Mondelez International [MDLZ] Conference call transcript for 2022 q3
2022-11-01 21:14:02
Fiscal: 2022 q3
Operator: Good day, and welcome to the MondelÄz International Third Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by MondelÄz management and the question-and-answer session. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for MondelÄz. Sir, please go ahead.
Shep Dunlap: Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. 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, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our Q3 2022 earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, then Luca will review our financial results and outlook. We will close with Q&A. I'll now turn the call over to Dirk.
Dirk Van de Put: Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I am pleased to share that we delivered another robust quarter with high quality top line growth continued strength in both developed and emerging markets and strong profit dollar growth. This execution, combined with continued acceleration of our strategic initiatives, supports raising our full year revenue growth and adjusted EPS outlook. Reinvesting in our business is one of the best ways we can deploy capital. And I'm happy to say that we continue to increase investments in our brands and capabilities that should reinforce and build upon our strong foundation. We also continue to make great progress in reshaping our portfolio with the full integration of our Chipita business as well as the closing of our acquisitions of Clif Bar and Ricolino. We remain confident that the strength of our brands and our proven strategy position us well to deliver attractive, sustainable growth for the remainder of 2022 and beyond. Above all, we remain extremely confident in our people who remain relentlessly focused on delivering the right snacks for the right moment made the right way to consumers around the world. Turning to Slide 5. You can see that our strategy is continuing to drive a virtuous cycle. We are well positioned to deliver a strong full year '22 performance and long-term revenue growth. This quarter, our revenue growth was 12.1%, which means 11.2% growth year-to-date. The revenue was generated through continued volume growth as well as strong pricing necessary because of ongoing cost inflation, and it demonstrates the resilient demand for our brands. That revenue growth is fueling our gross profit, which is growing 12.8% for the quarter and 10.8% year-to-date. This very strong gross profit growth is allowing us to increase our A&C investments high single digit, which in turn will help us to continue to drive sustainable top line and repeating the virtuous cycle. The strong gross profit growth also generated, after investments, operating income growth of 9.6% for the quarter and 10.6% year-to-date while delivering great free cash flow results. As you can see on Slide 6, we delivered 12.1% organic net revenue growth in Q3. Volume remained solid relative to much of the sectors as consumers continue to choose our trusted and beloved brands even as we implement necessary pricing. We view our performance in the third quarter and year-to-date as further evidence that our long-term strategy continues to pay off. Since the launch of our new growth plan in 2018, we have consistently over-delivered on net revenue growth through a virtuous cycle of increasing investment, strong local execution and targeted incentives. We remain confident that this strategy will continue to deliver attractive growth in the quarters and years to come. Like many companies, as shown on Slide 7, we continue to navigate through a dynamic operating environment, driven by cost inflation, the energy crisis in Europe and supply chain volatility. Let's take a closer look at each of these dynamics and the steps we are taking to address them. First, we continue to face elevated input cost inflation, especially in the areas of energy, transportation, packaging, wheat, dairy and edible oils. To offset these challenges, we have implemented appropriate price increases across key markets, including Europe. Additionally, we have announced further pricing actions across numerous markets across the globe, including the United States, which takes effect in December '22, and we are preparing for '23 negotiations in other markets. We also continue to take appropriate action to hedge our commodity costs with greater flexibility while continuing to advance our ongoing productivity initiatives. Second, in terms of energy inflation and continuity, we remain focused on risk management tools and alternative sources to help mitigate the impact. And third, we continue to manage through volatility in the supply chain, especially in the U.S. due to labor shortages at third party as well as a continuing shortage of trucking capacity and containers. We are prioritizing key SKUs to protect share and continue to make progress in improving manufacturing and warehouse capacity. Turning to our categories and the consumer on Page 8. Our latest research shows that snacking continues to play a central role in consumers' lives. And as a result, our core categories of chocolate and biscuits remain resilient. Consumers in developed markets continue to prioritize groceries over other forms of spending, and they continue to view our brands as affordable indulgences. Meanwhile, in emerging markets, consumer confidence remains strong with growing demand for our categories and continued loyalty to our iconic brands. Because of this enduring brand loyalty, private label share is either flat or down in the vast majority of our markets. Shoppers continue to say they are much less likely to switch to private label in chocolate and biscuits compared to other