Nestlé S.A. (NESN) Earnings Call Transcript & Summary

Good afternoon, and good morning to everyone. Welcome to the Nestlé 9-month 2022 sales webcast. I'm Luca Borlini, Head of the Nestlé Investor Relations team. Today I'm joined by our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer, Francois Roger. Mark will begin as usual with our key messages and discuss the full year 2022 guidance; Francois will follow with a review of the 9-month '22 sales figures. We will then open the lines for your questions. Before we begin, please take note of our disclaimer. And now I hand over to Mark.

Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company. I'm pleased to report that our sales growth momentum continued to increase in the third quarter. As a result, we're now reaching organic sales growth of 8.5% for the 9-month period of 2022. As in the previous quarters this year, growth was primarily driven by pricing. We maintained our responsible approach to pricing, but further pricing steps were clearly needed to react to significant levels of global inflation hitting us. Real internal growth remained resilient for the 9-month period but dipped into negative territory for Q3 at minus 0.2%. Short term and in the phase of extraordinary pressures, this is unavoidable and should not be a cause for concern. As we look at next year and beyond, we continue to work towards a healthy development of our volume and mix. Francois will show you later that our 3-year real internal growth average for this quarter, which is a good underlying growth metric at times of significant pandemic-related volatility remains quite stable at around 3%. Our volume growth, which remained positive in the first half, turned slightly negative. In addition to supply chain constraints and the super high base of comparison, volume development was reduced by active and conscious choices to cut the number of low rotation and underperforming SKUs. This strategy, which we call cut the tail to push the head, is one of our ways to counter cost pressures and supply chain limitations. It is one of several strategies that enabled us to limit the pressure on our underlying trading operating profit margin compared to the reduction we witnessed in our gross margin. Over time, this strategy is also expected to give us top line benefits through better on-shelf availability and visibility of our core SKUs. Next, I would like to turn to portfolio management. It has generally been a muted year so far. Our focus clearly has been on operating management at this challenging time, but I am pleased to report steady progress in building some of our growth pillars. Just this morning, for example, we announced the acquisition of the Seattle's Best Coffee brand from Starbucks. We have 4 years of experience with this brand. since it was part of our highly successful global coffee alliance with Starbucks. Full ownership of this brand will now allow an even more complete integration of this business in our highly efficient coffee supply chain. In addition to the iconic premium brand of Starbucks, we have come to like this trusted brand a lot. It gives us a highly credible midrange mainstream offering that competes very effectively and protects the premium positioning of Starbucks. We have also patiently and steadily built our Nestlé Health Science portfolio this year, not in leaps and bounds, but with very manageable incremental steps. While we will focus on Nestlé Health Science in our Investor Day at the end of November, I would like to stress 2 key items today. First, do not overinterpret the current short-term organic sales growth compression. Mathematically, this had to happen after 2 years of extraordinary sales growth during the peak pandemic period. We had told you ahead of time that this was unavoidable. And compared to our plans, the slowdown is less than we expected. We also continued to gain market share in VMS, which bodes well for future growth. In an era of increased consumer health interest, all signs point to continued attractive category growth once the strong COVID quarters are lapped. Our acquisition models and valuations for the deals we made in this space during the pandemic fully reflect this temporary post-COVID growth compression. Second, I would like to reconfirm that we have no intention of turning Nestlé Health Science into a pharma business. While a few of Nestlé Health Science's products are prescription-only, the vast majority falls firmly in the area of fast-moving consumer goods, which is our and your home turf. Nutritional supplements and vitamins in particular are fast turning into major branding and premiumization opportunities. We saw this trend early and are leading it with globally recognized and trusted brand names. I will now turn to the business as a force for good section on Page 5. 2 weeks ago, we published our Nescafé plan 2030. Following similar efforts in our cocoa sourcing, you're now seeing us bring the power of regenerative sourcing to another significant category of ours, coffee. Building on long-standing work in the field of coffee farming, you see that regeneration is firmly taking hold in our leading global coffee brand, Nescafé. It is no longer something that is limited to premiumized and exclusive offerings. We're taking this approach mainstream to the benefit of all coffee lovers, farmers and farming communities, as well as the planet. Before handing it over to Francois, I would like to cover the updated guidance. Following the strong third quarter, we're now in a position to raise the organic sales growth expectation to around 8%. While this is lower than our 9-month organic sales growth performance, I would like to assure you that this is not due to any particular concern. It simply reflects a healthy amount of caution at a time of significant economic and geopolitical uncertainty. All other aspects of our guidance remain unchanged and are fully confirmed. With this, I would like to hand it over to Francois.

