Q2 2019 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on musical. Thank you for your patience.
To last about one hour, including remarks by Munda lease management and the question and answer session.
And what did you ask a question. Please press the star key followed by the number one on your Touchtone phone at any time during the call I'd now like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for Mandalays. Please go ahead Sir.
Good afternoon, and thanks for joining us.
With me today are Dirk van to put our chairman and CEO and Luka Zero Miller our CFO .
Earlier today, we sent out our press release and presentation slides.
Which are available on our website Mana believes international Dot Com board flush investors.
During this call we'll 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 and 10-Q filings for more details on our forward looking statements as we discuss our results today.
Unless otherwise noted we will 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 earnings release and at the back of the slide presentation.
In today's call Derek will give you an overview of our results as well as progress update against our strategic priorities and Luc will take you through the financials and our outlook.
We'll close with QNX.
With that I'll now turn the call over to Dirk.
Thank you ship and good afternoon everybody.
Today, we're reporting strong second quarter results as our category leadership position and solid execution allows us to capitalize on strong snacking fundamentals in most of our key markets.
Our first half performance demonstrates that our more consumer centric approach and focus on our strategic priorities is working.
We're delivering volume driven topline growth.
Well driving earnings growth.
And improved cash flow generation.
Given this performance we are raising our full year outlook for organic net revenue growth to 3% plus.
Which look I will discuss in more detail later in the call.
As you can see on my first slide it is clear that our unique position as a global snacking leadership and our unique approach to growing our business is driving us forward.
We have a strong portfolio of global and local brands combined with an advantage manufacturing and distribution network.
We have leading positions in both developed and emerging markets.
And we have talented and committed colleagues who are energized by the progress they are seeing.
The combination of these advantages are helping to generate volume growth, which by virtue of our efficient operations generates more fuel to further invest in expanding our topline as well as create long term value for our shareholders.
We create that value through our consumer centric growth strategy.
As a reminder, if which is on slide five.
Our long term goal is to deliver attractive dollar profit increase.
Driven by solid topline growth as well as free cash flow expansion by focusing our business on three clear priorities.
First to accelerate topline growth.
Second to drive operational excellence and third to build a winning growth culture.
Turning to the financial results for the second quarter on the next slide.
We delivered strong performance against many key metric.
Our topline growth accelerated to 4.6%.
Underpinned by solid category performance, improving share trends and volume growth.
Our emerging markets grew 7.6% well developed markets shows 2.8% growth.
Our adjusted operating income grew in line with revenue as volume leverage and cost savings were partly reinvested in strengthening our brands and capabilities for the future.
We reported high single digit adjusted EPS growth and free cash flow reached 581 million since the start of the year.
We also continue to make great progress on living our purpose across the organization, including through our sustainability agenda.
To talk briefly about our geography.
Revenue grew across all four of our regions and was underpinned by market share gains.
Our North American business grew 2.5% led by strong U.S. biscuits results.
Our EMEA business grew 4.7% overall with strong growth in China and India.
Our European business grew 3.9% boosted by the UK, Germany and Russia.
And in Latin America growth was 10.9% or 4.2% excluding Argentina.
Let me share a little more detail on progress against our strategy turning to slide seven.
We committed to increasing and optimizing investment behind our brands, both global and local and our channels in order to create a solid foundation for future growth.
Year to date, we have driven a total increase in organic net revenue of over 500 million and an increase in adjusted operating income of almost a 100 million on a constant currency basis.
This investment is helping us to maintain strong growth momentum in two of our biggest brands.
Oreo and Cadbury dairy milk.
Thanks in part to expansion of distribution in key markets and channels.
At the same time, we are putting more emphasis than in the past on our local jewels.
For example, nothing about it.
An iconic you as Brent that celebrates its fiftyth anniversary. This year is delivering double digit growth thanks to fresh investment.
We'd also fueling channel expansion.
We continue to expand or rule distribution network in major markets like India.
This will give us an even stronger competitive advantage in a market, where we had already chocolate leaders.
In Southeast Asia further investment in molded into additional trade has enabled us to accelerate our fast growing chocolate business in countries like Indonesia.
Resulting in double digit growth and share gains.
We continue to build our e-commerce business as well.
Our global E Commerce reported net revenue grew more than 30% in the quarter, while our U.S. E Commerce business grew almost 80%.
We also saw continued strong growth in markets like China with partnerships with E. Tailers are helping us gain share.
Operational excellence remains critical to our success.
I was particularly pleased to see our east that execution this year.
During a particularly important time for our trucking business, we achieved best in class service levels in key markets across Europe .
And when it comes to cost we have continued to exercise the muscle we've built over recent years.
Cost disciplines remains well embedded in our organization, thanks to zero based budgeting, and we and extending efforts to cut the other unnecessary cost from our supply chain.
Including reducing waste in our us manufacturing network.
As we head into the second half of the year.
Our new commercial organization is operating well.
Our focus is more local and increasingly consumer centric leading to improved speed execution and results.
By way of example in changing our organizational structure to in Europe .
We've made our business planning process much more efficient with 40% fewer meeting see quiet.
This has increased the speed of decision, making and keeps our people focused on their growth initiatives.
On the next slide I want to talk about another important pillar of our growth strategy.
The acquisition of brands that help us accelerate growth by entering.
Excuse me into adjacencies in broader snacking or into more well being oriented product.
So far this year, we've already made investments through our snack futures unit in the Foleo vegan Chocolate company, you and into pre Biotics company uplift foods.
As you will have seen we've recently taken a majority stake in perfect snack the pioneer in refrigerated nutrition bars.
