnerships with E Tailers and online platform. So I reported growth in e-commerce for the quarter was 25%.
Another area to highlight our local jewels local brands that are also contributing to our girls.
A few examples that stood out in Q3, Arvind Jubilee biscuit brand in Russia, the iconic Greens polo brand in Poland.
And putting since biscuits in Indonesia. All these are performing well thanks to the new to investment in focus.
[noise] a bit priority for us this year has been to reinvigorate our marketing approach.
One money for station of that focus is what we call our new marketing playbook.
That gets to the roots of what makes a brand special.
Our intention is to drive clarity in brand positioning and consistency in execution.
We've applied this playbook to many of our global brands and we'll be rolling it out across more brands in the future.
As a result of this renewed focus we're seeing some good examples of brand equity campaigns.
That enhance our connection with consumers.
In the UK for instance, when our growth was particularly strong this quarter. Our latest edition of the Cadbury dairy milk generosity campaign is performing really well.
While we are driving growth, we remain very focused on our operational excellence.
For instance in marketing we've seen solely through improvements in our return on investment in digital.
Modeling our supply chain, we continue to focus on productivity and process improvements.
Good examples here would be the digitalization of for procurement function as well as a reduction of waste in our North American network.
Around the world in our different business units, we are trying to reach best in class execution.
In EMEA for instance, we had leveraging our significant sales and distribution capability in key markets like India and southeast Asia to win in Seasonals.
As an example, our seasonal gifting offerings performed well during the Hindu celebration of Iraqi in India.
Oh, that's another example of this year's mid autumn Mooncakes seasonal bus, particularly successful across southeast Asia, which Kindle and even Oreo brand that mooncakes selling really well.
Local adaptations of our global brands.
Oh, the success, you're having with culturally relevant seasonal offerings underscore the power of our more locally oriented model.
Another strong example of this is the work we are doing in China with us right gum Brad.
He is our approach is to pursue personalize, our marketing to Chinese consumers and it is working well, helping us win with genzyme consumers through mainly digital spend.
Finally, we continue to make good progress we are more agile innovation approach and our snack futures initiative.
Focuses on emerging threats and technologies in developing and premium product.
As an example, we've recently reached an agreement with the key suppliers to explore the use of gokul fruit by introducing those parts of the fruit into the food chain that have thus far been discarded.
A product using these ingredient was developed in record time and put into the market in a very limited distribution to see how it will perform.
This sort of an approach is very different from the innovation approach that we had in the past.
[noise] I'm also very proud.
Of the progress we are continuing to make on our sustainable and mindful snacking strategies.
Creating durable growth also means looking after our planet and the people who contribute and consumer products.
This quarter, we were again recognized by the Dow Jones sustainability index and improves our rating for environmental reporting.
This is just one example of hobbies, bringing to life are sustainable snacking strategy, which is our commitment to grow our business the right way.
Another example is how we are using a new methodology focused on science based targets to help us further reduce our end to end CEO to emissions.
Finally, I want to mentioned the work, we're doing to respond to the wellbeing needs of our consumers.
We're working on offering the consumer the rights snacks, which can mean different things to different consumers. The options are ranging from smaller portion size formats.
You could call permissible indulgence.
To better for you products, which are made with authentic and simple ingredients or with a particular functional nutrition characteristics.
A good proof point was our recent commitment into UK to ensure that all our products that are made for parents to offer to their children are less than 100 calories per serving.
I'm quite proud of this move and know that we'll have more to share in the future.
And with that I will hand, it over to Luca.
Thank you there and good afternoon.
As you can see on slide nine we delivered strong performance across a number of key metrics.
Our third quarter growth was notable for both its quality, which was broad based as well as for the balance of volume and pricing.
During the quarter, we drove growth on a variety of problems.
We delivered strong resolved in three or four regions.
Global brands grew mid single digits.
Why local brands continued to accelerate with growth in line with overall categories.
And this growth was high quality.
As it was three them by your balance on volume and pricing.
Finally, this happened on the back of strong category growth, which we helped drive.
We also delivered a solid increasing gross profit endo idleness, along with 10% Dps growth.
Productivity and cost savings initiatives provided the fewest for approximately 85 million or business investments through the first three quarters.
That was strengthened our brands our go to market positions and safes and marketing excellence for future years.
Finally, Q3 marked another good quarter of free cash flow generation, which continues to be a key priority.
We generated $1.2 billion through Q3 and are on target for a full year outlook of 2.8 billion.
Turning to slide 10.
Our scale reach an expertise in emerging markets are clear assets for our company.
We continue to drive robust volume driven growth in key countries like China, India, Southeast Asia, Russia, Mexico in Africa.
