Q2 2021 Mondelez International Inc Earnings Call
Good day, and and welcome to the Middle East International second quarter 2021 earnings conference call today's call it.
And is scheduled to last about 1 hour, including remarks by month lease management and the question and answer session and order to ask a question. Please press the star key followed by the number.
1 on your Touchtone phone at any time during the call.
And now I'd like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for model East. Please go ahead Sir.
Good afternoon, and thanks for joining US with me today are Dirk van de put our chairman and CEO and Luca.
<unk> Miller our CFO.
Earlier today, we sent out our press release and presentation slides, which are available on our website.
During this call we 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 and 8-K filings for more details on our forward looking statements.
As we discuss our results today unless noted as reported we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results and in addition, we provide.
Our year over year growth on a constant currency basis, unless otherwise noted we're also presenting and revenue growth on a 2 year CAGR basis to provide better comparability given the impact of Covid on 2020 results.
You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back on the slide presentation.
And today's call Dirk will provide a business and strategy update then Luca will take you through our financial results and outlook we.
We will close with Q&A.
With that I'll turn the call over to Dirk.
Thanks, Chip and thanks to everyone for joining the call today.
Firstly I want to acknowledge our colleagues.
Colleagues, our suppliers and our customers around the world, who continue to navigate through the pandemic, particularly in markets, where COVID-19 vaccines are not yet widely available.
We continue to work hard to accelerate access to vaccines for our colleagues and sincerely.
Th everyone's efforts to maintain the supply and availability of our products.
We had a strong first half executing our strategy well and leveraging our advantage to enable us to deliver against our growth drivers.
The strong first half gives.
Is the confidence to raise our full year revenue growth outlook to 4% plus.
We are seeing improving mobility trends in many places helping to drive recovery in areas, such as world travel retail and gum and candy that were negatively impacted last year.
We also see continued strong demand for the categories and channels that experienced elevated demand last year due to COVID-19.
And once again this quarter, we have demonstrated that our strategy is working as it is driving a virtuous cycle that is consistently delivering profitable volume.
<unk>, driven topline and bottom line growth as well as good returns to our shareholders.
We are leveraging our revenue growth management capability.
Which is particularly important in this inflationary environment to generate fuel for continued investment and our brands and capabilities.
And we continue to reshape our portfolio to further increase our focus on snacking as well as to accelerate our long term growth rates.
To this and we announced in Q2 and agreement to acquire Chipita, which I will speak more about later.
After this strong first half.
Of the year and strong previous years I remain even more confident that we have the right strategy and are taking the right actions to deliver continued and accelerated growth.
Turning to slide 5.
And the headlines of our financial performance.
We grew.
Grew revenue by 6.2% in the quarter and 5% for the half lapping 3.7% growth and the first half of 2020.
Despite cost inflation, which continues to be a factor in our sector.
We grew gross profit faster than revenue.
We achieved this through volume.
<unk> leverage pricing actions and continued cost discipline.
This profitable growth funded another quarter of double digit increase in working media spend.
Our ANC investments combined with our advantage portfolio of brands and excellent acute execution.
<unk> continued to deliver strong share performance.
On a 2 year cumulative basis, we are gaining or holding share across 75% of our revenue year to date.
And in terms of cash generation and capital return and we increased our free cash flow by $300 million versus half 1 of last year.
Year, and returned $2.4 billion of capital to shareholders and increase of 0.9 billion versus half 1 and 2020.
Adding the Q2 revenue growth through our track record of performance since launching our strategy in late 2018.
You can see on slide 6.
And that we are now averaging a 4% quarterly growth rates.
We achieved this by pivoting from a cost and percentage margin focus to a volume led growth and profit dollar focus.
By increasing clarity and accountability and the company through a simplified local first commercial.
<unk> model, where decisions are made closer to the consumers.
By stepping up the investment levels, and our brands and capabilities and by better aligning our incentives to our strategy to stimulate growth driving behaviors and a winning culture.
Driving sustained.
Sustained growth requires remaining close to the consumer and being informed by consumer insights, which I will discuss on slide 7.
As we entered the second half consumer behavior around the world is still shaped by Covid.
Gradual shifts in behavior continues to drive strong demand for our.
Snacks.
Globally, we are some distance away from reaching a new normal and the recovery is uneven largely dependent on availability and adoption of vaccines.
Comfort and mental well being remain as important as they have been throughout this pandemic.
And that is leading consumers to reach for the snack brands, They know and love variety and convenience value and nutrition have returned as decision factors as countries begin to reopen.
Mobility is increasing as restrictions ease but at home consumption remains.
And elevated.
And it appears that higher levels of working from home and shopping online are here to stay.
And more time and home <unk>.
Desire for trusted and comfort and brands and the return of inputs and on the go consumption are driving sustained growth and our core categories.
Year to date, the biscuit category has a 2 year average yearly growth rate of nearly 4% and chocolate is growing almost 6%.
Solidly growing core categories are the first of a long runway of growth opportunities that we are illustrated on slide 8.
The runway is long and we are realizing these opportunities by leveraging our strong enablers such as increased brand investments higher quality and purpose led marketing and pricing ability.
As a consequence this quarter, we continued to make progress against our key growth drivers.
These include.
