Q3 2022 Mondelez International Inc Earnings Call
Good day and welcome to the Mantra Lee's International third quarter 2022 earnings Conference call.
Today's call is scheduled to last about one hour, including remarks by them under these management and the question and answer session.
In order to ask a question. Please press the star key followed by the number one on your Touchtone phone at any time during the call.
I would now like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for Mondavi.
Sir Please go ahead.
Good afternoon, and thanks for joining US with me today are Dirk van de put our chairman and CEO and Luca Zero 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. In addition, we provide our year over year growth on a constant currency basis, unless otherwise noted.
You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our Q3 2022 earnings release and at the back of the slide presentation.
Today, Derek will provide a business and strategy update the Luca will review, our financial results and outlook, we will close with Q&A.
I'll now turn the call over to Dirk.
Thanks, Chip and thanks to everyone for joining the call today.
I will start on slide four.
I am pleased to share that we delivered another robust quarter.
With high quality top line growth continued strength in both developed and emerging markets and strong profit dollar growth.
These execution combined with continued acceleration of our strategic initiatives supports raising our full year revenue growth and adjusted EPS outlook.
Reinvesting in our business is one of the best ways, we can deploy capital and I'm happy to say that we continue to increase investments in our brands and capabilities that should reinforce and build upon our strong foundation.
We also continue to make great progress in reshaping our portfolio with the full integration of our <unk> business.
As well as the closing of our acquisitions of Clif bar Enrico Lino.
We remain confident that the strength of our brands and our proven strategy position us well to deliver attractive sustainable growth for the remainder of 2022 and beyond.
Above all we remain extremely confident in our people who remain relentlessly focused on delivering the right snack for the right moment made the right way to consumers around the world.
Turning to slide five you can see that our strategy is continuing to drive a virtuous cycle.
We are well positioned to deliver a strong full year 'twenty two performance and long term revenue growth.
This quarter, our revenue growth was 12, 1%.
Which means the 11, 2% growth year to date.
The revenue was generated through continued volume growth as well as strong pricing.
Necessary because of ongoing cost inflation.
And it demonstrates the resilient demand for our brands.
That revenue growth is fueling our gross profit, which is growing 12, 8% for the quarter and 10, 8% year to date.
This very strong growth gross profit growth is allowing us to increase our ANC investments high single digit which in turn will help us to continue to drive sustainable top line and repeating the virtuous cycle.
The strong gross profit growth also generated asset investments operating income growth of nine 6% for the quarter and 10, 6% year to date, while delivering great free cash flow results.
As you can see on slide six we delivered 12, 1% organic net revenue growth in Q3.
Volume remains solid relative to much of the sectors as consumers continue to choose our trusted and beloved brands, even as we implement necessary pricing.
We view our performance in the third quarter and year to date as further evidence that our long term strategy continues to pay off.
Since the launch of a new growth plan in 2018, we have consistently over delivered on net revenue growth through a virtuous cycle of increasing investment.
Local execution and targeted incentives.
We remain confident that this strategy will continue to deliver attractive growth in the quarters and years to come.
Like many companies as shown on slide seven we continue to navigate through a dynamic operating environment driven by cost inflation, the energy crisis in Europe and supply chain volatility.
Let's take a closer look at each of these dynamics and the steps we are taking to address them.
First we continue to face elevated input cost inflation, especially in the areas of energy transportation packaging wheat, dairy and edible oils.
To offset these challenges we have implemented appropriate price increases across key markets, including Europe Adil.
Additionally, we have announced further pricing actions across numerous markets across the globe, including the United States, which takes effect in December 'twenty, two and we are preparing for 'twenty three negotiations in other markets.
We also continue to take appropriate action to hedge our commodity costs with greater flexibility, while continuing to advance our ongoing productivity initiatives.
Second in terms of energy inflation in continuity, we remain focused on risk management tools and alternative sources to help mitigate the impact.
And third we continue to manage through volatility in the supply chain, especially in the U S. Due to labor shortages at third party as well as a continuing shortage of trucking capacity in containers.
We are prioritizing key skus to protect share and continue to make progress in improving manufacturing and warehouse capacity.
Turning to our categories and the consumer on page eight.
Our latest research shows that snacking continues to play a central role in consumers' lives and as a result, our core categories of chocolate and biscuits remained resilient.
Consumers in developed markets continued to prioritize groceries over other forms of spending and they continue to view our brands as affordable indulgences.
Meanwhile, in emerging markets consumer confidence remains strong with growing demand for our categories and continued loyalty to our iconic brands.
Because of this enduring brand loyalty private label share is either flat or down in the vast majority of our market share.