A few reasons why we are so excited about this brand.
The product at great developing credential and offer organic non GMO protein rich snack, which are on trend with consumers.
The company is growing fast and had 2018 revenues of 17 million.
We operate perfect snacks as a separate business in order to nurture its culture and its spirit.
And importantly.
Team members of the founding family the key.
Our keeping a significant minority stake and we will continue to lead the company.
While they remain a separate business, we will offer significant resources to expand distribution.
The business is delivering very strong growth and we remain excited about the potential with clear opportunities to expand this platform further.
Finally.
Let's turn to our impact on the world around us and our consumers.
Our phone.
Our company's purpose to empower consumers to snack right is also reflected in our broad corporate sustainability agenda.
In the second quarter, we announced our sustainable and mindful snacking goals.
As part of our sustainable Snacking strategy. For example, we have committed to sourcing 100% of the cocoa for our chocolate through cocoa life.
And moving to 100% recyclable packaging by 2025.
And in order to encourage mindful consumption by consumers. We will include portion amount and mindful snacking information on all packages globally by 2025.
We'd also committed to cutting carbon dioxide emissions from the energy used in manufacturing.
To help us achieve that we announced the partnership with annual Green power to purchase energy delivered to the grid from a solar energy farm in the U.S.
This will help us reduce our global manufacturing emissions by around 5%.
The feedback on these initiatives from consumers and government has been positive and underscores the importance for us to continue to lead the way in creating a future with people and the planet thrive.
With that I will hand over to Luka.
Thank you, Dave and good afternoon.
As you can see on slide 11, we delivered strong performance across all our key metrics that quarter includes broad based revenue growth, we balanced volume mix and pricing is solid increase in gross profit and high single EPS growth.
Productivity and overhead savings provide the fuel for $50 million business investments in the first half versus last year to drive sustainable growth.
Finally, these good results translate that into free cash flow of approximately $600 million year to date.
Turning to slide 12.
Our leading footprint in emerging markets remains a competitive advantage for us and helped drive our strong topline growth in Q2.
These markets grew approximately 8%.
Marking the fourth consecutive quarter of growth greater than 5%.
Excluding inflation driven growth in Argentina emerging markets grew 5.4%.
China, India, Southeast Asia, Russia, and Mexico, where among some of our business units that drove this growth with a nice balance of volume and price.
Developed markets also posted good momentum in Q2, we nearly 3% organic net revenue growth driven by strong results out of Europe and notable improvement in North America.
Now, let's let's review our profit performance on slide 13.
In the second quarter, we increased gross profit by more than 4%.
Productivity volume leverage and pricing all contributed and importantly, gross profit grew faster than revenues in three.
All four regions.
We feel very good about our ability to convert additional volume and revenue into gross profit ending vesting. These benefits to ignite that leads to a cycle.
In Q2, these benefits were partially muted by some operational issues, we had in Brazil.
I'll talk a bit more about those in a minute.
Our gross profit increase translated into solid, though I dollar expansion with volume leverage and cost savings offsetting a step up in investments as all the in seat out to market and the innovation.
Moving to regional performance on slide 14.
[noise] Europe delivered an excellent quarter with 3.9%.
Revenue growth.
Driven by strength in the UK, Germany and eastern Europe .
Notably strong in store execution, and marketing activations around Easter enable the halo effect on our chocolate business and allows us to exceed our sales expectations and gain market share while driving the category.
Philadelphia also performed particularly well as our investments are driving growth.
Adjusted to White dollars grew by 5% in Europe due to robust sales and volume leverage alongside ongoing cost discipline.
We also invested in agency and route to market in the quarter.
EMEA grew 4.7% due to continued strength across much of the region.
India deliver another quarter of double digit growth fueled by some market dynamics and great execution in both chocolate and biscuits.
China grew double digits driven by strong results in biscuits.
This includes a balance between global and local brands as both Oreo and Pacific deliver great results.
Gum also had a standout quarter with strong growth as we continue to take share.
Southeast Asia grew mid single digits with solid results in biscuits and chocolate.
Our EMEA increased operating income dollars by 5% due to operating gains partially offset by additional investments in high growth potential markets.
Latin America grew 10.9%.
Due in part to inflation driven growth in Argentina, and the impact of lapping the truckers strike in Brazil last year.
Growth excluding these items items was low single digits.
Mexico delivered another mid single digit increase driven by Graham.
Adjusted to Idleness in Latin America declined by approximately 13%.
Primarily due to issues in Brazil during the quarter surrounding deconsolidation of four plans to tool.
Production delays and some service delivery issues impacted our gross profit our team in Brazil is working to address these issues and we expect improvements.
Over the course of the second half, although there will be some might wins also for Q3.
Finally, North America grew 2.5% in Q2.
Led by solid results in the U.S. biscuits business, we gained share in biscuits as OEM belvita they need a strong results across multiple channels.
We continue to improve service levels and in addition, our DSD execution is driving benefits.
While we still have work to do to improve consistency. We are encouraged by this progress.
The North American region grew by nearly 10% due to affect the pricing waste reduction and overall supply chain execution.
Let me spend a moment on categories highlights.
Our three snacking categories continue to demonstrate great fundamentals, we thought of category growth of 3.4% on a year to date basis.
This builds off 2018 momentum and reinforces our confidence that we have shape the portfolio in the right way to benefit from attractive categories and markets.
We also know that in many cases, we have had tried this catholic it was trends through our investments and execution.
A few examples include U.S. biscuit, where Oreo and DSD are two key drivers or Easter execution around the world, but especially in the UK and Australia or in India, where our distribution gains are helping chocolate to make its way into consumption habits throughout the country.