Driving category growth and share gains in our core categories through impactful partnerships like the Premier League with Cadbury in the UK the U S Olympic steel and with Oreo and the NBA with Triton.
And also expanding our presence in key.
Key channels like digital Commerce, which grew 14% this quarter on a reported basis after close to triple digit growth last year.
We are also expanding our presence in emerging markets, where we continue to gain distribution in key countries like China and India with another 60020.
<unk> thousand and stores added this quarter.
We are and increasing our exposure to high growth segments, where we are underrepresented for example, premium where we have recently integrated states onto our U S. DSD system and are seeing the benefits through accelerated strong double digit growth.
<unk> this year.
And finally, we are also increasing our foothold and adjacent categories like gates and phase III, where we are now realizing the potential of acquisitions like giving go in North America.
We are also launching innovations like Oreo muffins.
Moving to slide 9.
And let me speak for a minute about the attractiveness of the package cakes and phase III category and our expansion into it.
This is a $65 billion category growing at or above the rate of our core snacks categories.
It also has attractive profitability.
Both.
Cakes and phase III typically have a higher net revenue per kilogram and cookies.
It is a close adjacency to our core biscuit capabilities and it is a fragmented category, which provides a clear opportunity for a company with the right brands and capabilities to gain a leadership position.
The number 1 and number 2 players have a market share below 10%.
And following the acquisition of <unk>, we will be the number 3 player.
And finally, we believe we can add value and premium is the category by leveraging our brands and you can see a few examples of debt on the slides.
Starting with Europe in Europe, the number 1 cookie brand in France, which is now building its presence and the cakes and phase Iii's aisles.
And that includes the well below the bird biscuit re imagined as a software and recently the brand is expanding even further into waffles in the highly incremental phase.
As III space.
On Oreo, we have recently expanded from our core cookies into cascade's donuts and more by leveraging our giving growth platform in North America.
Our products bring the Oreo taste and quality.
And finally milka the number of on chocolate brand in.
And France, Germany, and Austria, which we initially took into the kooky IL through our Shaco bakery innovation.
<unk> has now expanded into soft gates like Brown East and will soon expand into cross sells through the <unk> acquisition.
And you can imagine we will do the same with Cadbury in the countries where category.
Cadbury is our main chocolate brands.
We firmly believe that our leadership position and the cakes and phase III category can contribute to and accelerated growth rates for our company.
And between our core brands and recent acquisitions, we have the tools to succeed.
Now, let's dive a little.
And Peter on Slide 10.
We're very excited about acquiring these attractive portfolio, which is led by the 7 days brands. It is a $600 million business growing high single digits and skew towards European and emerging markets with strong potential to expand its presence.
Deeper on many other geographies.
The portfolio is predominantly pre packaged cross sales, which gives us greater exposure to the breakfast or pre lunch consumption occasion.
We have a clear revenue synergies, which are beta including distribution and co branding and we believe there is other attractive.
<unk> innovation and the pipeline.
We also expect to realize efficiency opportunities.
This will be our seventh acquisition since 2018, which will combine to add $1.5 billion of revenue to our business.
We also sold on a further $1 billion of KDB stock in Q.
Attractive, which will part front the Chipita acquisition.
We look forward to welcoming Chipita on board and believe this business can be a strong growth engine.
In conclusion.
As you can see from our first half performance.
Executing our strategy continues to deliver.
2 on results I am confident that we are well positioned to deliver consistent and profitable growth for years to come.
With that I will hand over to Luca for more details on our financial performance.
Thank you, Dave and good afternoon.
Our second quarter performance was strong across the board.
And we delivered robust top line growth as the gross profit dollar growth that allowed reinvestment in our brands and attractive free cash flow.
Revenue for the quarter increased by 6.2%.
Growth was broad based and volume led.
Pricing, which was favorable across all.
<unk> was also a key contributor.
Emerging market performance was strong growing more than 16% for the quarter and more than 5% on a 2 year basis, Despite India being affected.
At the beginning of the quarter by Covid related Lockdowns.
And India situation improved in.
And region and growth trends have already been restored in line with what we sold and quarter 1.
Of note. These emerging market results include double digit growth in Brazil, and India, Russia, and Mexico, and high single digit growth and China.
We remain encouraged by the resiliency and underlying.
June from our emerging market, while we continue to invest behind attractive growth opportunities for the long term.
Developed markets also performed well with robust consumption trends continuing.
These markets grew 1.3% during Q2 coming golf elevated demand in 2000 and <unk>.
<unk> signed a 2 year average growth for Q2 was nearly 3% and more than 3% for half 1.
Turning to slide 13 and portfolio performance.
<unk> grew 2.8% and Q2 and 6% on a 2 year average.
Brazil, Russia, and Mexico posted double.
Growth.
While Germany grew high single digits in this category.
Our North America business declined low single digits lapping double digit growth and 2020.
Chocolate grew more than 12% for the quarter with a 2 year average of 5.9%.
Indeed.
India, Brazil, Germany, and Russia, all posted strong results, despite some restrictions and India.
Cadbury Milka laughter and tober on all grew significantly during the quarter.
<unk> results reflect growth from improving mobility trend in world travel retail, albeit this business is only at around.
Digit percentage of 2019 levels.
