Q3 2023 Nestle SA Earnings Call
Good afternoon, and good morning to everyone.
Well come out to the naphthalene nine months of 2023 sales webcast.
Dukhobor lenient Nestle investor relation.
Today, I'm joined by our CEO , Mark Schneider and our CFO Francois.
As usual the market will begin with the key messages and discuss the full year 'twenty two 'twenty three guidance.
Francois will follow with a review of the nine months 2023 sales figures.
We will then open up the lines up 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.
As always we appreciate your interest in our company.
Let's turn straight to the key messages on slide four.
For the nine months period, we are pleased to report strong and broad based organic sales growth of 7.8%.
Pricing was eight 4%, reflecting significant input cost inflation over the last two years, but also starting to moderate which is in line with our expectations.
In the third quarter, we have started to see the expected recovery in our volume and mix development.
Progress in this area was masked by the temporary supply chain constraints you know in this the health science business.
But we have started to turn the corner and are on our way towards positive real internal croak in Q4, and probably second half of 'twenty two 'twenty three.
Across the board, we continue to increase our marketing investments and we see the benefits of our portfolio optimization program kick in.
So we'll cover both items in more detail.
Well the third quarter trading update does not include monitoring an earnings information I would like to confirm that our gross margin continues to recover from the inflation induced reductions in 2022.
We also continue to make good progress regarding free cash flow generation.
Next I would like to talk about our measures to help people enjoy a balanced diet.
In the third quarter, we issued new targets regarding be expected sales development of more nutritious foods and responsible consumption framework regarding our enjoyment related food categories.
Both are part of our long standing nutrition health and wellness trying to tee and built on this this foundational work in this area.
For the past 25 years.
The recent interest in a new class of drugs called G. O P. One agonists has underlined the public's desire to combat obesity rates around the world.
I believe we have important contributions to make.
Please note that while these trucks offer new therapy options for obese patients and for patients with type two diabetes, there are not a permanent solution.
No replacement for an appropriate diet, coupled with the right amount of exercise.
For the time that patient spend on these trunks and after them we are already developing a number of companion products.
The goal will be to address the risk of malnutrition and velocity of lean muscle mass while on the G. L. P. One therapy.
And to avoid or limit wait to rebound after the therapy.
These innovations are right in our wheelhouse, where we can bring our deep understanding of nutritional science and appropriate supplementation to the table.
Well I expect our food and nutrition categories to benefit from this as well the main upside will be seen in our niche the health science business perimeter.
Yeah.
Well, the only 15% of our global revenue and 20% of our North American revenue coming from either a center of the plate or snacking products, we consider any potential revenue exposure to be very limited in my judgment. It gets fully compensated by the innovation opportunities I just outlined.
This brings me to Nestle health science on slide five.
While we regret the short term supply constraints in our North American vitamins minerals and supplements business, which surfaced in August we don't think that it takes away from the strength of the underlying business model.
Following a four to six quarter period of post Covid compression the vitamins minerals and supplements market shows solid growth very much in line with our expectations.
The international expansion of our globally, known and globally desired North American vitamin brands, such as pure encapsulation.
Martin of life, and Sagar is making great progress.
And our medical nutrition and active nutrition businesses continue to grow very successfully.
We expect the supply chain issues to be resolved by early 'twenty 'twenty four and we confirm our 2025 financial objectives for Nestle Health science, albeit with a delay of about six months.
The strategy of National Health Science is a lot more straightforward following the divestment of our peanut allergy treatment, California.
It focuses on proven winners such as medical nutrition.
And new consumer centric health solutions, such as vitamins minerals and supplements as about as active nutrition.
High Stakes prescription drug developments with a high degree of scientific and regulatory risk will not be our focus area going forward.
This brings me to slide six and our business as a force for good sanction.
This summer we celebrated the 10th anniversary of our initial needs youth initiative.
Founded and led by my Executive Board colleagues no on Fracs it helps to create economic opportunities around the world.
It is an education farming entrepreneurship.
It has become a key part of our contribution to local communities, where we are present.
And it makes a noticeable societal difference in particular in regions with a high degree of youth unemployment.
Clearly a hallmark of our social commitment and something to be proud of.
Yeah.
Before handing it over to Francois I would like to cover our 'twenty to 'twenty three guidance on page seven with.
We fully confirm our expectations for organic sales growth.
Underlying trading operating profit margin and underlying earnings per share and constant currency.
Regarding organic sales growth I had shared with you in our half year conference call My expectation that we would reach the upper half if not the upper end of our guided range.
Based on the new situation regarding this the health Sciences supply chain constraint, which I was not aware of it at the time I owe you an update and now expect our CRO to be firmly in the guidance range, but with a more cautious view.
With this I would like to hand over to Francois I look forward to answering your questions later.
Thank you Mark and good morning, good afternoon to all let me start with the highlights for the nine months of 2023 organic growth reached seven 8% with pricing of eight 4%, reflecting the impact of cost inflation received over the last two years.
<unk> was minus 0.6% impacted by portfolio optimization and capacity constraints.