Shoppers continue to say they are much less likely to switch to private label in chocolate and biscuits compared to other categories.
With the return to school, we are seeing growth in products popular for school lunches like biscuits multi packs here in the U S.
We're also seeing continued growth in chocolate bars, three sizes gifting and seasonal shapes in Europe .
Looking forward to the Christmas season, the majority of European consumers say they plan to spend the same amount over the holidays, if not more as in 2021.
They also say they plan to spend more money at home and on gifting with less money spent on dining out and entertainment.
These category dynamics combined with the enduring strength of our trusted and beloved brands give us confidence that we will continue to successfully navigate inflationary periods like today.
Moving to our efforts around portfolio reshaping on slide nine I am pleased to share that we are continuing to advance our strategy of strengthening our leadership in core categories through our acquisition and divestment approach complemented by strong integration playbook.
Over the summer we completed the integration of Chipita, a high growth European leader in packaged cross sells and baked snack.
<unk> provides us an important platform to further accelerate growth in the attractive biscuits and baked snacks category.
More recently, we closed our acquisition of Clif bar, a company expanding our global snack bar business to more than $1 billion.
Anchored by the marquee brand widely loved for taste and sustainability.
This business is up low double digits on a year to date basis.
Excited to take these great brands to the next level.
And just today, we closed our acquisition of recall Lino, Mexico's leading confectionary company doubling the size of our business and more than tripling our routes to market in the high priority Mexican market.
These are just the latest steps in our ongoing commitment to accelerate focus on our core categories filling geographical white spaces, expanding our presence in high growth channels and growing our presence in key segments and price tiers.
We are confident that this focus will allow us to drive sustained growth accretive to our algorithm across the portfolio.
As we continue to accelerate our focus in growth.
We remain committed to doing our part to drive positive change at scale.
At our Investor update earlier this year, we announced that we have elevated sustainability to become the fourth pillar of our company's long term growth strategy.
Within this framework you can see on slide 10 that we recently launched the next chapter of cocoa life, our signature cocoa sourcing program.
Cocoa life already has delivered strong results over the past decade farmer net income has increased about 15% in Ghana and about 33% in Cote d'ivoire.
Tilden and are better protected with more robust monitoring and remediation system and really helping to prevent the forestation by educating farmers about optimal farming practices.
But cocoa farmers and their communities still face big systemic challenges.
That's why we're investing another $600 million, bringing.
Bringing our total investments two 1 billion with an aim to source, 100% of our cocoa volume through cocoa life farmers by 2030.
While we are excited about the promise of these investments we continue to call for more collaborative efforts and collective actions to drive greater impact, including new private public collaborations.
We are proud of our leadership in helping to make Coco right and we will keep you updated on our progress.
Finally, before I hand over to Luca for more details on our financials I would like to make sorry to take a moment to share some updates to our leadership team.
First I would like to congratulate Sandra Mcmillan, our chief supply chain officers on her well deserved retirement.
Since joining <unk> in 2019, Sandra has brought focus and clarity to our supply chain organization.
With a people first leadership style and an unrelenting commitment to doing it right from shelf to field with <unk>.
Tanker for his tremendous contributions.
Frank Survey has assumed the role of chief supply chain operations officer reporting directly to me.
Frank is a proven leader, bringing more than 30 years of global supply chain experience to the table. He has a strong drive for execution excellence tackling big challenges and pursuing continuous improvement.
His recent roles within Mondo lease, including most recently, leading supply chain strategy position him well for continued success.
Additionally, after a successful 34 year career in research and development, our Revpar growth, our Chief R&D Officer.
Be retiring January 2023.
During his tenure with Mont Elise, Rob successfully transformed the R&D function from a complex blends of category and geographic activities to a well connected technically rigorous global community.
Thank him for his many years of dedication and accomplishments.
With Rob's retirement, we welcome Daniel Ramos as our new Chief Research and development Officer reporting directly to me effective November eight.
Daniel is a seasoned global executive with more than 25 years of R&D and consumer centric innovation expertise.
He joins us from the Este Lauder companies, where you had a strong focus on advancing sustainable packaging initiatives.
One final piece of leadership news Cheviot bullet, our chief Digital and information Officer is now serving on our <unk> leadership team, providing enhanced strategic oversight as we advance our commitment to becoming the digital snacks leaders.
Since joining the company almost three years ago have yet has elevated our technology.
Our technology initiatives and infrastructure at both the global and business unit levels.
Yes, we will continue to report to Luca.
With that I will hand over to Luca for more details on our financials.
Thank you Dirk and good.
Good afternoon, everyone.