In aggregate emerging markets grew approximately 7%, marking the fifth consecutive quarter of growth greater than 5%.
Excluding inflation driven growth in Argentina emerging markets grew 5%.
[noise] developed markets also performed very well during the quarter with revenue growth up nearly 3% driven by strong volume driven results out of Europe , and North America, where we saw a combination of volume mix and pricing increases.
Now, let's review our profitability performance on slide 11.
In the third quarter, we increased gross profit by 2.6%, which in turn translated into solid like dollar improvement with volume leverage pricing and cost savings, partially offsetting investments primarily in route to market capabilities.
It is important to note that our profitability results are consistent with our goal of higher quality and sustainable growth.
[noise], when excluding Brazil, which is dealing with margin headwinds related to supply chain transition and powder beverage category weakness our businesses.
Rolling volume mix by more than 2%.
Growing gross profit dollars faster than revenues.
Enable incremental investments across a and C and go to market.
And growing operating income dollars faster than revenue on a year to date basis.
Moving to regional performance on slide 12.
Europe delivered another excellent quarter with 5% driving new growth.
The UK was a spend out with double digit revenue growth in the quarter.
Germany, Russia, and the rest of Eastern Europe also posted strong results.
Europe continues to demonstrate sales and marketing excellence with particular try and seen our chocolate franchises, where all of our top brands, the LIBOR volume and revenue growth.
Consistent with Q2, the Philadelphia business turn in very good results driven by targeted investments and great say some marketing execution.
Adjusted <unk> dollar grew by 6% in Europe due to robust same same volume leverage alongside them going investments, partially offset by higher agency.
EMEA grew 5.3% showing companions trends across much of the region.
India grew double digits behind strong execution, and then attractive market backdrop.
We continue to perform well in chocolate, while building out a more meaningful biscuits business that represents a larger and larger opportunity for us.
China grew just shy of 10% driven by another well executed quarter in both biscuits and gum. The team continues to show the power of our new local first commercial approach that mpower speed agility and consumer centric decision, making.
Southeast Asia grew mid single digits with solid results seem biscuits and chocolate.
EMEA increased operating income dollars by 10% due to leverage from topline growth, partially offset by continued increasing investment in high growth potential market.
Latin America grew five 4.3% due primarily to inflation driven growth in Argentina.
Revenue declined 1.5% excluding Argentina.
[noise], Mexico grew mid single digits, driven by strong execution in can the white, Brazil posted a decline mostly due to softness in powdered beverages, driven by category decline and some share losses.
We expect to see some volatility in this category in the coming quarters.
Adjusted Y dollars in Latin America declined by approximately 13%, primarily due to volume losses in powder beverages as well as the plant consolidation issues in Brazil that caused additional waste and logistical costs.
We are continuing to work through these issues and expect to see progress in Q4, Dole steel summit wins on an absolute basis.
Finally, North America grew 2.5% in Q3 led by another solid quarter in U.S. biscuits.
We grew share in be skates, as Oreo rates and belvita older lever a strong results.
Improved commercial execution and innovation.
Share gains seen alternative channels and more consistent seeing supply chain help die these results.
We remain committed to sustaining our improved performance in the region.
The North American region grew wide by almost 5% due to effective pricing and waste reduction with pricing and volume mix, providing fuel for marketing investments.
Let me spend and momentum caught the course highlight.
Our three snacking categories continue to demonstrate strong fundamentals, we total category growth of 4% on a year to date basis.
We remain encouraged by the has about what categories and believe they can continue to sustain growth of approximately 3% over the long term.
In many geographies, we were a key driver of the Catholic recall.
These include areas, such as U.S., and China, Biscuits, India, UK, Russia, and Germany chocolate.
And China go.
As we mentioned before specifically chocolate is benefiting from it prolong Easter season, and the subsequent halo effect on overall consumption.
These they tailwind accounts for almost one percentage points overall category growth.
Overall, we held or gained share in 65% of our business, which is consistent with our second quarter and David then on improving trends over the past here.
This resulted in overall flat share results for home deliveries.
Our biscuits business grew 4.1%.
Approximately 75% of our revenue grew or had share in this category, including our U.S., China and India businesses.
In chocolate our business grew 6.4% approximately 65% of our revenue crew or had share, including the UK, Australia and Russia.
Gum and candy revenue grew slightly.
About 35% of our revenue in this business gained or held share, including strengths in China, France, Brazil, and Russia Tom.
Now turning to P.S. on slide 18.
Q3, P.S. grew 10% in the quarter.