Divestitures decreased sales by 0.8% largely related to the divestiture of a majority stake in freshly, whereas whereas the disposal of the doorbell good start infant formula brand in the United States.
Foreign exchange had a negative impact of seven 4% on sales growth following the appreciation of the Swiss franc versus our basket of currencies.
Total reported sales for the nine months were $68 8 billion Swiss francs.
Turning to the distribution of girls between developed and emerging markets are getting growth in developed markets was six 9% driven by pricing with negative region grew.
Growth in emerging markets was 9% based on pricing and slightly positive region.
<unk> for the nine months was negative impacted by portfolio optimization and capacity constraints in the third quarter rig improved to minus 0.3%. Despite the impact of temporary capacity constraints for Feraheme and short term supply constraints from Nestle Health Science.
Rig is clearly trending towards positive territory.
As you can see on the slide when adjusted for the number of trading days rig was already positive in the third quarter.
The step up in rig is being driven by the moderation of new pricing the benefits of portfolio optimization and increased marketing investments.
We expect to be positive in the fourth quarter and in the second half of 2023 going for a while that we expect it to be again the main driver of growth.
We are now seeing the benefits of portfolio optimization.
We have previously commented that you finish.
<unk> includes two components first freeing up resources through the discontinuation of local rules and low margin businesses.
T sport is nearing completion, having discontinued annualized sales of around 700 million Swiss francs.
The negative impact on rig of this portfolio optimization actions was around 60 basis points for the first nine months.
The largest example of these pruning exercise is frozen food, Canada, which we are winding down faster than originally planned.
The second component is the more interesting part as we are redirecting resources towards high growth and high margin products.
We are now seeing the positive benefits of these resource allocation.
One example is a matter of your on progressive step up in customer service levels with an almost 600 basis points improvement over the last nine months.
There is further room for improvement and we expect to return to above 99%, where we were pre COVID-19, which will support a recovery in reed.
Turning to pricing, which was six 3% in the third quarter, we expect a sequential moderation to continue over the course of the Yale as we are lapping a high base of comparison in 2022.
As we are implementing a lower level of new pricing since the second quarter.
We will continue to price where needed but not to the same extent as we have already done like lately.
Pricing that happens now will be more targeted by category Brown and country, particularly for those commodities, which have increased recently, such as robust style sugar and Coco.
Hello me to make a short comment on gross margin given the progress we have seen in the third quarter I would like to confirm that we expect a matter of your own improvement in gross margin for the second half of 2023.
Let's switch focus to the results of our seven operating segments, beginning with North America, where we saw 8% organic growth with pricing of eight 9%.
Rig was minus 0.9%, reflecting portfolio optimization actions on capacity constraints.
The impact of portfolio optimization, Henrique, particularly the rapid winding down of the frozen food business in Canada was around 70 basis points for the nine months.
The zone, so sustained broad based growth across most brands and categories driven by mix and out of home channels.
E Commerce continued to be a key growth driver with double digit growth for most categories.
The zones or market share gains in pet food, so Roland portion coffee as well as frozen meals.
By product category.
The largest growth contributors were purina petcare Nestle professional on Starbucks out of home products, which all grew at double digit rates.
Within pet care growth was broad based across brands led by Purina.
Pro plan and veterinary diets.
Frozen food reported negative growth impacted by portfolio optimizations in Canada.
In the U S growth in frozen food was positive strip all supported by staffers as windows of JAKKS and Tom Stone peak zones.
Next we have zoomed in Europe are getting girls was eight 8% driven by pricing.
Rig was minus two 3% following capacity constraints portfolio optimization and some limited elasticity.
Growth was supported by strong sales development for E Commerce and continued momentum for outperform channels.
Zone or market share gains in pet food and infant nutrition.
By geography, the U K, Turkey, as well as central and eastern Europe , whereas elite contributors to growth.
By product category. The key growth drivers was purina petcare fueled by premium brands Felix Gourmet and one.
Coffee saw mid single digit growth, we spotted your loss trends fault miska fee.
Confectionery reported high single digit growth with strong demand for kitkat.
We're also in water was flat impacted by temporary capacity constraints for Feraheme.
Moving to zone AOA dissolve reported high single digit organic growth pricing was eight 6%, reflecting the impact of input cost inflation and currency depreciation.
<unk> was flat.
Growth was driven by continued momentum for e-commerce on the outer form channels, the zones or market share gains in coffee cocoa and more beverages as well as chocolate.
By geography, all regions posted positive set of developments growth in southeast Asia was driven by coffee culinary and infant nutrition.
South Asia recorded double digit growth across all categories led by Maggie unless Cassie.
The Middle Eastern Africa also saw double digit growth with particular trends for affordable offerings.
By product category infant nutrition was the largest growth contributor.
[noise] standards in culinary grew at a double digit rate led by Maggie.
Coffee posted high single digit growth with continued robust demand for Ms. Kelsey on Starbucks products.
Next is on Latin America, which reported double digit organic growth with pricing of 10, 5% read was minus 0.6% turning slightly positive in the second quarter.
There's one recorded strong growth across all geographies and product categories supported by operational execution and continued momentum of outperformed channels the zones or market share gains in pet food infant nutrition and culinary.
