KHC
#Thank you, <UNK>, and hello, everyone
I'll start on slide 5 with our U.S
As expected, organic net sales performance continued to improve in Q3 to a 0.4% decline
Volume/mix performance was in line with what we saw in Q2.To the plus side were consumption-led growth in Lunchables and P3, gains in foodservice and a roughly 30 basis point benefit from hurricane-related consumer pantry loading
But these were more than offset by distribution losses in nuts and cheese, as well as lower shipments in meats and coffee
By contrast, pricing began to come through stronger in Q3, reflecting higher prices in cheese and bacon to address rising commodity costs, as well as pricing in desserts that were partially offset by the timing of promotional activity versus last year in a number of categories, including Oscar Mayer cold cuts and Capri Sun ready-to-drink beverages
We also saw stronger EBITDA performance in Q3 than either Q2 or the first half, with adjusted EBITDA up 6.8%
As <UNK> mentioned, incremental Integration Program savings of $125 million between the U.S
and Canada was a key contributor
Beyond Integration Program savings, lower overhead costs and favorable pricing were partially offset by unfavorable key commodity costs, particularly in meats and cheese
On our last call, <UNK> talked about a better balance of pricing and key commodity costs in the second half versus what we saw in the first half
While this did, in fact, happen, it was less pronounced than anticipated, due to a step-up in dairy and bacon costs during the quarter
Going forward, there are a couple of factors that will impact U.S
performance in Q4. Organic sales growth in Q4 will see a 30 basis point headwind from hurricane-related consumer pantry loading in Q3; as George mentioned, delayed production line start-ups impacting cold cuts; as well as the fact that we're up against the strong 2016 fourth quarter that included some degree of retail inventory build that we don't expect to repeat this year
That said, we do expect solid EBITDA growth to continue, reflecting our ongoing focus on profitable sales, as well as further cost savings that I'll speak to later
Let's turn to slide 6 and Canada, where in the third quarter we continued to see our focus on profitable sales pay off
Pricing largely reflected increased promotional activity versus the prior year, as we're essentially seeing 12 months of merchandising activity being fit into the last nine months of this year
This is due to the delay in reaching go-to-market agreements with key retailers in Q1. Volume/mix mainly reflected ongoing consumption growth in condiments and sauces that was offset by lower shipments of mac and cheese versus the prior year
At EBITDA, similar to the U.S
, we had solid mid-single-digit constant-currency growth and more than 200 basis points of margin expansion
Here, gains from cost savings and lower overhead costs, as well as improved product mix, more than offset the impact of lower pricing from higher promotional costs versus the prior year
Looking ahead to Q4, we expect a similar picture to Q3 on the top line with solid underlying growth and a good level of in-store activity
However, with the strong headwind in December as we expect to end 2017 with lower retail inventory levels than seen at the end of Q4 last year
At EBITDA, grocery continue to improve from a combination of cost savings and a better balance of pricing and input costs versus the prior year
That brings us to Europe on slide 7, where we saw a very solid quarter
Pricing was sequentially better than Q2, but continued to be weighed down by trade investments to address competitive activity in our Italian infant nutrition business
Volume/mix improved to 4.1% growth, driven by strong consumption gains in condiments and sauces across the region, as well as gains in foodservice, although there was a small benefit within all of this from shipment phasing versus last year as we mentioned on our last call
Importantly, the ongoing stable consumption growth in the UK gives us the confidence that the business is on the right path
At EBITDA, we continued to benefit from volume/mix gains and strong efforts to control costs, and this more than offset unfavorable input costs in local currency driven by transactional currency headwinds
Going forward, in Europe, we don't expect organic sales growth in Q4 to be quite as robust as Q3 due to a combination of program timing and comparisons
However, we do expect to see a combination of organic net sales growth and cost efficiencies continue to drive EBITDA growth
Finally, let's look at our Rest of World segment on slide eight
Clearly, the 3.6% organic net sales growth was not the acceleration we had expected and remains a lower rate of growth than we would expect on an ongoing basis
We did see strong, double-digit gains in markets like Indonesia, China, and the Middle East, driven by the focused investments we've been making to drive condiments and sauces, as well as our Planters nut businesses, and this was very much in line with our expectations
That said, for the second quarter in a row, a number of one-off factors contributed to this performance, including an unfavorable impact from distributor network realignment, which we have seen in the past couple of quarters, but should begin to fade as Q4 progresses
We also saw lower shipments in Brazil as we've seen a general slowdown in the market, but most acutely impacting our canned vegetable business in the quarter, even though we continued to grow market share
In addition, Q3 was further held back by overhang from the GST change in India, primarily impacting our nutritional beverages business and to a lesser extent lost sales due to the hurricane impact in the Caribbean
At EBITDA, we saw the solid underlying growth I mentioned, together with the tight focus on costs show up at the EBITDA line
Adjusted EBITDA was up 6.4% in constant currency terms in the quarter and margin is now moving in a positive direction, consistent with the expectations we laid out on our last call
Going forward, we do expect the impact of the one-off factors I mentioned to fade in Q4 with organic sales reaccelerating, and this should happen despite a headwind from Chinese New Year-related shipments shifting into Q1 2018 due to a later-than-normal holiday
We also expect to better leverage the investments we've been making over the past year, driving stronger growth in EBITDA
This brings us to our outlook for the total company
