Q2 2020 Mondelez International Inc Earnings Call
I want to lead management and the question answer session.
What are you asking questions. Please press the star team followed by the number one on your cuts counsel at any time during the call.
All over to Mr., Shep Dunlap, Vice President Investor Relations for Mona Lisa. Please go ahead sorry.
Good afternoon, and thanks for joining up with me today or dark fan to put our chairman and CEO and Lukas Zormelo our CFO.
Well there today, we set out our press release, the presentation slides, which are available on our website.
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 10-Q, an 8-K filings for more details on our forward looking statements.
As we discuss our results today.
Noted as reported will be referencing our non-GAAP financial measures, which adjust for certain items included in our cap result. In addition, we provide our year over year growth on a constant currency basis, unless otherwise noted you can find the comparable GAAP measures and GAAP non-GAAP reconciliations within our earnings release and that the back of are presently.
In today's call circle provide a business update the local will take you through the financials and our outlook.
Well, then close with QNX.
With that I'll now turn the call over to dark.
Thank you ship.
Let me start off by sharing an overview of our Q2 performance on slide four.
Overall, we are pleased with our results.
Business has been resilient and our execution has been strong.
Our first priority remains the safety and they'll be off our colleagues.
In our communities as we navigate cope with 19.
It goes.
There are still are area so high risk.
We are preparing the reopening or already have opened some of our offices around the world.
And he just clear that the situation will remain volatile for at least the remainder of the year.
Our second priority also remains business continuity.
I'm very proud of what are called each have and aren't doing to keep our operations running well.
Also we need to remain vigilant because with a growing number of cases, the risk of business disruption continues to exist around the world.
Our overall results for Q2 are good.
Despite the fact that go with has impacted various markets in quite a different ways.
Our portfolio of trusted brands as well as excellent execution has helped us to where does the high volatility reassuring us that our business fundamentals are solid.
Particularly our execution in supply chain as well as our commercial operations have been superior in a very challenging environment.
For instance, today approximately 90% of our plants are running in line or above historical performance.
Although we have already good market share momentum going into the crisis.
This combination of the strength of our branch and our superior execution has helped to drive unprecedented games.
While the business environment globally remains very volatiles, our strategy has proven to be a strength in these difficult circumstances. So we don't see a need to make changes, but we do see opportunities to double down and accelerate sorenson areas.
For instance, due to our current momentum some overall cost savings and our market share momentum we are increasing investments you know Branson h. too.
That's virtuous cycle of investments in our brands is an anchor stone of our strategy.
Looking at the second half, we expect to see volatility continuing but we are well positioned for several reasons.
Overall snacking tends to be very resilient category, even in times of recession.
Meaning we are generally in the right categories.
Our brands are some of the most preferred brand seen our categories, both local and global.
Our geographical footprint is diversified meaning that while cool we might impact one location all there might be doing better.
And finally, our people are responding very well with agility and resilience and our local first culture is an advantage in this environment, where decision making needs to be fast and maybe the local consumers in mind.
Switching to slide five.
Despite serious challenges caused by koby to fix on three channels and consumers.
We delivered solid results across the board, giving us confidence for sequential improvement in the second half as well as confidence to maintain the course of the strategy, we announced almost two years ago.
Our revenue growth was 0.7% in Q2 and 3.7% for the first half.
I considered this pretty good given that during the quarter and one state chartered another every country and many three channels, where do you look though.
There are parts of our business that have slowed down significantly such as the gum category World travel retail away from home and the traditional trade channel in some key emerging markets.
At the same time, the grocery business in most of the world is well above normal trend.
The combination of these two extremes give an almost 1% growth as an average which we feel good about given the circumstances.
Emerging markets, where more affected them developed markets and decline. Thank you too.
The good news is that they showed sequential improvement during the quarter and they exited the quarter with growth.
We are maintaining or gaining share in markets, representing around 85% of our revenues in years to date Twentytwenty.
This is driven by a number of key reasons.
We are seeing consumers turning to brands and products They trust.
We have many of these trusted brands around the world.
We didn't organic read there was also a shifts to segments that are better fit for at home consumption. So we are stronger in these segments like tablets versus proteins or bars in chocolate.
And our supply chain has kept functioning quite well throughout a shortage of labor or lockdowns, providing us with a competitive advantage.
Our adjusted EPS grew 16.1% in Q2 or 8% for the first half.
Look I will provide the details, but despite the extra corporate related costs are operating income so only marginally thanks to some offsetting cost containment activities.
We generated very strong cash flow.
In the first half free cash flow was 1.1 billion.
Have you raised our quarterly dividend by 11%.
Transitioning to slide six.
As mentioned.
Our long term strategy does not change.
But seen our current momentum we are accelerating some initiatives, which will allow us to emerge even stronger from this crisis.
As it relates to growth strategies, you're planning a significant increase in investments behind working media in the second half capitalizing on the strength and demand for our brands and built on our increased market share.
We're also making adjustment to some of our advertising copying campaigns to make them more relevant in the current context.
Seem to affect other consumer is driven more to our core offerings. It is an ideal moments to simplify or portfolio as well as our innovation pipeline to focus on our value driving core.
So really moving 25% of is to use which will simplify your supply chain reduce our cost any inventories and increase our sales and customer service.
With the consumer probably focusing more on value, we are amplify and accelerating our efforts on revenue growth management.
He believes any significant potential to capitalize on the increase in E commerce, particularly with many first time buyers buying their groceries online.
In execution, we were always very cost conscious, but we're taking a fresh look at cost opportunities reducing in areas like travel and office costs.
Costs also benefits from a smaller number of projects and initiatives.