This growth primarily reflected operating gains driven by strong revenue results income from the JV equity and the tax benefit in the quarter.
I'll now move on to our free cash flow results on slide 19.
We delivered year to date free cash flow, all 1.2 billion, which is an improvement over the last years through Q3 due to continued progress in our cash conversion cycle lower cash restructuring that capex.
We remain well positioned to deliver on a full year target and feel good about our ability to make improvements over the coming years.
I wanted to also mentioned that we continue to thoughtfully manage our balance sheet and leverage and cost of debt in September we raised approximately 2.5 billion in new financing at attractive rates to refinance debt that matures in late October .
Turning to capital deployment on the next slide we have returned 2.3 billion to our shareholders through the first three quarters.
Moving to our outlook, we are increasing our full year organic and I tried new growth expectations to 3.5% plus.
This reflects our strong year to date results, which included the benefit of a longer Easter season.
These dynamics do not expand into Q4 and Thats a resolved we're not expecting Q4 growth at the same level as the first three quarters of the year.
We're also increasing our outlook for adjusted EPS growth to 5% to 7%.
As a reminder, in Q4, we expect to lap significant favorability in the equity income line related to our JV investment due to the impact in Q4 of 2018 from on enacted tax rate reduction in the Netherlands.
Please note that when estimating adjusted the P.S., we apply 5% to 7% outlook to the prior year basis of $242.
Then adjust for the expected impact of currency, which we anticipate to be silica 14 cents.
We expect underlying profit performance to be comparable with the profile, so far where volume leverage upsides and gross profit increases will be partially reinvested in growth initiatives.
Additional Jake geopolitical disruptions or other disruptive events, including the how Brexit are not anticipated within dcps outflow.
We now expect to spend approximately 1.5 billion for the full year on share repurchases as we acquired the perfect snack business and they're managing overall leverage thoughtfully.
We repurchased a little over 200 millions of shares in Q3, two bringing our year to date amount to more than 1.1 billion and continue to repurchase shares at current levels.
We remain committed to returning meaningful capital to shareholders and share repurchases continue to be an important component of our capital return program.
We will continue to operate we the discipline approach, which aims to optimize resolves for continuing shareholders and allows for flexibility based on market conditions.
Finally, our free cash flow expectations remain unchanged we.
With that let's open the lines for questions.
Can I ask your question you need to press Star one on your telephone to withdraw your question press the pound.
Please stand by all the capacity today roster.
And your first question comes from the line of Angela Saar with Barclays.
Good afternoon.
Hi, Hi, Andrew.
Two questions if I could first the updated full year organic sales guidance of 3.5% plus.
Mentions suggest perhaps the sequential deceleration in Fourq you can you explain some of the puts and takes on that particularly in light of the accelerated global category growth I know you mentioned Easter but wanted to know if there were some other things playing into that as well and then second monthly discuss the challenges in Brazil on the supply chain last quarter feels like things.
Maybe got a bit more challenging.
In Threeq you can you talk about your visibility there why do you think you've got your arms around it and perhaps you can parse out how much of the the impact in third quarter was really supply chain versus some of the other headwinds in Brazil, like powdered beverages and such thanks very much.
Okay well.
Maybe I'll start with.
Looking at the the topline and then maybe look at can discuss Brazil.
The first thing I would like to say that the the strategy is working well we're pleased with our progress we see good momentum in the business, we're delivering on and above our goals everything we put in motion a year ago about consumer centric organization and increasing our speed.
Execution results.
Working out.
Probably faster than we expected.
And I and in this quarter, we saw some quality net revenue growth.
And also year to date as it relates to volume mix and price the mix between developed markets in emerging markets or between global and local brands as the balance is there and the category is strong as you pointed out Andrew in many cases, it's driven by us seems to be play in a major player in the categories and yes.
We do have some challenges in Latin America, but otherwise our overall performance from net revenue through gross profit into July is a very healthy equation and it shows that the topline growth with having combined with the cost discipline. This is working out for us.
We did call up our full year outlook to three and a half plus net revenue growth in any PS two 5% to 7%.
Means that yes, we expected Q4 will be or a little bit lower I would say as you pointed out that through the first thing to keep in mind.
The longer Easter season that we had this year, which which will have an effect or listen no effect in Q4, if I can say like that.
In Q3, we also lapped the heat space, we had last year in Europe , which was beneficial to us so that had a benefit and so in Q4, we will not see any of these benefits and overall, we feel that our categories are somewhere between 3% to 4% growth not fully the 4% that we saw in Q4.
For everything that the categories will go back to normal a growth rate of around.