By geography growth was led by Brazil, and Mexico by product category confectionery was the largest growth contributor fueled by strong demand for kitkat keto core brands and new product launches, including shook out for you in Brazil.
Infant nutrition posted double digit growth based on solid momentum for Nan and Muslim infant surrounds.
Coffee reported broad based double digit growth supported by net cafe soluble coffee.
Turning to his own greater China organic growth was four 9% with pricing of two 6% on a rig of two 3%.
Growth was supported by strong sell developments for our telephone businesses and e-commerce momentum.
The zones for market share gains in pet food and confectionery.
By product category Nestle professional was the largest growth contributor.
Confectionery reported high single digit growth led by Sue Fucci and Shockwave so truly.
Culinary posted high single digit growth with increased demand for totally in out of home channels and innovations.
Infant nutrition, so low single digit growth led by non specialty offerings.
Turning next to Nestle Health science, the business posted low single digit growth with pricing of four 4% on rig of minus one 9%.
That means minerals and supplements so negative gross sales in the third quarter a decrease it's following a 19 integration issue when implemented highly automated systems during the consolidation of U S packaging sides.
The resulting short term supply constraints reduced organic growth in the third quarter by around 700 basis points from Nestle Health science, which translated to around 50 basis points for the group.
We expect the impact on Q4 girls to be slightly low well.
These short term supply constraints are expected to be resolved by early 2024.
Purion calculations, which was not impacted so strong double digit growth in the U S.
More generally market growth in the vitamins minerals and supplements category has returned to positive territory, reaching a mid single digit level in the third quarter.
Our active and medical nutrition brands have been unaffected by the supply constraints.
Active nutrition, so mid single digit growth with market share gains and robust sales development for all gain on vital proteins.
Medical nutrition reported strong double digit growth with market share gains across all segments.
The 2025 objectives from Nestle Health Science are confirmed with a six months delay.
Finally in this for I saw which reported mid single digit organic growth with pricing of three 5% rig was one 6% with a continued sequential improvement in 2023 to reach three 5% in the third quarter.
The key growth contributors was a virtual system.
Gross for out of home channels was also strongly supported by the momentum Sistema.
Innovation continued to resonate with consumers.
Launch of home Compostable paper capsules in France in May and in Switzerland in September has been well received.
By geography, North America continued to post double digit growth with market share gains.
Europe saw positive growth in other regions combined recorded low single digit growth.
Let's now look at product categories organic growth was broad based supported by pricing across all categories.
Within powdered and liquid beverages coffee centers grew at a high single digit rates.
Growth was broad based across segments bronze and geographies and led by continued momentum for the out of home business, which grew at a strong double digit rates.
Cocoa and more beverage is reported low single digit growth based on a strong contribution from Milo.
Science based premium and veterinary product so strong census developments.
Nutrition and health Science posted six 3% growth in.
Infant nutrition reported nine 2% organic growth with broad based contributions across geographies segments and key brands.
Standards of human milk Oligosaccharide products grew at a mid teen rate, reaching almost 1 billion Swiss francs for the nine months.
We have already discussed Nestle health science.
Prepared dishes and cooking AIDS, so five 3% growth driven by Maggie which reported double digit growth.
Around best food posted flat growth following the impact of portfolio optimization.
Milk products and ice cream recorded six 6% growth the key contributors to growth were coffee creamers foldable fortified milks, they're recruiting our resolutions.
Sales in ice cream grew at a mid single digit rate led by Kitkat ice cream sticks in southeast Asia are getting done in Canada, and Drumstick in Canada and Malaysia.
Growth in confectionery was 10, 1%, reflecting continued strong broad based demand for kitkat, which is gaining share across all geographies.
Confectionery also saw positive set of developments for key local brands, including Garo Tau in Brazil, Munch in South Asia and Shockwave for in China.
Sales in water grew by three 5% despite temporary capacity constraints for Berry on a high base of comparison in 2022.
San Pellegrino on equity panel, so double digit growth.
The modernization of our failure sites will be completed during the fourth quarter, we supply expected to normalize from the end of 2023.
Let me now hand over to Luke careful Q&A.
Thank you Francois with that we move to the Q&A session. We open the lines for questions from financial analysts.
Please limit yourself to no more than two questions. The first question is from Guillaume Delmas said UBS. Please go ahead.
Thank you Luca and good afternoon, Mark and Matt also.
Two questions for me please.
Firstly on North America wholesale you mentioned, a challenging consumer environment.
Nothing new I mean, we've heard from some of your peers recently that the current economic pressures are changing a little bit consumer behavior less discretionary purchases more use of leftover less waste. So my question here is.
Temporary or could things get worse before they improve.
And then my second question is on Europe .
Underlying trading operating profit margin guidance for the year are only.
Only two and a half months left to get to year end and you still have a relatively broad guidance range plus construct you also mentioned a material improvement in gross margin in the second half. So how should we interpret this oh, there's so many moving parts on which you do not have perfect visibility or is it more.
Two having the maximum P&L flexibility I E being able to invest if you see more opportunities arising between now and the end of the year.