Overall, we held or gained share in 65% of our business, which is an improvement over recent quarters.
Our biscuits business grew 3.6%.
Approximately 70% of our revenue grew or held share in this category, including our U.S., China and India business.
In chocolate our business grew 6.6%.
Approximately 65% of our revenue grew or has share, including the UK, Australia and Brazil.
Execution around the season in many of our key chocolate countries was best in class.
Gum and Candy revenue grew slightly about 35% of our revenue in this business gained or held share including strength in China gum and Mexico Andy.
Now turning to EPS on slide 20.
Q2, EPS grew 9%.
This growth primarily reflected operating gains.
Driven by strong revenue results as well as well as income from the JV equity investments and share repurchases.
I'll now move on to our cash flow results on slide 21.
We delivered year to date free cash flow of $581 million.
In line with our plans due to further working capital efficiencies.
We are well positioned to deliver on our full year target.
Turning to capital deployment on the next slide we have returned 1.7 billion to our shareholders through the first half.
Today, we announced an increase to our quarterly cash dividend of 10%.
Consistent with our goal of dividend growth in excess of adjusted EPS.
Moving to our outlook, we are increasing our full year organic net revenue growth expectations to 3% plus.
This reflects our strong first half results as well as our view that the fundamentals around our categories remain robust and that momentum will continue into the second half.
But it also acknowledges that our year to date revenues.
Was positively affected by an exceptional execution in our Easter season.
We are also increasing our outlook for EPS growth to approximately 5%.
Let me spend few awards to explain some of the dynamics here.
Our EPS delivery in the first half has been strong but with respect to the second half. It is important to note that we lapped while items.
The first one is a tax favorability in Q3 last year related to the U.S. tax reform transition period.
And the second is the impact of lower tax rates in the Netherlands that benefited JV in Q4 2018.
Excluding these two items, our underlying profit performance should be comparable with the first half where volume leverage up sites and gross profit increases will be partially they invested in growth initiatives.
Concerning our overall second half effective tax rate. It is important to note that these are expected to be in line with Q2.
We are also updating our interest expense estimate to approximately 400 million.
Additional geopolitical disruptions or other disruptive events, including Brexit are not anticipated within dcps outlook estimate.
Finally, our free cash flow expectations are unchanged.
With that let's open the line for questions.
As a reminder, if you would like to ask a question at this time simply press Star then the number one on your telephone keypad.
Your first question comes from the line of Andrew Massaro with Barclays.
Good afternoon, everyone just two questions for me.
Hi, Andrew.
Good afternoon.
First I guess just at a high level direct with the strong first half I'm curious, where where do you see this as putting monopolies in the scheme of.
Broader strategy I guess do you see the company is ahead of schedule to return to the stated long term algorithm.
And then second guidance for 3% plus organic top line for the full year.
As you mentioned Luca suggests a deceleration from call it the 4% level in the first half.
Are there some discrete items to think through here, particularly given category growth is running above three or is there also perhaps some conservatism being employed as well.
Thank you.
Okay.
Thanks for the question Andrew.
Oh.
Maybe replied to the first part and then Luca can take the second question.
So yes, we are pleased with the performance in the first half.
We feel that it's a confirmation of the strong fundamentals that we have which has to see with our unique position as a global snacking leaders.
During the ride categories, we are in the right geographies.
Emerging markets, but also developed markets this quarter is doing quite well.
We feel that we are successfully executing against our strategy, which is good given good.
Early results and.
And share trends.
We wanted to invest in our brands and our capability, which we are doing and which we can probably increase a little bit for the year.
Have you know that that's not linear not all of the effects of that increase investments. We will see this year, that's going to build up overtime.
And then there's the whole changed we want to driving the company, becoming more consumer centric.
We've changed our structures two business units over the local first approach change the incentives to also improve speed and execution and results.
And yes, I would say that at this stage, we feel that everything is going as planned and probably faster than we would have planned.
And we feel that the strategy, we put in place and our execution against that strategy is positioning us in.
In a situation, where we think that they're creating sustainable long term shareholder value.
This is clear.
And yes, we feel pretty good about what's happening in the company at this stage to maybe look at you can talk about the guidance yes.
Thank you Andrew I think when you look at the quality of the oral dissolve.
With these I think fair to say that probably all around disease.
One of the best if not the best quarter since the formation of monopolies.
And clearly you know that gives us the confidence.
In India. The boats are going forward. So we remain quite optimistic on the outlook and we clearly PC paid continued momentum in the second half.
We have brought knowledge, though that the first half was positively impacted by what we called the Halo effect on a great piece that execution as we look around all the countries, where we have a meaningful chocolate business and there are many we clearly drove the category performance seen in Q2 and.
We have executed very well from a I would say supply chain with the exception of Brazil, which we called out as that as one exception.
To actually being able to study the marketplace not only our seasonal products, but also the regular lines.
And.
As we look at this that we are very very pleased we did exceptionally well and.
That is one of the reasons why maybe the second part of the year might be lower than the 4% growth rate that you have seen in the first half but to be very.
Pretty size, we didn't have any discrete items in Q4 for that matter in the first half, yes, we are lapping the tractor cycle getting Brazil, but in the big scheme of things it's quite.
Materially piece 0.1 points of growth for both on the lease.
You didn't ask about profit maybe I'll spend a couple of awards there as well.
Again, we are very pleased with what we saw in the first half excluding Brazil gross profit is really growing nicely and we see the business cycle coming to fruition, we see volume leverage coming through productivity affect the pricing I mean look at the number we are booking for North America profits. As one example, and we are using the upside through touring best in the business the second half.