Thank you, Mark, and good morning or good afternoon to you all. Let me start with the highlights for the 9 months. Organic growth reached 8.5% with pricing of 7.5%, reflecting significant cost inflation. RIG was resilient at 1%, following a high base of comparison in 2021, continued supply chain constraints and the effect of SKU optimization initiatives. We have seen limited demand elasticity so far. Net acquisitions increased sales by 1.2%, largely related to the acquisition of the core brands of The Bountiful Company and Orgain, a leader in plant-based nutrition. Foreign exchange had a slightly negative impact on sales growth. Total reported sales for the first 9 months were CHF 69.1 billion, the 9.2% increase versus last year. Turning to the distribution of growth between developed and emerging market, organic growth in developed markets reached 7.4%, mostly driven by pricing with slightly positive RIG. Growth in emerging markets was 10.2% based on both pricing and RIG. Growth was supported by continued momentum for affordable offerings, particularly in AOA. Turning next to the breakdown of sales by channel. Organic growth for retail sales remained robust at 7.3% for the 9 months. Growth accelerated in the third quarter. Within retail, e-commerce sales grew by 8.4% building on a 17.2% growth for the 9 months of 2021. Organic growth in out-of-home channels reached 26.1% for the 9 months, with sales exceeding 2019 levels. In the third quarter, growth was supported by strong RIG and pricing. Given the volatility of RIG over the last few years in the context of the pandemic, a 3-year RIG average provides a clearer picture of underlying growth trends. As can be seen on the chart, the level of underlying RIG by quarter remains relatively stable. For the 9 months, RIG remained resilient at 1%, following a high base of comparison in 2021 and continued supply chain constraints. As we mentioned during our call at the half year, we expected to see some demand elasticity going forward. We are seeing some, more specifically in food and dairy, but the level remains limited in the context of the pricing actions we have had to take. In the third quarter, we also began to see the effect of our SKU optimization initiatives. Going forward, we will continue to closely monitor consumption patterns given the volatile macroeconomic environment and pressure on consumer purchasing power. Let's now look at the results of our 7 operating segments, beginning with Zone North America, where we saw 11.2% organic growth. RIG was 0.1%, impacted by a high base of comparison in 2021 and supply chain constraints, particularly for Purina PetCare. Growth was supported by pricing, sustained momentum in e-commerce, as well as a further recovery of out-of-home channels. By product category, sales in Purina PetCare, Nestlé Professional and Starbucks out-of-home products grew at a strong double-digit rate. Infant formula recorded strong growth following supply chain constraints in the market. Baby food posted robust growth based on innovation. The recently launched Plantastic range of plant-based offerings resonated strongly with consumers. Frozen food reported low single-digit growth with positive contribution from pizza and frozen meals. Shifting to Zone Europe, organic growth was 7.1%, supported by pricing across most geographies and categories. In a challenging environment, RIG remained resilient at 1.5% despite a high base of comparison in 2021 and supply chain constraints. Growth was supported by pricing, further recovery of out-of-home channels and innovation. By product category, the key growth drivers were Purina PetCare and Nestlé Professional. Sales in water grew at a double-digit rate with positive contributions from most brands. Sales in Infant Nutrition also grew at a double-digit rate based on continued strong demand for Human Milk Oligosaccharides products or what we call HMOs. Coffee posted low single-digit growth following a high base of comparison in 2021. Garden Gourmet plant-based products continued to see strong double-digit growth, boosted by new product launches. Moving now to Zone AOA. The zone reported high single-digit organic growth, with positive contributions from all geographies and categories. Growth was driven by pricing, SKU optimization and the further recovery of out-of-home channels. By geography, all regions posted positive growth with particular strength in Southeast Asia, South Asia and Africa. By product category, Culinary was the largest growth contributor. Coffee reported high single-digit growth. The zone launched Starbucks ready-to-drink products in selected markets, including Australia and Indonesia. Sales in Nestlé Professional grew at a strong double-digit rate across geographies and categories. Infant nutrition, Milo and PetCare all posted high single-digit growth. Next is Zone Latin America, which maintained double-digit organic growth with broad-based contributions across categories and geographies. Growth