Thank you.
Thank you for speaking.
The on the North American economic momentum.
You mentioned in a couple of forums, where I spoke earlier when I was in some of them always is to firstly the.
You have heard me say North America. The fact that we have seen a lot of subsidies.
Disappearing from the market and basically what is left I think he's a few student loans, but we saw a massive reduction in subsidies, which probably had an impact somewhat on the conception not so much for most of our categories. We saw a little bit of evidence maybe your feet in pizza, but not really further than that so no major concerns. The other thing is that although the loss.
A couple of quarters, we believe that consumers were still using a large part of the savings that they had generated during COVID-19, which is probably coming to an end as well. So we don't see a structural issue is probably I would say a soft landing after the post COVID-19 period to a large extent, but no specific imager worry in.
In North America on the economic front in the you talked about genes at the second option that you were mentioning this is more about keeping flexibility anyway, we don't default each year from what we have done in the previous year, we always keep a little bit of margin.
Our investments, but we don't have any concern and I know you took lending for the.
For this year as you know we indicated the confidence even after another quarter since we last talked to you about our gross margin and gross margin is a key driver obviously of our Utah developments on at the same time it gives us sufficient flexibility to invest in marketing and as you know we plan to invest about 100 basis points.
More in marketing in the second half of the U S. I was just asked you.
Thank you and this is Marc let me build on France, plus comments, which I fully agree with I think when it comes to the consumer behavior.
There are a number of specific circumstances that Francois described so this is why we don't necessarily see that this is now the role model for other markets around the world.
It's also that we do have a launch frozen business in the U S and we don't have that it elsewhere, but this exposure may be specific.
To the U S market.
When it comes to the more challenging consumer environment in General I think this has more to do with larger ticket items and durable consumer goods I think here in everyday consumer goods.
The pressures are less prevalent in that those larger ticket and consumable items.
And to durable items.
Next question is from Warren Ackerman at Barclays. Please go ahead Warren.
Yeah, Hi, everybody, it's a bar and Hey, Hi, Mark Hi, Charles for Hi, Luca first question for me can we take it into the supply chain issues within health Sciences, what happened what went wrong and.
How can we be sure it will be done by early 2024.
And was that the reason behind the management change I'm, just trying to understand the drag on organic sales growth in Q3, and then Q4 and Q1 and.
Why does it get delayed by six months of 2025, a I would've thought that you would be able to catch up over the next two years. So can you maybe update us.
Oh, what the extra cost there will be and whether there's going to be any pedal saves from customers because of what's happened and also on the topic of supply chain any issues on Perry a in pet food in terms of break benefit on that on that side. So really one of those supply chain focused on health sciences, and the pay on Perry and pet food.
And then secondly can we just maybe take a bit more into pet food. There's obviously been a lot of debate around the topic.
Given some of the competitive comments about down trading I think you've been relatively vocal about your position I think Rick did slow slightly in the third quarter compared to the first half can you maybe just update us what youre seeing in North America and.
In rest of world and in pet food and what your competitiveness looks like in terms of market share. Thank you.
Warren. Thank you this is mark and Tim I tried to answer both of your questions. So on the Nestle Health Science supply chain issue as you saw from our explanations there's truly a surface as a surprise and yes of course, we're not happy about it but I also want to <unk>.
Yes, any potential concerns that people may have that this is something that's not fully in our capability range. So we've done a lot self I T integrations and we've.
We've done that as part of our past acquisition activities and so they should have been done right and so clearly you know we are fully on top of it. The reason. This now has a certain shadow that goes to the beginning of a 24, it's not so much that we were scrambling to find the solution I think we are close to the recall.
I'll put it already but when you are missing production from several weeks then clearly you know your supply chain from that time, given that demand has come on quite strong again is empty and so we need to refill and that's why you're basically trying to back up what has been around try and time and that's why I think we will see.
<unk> continued effect into early 'twenty four.
There was nothing technologically overly complex here. It was simply just that we were overwhelmed by a large number of different systems and it has to be brought together and also a large number of skus that are basically the nature of the vitamins minerals and supplements business, but again, it's on demand and.
One other item since you did mention at penalties you may have seen that pricing and.
In Q3 wasn't the low side and this is due to the fact that of course, if in a very surprising environment youre not able to to deliver there are some penalties that we had to pay to retailers and those penalties get booked against pricing. So this is how it manifested itself, but again.
Disappointing as it is I think we've given at full attention from all the resources that our North American market in the group in operations and antiques and bring to bear and so we are focusing on that with a lot of intensity.
Regarding the two other areas outlined on Perry building on Francoise comments in his prepared remarks.
As you know beginning of the year, we prepared you for these supply chain limitations during the year. We told you that they were likely to last until the end of 'twenty three and this is what we're confirming now.
From what we know today, they should come to an end.
At the end of the fourth quarter and regarding pet food, what we're seeing here with line. After line now coming on stream that Theres, a gradual easing of the supply chain constraints that we used to have and so they are also starting from 'twenty four we shipped in a much better position to deliver that.
That gets me to your second question on pet.
Pet food and obviously.