As far as profit goals it would be comparable to what we have seen so far but we also want to solidify our business through continued investment there. So there is a little bit more to come in terms of investments and clearly where we see momentum maybe we'll double down to make sure that that we generate even even more revenue. So maybe we are conservative, but I would say the first half was exceptionally well as we executed the rounds.
For instance, Easter as I called out.
Great. Thank you.
Thank you Andrew.
Your next question comes from Brian Lane with Bank of America.
Hey, good afternoon, everyone.
So just two questions for me one just first one in North America.
You know pricing was up a little bit more sequentially in the second quarter than it was in the first quarter. I think you said in the prepared remarks that you also had share gains so.
I guess two to two things around that relative to this price increase that you took earlier in the year or late last year.
Has the share performance in the brand's responded to that pricing.
Maybe better than you expected and I guess as we're thinking about kind of the balance of the year would you expect that level of pricing to hold up the balance of the year.
Yes, maybe I'll I'll I'll start and then now you know to give you a little bit more perspective on sales and brand dynamics I think the if we let.
Color a little bit of color there so pricing, yes, if the sequentially better by the way I think if you look across all the regions. It is a little bit sequentially better. So it's not only a north American thing I will say at but you know we announced price the second wave quite frankly towards the end of last year and became partially into effect in Q1. So is kicking in.
You know I think full vesting in Q2 and Thats why you see.
You see the benefit becoming a little bit more pronounced in in Q2 as you said the categories, particularly in biscuits are reacting well you know when you dissect the category dynamics, you see both volume and pricing being positive and so not really through that you know you can't price and you're going to lose volume if you had to put marketing.
Bomb Bowl Sunday, if you support your franchises that can lead to value and volume growth simultaneously, which is the case and on top of that we are driving with Ivan chair.
Yes, and maybe to add to that on the share so.
Yes, we are.
We're seeing that our biscuits category is in very good shape North American as you know, it's 80% of our business.
We have outstanding results for our brands like Oreo Belvita.
Which means that we are driving the category growth, we see the pricing come through as Luka was commenting and and we are gaining share.
We also are seeing clearly that we have the benefit now of DSD with excellent execution in DSD in this quarter and the other thing that has been changing is the retailers restocking is slowing down.
So overall, we feel that there's good momentum in the consumer.
Or in the consumption of our brands.
We feel that this momentum is going to continue maybe on North America, which has been a discussion in the past a little bit on the supply chain.
Because that could throw us off from on the on those share gains that I was talking about.
We saw a very good quarter.
We are lowering our waste our case fill rate is back to a reasonable level.
There is more work to be done, but overall, we feel that we really are seeing good progress there.
We also have to improve our predictability and the consistency of the supply chain that has been one of the issues, but again.
Now for a number of quarters that has been improved and we are also focused overall in driving excellence in our core operating processes. So we don't see anything in the internal functioning of the company that withdrawal was off to continue to gain share in North America.
Okay, great. Thanks for that and Luca if I could just follow up on net interest expense, it's down for the year versus the original is that a function of like refinancing or a movement in rates just trying to understand if theres more sensitivity to that as we look forward.
No I don't think I mean, neoprobe I've missed.
And some of your colleagues.
In Q1, you know year to date, we are 180 give or take in terms of interest cost I think it is going to be in the ballpark of 400 million. So I think it was a little bit more of we wanted to be on the safe side I think in the meantime, you know interest cost that move down and particularly given the commercial paper program. We have we are capturing some benefits versus the original guidance. So I don't see anything material changing in 19 stressed environment going forward and we will continue to do what we have done so far which is really getting.
Our interest cost over the last five years down to a very good level considering the investment grade we have.
Okay. Thank you.
Thank you Brian .
Your next question comes from Chris Growe with Stifel.
Hi, good evening.
Hi.
Hi, Thank you.
I just had a question for you first off on just the broader level of investment you're putting behind the business and as we think about you gave some good kind of.
Forecast for the second half for profitability in any unique factors to keep in mind.
This is you've outperformed the first half or your investments even heavier in the second half than they were in the first half of the question and then just to understand how they are going emerging market adverse development market just to get a better sense of that please.
Yes.
Yes so.
We're trying to get ourselves into this virtuous cycle, whereby we invest more.
And that investment is concentrated in three areas one is and see the second punished route to market in the third one is R&D and as we invest more we want that to generate volume growth together with some pricing and that increases our gross profit dollars of which we reinvest part of it and.
And the other.
Part flows down to the bottom line in 2019, our thinking here is to largely reinvest most of that gross profit in the business.
We obviously are going to deliver on the ROI increase we had for the year, but.
If this is really a year of trying to get the momentum in our brands and protect them for the long term. So if we have the opportunity in the second half, yes, we are planning to.
To invest more.
I would also like to say that it's not just a question of investments. What we're also doing is trying to optimize our spending.
What that means is that we are.
Thing a lot of attention to our ROI on our investment activities, we implemented the new what we call marketing playbook, which is working well for US and is also shifting more of the investment to working media. So the net effect of what we really are spending on media and online.
It's more than the than the extra amount we are investing it's a shift within that spending too.
So.
The long answer to your question is yes, we will we see this year as an investment year still growing our ally, but we want to capture as much. This momentum as we can on our brands and so with what we are seeing coming at us in the second half we expect that we can do a little more.
As it relates to emerging markets versus.
Developed markets.
I'd say at a high level what is happening is that the very good trend that we've seen in the emerging markets, which was now for the fourth quarter in a row or growth of about 5%.
They were up 7.6%.