Around 3% plus a as as we've been saying all the time in reality as it relates to a 2020, we continue to see big opportunities for us to keep on driving the categories to improve our market share and and increasing our investments in our brands in our capabilities, but we have to remain a little bit.
Full again about Brexit, which they didn't happen this year, but it will have an effect, but potential on the first quarter will give you a full outlook on 2020, when we report the Q4 earnings, but I would say a that's the way we're looking at Q4 right now looking maybe a bit on Brazil, Yeah, Let me make.
The desktop by saying that.
Brazil for US these are large and complex markets, we have clearly a big portfolio in there that spans pretty much across all the categories that model. These competing globally. We have a good set of global and local brands and as you say entering Q3, we had the material negative impact.
Yes, if needed for the most part.
And this negative impact quite frankly explains the entirety of that profit shortfall that we had.
In a late in the quarter versus last year.
As you said the issues are two fold as we discussed last quarter, some plant closures cost transition issues.
We ended up with that line startups that.
Were delayed and that we faced extra cost we ended up scrapping.
More products than that then we wanted to and in addition to that we had some extra logistics costs I would say these first the shoe accounts for pretty much half of the material profit GAAP, we sold in the quarter in Italy and in Brazil, as I said and the second issue is about.
Powdered beverages, which is a PDF category for us both in terms of top and bottom line the category southeast quite challenged at the moment and our shares of markets are declining.
Declining trends accelerated the beat in Q3 versus what the first 40. So in the first part of the year and that's resulting in revenue and profit shortfalls also compounded by the fact that in a declining category and share environment, we had to take out some trade stocking in the quarter.
So we're working on both fronts and we're making good progress with our supply chain, but as we said very clearly in Q3, we will still have some impacts in Q4, but the issue should get materially better as we enter 2020 for PBS add the issue is a little bit more.
Accentuated and it'll take some time for us to address both the category and the share decline dynamics.
I would also like to take the opportunity that you provided with your question to reiterate a couple of things.
Despite as I said in my prepared remarks or.
Recorded remarks, the materiality of the issues in Brazil and effect that we are locking the highest gross margin in Q3 last year our.
Our mutual cycle is working.
GP and why are both growing synced up 4% on a year to date basis as I said when you take out Brazil gross margins and why margins at both operating year to date phases, we are delivering the volume leverage and SGN a leverage as we plan we continue.
With cost discipline, I think you've seen the quarter a good number four SGN a.
That number includes a an increase in agency bought.
Embedded in CBD behaviors, we have are delivering savings and all of these quite frankly gives me confidence at the mall that is working and that we will deliver on our long term ambition to grow or high end GP more than that than revenue. So not ideal what we saw in investing in the quarter, but in the big scheme of things when you strip.
Without letting them all that is working and the long term algorithm we had in mind.
Same got of it.
And your next question is from Chris Growe from Stifel.
Hi, Good evening, Hi, Chris Hi, well, just sort of first kind of high level question.
As you think about the strategy in executing our new strategy and your playbook for the business I'm just curious.
How that's developing sequentially, so maybe even a quarter by quarter, but just like are you moving on to different types of investments have you made a lot of the initial that's what you want to may exist movie more out of marketing new products sort of get a sense of how that's playing into the stronger revenue growth barring some of the unique things that occurred this quarter.
Yes.
Maybe first of all a it's a multiyear investment program.
We are probably flowing less of our gross profit next year than this year into investments, but we want to keep on increasing our investment year after year and this year. The investment was focused on an increase in our AMC an increase in rate route to market the investment and.
R&D so innovation.
So look I was talking about this virtuous cycle, which we want to continue.
If I look at what that means for for us going forward I do not expect substantially these investments to change we we do have still.
Areas of the World, where we should be putting more and see investments in our brands, particularly the local brands, which are accelerating but they already get not not always on the right level of investment.
We still have big route to market opportunities, if I think about China, India, where we have to go in third and fourth tier cities and we for several years when we need to keep on investing and and you can imagine the same for places like Southeast Asia, or Africa, where where we need to keep up.
That and then in R&D we.
We do want to.
Continue push on the more agility and fast speed and we maybe a little bit less in the in the years to go forward than we did this year, but it's going to be.
Largely the same three buckets that we are going to invest in.
I would also say that apart from increasing our investment. We are also moving more of the investment within a and C into working media and also we are trying to drive the ROI of our marketing spend.
We've done things like consolidations.
Of our agency, which drives value and gives us more consistent quality globally.
And we we are also.
Looking quite hard on our point of sales execution investment, which we will continue next year. So.
Maybe a long.
Answer just point out where we are investing and the fact that we see that continuingly, it's working for us and we feel that there's still a big upside in continuing to do so.
