Q3 2022 Nestle SA Corporate Sales Call

Good afternoon, and good morning to everyone.

Welcome to the Netflix nine month 2022 sales webcast I'm.

I am Luca Bellini.

The investor relation team.

Today I'm joined by our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer and Francois here.

Market will begin as usual, we don't key messages and discuss the full year 2022 guidance.

Francois will follow with a review of the nine months of 'twenty two.

Figures.

We will then open the line for your questions.

Before we begin please take note of our disclaimer.

And now I hand over to Mark.

Thank you Luca and a warm welcome to our conference call participants today.

Always we appreciate your interest in our company.

I am pleased to report that our sales growth momentum continued to increase in the third quarter.

As a result, we're now reaching organic sales growth of eight 5% for the nine months period of 2022.

As in the previous quarters. This year CRO force, primarily driven by pricing.

We maintained our responsible approach to pricing, but further pricing steps, we're clearly needed to react to significant levels of global inflation hitting us.

Real internal growth remained resilient for the nine months period, but dipped into negative territory for Q3 at minus <unk>, 2%.

Short term and in the face of extraordinary pressures. This is unavoidable and should not be a costco concern.

As we look at next year and beyond we continue to work towards a healthy development of our volume and mix.

First I will show you later that our three year real internal crop average for this quarter.

Which is a good underlying growth metric at times of significant pandemic related volatility.

<unk> quite stable at around 3%.

Our volume growth, which remained positive in the first half turn slightly negative.

In addition to supply chain constraints and the Super high base of comparison.

Volume development was reduced by active and conscious choices to cut the number of loan rotation and underperforming skus.

This strategy, which we call cut the tail to push the head is one of our ways to counter cost pressures and supply chain limitations.

It is one of several strategies that enabled us to limit the pressure on our underlying trading operating profit margin compare to the reduction we witnessed in our gross margin.

Overtime. This trial is also expected to give us top line benefits through better on shelf availability and visibility of our core skus.

Next I would like to turn to portfolio management.

It has generally been a muted here so far I'll focus clearly has been on operating management at this challenging time.

But I am pleased to report steady progress in building some of our growth pillars.

Just this morning for example, we announced the acquisition of the Seattle's Best Coffee brand from Starbucks.

We have four years of experience with this brand since it was part of our highly successful global coffee Alliance with Starbucks.

The ownership of this branch will now allow an even more complete integration of this business in our highly efficient coffee supply chain.

In addition to the iconic premium France, Starbucks, we have come to light. This trusted brand a lot. It gives us a highly credible midrange mainstream offering that competes very effectively and protests the premium positioning of Starbucks.

We have also patiently and steadily built our Nestle health science portfolio this year.

Not in leaps and bounds.

Very manageable incremental steps.

Well, we will focus on Nestle health science in our Investor day at the end of November I would like to stress two key items today.

First do not over interpret the current short term organic she has prof compression.

Mathematically this had to happen after two years of extraordinary sales growth during the peak pandemic period.

We had told you ahead of time that this was unavoidable and compare to our plants. The slowdown is less than we expected.

We also continue to gain market share in B M S, which bodes well for future growth.

In an era of increased consumer health interest all signs point to continued attractive category growth.

Once the strong cobot quarters are lapped.

Our acquisition models and valuations for the deals we made in the space during the pandemic fully reflect this temporary post COVID-19 drove compression.

Second I would like to reconfirm that we have no intention of Tony Nestle Health science into a pharma business.

While a few off necessarily health sciences products, a prescription only the vast majority false firmly in the area of fast moving consumer goods, which is our and you are home turf.

Nutritional supplements and vitamins in particular, a fast turning into a major printing and premium amortization opportunities. We saw this trend early and a leading it with globally recognized and trusted brand names.

I will now turn to the business as a force for good section on page five.

Two weeks ago, we published our NES coffee planned 2030.

Following similar airports in our cocoa sourcing you're now seeing us putting the power of regenerative sourcing to another significant category of ours coffee.

Building on long standing work in the field of coffee farming, you'll see that regeneration is firmly taking hold and our leading CRO with coffee Brent naskapi.

It is no longer something that is limited to a premium mice and exclusive offerings were taken this approach mainstream to the benefit of all coffee love us farmers and farming communities as well as the planet.

Before handing it over to Francois I would like to cover the updated guidance.

Following the strong third quarter, we're now in a position to raise the organic sales growth expectation to around 8%.

While this is lower than our nine months organic says crop performance I would like to assure you that this is not due to any particular concern. It simply reflects a healthy amount of caution at a time of significant economic and geopolitical uncertainty.

All other aspects of our guidance remains unchanged and our fully confirmed.

With this I would like to hand, it over to Francois.

Thank you Mark and good morning, or good afternoon to you all let me start with the highlights for the nine months organic growth reached eight 5% with pricing of seven 5%, reflecting significant cost inflation.

Rig was resilient at 1% following a high base of comparison in 2021 continued supply chain constraints and the effect of a SKU optimization initiatives, we have seen limited demand elasticity so far.

Net acquisitions increased sales by one 2% largely related to the acquisition of the core brands of the Bountiful company on all again the leader in plant based nutrition.

Foreign exchange had a slightly negative impact on sales growth.

Total reported sales for the first nine months were $69 1 billion Swiss francs, the nine 2% increase versus last year.

Turning to the distribution of girls between developed and emerging markets.

Again growth in developed markets reached seven 4%, mostly driven by pricing, we slightly positive Regan.

Growth in emerging markets was 10, 2% based on both pricing unredeemed.

Gross was supported by continued momentum for affordable offerings, particularly in AOA.

Turning next to the breakdown of <unk> by channel organic growth for retail sales remained robust at seven 3% for the nine months growth accelerated in the soft quarter.

Within retailer you come off sounds grew by eight 4% building on the 17.2% growth for the nine months of 2021.