Given that we are seeing these very very strong profile and that many of you had asked about the strong cohorts in the past.
No one should be surprised that this growth is moderating somewhat now I mean, we told you about this is not going to be a permanent double digit grower, but that we would continue to see it as a high single digit ROE and I think this is what it's moderating too.
There are some other segments that we're probably more exposed than the ones were strong and so we're seeing for example, with post COVID-19 normalization less.
Less of a demand for treats but as you know this was never one of our very strong subcategories and then also we're seeing a little bit of pressure on ultra premium, but as you know that's also not our focus area for what we are serving and especially around the science based formulas were seeing and also the premium and ultra premium.
I'm, sorry, the premium and Super premium, we're seeing continued good strong demand and hence no reason for concern.
Our next question is from ethylene Penuche of Jpmorgan. Please go ahead the selenium.
Thank you good afternoon Mark.
My first question and in fact.
Okay. I did ask you that Christian already at H, one I ask whether a week would be positive for the full year and you said that it was Michele now we've seen that Sri I suppose.
Improved despite till they choose that Jeff black.
Do you think that we will be pretty cheap for the full year and as you see the momentum and with the caveats for Q4 NHS that you mentioned.
And by the way I think you also mentioned that we'd be an integral part of our growth going forward.
What kind of visibility or can you give that back to a 2% to 3% a week as we look into 'twenty 'twenty four.
And then my second question is on the price you made it clear that there's been a lot.
At this time I think you also mentioned that pricing.
Right.
Some places so I just wanted to understand a bit where.
Whether you've seen a bit more pricing pressure or competition.
Oh Crikey, Oh I appreciate you all over your prices.
It does let you maybe.
For pricing that theres been a bit weaker than what we anticipated. Thank you.
So again, thank you and let me give you some quick impressions from my side on rates, but then hand to do from a sponsor that he can add to the rig question also to our pricing.
So we.
We do believe that for Q4, we will swing back to positive break and that based on the strength of our bank. We will also see then pauses or breaks for the second half.
As you know for the full year, we've always stayed away from exactly weighing.
The negative rate for the first half against the size of the positive for the second half and so that's fine.
You know I'm, a little bit cautious on that one would want to see how the fourth quarter specifically unfolds.
So maybe you have to add to this celine.
In terms of Oh Gee gross components, we are clearly moving into a normalization phase where there is less pricing and I'll come back to that and there will be less pricing than you were going for a world and we see Riga, increasing at the same time and we are now entering into a positive phase and so we are aiming to go back to where we were.
Somewhat a pre COVID-19 with rig being the largest component of our growth obviously.
So there will be a transition period to get them pricing, yes, we have less and we will have less or no big surprise. There you saw that there was a relatively.
A sharp decrease in Q3, which is reflecting the fact that we did increase very materially on pricing in Q3 last year and more specifically in North America and in Latin America. So the declines that we see this year is predominantly the consequence of the high base of comparison last year and to a lesser extent. The fact that we do less pricing today.
It's not that we are totally stopping pricing because we will do some pricing, but on a selective basis.
Some categories, where we still see some increase in input cost inflation and I would mention there for example for cocoa for robust stuff or sugar and each we'd have some consequences for all categories 101 of use one is confectionery. For example, we will have selective price increases as well in some geographies or more specifically where we are.
Experiencing currency depreciation on I named a few earlier just in terms of pricing, it's not that we see a lot of pressure to go down easily also let's not go to the extreme but it is clear that our market globally is moving from a phase of supply constraint over the last couple of years with less promotional intensity.
Two a phase today, where it's more about generating demand with an increase in.
Promotional activities, we had maintained anywhere else and if you know that last year, a relatively high level of promotional activities. We continue increasing it but not to a very large extent our focus for 2023 is much more about reinvesting in marketing, which is exactly what we all do what we are doing as we speak.
Next question is from Patrick spending minutes Kantonalbank. Please go ahead Patrick.
Patricia Debouncer etcetera. Thank thank you Luca Hi, Mark Hi, Faisel again on the recounting Mark you have mentioned that Rick will become the main driver of growth going forward based on your mid term guidance organic growth of 4% to 6%. This means that rig should come back to <unk> to 3% next year already is this best guess assumption correct.
Second question, what will be the main growth drivers in terms of rank in terms of product categories and in terms of regions. Thank you.
Thanks, Patrick and Tim Yes, fully confirm this whole notion that Rick as always.
Is the bedrock of our growth so what we've seen over the last two years was an aberration from this due to the historic.
Pricing spike in inflation Spike.
But clearly we're finding back to that.
In a volatile world as we're seeing right now and with so many variables out there it's very hard to.
To predict exactly when and how it will come back to the percentage you indicated but again a rig is the one that we focus on is the one where we believe we have a lot more control over and obviously in the rig.
It is the mix part, where we believe that we bring our innovation engine fully to bear and this is where as you know from so many investor calls that we had before Covid. We believe if we bring exciting products to market, they're really meet.
Consumers demand and this is where you have faith in your own hands not about you are not dependent on so many other macro and geopolitical events to either try.
<unk> CRO for drive demand and pricing and so this is what we're focusing on and.