Yes.
Labour Duncan of that meant second.
You know all of these is completed in the mid single digit guidance for high growth that we gave you investment they at the high single digit Dps growth that again, we gave us at Investor day.
Going forward. Thank you, yes, okay and just just one other question if I could it which is the pricing that's coming through this year would you say that is offsetting cost inflation. So we think about a pricing net of cost. Your your that's that's sort of not a factor on the gross margin here.
At the right way to look at that.
Yeah, I think it is at the.
I'm, particularly pleased about the fact that our topline is in the quarter volume and pricing.
I think it varies a little bit by by region clearly.
We see pricing more pronounced in emerging markets and the North America, where the inflationary pressure has been.
A little bit higher than that in Europe , Europe growth is mostly driven by volume I think you see AMEA with combined strong volume growth and and pricing and happy to report clearly that North America as we turn to volume growth. This quarter. So overall, we really like the algorithm is more volume three even in.
Developed markets, where margins are higher and emerging markets.
In terms, so we see a little bit less volume and more pricing, which again, we like so in the be scheme of things.
Quite balanced and it is offsetting the inflationary pressure.
We see quite frankly, though.
That is also because we covert our commodity and porreca exposure quite well.
So I don't want to into any pricing going into into next year.
But if we had to mark to market, our commodities and Forex impact will be a little bit higher than what you've seen the PNNT at the moment.
Okay.
Thank you for all the color it was helpful.
Thank you Chris Thank you.
Your next question comes from Dan any with Morgan Stanley .
Hey, good afternoon, guys Hi.
So first just a clarification Luke on the Brazil issue is it sounds like it will linger in Q4 are you expecting a similar magnitude in Q4 relative to Q3 and then it's really next year would you start to see that drag dissipate.
And then second in the UK, obviously very strong momentum in the quarter double digit revenue growth can you give us a bit more detail and what drove that strength in terms of market share versus category growth and some CPG companies have noted a bit of slow down around the Brexit uncertainty, even though it didnt ultimately come to fruition this month.
So have you seen any impact there so far in Q4 expecting any deceleration going forward. Thanks, Yeah, maybe I'll comment on on Buzzy little bit on on the UK and the pension plan here so on Brazil.
The.
The biggest impact has been.
Actualize, the not ball Q2 in Q3 that will still be an impact in that in Q4, but the impact will be sequentially lower importantly, as we enter next year the supply chain related issues should be.
Fully solved almost entirely sold I think we still see some issues related to powdered beverages and that competitiveness of on the leasing that in that category remember in Q1.
Summer time, and so there is a big Consumptions sold there might still be some PB. Our other patents related issues in in Q1 in the UK I think we are quite frankly, hitting on all cylinders the category. The chocolates categories up if he is on the backhaul.
A hot summer last year, and and the fact that Q3 was was quite halt. So there was a market because but importantly, we are gaining share.
Polluted nearly two or actually said that.
In Q3, the execution of our capacity they need the campaign with cap or they may generosity is working very well.
And that we see material share gains. So we are executing quite well I don't chocolate, but I would also say at on biscuits, which is the other girls category.
So we're very pleased with the execution in that market and with that.
At this stage, we cannot talk about any slowdown as it relates to Brexit worries.
Has the numbers testify so we don't see that the monthly moment to be preparing for it of course.
But we also believe that our categories.
Yes.
Knocking categories, not necessarily going to go big swings up and down its consumer sentiment goes up and down. So we hope that we will be a little bit protected from a big consumer sentiment changes.
Great. Thanks, guys. Thank you.
Your next question comes from Ken Goldman with Jpmorgan.
Hey, good afternoon everybody.
I wanted to I know, you're not willing to talk about 2020, specifically, yet, but you have brought a Brexit it a couple of times I just wanted to ask how you think about.
Either including or excluding any potential impact from Brexit in your guidance and some companies have said you know what theres no way, we can quantify it's where we think about the out years, we're just not going to even try and other companies who said no. Maybe we should begin a little bit of risk into our guidance. Just in case I'm just trying to get a sense of where you guys fall on that.
Spectrum, if you even consider that yet.
Yes.
Roger scale I would say you can say right in the first part where we cannot really quantify if we don't know what type of Brexit it will be and so we have not included.
The larger effect of Brexit in into our thinking what we always includes which we will also do.
For 2020 is the short term Brexit.
Disturbance that you could have at the board, there's where we need to increase our inventories we need to book more transportation.
Need to stock up on raw materials, and packaging and so on that we've always done and that we will continue to do and Thats included in our forecast.