Gum, and candy posted strong double digit growth, resulting from improving mobility trends and lapping the peak COVID-19 restrictions in 2020.
This business grew 28% during the quarter are still declined over 7% on a 2 year.
Year basis.
We expect growth to be better for the second half of the year as mobility generally improves yet we are still cautious about gum category dynamics that is still at 80% of the 2019 levels and our full year outlook does not imply a full recovery to pre COVID-19.
Now I'll cover our market share performance on slide 14.
We continue to see good share performance given the unique impact of Covid on results last quarter, we switched to a 2 year cumulative for percentage of revenue gaining or holding share as we've seen the better depicts how we are truly.
Good morning.
On a 2 year commodity basis as of June <unk>.
We have had or gain share and 75% of market and category combinations.
Biscuits and chocolate continued to be the primary drivers of this performance as they had or gained in 80% of our revenue base.
Notable share gainers on a 2 year basis include the U S, China, Russia, and Brazil, and Germany, and Russia, and South Africa chocolate.
Gum and candy held or gained in 50% improving since the last quarter, primarily due to the U S and the performance.
Now, let's review our profitability on slide 15.
Overall profitability was strong in the second quarter and year to date.
Gross profit grew faster than revenue, increasing more than 7% due to strong volume leverage productivity line pricing and revenue growth management initiatives that al.
And to offset inflation and commodities logistics and labor.
As we said many times inflation and commodity costs are higher than we originally anticipated at the start of 2021.
We continue to believe that they are manageable and.
And we are holding to our original stance as far as investments.
Our concern.
Having said that we are managing gross profit dollars for the year and there might be some pressure points in the second half. In addition, our goal is to enter 2022 with a sound profitability level that will enable higher investment in 2022.
Operating income dollars also increased by.
By more than 7%.
Moving to regional results on slide 16.
Europe revenue grew 5.4% in the quarter and 2% on a 2 year basis with Oi dollars or plus 15%.
North America declined slightly at minus <unk>, 3%.
In.
And the quarter with a 2 year average growth of 5.2%.
Operating income declined -7.2% in the quarter because of volume and mix dynamics as well as some cost inflation that was more pronounced in this region and others.
EMEA posted growth of plus 7.
And the 2 year average of 1.8%, which includes the peak Covid Lockdowns in Q2 of last year.
India delivered another quarter of exceptional growth despite the challenging start related to lockdowns growth.
<unk> strong double digits, India grew on a 2 year average.
Mid single digit.
EMEA operating income dollars grew more than 7% in the quarter due to volume leverage and was as well as cost mitigation efforts with substantial brands and working media investments increases.
Latin America grew 33, 7% and Q2 and April.
8.9% on a 2 year average aided by Brazil that grew by double digits.
Why dollar in Latin America grew significantly over previous year due to topline growth and mix as gum is on a recovery path.
Now turning to EPS on slide 17.
<unk> Q2, EPS increased 1.6 percentage constant currency, driven mostly by operating gains which were partially offset by the lapping of a 1 time tax benefit in previous year quarter.
First half EPS increased 8.6% at constant currency, primarily due to operating gains and despite.
Despite lapping a 1 time tax impact last year.
Moving to cash flow and capital return on slide 18.
We deliver free cash flow of $700 million in the second quarter, bringing us to $1.4 billion for the first half.
We also repurchased approximately 1.
By billions and shares in the first half at attractive prices.
Dividend growth remains an important part of our capital allocation approach.
And 2 the 10, we announced another increase of 11% to our cash dividends today.
This represents an increase of almost 85%.
1.
Over the past 5 years.
Moving to our outlook on slide 20.
As a result of first half strength continued category durability, and healthy demand, France, and both emerging and developed markets.
We are increasing our full year net revenue growth.
<unk>, 4% plus.
We the first half at plus 5% the implied growth rate for the half 2 is at least 3%.
We remain prudent in the way we plan the business, whether it relates to channels, such as world travel retail and categories like gum.
Which are.
We're beginning to benefit from an improvement and mobility.
We're also mindful that there is still a significant degree of volatility on a global basis as many countries find themselves in different stages.
As it relates to vaccines rollout.
<unk> transmission and restrictions.
In.
Plus EPS, we continue to expect high single digit growth for the full year.
We have not factored in the full benefit of the topline additional growth on the EBIT.
We will continue to reinvest the volume driven upside back in the business to sustain our share performance.
We also continue to expect free cash.
Terms of generation of 3 billion plus for the year and some additional cost related taxes and now factored into our outlook.
Forex translation is now expected to positively impact our reported revenue by approximately 2 percentage points and EPS by 9 cents on the year based on current market rates.
Cash flow as said our updated outlook is based on current conditions and does not factor in and material degradation in the operating environment that could be triggered by a significant worsening of COVID-19.
We also expect to continue executing against our clients and revenue growth management, including pricing and.
Vacation in order to offset some of the inflationary costs related to commodities logistics and labor that we expect to be incrementally higher and the second half of the year.
As already said, we want to enter 2022 with a strong margins that will allow the combination of the virtual cycle and high investment level.
Simply to close we remain focused on consistently executing against our strategy. This means continued investment and our brands driving core growth expanding in underserved channels doubling down on high growth segments, and capturing new opportunities and close in Adjacencies like cakes.