Going forward as you know the key core categories the growth engines.
Of coffee and pet care remain very interesting you've seen from confectionery that he was a category that has really done its homework over the last few years and is now, especially around kitkat, but also some of the other brands are very much in demand.
I think some of the developments that phone smart pointed out early in Brazil. For example, the recent Shocker trio innovation. They are really really doing strong in the market there and it's a good example of how we are providing meaningful innovation to the consumer and so I would expect to see more of that and then obviously, we talked earlier about the GOP one drugs.
I think give another innovation plank and innovation platform for Nestle Health Science, but also for the food category overall.
Thank you Mark next question is from Jeremy Fiasco with HSBC. Please go ahead Jeremy.
Hi, Jeremy Falco head HSBC couple of questions. So the first one is just on the slight do anything to the organic growth guidance that you have given from what you're saying it's wrong is a 2025 basis point impact on the third year from this health science issue and that is just the only reason.
And why you have made this slight adjustments there's no there's nothing else.
That you've seen in the business in terms of maybe the pricing coming off a bit quicker than you'd anticipated or something like that that has caused you to make this small adjustment.
Then secondly could.
Could you talk a bit about this decision to close the IMF plant in Ireland, and what the kind of structural assumptions that you've got an underlying that in terms of the sort of the China market that growth.
The shaft from the local competitors. Thanks.
Thanks, Jeremy and look to comment on organic growth.
No me from past Investor calls I tried to be as precise an up to date with U S. I can I had made that comment at the H One conference call based on the fact that I was aware of at the time and with that one exception. The Nestle Health Science, one everything else is pointing exactly to what we.
We're believing at the time. So this is the only outlier and in terms of the size I think Francois is giving you the impact which was 50 bps. So far this year.
So clearly this is the one that has changed from the semi I'm not aware of the changes.
Looking at the island situation.
As you know clearly.
Birth rates around the world are in decline birth rates in China are very low.
Relatively speaking when it comes to restoring our market shares we're making good progress there in China, but theres no stepping away from the fact that compare to the manufacturing setup that we were building several years ago.
Today's global demand is not what it used to be so this is different from situations like coffee and pet care, where we see continued strong underlying demand increases going forward and in fact in some like in Petcare had to catch up to meet demand and so it was about rebalancing base and it was about also specifically then.
The demands of the Chinese consumer.
We're clearly interested in locally manufactured products is on the rise and that is behind the plan that we outlined yesterday.
Next question is from the maroon or maintain at Bernstein. Please go ahead Bruno.
Hi, Good afternoon Martin from slumped. My first question is back with G O P loans.
I think mark you sort of suggest that it's mainly center of plate it will suffer but from my understanding of the GOP ones that really helps people that use the drug to.
To control the odds are that compulsive behaviors and it seems to have a broader impact I'm just to quantity of food and clearly coffee is another product that consumers you know some of them are struggling to control their consumption do you not expect any reason to worry about the growth of coffee, if and when G. O P wants help consumer sort of control the consumption.
Our food and drinks more generally.
The second question is about the growth of out of home I mean, it's nearly 16% that's twice the level of the retail growers Sandy hydro for out of home food am I right to assume that most of that is still sort of post COVID-19 recovery.
And therefore when would you expect.
Of growth the out of home food.
Normalize back to more normal levels of growth. Thank you.
Thanks, Bruno let me take the first one and then hand it to Francois for the second one so clearly.
As you can imagine we've been looking at these trucks for quite a while and the impact that they have and there was going back a lot longer than some of the recent headlines that we've all seen and to our best knowledge.
<unk> and snacking related.
Categories are the most impacted so in our case that will be the frozen foods side of things confectionery and to some extent to ice cream.
On coffee, yes, anecdotally hear him there we've heard that people may have less of a tasteful coffee.
But again this is more than be anecdotal category and of course, it's also important to remember that coffee when it comes to calories. When it comes to obesity is certainly not a claim it's the ultimate low calorie drink typically a couple of espresso as three calories and a cup of coffee is very similar to that so.
Yeah, I don't think the main exposure will occur and as anyone who's trying to lose weight now is I think a lack of energy is one of the things that people complain quite often about during that period and so if you use two of caffeine fix before your diet I think that even do them at night, you would want to have some access to campaign fixing.
Coffee of course is the prime beverage format, so I'm less worried about the coffee, but obviously, we're watching closely so far the evidence we've seen is very anecdotal only but not backed up by a hard data.
Good afternoon, but we know for sure speaking.
In fact of our out of all we don't see the strong momentum that we still have today in out of home as a consequence of the post COVID-19 lending we saw that relief.
Being completed more or less at the end of Q1, we can look at it with very strong evidence because for example, if you take coffee we have a presence both at home and out of home and we saw even negative volume development for many businesses at all until the end of Q1 2023, and then it started to be again.
A little bit to the normal lives that we experience pre COVID-19.
So I would say over the last six months, we have no real evidence any more that our business is impacted by channel.
By the Covid implications, even we see the same Florida. For example, if you take our Vms, we were talking vitamin minerals and supplements we were talking about it Vms grew very strongly during COVID-19 did not really go down, but very marginally down and is back to growth now already with mid single digit growth in Q3, So we don't have them.