But if we would be hard Brexit, we either a devaluation of the bound and a big consumer reaction that is not included for us.
Thank you and then.
Follow up is.
It was ours conference recently, you talked about florio's distribution not being good enough in U.S. C stores.
I've always thought then I think you guys have always thought it's a pretty big opportunity that is not necessarily being capitalized on now, but I didn't get a sense of.
What you moves you're making necessarily to improve oreos and C stores, whether you're going to use your DSD system to gain distribution and sort of what I just wanted to get a better sense of sort of what the strategy and maybe some of the tactics or along those lines.
Yes first of all I can say that in in the background Theres a lot of work going on as it relates to a Oreo in C stores.
It takes a while we have to test our approach to see if it works over next year, we're expecting to make bigger strides as it relates to that.
Just to clarify our DSD does not work in the C store channel are the Aziza.
A system that work in the supermarket channel for us. So we are not planning at this stage to use our DSD system for that.
As we do have.
The right route to market set up and we are building up the right programs and relationships with the clients and we're expecting that next year will show some significant progress.
And I think I wondered if you look at the market than share for.
C stores I think we are having wealth is as high as the opportunities yet, but we are gaining share in C stores in in biscuits as well.
Great. Thank you.
Thank you Ken.
Your next question comes from Steve strictly LTV.
Hi, good afternoon.
So.
So look a quick cleanup question on the gross margin.
Excluding Brazil, I think last quarter, you called it out as a 25 to 30 million dollar profit drag to the line.
How should we think about the context specific to Q3, and then I have a revenue question follow up.
I think it is.
About the same number in the ballpark I think clearly the.
One of the components as I called out Pts in relation to PBS Apollo beverages, and some destocking, we had in that in that category or when you look at.
All the numbers excluding.
Brazil, you really see that the shape of the PML is is good and as I said, particularly on the year.
Notwithstanding the fact that in Q3 will not be the highest gross margins last year, particularly on a year to date basis, you see that build towards mobile predicated on volume growth coming into fruition.
Okay, and then dirt can you walk us through some of the bigger chocolate markets, where mindless entered the last few years, but not necessarily has scaled pretty big into specifically China in the us what's your latest thinking about what the near medium and long term opportunities for both as markets. Thank you.
Yes.
Markets are little bit the same for us we entered.
Largely from from what I would say as an opportunistic.
Approach trying to carve out as big a niche as we as we can.
That would lead to a marketshare somewhere between one two maybe 3%.
Best case, we would always aware of that.
I would say now that we that both markets very significant players.
Hearing us any China that we would be up again, so we we didn't want to have a sort of.
A major Ah.
Strategy or a major approach we wanted to just captured the opportunity that we have largely using Oreo as a brand.
So far we have captured what we what we were.
Planning to get but we are not planning on pushing that.
Into other brands or a major chocolate approach, we feel that we have other opportunities around the world which are more.
Which our biggest and give us a better in turn and we want to focus on both first before we we wanted to enter those two big chocolate markets around the or increase our presence in those two big chocolate markets in China anyway.
Okay. Thank you.
Thank you Sir.
Your next question is from Jason English with Goldman Sachs.
Good evening folks.
Isn't.
What Jesus we've covered a lot of ground. So far so I was just want to I guess I'll bring us back to that gross margin question to build off of skews prior question.
I appreciate that you're up against a larger year on year comp, but just looking back over history. Your gross margins army meaningfully different between the second quarter in third quarter.
This quarter they sequentially fell by around 90 Bips.
It sounds like a fairly comparable Brazil supply chain issue.
I'm not trying to make a mountain out of a molehill here, but can you just help us understand a little bit more what what the drivers are of that sequential step down.
How many of them are are durable in nature, and which ones may may dissipate with time.
Yeah.
I think we've look if you really look at.
Percentages that company equity raises.
We are and about 40%.
I think we close last year at 40.2%. So if we really want to dissect to the decimal points yet we are.
A few decimal points behind I don't think.
Jason There is anything structural besides Brazil, and Brazil, again as I dissect the issue.
There is part of it that is going to persist to a certain extent into into next year entities. The powder favorite part of it on supply chain. We should we should be the six I think as you look at all the components of the.
Gross profit delivery volume leverage is there I think when you look at side.
At the volume mix that these.
2% that is a good number I think that provides mosquito elaborate booking to the GP line and the overhead line and I think we see it coming into fruition income Sop pricing.
Last year, we announced a couple of waste sop pricing in in the west market.
And I.
I think as you look at the be skate market, specifically, you see volume and value going up in that context, we are gaining share.
I think in emerging markets, we clearly have the pricing discipline that is required and that quite frankly diesel it'll be more sophisticated than.