Well as the reduction of our inventory levels.
I'll give an abundance of caution we've decided to only invest capex this year in essential project.
And we are accelerating a number of key supply chain initiatives, which are aimed at improving our efficiency.
Finally.
All of these changes are enabled and underpinned by the continued evolution of our culture.
Our local first approach is enabling and child decision, making and adaptation in markets.
We also see weekend evolved the way our people work, helping them get a better balance of life work for instance, going forward, we see more people working more stein from home.
Some of the changes due to cope with will be permanent so be redeploying resources do the areas to be the highest return opportunities and areas that will be critical both scope.
As an example E commerce.
Now moving to slide seven.
Despite the current volatiles and unpredictable environment.
Belief is GE is as important as ever if not more so and we remain committed to making progress in this space.
In terms of social impact, we have now made cash and in kind donations of more than $25 million related to cope with 19 through product donations, but also gas report as actions by brands and themes to donate BP he and other essential items.
Our responsibility the communities. We operate in has also been highlighted by the recent attention on the racial justice any quality movement.
Without question there is no place for racism in our company or in our society and it's critically important that we along with other companies show measurable action in helping to redress some of the injustices that exist in our society.
My leadership colleagues in I've spent time listening to our employee resorts groups and colleagues across the business.
We've heard that colleagues won't actions that are sustainable impactful and generally make a difference.
Want to build on our historical efforts in this area and so weve organized ourselves across three pillars colleagues culture and communities.
In our supply chain, we continue to advance our work on creating sustainable supply of critical ingredients. One of the biggest challenges in this space is deforestation and the result impact or the resulting impact on C O through.
This quarter, we have launched as part of the consumer goods Forum the forest positive coalition with other CPG companies.
Encouraging our suppliers to be more transparent on the lance used to grow our ingredients.
And finally, we are on track to meet our 2025 goal of 100% recyclable ready packaging.
I'm proud of the fact that weve been continuing to work on these critical long term is GE topics throughout this crisis.
And with that I handed over to Luca.
Thank you the it's gotten a good afternoon.
Second quarter performance was solid didn't come some girl share gains earnings and cash flow given the circumstances. We delivered positive revenue growth look combination old we've seen in the topic when he's been superior execution, despite facing significant disruptions and operating restrictions from the crisis.
I would develop market continues to perform while we try and in North America, and Youre must retail confirming elevate that momentum as seen in Q1.
Emerging markets were significantly impacted by broad look dolls, especially during April and intimate. Despite these dynamics, we're doing well on that elected days as compared to peers as we are gaining share.
I would like Plum pack, our topline cadence to give you some context, how we ended the quarter.
That might be morning, because they tend to peel off Q2 number.
I have two called it we were seeing some momentum in both developed and emerging markets.
And that will both Newton's next topic, what he's momentum and share gains.
Once we moved into late March and for the month of April we saw significant significant divergence between developed and emerging.
In developed markets, we saw a spiking consumption and despite some challenges our ability to operate well still okay.
On the flip side, we enforce lumped thousand curfews in emerging markets, we incurred and Turkey significant operating distinctions.
These markets, where most impacted in April we double digit top line declines at high percentage of outlets, where inaccessible to consumers and to us.
As a result bolt on revenue declined low single digits meaningful.
As we moved into me things began to improve.
Ending June our emerging markets turn positive and posted low single digit growth.
We expect these kind of improving growth to continue into July as the majority of these markets I don't become something.
We also expect strong demand in North America, and Youre must be paid, albeit not as an updated as enough one.
I thought about companies trending back that into like that in Q2.
Turning to slide 11, you can see that Q2 revenue growth was driven by positive volume and pricing.
This comes despite some significant makes had we presented by lower revenue from world problems, we pay income.
Be scared he seemed elevated demand and like well more than 9%.
Chocolate declined slightly by these include three points all headwind from war probably.
In addition, chocolates was also impacted by luck Donald seen emerging markets, mostly India.
It is worth noting that India was nearly flat in may and posted positive growth engine.
Gum and candy declined double digit primarily driven by gum as it skews towards away from home consumption and convenience.
These channels that seems significantly reduced traffic during the crisis.
Turning to copy going to ensure highlights on page 12.
Consistent execution, please have Brian and our investments in brands and capabilities continue to drive strong sat resolved.
Yesterday, we have had all gained share you need to cut the strength of our revenue base and now what overall Sam is as high as he has ever been.
Before he can chocolate so the overall outcome.
More specifically we gained share in the latest three month btis across a number of our biggest markets, including you have to be skids Europe, we UK in Russia in front of standing out in AMEA, China in Vietnam be scale.
A couple so Australia, New Zealand and you can get chocolate.
In Latin America, we sell some improvements in Brazil, Chocolate, then powdered beverage chair.
I wouldn't Mexico.
Our topic Louise adopt relatively well the exceptional forgotten.
However, it is important to know, but yet to date category growth about 4.5% doesn't reflect a major channels such as convenience and we'll probably take all the lag effect of some emerging markets readings.
Now, let's review our profitability perform on sounds like 13.
As expected our estimated coffee related costs during the second quarter, where more than 100 million, including over time protective equipment phone line bonuses incremental logistics costs and lower cost absorption in emerging markets.
Ex these costs gross profit would have shown solid growth in line, we left yes growth rate.
In fact, Bhagyam leveraging both North America, Europe, as well last calls from payment exports across the business enabled us to offset much of these on a gross profit basis has declined less than $10 million versus previous year.
Operating income declined 3.8, the site for you to due to the declining gross margin, which was partially offset by lower agency.
And higher overhead you called it as well as the other line impacted by somebody got schools.