Third quarter results were strong from volume revenue profit dollar growth to cash flow generation.
In addition growth was broad based across categories and Brian .
We delivered revenue growth of more than 12% with one point of growth driven by volume mix.
Emerging markets were a clear highlight for the quarter.
With broad based strength on both top and bottom lines emerging markets net revenue grew more than 24% in the quarter with eight points of that growth coming from volume mix.
Developed markets grew five 2% volume mix was down three points.
Partly as a result of customer disruptions in Europe related to pricing negotiation nearly all of which has since been resolved.
Turning to portfolio performance on slide 13.
Our chocolate and biscuits franchises continue to demonstrate their resilience and delivered strong results while ongoing improvements in mobility has fueled robust gum and candy performance.
Biscuits grew 11, 5% for the quarter, we nearly one point coming from volume, albeit mix was negative as we suffered from customer disruption in Europe emerging markets again grew strong double digits, while developed markets increased high single digits Oreo chips Ahoy right trace.
<unk> and glop social.
Among brands that deliver outstanding growth.
Chocolate grew more than 9% of which one three points were driven by volume mix with increases in both emerging and developed markets.
Emerging markets posted exceptional growth of strong double digit Cadbury dairy milk told their own laptop and <unk> all grew double digit.
Gum, and candy grew more than 22%, Brazil, Mexico, Western India, and Middle East North Africa, all performed very well.
Now, let's review our market share performance on slide 14.
We held or gained share in 45% of our revenue base, which includes 20 points of headwind coming from U S supply chain constraints.
We are seeing gradual improvements in share and service levels as we close the quarter and early into the fourth quarter and in fact sharing the U S should turn positive for the last few readings of the year and we should enter next year with a favorable trajectory.
Chocolate performed well with 65% of our revenue base holding or gaining share. This.
This number is still reflective of our good execution in the category and our ongoing investment at <unk>.
I expected given the customer disruption in Europe .
Our biscuits business held or gained share in 35% of our revenue base. This includes 35 points of headwind from the U S supply chain.
Now turning to page 15.
In Q3, we posted gross profit dollar growth of plus 13% and plus 10% for EBIT year to date, we have delivered nearly $900 million in absolute gross profit dollar growth and anchor high for our business. This dollar growth enables us to continue investing in brand deal.
To drive our virtuous cycle of growth.
Although organic top line and profit dollar growth are key focus areas cost excellence remains an important part of our DNA and an enabler in this environment.
And we continue to make good progress around digitizing, the enterprise and realizing efficiencies, reducing non essential albright span and driving simplification.
Turning to regional performance on slide 16 Euro.
Europe grew five 2% during the quarter. This includes nearly five points of volume mix decline entirely linked to customer disruptions from a round of pricing negotiations. During Q3 importantly, as I already said, we have successfully implemented virtually all of the price flattened.
We continue to support our brands with meaningful investments in the region to ensure consumers stay loyal to our categories and franchises.
<unk> dollar for the quarter declined by seven 4% driven by customer volume disruption and ongoing commodity pressure now that pricing has been implemented we expect margin to cooperate for Europe in Q4.
North America grew 12% in Q3, driven by higher pricing in biscuit strong and the growth and robust increases from our ventures businesses, particularly <unk> and given goal volume mix was roughly flat.
North America Oi increased by more than 20% during the quarter due to higher pricing that close implemented in Q2 as well as some benefits related to the factory closings last year and the addition of cliff.
EMEA grew 14, 6% for the quarter with strong volume mix growth of eight five points and broad based growth across all of our business units in the region.
India grew strong double digits for the quarter, driven by both chocolate and biscuits, China increased high single digits. Despite COVID-19 restrictions in certain cities, while southeast Asia delivered robust double digit growth across all snacking categories, and Australia grew mid single digits.
<unk> increased <unk> dollars by 17, 2% for the quarter as volume leverage and pricing were partially offset by commodity and transportation inflation.
Latin America grew 31, 6% with mid single digit volume mix growth.
Similar to Q2 this trend was expensive with double digit increases across every single category.
Brazil, Mexico, Western and get business units, all posted double digit increases for the quarter.
In Latin America grew nearly 50% for the quarter. This increase was driven by broad based volume growth pricing and ongoing improvements from the gum and candy categories.
Next to EPS on Slide 17, Q3, EPS grew 15, 7% at constant currency.
This growth was primarily driven by operating gains and despite significant currency headwinds. We grew reported dollars by nearly 6% in the quarter and 4% on a year to date basis.
Turning to slide 18.
We remain focused on generating strong free cash flow year to date, we have generated $1 9 billion, including a one time expense of $300 million related to the <unk> acquisition and buy you out all the non vested employee stock ownership plan.