was supported by pricing, strong execution and further momentum of out-of-home channels. By geography, Brazil reported double-digit growth. Sales in Mexico and Chile grew at a high single-digit rate. By product category, confectionery was a key growth contributor, reflecting strong demand for KitKat and key local brands, particularly Garoto in Brazil and Carlos Quinto in Mexico. Purina PetCare, coffee and Nestlé Professional, all reported double-digit growth. Infant nutrition saw high single-digit growth with market share gains and dairy posted mid-single-digit growth led by fortified milks and home baking products. Turning to Zone Greater China. Organic growth was 4.7% based on solid RIG and pricing. As a reminder, inflation remained relatively limited in the region. The zone continued to be impacted by COVID-19 related movement restrictions. Growth was supported by strong operational execution, e-commerce momentum and continued innovation. By product category, infant nutrition reported double-digit growth with improving market share trends for NAN and illuma. Coffee posted high single-digit growth, led by Nescafé soluble coffee and Starbucks products. In confectionery, Hsu Fu Chi and Shark Wafer both reported high single-digit growth. Next is Nespresso, which reported low single-digit organic growth following 11% growth in 2021, with consumptions remaining above pre-pandemic levels. Growth was supported by continued momentum for the Vertuo system. Sales for out-of-home channels further recovered, with continued expansion of the Momento system, as well as improved sales development for the office segment. By geography, North America posted double-digit growth with continued market share gains. Europe reported a sales decrease following high single-digit growth in 2021. Other regions combined reported high single-digit growth. Finally, let's turn to Nestlé Health Science. The business posted mid-single-digit growth, building on 2 consecutive years of double-digit growth. Pricing, innovation and geographic expansion supported growth. Consumer Care reported low single-digit growth. Healthy Aging products grew at a double-digit rate. Growth in vitamins, minerals and supplements was close to flat, following a high base of comparison, particularly for immunity-related products during the pandemic. Medical nutrition reported double-digit growth with strong sales development for pediatric and allergy products. By geography, sales in North America grew at a mid-single-digit rate. Europe saw positive growth, while all other regions combined posted double-digit growth. Let's now look at product categories. Growth was broad-based, supported by pricing across all categories. We are seeing consumer demand somewhat normalizing by channel for the 9 months. Categories with greater at-home consumption, such as dairy and culinary, saw softer growth over a high base of comparison. By contrast, categories with greater exposure to out-of-home channel, on-the-go consumption and impulse buying, such as confectionery and water saw a strong recovery over a low base of comparison. Within powdered and liquid beverages, coffee saw high single-digit growth over a high base of comparison in 2021. All brands contributed positively to growth, with sales of Starbucks and Nescafé ready-to-drink products growing at a double-digit rate. Cocoa and malt beverages reported high single-digit growth, driven by strong demand for Milo and Nesquik ready-to-drink formats. PetCare reported strong double-digit growth with mid-single-digit RIG. Science-based, premium and veterinary products saw strong sales developments. Growth was also supported by continued e-commerce momentum on innovation. Nutrition & Health Science posted 8.5% growth. Infant nutrition reported 11.5% organic growth with a strong recovery across all geographies, particularly in China. Growth was supported by continued demand for HMO infant formula products, with sales reaching almost CHF 1 billion and growth of around 15%. We have already discussed Nestlé Health Science. Prepared dishes and cooking aids saw 2.6% growth driven by strong sales development for ambient culinary, particularly Maggi in Zone AOA. Vegetarian and plant-based food products delivered double-digit growth led by Garden Gourmet, innovation continued to drive growth with a new chicken analog and the further rollout of Wunda, our plant-based tuna alternative across Europe. Growth in frozen food was slightly positive. Milk products and ice cream reported 4.8% growth. The key contributors to growth were coffee creamers and home baking products, as well as Ninho in Brazil and YIYANG in China. Growth in confectionery reached 10.7%, reflecting strong momentum for KitKat, seasonal products and key local brands. Sales in water grew by 15.1% despite supply chain constraints. Growth was driven by international premium brands and the strong recovery of out-of-home channels. Let me now hand over to Luca, who will manage the Q&A.