And.
We have very good results in places like India, China Southeast Asia Eastern Europe .
At this stage, we feel very good about these markets and.
We feel that we can continue to drive category development through increased distribution more investment in the brand.
Probably the biggest change came from developed markets versus the previous strength in this quarter whereby.
They now grew 2.8% almost 3%.
That was driven obviously by the continuous improvement in North America, and a very strong Easter season.
In the UK and Ireland so.
What I would say.
A good balance of volume and pricing.
Was also a.
Clear for us in that in the developed markets.
And.
We expect that we also saw us expanding our margins in those markets. This quarter. So overall I would say.
The positive signs in both in the UK.
Looking at this on the horizon that with throws off a chip maybe from a brexit or something like that but.
We see the momentum in emerging and developed markets continue.
Okay. Thank you for the answer there is lot of good color I had just a quick follow on which is in relation to the pricing that you achieved this quarter would you could we call that a sort of a full run rate based on what you've announced so far or is there more pricing still to come through that you've announced in the in the market rather than folks sensibly may still announce for the for the business.
Look I think Chris the price sensitive out talking about future pricing actions and.
I don't want to signal anything.
Just remember that we had some incremental pricing actions that took effect in in the second part all of last year.
And.
You know in general terms, what I would say is we have proven that.
We want to be disciplined in terms of pricing last year in the U.S. I think we were the first player to really move. So we will continue to be disciplined on pricing. We believe it is essential to the algorithm to support our franchises. So without talking about specifics, we see some places where there is inflation, where there is some commodity cost pressures and we will take appropriate pricing actions that as we as we see appropriate.
Okay. Thank you very much thank you Chris.
Your next question comes from the line of Steve Stricker with either.
Hi, good afternoon.
Hi, Andy.
So look at the start off I appreciate the color on Brazil was hoping to get a little bit more insight as to dimensionalizing, how much of the profit drag. It was just segment or total company profitability and how do we think about the recovery rate in the back half specifically is this.
You know weighing on your ability to fill customer service rates is it, causing any kind of distribution losses in Brazil.
Color there would be helpful. I have a quick follow up for look for Dirk.
Yep So I.
These operational issues in the quarter.
Adversely impacted the gross profit line by I would say 20 to 30 million. So it was a material impact.
The simple fact over the last couple of years at least Brazil has as an economy sulfur suffer quite the beat then.
The categories, where we compete.
Lost quite a bit of volume. So we really underwent a material change in the business and we featured in the past could achieve but which is one of the two plants. We have one in the south and the other one in the north.
As being very cost competitive, but the facts are we consolidated four plants down to these two plants and we had some executional issues that translate that first theme to inefficiencies and product that we have to scrapping the plans, but also.
In our logistics related issues in terms of distribution inability to have the right product in the right place and also extra cost.
The.
You know the recovery rate is hard to give you a specific answer they are what I would say, though is I don't think we would be fully sold by the end of Q3 and there might be.
Improvements in Q4, I feel hopeful that there will be improvements in Q4, albeit I can't tell you exactly what what they will be at this point in time in the overall guidance. We gave you we consider all those things and so we will provide an update clearly as size, we post Q3, and as we talk about bulk before but for the time being I can't say that we will be fully sold by Q3 or Q4.
Thanks, and then for journey, we've seen a lot of the global multinational companies that are also showing very good organic sales growth Reinvests also back into the core business. So to extent you had the ability to pull for some of the investment spend that you're planning for maybe the start of.
Early fiscal 20 into this year what are some of the priority country category combinations that we can look for the business to maybe improve or maybe even accelerate at the margin. Thanks.
Okay.
Yes, I mean.
For us the emerging markets are very important and the reason being that we see that a lot of the snacking growth around the world will be coming from those markets. So.
For us to invest more in places like India, China Southeast Asia Eastern Europe .
Loss of Brazil.
Those those are the places where we would think about at the same time.
We do feel that we have very good momentum in North America, and we have not necessarily.
Being able to invest a lot more versus the past in North America. So we are planning also there to increase our investment so that's the way I would.
Describe it it's about the emerging markets the ones I mentioned and then North America.
[noise].
Your next question comes from the line of Ken Goldman with Jpmorgan.
Hi, Thank you.
Hi, guys.
Yes, hi, it seems at least it's a possibility of a hard Brexit taking place at this point and.
I know you've spoken in the past about some of the preparation you've done to maybe mitigate the impact can you just update us on some of the steps you've taken since where do you stand with that and I imagine it's far too difficult to have any level of certainty here, but if you are any closer.
To being able to quantify some of the risks of a Brexit that would be a that would be helpful too.
Yes, well, it's difficult to speculate I can give you an indication.
What we think the possible effects out of a Brexit but.
To quantify that exactly is a little bit difficult things, we don't know which shape before Brexit will take.
Having said that the UK business is an important business for us.
It's also one of our powerhouse businesses, it's a snacking powerhouse with a very strong presence in chocolate biscuits and candy or it's a it's a market that.
Is doing very well for us, it's very profitable and growing at a very good pace and particularly the second quarter was a very good quarter for the UK.
Like I said, it's very difficult to speculate, but there's there's different forms of Brexit and if there is a hard Brexit there will certainly be implications to our business.
In the short term, we are largely talking about supply related issues and in Q1 as we were preparing for a potential Brexit in March we put in motion those plants.
What does that mean it means that we increased the level of raw materials, we have in the country. We increased the number of warehousing space we have four.
For finished products we contract more.
Distribution.
For trucks, and so we are ready to keep our production distribution no matter what.
We did that very well in fact that the rate golf our preparation.