This was part of the originally disclosed purchase price.
But as it relates to the Aesop for employees and deemed compensation. It is reflected in cash flow.
This strong free cash flow performance has enabled us to return $3 3 billion to shareholders year to date through share repurchases and dividend.
Turning to our outlook on page 20, we continue to see positive momentum in the business as a result of our strong position within attractive categories significant brand support and consistent execution for the time being our categories are resilient and continue to see lower elasticity.
And then install recall levels.
Given the strength of our performance through the first three quarters the successful implementation of pricing in Europe , and the overall health of demand trends in our business. We now expect for the full year.
Organic net revenue to grow 10% plus versus our prior outlook of 8% plus.
Adjusted EPS to increase 10% plus versus our previous outlook of mid to high single digits.
And free cash flow.
3 billion, plus which includes the $300 million of expenses related to the clean diesel.
Which would indicate stronger underlying results.
We continue to expect broad based growth in our core categories of market. We also expect a significant contribution from pricing and we continue to plan for double digit cost inflation.
We have just announced another round of pricing in the U S to reflect continued inflation and positive impact of our commodities coverage in 2022, CZ and <unk>.
Current spot levels in 2023.
While we successfully concluded our European pricing with disruption below our anticipated levels inflation continues to be a concern in Europe , particularly with energy that despite some yield driven measures is still a significant headwind.
Tenancies as both repercussions bolt on patent costs and other raw materials, we expect another round of pricing in Europe as we enter next year.
Our EPS outlook also now factors in 26 cents of headwinds related to Forex impact.
19 of these amounts have already been included in our first three quarters.
At current Forex levels and outlook EPS in reported dollars would be positive year on year, which shows the resilience of our business.
With that let's open it up for questions.
Yes.
Operator, we're ready for the first question.
Yes.
Operator.
Thank you. Our first question comes from Bryan Spillane of Bank of America. Please go ahead. Your line is open.
Alright, great. Thanks, operator, good afternoon, everyone.
Maybe just to start off there.
Obviously theres been a lot of questions.
In our world around just.
Current events current affairs.
So could you just give us maybe a little bit of a as you see it now kind of the state of the Union and some of your key markets and just.
How the consumer is holding up.
Just how all these macro pressures or may or may not be affecting the markets as you see it now.
Yes, yes, thank you Brian .
Well.
First on the results I would say we have a very.
This strong top line performance, which I think is a testimony to the resilience of our categories, which is important to take into account, we see signs that consumers really want to continue to consume chocolate and biscuits.
I think our pricing execution is now really coming through and and on top of all that we have.
Volume growth, which.
Is quite unique in todays world.
Obviously, you've seen that the emerging markets are highlights in Q3, but also year to date.
With our broad based strength from China to India to Brazil.
We're doing well in all of our emerging markets.
Our margins are little bit impacted by customer disruptions in Europe .
Sales in Europe overall were good but there was some customer disruption. So sales could have been better and then also has affected our margins a little bit.
And then.
Profit our bottom line is ahead of algorithm and could have been better without that European impact.
So we are increasing our view on what the year will look like.
From a topline and bottom line perspective.
Particularly that are pricing in Europe is is complete and behind us.
And so yes, FX is impacting our EPS, but we are still showing real growth and growth in real dollars. So overall I would say the results are good. So if you look a little bit beyond that what does that mean from a consumer perspective in the first place.
We see an emerging markets consumer sentiment being very solid very positive.
Talking about Southeast Asia, India, China, even and so.
There is a certain optimism and the degree of strength in the consumer confidence in emerging market for us is almost to pre COVID-19 level.
Of course developed markets, we see a very mixed picture.
Challenged in Europe , as we all know relatively optimistic in U S.
In the middle of all that as I already said our categories. We expect to continue with strong by we see more and more signs of consumers.
<unk>, two <unk> or increasingly see our categories as an affordable indulgence.
We see consumers, saying the chocolate is really something they cannot live without and so we believe that.
The spending decrease that we will see from consumers eventually as inflation keeps hitting them is going to be probably in more in the big ticket items grocery seems to be doing overall pretty well I would say.
I think we also.
Benefiting from the fact that we have strong brands in which we continue to invest quite.
Quite significantly.
Part of our thinking and I think that is helping us in our results.
Pricing of course played a role in on pricing, where we stand is that we've just gone through a second round of pricing. This year in Europe , We've announced a third round of pricing in the U S, which will take effect in December and we are starting our negotiations in Europe for the typical beginning of the year 2000.
23.
Pricing round.