We're getting growth in out of home channels reached 26.1 person for the nine months, we soundly exceeding 2019 levels.

In the self quartile growth was supported by strong read on pricing.

Given the volatility of read about the last few years in the context of the pandemic. The three Gael rehab Reg provides a clearer picture of underlying growth trends.

As can be seen on the chart the level of underlying rig by quarter remains relatively stable Warner.

For the nine months rig remains resilient at 1% following a high base of comparison in 2021 and continued supply chain constraints.

As we mentioned during our call at the half year, we expected to see some demand elasticity going for a world.

We are seeing some more specifically in food on dairy, but the level remains limited in the context of the pricing actions, we have had to take.

In the third quarter. We also began to see the effect of all S. K you optimization initiatives.

Going forward, we will continue to closely monitor our conception patterns, given the volatile macroeconomic environment and pressure on consumer purchasing power.

Let's now look at the results of our seven operating segments, beginning with North America, where we saw 11, 2% organic growth.

Greig was 0.1% impacted by a high base of comparison in 'twenty, 'twenty, one and supply chain constraints, particularly for peering up head count.

Gross was supported by pricing sustained momentum in e-commerce as well as it fills a recovery of out of home channels.

By product category, Celgene Purina, Petcare Knisley professional on Starbucks out of home products grew at a strong double digit rates.

Infant Formula recorded strong growth following supply chain constraints in the market.

Baby food posted robust growth based on innovation.

The recently launched plumbed Tastic range of plant based offerings resonated strongly with consumables.

Frozen food reported low single digit growth, we supposedly contribution from pizza and frozen meals.

Shifting to rezone Europe organic growth was seven 1% supported by pricing across most geographies and categories.

In a challenging environment rig remained resilient at 1.5%. Despite a high base of comparison in 2021 on supply chain constraints.

Growth was supported by pricing fell to a recovery of out of home channels on innovation.

By product category, the key growth drivers were purina petcare unnecessary professional.

It sounded in water grew at a double digit right. We suppose he teed contributions from most brands.

Sales in infant nutrition also grew at a double digit rate based on continued strong demand for human milk oligosaccharide products or what we call hmos.

Coffee posted low single digit growth following a high base of comparison in 2021.

Garden Gourmet plant based products continued to see strong double digit growth boosted by new product launches.

Moving now to zone AOA, there's one reported high single digit organic growths, we supposedly contributions from all geographies and categories.

Growth was driven by pricing S SKU optimization under fills a recovery of outperform channels.

By geography, all regions posted positive growth with particular strength in Southeast Asia, South Asia and Africa.

By product category, Qt and that really was the largest growth contributor coffee reported high single digit growth.

The zone launched Starbucks ready to drink products in selected markets, including Australia and Indonesia.

Sounds initially professional grew at a strong double digit rate across geographies and categories.

Infant nutrition Milo in Petcare, all posted high single digit growth.

Next is zone, Latin America, which maintained double digit organic growth with broad based contributions across categories and geographies.

Growth was supported by pricing strong execution unfurl, a momentum of outperform channels.

By geography, Brazil reported double digit growth sales in Mexico, and Chile grew at a high single digit right.

By product category confectionery was a key growth contributor reflecting strong demand for kitkat on key local brands, particularly Gerald two in Brazil, and Carlos can talk in Mexico.

Purina Petcare coffee unless les professional all reported double digit growth.

Infant nutrition saw high single digit growth with market share gains.

Dairy posted mid single digit growth led by 45, milks and home baking products.

Turning to zone, greater China organic growth was four 7% based on solid read on pricing.

As a reminder, inflation remained relatively limited in the region.

The zone continued to be impacted by COVID-19 related movement restrictions.

Growth was supported by strong operational execution, he called mass momentum and continued innovation.

By product category infant nutrition reported double digit growth with improving market share trends for illumina.

Coffee posted high single digit growth led by NIST Cafe soluble coffee and Starbucks products.

In confectionery Sue Fucci on Shockwave fell both reported high single digit growth.

Next season, espresso, which reported low single digit organic growth following 11% growth in 2020, one with conceptions remaining above pre pandemic levels.

Growth was supported by continued momentum for the virtual system satisfies our telephone channels fills a recovered with continued expansion of the momentous system as well as improved sales development for the office segments.

By geography, North America posted double digit growth with continued market share gains Europe reported a sales decrease following high single digit growth in 2020 one.

Although regions combined reported high single digit growth.

Finally, let's turn to Nestle Health science, the business posted mid single digit growth building on two consecutive years of double digit growth.

Pricing innovation and geographic expansion supported growth.

Consumer care reported low single digit growth healthy aging products grew at a double digit rate growth in vitamins minerals and supplements was close to flat following a high base of comparison, particularly for immunity related products during the pandemic.

Medical nutrition reported double digit growth with strong sales development for pediatrics and allergy products.

By geography sales in North America grew at a mid single digit right Europe saw positive growth while all other all other regions combined posted double digit growth.

Let's now look at product categories gross was broad base supported by pricing across all categories.

We are seeing consumer demand somewhat normalizing by channel for the nine months categories with great had AUM conception, such as dairy and culinary so soft outgrowth of a high base of comparison by contrast categories with greater exposure to out of home channel undergo conception unemployed is buying.

Such as confectionery on water saw a strong recovery of a low base of comparison.

Within powdered and liquid beverages coffee, so high single digit growth a very high base of comparison in 2021.

Or brands contributed positively to gross we Saturday of Starbucks on this gut feel ready to drink products growing at a double digit rate.

Cocoa out on more beverages reported high single digit growth driven by strong demand for Milo and <unk> ready to drink formats.

Pet care reported strong double digit growth with mid single digit rig site.

Science based premium on veterinary products saw strong center developments.

Growth was also supported by continued e-commerce momentum on innovation.

Nutrition and health science posted $8 five per some girls infant nutrition reported 11, 5% organic growth with a strong recovery across all geographies, particularly in China.