Thank you, Francois. With that, we move to the Q&A session. We open the lines for questions for financial analysts. [Operator Instructions] The first question is from Warren Ackerman at Barclays.

Warren here at Barclays. I've got 2 questions. First one is on RIG. In the quarter, you mentioned a few factors. Can you quantify the impact on SKU rationalization? It seems like it was mainly an Asia issue. And then the RIG was also weaker in Nespresso and Health Sciences in particular. I know you said it was a tough comp on a 1-year view. But even on a 3-year stack view on Nespresso and Health Science, it does seem to be decelerating. I was just wondering, Mark, whether you can reiterate that there's no underlying slowdown in those 2 areas. Because on my math, to keep the RIG momentum that you've seen in the last couple of quarters, you would need the RIG to be back into like plus 2% or certainly positive in Q4. Just wondered what your thoughts were on that. And then secondly, just on the gross margin. You talked about gross margin compression quite significantly in the first half, but you have also been talking about gross margin stabilization in the second half. I was wondering whether you're able to talk about whether the pricing is now kind of matching the inflation, and we should be actually seeing the gross margin coming back in the second half looking into next year. That would be very helpful.

Warren, thanks. And maybe I'll take a first crack at your questions, but then also hand over to Francois for some additional detail. Let me just start with the second one on gross margin and to confirm that we are still in the process of having to catch up. As you saw from the half year numbers, there was still a pretty sizable gap to the period before the onset of inflation. And so we're still in the process of catching up. There is a pretty significant full year effect that we're facing, and this will take us into '23, there's no question about that. And so we need to be resolved and need to remain disciplined when it comes to pricing action because not all of the things that have hit us have been recovered. Regarding RIG, a few thoughts. So first, maybe I'll give you a bit more color on this SKU rationalization project. And let me also say this one will figure more prominently in our Barcelona Investor Day. Laurent Freixe, who is leading that for us internally, will present on it. It's something that we kicked off earlier this year when we saw that after the beginning of the Ukraine war, that clearly inflation was going to be a much more significant factor this year than before, and that supply chain constraints were also going to continue to a larger extent than anticipated. And so I think we started on a timely basis, which is why we're now standing to reap some pretty significant full year benefits. But Laurent will itemize that to create a degree of detail then when we present in Barcelona. But it's a good one because it gives us efficiencies, and yet at the same time, it also should lead to growth for the core SKUs, the ones that are high rotation and most successful. And so I think it's not only about cutting the tail. It's also about pushing the head. And as you rightly pointed out, AOA is one of the zones where we were particularly disciplined in implementing that. But let me confirm to you that this is a global project with a global reach, and everyone here in Semper Group is participating because everyone sees the immediate benefits of that and also the benefits going forward. Generally, when it comes to that ever so slight RIG decline in this third quarter, let me just address one common misconception, and that is people make too much of a push-pull relationship out of it with pricing. Pricing goes up, hence, the RIG has to come down. That is too simplistic. So the point that Francois and I were trying to make to you is that it's a number of contributing factors. Clearly, the high comparables from previous year are a big feature of that. Then we have supply chain constraints, and those are also uneven. So for example, AOA is one of the zones that was hit more by it. Then we have the pricing, which, I mean, clearly, there has been some trading down, and that's something we have to face. And then we have the voluntary actions here that come from SKU rationalization across all zones, but in particular, for AOA. So it's really, to our count, 4 major buckets that was feeding that limited and muted RIG development. But let me hand it to Francois for some more detail.

Thank you, Mark. Just to reinforce what Mark is saying as well, if you look at it on the high base of comparison, we can clearly see when we look at the development of our sales and our growth by category, the way that it is -- everything is normalizing post-COVID. If you look at at-home consumption, everything that we have there is actually having negative RIG developments. And everything that is out-of-home is having significant growth levels today. So which is clearly the evidence that the low level of RIG that we see now is clearly the consequence of the normalization of the post-COVID era. And I just want to say one more word on Nespresso and NHS. We are not concerned by the development there. If you look at Nespresso in the first 9 months, we are sales-wide on a comparative base, 20% above where we were in 2019 in sales. So this is the evidence that I mean the business is not suffering over the medium term. It's just a consequence of once again, this soft landing post-COVID. And we are with, I mean, volume levels, which are above pre-pandemic level. NHS, exactly the same thing. We have gone to over 2 years of strong double digit, even last year. It was almost 20% growth in during the pandemic, so which is the reason why you can see a negative RIG this year, but no specific concern there.