As it relates to Latin America, and EMEA, the the pricing that we implement is more fragmented but in most cases. We are also in our third pricing round thing so far it looks like that will go well this new pricing round. There of course, we have to see what happens in Europe , where we expect.
More customer disruption in the beginning of the year as we announced the pricing.
From an elasticity perspective, maybe.
I would say that that remains below expectations.
It is.
Lower than it was last year, even certainly lower than it was pre COVID-19 in our forecast we are foreseeing higher elasticity effects, because we believe that eventually there will be a bigger effect, but so far we've not quite seeing that and then from a cost perspective.
We are seeing some commodities.
Showing signs of pulling back, but we still expect significant inflation in 'twenty, three and hence the pricing round. So we have to go through.
I think we're very well positioned for 2003.
We will have to continue to price in light of the inflation, we will increase our focus on.
RCM revenue growth management.
And we continue to invest to drive volume or.
Volume growth and of course net revenue growth and I think as I said before we will see some volatility in Q1 in Europe as we implement pricing.
Maybe a little bit deeper.
Because I know that's on everybody's mind as it relates to the European consumer and what are we seeing there.
It might be useful to do so.
<unk>.
We while we see that they continue to prioritize grocery spending they seem to be.
Choosing that instead of.
Spending on other discretionary items, so we see a clear decreasing entertainment and leisure and travel and restaurants.
Anything out in clothing personal care household goods, Thats, where we see the decreases in Europe , but not nothing food and not in our categories.
So the consumer is also relatively positive we see in Europe . They are very aware of the current situation, 80% Express concern with the current situation and they all understand that.
Things are going to be rough, but 60% furnaces of consumers in the UK or Germany believes that six months down the road there situation will be better any entrance that sentiment is even higher which is understandable because there the energy price effect is lower for them.
Chocolate is highly desired we see more and more size as consumers are saying it's.
The snack they cannot live without.
So I would say concern short term from consumers relatively optimistic and they keep on buying our categories, which is reflected in the numbers that you saw which includes Ive said before some some client disruption I hope. This gives you an idea Brian yes, no thats great. Thanks, Derek appreciate it I'll pass it on.
Okay.
As a reminder, if you'd like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the star and Q.
Thats Star one to signal for a question.
And next we move to the line of Andrew Lazar with Barclays. Please go ahead. Your line is open.
My apologies Andrew if you could brief signal, we will move next to Ken <unk> with J P. Morgan.
Hi, Thank you.
I recognize it's it's too early to discuss next year and so I wouldn't anticipate any specific numbers, but I think a lot of people are looking at maybe some tailwind and headwinds in a broad sense.
I was hoping to kind of review some of these and see if I'm missing anything big on the tailwind side Youll have wrap around pricing plus new pricing you should have good organic volumes still on underlying demand.
Have strong advertising again.
Maybe the same dollar inflation, but will be less on a percent basis, and then youll have the topline benefits from acquisitions right and then in terms of headwinds, maybe a little bit less pricing in 'twenty two.
Some macro uncertainty in Europe and Asia.
Some new regulations in the U K you have to Wade through and then of course, you'll have FX higher interest expense and lower pension income. So I know I'm running through all of these pretty quickly I don't mean to put you on the spot, but does anything kind of stand out.
Major that I'm missing or getting incorrect in that kind of a quick list there.
Yes, maybe I think the only one thing I would add to that equation can ease the synergy that will come to fruition through the acquisitions of <unk> and those are not only a revenue synergies as you mentioned they are also cost synergies and better bottom line.
I think in general the way, we think at this point about 2023 is that.
Consumer demand fundamentals are still strong and we believe we are in a good place in terms of <unk>.
Revenue and demand for next year.
As Ive just said we compete in resilient categories and we have created strong loyalty through the investments we have been making in our brands I think importantly, as you dissect the regions.
Emerging markets are doing very well I think that.
Looking at the revenue number 84% plus 8% volume growth in the quarter. It is simply amazing and it is important to say here that particularly on these we still have.
A bit of headroom in terms of distribution penetration of our categories that not to mention.
Bayou of catheter was like cakes in phase III, and et cetera, I think in terms of the U S. It is on a good trajectory I mentioned, a little bit the share trajectory that we see going into next year and as we said.
We are about to implement another about pricing I think the <unk>.
Question, Mark is a little bit to Europe .
Pricing there is inevitable, we'll see what happens with customers in Q1, but importantly, we have been investing in brands there as well, we have been creating bonds with consumers and as and as we said I think we believe our categories are still a necessity. These tough times. So all in all I think we are going to happen.