I'll start by picking up on the sentiment <UNK> laid out earlier that while our numbers have not been as strong as they could have been, the impact our investments are making in the marketplace and our P&L are building the positive momentum we expect and need to continue delivering sustainable profitable growth
Our focus from here is to close out the year strong and make sure that we continue to make progress against the things that will drive positive momentum in 2018. This should play out on three fronts
First, seeding and growing organic sales
In the U.S
, this means executing our strong pipeline of innovation, renovation, marketing, and go-to-market initiatives
In Canada, to sustain the recovery in our activities at retail, as well as innovation-driven gains in our grocery portfolio; in Europe, to continue improving our share performance where we currently compete as well as capturing the whitespace in front of us including the repatriation of the Kraft brands; and for rest of world growth to accelerate with the return to run rate performance in both our EMEA and Latin America regions, each driven by a combination of innovation and whitespace gains
Second, continuing to build profit momentum
On cost savings, we're now targeting between $1.7 billion and $1.8 billion of cumulative Integration Program savings by the end of 2017, or $500 million to $600 million of net incremental savings in 2017 versus 2016. Ramping up supply chain related savings will be a key factor
We're confident that the savings are there, it's more a matter of timing relative to the end of the year
Another factor at work will be business momentum picking up in the form of sequentially better organic net sales growth in the areas where we've been investing the heaviest and the levers that provides at the EBITDA line
And finally, we continue to expect a more favorable balance between pricing and input costs as we go forward with Q4 sequentially better than the third quarter
The third and final part of our outlook is below the line costs, specifically the tax line
Based on the flow of discrete items we've seen through Q3 and what we're forecasting for Q4, we now expect our full year 2017 effective tax rate to land at approximately 29% versus the 30% we think is representative of our run rate on an annual basis
All things considered, we remain confident that a strong earnings profile should continue to show through, driven by a combination of profitable organic sales and EBITDA growth
Thank you, and now we'd be happy to take your questions
Question-and-Answer Session
This is <UNK>
And thank you for the question
So to summarize my comments from earlier, I'd say in Q4 we'd expect organic sales to reflect two things
One, some one-off headwinds from the U.S
and Canada, but we do expect this to be offset by acceleration in rest of the world
So I think that's kind of the trajectory you would expect for organic sales
The other thing I would say is we continue to expect strong EBITDA growth globally into Q4.
Hi, Matt
This is <UNK>, and thank you for the question here
So to answer your question, I think there are a few things to note on how the P&L is playing versus last year
So on gross margin, as you asked, the performance versus last year really reflects two factors
So first, we've seen an unfavorable balance in pricing and commodities, with commodity inflation that we've talked about in first half and last quarter
I'll reiterate that we did see improvement in Q3, and we expect to see an accelerated improvement in this balance into Q4. And in fact with that improvement in Q4, it should enable better flow through of savings – of our integration savings to the bottom line to EBITDA
The second factor here to highlight is we did have some increased depreciation and amortization expense within our gross margin line
If you actually take this out – and it's related to the footprint projects that we've talked about previously – if you take out this increase, our gross margin actually increased in Q3 by 35 basis points
So again, we started to see the improvement in Q3 which we expect to improve with PNOC and into Q4.
Hi, Rob, this is <UNK>
And thanks for the question
So to answer it, I think this increase in integration savings that we saw from the $1.7 billion to a range from $1.7 billion to $1.8 billion
Again, this is net of some of the inflation and investments we talked about, so that's an all-in number
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Okay
So it would've been higher, but are you raising your freight number in there also? Would it have been higher
Again, this is an all-in number, so it's net of some of the inflation investments that we've had
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Okay
Good afternoon
Thanks, <UNK>
And hi, <UNK>, thank you for the question
So on the SG&A line, I'd say we did see a significant decline versus prior year as a percentage of sales, and that really reflects lower people cost that we've seen, as well as ZBB savings versus prior year
The one thing I want to note to address your question is as you update your models, you should not straight-line the SG&A as a percentage of sales like you saw on year-to-date in Q4 – or sorry, year-to-date in Q3 into Q4, because we do have some seasonality in this line item
So I'd say if you think about EBITDA for the year – sorry, for Q3 globally, we saw strong EBITDA growth up $120 million to $130 million
That was really driven by two things
One, cost savings in North America, as well as growth in Europe and rest of the world
So if you look at North America, we're actually up $100 million, and the difference there, the $30 million, is really driven by Europe and rest of world
So in North America, we have the benefit of $125 million of integration savings
The delta there, the $100 million growth in EBITDA, was really driven by the unfavorable balance of pricing commodities that we talked about, which did improve in Q3, but was still had one for us, and that was partially offset by savings in the business
So that's kind of the rough trajectory of EBITDA versus prior year
Hi, <UNK>
Thank you for the question
So I think to answer your question, like I said, we had an increase in depreciation related to the footprint which if you strip this out we would've had increasing gross margin of 35 basis points
So I think the disconnect there is really timing related relative to the ramp up that we would see in some of these programs relative to the CapEx that we have to spend