The strong momentum there is a consequence of post COVID-19, it's small debt probably outperform is the channel where we have been traditionally somewhat under index and we have invested a lot and so we are probably you are reaping the benefits of the investment that we have done over the last couple of quarters.
Thank you next question is from James Edward Jones at RBC. Please go ahead the Jameson.
Thank you Erica.
Couple of quick questions.
The supply chain issues, you seem to be calling out supply chain constraints a loss on the obviously.
Infant Formula coffee Walkner period right now.
Are you going through a particularly difficult period or is there. Some reason why this should be more of a feature in the future than it has been in the past.
The second one Paul around really can Patrick's question, what was the mix component in rig and the first nine months of the year.
Thanks, James So on the supply chain, let me reassure you about these different category situations that we talked about are not at all connected.
And Tim I think you can also get that from the way we have covered this over the quarters and years. So pet care is something where I think you see a very clear origin.
With the onset of Covid.
Large increase in private pet ownership and the surge in demand for pet food and yes, we were close to our capacity limits at the time already and then when you have a very surprising events like this happen.
It clearly put us Bianca limits at the time, we immediately then commission mutational capacity is very much coming on stream in line with our calendar expectations at the time, but as you can imagine getting the permits during the plans and then building sometimes it takes a while and this is why we've talked about pet.
Food for a while.
Also I mean, we talked to you about this ahead of time advocating over here and so it's a planned event and not something that was a surprise. So this one here truly on Nestle Health Science was a one off and something where I hope you sense, a certain element of disappointment and also a good sense of urgency now.
ESCO dealing with this and we'll fix it and then obviously we will also ensure the internal processes that sometimes this is very unlikely to happen again.
So for speaking with in mix. Indeed, we have two components volume and mix as you know as far as volume is concerned we do operate anywhere in markets, which have negative volume development. So we are slightly negative as windows with improving quarter after quarter. So its very positive very encouraging from that point of view. So the bulk of our mix of our rigs.
This is made of mix and mix actually improved.
Historically over the last couple of years and as Mark said before we are extremely pleased by it because we are not dependent from economic cycle, but mix is really where we create value through premium musicians through innovation. So the fact that we have seen mixed consistently increasing year after year over the last couple of years is extremely encouraging and positive for the future.
And James Let me just build on one other item that you brought up and that is infant nutrition. The I'm not aware of a significant supply chain issue. What we're talking about is essentially <unk>.
Dusting, our capacity to the demand situation that we're seeing out there and I think this is one where over the years clearly.
Birthrates half's wound down more than anyone expected I remember at the beginning of Covid. There was a big bet out there I was just gonna be leading to more births or less and everything around the world. What we've seen is that birth rates have taken their turn south and so this is more about adjusting it in specific specifically with regards to China, but it's not.
Pointing to any underlying a supply chain issue.
Next question is from Tom Sykes Deutsche Bank. Please go ahead.
Yes, good afternoon everybody.
Just to follow up on the pricing commentary first place.
Just interested in your fees on your competitiveness. This is what's happening to Cogs.
Or you don't comment on hedging with commodities largely coming down.
Well pricing is being weakest in trying to hold to that versus peers.
Or are you also or are you perhaps.
In any way leading prices down because of some of the Cogs guidance.
Right.
And just to clarify your comments on formation.
Is the gap between list price and net price decreasing sorry.
List pricing is not increasing as much of it was that how to think of it and then just a follow up on pet. Please could you say something about the difference between North America and Reagan.
And would you see pet rig increasing from here given the lines expansion that you talked about please.
Tom Let me just maybe cover the first one on the pricing first of all I want to correct. One thing that youre, saying not all commodities are down actually to start with I mean, I mentioned three that continue to go up robusta, which is significant for us sugar and Coco.
We need to address this one says one which is one of the reason I mentioned why pri.
Pricing is not going to be down necessarily as I mentioned earlier, we are not really thinking all working on material price decreases there might be some under let me give you one which.
Which is currently happening for example, the price of food dairy components have gone down by 25% since the beginning of the year. So we do have some adjustment there which is the reason why you may have seen that pricing is actually softer maybe than maybe some of you would have thought in emerging market. This is largely as a consequence of these they're reprises.
Going down so we do address by our businesses, but let's not forget that our gross margin had fallen down by 400 basis points due to the end of last year, So which mean that this is not the time to.
Took a significant price decreases the other thing that you still have although items outside of commodities would go up salary and wages went up significantly last year general inflation is not is still there I mean.
Which means that we will still have.
Inflation as well in terms of salary and wages as well.
The difference between list price and effective process.
She is largely the consequence of trade spend as I mentioned, we have increased trade spend.
Metal Uli last year, because we thought at the time when we raised our prices by 8%. After 15 years of no pricing unlimited pricing. It was important to make our products more accessible and affordable which is a reason why we did raise our performance trade spend I'm, excluding rebates and discounts there we.
We continue increasing our promotional activities, but to a lesser extent once again in 2023, our focus is essentially on.