One of the best if not the best preparation for a potential Brexit and we are going to put that plan back in motion.
We thought it would cover us very well on the on the short term potential effects of disruption in the supply chain.
However, there is.
Also a risk that there could be an inflation and currency devaluation as a consequence of Brexit and those artifacts that are much more difficult for us to estimate and it would lead to a number of other changes that we needed to implement related to pricing related to sourcing those are more the longer term effect and as said at this stage very difficult to exactly estimate what the the quantitative effect will be.
We are ready to deal with these challenges as you can imagine we are running scenarios and we are ready to implement.
We do believe that over the long term. This is a very strong market. It's a business that we do want to protect and we are sure that.
If we have to deal with any short term or even a little bit longer term disruption.
That in the end, we will be back stronger than before as you might know we have a very significant production presence in the UK and we see ourselves capable in the end to supply the UK from the okay if need to.
Great. Thank you very much.
Okay.
Your next question comes from Jason English with Goldman Sachs.
Hey, good morning, folks I guess I'll root.
Real quick I, just build off of of Kens question that I've got an entirely separate question.
The UK government Marsh announced a temporary.
Well since our proposal for temporary relief in the situation of a hard Brexit on import tariffs for up to 12 months that would appear to apply to most food products.
Do you believe that would be applicable to your business and could that be a powerful mitigator of any sort of near term disruption.
Look we did quite expensive.
Analysis of these we don't believe even after a temporary period that wouldn't be material tie impacting our business side. Given you know the stock chart, all our imports into the country.
As Nick said, we had a material prices in the UK to start with but also you know given what we import and the shape and form of Walton pork. We don't believe there will be much easier ongoing tight at this point in time based on what we know at this point, so I would say not only temporarily but also in the long term that would be most likely no material cost impacts for us at this point in time Thats, what we see I think as <expletive> said, a hard Brexit will might hamper our consumer confidence that would be most likely.
And the media currency devaluation on top of what we have seen these last couple of days.
But we will also see potentially inflation running up into into the counters and that might lead you know put consumer situations.
That might be the pre menthol, not only to our business, but to the overall economy. So it's hard to say exactly what will happen, but that that's really what we need to watch for and that's how we want to take as a company at long term stance, making sure that we protect the business. We have they are which is quite a good business.
Sure that makes a lot of sense. Thank you.
And then pivoting to my second line of question, it's really around gross margins.
I understand the Brazil math it looks like it was somewhere in the magnitude of 30 to 50 basis point drag on Gms this quarter.
But the lack of margin.
Flow through on the accelerating price growth is nonetheless, a little bit surprising.
Can you walk us through the puts and takes like Where's productivity coming in worse inflation, where sort of reinvest in product to expansion into a into other lower lower margin verticals that can mix down what are all those puts and takes that are holding back GMC.
I would say you know and we're clearly not going to disclose a gross margin or gross profit by either by region, but I can do assure you that as I look at pretty much all PNM by category and that business unit.
Around the world.
I can tell you.
The vast majority of those PNNT, let's make a lot of sense you see broad based growth and you see a nice balance of volume and pricing the volume effect and the leverage that it provides to our supply chain is coming into into effect. Then we see continued cost savings into into Caulks and overheads in some cases clearly there are.
Our outcomes then now then in others, but overall I would say again as I look around the world. We are quite in a good place in terms of five GP growth I think on a year to date basis. We are 20 Bips up in total company and again when you add back the potential impact of of Brazil, and the fact that in terms of your percentage margins places like Argentina are becoming a little bit more dilutive than that then you know we have seen in the past I think when you can see that those two effects.
I think we can say we are quite pleased you look at your high growth.
In Q2, North America growing almost 10% July you look at you know you and in EMEA, 5% up there we may mosquitoes investments in a in the agency line I think all in all the algorithm has we envisage in the first place is coming to fruition. It's not a you know that we are not believing the savings that volume leverage isn't there is the fact that this specific quarter we had.
Latin America being an outlier.
Okay. Thank you.
Thank you Jason.
Your next question comes from David Palmer with Evercore ISI.
Thanks, Good evening.
Two two quick.
Well good evening Hi.
First on chocolate your your chocolate business was holding or gaining share I think it was about 35% to 40% of its markets last year and now those numbers look more like two thirds of that business are holding your we're gaining share.
So thats a nice improvement could you talk about the biggest factors that have really turned your market share trends in chocolate around.
Yes, yes, well.
We are over indexed in eastern.
And particularly in Europe , and so what you saw in the first quarter was that.
It's kind of a normal trend in our business.
Easter This year was nothing in the first quarter was in the second quarter last year was in the first quarter. So you saw the difference and then the second.
Great. Thanks.
Well you know the.
Now we sort of.
That's helpful.
Okay.
Sure.
Lucky.
Got it and then you've talked in the past about a more decentralized management approach and that was going to dovetail with the greater attention to and perhaps spend behind some of your regional power brands, not just or global ones.
Is that or is that shift already begun and is that a factor in your results. This year or is that something more of a longer curve to it.
[noise] Oh, no that shift has started and so we've increased our overall investment than I would say.
Large chunks or I can't put an exact percentage on it but but I would call. It maybe 70, 80% is going into those local brands.
And we've seen a clear change of trend.
Since we've started to do that so local brands regional brands in the past would have been negative for us. They are now positive and they have been accelerating every quarter in their growth. So.
The intention was there we were executing and we're seeing the effect already very clearly.
In our results.
And do you think that that will be continuing to go.
An area of improvement even from these levels.
I would expect that we still have some some upsides at the moment there are growing.