<unk> and pastries and bars.
With that let's open it up for Q&A.
At this time I'd like to ask a question. Please press Star then the number 1 on your telephone keypad and.
And the Star then the number 1.
Okay and your first question comes from the line of Ken Goldman with JP Morgan.
Alright, thank you.
Sure you mentioned that your plan remains prudent you talked about global volatility.
And I'm curious how you see the situation today.
And some of your key emerging markets.
And what your outlook is for the rest of the year again, I know you don't have a crystal ball, but are there any areas of the world, where you might be more optimistic more concerned just trying to get a sense of that.
Okay. Thanks, Ken.
Yes pleasure to go into into that.
You probably saw debt.
We had a strong emerging market performance in Q2, with 16% growth and the quarter and and now a 5% growth on a 2 year average basis.
It would have been probably higher.
But we have disruption and India COVID-19 costs.
And in May.
And so if you look around I would say you look at the big markets.
We have strong double digit growth in all of the BRIC countries for the quarter, So, Brazil, and India, Russia, and then the high single digit growth in China.
There is.
And I would say.
And of those countries and there's always a potential maybe except for China.
Covid will cause some some.
Volatility.
Particularly a country like India looks more susceptible to it but overall they seem to be on a path over gradual.
And increase.
China, I mean, the operating well COVID-19 seems to be under control, they're returning to mobility, and we've seen and constantly improving category performance and on top we have strong share gains.
And sometimes like income 3.
Nothing to year to date.
If I if I look at India.
They bounced back in June after the crisis of April and May and.
And daily cases are now.
10% of what the peak was.
So the short term risk of further disruption.
<unk> <unk>.
Significant due to the slow vaccine rollout the new variants.
But if I look at the long term prospects.
I believe they still are very strong and our team there is executing the strategy very well doing more investment.
Increasing our range and driving mortgage.
<unk> remission.
And then Brazil had very strong growth.
Double digit net revenue and also double digit on a 2 year CAGR.
And the Covid.
Nervousness is still there.
And then.
And the chocolate and biscuit consumption is growing while.
Distributing and candy, which as you and obviously very heavily affected by Covid is still negative by the reduced mobility and.
In Brazil, we see the vaccine rollouts accelerating and it's starting to have an impact and should we expect mobility and Brazilian and the second half to be quite strong and we also see some share gains and biscuits and Brazil.
Greg Marcus I cannot say.
Apart from what I, just said that there would be.
A major shift.
Surprises.
I would say at this stage southeast Asia, and particularly effective and so that's going to take.
Few months probably.
We have transmission speaking and Vietnam and Indonesia.
So and the Q2 was flat against 2019, so we have to monitor that very closely and then and the middle East and Africa.
In general they are and growth on a 2 year basis, but thats also a part of the world that I would say, we need to remain careful and and I don't think theyre fully.
And we recovered.
If I look at Latin America, the smaller markets, Mexico, and slight growth on a 2 year basis now.
Your last year coming back quite nicely the rest of the smaller markets, probably not quite there yet still below the 2019 levels. That's also driven by the fact that.
And can the business is quite important and those markets and then European and emerging markets apart from Russia. They remained strong so I would say.
Overall, the smaller markets that are affected at the moment, but the big emerging markets are doing well volatility remains but I would largely see debt in India and southeast.
East Asia and potentially Africa.
But overall I think the mix of our emerging markets over time, we will keep on showing more stability and a gradual increase versus 2019.
That is very helpful. Thank you.
Derik and then quickly Luca I was just thinking about.
On the phasing of the third quarter and the fourth quarter from a top line perspective.
As we model each of those quarters are there any 1 time, maybe headwinds or tailwind that you'd like us to consider keep in mind.
I mean this tight.
I would say is that.
Clearly, we're very happy with the strong force staff.
And the.
4 plus percent guidance, which implies at least 3% growth for the second half east.
Evenly spread I would say between Q3 and Q4.
The 3% plus.
Or at least 3% and the second half my of vehicle and serve it Dave and maybe <unk>.
And given the first half trends.
As Dave just finished talking about the emerging markets, we know the situation and the steel and volatile in certain parts of the world and we do not know to which extent GAAP.
And candy and will probably sales.
We'll recover so we feel quite good about the 4 plus percent.
Specced.
The growth to be evenly spread between Q3 and Q4.
Thank you.
Thank you Ken.
Your next.
Question comes from the line of Andrew Lazar with.
Barclays.
Good evening everybody.
Hi, Andrew I, Andrew right.
Hi, there.
To start with you talked about how you obviously expect a better organic revenue growth for the year and are kind of standing Pat on on the EPS growth outlook and I guess, it's a combination of reinvestment and some additional.
Inflation, but first off I was hoping you could break down those 2 for US is 1 of those 2 maybe a significantly larger.
And of the of the impact to the incremental impact to margins on the back half of the year and to the extent it's.
And our reinvestment to kind of hold up market share.
Given you're starting to lap some.
Additional and precedented market share gains from last year. What are you seeing that that helps inform your ability to hold on to some of these these share points are these share wins as you go forward. Thank you.
So maybe I'll start with this last 1 in terms of share gains that peak of the share gains where last.
On the until 2 and.