We continue to expect called related cost in the second half.
However, we believe improved leverage and cost mitigation exports will more than offset at least economics as we progressed through the second half.
Additionally, in Q4 with Q3 being somewhat the basket.
Moving to regional performance on slide 14.
North America grew 11% driven by strong sampling sudden elevated biscuits consumption.
Our DSD network continues to demonstrate its value in keeping shot stall and enabling significant share gains.
Down was down double digits.
North America operating income increased by more than 20%.
North America, we continue to broad Bobby stories on right now we expect lower goal. Thank you too as we move throughout the year.
Europe revenue declined 1.2% in the quarter.
Headwind from won't try to repay we tools and drive up 2.5 percentage point as well as Dom and do you spend consumption Charles drove this dynamic.
We saw strength and good execution, he said lucky markets.
Including must be paid which grew high single digit.
Ending chocolate web we posted significant share gains in the UK in France in Russia and better lives.
Although we expect continued challenges in won't probably thing we have more constructive on the stapled convenience and traditional trade.
Which I expect it to be much last fall the headwind in the second.
We saw improved access faith in June and good growth into July.
Overall, we expect you to return to growth in Q3, unless the reason mosquito call. These relapse.
Adjusted the wide dollars decline as a result, but significant called be calls and unfavorable mix. These results should improve as we progressed through the second half of <unk>.
I mean, you had declined 3.1 person with completions that by greatly by market.
China continues to be covre growing double digits.
Southeast Asia grew mid single digits.
India declined double digit due to significant look down the same store closures in April and May be 40, turning to mid single digit growth engine.
As we move into the second half and based on economics, we see today, we are expecting these improvements to continue.
Unless there are additional shutdowns in key markets.
Our EMEA operating income dollars declined by approximately 5% due primarily to lower than two because volume leverage.
The additional called related expenses.
Yeah executed well on calls from payment actions.
Latin America decreased 11% due to traditional trade disruptions to multiple Mickey markets, while Argentina boasted cool you think collections, even pricing X, Argentina, Latin America declined by 16%.
Mexico, because line low double digits due to a significant declining gum and candy.
In Brazil, we declined high single digits due to significant disruption seemed traditional trade.
Our western Andean countries, we try and mobile most impacted by called me also decline.
We did see improving sacrificing said I don't know couple more.
Adjusted dollars Latin America declined by 78%, primarily due to headwinds associated with negative mix on the absorption and then a cool for a legal related my third but accounted for one third of the decline versus previous year.
We expect getting bottom anti lock in America to remain challenging in the second half deep NBS two actions in place in most markets ending pack that those restrictions are having on economic growth.
We remain focused on what we can control, we cheese exact using our plans and driving better shapes and forms.
Now turning to earnings for sat on slide 18.
Q2, P.S. grew 16%.
Breaking basing the quarter were impacted by call these costs, which were north of $100 million, which means more than seven cents impact.
I'll now move on to our free cash flow on slide 19.
We didn't either free cash flow of 1.1 billion need the first off.
Oh working copies of these simply wasn't big driver as we improved our cash conversion cycle by eight days.
We also had before tax payment for more than $200 million, we treated mostly reversing the second half as well as know what capex and cash restructuring.
Our priorities for meeting made their old ear say the year and we we continue to be DC.
I wanted to provide some thoughts on our joint ventures, specifically our participation be successful IPO of GDP.
Prior to transaction, we exchanged our JV investment for running by smoking JB Pete.
GBP then went public for 31 Peaky U.S. per share at the end up made.
The stock now praised by their own 38 euros per share, which places the value of our stake at approximately 5 billion.
This wasn't great teams all as he provides more flexibility and the public bar for these financial investment.
Moving to slide 22, as previously disclosed due to that called me on that and visibility remains limited that'd be starting in the number of key markets.
As a result, we're not providing a two year financial outlook.
However, we continue to expect that's holding for Twentytwenty.
On the effective tax rate in the low to mid Twentys.
Adjusted interest expense of approximately 218 million.
And we now expect exchange translation to negatively impact our reported revenue by treat aside and B P. S by five cents based on current markets right.
Although we're not providing full year guidance at this time I wanted to share some thoughts regarding how the second we play out.
We expect improving conditions in many markets that's experienced significant store closures in late Q on Q2.
In home consumption is expected to be at elevated levels, which is helpful. In developed markets such as North America.
And we expect to make critical investments behind our brands to continue to drive momentum on that at a peak phases.
On the flip side.
We expect the negative impact to competing in some emerging markets most in Latin America.
All traveled repaid you suspect they compete with snack at the time.
And although there is no wait to know exactly how the combined with the ball that he LOE was the potential for a second wave of shutdowns.
In aggregate, we expect positive revenue and the sequential improvement in the third quarter based on what we see through month, one off Q3.
With that.
Let's open it up for kidney.
If he would like to ask audio question at this time. Please press star one I guess telephone keypad I came back I want to ask audio question.
Your first question is trying to like I've kind of Goldman with JP Morgan. Please go ahead.
Hi, Thank you and good afternoon everybody.
Two for me if I can't I want to first touch on 'em your share gains. So these games I think our duty your north American supply chain, which obviously is.
Quite advantaged and some perhaps due to your competitors troubled globally, but you did highlight some brand strength.
Other positive factors in your prepared remarks, so just as you think about your expectations for market share in the back half the year can you walk us through what you think some of them more sustainable drivers are getting higher marketing spend is one of them and maybe with drivers cut back off a little bit versus the first half.
Hi, Ken.
Yes sure <unk>.