categories. With the return to school, we are seeing growth in products popular for school lunches like biscuit multipacks here in the U.S. We're also seeing continued growth in chocolate bars, treat sizes, gifting and seasonal shapes in Europe. Looking forward to the Christmas season, the majority of European consumers say they plan to spend the same amount over the holidays, if not more, as in 2021. They also say they plan to spend more money at home and on gifting with less money spent on dining out and entertainment. These category dynamics combined with the enduring strength of our trusted and beloved brands give us confidence that we will continue to successfully navigate inflationary periods like today. Moving to our efforts around portfolio reshaping on Slide 9. I'm pleased to share that we are continuing to advance our strategy of strengthening our leadership in core categories through our acquisition and divestment approach complemented by strong integration playbook. Over the summer, we completed the integration of Chipita, a high-growth European leader in packaged croissants and baked snacks. Chipita provides us an important platform to further accelerate growth in the attractive biscuits and baked snacks category. More recently, we closed our acquisition of Clif Bar & Company, expanding our global snack bar business to more than $1 billion, anchored by the marquee brand widely loved for taste and sustainability. This business is up low double digits on a year-to-date basis and we are excited to take this great brand to the next level. And just today, we closed our acquisition of Ricolino, Mexico's leading confectionary company, doubling the size of our business and more than tripling our routes to market in the high-priority Mexican market. These are just the latest steps in our ongoing commitment to accelerate focus on our core categories, filling geographical white spaces, expanding our presence in high-growth channels and growing our presence in key segments and price tiers. We're confident that this focus will allow us to drive sustained growth accretive to our algorithm across the portfolio. As we continue to accelerate our focus on growth, we remain committed to doing our part to drive positive change at scale. At our investor update earlier this year, we announced that we have elevated sustainability to become the fourth pillar of our company's long-term growth strategy. Within this framework, you can see on Slide 10 that we recently launched the next chapter of Cocoa Life, our signature cocoa sourcing program. Cocoa Life already has delivered strong results. Over the past decade, farmer net incomes have increased about 15% in Ghana and about 33% in Côte d'Ivoire. Children are better protected with more robust monitoring and remediation system, and we're helping to prevent deforestation by educating farmers about optimal farming practices. But cocoa farmers and their communities still face big systemic challenges. That's why we're investing another $600 million, bringing our total investments to $1 billion with an aim to source 100% of our cocoa volume through Cocoa Life farmers by 2030. While we are excited about the promise of these investments, we continue to call for more collaborative efforts and collective actions to drive greater impact, including new private-public collaborations. We are proud of our leadership in helping to make cocoa right, and we'll keep you updated on our progress. Finally, before I hand over to Luca for more details on our financials, I would like to make -- sorry, to take a moment to share some updates to our leadership team. First, I would like to congratulate Sandra MacQuillan, our Chief Supply Chain Officer, on her well-deserved retirement. Since joining MondelÄz in 2019, Sandra has brought focus and clarity to our supply chain organization, with a people-first leadership style and an unrelenting commitment to doing it right from shelf to field. We thank her for her tremendous contributions. Frank Cervi has assumed the role of Chief Supply Chain Operations Officer, reporting directly to me. Frank is a proven leader, bringing more than 30 years of global supply chain experience to the table. He has a strong drive for executional excellence, tackling big challenges and pursuing continuous improvement. His recent roles within MondelÄz, including, most recently, leading supply chain strategy, position him well for continued success. Additionally, after a successful 34-year career in research and development, Rob Hargrove, our Chief R&D Officer, will be retiring January 2023. During his tenure with MondelÄz, Rob successfully transformed the R&D function from a complex blend of category and geographic activities to a well-connected, technically rigorous global community. We thank him for his many years of dedication and accomplishments. With Rob's retirement, we welcome Daniel Ramos as our new Chief Research and Development Officer, reporting directly to me effective November 8. Daniel is a seasoned global executive with more than 25 years of R&D and consumer-centric innovation expertise. He joins us from The Estée Lauder Companies where he had a strong focus on advancing sustainable packaging initiatives. One final piece of leadership news, Javier Polit, our Chief Digital and Information Officer, is now serving on our MondelÄz leadership team, providing enhanced strategic oversight as we advance our commitment to becoming the digital snacks leaders. Since joining the company almost three years ago, Javier has elevated our technology initiatives and infrastructure at both the global and business unit levels. Javier will continue to report to Luca. With that, I will hand over to Luca for more details on our financials.