As we said many times it was fairly consistent across the board.
Our top countries and our middle sized countries and bulk chocolate and biscuit pulse.
Posted tremendous share gains and obviously, the 75% to 80% share gains that we're talking about.
Clearly don't give full justice to the absolute amount of shares.
And so by lapping the peak last year, what I can tell you today that we are fairly happy with the overall result over that 2 year period, and we intend to keep it as it is as of Q2 and potentially.
Italy growing those share gains in the second part of the year.
In terms of dynamics.
Amount of agency debt, we are going to invest for the second part of the year is pretty much in line with what you have seen so far in the first half obviously.
He is like Q2 last year we.
And of caught a little bit agency, because we were impossibility to do business and certain places, particularly in emerging markets, but when you look so on the face of it be incremental and the second part of the year will be will be lower but in terms.
<unk> run rate and absolute numbers. It is absolutely in line with the first part of the year in terms of.
And pricing and inflation I would say there is going to be more in the second part of the year.
To start with our pipeline of commodities and Forex has been has been advantageous.
Pages and the first part of the year and.
We expect.
Some commodities and forex impact to be relatively higher in in the second part so there will be some more pressure.
In Q3, specifically, but we will continue to be very disciplined in terms of costs and pricing.
<unk> and the overall goal for US is to enter 2020 tool a with some strong share momentum and tool with.
Some GP level that will enable continued investment so as I said Q3 will be more pressure than than Q4, but I think at this point and time, we have line of sight.
The 2 incremental pricing, we have line of sight to Ingram.
Incremental volume and we have line of sight certainly to more of what we call our GM, which is critical for us as we continue to.
Support our plan and with the ultimate goal to again as I said to enter 2022.
With a strong momentum.
Thank you.
Your next question comes.
Your next question comes from the line and Nik Modi with RBC capital markets.
Yes. Good afternoon, everyone. So I just wanted to follow up on on Andrew's question regarding share gains and a year ago, we were talking a lot.
Consumer trial.
And and household penetration and.
And we could turn and I was hoping you could maybe provide an update on the retention so what youre seeing from some of these new consumers.
Maybe that can help us provide some perspective around the sustainability of share gains and thank you.
Yes.
<unk>.
So.
And if I look at the household penetration.
In the last 12 months globally, we have an increase of about 150 million households, which we are holding on to that is not falling back.
The other area that I see as in.
Not necessarily going to lead to share gains but.
I think it will lead to strong categories is this combination of.
And at home consumption that is <unk>.
Lower than it was slightly lower than it was last year, but still significantly higher than it was in 2019.
But that is then.
Sort of.
Buildup or theres, a build on from mobility increases and the impulse channel coming back and giving us strong.
Growth and gum and candy as well as in biscuit and chocolate.
And so.
And then I think would be.
A second factor that will influence this and then.
And look I was saying we are lapping the highest share increases that we had last year.
And that was of course, a combination of of our brands and the performance of our brands, but also the fact that our supply chain last year.
Kind of works.
Better and some of our competitors that affect renew over time was going to go away, but in the second half of the year. Those huge increase is driven by our supply chain performance last year are gone and so we'll be lapping market share increases that are milder.
And on top.
And I expecting as we did.
In the second quarter, but also and the dearth and the fourth quarter to continue to increase our working media spend and a significant way. So I expect that also to contribute to the market share gains. So what we expect to happen is that by the end of this year.
The market share gains that we had at the.
And of last year will have retained or potentially increased a little bit.
Excellent that's very helpful. And then just 1 last question.
And we start seeing a surge in cases and the U S and obviously other profit per well.
And have been not as favorable as what the U S.
Are you seeing retailers behave any differently are they.
There's a fear that apply won't be able to come to the market and people start stocking up they're buying inventory and early any any context around that.
No not really at this stage, we haven't really seen anything there was a little bit.
But not really significantly I would say.
Now.
<unk> continues to do worse and like the CDC, saying today that.
And even vaccinated people in certain circumstances should start to wear masks again.
The fact that.
Consumers might stay at home longer because the.
Turning to work.
And as evidenced after labor day at the moment.
I think we might see.
And sort of a.
Repeat of previous situations I don't think to be lead to massive stocking at home, but the increased consumption at home.
I think that will continue for a while.
He is not the moment for instance.
The food consumption at home still shows a 15% spend increase versus 2019, I think that will continue well into the third quarter and potentially in the fourth quarter and.
And the.
On the out of home eating is still not quite there and still.
So as a percent down the spending there versus what it was in 2019, but the consumers venturing out more which also helps our snacking category. So.
I think overall, our categories will benefit, but do not expect that we will see massive sort of stocking and.
And retailer.
And final, arguing with replenishment.
Excellent. Thank you so much and I'll pass it on.
Thank you.
The next question comes from the line of Bryan Spillane with Bank of America.
Hey.
Good afternoon, everyone.
Hi, just wanted to ask a question.
And about investment levels.
And I think you talked about part of the what's contemplated in the guidance for the for the full year and 'twenty, 1 as some incremental investment and.
Wanted to be and a good place to invest for 'twenty 2 as well. So I guess 2 questions around that 1 is just where is the where are you.
So those investments just I guess in terms of maybe which product categories or which geographies and then.