<unk> if I if I may be explained there aren't that the share gains happening and then go a little bit into the drivers and then and what we think.
So will happen.
First of all the same as we said in the presentation, we've gained and share in 85% of our revenue base. So it's it's very broad based it is in a biscuits, it's in chocolate its or across the geographies I would say.
Almost in every single markets around the world and certainly not important markets.
See significant market share increase for instance, biscuits, China biscuits, U.S. biscuits in France, but also chocolates and UK chocolate dose daily Chocolate, India, and we also see the gross smaller or gotta be so it's very a widespread and on top of we see that it's our global and not low.
Local brands, it's not just one brand it's it's across our brand.
One of the interesting factories that are penetration of our brand is increasing overall and also that we see some some very good repeat of those new a users.
So what is the reason I think.
Fundamentally during to covert crises. There there are three first of all is as you alluded to we have Oh, we have had a very good performing supply chain and route to market you could sort of say that.
Not only in U.S., but in other markets, we increased our share of the distribution points.
Not so much because we increased our distribution, but but customer severance service 11 and are on shelf availability.
It was better than than our competition and so for instance in U.S. already in other markets around the world is the is it is a key advantage.
The other one is that we usually have sort of the the strongest brands in our categories around the world and consumers have been going back to the brands, They know and trust and so a an Oreo as an example, or a milka or some of the other local.
And that we have I have three of consumer trust them every CEO, that's why we see all of them increasing their their share also.
And then we didn't snacking if you look at either sort of category by category. We are in those segments within the categories that are benefiting from at home consumption.
Footings, establishing chocolate do better than bars or better than for lean sending biscuits seats you more traditional biscuits that that is the segment, where the consumer is going to.
I would say these these are the three big drivers when bill they go away well, it's difficult to saying supply chain I assume that everybody's catching up on their supply chain, although with what we're seeing or.
The U.S. and some other places around the world having their supply chain perform is not as simple as it might sound I do think that this trend to go to bigger brands and more known brands is here to stay for awhile and the mix or with the in home consumption I think thats going to last for a while to be you're now clearly talking about this.
Change to our lives continuing well into a a 2021.
I would also like to point aren't that we have momentum before the crisis, we were already increasing our market share before they started and so underlying is that there was a fundamental a share increase that was taking place.
I also think the repeat rates of our brands the of the new users that that's important to notice and then I talked about that increasing working media with significant increases in the second half over the years, which should also give us a good pull on not Brent.
And then I think what we're doing that our business simplifying everything eliminating SK use going to fewer innovations all that well give us even more strength in execution. So.
Overall, I am I'm pretty optimistic I think you've done a big parts of these marketshare unrealistic.
That's helpful. Thank you and then quickly on my follow up I'm speaking of the higher marketing spending.
You talked about in the third quarter, I know, you're not giving guidance there, but I want to poke a little bit a into what you were talking about to make sure I understood you talked about a better revenue into the third quarter and you've talked about some simplification of the business. You've also talked about ramping up your marketing spending like I said, so just trying to get a sense.
All these factors and maybe some that I'm missing.
Is it reasonable to expect improved operating income in the third quarter as well in addition to better revenue.
The reason I'm asking is the streets modeling an increase year on year and your third quarter. EBIT is this reasonable given what you're doing right now or is it it's really just too early to say.
I can maybe maybe Luca you want to they just one yeah, yes, I like what come back and a nice to have you again no no no. Good deed back. Thank you.
Yeah.
Look I believe easily to be premature to give you a precise number here, but we gave you a few indications and be prepared remarks, south for Q3, and a enough to simply said, we expect a north America to continue with that increased momentum certainly.
We were not going to see as high of a number as we saw in ER in in Q2, you know, having 11% topline I will spend the exceptional and not 20 plus percent. Why are you up is expected to return to grow overall, despite a will travel retail and I would expect for sure.
Better profitability and a better leverage a sum up he called the cost will subside a me as well is expected to return to growth in a in Q2 in Q3 and there should be again lower called the cost and better volume outcomes Latin America is quite frankly expire.
Tactic to meaningfully improve particularly on the line.
<unk> to Q3, but we're not gonna see necessarily a positive year on year profit. So I would say that overall topline form one believes in Q3 is expected to be better than than Q2, as we look at a July we see a good numbers coming in at least.
One thing time, but obviously I have to make a disclosure here, we cheese that these apps and Timothy there the lapse.
Or issue in one older or the biggest markets or even more than one as far as both a line is concerned I think that would be a sequential improvement.
You tweets on why we seek to be whether it will be all the way to bright I I'm not sure as sad there will still be some called it related costs and build the actions were putting in place actually we've come into fruition in Q4. So you wouldn't see some improvements in Q3.
But then you would see even more in Q4.
From what we see today.
That's helpful. Thanks, so much.
Thank you can.
And your next question it sounds a lot of injury Lazard with Barclays. Please go ahead Sir.
Great. Thanks very much.
You know with some concern over economic recession in some some key emerging markets can remind us of I guess monopolies ability to manage through these sorts of macro events in terms of downtrading in a unit pricing and such and the reason I ask is with global category growth.
Year to date up around 4.5%.
And at least holding are gaining share in 85% of categories.
You know I guess, what realistically would hold Miranda leaves back at this stage from delivering you know at least 3% organic growth for the year, even if global category growth slows a bit from here, let's say due to some recession.
Yes, I can oh first of all or a good to hear you Andrew and yes, I can certainly explained that the little bit Ben first of all as it relates to that 4.5% girls in categories. Those are the measures categories and asked me for instance, a explains world travel retail.