Luca Zaramella : Thank you, Dirk, and good afternoon, everyone. Our third quarter results were strong from volume, revenue, profit dollar growth to cash flow generation. In addition, growth was broad-based across categories and brands. We delivered revenue growth of more than 12% with 1 point of growth driven by volume/mix. Emerging markets were a clear highlight for the quarter with broad-based trends on both top and bottom lines. Emerging markets net revenue grew more than 24% in the quarter, with 8 points of that growth coming from volume/mix. Developed markets grew 5.2%. Volume/mix was down 3 points, entirely as a result of customer disruptions in Europe related to pricing negotiation, nearly all of which has since been resolved. Turning to portfolio performance on Slide 13. Our chocolate and biscuit franchises continue to demonstrate their resilience and deliver strong results while ongoing improvements in mobility helped fuel robust gum and candy performance. Biscuits grew 11.5% for the quarter, with nearly 1 point coming from volume, albeit mix was negative as we suffered from customer disruption in Europe. Emerging markets again grew strong double digit, while developed markets increased high single digit. Oreo, Chips Ahoy!, Ritz, Triscuit and Club Social were among brands that deliver outstanding growth. Chocolate grew more than 9%, of which 1.3 points were driven by volume/mix, with increases in both emerging and developed markets. Emerging markets posted exceptional growth of strong double digit. Cadbury Dairy Milk, Toblerone, Lacta and Bis all grew double digits. Gum & Candy grew more than 22%. Brazil, Mexico, Western India and Middle East, North Africa, all performed very well. Now let's review our market share performance on Slide 14. We held or gained share in 45% of our revenue base, which includes 20 points of headwind coming from U.S. supply chain constraints. We are seeing gradual improvements in share and service levels as we closed the quarter and early into the fourth quarter. And in fact, share in the U.S. should turn positive for the last few readings of the year, and we should enter next year with a favorable trajectory. Chocolate performed well with 65% of our revenue base holding or gaining share. This number is still reflective of our good execution in the category and our ongoing investment, but some headwinds are expected, given the customer disruption in Europe. Our biscuit business held or gained share in 35% of our revenue base. This includes 35 points of headwinds from the U.S. supply chain. Now turning to Page 15. In Q3, we posted gross profit dollar growth of plus 13% and plus 10% for EBIT. Year-to-date, we have delivered nearly $900 million in absolute gross profit dollar growth, a record high for our business. This dollar growth enables us to continue investing in brand-building to drive our virtuous cycle of growth. Although organic top line and profit dollar growth are key focus areas, cost excellence remains an important part of our DNA and an enabler in this environment. To that end, we continue to make good progress around digitizing the enterprise and realizing efficiencies, reducing nonessential overhead spend and driving simplification. Turning to regional performance on Slide 16. Europe grew 5.2% during the quarter. This includes nearly 5 points of volume/mix decline entirely linked to customer disruptions from a round of pricing negotiations during Q3. Importantly, as I already said, we have successfully implemented virtually all of the price planned. We continue to support our brands with meaningful investments in the region to ensure consumers stay loyal to our categories and franchises. OI dollar for the quarter declined by 7.4%, driven by customer volume disruption and ongoing commodity pressure. Now that pricing has been implemented, we expect margin recovery for Europe in Q4. North America grew 12% in Q3, driven by higher pricing in biscuits, strong candy growth and robust increases from our ventures businesses, particularly Tate's and Give & Go. Volume/mix was roughly flat. North America OI increased by more than 20% during the quarter due to higher pricing that was implemented in Q2 as well as some benefits related to the factory closings last year and the addition of Clif. AMEA grew 14.6% for the quarter with strong volume/mix growth of 8.5 points and broad-based growth across all of our business units in the region. India grew strong double digit for the quarter, driven by both chocolate and biscuits. China increased high single digits despite COVID restrictions in certain cities, while Southeast Asia delivered robust double-digit growth across all snacking categories and Australia grew mid-single digit. AMEA increased OI dollars by 17.2% for the quarter as volume leverage and pricing were partially offset by commodity and transportation inflation. Latin America grew 31.6% with mid-single-digit volume/mix growth. Similar to Q2, this trend was extensive with double-digit increases across every single category. Brazil, Mexico, Western India business unit all posted double-digit increases for the quarter. OI dollars in Latin America grew nearly 50% for the quarter. This increase was driven by broad-based volume growth, pricing and ongoing improvements from the Gum & Candy categories. Next to EPS on Slide 17. Q3 EPS grew 15.7% at constant currency. This growth was primarily driven by operating gains. And despite significant currency headwinds, we grew reported dollars by nearly 6% in the quarter and 4% on a year-to-date basis. Turning to Slide 18. We remain focused on generating strong free cash flow. Year-to-date, we have generated $1.9 billion, including a onetime expense of $300 million related to the Clif acquisition and buyout