Second just.
And if you give us a sense of what types of investments those are so our day product and packaging is it marketing just just trying to get up and understanding of kind.
Kind of where and.
Making the investments are.
It is a combination of the strategy, we have all along since the launch of <unk>.
The new strategy in 2018 first and foremost.
He's around global brands, but also about local brands and sold our local jewels we have.
And on the walls are all benefiting.
And from increased agency.
It is about more working media than anything else and so we are reducing consistently over the last couple of years the amount of non working media that we have in our plants and in our numbers.
And we are.
What decently pushing the envelope on renovation of some of these brands and we continue investing in.
On new packaging, and new quality et cetera, but the overwhelming part of the investment is around.
<unk> is around working media it is.
Cause more skew towards biscuits and chocolate, but we are also increasing particularly in some places like China and Latin America gum investment because we want obviously.
And to reap the benefits of.
Increased mobility, and so I think it is EPS.
<unk> per ounce.
These global and local brands and that's I think.
Going back in terms of share gains and certainly in terms of volume and revenue growth.
Okay. Thank you.
Thank you Brian.
Your next question comes from the line of Robert Moskow with credit.
Is <unk>.
Hi.
Quick questions.
The first is <unk>.
Have you experienced higher freight and logistics costs.
And did that occur and <unk> I didnt hear it called out and if it is.
Is it showing up on SG&A or is it in Cogs.
So the other question was I just wanted to confirm about the guidance is high single digit off of a higher EPS base.
And by about 3 cents following the restatements so.
I know you said theres a lot of reinvestment, but on.
Are you also saying that some of it some of this top line benefit will drop to the bottom line because.
And then on.
Around the order of <unk>.
Yes.
And so.
Logistics cost and freight cost is a pressure point already in Q2 and it is reported into Cogs.
<unk> for the most part of the phenomenon that we saw in.
In North America.
He is not only limited to North America Ocean freight.
And really on the rise everywhere and it is impossible pretty much to cover.
For a long period of time, and so we are facing pressure, particularly in debt in that area. Obviously, given the fact that we have and the U S and DSD.
Eastern which is our captive system, which is.
On lease trucks et cetera, we are somewhat more insulated than than others, but it is definitely a pressure point, we called out in general inflation, because there is more and then logistics and trade. There is also some packaging cost debt.
These debt is high and in general commands and co Packers are.
Rising costs with us.
In terms of EPS.
Had been guiding to high single digit that is on.
Off the base that has been restated and there is a little bit on upside driven by the income.
And part of revenue, but the most part of the upside is being reinvested back into these and as you might imagine at all debt.
We might implement more pricing around the world and.
Given also the high share of debt.
We are retaining we want to enter 2000.
And 22, a with strong share momentum and b with a level of profitability that these.
Allowing us to continue to reinvest and implement more pricing, obviously, we need more support to our brands.
Great. Thank you.
Thank you Robert.
Yeah.
Your next question comes from the line of Alexia Howard with Bernstein.
Good evening everyone.
Hi, Lee.
Hi, 2 quick questions for me.
I think you mentioned and the press release that you were getting some benefit from manufacturing productivity.
I'm curious if that's just operating leverage on whether there.
There are specific manufacturing cost savings that youre seeing around the world and if so where those are and what is it.
Going on and then my second question is really around just the commentary on the negative mix on both the revenues and the gross margin.
Was just wondering if you were able to quantify that and and.
Qualitatively describe what.
And what's happening thank you.
So in terms of net productivity with the exclusion of commodities and Forex cost.
We include everything gas and in net productivity really too much so labor inflation.
And and any other type of inflation that's easing there.
Sure.
We are benefiting from the fact that volume is growing 4.4% in the quarter entities, providing leverage in our factories as well, obviously, but I think it's fair to say also that all the actions that we have put in place in the last few years in terms of simplification.
For instance of the portfolio. The fact that we continue to invest on.
Our capex, mostly behind productivity initiatives is giving us benefit and that is particularly evident in places like Latin America and EMEA.
A good rate of.
Net productivity clearly in the U S, where as I said.
Logistics inflation, which is part of productivity.
Is higher is somewhat muting a bit the <unk>.
Benefit that we're having in and conversion costs in terms of mix I called out during the prepared remarks debt.
As you.
Think about.
Travel retail, which is a quarter of a billion dollar business in 2019 or a little bit less it is still running at 40% of what they used to be in 2019, and this is a business that fronts.
And with a much higher gross profit because it is mostly we'll.
And paid which is.
Toblerone and it is sold at a very premium.
On the rest of the portfolio. The other 1 obviously is gum I said that it is.
80% of what they used to be in 2019. It is 5% of the bolt on revenue that we have and again that is a lineup.
Line of business that runs.
With.
A GP margin that these.
Relatively higher.
Rest of the portfolio, so I don't want to embarking giving us and exact mix number what I can tell you is that if we restore the business to the levels of 2019 it.
Travel and material impact and.
Positive impact in terms of dollars that we would drop to the bulk on line.
As I said think about them running at 20% higher than it is today or travel retail running at 60% higher than it used to day that will be a material benefit to the bottom line and to be approved.