Is is not a included in the massive channels and some of the foodservice and so so I'm reading that overall the category growth season is not the fourth and have seen that those other channels than us more severely affected by by covert.
As it relates to our touch our categories and our strategy in a recession.
I would say that.
First of all we look back at history.
And in the history has shown that.
Overall biscuits in chocolate tend to be quite durable in the downturn during a in a in developed markets, but also in emerging markets.
And in fact biscuits in general are not affected by the recession and actually.
Actually sometimes accelerated during the recession because again there is the switch to more in home consumption, which biscuits benefits from Oh, there's little bit more of a mixed picture some markets. It went down to some marketing spend up but overall I would say it's also quite resilient.
We do a very fast recovery as the recession starts to fade away.
Candy was solid Oh, very little change anything it speeds gum that suffers in a recession in our case that as we currently are seen but that's more driven by the fact that gummies and on the go product and that a lot of these channels have been close but also in a in a recession sees again this morning.
In home consumption gum suffers.
As it relates to the price points I think we've done a good job around the world I'm thinking, a india, or Brazil, or Mexico off overall, making up tropics quite affordable and and covering all the price point.
And.
I think we have set up now to really play in into different segments that you will see.
Another thing I think that's important in our categories as it relates to recession is that private label penetration, particularly in emerging markets is very limited compared to other food categories. So, let's say that we were expecting the categories to grow about 3% pre crisis. It may be.
They slowed down slightly but.
I think together with our market share gains and the opportunities that we have a as it relates to adjacent seized to our categories. We should be able to do to get through that to that level. That's as he was talking about I also think internally we are stronger.
We have invested more in our brands I think our brands today are stronger than they were two three years ago. We are modernizing our portfolio. We have communications that are more effective execution is good in the in the past our execution was was maybe sometimes not as great now supply chain in North America.
He is an example forests and so I I don't see us as a company not being able to deal with the recession I I think we can enter it with the position of strength as it relates to execution and being a being present.
And so I believe that overall, we have work to do don't get me wrong. For instance, we are working quite hard on what we call revenue growth management to make sure that we get the right price points completely or squared away a lot of price pack architecture understanding what will happen different channels. So all the business units on Hong.
If that works to to prepare for that but I do think that we are set up to do well and and if we can keep the momentum going on our market share.
I would agree with you I don't see reason why we cannot deliver against our long term algorithm.
Thank you so much.
Uh huh.
Your next question is on the line after Dora most <unk> with Morgan Stanley. Please go ahead.
Hey, good afternoon guys.
Hi, Dan Hi.
So clearly strong organic sales growth in the U.S. from the quarter can you unpack how much of that was true sort of underlying demand at retail was there any retailer inventory build or was this more strong retail sales growth and just the sustainability of that sales growth going forward given it looks like.
You as trends slowed a bit sequentially in the scanner data towards the end of the core would be helpful.
Yeah I'd be ally.
Awesome.
Okay.
No in Colombia gone.
Okay.
Well I would say that the ER.
The reason of the increase sales in the U.S. I'm is driven by the biscuits segment and a this could segment. These heavily influenced by in home consumption and as long as the consumers will be more and home and more consuming at home I think we will see an increase.
In our sales in the U.S. first reviews here.
Yeah, well since the beginning a the start of the crisis there was some.
Some a little bit of pantry loading, but that is out of for the equation now so what we're seeing now he's continuing to consumption I would say.
And I would expect that sort of the foreseeable future no. The change in that in home consumption, Oh phenomena now to <unk> to be clear gum is a continuity of that it's very negatively impacted by dialing home consumption. It skews out of home.
So on the go consumption.
And and so that's going to be lower during the crisis as it relates to the trade.
If anything I would say that the trade inventories at the moment are low because it has been difficult to keep up with demand we significantly have reduced our our assortment of for SK use just to do.
Provide a good customer service and so if anything I would say S.S., our demands would slow down a little bit that will give us an opportunity to bring to trade stocks back in line with Wednesday, they should be so from my perspective, I've I feel pretty strong certainly about Q3 in Q4.
Gordon U.S. I don't really expected might slow down a little bit, but you're still in high single digit growth rates. There my opinion, which is much better than it wasn't the past look I go ahead.
You know I stick on the old old once you made and out to be by plan sponsors meeting somebody out what we can the.
<unk> was lower in the last when he used to be and eat is not the only place where we had no what takes talk a and just to give you. Another data point, you're absolutely right that there was a little bit Isle base load balancing consumption, but as we look at or some of the numbers we have for July.
And he'll add you feels like a you know there is still opportunities for us to go SSD Excising. The high single digit territory. So are we feel good about what we see.
As these pointed out these through that gum, he's a little bit on a on a don't try and at the moment, but I would also say that a U P sequentially improving.
And the last point I like to make he's a particularly in candies like a Swedish fish and that's our pockets we have seen quite a bit of growth at the moment as well. So all these pointing in the direction. All slot continued momentum will be might not be 11% that you saw in.
Thank you too.
Might be able to be lower.
Great. Thanks, guys, it's very helpful.
Your next question is from the lot of Brian Delaney with.
Erica Please go ahead.
Hi by you might be a meal.
The next question it sounds a lot of John Baumgartner with Wells Fargo.
Good afternoon, thanks for the question.
Oh Duncan.
Dirk or I guess Luca how you doing I guess, one aspect of your revenue growth story overtime is that your penetration rates across emerging markets are still low in the white space opportunity you can be you're still fairly impactful. So you're in the context of the fallout from coded to what extent is that you kind of creating delays against the plant entered you pointed to.
Attribution or cause you to Reprioritize your growth drivers over the next year or so.
[noise].