Going out and announcing big price increases it is leveraging the full array of pricing tools that we had including you know our previous optimization common density price pack architecture, and as I answered before.
I look at the.
Composition of the commodity and Forex inflation and the pricing we have taken business unit by by business unit I think we did a good job in both emerging and developed markets and productivity is a little bit lower than in in in the past years.
Not because gross productivity isn't there if there, but we're facing a little bit more inflation on the labor front, Andy logistics costs, So as our dissect the gross margin component and died.
Take myself you know.
In the context, when I say, okay, Brazil is a little bit of an outlier do I see us heavy material issues on price net of commodities productivity.
Volume leverage the simple answer is is no.
I think the one point is mostly attributable to Brazil is attributable to the fact that in Q3 last year. The number was higher than the rest of the year.
40% with Brazil embedded into the number.
I don't think it is for something that we should worry structurally about I think having said that we need to continue working well on that delivering volume on getting the productivities and pricing in line with inflation, we've seen the marketplace.
Very well. Thank you for the fair response I appreciate it I'll pass it on.
Yes.
Your next question is from David Palmer with Evercore ISI.
Thanks, Good evening.
Hi, Mark.
Hi, Turkey, and the pass you've talked about that country level approach to management and one outcome would be that the local power brands would be getting more marketing support.
Could you talk a little bit Baghdad, how's that going or your country level managers spending more on those local brands. As you had planned and are you getting return on that investment in terms of accelerated local brand growth any numbers on that would be helpful and I have a quick follow up.
Yes.
The short answer to your question is yes, they are spending more on the local brands and yes. We are getting on a return on that and also we've seeing an acceleration of the growth. So if I look at our local brands.
They.
For instance in 18, they would have grown around 1%.
Year to date 19, they're growing a about three and a half a percent and never even higher in Q3. So we clearly see the effect on our breath and we we feel that we're getting a good return.
Of course, we want those local brands to grow in line with the markets and that about there.
But there is still.
We feel opportunity to keep on investing more.
An example would be a brands like Pacific in China, which is a very local brands, which is.
Adapted to local flavors biscuit brand and it.
It also has.
A health and wellness consultation so that plays well, we revamping Lou in Belgium, and France, and there's a number of these brands around the world, which.
We think we need to really offer a full portfolio through or consumers and.
Again to answer your question.
Clearly, yes, we are seeing very clearly an effect on our local brands and it's working well.
And related to that I would I would have thought by now there'll be more of those bolt on teets like acquisitions around the world de beginning a wish list as you get that country level approach and they're seeing stuff that is more relevant for them and their country level and then you beginning that wish list to to be building up.
By now and that inorganic growth would be becoming a bigger part of the story.
Do you think that that could happen at some point that we start to see more and more bolt ons as.
They look to add to the inventory of brands.
Yes, yes.
We are.
Constantly evaluating I would say largely in our bigger markets what are the opportunities for us to do bolt on acquisitions of course into first place we want to invest in our own local brands, but if we see a clear gap in the Mark sorry in the snacking landscape as we laid out and the brands fits their like differences.
With the recent acquisition of perfect snacks hearing us.
Protein bar refrigerated.
Largely based on.
Nuts.
That is something we don't have growing very fast so as we see these opportunities around the world. We are clearly engaging we tried to be.
Disciplined.
And so we only we'll we'll do it when it makes financial sense for us and on top we see a large runway towards becoming a significant brands, we do not want to.
By brands that in the end will not be of significant volume and net revenue for to make a difference for us, but yet again that the answer would be.
And.
Hopefully in the coming quarters, you will see the effect of that.
Thank you.
Your next question comes from from Nick Medallion with RBC.
Thanks, Good evening everyone.
Derek maybe higher you maybe you could just answered two quick ones. The first is this latest thinking on DSD. You know just werent wanted to get your latest data you need on that and then the second is you know.
Really talking about the breakfast occasion.
As well as Sabri snacking kind of how your initiatives in those areas working and what we should be expecting I do you have any big opportunities over the next few quarters. Thanks.
Okay.
Maybe on the DSD.
As we said in the past we think we think DSD for US is a strength it allows us to have a better customer service.
Full or presence if I can call it like that in the store every very pleased with our.
Performance over the India with everything.
Important market share gains and we're pushing the category.
Obviously the way, we think about our DSD system is as we acquire some of these bolt on brands, we are expecting to bring them overtime onto our DSD system and we've been testing that we want to trend very carefully and we do not want to do.
Do it overnight, but some of the tests, we've been doing putting some of those new brands on our DSD system as being highly successful and so as we go forward you will start to see us.