In line with us is even slightly above or the categories. But these are brands that have not received a lot of investments for years.
If you take into account, we started about nine months ago, and really investing in them. So we haven't even seen a full year on the investment and the.
We're also not only increasing the investment, but we're doing a number of innovations.
Launching a number of healthier product with the.
Cleaner ingredients and so on so we.
A couple of things I think you said that the second half you expect it to be similar to the first and were you referring to sales and operating income growth both.
Because you know they are both running around 4%.
Ex currency and then secondly, I'm still trying to figure out you know the level of investment or at least roughly your gross profit dollars ex currency are up 4.4% year to date.
Yeah, that's about $200 million it is.
Is the answer you know something along the lines of half of that or.
Some some percentage of that <unk> I know you don't want to give us an exact number but I'm just trying to figure it out.
Yep.
So when I said when I was talking about the profile being compatible I was talking more about gross profit that ER and the like.
We gave you the coppell items that are masking that it'll be the underlying performance of our yes, and they relate as I said to DOCSIS. So I was really referring to <unk> to the bottom line more than the top line what I said on the top line is that we clearly see momentum in the business and you know we anticipate continued momentum in the second half Bolting themself caustic was and is one of your colleagues said Olson themselves that we are quite pleased we what we saw in chocolate.
But having said that the first off was positively impacted by what we called the the Halo effect of a great piece the execution and that is why the second part of the year might be lower than the 4% growth rate Oh, the first off as it relates to the level of investments and as we said.
For the year, we intend to invest give or take $150 million I think as you I I gave you enough elements to say how the second part of the year, we look like in terms of GP and why growth and then Ah we made that friends. What we spent in the first off so there is more to come in in the second half, but we will continue to invest.
Both global and local brands. We said we are investing you know you see as <expletive> said, it's not only the amount of money is the quality of what were doing elevating the emotional connection so far of our brands, but also in in in route to market. The leaned out the markets in a in places like India, Russia, we continue to invest and we won't.
To continue to invest and finally, you know indeed, we are also making material investments specifically around the you know that's the Nearne methodology is a giant methodologies. We gave you a few examples of things. We're doing so I think you have enough elements to do on this thing will wear.
How Q2 out Q3, and Q4, we look like in terms of GP and NOI.
And just to be clear the 150 is the the reinvestment for the total year, we're less or is that.
Great. Thank you.
Thank you perfect.
Your next question is from David Driscoll with Citi Research.
Great. Thank you and good evening.
Hi, David.
And I appreciate you guys get me in and I see what time, we are on the hour just just a couple of points. The first one is it's nice job on the first half of the year so far.
And then I wanted just to ask a little bit about North America. The margin in the quarter I can just a little bit more than 22% segment margin I believe that might be a record margin for North America.
Given the problems that happened on the on the malware attack et cetera can you. Just can you just take us up to date as Q, what really was the key driver for that margin and and would you expect that margin has has upside in the future. As you continue your progression on cost in lines of the future et cetera.
Look I think if I have that I can really tell you walk is the difference in in Q2 versus other quarters in North America.
East, we have created and a lot of discipline around.
Keep processes for the company, starting with the mom blending making sure that we shape up in a way that makes sense in terms of cost instead of shipping products from branch to branch, we are governing poor weather forecast through it better governance, all those flows all goods that that unit.
Complex, where we have.
No more than 50 branches and that quite a few SK using this gets you know governing that these is clearly a key we have created a lot of discipline and visibility and transparency around waste and waste for us is not only Walt we generate in a plan, but also you know returns on boots and I can tell you there is a material benefit coming through as Glen and the team have established processes to over and again, a again waste and ER and third.
But no less important is the fact that by having visibility and good understanding of how demand is shaping our factories are able to predict more reliably what they need to produce and when and so we have more efficient around scene in the company.
There is clearly also pricing coming through in a context, where last year, we saw inflation.
We price promptly I believe but the full benefit of price. It didn't come through left so now you have a more balanced situation income so pricing net net the fall. So these four elements are coming to do I think we can improve absolutely I think we can improve as we said North America is one of the networks, where we will be making more investments going forward and so I think in terms of upside potential.
There is more to come.
No. It's a very thorough answer one one follow on relating to outside North America.
It relates to chocolate, we've heard a number of us chocolate companies, taking price increases in the United States. You guys of course have to have your major chocolate operations in Europe and elsewhere is it can we draw any parallels between the price increases that were seeing in the United States in chocolate.
Where those price increases might be applicable to your chocolate operations outside the United States.
Or would you or did you really got to Disabuse me of that notion and say that these things there are more unconnected than that but it feels like North America and Europe should have some kind of connection in terms of chocolate pricing, but just love to hear your thought process.
Okay again.
It's really wouldn't be good for me to comment on future pricing actions in a in places like <unk> like Europe again.
That is too sensitive overall uptick I think there are a couple of things, though that a very clear at this point in time. One of these that are there is quite a bit of inflation not only in the U.S., but all around the world in terms of.
Specifically two items if one if these logistics costs.
And the second one is is labor costs and so I think you know overtime, we had to make sure that we price that the way might not happen in the short term, but over time, we have proven that we have been disciplined tool to price those costs away.
The second part I think it is very important to note that in terms of Ah you know the way we procure coal we have never hand to mouth and this year for instance, cocoa prices went off for us, but we were able to particular cohort of a.
Reasonable price, but I think it is fair to say that given some of the proposals that are coming out of.
He called the war in Ghana.
There is a you know a spike in a in coal cost and concepts like the leaving income differential are putting a little bit of pressure in the market and the cost of Copel has gone up so I think I've given you enough elements for you to draw some conclusions, but for me to be able to talk about specific pricing actions I think it is it is really hard.