On algorithm here, but let's stay tuned because quite frankly, it is a little bit premature at this point in time to give you guidance for 2023.
Understood. Thanks, so much.
Next we'll go to the line of Andrew Lazar with Barclays. Please go ahead. Your line is open great.
Alright, thanks, so much.
Maybe start off just picking up on the emerging market commentary obviously the results there.
Really really standout.
And probably better than many.
<unk> our forecast given how volatile some of these markets can be maybe you can just get into a little bit more detail on just a couple of our key largest emerging markets and kind of how youre thinking about how those look as you go forward and what you're sort of building into the forecast and then I've just got a quick follow up.
Yes, maybe I'll take that and you can.
Can also chime in here.
Local realities, we are really pleased with emerging market performance and I think it is being quite strong all around.
When we look a little bit beyond the last three quarters I would say that said all emerging markets pretty much bounced back very well.
From pre Covid.
For Colby.
I think the performance versus pre 2020 has accelerated in those markets. We have been consistently investing and that is paying off.
We are not Privy to all the P&L for emerging market, but what I can tell you is that they are delivering and reported dollar topline growth, they're delivering top and bottom line dollar roll and importantly, generating quite a bit of cash flow for us. So I think from a return of capital.
Is really something that is that is remarkable we still have huge headroom I believe with brands like Oreo Milka, and Cadbury et cetera, and I believe we will be.
We'll continue to be positively surprised by these markets also going forward look beyond that.
Use our suspects like India, China et cetera, and those are markets that continue to do very very well, we are particularly pleased with markets like southeast Asia at this point in time.
We are particularly pleased with markets like Brazil, we continue to do very very well and generate solid top and bottom line in those markets I think what come which is western Andean region bouncing back from.
Pre COVID-19, particularly through gum and candy, but importantly, the like multi for both these markets is the.
Performance of <unk>, which is just amazing so I think all in all I would say I can't call out one specific market the IEPS pretty much all of them doing quite well.
Thanks for that and then you've talked about a lot of some of the incremental pricing moves that you've made or are in the process of making to try and better positioning yourself for what's coming next year.
We anticipate at this point.
Being at a point to enter the year.
Where you would have all of what you need in place such that there wouldn't be as much of let's say a lag to start the new year.
Or.
Should we brace ourselves for sort of a consistent lag of getting incremental pricing in before you really fully catch up again to the type of cost inflation that you are looking for next year. Thanks, so much.
Reality is pricing for more than half of more than 50%.
Has already been taken or announce and so as a matter of pricing for next year, yet to think about carryover of announced pricing at being for more than 50% down obviously as we said there is the U S timing as of December and that will add to the 50%.
I think in general your assumption is absolutely correct. The only one distinction I would make is is Europe and Europe I think we will have.
A little bit of a lag compared to the necessity of pricing because.
Particularly energy costs.
<unk> right now and so youre going to see some margin pressure.
Potentially in Europe in Q1 and <unk>.
Potential customer disruption will compound one that I think for the rest you are correct. Thank.
Thank you.
Next we go to the line of Robert Moskow with Credit Suisse. Please go ahead. Your line is open.
Hi, Thanks.
Hey, I was hoping you could give a little more color into the large explore this.
Third round of price increase.
In the U S.
Are you taking it because you have commodity hedges that are rolling over.
And.
Can no longer protect your costs.
Are you taking it because packaging costs are rising higher.
Could you be more specific as to as to that and then also.
Are you also trying to price through some of the knock on elements of of inflation like labor or energy or does the logic still just focus on the.
Kind of components.
Components of the product.
Your assumption is right. It's a combination of everything you've said so our approach to pricing is that the additional costs, we see every year.
Which could be from a commodity perspective packaging labor transportation.
We are trying to price away. So we do have a number of hedges that are coming off.
We are careful on the hedging for next year, because it could to our opinion go both ways prices or cost could still go up we want to hedge the right way against that but we also need to be careful that commodity costs come down and that we can benefit from that.
And so the.
Short answer to what you said, it's all of the above the good news about the third round of pricing in U S is that it has been announced and has been accepted by the clients.
We will see how the consumer react, but so far the two previous price increases we.
We have not seen a major impact on consumer.
Ill stake in penetration and frequency volume vault and so on is all still very strong so we have.
Good confidence that this price increase will who will go through and then we should be okay.
Unless something happens in our cost picture.
Okay. Thank you.
Next we go to Chris Growe with Stifel. Please go ahead. Your line is open.
Thank you good afternoon.
Hi, I just had a couple of questions for you. The first one would just be that you've given some commentary around obviously some more pricing in North America.