It will be it is fair to say that you haven't seen a big impact last year of this year, because we have been able to offset it through a lot of cost measures that are embedded into the P&L. In fact, when you look at the operating line. We are very happy with what we have and and.
And I think that is the reason why we are holding.
And it would be profit.
At good levels and.
Increasing it by 10% in the first half despite double digit agency.
Great. Thank you very much and I'll pass it on.
Thank you Alexia.
Your next question comes from the line of Chris Growe with Stifel.
Yes.
Hi, good evening.
And I credit growth.
Hi, guys.
2 questions for you on the first 1 would just be in relation to the degree of cost inflation I'm, just trying to get a sense of how it differs if it differs between developed and emerging markets and I guess related to that I'm seeing very strong pricing in Latin America.
<unk> are a little bit more on Asia, but very limited pricing and Europe and North America.
Starting to see that pricing pick up based on inflation and second half of the year.
Look it's difficult for me to make statements about future pricing as it boils down to segment.
Rising and profitability Walter.
Ill tell you is we are seeing pressure and the commodity market and so what we see in <unk>.
Commodities like sugar edible oils.
Packaging material and rising costs et cetera, those are common to all markets around the world.
To that I would.
Bad debt and some developing market.
Forex pressure is compounding and so if you think about the Russian ruble.
There is more cost pressure and in in some of these developing markets certainly in the U S. When we look at labor cost when we look at packaging costs when we look at.
Edible oils and logistics and freight there is clearly a material impact as I said I don't want to start making comments about about future pricing.
And I can tell you is that in general terms, we have developed great capabilities around revenue growth.
And in North America is most likely leading the pack in that area and second I would tell you that not any different than any other segments. We operate in.
All the business that we have is trying to enter 2022 with a level of profitability that allows continued reinvestment.
And I will leave it there because as I said I don't want to give any indication.
And of future pricing by by segment.
I understand and thank you for the color that you can give and.
And then just a quick follow on and.
In relation to Brian's question earlier about the investment and I think you've just said about how you're trying to.
And to be able to reinvest again next year.
And 2022, I assume youre going to reinvest every year, frankly, and I think thats hopefully can help drive the strong revenue growth I just want to get a little more color as youre thinking about 2022 is at a heavier rate of reinvestment and foresee or is it just the normal course of continuing investment that you are calling on for next year.
And if so.
We are.
In general what we're trying to do.
Of course, there is a little bit up or down every year is to take half of the extra gross profit and regenerate and dollars every year and reinvested in the business. That's the ideal forma let's say that we are trying to achieve.
And planning to change that next year.
And as you can imagine we will have to deal with the inflation that we see as Luca was explaining so we will have to do more pricing and we might have a little bit more pressure on our gross profit line. So.
<unk>.
For the remainder of the year.
And we don't.
Expecting debt, we will do better from a topline perspective.
And see significant growth and our gross profit line, but we are expecting debt.
Most of it we will have to reinvest in the business.
That's what we mean to get ourselves into the ideal position at the startup.
Year and steer, but then next year, we would expect them to do exactly what I explained.
Our current way of looking at things and the non expectation of increasing investment significantly next year on a year on year basis, Thats, usually a 7 to 8 sometimes double digit increase of on investments.
And that's hormones and I was talking about.
And that makes sense. Thanks, so much for your time Tonight.
Thank you Chris.
Your next question comes from the line of Michael Lavery with Piper Sandler.
Good afternoon, and thank you.
Hi.
Just wanted to follow up on innovation and SKU rationalizations and maybe.
And tie them together, a little bit 1 just could you give a sense of your progress on SKU rationalizations I know the and 25% you were cutting is big but it.
Clearly hasnt slowed the organic growth.
And then also curious a little bit related to debt on innovation.
What are your learnings are from that process.
Try that changes, how you think about screening or gating your launches and just what implications that might have as you look at new products.
First of all on <unk>.
SKU rationalization, there's really.
3 levels.
You should think about SKU rationalization and first of all.
And it's <unk>.
Stopping production.
And so not reducing certain skus anymore. Secondly, then having those skus not and inventory anymore, and then having those skus and nothing to store anymore and so those are the 3 levels, where we are at the moment these debt of that 75% most.
There is a production has been stopped.
We are gradually running out of inventory, we didn't want to write off the inventory, which would give us a big cost effect and then it's now starting to do.
Show up and store in store, we are not yet down 25%, but it's it is increasing rapidly.
Of it.
The effect of that sort of trickle reduction.
Is is going to be that I don't think you will see and effect on our topline and.
And then it really.
Should.
And go buy almost unnoticed and we have 75% less skus and keep in mind also that 25.
It leaves us kind of 2 or 3% of our.
Total net revenue and if we manage it well in store and keep the same shelf space and replace those 25% with faster rotating skus, we could even game sales.
On innovation.
And a business like.
5% innovation is.
Kind of.
3 things first of all what we call renovation its existing skus that we have to renovate update make more interesting second there is then innovation within the core new flavors and so on and then there's what we.
Our innovation and beyond the core which is new to market type of.
Segments or new types of products.
What we've been aiming for in our innovation approach is that renovation part.
And that sort of new flavors part that's weighted.
We believe we can reduce a little bit the amount of activity that we have and we've been doing that also around that 25% Mark.
And that.