of the non-vested employee stock ownership plan. This was part of the originally disclosed purchase price, but as it relates to the ease for employees and deemed compensation, it is reflected in cash flow. This strong free cash flow performance has enabled us to return $3.3 billion to shareholders year-to-date through share repurchases and dividends. Turning to our outlook on Page 20. We continue to see positive momentum in the business as a result of our strong position within attractive categories, significant brand support and consistent execution. For the time being, our categories are resilient and continue to see lower elasticities than historical levels. Given the strength of our performance through the first 3 quarters, the successful implementation of pricing in Europe and the overall health of demand trends in our business, we now expect, for the full year: organic net revenue to grow 10%-plus versus our prior outlook of 8%-plus; adjusted EPS to increase 10%-plus versus our previous outlook of mid- to high single digit; and free cash flow of $3 billion-plus, which includes the $300 million of expenses related to the Clif ease-up, which would indicate stronger underlying results. We continue to expect broad-based growth in our core categories and markets. We also expect a significant contribution from pricing, and we continue to plan for double-digit cost inflation. We have just announced another round of pricing in the U.S. to reflect continued inflation and positive impact of our commodities coverage in 2022 seizing current spot levels in 2023. While we successfully concluded our European pricing with disruption below our anticipated levels, inflation continues to be a concern in Europe, particularly with energy, that despite some EU-driven measures is still a significant headwind. Energies has broad repercussions, both on pack cost and other raw materials. We expect another round of pricing in Europe as we enter next year. Our EPS outlook also now factors in $0.26 of headwinds related to ForEx impact. $0.19 of this amount have already been included in our first three quarters. At current ForEx levels and outlook, EPS in reported dollars would be positive year-on-year, which shows the resilience of our business. With that, let's open it up for questions.
Shep Dunlap: Operator, we're ready for the first question.
Luca Zaramella: Operator?
Operator: Our first question comes from Bryan Spillane of Bank of America.
Bryan Spillane : All right. Great. Maybe just to start off, Dirk, we've -- obviously, there's been a lot of questions in our world around just current events, current affairs. So could you just give us maybe a little bit of a -- as-you-see-it-now kind of the state of the union in some of your key markets and just how the consumer is holding up and just how all these macro pressures may or may not be affecting the markets as you see it now?
Dirk Van de Put : Yes, yes. Thank you, Bryan. Well, first, on the results, I would say we have a very strong top line performance, which I think is a testimony to the resilience of our categories, which is important to take into account. We see signs that consumers really want to continue to consume chocolate and biscuits. I think our pricing execution is now really coming through. And on top of all that, we have volume growth, which is quite unique in today's world. Obviously, you've seen that the emerging markets are a highlight in Q3 but also year-to-date with a broad-based strength from China to India to Brazil. We're doing well in all of our emerging markets. Our margins are a little bit impacted by customer disruptions in Europe. Sales in Europe overall were good, but there was some customer disruption so sales could have been better, and that also has affected our margins a little bit. And then our profit, our bottom line is ahead of algorithm and could have been better without that European impact. So we're increasing our view on what the year will look like from a top line and a bottom line perspective. Now particularly that our pricing in Europe is complete and behind us. And so yes, FX is impacting our EPS but we are still showing real growth in -- or growth in real dollars. So overall, I would say the results are good. So if you look a little bit beyond that, what does that mean? From a consumer perspective in the first place, we see in emerging markets consumer sentiment being very solid, very positive. I'm talking about Southeast Asia, India, China even. And so there is a certain optimism. And the degree of strength in the consumer confidence in emerging markets for us is almost to pre-COVID level. Of course, developed markets, we see a very mixed picture, challenged in Europe, as we all know, relatively optimistic in the U.S. In the middle of all that, as I already said, our categories, we expect to continue a strong buy. We see more and more signs that consumers continue to see or increasingly see our categories as an affordable indulgence. We see consumers saying that chocolate is really something they cannot live without. And so we believe that the spending decrease that we will see from consumers eventually, as inflation keeps hitting them, is going to be probably more in the big ticket items. Grocery seems to be doing overall pretty well, I would say. I think we also are benefiting from the fact that we have strong brands in which we continue to invest quite significantly. That's part of our thinking, and I think that is helping us in our results. Pricing, of course, played a role. On pricing, where we stand is that we've just gone through our second round of pricing this year in Europe. We've announced a third round of pricing in the U.S., which will take effect in December. And we are starting our