Growth was supported by continued demand for HMO infant formula products, we sounds, reaching almost 1 billion Swiss francs on growth of around 15%, we have already discussed Nestle health science.

Prepared dishes and cooking it sold 2.6% growth driven by strong sensitive look months for ambient culinary, particularly Maggie insulin AOE.

Vegetarian and plant based food products delivered double digit growth led by garden Gourmet.

Innovation continues to drive growth with a new chicken analog underfed zelle rollout of Buena Auckland based Qunar alternative across Europe .

Growth in frozen food was slightly positive.

Milk products on the ice cream reported four 8% growth the key contributors to growth were coffee Cui miles on one baking products as well as new new in Brazil and in young in China.

Growth in confectionery reached 10, 7%, reflecting strong momentum for kitkat seasonal products on key local brands.

Sandoz in water grew by 15, 1% despite supply chain constraints gross was driven by international premium brands on the strong recovery of out of home channels.

Let me know hand over to Luca who will manage the Q&A.

Thank you Francois with that we move to the Q&A session and we open the lines for questions from financial analysts.

As usual please limit yourself to no more than two questions. The first question is from Warren Ackerman at Barclays. Please go ahead a warning.

Hi, everybody a high Mark Francois Luca Warren here at Barclays I'm I'll go.

Two questions first one is on the way.

In the quarter you mentioned a few factors can you quantify the impacts on S. K U rationalization. It seems like it was mainly in Asia.

Okay and then the rig was also weak when the espresso in health Sciences in particular, I know you say it was a tough comp on a one year view, but even on a three year stack view on the stress unhealth size. It does seem to be decelerate. So I was just wondering.

Whether you can reiterate that there's no underlying slowdown in nice two areas.

Because on my math, yeah to keep the rig momentum that you've seen in the last couple of quarters, you wouldn't need the rig to be back in July plus 2% or slightly positive in Q4, just wonder what your thoughts were on that.

And then secondly, just on the gross margin you talked about.

About gross margin compression quite significantly in the first half, but you have also been talking about gross margin stabilization in the second half I was wondering whether you're able to just talk about whether the pricing is now kind of matching the inflation and we should be actually saying the gross margin coming back.

In the second half looking and say into next year that would be very helpful. Thank you.

Warren Thanks, and then maybe I'll take a first crack at your question, but then also hand over to fronts going out for some additional detail. Let me just start with the second one on gross margin and to confirm that we're still in the process of having to catch up.

As you saw from at the half year numbers that we're still at a pretty sizable gap to the period before the onset of inflation and so we're still in the process of catching up there's a pretty significant full year effect that we're facing and this will take us into 'twenty three there's no question about that.

And so we need to be resolved in each of the rain disciplined when it comes to pricing action.

It's not all of it off the things that have hit us and have been recovered.

Regarding rig a few thoughts so first maybe I'll give you a bit more color on this S SKU rationalization.

Project.

And let me also say this one will figure out more prominently in our Barcelona Investor day, our long Fracs, who is leading that for us internally will present on it is something that we kicked off earlier this year when we saw that.

After the beginning of the Ukraine wall, that's clearly inflation was going to be a much more significant factor this year than before in that supply chain constraints. We're also going to continue to a larger extent than anticipated and so I think we started on a timely basis, which is why we're now withstanding to reap some pretty significant.

Full year benefits, but no one item I stat to equate a degree of detail Dan when we present in Barcelona, but it's a good one because it gives us efficiencies and yet at the same time. It also should lead to growth for the core skus. The ones that are high rotation and most successful and so I think you know.

It's not only about cutting the tail. It's also about pushing it ahead and Tim as you rightly pointed out.

Anyway is one of the zones, where we were particularly disciplined in implementing that but let me confirm to you that this is a global project with a global reach and to everyone here in Santa Cruz is participating in it because everyone sees.

The immediate benefits up at and also the benefits going forward.

Generally when it comes to that ever so slight rate decline in this third quarter let.

Let me just address one common misconception and that as people make too much of a push pull relationship out of it with pricing pricing goes up hence the outbreak has to come down that is too simplistic. So the point that Francois and I were trying to make to you is that it's a number of contributing factors.

And clearly at the high comparable from a previous here are the big feature of that then we have a supply chain constraints and those are also uneven. So for example, aways went up the zones that were set more by it.

Then we have the pricing, which I mean, clearly there has been some trading down and that's something we have to face and then we have the voluntary accidents here that come from SKU rationalization across all zones, but in particular for a way. So it's really two hour counts you know four major buckets are that was feeding.

That M limited a muted.

Rick development, but let me hand, it to Francois for some more detail. Thank you Mark and good afternoon, Warren just to green.

To reinforce what Mark is saying as well if you look at it on the high base of comparison, we can clearly see when we look at the development of our sounds an all girls by category the way that our it team everything is normalizing post Covid. If you look at the at home consumption everything that we have there is actually having negative redevelopments.

And everything that is out there for me is having significant gross levels two days, so which is clearly the evidence at the low level of rate that we see now is clearly the consequence of the normalization of the post Covid era and I just want to say one more well done misprice. The one in the chest, we're not too concerned, but it's a developing.

If you look at net price so in the first nine months, we all centers wind on a comparative basis, 20% above where we were in 2019 and sounds. So this is you have you done that I mean, the business is not suffering a all the oh. The medium term you chose a consequence of once again these are soft land.

Being post.

Post COVID-19.

And we are with our volume levels would shop, both pre pandemic level and the chest exactly the same thing we have gone to over two years of strong double digit even last year. It was almost 20% growth in the during the pandemic. So which is a reason why you can see it and they get even a regas each year, but no specific consume them.

Next question is from John any settlements ex please go ahead John .

Hello, everyone.

I have a question on pet care. Please.

Which I guess, it's been a standout performer for a while now I guess.

We've seen a number of capacity announcements over the last year or so from you Hales fresh patent laws et cetera, but the schedule and so when you. When you think about this capacity coming on stream over the next three years.