At this stage it doesn't feel to us that we need to reprioritize.
We feel that a lot of the slowdown that you've seen in emerging markets has really gone directly related to the did the covert crises and the fact that consumers were already locked down or distributors couldn't operate or the stores were closed and and as we.
We open up the channels, we will see two which levels we go back.
If I would think India as an example, India of course in April was not not that great. Maybe goes back to flat versus last year ending June started to show a low single digit growth versus last year in July there will be higher than that will India go back to double digit growth in coming months.
Maybe not but if India delivers a 678% a topline growth that's more than enough for us to keep on going on our plan we were.
Planning to expand our distribution in in India for the year in <unk> hundred thousand stores or more.
Probably have to slow that down a little bit during the the covert crisis, but we are planning to be could write up every left it off and keep on going at this at this stage an Indian is an example for what we see another country. So.
For me at this stage, there's no reason to change our strategy, we might have at this stage, maybe a quarter or a of off delay, but we will try to catch up us as as much as we can certainly for 21, we are.
Planning to keep on going in the direction that we had said.
Thanks for your time.
Okay.
Your next question from a lot as Chris Growe with Stifel. Please go ahead.
Hi, good afternoon.
Hi, Chris Thanks, Hi, guys, Hi, I, just said two quick questions I'm sort of related but I'm. Just curious we know that the gum category was a pretty significant detractor from the from the quarter a the world travel retail and away from home <unk> can you say how much those were dragging on revenue in the quarter and then I guess what related.
I'm curious if you look at you define the koby cost you also I think have indicated there's been some benefits from leverage and you know some of your own expense control. The overcome that we're wouldn't know cobot costs come off for the quarter. If you were kind of put that against the savings realized in the quarter.
Thank you.
Yeah.
I I think that sounds one for you look out.
Yeah, I I'll take these Ah so Chris I think you know that ER gummies are down about 7% of our revenue and the or there was about PBR decline a in Q2, a year tools that you know I would say 35, 40% Inc.
Hope all depending on a on the market.
He be somewhat driven by share about 80% of these sites due to market, but frankly the market. These its really being impacted by you'll be shutdowns and ER. We have told that it is very difficult to two with the mosque as wasn't certain places. So we saw a it little bit of Oh Venetian.
That market, having said that as we look at a in July we see coming better I called it out in the U.S., but it is also another market I can tell you. One notable one for US is a if China in Latin America, though we still see a and b public on P. neutrality.
Particularly in Mexico, and and I'm Dan.
Then, we'll probably paid meet these give or take a quarter of a billion dollar business for the year and equals nearly zero or in a in Q2, we expect it to improve particularly towards Q4, but it wasn't materially on drug we called out in the prepared remarks, both the impact on Oh.
On a.
You up on a and chocolate and meet these two went up three points of all the drug bolt on or on Europe, which declined one.
Last but essentially you can do the math on how much Europe grew excluding will travel retail and the same on chocolate and that was almost flat, but oh, you would have been much better. So as we look forward as I said, we feel quite good about a about European now in Q3 Europe was another one that wasn't that.
It'll be by trade Destocking in Q2, as well so we see that thought coming a little bit backing in Q3, and importantly in chocolate across the board, we see a quite solid category growth at this point and a and chat as well the biggest differential in chocolate there's going to be.
Yeah coming back and a as I said, India goes the quarterly in June in a in a good growth territory and as we look at July specifically are you guys quite solid so we were expecting yet to be a in a in a good growth that it's really not in Q3. So that gives you a little bit the same so.
These headwinds and how they impacted the quarter for us.
There was already called it got yes. Thank you, yes sure like on the cost so the coffee costs look they we had more than one on the million dollar scene in the GP line, we had another 20 25 million Boes.
Right.
So I would call it's tough for lack of a better number one other than Turkey plus million dollars packed.
We deep caught a travel clearly, but the biggest upside both in terms solves a you know switching.
Ah from Nonworking media to working media other promotional spending items some cost containment actions that were taking in our factories.
They haven't packs that if I had two gassy, we'll beat on about $20 million, even though you to the big upside for all these actions is going to come in the second part of the and specifically in Q4, I think you will see a in Q4 these cost savings being meaningful and total profit.
Being materially better than it is a two day or even in Q3 for that matter a bulk because these would come to fruition also because they called it related cost in Q4 will subside.
Our current yes.
The outlook. So we will see what those costs are exactly but that's the how we see things at the moment.
Okay. It was very good color. Thank you for that.
And I know your question. It you have the next question from Brian The line again with Bank of America.
Hey, good afternoon, everyone.
Hi, Brian.
Brian.
So I just wanted to get back to I think it might be related to John Baumgartner. His question, but but there are you in the prepared remarks, you talked about SKU reduction and also I get a slowing up some of the new product introduction. So just wanted to know a is that more of a near term.
Respond.
Well the SKU reduction at all in the near term create any kind of drag on revenues, but then more kind of longer term how does how does that square with.
You know what you did the presentation you made academy, where you talked about channel expansion adjacent categories.
As part of the growth agenda, so just trying to square.
Kind of SKU reduction and fewer new product introductions with how that sort of relate to the to the growth Denny you presented back a CAGR.
Yes, yes, well it's in a nutshell, it's it's all part of the same thinking.
Though the way I would.
Right to expand it is that.
If you if you look at our business.
We have an opportunity to simplify our business and my experience in many other consumer goods companies is that in general what has happened over the over the years. He is that people are chasing growth and as a consequence that keep on launching new products.
And that gives you a short term benefit but at the certain stage you you need to clean that up you need to look at your rescue use you need to keep it could take a look at your innovation pipeline and sometimes also at your brands and say can this be simpler, but it's always a big discussion.