negotiations in Europe for the typical beginning of the year 2023 pricing round. As it relates to Latin America and AMEA, the pricing that we implement is more fragmented, but in most cases, we're also in our third pricing round. And so far, it looks like that will go well, this new pricing round. Of course, we have to see what happens in Europe, where we expect more customer disruption in the beginning of the year as we announce the pricing. From an elasticity perspective, maybe I would say that, that remains below expectations. It is lower than it was last year even, certainly lower than it was pre COVID. In our forecast, we are foreseeing higher elasticity effects because we believe that eventually, there will be a bigger effect, but so far, we're not quite seeing that. And then from a cost perspective, we've seen some commodities showing signs of pulling back but we still expect significant inflation in '23 and hence, the pricing rounds we have to go through. I think we're very well positioned for '23. We have to continue to price in light of the inflation. We will increase our focus on RGM, revenue growth management. And we continue to invest to drive volume growth and, of course, net revenue growth. And I think as I said before, we will see some volatility in Q1 in Europe as we implement pricing. I can go maybe a little bit deeper because I know that it's on everybody's mind as it relates to the European consumer and what are we seeing there, might be useful to do so. What we see is that they continue to prioritize grocery spending. They seem to be choosing that instead of spending on other discretionary items. So we see a clear decrease in entertainment and leisure, in travel, in restaurants, in eating out, in clothing, personal care, household goods. That's where we see the decreases in Europe but not in food and not in our categories. So the consumer is also relatively positive, we see, in Europe. They're very aware of the current situation. 80% express is concerned with the current situation and they all understand that things are going to be rough. But 60%, for instance, of consumers in the UK or Germany believe that six months down the road, their situation will be better. And in France, that sentiment is even higher, which is understandable because there the energy price effect is lower for them. Chocolate is highly desired. We see more and more signs that consumers are saying it's the snack they cannot live without. And so I would say, concern, short term from consumers, relatively optimistic and they keep on buying our categories, which is reflected in the numbers that you saw, which includes, as I said before, some client disruption. I hope this gives you an idea, Bryan.
Operator: And next, we move to the line of Andrew Lazar with Barclays. My apologies, Andrew. If you could resignal, we'll move next to Ken with JPMorgan.
Ken Goldman : I recognize it's too early to discuss next year in full and I wouldn't anticipate any specific numbers. But I think a lot of people are looking at maybe some tailwinds and headwinds in a broad sense. And I was hoping to kind of review some of these and see if I'm missing anything big. So on the tailwind side, you'll have wraparound pricing plus new pricing. You should have good organic volumes still on underlying demand. You'll have strong advertising again. Maybe the same dollar inflation but it will be less on a percent basis. And then you'll have the top line benefits from acquisitions, right? And then in terms of headwinds, maybe a little bit less pricing than '22, still some macro uncertainty in Europe and Asia, still some new regulations in the UK. you have to wade through. And then, of course, you'll have FX, higher interest expense and lower pension income. So I know I'm running through all these pretty quickly. I don't mean to put you on the spot, but does anything kind of stand out that's major that I'm missing or getting incorrect in that kind of quick list there?
Luca Zaramella : Yes. Maybe I think the only 1 thing I would add to that equation, Ken, is the synergy that will come to fruition through the acquisitions of Chipita, Ricolino and Clif. And those are not only revenue synergies, as you mentioned, they are also cost synergies and better bottom line. I think in general, the way we think at this point about 2023, it is that consumer demand fundamentals are still strong, and we believe we are in a good place in terms of revenue and demand for next year. As we've just said, we compete in resilient categories. And we have created strong loyalty through the investments we have been making in our brands. I think importantly, as you dissect the regions, emerging markets are doing very well. I think looking at the revenue number, 34%-plus, 8% volume growth in the quarter, it is simply amazing. And it is important to say here that particularly on this, we still have quite a bit of headroom in terms of distribution penetration of our categories and not to mention the value of categories like cakes and pastries and et cetera. I think in terms of the U.S., it is on a good trajectory. I mentioned a little bit the share trajectory that we see going into next year. And as we said, we are about to implement another round of pricing. I think the question mark is a little bit Europe but pricing there is inevitable. We'll see what happens with customers in Q1. But importantly, we have been investing in brands there as well. We have been creating bonds with consumers. And as we said, I think we believe our categories are still a necessity these tough times. So all in all, I think we are going to have an algorithm year, but let's stay tuned because quite frankly, it is a little bit premature at this point in time to give you guidance for 2023.