I guess what is what does it mean for the industry does it create promotional pressure or is it going to create an increase in SKU fragmentation again.

Does it seem to get absorbed by the anticipated volume growth you are forecasting for the industry I'm just very keen to get your thoughts on memorial. This new capacity is going to mean for industry growth outlook. Thank you.

Thanks, John and Tim obviously, when we clean light it those.

Vestments over the past few years this whole notion of a future supply and avoiding a clubbed in oversupply and idle capacity was of course high in our minds, because there was a pretty significant capex investments and with some of the construction of inflation, we're seeing now they have become even more.

Pricey, but I think this is where the very strong underlying growth dynamics of pet can come in as the saving Grace and this is independent of the one time step up that we've seen as a result of Covid. As you know there are some pretty long term growth drivers here.

Building on emerging markets and the calorific conversion that we're seeing there when people turn to dedicated pet food as opposed to feeding into pet with household food waste and in emerging and developed markets, we're seeing ever more premium amortization and our interest in higher value offerings and those two growth drivers continues.

To apply that were already in place before COVID-19. They continue to apply now so clearly when we did some sensitivity analysis. It was very clear that even if some other people also have significant capacity investments and even if maybe we design things.

Two large and if there's a temporary demand downturn eventually you will grow into it. There's no question in term and hence any pressure here if anything at all will only be short term in our case I think we were running pretty close to capacity limits already.

And.

If anything we probably wait a little bit too long because no one saw COVID-19 coming in.

And then of course, we accelerated those investments.

But I'm I'm not concerned going forward here.

Would lead to significant oversupply and price pressure simply because the category dynamics are so great.

That's very helpful. Thank you.

Next question is from Nike on deny said UBS. Please go ahead the Gilman.

Thank you very much for your carrying Matt good afternoon, Mark and their coursework.

Two questions for me. Please the first one mark is on it.

Next week.

Responsible pricing approach, ensuring our products remain affordable.

My question here would be how do you reconcile this commitment and the comment you made in the late July about not having a longer term margin reset which seems to indicate a strong focus internally on rapidly restarting your level of profitability.

How do we can copy.

Parents tension between affordability and rebuilding margin.

Should we read into that.

You may be looking at stepping up your productivity and efficiency efforts going forward.

And then my second question is going back on the rig, but destocking zooming in on Western Europe .

Because if I look at your performance in mature market rig seems to have deteriorated in Q3, this like North America, improving quite significantly.

The third quarter on the rig front.

So wondering what you've seen in the quarter in Western Europe in terms of maybe trading down.

Cancel delisting or maybe you know this that impact them at scale.

So any color on that would be helpful. Thank you.

Thanks, Kim and Tim look on the first one when.

When we talk about responsible pricing in an inflationary setting I think most of it has to do with timing and I think you've seen this play out over the last one and a half years, where we were not fully holding up our gross margin on day, one and that was unavoidable and.

That means we're not passing on all the inflation right away that we were also very clear that eventually we will have to catch up because what we don't want to do is permanently weaken the company and make it live on a lower gross margin level or profit margin than ever when it comes to the operating profit margin.

And so to me, it's about timing and I think especially in more high inflation emerging markets people are used to that so I mean over time best salaries and the incomes are inflating too and so it's more about the fact that you keep things affordable when and when prices are rising sirvente their salary levels and disposable income can catch up.

And affordability is a short so its time as opposed to absolute amounts that I think.

Make this approach special and I think in food and beverage.

It's almost a social responsibility and I think we've been living it and disappearing at for Western Europe had let me hand, it to Francois for some more detail.

Uh huh.

Western Europe actually a rig has been fairly resilient around one 5% you have seen that we have done less pricing relative to the U S. Actually we are a little bit north of 5% and pricing. While we are north of 10% in the U S. So I mean, it's you're going to take a little bit more time in our western Europe to implement pricing dishes are so part of responsive.

Pricing as well too spread out overtime does that consumer can absorb it and in the U S. Usually you can do things a little bit faster on as well. So we have not seen really clear have you done so food down trading.

In Europe , we had actually limited the impact is as windows delisting given that we have had a very staged approach in terms of pricing in Europe , which means we did not go for you know big amounts in one go but supply details of time. So I think it has proven to be a fairly efficient trading down we expect in Europe , we are concerned by the.

The outlook in Western Europe , especially so that the energy crisis that is coming at essentially a European one that will hit.

Schumer processing per well so we are a little bit more concern for all of Q4 Q1, Q2 next year to be seen them, but so far so good but something we are monitoring very closely.

Thank you next question is from the Selena the annuity of Jpmorgan. Please go ahead, Sir Nina.

Thank you good afternoon Mark.

My first question is in fact to rebound on them.

And mix commensurate, yes, Mark you said to me.

I ask that you expect next year, the healthy development of volume and mix.

I wouldn't put tougher that's clearly above zero.

For the rig in 'twenty three so just want to know what kind of down trading impact are you factoring when you are saying that.

And my second question you also mentioned that pricing will accelerate next year can we have a bit of it and if you have what kind of cost inflation and you are.

When you say that and and with regard to our discussion with retailers is it getting harder to pass on those price increases. Thank you.

Yeah, Celine I'm happy to comment and.

On the volume mix I just wanted to be clear. This does not constitute guidance and the choice of words was we're working on this because we're very much focused on a healthy Rick development in our rig as you know as to some of volume and mix and so I wanted to reassure everyone that we're not turning into an organization, where it's all about short.

And price taking at the expensive break and so we're working on this but specifically what we expect then for the next year in a volatile environment like this and I think there's good reason to wait then for temporary and to keep you than our expectations.

Likewise on the pricing I didn't mean to indicate that our pricing well yet accelerate from here and so what I was trying to indicate is that pricing will need to continue when it comes to the remainder of this year and next year Asquith southern catch up mode towards repairing and restoring our gross margin.