Sounds like a little better volume performance in Europe , and I, just wanted to understand around those factors and perhaps others to consider would you.
Hello.
Mr Desmarais Sr.
My apologies.
We move to Mr. Dickinson with Jefferies. Please go ahead.
Great. Thanks, so much.
Maybe just kind of a broader question for you Derek around AMC.
Obviously, we keep hearing.
A lot of people think.
Promotional activities you didn't need to increase because your assistant will increase but I've heard a lot of.
<unk> level.
Rogers from crude cover these CPG companies to actually now right as long as you're assessing these days.
Don't need to increase promotional side, while at the same type of a global basis.
Q3, you've obviously continue to really invest behind their brands. So I guess kind of quick two part question. One is just.
What's the current perspective or kind of go forward promotional needs with the competitive backdrop and then too.
Should we be thinking as we.
Go forward lets say, even two years or three years that that rate of that year over year.
<unk> spend could kind of mimics the rate of the year over year revenue growth spend as you may have some needs, especially with some of the.
Recent acquisitions or is there operational leverage that could come out of that that's it. Thanks.
Yes, well.
I would say that.
And in the current environment, where we have to increase our prices quite substantially.
Is important for us to.
<unk>.
Keep on increasing our A&P spending.
Because we need to.
Make sure that the consumer.
As trust in our brands and really want to consume them and we can clearly see the effects of this year after year, increasing in our spending we can now see although overall theres not that much movement into private label in the market, where there is a little bit of movement in private label is not so much coming from our brands and I think that is a reflection.
<unk>.
From the spending that we've had.
Going forward.
Particularly since we are seeing an acceleration in our top line, particularly since we're seeing our volume working for US I would say, we don't really anticipate that we're going to change that formula.
Way, we think about this we grow our gross profit and X percentage.
This quarter quite strong I would say and we then want to flow half of that back into investing in the business and half of that in the bottom line.
I don't think that that will necessarily change, it's working for us and the business is accelerating as it relates to the acquisitions.
Obviously, we have foreseen in some of the acquisitions are significant investment because we do have cost synergies, which as Luca said will start to show up next year in our results, but we also have topline.
Synergies and we feel that some of the brands to have quite a good potential but they might need some investments. So we're going to use the same formula as it relates to acquisitions as we are using on the rest of the business.
Well over time, we do a constant measurement, all which is about advertising sufficiency.
That still shows that increasing our advertising will lead to increased volume will lead to increased net revenue growth and so as long as we can confirm that picture. We feel that this is the right track for us as soon as we would see that that is not the case anymore. Obviously, we would not keep on increasing our ANC, but at this stage I think it's working we don't see a real.
<unk> exchange rate.
Fair enough. Thanks Derek.
Thank you.
We return to the line of Chris <unk> with Stifel. Please go ahead. Your line is open.
Okay, you got me now.
Yes.
Chris again.
Yes.
Yeah. If you didn't like that question. It is a cut me off.
I'm only kidding. So I was just going to ask about the gross margin and just understand with more price with pricing more pricing coming to North America. It sounds like a little better volume performance in Europe should we expect.
A better balance of pricing and cost inflation in the fourth quarter and therefore, some sequential gross margin improvement.
Look I think.
As a matter of fact, we don't see much guidance around gross margins. The way you ought to think about it is that.
Yes.
Gross profit growth in terms of dollars that we commit to and that we are going to deliver as you think about gross margin percentage.
I think particularly the U S Latin America and EMEA.
I believe our solid ground, obviously in Europe you are.
We're going to see the benefit of pricing, but not necessarily neglect. The fact that particularly around energy. There is more cost coming our way now for the year. We are 100% covered in terms of commodities and Forex. So we have visibility I think are still going to see.
We felt the margin pressure in Q4, but importantly, youre going to see strong dollar goal and youre going to see that flow and partly to the bottom line, we will continue to invest.
And as I said as you think about.
Particularly chipita and if you think about that fleet, there will be some synergies coming our way.
Okay. Thank you for that.
Just one other question on there was a comment some comment about mix being a bit of a drag I just wanted to understand is it geographic mix or is that.
It's something you are seeing in terms of your product assortment skus any kind of trade down or smaller pack sizes that kind of thing. Thank you no I don't think it is anything concerning what I said as it relates to base case is that volume was up our volume mix was partially down and the reason for that is that.
Mix in Europe , because of customer disruption caused a little bit of all the problems so that web product lines, particularly.
In France and other places.
More profitable than others around the world and those were mostly impacted by customer. This option you have also to realize the customer disruption in terms of margin is a little bit higher because obviously, we still have fixed costs.