Because the teams feel I'm comfortable doing it although if you maintained the same shelf space and I've done in several times in my career.
What you will see is that not only do your sales increase because now the best selling items get more space.
Youre.
Supply chain costs go down because of longer runs less changeovers less inventory and less waste and it also has a big benefit on your cash. So it's it's a good exercise to do you have to think about us having thousands of SK use and every year.
A few thousands of innovation project, a lot of small ones and to be Frank. It's it's a b. We're looking for a reason to break this chain because we do believe there's a much better way to do this.
The reason why we want to do it now me why reactor elevated now is that I would say the stars if lined up to the clients want great customer service. They want a cleaner shelf they want to make sure that they can serve their their customers and and we have the same initiative. So we were already are obliged in.
This crises to work with a much smaller set the whiskey use in order to make sure that the key is can use on the shelf and what do we see our sales are better off the shelf and looks cleaners, and and we get some benefits from it so we kind of pushing through using the opportunity to say this is the moment to be do with those 25.
Present, this can use a represent less than 2% of ourselves and and I think we will see no effect from a and thinking about now it's not even one go this takes a while a it's kinda run over a few months and be probably out of those 25% obviously use somebody at the beginning of next year.
That doesn't mean that we will not do channel expansion and adjacent see didn't the net at the 25%. These net it means that we will launch a number of new items, particularly focused on price pack architecture to hit those price points that we need specific channels and specific sizes.
What channels or we needed because of.
The the revenue growth management that we are applying and we also be launch a number of items in adjacent sees so the 25% is net of all that so I I see this part of the same strategy and I'm really looking forward to be or the other end of this because I think we will have a much.
Cleaner asking you portfolio, a much greater innovation portfolio and hopefully we can also clean up a few brand so that.
Lean as a company at the end of this.
That's great. Thanks for the clarity there get really tie that together thanks again.
Okay. Thank you.
Your next question is on the line of Alexia Howard with Bernstein. Please go ahead.
Good afternoon, everyone.
I highlight yeah.
Hi.
Couple of questions for me.
Cool see negative mix impact I think minus 2.6% this time.
Could you help us understand.
Well, what's driving that.
Got headwinds is expected to continue into the second Paul.
And my second question is just around the dynamics, we think about the U.S.
Hi.
How flopped, if he collects breaking athletes.
He is.
Not to continue thank you and I'll pass it on.
Maybe Luca you do the first one on the mix and I'll do E Commerce.
Absolutely less and less know that left him up here. So on the negative mix impact a 100% of it. These are attributable to a two categories I would say a won't travel retail a we cheese and business that has.
Hi, good margins, we sell a predominantly toblerone odd there which is.
A great brand with that quite solid gross margin and that's the number one driver and the other one is the gum topic, knowing that as I called out before it declined 35, 40% I I said, a about will probably pay lucky towards almost needle in the quarter. So I expect.
Yeah.
An improvement, particularly in a in Q4 and on the business and equally for gum I expect them, a PD L. A improvement, particularly as we exit the I'm not sure you will improve.
Dramatically in a in Q3, but certainly as the situation stabilizes and trade stocked we opened particularly in emerging markets. I mean traditional trade, we expect to see a gradual improvement compared to the kind declines in a in gom. So the unique situation shooting pool.
While the year and ER.
He has always been a fairly neutral number for us I would say as or some emerging markets had a little bit of lower margins than than some of the developed markets and I was happy were keeping getting control quite well, obviously gum and will travel retail are little bit though are of a driver at this point.
Okay.
[noise] and then to Lincoln with E Commerce, So the numbers on E Commerce, our Oh the growth of my 91% in Q2. So E. Commerce last year was about 3% of our net revenue in Q1 of this year he was 3.5% and.
Thank you too it's a 6%.
Biggest increase we saw was indeed Wes.
Closed to 200, Percentincrease and that was driven by the fact that people that already shop online bought more online, but also a significant amount of first timers and that started to bind to grow Ses online and so the penetration of.
Last year of.
E Commerce for went from 4% to 9%.
So we do expect that E commerce will remain in large part of our you business U.S. business after the crisis.
The growth rates are high across all platforms, click and collect and the Liberty and also on market share. We gained 20 says about four points of market share a in biscuits online.
And so we had already a good momentum <unk> before the crisis M.B. for double down of course in click and collect since we had a very strong performance over the years, the operation and see that pick the products. Although the store that has helped our performance.
As we go through Europe, you're talking about growth in UK in France, which was 1% and 50% respect respectively. So also very very strong growth and China, where E commerce, He's already 18% of our sales we had a growth of 20%.
Which is consistent with the growth that we saw in in a in 19. The penetration there is already very high yeah compared to other markets around the world.
And if I reflect on E. Commerce I think we've got good momentum we are increasing our market shares we have some P.A. gaps we cannot yet always offered the consumers the sizes at the prices that they that they want so we will continue to launch a E commerce specific facts, which is a little bit more difficult in click and collect.
And we are also further investing in people and ins infrastructure. So overall, we see very strong momentum in E commerce.
Wonderful. Thank you very much a hospital.
Your next question it sounds a lot of Jason English with Goldman Sachs. Please go ahead.
Hello, and good evening folks.
Hi, Jason Hi, Jason.
Thank you so much for squeezing me in a very much appreciate it.
I want to come back to the productivity comments and it sounds like you have a lot of initiatives under way, obviously cutting 25 person excuse me impacting your supply chain can can be quite robust.
I think your productivity has been tracking south of 2% net productivity self the 2% of Cogs last year or two.