But I didn't want to guide anyone specifically, whether you know the pricing pace would stay the same accelerate or slow down so I hope that's helpful.

Next question is from Patrick spending man at silica Kantonalbank. Please go ahead Patrick.

Yeah. Thank you Hi, Mark Hi, first of all Patrick shrinking answer Kantonalbank again onto Rick's question would it be a fair assumption to expect a slight negative rates for the next couple of quarters because of its high comps in there because of these Sku's Act. That's my first question and second question in terms of the marching development developed.

Mark you have mentioned before that you want to have a fool auction recovery over time with today's knowledge to belief there's already a first step in the right direction, possibly an H <unk> and in 'twenty see thank you.

Patrick we'd love to be helpful. But as you know with our Q3 update all we're doing is gives you the.

The latest on our sales numbers and so you've seen us confirm or.

Other aspects of the guidance, including the underlying trading operating profit margin, but I wouldn't want to speculate on where we stand now specifically when it comes to improving on that.

And for the first question on the brakes, maybe I'll hand, it over to Francois.

Hi, Patrick on the rig we don't provide any guidance on rig by quarter. The only thing you got to you know that already but in Q4, the comps are not necessarily easier than they were in Q3, because I mean, we had to re grow 4% last year. It was four 4% in Q3 last year. So it's spread equivalent. This is almost two times, what we had experienced.

Pre COVID-19 level, so, which mean that the pressure on rig coming from the comps remained at least for one quarter, becoming one. So we are we are really working to preserve Rick as Mark indicated earlier to preserve it into positive territories.

And we are working on the two components are as well the mix is still.

In positive territories, which is a good indication of our capacity to innovate our capacity to premium bonds as well. This is largely work we are creating value so very happy with that.

Question is from the Bruno maintain at Bernstein. Please go ahead Bruno.

Hi, good afternoon, and just coming back on the first impact you talked about which is sort of the normalization of the very high demand in several areas.

During COVID-19, how many more quarters.

Do you should we expect of that normalization is in a quarter for the last quarter, a normalization or you think that can last well into next year.

My second question is you did mention that is large it is normalization beat it also mentioned some price elasticity and down trading if you had to look for down trading to private label all price elasticity is going badly which areas do you see it in and can you quantify how big it is and those potentially problematic areas. Thank you.

Good afternoon, but we know so the normalization of Covid I think probably one more quarter Q4. After that I think it starts to normalize because it really would correspond to the three year when stopped when Covid started so one thing that we should be back to a normal situation as far as the elasticity is concerned so as we have said we have not seen much yet you teased out.

I'd say less a function of geography, so far and if you look at the example of emerging market. They have proven to be very resilient in spite of the fact that the affordability matters more but that shows the power of our brands as well. So we did not see much elasticity in emerging market.

And so this is a we are as I said to you from a geography point of view more concerned about Europe in the next couple of quarters because of the energy crisis, if we look at it by category.

Wherever we saw a little bit early signs of of elasticity is probably in Darien food, that's probably where we are less premium minds as well and if you take categories, where we are more premium months like coffee.

Like Petcare, obviously like water with a premium hotels, we sold less elasticity as a consequence.

Thank you and maybe prune if I can build on a few thoughts here.

I think one of the benefits of having a number of brands at different price points is that even when people do trade down it doesn't mean automatically we're losing those consumers. There's a good chance to catch them at a different price point and then another thought on private label.

I mean this is a time when do you have of course several trends now overlaying each other so one is the post COVID-19 normalization and the other one is supply chain inflation.

As you know private label did suffer during Covid times, and so there was going to be some recovery to be expected anyways. So not all of that recovery has to do with inflation. Some of it is simply this is the normalization of their supply chain and as you can imagine when you have several of these trends overlaying each other it sometimes.

Pretty hard to read out exactly which part is due to which but do.

Do keep in mind that some of it is the normal post COVID-19 recovery of private label.

Next question is from that James Edward Jones at RBC. Please go ahead James.

Thank you Luca.

Kind of carrying out on the private label point do you say anything about the price gap between branded and private label.

Married and to what extent has it marriage.

And also on P. M S.

You attributed it to third quarters slowdown negotiate tough comps keeping their granite city is discretionary in nature of the category. How confident are you that it's not anything more than that.

So Jamie I think on P. M S I'm feeling really good that.

Very similar story to what we've seen in espresso up and we've seen outsized growth here for two years when people were really trying in particular to strengthen their immune systems. There's plenty other health objectives that people are pursuing the interest when it comes to Google searches and and all sorts of.

Consumer questions on Optima.

Optimizing your health outcomes that one has not gone away. It is a willingness to pay for that and so in my opinion. This is truly a lapping issue and as I mentioned, we properly reflected this when we did deals during the pentair. It makes sense, we knew about at some point. This period of outsized growth was coming to an end we've reflected.

This and our business models, and we're very happy overall with the planting opportunity that BMS affords them. So as promised we indicated Q4 is still a quarter that of course are seeing rates related to high comps, but overtime I think with 23 and beyond you will see the more normalized crop of.

A category like this shine through.

And then with regards to the first question and let me hand, it to Francois Thanks, Marc Hi, gyms under private label, one so inflationary pressure impact all players in the industry, including private labels and actually the pressure is typically more pronounced for private labels since input costs typically represent a higher proportion of their sales.

So as a consequence, we have seen since the beginning of the year always private label has had to implement significantly higher percentage of increase than branded products. It was typically around two times faster more than what we did so as a consequence, we don't think that the price gap between private label and branded products as a needle.

Narrowed Darren extended its probably the same as before.

That's correct.

Theres, one which isn't really your question.

Or to make these weeks since it was critical categories and and geographies, but I.

I'm also very much in support of our points was that.

The one other one to watch that I think is playing in our favor is the out of home and in particular eating out in restaurants, or you know, having a coffee at a bar or whatever so clearly that's where you're also seeing significant inflation and you're also seeing sometimes additional cost issues.