And so the marginal contribution of those lines sees a little bit higher but mix is not a concern and as we will start seeing biscuit growing volume more consistently most likely in the U S. I think youre going to see the benefit of mix coming through but there is nothing really to worry about down trading or anything else.
Okay. That's very helpful. Thanks for your time.
Thank you Chris.
Next we go to the line of Pamela Kaufman with Morgan Stanley . Please go ahead.
Hi, good evening.
Hi.
So your full year guidance for at least 10% organic sales growth implies that Q4 slows to a high single digit growth.
<unk> to over 11% organic sales growth year to date.
Should we think about degree of conservatism in your outlook and have you seen any changes in the operating backdrop that make you more cautious about the near term track.
I mean, your math is right obviously.
Implied Q4 goal is 7% plus but importantly, there is a plus in there so.
We might have more than seven which is <unk>.
Something that obviously.
We will we might have realities, we are about to implement pricing actions and what we want is 20 year, particularly on the trade stock side.
On a good position, we don't want that trade or retailers.
Pocketed buy more stock and so.
Call Us conservative and we would see realities.
The current guidance, which is 10% plus.
For revenue and EPS, I think we feel quite comfortable but.
There might be a little bit of upside, but we will try to make sure that we end the year in the right place in light of 2023.
Great. Thanks.
And then can you talk about the drivers of your market share improvement are your expectations for market share improvement in the U S.
Where are you in rebuilding capacity on.
Alright inventory levels on some of the brands, where you saw capacity constraints.
Sure.
Yes.
So as we said in the.
Last month, we have already seen market share gains, we expect that to continue.
And we expect a good.
Tailwind market share wise into 2023.
The overall industry headwinds.
Our moderating that is helping so logistics challenges.
Has improved.
A little bit of issues around cross border transportation from Mexico, but we didn't USB is doing quite well the labor market is easing so.
Our third party manufacturers are having an easier time with that.
And so I would say.
Turnover is still high but we are.
And continuing to be.
A good staffing in the plants.
As a consequence of all of that.
And us sort of focusing on the GSK us doing a number of changes in our factories, making sure that we have longer runs of lesser skus and so on our service levels have consistently improve now every single month in the quarter.
So we're now back into high seventies, nothing yet to brag about but clearly improving.
The consequence of that is that trade inventory levels are continuing to recover so we have less out of stocks and that starts to show in consumer offtake.
Most of our biscuit brands are already in positive share territory.
In September our biscuit share was up as I said, and we expect that share growth to accelerate in Q4, because the on shelf availability recoveries is going quite well now on top we will increase our ANC investments in the fourth quarter in the U S.
We so far has held back a little bit because of those supply chain issues, but now to accompany the price increase we are going to significantly step up our investments.
No.
We expect that we will enter 2003 with.
Good momentum in the U S.
Alright, thank you.
Our final question for today comes from the line of John Baumgartner with Mizuho. Please go ahead. Your line is open.
Good afternoon, and thanks for the question.
Hi, John Hi, John .
Yes.
Well I just wanted to come back to emerging markets and specifically the <unk> component of growth. There can you just speak a bit more to the breakdown between the contributions from underlying consumption and I guess just from the Covid recovery, but then also specific to your investments, whether it's distribution growth innovation and local jewels regaining share how would you.
Rank ordered the contributors to vol mix and then should we expect any change to the balance of those drivers going forward. Thank you.
Yes so.
It's a mixture of the two in the sense that we are very.
Strong investment in our brands, we have a confident consumer in emerging markets and that is leading to robust volume growth. They are also.
More used to an inflationary environment.
I'm talking about the consumer but also about our themes with to constantly year after year deal with this.
Pricing in RCM, so that is leading to very robust robust volume growth I would say.
Our volume in Q3 is up 7%, which is quite extraordinary.
The other thing I would say is that we.
Also.
Increasing.
Our distribution, which is an added benefit.
If you think about China or India.
Literally adding tens of thousands of stores every year through our distribution and that obviously helps.
The third thing that I would mention is the strength of Oreo and the fact that we are investing.
Now across the board a.
A little bit more in Oreo and we're seeing good results from that so Oreo is becoming very strong for us in these markets.
And.
We for instance in Mexico.
To see some big effects from <unk>, where we are tripling our route to market. So that start will start to play a role also so I would say, it's a combination of very good investment confident consumer.
Careful management of our GM, we are not doing across the board price increases, but playing very careful in the different countries combining with good distribution gains that is leading to that strength in emerging markets for us.
Thank you Doug.
Okay. Thank you John .
This does conclude today's program. Thank you for your participation you may disconnect your lines at any time.
Okay.
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