It has led to bigger renovations or bigger.
And sort of within the core innovations and we're seeing the benefits from debt and is clearly showing up and the way.
Our net revenue growth as being composed.
Where we still have work to do is what we call beyond the core we're working that hard with trying to.
Shift some resources to that that requires a longer lead time requires more investment, but over time and give a significant growth for the company. So.
So what I would say here also the 25% reduction has given.
And upside to us.
And we are very happy with the way our innovation contribution to growth spending out at the moment.
Really great color. Thank you so much thank.
Thank you.
Okay.
Okay and your last question comes the line of Ken Zaslow with bank of Montreal.
Hey, good evening guys.
Thanks, Dan.
Just a couple of questions..1 is what are you seeing with price.
Price elasticity at the customers and how is this different than in the past.
Second question would be when you think about your acquisitions, all you tack on and you bolt on acquisitions.
How much incremental sales growth do you think that's added and how much will it add going forward.
And the first question look on the USB C D.
So if we see.
Elasticity numbers that given prices raises.
Oh, Okay, yes.
Okay.
I'm sorry.
And again I.
And I didn't understand the question the first 1 and there was a bit interrupted for me but.
And Alex this is deep.
Perspective, our categories are.
Showing a what I would say on average elasticity from what I've seen to other food categories.
And it depends a little bit where you are and which markets around the world in developed markets, where most of the sales are through supermarkets and.
And.
Done in larger facts.
And there are price point, but theyre, probably not as solid and.
For instance.
In Germany, the price per kilo is extremely important and fly in France, the exact price points, where debt back normally sold is much more important.
And then so it's a mixed picture, but I would say, we can more easily move things up or down and then again when we talk about pricing.
You should not just think about direct price increase it's also what we call price pack architecture, it's the among and.
And the depth of promotions that we have and.
And at some of the trade activities as we deploy so pricing is a big word or is it sort of a.
Grouping of a number of activities, which might not necessarily immediately translate in the elastic effect for the consumer who suddenly sees the price change and emerging.
The market is slightly different.
There is really about price points and you need to maintain those price points. So in general what we do there is we work much harder on productivity.
Using of packaging Inc.
Proving the cost of our ingredients.
And.
And improving the cost of our distribution and so on.
Also.
And making sure that.
We work hard on price pack architecture, and so on so that's a bit more of a difficult approach, where you need to stick to the price points and usually when you have to move away from a price point.
The elasticity effect shows quite considerably and your volumes and so the game is played slightly different there. So I hope that explains a little bit the 2 ways that we manage elasticity.
But I would say in North America and Europe.
In general the way, we're doing it and U S.
As you probably heard and previous discussions are price movements are bigger than previous year, but not massive and thats. Thanks to that RCM approach I would say.
We are able to deal with the elasticity that comes from it and an example is a 4% plus volume growth we've seen in this and this quarter.
And as it relates to.
Acquisitions.
Acquisitions that we've done so far if added about 1.5 billion.
To our topline.
Is that they grew high single digits and so you can probably calculate what they add to our top line growth I would say, it's probably in.
The order of 3% growth on.
Our plan is to continue to do bolt on acquisitions, it's it's difficult to say, how much and when and at which growth rate, but and.
In general when we.
<unk> announced our strategy, we always said that we were counting on a 3% plus.
Organic growth and then we would complement that with.
Growth through acquisition and that thinking we were thinking that about 5.6 of growth would come eventually.
From from acquisitions, so that's more or less what we have in mind.
We haven't.
Done that many acquisitions, yet and it.
And what are you still take us a few years before we got a significant math that would lead to that point and $5.6 but that's sort of our thinking as it relates to the contribution of acquisition.
Great I appreciate it.
Just have a quick 1 just to add is at what level of sales growth would you not reinvest that would fall to the bottom line.
And I'm not guiding you anywhere, but if it was 5% would you drop it down is it 6 percentage of 4 and a half and then and I'll leave it there and I really appreciate your time.
Look the idea is to get the algorithm and we have in mind and staff.
And 3% plus on the top line is under normal circumstances 4 to.
And GP dollars.
And then we take half a week, we reinvest it and half of it will drop as to EBIT and then that should deliver the.
EPS growth.
High single digit and clearly as you look at this year. We are ahead on fall and Buffalo line, but as we said very clearly.
Thus, while we want to do is to sustain.
Stay and the market share gains and potentially additional pricing that is coming and enter 2022 with a level of confidence that we can feel.
This virtuous cycle, we're in and that we want to protect.
Great I appreciate it.
Thank you.
Okay. Thank you and I think with that we can conclude the call.
We'd like to reiterate that.
It was a great quarter solid top line growth.
Good gross margin and gross profit growth.
Significant reinvestment and the business and I think is strong.
And bottom line going forward, we will see.
A bit more inflation pressures.
And our intent is that we will deliver a higher top line growth of 4% plus as we said and then any additional margin that we have that we reinvested in the business. So that we can.
And.
2.
'twenty 2.
With.
Great share position as well as a great margin position, which would allow us to continue our virtuous circle in 'twenty 2.
Thank you for the interest and the business.
Looking forward to really to take you through the results.
And 3 in Q4 and thank you for of course for <unk>.
And your questions and.
On that.
Thank you.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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