Cost of labor cost and sometimes also truly service quality issues because of labor scarcity, and so I think as families.

Have a harder time here, making ends meet one of the thing that can be expected as that they reduce the number of out of home occasions, and that actually is a bit of a tailwind it will be better if it headwind towards in home consumption, which of course gave us a split the stronger market shares in our in home consumption.

Yeah.

Next question is from Jeremy Fiacco at HSBC. Please go ahead Jeremy.

Hi, Good afternoon couple of questions from my side. When you look at the rig I think theres been a lot of discussion around kind of elasticity comps SKU rationalization et cetera, et cetera, but when you look into subsequent quarters 2023 can you talk about any particular tailwind that might be on the rig site safely.

I'll put the supply chain smoothing it out the capacity coming on line any areas, where you've got easy comps, perhaps you could elaborate on those areas. If any and then secondly on nespresso and keeping quite confident in terms of the underlying kind of demand and perhaps you could just confirm then when you look at the market.

Sure. So suppress so Starbucks and then the the generics there's been no real change in terms of the market shares of the different players are producing especially compatible capsules and that you are kind of holding or gaining share within that thanks.

Jeremy I'll hand, it to Francois for the second question on the first one just let me leave you with a high level of thought and that is the only one thing in this turbulent time that you can say.

Relative good degree of certainty for 'twenty three is that this pressure from these extraordinarily high comps.

On a rig that that one is going to be less in 'twenty three than it was in 'twenty. Two that's assuming that you know the COVID-19 pandemic continues to ease now and it doesn't get a lot worse, but that's the only thing you can say on everything else I think the visibility at this volatile time is so low that at this point I wouldn't want to speculate.

On it.

Jeremy So in this case also reiterated the fact that so we are confident about where we always nespresso today without getting extended gross that up around 20% higher than they were three years ago. This is only fondness for so on a comparable basis is unconcerned needs of both pre pandemic level that does not take into account the additional sounds we have through Starbucks.

Although these personal compatible capsules and just for your information as you know we have actually gained with Starbucks and ozone is first of all commodity won't kept you did about 20% of the compatible market in three years worldwide, So which is quite significant and we need to look at the market share in a comprehensive way and I think market share had been relatively.

Stable or even we have gained a bit as a consequence of these compatible market. So no no concern on that on that front.

Okay. The next question is from James targeted Greenberg. Please go ahead James.

Hello, Good afternoon, everyone. Two questions from me just firstly could you give us some color on the relative performance in Q3 between your premium and mainstream and value segments. If there's any change in trends there.

And then secondly, just on competitiveness.

And impact and market shares following.

The recent pricing increases and what kind of share losses would you tolerate before you'd look to adjust price levels. Thanks.

James Let me start out on the second one and then hand it to Franco for the first one I think a good example, where you see a reaction Ah was our prepared meals in the U S where we clearly took some of the pricing early and we saw some of our competitors do it laid out and so yes short term.

There was a reagan volume reaction.

But as you see from that description is not about how much are we willing to.

To accept TNF volumes slow down because overtime.

This inflation is so significant that you know it.

<unk> down to timing decisions I mean, it's not like people can afford to completely forgo the pricing and then you know just a smart all the way to the bank based on the share that they're gaining it's too big and that's why you know I think pricing early has turned out to be the right strategy.

And we fully stand by it.

And overtime, then we can expect to regain some of the shares that short term may get lost one more reason for not over interpreting our you know short term market share data here because with this pricing action going on and pretty significant pricing action, you have pretty significant ups and downs, but that's why the timing one is so specific.

Vic and that specific example is also a good explanation why you saw.

Some slowdown here on prepared meals.

As you look at this year.

Jim So a few words on premium products. So premium cooking products. As you know accounts were about to sell the first sales that's a significant development versus where we were in 2012, we've only had to live in person.

If we look at our teams at the beginning of the year premium products grew slightly very slightly below the group average, but it's essentially coming from a high base of comparison with two consecutive years of double digit growth. So we had very attractive growth in premium products, driven by Purina petcare water infant nutrition, but.

As we explained earlier Nespresso and Nestle Health science were particularly impacted by the high base of comparison in the context of the pandemic, we saw high level of at home consumption on the search for him some immunity benefits.

What is important as well as far as premium product is concerned. She says that we have not seen any demand elasticity linked to pricing for these category, which can be easily understood because the level of price increase that we had to implement for premium products is more limited.

And on the top of its premium consumers typically have less financial constraints. So no concern on that one maybe just a few words on affordable affordability at the other extreme of the new consumer if you're on mute.

Becoming obviously more relevant to consumers at a time of inflation on economic pressure and here's the reason why we have increased our level of our offerings for their own products under which is entirely focused on emerging markets and they have been very resilient and if we look at the nine months have actually grown double digit 10 point to 8%.

Led primarily by our <unk> and the growth in our affordable offerings was broad based across most categories, but we spot tequila strong roes in cooking ads and our beverages.

Thank you. Your next question is from that Pineda Irgun at Morgan Stanley . Please go ahead at Panera.

Thank you two questions from me. The first one is on the supply chain can you. Please discuss the latest dynamics here and whether constraints have been easing in any parts of the world how have your inventory management practices changed if at all since H one.

And the second one is on pet food, there's been an increasing level of speculated corporate action around U S. Pet care assets in the media how do you think about potential consolidation in this industry and would you consider expanding your reach further in petcare through new acquisitions or are you focusing primarily on organic growth. Thank you.

Thanks, Peter So on supply chain, let me share this one with that Francois.

One element of where we've seen a bit of easing is around global container shipping rates and availability. So as you know that was a major issue in 2021 I think at that one has relaxed quite a bit and it's not quite back down to where it was before the pricing.

When I said started about one and a half to two years ago, but.

Certainly a lot better than we saw last year.