Putting things like based on our VSP across the west which will pick a boost to the dates Brad. So we remain very committed to the heavy.
We have appeared Executional expectation of happy vivo performance for our current brands, but we also see a big opportunity to bring some of our new brands onto our DSD system.
As it relates to the to the breakfast occasion do you mind repeating what you were.
Alluding tuning because I didn't fully understand it.
Yeah, I'm, just trying to get a sense. Obviously those are two important area opportunities for growth for for the company. So just wanted to understand what your you know how those businesses performed this quarter and are there any big initiatives that we should be looking out for the next few quarters.
Well the brands that we are.
This sitting on the breakfast occasion is belvita.
Well, we take the biscuits that gives you a.
Sort of a slow release of energy gives you a for our energy.
It's a it's a brand that is performing quite well and.
It's a mid single digit growth at the moment.
And quite well, particularly in the U.S.
Our evolution for Belvita is to offer it in more.
Different forms.
Going into a softer soft gates for instance, going potentially into bars and gradually expand the range of build Rita to make it a fuller breakfast offering not only us but.
Around the world and potentially also take the brand into mid morning, Snacking, which could also be very interesting and I think the brands has a credentials not only from a branding perspective, but also from the active ingredients to make that happen that's really our our focus for the breakfast occasion for us.
Excellent. Thank you.
Okay.
Your next question from Robert Moskow with Credit Suisse.
Hi, Thank you.
You know this year is characterized as one of reinvestment. So I think people are going to look at the the SGN a decline as a percentage of sales.
As a sign that this quarter didn't get the reinvestment as you normally would give to that business.
But then again you've been very clear that ex Brazil, there was.
Reinvestment and there.
Model was working so can you kind of confirm that that just the missteps in Brazil.
Didn't result in any kind of lower spending elsewhere around the globe that you knew the profit was coming in week in Brazil, but that maybe you cut the spending a bit in Brazil, but but not elsewhere and then secondly, a question on powdered beverage is about 400 million in sales that was just Mike discussed.
At here.
In Brazil.
So as to your first part of the question.
We didn't cost anywhere.
Our the expenses are up materially in Q3 actually more than on a year to date basis. So we put back that the agency investment as <expletive> said many times are a couple of things to bear in mind. There. The first one is we are also skewing more towards working media sold that.
Number that's on the face of it is high in terms of Copel, a and C is even higher in terms of.
Working media.
In the quarter Eylea and on a year to date basis and the second element that pass to be kept in mind is that management certainly management sitting at the stable, but also management's sitting in that in the business units is not getting any pass for AMC reductions in terms of incentive so.
If we deliver profit in a quarter tool capping a and C. The.
The number is not going accounting terms solve.
Yeah.
Incentive that when I got that he ended the year and I think that is an important step forward for the past and that the last thing we're going to do is copy and see even in a complex where may be.
And that is a little bit of pressure from a profit deliveries in Brazil with deep perhaps some AMC.
But the flows.
Due to the fact that we clearly that seat walking so.
I'm going to be blind and say, yes, let's spend will favor and not a wall.
But I won't reassured that.
On that front, we're not going to do anything that we will regret in the medium to long term DPP categories in Brazil.
He is north of $300 million.
As I said the category isn't it will be challenged we had big brands in their namely tongue and CLI.
And the local brand, which is called fresh we are facing a couple of pressure point.
One eighties csds are taking share from the category and the second element I saw the category is shrinking a bit and the second element is we are getting pressure from.
More competitive propositions and low price point propositions for consumers. So we're working on on both and there is a more comprehensive plan we have in place for piled up beverages, which hopefully will bring some.
Positives, but I think it will take a little bit uptime for that plan to really be in full effect and bring the Catholic with backup and our share of a top.
Great. Thank you.
Thank you.
I think we in.
We can stop the questions here at the top of the hour.
So to wrap it up our third quarter results.
Particularly our topline performance.
Demonstrate the continued strength of our core categories.
And the power of our unique local and global brand portfolio.
Our new strategy focused on growth execution, and culture is continuing to drive engagement and results across our business unit.
We are encouraged by our early progress against our strategy. We're equally excited about opportunities that we see ahead of us spis, particularly for next year and to increase further the momentum for our company.
We see that in the former for expansion into Adjacencies.
Driving market share gains in our existing portfolio.
Our.
Reinforcing the growth potential of our categories.
Our focus going forward.
Remains on continuing to execute against our strategy and ensuring that the companies will position for sustainable growth and attractive long term shareholder value creation.
Thank you for dialing in thank you for your interest in the company in tough you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
HM.