Operator: Next, we can go to the line of Andrew Lazar with Barclays.
Andrew Lazar : Maybe to start off, just picking up on the emerging market commentary. Obviously, the results there remain really standout and probably better than many had surmised or forecast, given how volatile some of these markets can be. Maybe you can just get into a little bit more detail on just a couple of the key largest emerging markets and kind of how you're thinking about how those look as you go forward and what you're sort of building into the forecast? And then I've just got a quick follow-up.
Luca Zaramella : Yes, maybe I'll take that and Dirk can also chime in here. Look, reality is we are very pleased with emerging market performance. And I think it has been quite strong all around. When we look a little bit beyond the last three quarters, I would say that all emerging markets pretty much bounced back very well from pre COVID and -- or for COVID. And I think the performance versus pre-2020 has accelerated in those markets. We have been consistently investing and that is paying off. We are not privy to all the P&Ls for emerging markets, but what I can tell you is that they are delivering reported dollar top line growth. They are delivering top and bottom line dollar growth, and importantly, generating quite a bit of cash flow for us. So I think from a return of capital is really something that is remarkable. We still have huge headrooms, I believe, with brands like Oreo, Milka, Cadbury, et cetera. And I believe we will be -- we will continue to be positively surprised by this market also going forward. Look, beyond the usual suspects like India, China, et cetera, and those are markets that continue to do very, very well, we are particularly pleased with markets like Southeast Asia at this point in time. We are particularly pleased with markets like Brazil. We continue to do very, very well and generate solid top and bottom line in those markets. I think WACAM, which is Western Andean region bouncing back from pre COVID, particularly through Gum & Candy. But importantly, the light motive of all these markets is the performance of Oreo, which is just amazing. So I think all in all, I would say I can't call out one specific market here. It is pretty much all of them doing quite well.
Andrew Lazar : And then you've talked about a lot of the -- some of the incremental pricing moves, right, that you've made or are in the process of making to try and better position yourself for what's coming next year. Would we anticipate at this point being in a point to enter the year where you would have all of what you need in place such that there wouldn't be as much of, let's say, a lag to start the new year? Or should we brace ourselves maybe for the sort of consistent lag of getting incremental pricing in before you really fully catch up again to the type of cost inflation that you're looking for next year?
Luca Zaramella : Look, reality is pricing for more than half -- more than 50%, has already been taken or announced. And so as a matter of pricing for next year, you have to think about carryover of announced pricing being for more than 50% done. Obviously, as we said, there is the U.S. coming as of December, and that will add to the 50%. I think in general, your assumption is absolutely correct. The only 1 distinction I would make is Europe. And Europe, I think, will have a little bit of a lag compared to the necessity of pricing because particularly, energy costs are a reality right now. And so you're going to see some margin pressure potentially in Europe in Q1 and potential customer disruption will compound on that. I think for the rest, you are correct.
Operator: Next, we go to the line of Robert Moskow with Credit Suisse.
Robert Moskow : I was hoping you could give a little more color into the logics for this third round of price increase in the U.S. Are you taking it because you have commodity hedges that are rolling over and can no longer protect your costs? Are you taking it because packaging costs are rising higher? Could you be more specific as to that? And then also, are you also trying to price through some of the knock-on elements of inflation, like labor or energy? Or does the logic still just focus on the kind of components of the product?
Dirk Van de Put : Your assumption is right. It's a combination of everything you said. So our approach to pricing is that the additional costs we see every year, which could be from a commodity perspective, packaging, labor, transportation, we are trying to price away. So we do have a number of hedges that are coming off. We are careful on the hedging for next year because it could, to our opinion, go both ways. Prices could -- or cost could still go up. We want to hedge the right way against that, but we also need to be careful that commodity costs don't come down and that we can benefit from that. And so the short answer to what you said, it's all of the above. The good news about the third round of pricing in the U.S. is that it's been announced and it's been accepted by the clients. We will see how the consumer reacts, but so far, the two previous price increases, we have not seen a major impact on consumer offtake and penetration and frequency, volume growth and so on is all still very strong. So we have good confidence that this price increase will go through. And then we should be okay unless something happens in our cost picture.
Operator: Next, we go to Chris Growe with Stifel.