Is that right Andy as we think about the sort of run rate into the fourth quarter, where do you think that figure is going to fall by probably get the fourth quarter.
Yeah, maybe at a lot I law I'll comment on leaves a and then they can come to pin I think you've got the number on the ball bright had been cortez weapon numbers being a little bit higher corpus glad that number has been a little bit lower as remembered the.
The impact that a use due to multiple supply chain written reinvention.
Yes, I ended up being lower than a then he has been in the past we count on ER volume leverage a bubble to get our Productivities are stepping up a we count on or about a small changes that we're going to make a in some places a bigger one another's a and b.
Comp on these concept fault block continues improvement we haven't you need any supply chain and she has developed quite a bit though for all of a softer G.N. ball I think we had a what he takes two to continue to delever coffee to productivity to your point obviously.
When you look at some of the numbers across the board you kind of realized that productivity lucky to make up this quarter wasn't great because of a clear volume declines and the you know if you talk about productivities, including Colby cost.
Productivity is having haven't been great in a in Q2 overall as we had two or you know additional color you will see an improvement seen a in Q3 and in Q4, you would see that will affect all colby cost come down quite a bit and also on the flip side, you will see a monkey the cost savings that.
We are about to implementing we have for some parts already implemented in terms of tightening the belt not only in the supply chain, but also in NGL bretts area. So all of these should come to maximum Felicia and in Q4.
Okay, I guess, what else really England out was it sounds like you're gonna have a very large productivity year in 2021, because if you hit the run rate in Fourq you. That's a lot of spillover and it sounds like some of these initiatives you're not any about fully intact and see bleed into the early next year.
So let me try more tied to come back at that number that legacy. So the 2% what do you think it might look like next year in context of all these initiatives.
No we should be better than not quite honestly, then that number I you know that is the expectation obviously, having said that we don't know exactly how it gets in Q4 will play out imagine about 2021, Bob do we expect a body lapping some of these extra called the call and the fact that as you point the.
As you pointed out correctly.
We are having a spillover impact into next year old old. These cost savings, we expect that benefit yes, absolutely I think the counter to that these sat in some cases, a little bit of more inflation around certain cost areas, but overall the simple straight on sorry is do we expect better productivity is next.
At this point I would say so.
Yeah. Thank you very much.
Youre welcome Pleasant.
And your final question is on the line of David Palmer with Evercore ISI. Please go ahead.
Thanks, and thanks for your earlier comments on Europe, It sounds like the trade shipment timing and the travel channel each hurt the second quarter organic revenue.
Your you made also a comment I think it isn't it in an answer to question that you would get back to growth in the third quarter is that because of that shift in retail inventory or is there other consumer channel trends that are giving you confidence in into the second half in Europe.
Yeah, I would say that.
In Europe, if you exclude because for historical reasons, we've always added world travel retail into our European numbers and so their number you've always seen.
Includes a world travel retail now rural travel retail in this quarter is virtually zero because the cost there was the duty freestor shops for closed if you take that out.
Plus already growing low single digit Buddy, but it was a growing the reason why it was not higher than low single digit did that they have a number of others channels, particularly a foodservice and an impulse Ah. So convenience are we talking about 20% together with the world travel retail of theirs.
Sales they were affected by the lockdowns into consumer not being a out then about.
Europe is going back to normal better than what you're seeing in North America. So we are seeing gradually those two channels coming back we even expecting world travel retail to start showing a little bit of sales in Q3. So that's really the effective you're talking about then why we feel that a European show.
A positive numbers, including world travel retail going forward.
And then just around the product line Oh go ahead, sorry, Luca and if I may maybe add one thing I think the other thing that.
He's more predominant now he is our share gains and.
It is gonna be quite good so as Nick said, the reason that would be self pay stokley fighting the reason it would be for improvement in all these channels that created a headwind in <unk> in Q3, but importantly, the underlying consumption in the rest of the business due mostly to share and I would say also solid topic, which is improving in Q3.
From where we see today.
And I think you just touched on a little bit I'm, just wondering about the profit you know where the leverage line to this this organic revenue.
You said koby costs and mix headwinds, leading to that negative 11, or how much are those headwinds going away into the second half for that segment or do you expect that you know that they did that this topline growth will lead to a bottom line.
Growth as well.
In terms the supply chain Europe has been the most impacted by called me back stock cost you will still see an impact in Q3, and so profit will be back starting in Q3 again, you won't be all the way to bright you will.
See a much better profit number.
Then from where we see today and what we see into Q4 at this point in a in Q4 or so.
There isn't a PD l. cost, we have a multiple plants that class or multiple countries in Europe. So logistically if he's more difficult for people to get into the plan as they come in some cases across the borders and becomes more difficult as sad that there was in some places.
It'll be pop higher absentees impact, we still see to a certain extent and importantly, some of the cost that we sold to.
Perfect all our people had been I for one reason would be out there that could be tie into Europe, and so you still see an impact in Q3.
Got it thank you very much.
Thank you love it.
Hi, there no further questions in queue at this time I like to turn the call back to our speakers for closing remark.
Well.
Thank you for connecting.
I think I cant wrapping up by saying.
From our perspective, it was a solid Q2.
Particularly seen the circumstances that we face around the world, we exited the quarter with very good momentum and we see a confirmation of that momentum in July.
We have to fuel to invest in our growth.
Yeah, we do not appear now for a for the second half and so we feel very confident that three will exit 2020 or with some strength and not having for a great. A 21 also so thank you again looking forward to talk to you in the in the coming corridor.
Ladies and gentlemen, frankly today's conference call. Thank you for participating you may now disconnect.
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