At the moment some of the key supply chain issues are the ones, where we had run into our own capacity constraints. So think about pet care in the U S. Well think about pet care in Australia, but also you know what's kind of dampening, our volume and rate growth in AOA for the third quarter.

And then of course, obviously, we will need to wash the geopolitical situation for any surprises that may be happening but.

I think compared to last year and some of the shipping may him.

We certainly have seen the situation of relaxing would you then have some very interesting one offs. So for example, when it comes to what US all of a sudden shortness on C. O two which comes through you know when it when it relates to carbonated offerings is of course, a critical ingredient.

And.

That has to do with industrial gas suppliers are.

No longer focusing on this because of higher energy costs and so I mean in this uncertain world you always have some short term surprises to to deal with.

And then related to pet food, obviously pet.

Pet food is one of our core areas. We are essentially playing in all of the key segments, but if there are ways to meaningfully improve our offering and our footprint in it we would be open to it I think as always you know we have a duty to study anything that specifically comes to market I wouldn't want to speculate on any of them.

Hum speculation, but it's running around and rumors but generally when something happens we feel a duty to look at opportunities, but obviously four large categories. Like this we also have to check it very carefully for any relevant antitrust limits.

So speaking of just a few words on the inventory management, we have decided at the beginning of Covid to increase our inventory level in the context of significant shortages of raw material packaging material I think it was absolutely. The right decision. We saw it that our we had actually far less issues to supply the market then.

Most of our company tells we talked about you detailed for us to gain market share has been over the last two years. So clearly the right thing to do as things are normalizing a bit like a mark was saying on the transportation side of things will normalize anora capacity constraints.

Constraints internal ones overtime, we have already started to work over the last couple of months to review our inventory level and I can come back to where we were two years ago just for your information and you could see it and you were at the end of June we had $5 5 billion Swiss francs, a higher inventory level than two and a half years ago half of it is coming from the <unk>.

Chris in the inflation in raw material and packaging them until about half of it was linked to the fact that we wanted to secure supply and once again the right thing to do so it's going to take a little bit of time, but I'm going to take probably a few quarters to come back to a normal situation depending on how things are evolving in the market as well, but clearly something we are focusing upon today.

Next question is from David Hayes at Societe Generale. Please go ahead David.

Thanks, Mike and good afternoon all.

Just one for me just following up on the supply chain dynamics.

The supply chain constraints.

Proving as you expect them to and the reason I guess I'm asking is I think you've talked in the first half about lower marketing and brand spend because there's no point spending into getting more demand if he called satisfy but just thinking about that commitment you made for higher brand spend in the second half does that still is that still the same as the supply chain constraint.

Improving such that Youll spending as you plan to do and he talked about it back in July . Thank you so much.

Thanks, David and generally S. Francois indicated in December in our Q2 conference call. I mean, clearly we are targeting a higher consumer facing marketing spend in the second half compared to the first half and so we indicated our willingness to reaccelerate.

As we mentioned here on this call you still have select pockets, where we our supply chain constrained and particularly in the pet food area, but let me give you. Another one I mean think about hot pockets, where I think you may have seen some of the news about the factory fire. We had earlier this year, so clearly where those continue to apply I think.

A more muted approach on marketing spend makes sense and obviously.

On everything else. We're trying you know we're supplying changed easing to also hit the accelerator again and be sure that we're staying very relevant and high and everyone's awareness with our brands.

Before the end of the Cola. So next question is from Tom Sykes Deutsche Bank. Please go ahead Tom.

Yes. Thanks, good afternoon, just firstly on lift prices and how sticky CEO list prices when commodities come down well, what discussions you're having with retailers about the level of promotional activity that you would you would have to have the other side.

And as the raw materials pressures to ease and just to be clear in terms of the rig calculation or promotional activity that just got into net price doesn't have an impact on <unk>.

Rick a question.

And then you've mentioned several times.

Weakness that you're expecting or the or the potential difficulties in Europe .

The timing of price increases and being able to catch up year, it's called.

Potentially weaker labor productivity is it.

Fair to say that we should expect the European margin to be a bit weaker year on year in the HTM versus H one place.

Please.

Yeah.

So Tom on the first question, let me just say.

It's important that we do not over interpret some temporary easing on some of the commodity input costs that we're seeing that we saw this summer.

Cause even with some of the temporary easing when you look at the full year development compared to the same period last year.

Then theres still you know quite a gap that needs to be felt so this is a difference between a commodity trader and us where yes portrayed a you know there's something eases from one week to another that's relevant.

For US clearly you know things are not yet coming down to the levels that we have seen before the start of the inflation and even if there isn't an easing we don't feel that benefit. The next week because typically you know a certain amount of your inputs are hedged intense you know for a number of months you were still then sitting on those.

For what contracts and and to have the higher input costs that they imply so that's why when you look at the full year effect and some of the ongoing of hatching clearly there's momentum on the input cost increases and hence on pricing for the rest of this year and going into 'twenty. Three there's no question about that and hence any question here.

You know how lower input costs would translate then into pricing going forward and that's still quite a while away. We're still talking about increases here and that map applies a pretty much every other manufacturer as well.

And then maybe for the second question I refer to Francois isn't just to complement what mark is saying as well we are not done in terms of input cost inflation. Because there is one item that will come true.

To a lesser extent at the beginning of next year, which he salary and wages because typically it comes at the beginning of the year. So you may have some commodities are going down but on the energy projects is another item that goes up as well on Europe I mean, you you.

You said it I mean, we have done less pricing a year to date, Tom by the way because just for your information is one traditionally we could do only one batch of price increases in Europe and this year, we are doing more than that so we have increased prices a little bit further during the year, but I mean, if we spread it over the year and traditionally we do again.

Some at the beginning of next year, So I don't want to comment on the mountain of Europe , specifically, because we don't guide at that level, but as we said and as we indicated earlier, we are spreading pricing in Europe over a longer period of time.