Chris Growe : I just had a couple of questions for you. The first one would just be that you've given some commentary around, obviously, some more pricing in North America. It sounds like a little better volume performance in Europe. I just wanted to understand around those factors and perhaps as others to consider. Would you...
Dirk Van de Put : Hello?
Operator: Mr. Dickerson. My apologies. Next, we move to Mr. Dickerson with Jefferies.
Robert Dickerson : Maybe just kind of a broader question for you, Dirk, around A&C. Obviously, we keep hearing a lot of people think promotional activities going need to increase because you see still increase, but I've heard a lot of C-level managers from food companies, CPG companies say actually now price as well as elasticity stays benign, don't need to increase promotional side while at the same time on a low basis as we saw in Q3. You obviously continue to really invest behind your brands. So I guess kind of quick, almost two-part question. One is just kind of what's the current perspective on kind of go-forward promotional needs with the competitive backdrop? And then two, should we be thinking as we go forward, let's say, even two years or three years that of that rate of that year-over-year A&C spend could kind of mimic the rate of the year-over-year revenue growth spend as you may have some needs, especially with some of the recent acquisitions? Or is there operational leverage that could come out of that? That's it.
Dirk Van de Put : Yes. Well, I would say that in the current environment where we have to increase our prices quite substantially, it is important for us to keep on increasing our A&C spending because we need to make sure that the consumer has trust in our brands and really want to consume them. And we can clearly see the effects of this year after year increasing in our spending. We can now see -- although overall, there's not that much movement into private label, in the market where there is a little bit of movement in private label, it's not so much coming from our brand. And I think that is a reflection from the spending that we've had. Going forward, particularly since we're seeing an acceleration in our top line, particularly since we're seeing our volume working for us, I would say we don't really anticipate that we're going to change that formula. You know the way we think about this. We grow our gross profit at an X percentage. But this quarter is quite strong, I would say. And we then want to flow half of that back into investing in the business and half of that in the bottom line. I don't think that will necessarily change. It's working for us and the business is accelerating. As it relates to the acquisitions, obviously, we have foreseen, in some of the acquisitions, a significant investment because we do have cost synergies, which as Luca said, will start to show up next year in our results. But we also have top line synergies. And we feel that some of the brands have quite good potential, but they might need some investments. So we're going to use the same formula as it relates to acquisitions as we are using on the rest of the business. Will, over time, we do a constant measurement, which is about advertising sufficiency? That still shows that increasing our advertising will lead to increased volume, will lead to increased net revenue growth. And so as long as we can confirm that picture, we feel that this is the right track for us. As soon as we would see that, that is not the case anymore. Obviously, we would not keep on increasing our A&C. But at this stage, I think it's working. We don't see a reason to change it.
Operator: We return to the line of Chris Growe with Stifel.
Chris Growe : Okay. You got me now. Yes, if you didn't like that question, you didn't have to cut me off. I'm only kidding. So I was just going to ask about the gross margin and just to understand with more price -- with pricing -- more pricing coming in North America, it sounds like a little better volume performance in Europe. Should we expect a better balance of pricing and cost inflation in the fourth quarter and therefore, some sequential gross margin improvement?
Luca Zaramella : Look, I think as a matter of fact, we don't give much guidance around gross margin. But the way you have to think about it is there is gross profit growth in terms of dollars that we commit to and that we are going to deliver. As you think about gross margin percentage, I think particularly, the U.S., Latin America and AMEA are on, I believe, a solid ground. Obviously, in Europe, you're going to see the benefit of pricing but do not necessarily neglect the fact that particularly around energy, there is more costs coming our way. Now for the year, we are 100% covered in terms of commodities and ForEx, so we have visibility. I think you're still going to see a little bit of margin pressure in Q4. But importantly, you're going to see strong dollar growth, and you're going to see that flowing partly to the bottom line. We will continue to invest. And as I said, as you think about particularly Chipita and if you think about Clif, there will be some synergies coming our way.
Chris Growe : Okay. And just one other question on -- there was a comment about mix being a bit of a drag. I just want to understand, is that geographic mix? Or is that something you're seeing in terms of your product assortment, your SKUs? Any kind of trade down or smaller pack sizes, that kind of thing?