Increasing our marketing spend which was at a relatively low level last year and the pet care momentum in terms of region. We do expect to have more region coming from pet care in emerging market I did a presentation at the beginning of the year on that because of the opportunity that we have which is much more about the category for conversion.
In emerging market, which is increasing that increases the corrosion conversion by seven percentage points over the last 10 years worldwide.
One person touch points by the way is worth a billion for the category and this is one of the main driver that we have which will we will find essentially on rig while on in.
They've looked to market like north.
North America Europe , it's much more about premium edition, which has less impact on regions.
Okay. Thanks.
Next question is from Jeff Stent Alexander Please go ahead Jeff.
Thank you Luca.
Just one question.
All of these is back on the GL PS.
But as far as I can see it seems to be the case that this isn't critically I agree on it there's very little reliable resell Shanghai those in part consumers purchasing habits.
Interferes with dopamine effects et cetera. So my question is to you how.
We see out there.
Sort of proprietary to nationally that's informing some of the statements that you put forward.
Just a little bit surprised how confident you are.
This won't be an issue, particularly particularly in areas like coffee. Thank you.
Thanks, Jeff and let me turn it around we were a little surprised about this transfer of the reaction here on something that's very early days, where clearly the rollout of these trucks is going to be taking a long time, given the cost and capacity constraints.
Unknown at this time, how many people will opt for this it's unknown at this time, how long people will stay on Thanksgiving. So it won't be very serious side effects and its unknown also what their specific needs are wendy's treatment regiments are over so yeah from our perspective, if anything the overreaction was more like the episode.
And that is.
The strong reaction we've seen over the last few weeks surfacing. After some comments were made by a U S retailer.
So from our perspective as you know these trucks have been now around <unk>.
For a number of years clinical trials have been conducted.
I very carefully mentioned on coffee.
We've seen this anecdotal evidence, but it didn't go beyond that and so the verdict. There is out in the first one to acknowledge that.
But then on the other side honestly health science in some of these companion products, yes, we've been researching and we have products that are good feel fit already know for example, our octave has range of products, which I think is very good before doing after.
The treatment with these T O P. One agonists.
We have products in our booths range. They are very much targeted to that and we have new innovation hitting the market.
As soon as next year that we believe you know.
We'll back up the statements I made.
Thank you next question is from Victoria Petrova at Bank of America. Please go ahead and Victoria.
Thank you very much I have two follow ups. One is on if you could quantify next year capacity increase from new pet care facilities, and if I understand correctly, you're still capacity constrained there that would be my first question and my second question is around the magnitude of one offs in the water in Q3.
Which will not impact first quarter and by that I mean theory capacity constrains impact and abnormal weather conditions in Europe could you broadly quantify it similarly to the way you do it the Nestle Health science.
Victoria, Thank you and as always you know, we're trying to be helpful. But.
I think on pet the best way, we can work it is to say that we expect these remaining constraints to ease in 'twenty four and debt as mentioned performed Perry.
I will come to an end at the end of Q4 this year.
Since we haven't given a precise numbers impact before on the size of the limitations also now very difficult to provide the numbers impact on the remaining limitations that would fall away.
Okay. Thank you and the last question is from Pascal Bowl at Stifel. Please go ahead the Pascal.
Yes, Hello, Aragon and two questions.
First question on coffee, we have seen a positive second quarter with ER positive breast.
So can you give some are quantified to week four less coffee and Starbucks in Q3 and year to date.
And then the second question I have to come back on the right I mean going forward do you expect it to be again, the main driver of organic growth. However, I mean, if we look at your competitors, especially North America I think we see that our pricing is moderating but volumes are not really.
[noise] bouncing back so what keeps you read it that confidence.
Rick will turn more positive.
Next year is it just pricing less pricing is it.
Nicola aspect of lower base is it more marketing spend thank you.
So let me start maybe with the second one.
Then Francois can also chime in and also helped me out on the first one so clearly on real internal growth I think one of the elements. We have always prided ourselves on is the mix part which is.
As a direct proxy for innovation and meaningful new things that we bring to the market and as you know we have an.
An industry, leading budget on R&D I think we have a very renown innovation muscle there and I mean that one.
Has never really let us down and we expect that one to also then carry some of the burden going forward.
So how exactly this will play out obviously, a lot will depend on the volume demand the state of the economy in various countries and where the consumer is but.
The the fact that after one and a half two years of pricing led growth. We're now engineering a transition to crop that is again led by real internal growth and within real internal crop in particular mix I think that should not come as a surprise and I think people generally understand where well equipped for us comparatively speaking.
Regarding coffee clearly I mean do you see in the numbers for an espresso so very strong numbers there but.
But let me say that I'm on Starbucks overall, we are also seeing continued a very nice growth in our rollout and increasingly flow coming from our new innovative products in the pipeline and net cafe also stable development. So no issues there.
Okay.
Fantastic.
So look I think we're getting to the end of the of the of the webcast. So we thank you very much again for your interest in ethylene as usual if there are further questions don't hesitate a the IR team is available. Thank you. We wish you a very pleasant continuation of today.
Okay.
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