Next question is from the junk upset Kepler. Please go ahead John .

Yeah. Thanks. Thanks, Luca you caught me by surprise I thought we would finish but.

Guys good trend by the way well done.

Couple of questions for you just on the S. K you volume impact you mentioned, we'll hear more about it when we get to Barcelona, I Wonder if you just give us a rough idea of what that may be in terms of a point or half a point or.

Something.

And as part of that is there any reason why you cant reiterate the Nestle model for next year in terms of that mid single digit organic sales growth our incremental.

Incremental margin gains any reason why you wouldn't be able to mentioned that and just a last one on the gas situation in Europe I know you've been asked 100 times about it but just wondering what your PREPA preparedness is four.

For any gas disruption, we may have in the in Europe over over the winter. Thank you.

Yeah, Thanks, John and just start with the second one obviously a lot of work has gone into each and every one of our 110 European manufacturing facilities to be sure that we look into alternative energy sources. Just in case, there was an interruption.

And that also we are using every opportunity to lower the total energy input needed for these factories because frankly it also comes down to simply saving energy, which is good business and also an act of solidarity at this time of an energy and security. So all spring summer and fall, we worked really really hard on this and I think.

We're sitting now on some very very good preparedness plans in reduction plans are.

For each of these facilities and and that's an ongoing effort, whether that's gonna be enough or not I mean, clearly there's lots of unknowns here on how difficult. This winter is going to be and I think this is the kind of uncertainty that we're all facing in our personal lives now as we look at the winter here and and how it will.

Unfold. So this is why it's hard to provide a specific forecast.

And maybe I'll hand, it to Francois for the other question John on the U S. K U N volume impact to these are activities that we are doing at the SKU level. They have a positive impact on our margin. This is truly the objective and they have a marginal negative impact on Oh, Gee organic growth on volume and rig.

I cannot quantify it at this stage because this is part of what we will share in Barcelona, but it is a relatively we started this program at the beginning of Q2. So did not have really any impact in Q2, we started to have some impact in Q3, as we said more specifically for E on which is the main reason why we moved into negative territory fault he always specific.

In Q3, but once again, we will share more information during our Barcelona confirms.

We have two remaining questions one from Andrea Stefan accident or the one for from the Warren at Barclays. Andrea. Please go first and then a wording would follow.

I guess that you're connected.

Today is in a much different states, it's much larger much more premium is different distribution channel and.

Different competitive environment, what do you see do you see any reason why it would react differently in an upcoming recession as compared to the past. Thank you very much.

We missed the first part of your question. Unfortunately can you repeat the first part.

Yes. So can you hear me now doesn't work, yes, now we do work yet.

Yeah, so on pet care in the recession of 2009. This has been very resilient category. However, it is a different category today, it's much more premium much larger different distribution channels and the different competitive environment do you see any reason why in an upcoming recession.

The consumers might react different than in 2009 or do you still believe this is one of the most recession proof category. Thank you.

Thanks, answering is and the shortening reassuring answer is that it certainly is one of our more resilient categories. I think many classes have proven that in the past.

And.

The World Financial crisis is not the only comparison point because as we look around the world. We've also seen in select markets.

Temporary and more limited crisis and generally.

Pet foods has continued to hold up really well there.

Andrea said, please what I'm glad that you are you on the last question. Yeah. Thank you. Thank you for allowing me a follow up a couple of follow up. So first one is just like Mark I know you've got a question about bottone.

But is there any update on there because clearly it's a very high topic for investors or are we still waiting for.

For the French investigation for you to make a kind of a formal statement or what can you can you I know, it's very sensitive, but it will be great. If we could.

Any more color that you have and I I also know the tollhouse had a had a record in the U S. On plastic I was just wondering whether you know given given the situation of process now that you know where we are on all of this.

And then just secondly, just on China infant Formula we didn't get a chance to talk much about that but you know double digit growth very impressive in the quarter can you maybe elaborate a little bit about what's going on with the loomer unknown.

<unk> market share is improving is that is that just share gains or are you seeing any any signs that the market is improving.

Thanks, born so clearly uncle Toni this continues to be a very high priority item and I would like to do the same it did in previous conference calls and that is express my sympathy and support to all the individuals and families that were affected by it as we take this very very seriously and are in the process of.

Walking up all the internal details fully cooperating of course with the authorities and and making sure that it's something that this doesn't happen again over the summer you will have also seen the news flow on the public apology that we are issued.

So a victim support fund so without taking away from any of the potential legal claims against US we wanted to be sure, but even in the short term cash needs are fully covered so on the inside and the outside I think we are getting.

Given this a lot of visibility in priority and and as I mentioned in previous calls you should not.

You know take from this very regrettable incident.

Conclusion that our quality.

It's something that we don't fully focus on in fact is one of our highest priority internal items and we'll continue to stay very focused on it in that light you should also see that latest voluntary recall in the U S were to my knowledge. Fortunately no one got injured and this.

This was a.

Our very early voluntary recall as soon as we heard some other consumer complaints, but very different subject matter compared to what we're dealing with in front of us.

And Warren on infant nutrition in China. So.

We are starting to get the results of what we have done over the last two years to restructure that business, we launched new products, we went into tier three tier four cities we restructure.

Distributor network, we change of management as well and so we always said that it would take some time and so very happy to see that we are starting to and we're coming back and starting to gain market share more specifically by the way on the stages, one and two which is very positive for the future because it would probably translate into market share gains is wonderful levels.

We are not fully done yet still some.

<unk>, which is in progress, but we're encouraged by that as you know the market is a little bit under pressure somewhat because of volume decline with less booths, but in that context to gain market share and it's actually very very encouraging very positive.

Thank you.

With no further question said, we come to an end of our session. Today. So we thank you again for the interest in athletes as usual if you have the further questions don't hesitate to.

Being contact with our IR team.

Wish you all the best to stay safe and healthy.

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