Luca Zaramella : No, I don't think that it is anything concerning. What I said as it relates to biscuits is that volume was up but volume/mix was partially down. And the reason for that is that mix in Europe because of customer disruption caused a little bit of the problem. So there were product lines, particularly in France and other places, that are more profitable than others around the world, and those were mostly impacted by customer disruption. We have also to realize that customer disruption in terms of margins is a little bit higher because obviously, we still have fixed costs. And so the marginal contribution of those lines is a little bit higher. But mix is not a concern. And as we will start seeing biscuit growing volume more consistently most likely in the U.S., I think you're going to see the benefit of mix coming through. But there is nothing really to worry about down-trading or anything else.
Operator: Next, we go to the line of Pamela Kaufman with Morgan Stanley.
Pamela Kaufman : So your full year guidance for at least 10% organic sales growth implies that Q4 slows to high single-digit growth compared to over 11% organic sales growth year-to-date. So how should we think about the degree of conservatism in your outlook? And have you seen any changes in the operating backdrop that make you more cautious about the near-term trends?
Luca Zaramella : I mean, your math is right, obviously. The implied Q4 growth is 7%-plus, but importantly, there is a plus in there. So we might have more than 7%, which is something that obviously we might have. Reality is we are about to implement pricing actions and what we want is to end the year, particularly on the trade stock side, on a good position. We don't want the trade of retailers to be impacted by more stock. And so you might call us conservative and we will see. Reality is into the current guidance, which is 10%-plus on both revenue and EPS, I think we feel quite comfortable that there might be a little bit of upside. But we will try to make sure that we end the year in the right place in light of 2023.
Pamela Kaufman : Great. And then can you talk about the drivers of your market share improvement and earlier expectations for market share improvement in the U.S.? Where are you in rebuilding capacity on inventory levels on some of the brands where you saw capacity constraints shortages?
Dirk Van de Put : Yes. So as we said in the last month, we've already seen market share gains. We expect that to continue and we expect a good tailwind market share-wise into 2023. The overall industry headwinds are moderating. That is helping. So logistic challenges have improved. Still a little bit of issues on cross-border transportation from Mexico. But within the U.S., we're doing quite well. The labor market is easing, so our third-party manufacturers are having an easier time with that. And so I would say turnover is still high but we are continuing to be at a good staffing in the plant. As a consequence of all that and us sort of focusing on the key SKUs, doing a number of changes in our factories, making sure that we have longer runs of SKUs and so on, our service levels have consistently improved now every single month in the quarter. So we're now back in the high 70s, nothing here to brag about but clearly improving. The consequence of that is that trade inventory levels are continuing to recover, so we have less out of stocks, and that starts to show in consumer offtake. Most of our biscuits brands are already in positive share territory. In September, our biscuit share was up, as I said, and we expect that share growth to accelerate in Q4 because the on-shelf availability recovery is going quite well now. On top, we will increase our A&C investment in the fourth quarter in the U.S. We, so far, had held back a little bit because of those supply chain issues. But now to accompany the price increase, we're going to significantly step up our investments. So we expect that we will enter '23 with a good momentum in the U.S.
Operator: Our final question for today comes from the line of John Baumgartner with Mizuho.
John Baumgartner : I just wanted to come back to emerging markets and specifically the vol/mix component of growth there. Can you just speak a bit more to the breakdown between the contributions from underlying consumption? I guess just from the COVID recovery but then also specific to your investments, whether it's distribution growth, innovation, the local jewels, regaining share. How would you rank order the contributors to vol/mix? And then should we expect any change to the balance of those drivers going forward?
Dirk Van de Put : Yes. So I think it's a mixture of the two in the sense that we have very strong investment in our brands. We have a confident consumer in emerging markets, and that is leading to robust volume growth. They are also more used to an inflationary environment. And I'm talking about the consumer but also about our teams to constantly, year after year, deal with this pricing and RGM. So that is leading to very robust volume growth, I would say. Our volume in Q3 is up 7%, which is quite extraordinary. The other thing I would say is that we are also increasing our distribution, which is an added benefit. If you think about China or India, we're literally adding tens of thousands of stores every year through our distribution and that obviously helps. The third thing that I would mention is the strength of Oreo and the fact that we are investing now across the board a little bit more in Oreo, and we're seeing good results from that, so Oreo's becoming very strong for us in these markets. And we -- for instance, in Mexico, we expect to see some big effects from Ricolino where we are tripling our route to market. So that will start to play a role also. So I would say it's a combination of very good investment, confident consumer, careful management of RGM. We are not doing across-the-board price increases but playing it very careful in the different countries, combining with good distribution gains. That is what's leading to that strength in emerging markets for us.
Operator: This does conclude today's program. We thank you for your participation. You may disconnect your lines at any time.