Really appreciate the comments thank you guys.
Thank you. Thank you.
We have time for one more question. Your final question comes from Rob Dickerson with Deutsche Bank.
Oh, great. Thank you first and then.
Hey, how are you.
Couple of questions. The first question is.
Regarding the top line guidance and said you know potential implied slight deceleration if that does happen in the back half versus kind of the four what we saw in the first half.
The question I have though is.
It doesn't seem like pricing would necessarily be decelerating.
Just given you know.
Actually we're seeing flowing through in North America, maybe Latin America as well, there's not much in Europe , but no other parts of the or lets say your other.
Overall end market.
Basis is still seeing decent pricing.
And so then I look at it as well.
Okay, well, then obviously it would be more volume mix.
And there could be some nuance as to why well it again when I look in the first half right. The first half the volume performance in growth terms volume mix was essentially similar to what we saw in the first half of last year.
And then if we look at the back half the volume mix is a little bit easier last year to compare against so you know.
The question, even though word is basically if there is deceleration it seems like kind of what you're saying is maybe there's a little risk of nuance volume deceleration in the back half of the year because the first half was impacted by a well executed Easter.
It doesnt seem like pricing would decelerate, but then that's off of an easier second half compare so.
Like why would volumes really.
Decelerate that much if the compares easier and if pricing isn't coming down why would organic sales really decelerate. Thanks.
I have one more.
Yeah look as we said I don't think disease about you know.
Nope, having confidence in in the second part of the ore.
As seen momentum slowing down or as a as Andrew you asked the first question, having some discrete items seen in the first off that will turn into a you know issues in <unk> in the second part this is nothing around old any of these topics.
Again it is the recognition of the fact that in a in the 4.1% we had on a year to date basis in the first half.
That was a clear execution gains related to Easter and ER that is why the second part of the year might be lower than the 4% we see in the first off but I think in the end.
We have to feel good about the solidity of our Catholic It was the fact that the growth of the business is broad based again it is not about the quarter at 4.6% that they like and obviously I like the 4.6%, but these the good quality all resolved all around I haven't seen you know these types of volume mix and price gains in a long long time I was very pleased with the share gains that that we start seeing chocolate is fantastic you know.
We asked the losing a bit of sharing places like India, where we have 65% share, but you know if I take out India. All the big market. They are growing share and you know the same is applicable to be asking. So this is not about saying the second part of the year, we will have a slow down or if these are both recognized that into first off there was a positive impact new police there.
Okay fair enough.
And then one other question Ive two questions one's a little bit more so that's the first question is.
Just your JV piece right total income from equity investments in the first half year over year, it's up say, 30%.
So, obviously something's going well there.
As you know if you could just provide any color as to why there will be performing so well one and then two is that you know a run rate that we should be thinking about the lease in the near term for the back half.
I asked just given.
Obviously material to your total income.
Look we are very pleased and with coffee is it fair to say that they have performed very very well so in Q2 and in and the first stuff.
As you said the earnings grew respectively, 40 and 25%.
As kbps getting the synergies and they should be no surprise you know we are reporting KDB on a lag. So people understand what is going to happen in Q3 for KDB you have to look at a at their Q2 and Jvs capitalizing on nice successful business model and single serve Nespresso compatible business, which is doing very very well and the team is taking share in a in the major markets in Europe , mostly the company is also generating good cash flow and they have the leveling delevering fall off and so there is a subsequent interest cost saving so nothing has really changed in what we see in in J.D. and KBB, they're good financial investments for us they doubled in value since the inception of <unk> of the JV and as we said many times there is more upside potential for both businesses and we likely that clarity the vision of the potential and the flexibility of those dosing.
Restaurants offer.
So it doesn't sound like there's much urgency and let's say or any change to the strategic optionality thought process right, they're doing well, obviously Q1 Q2 that they've done very well.
Unless you really need the cash for some reason.
Let's just keep letting them do well, it's pretty much that yeah. I mean, we have good shareholder rights over both companies specifically for JB.
We could propose a price to job for which they have the right of first refusal.
And then if the value is not accepted we could take JD public through an IPO and clearly we would love to have it public mark for both investment.
As we believe there is more value. So yes, you're right nothing at this point us as really change, we see more upside potential for both companies.
Okay Super and then one last quick one is just your when you said back half profit would be similar to first half.
Profit means a lot of different things and maybe I just don't get it.
Sometimes they don't.
Is that you're just you're literally just saying operating profit or is that gross proper that is net profit net income would be similar on a dollar basis back half versus second half that's it. Thanks.
Yeah, I think you know the shape of that PNM wouldn't be similar to the first half.
I would say I will leave it at that clearly there is a little bit more investment coming in the second part of the about broad stroke.
The shape of the PNM is going to be similar.
Okay Super Thank you so much.
Thank you.
Thank you and.
As I said at the outset.
I am proud of this quarter's results and of the work the artwork of my colleagues across the globe.
I think this quarter than the first half show, how our leadership position and strategy is helping.
To drive the strength of snacking categories around the world and creating value for our shareholders.
And we do all this while remaining committed to delivering on our promise to create a future with people and the planet thrive.
Hi, just first half helps us to remain focused on our long term objective of generating volume given top line growth of 3% plus and fueled by a virtuous circle of increasing investments, which generates solid sustainable operating income growth.
Our progress to date gives me further confidence in the value of our strategy and our long term prospects.
Thank you for your interest in the company.
Thank you. This does conclude today's conference call you may now disconnect.