Next question is from John Ennis at Goldman Sachs.

I have a question on PetCare, please, which I guess has been a standout performer for a while now. I guess, look, we've seen a number of capacity announcements over the last year or so from you, Hill's, Freshpet, Mars, et cetera, the list goes on. So when you think about this capacity coming on stream over the next 3 years, I guess, what does it mean for the industry? Does it create promotional pressure? Is it going to create an increase in SKU fragmentation again, or does it simply get absorbed by the anticipated volume growth you are forecasting for the industry? I'm just very keen to hear your thoughts on what all this new capacity is going to mean for industry growth outlook.

Thanks, John. And obviously, when we greenlighted those investments over the past few years, this whole notion of future supply and avoiding a clogged and oversupply and idle capacity was, of course, high in our minds because those are pretty significant CapEx investments. And with some of the construction inflation we're seeing now, they have become even more pricey. But I think this is where the very strong underlying growth dynamics of PetCare come in as a saving grace. And this is independent of the onetime step-up that we've seen as a result of COVID. There are some pretty long-term growth drivers here, building on emerging markets and the categoric conversion that we're seeing there when people turn to dedicated pet food as opposed to feeding the pet with household food waste. And in developed markets, we're seeing ever more premiumization and interest in higher value offerings. And those 2 growth drivers continue to apply. They were already in place before COVID. They continue to apply now. So clearly, when we did some sensitivity analysis, it was very clear that even if some other people also have significant capacity investments and even if maybe we design things a tad too large and if there's a temporary demand downturn, eventually you will grow into it. There's no question. And hence, any pressure here, if anything at all, will only be short term. In our case, I think we were running pretty close to capacity limits already. And if anything, we probably waited a little bit too long because no one saw COVID coming. Then, of course, we accelerated those investments. But I'm not concerned going forward here that it would lead to significant oversupply and price pressure simply because the category dynamics are so great.

Next question is from Guillaume Delmas at UBS.

2 questions for me, please. The first one, Mark, is on Nestlé responsible pricing approach, so ensuring your products remain affordable. My question here would be, how do you reconcile this commitment? And the comments you made in late July about not having a longer-term margin reset, which seems to indicate a strong focus internally on rapidly restoring your level of profitability. So how to reconcile this, at least apparent tension between affordability and rebuilding margins. And should we read into this that you may be looking at stepping up your productivity and efficiency efforts going forward? And then my second question is going back on RIG, but this time zooming in on Western Europe. Because if I look at your performance in mature markets, RIG seems to have slightly deteriorated in Q3 despite North America improving quite significantly in the third quarter on the RIG front. So wondering what you've seen in the quarter in Western Europe in terms of maybe trading down potential delisting or maybe this impact on SKU optimization. So any color on this would be helpful.

Thanks, Guillaume. And look, on the first one, when we talk about responsible pricing in an inflationary setting, I think most of it has to do with timing. And I think you've seen this play out over the last 1.5 years where we were not fully holding up our gross margin day 1, and that was unavoidable. And that means we're not passing on all the inflation right away. That we were also very clear that eventually, we will have to catch up because what we don't want to do is permanently weaken the company and make it live on a lower gross margin level or profit margin level when it comes to the operating profit margin. And so to me, it's about timing. And I think especially in more high inflation emerging markets, people are used to that. So I mean, over time, the salaries and the incomes are inflating too. And so it's more about the fact that you keep things affordable when prices are rising, so that the salary levels and disposable income can catch up and affordability is assured. So it's time as opposed to absolute amounts that I think make this approach special. And I think in food and beverage, it is almost a social responsibility, and I think we've been living it in this period. For Western Europe, let me hand it to Francois for some more detail.

Guillaime, in Western Europe, actually, our RIG has been fairly resilient around 1.5%. You have seen that we have done less pricing relative to the U.S. Actually, we are a little bit north of 5% in pricing, while we are north of 10% in the U.S. So I mean it's going to take a little bit more time in Western Europe to implement pricing. This is also part of responsible pricing as well to spread it over time so that consumer can absorb it. And in the U.S., usually you can do things a little bit faster as well. So we have not seen really clear evidence of down-trading in Europe. We had actually limited impact as well of delisting, given that we have had a very staged approach in terms of pricing in Europe, which we did not go for big amounts in one go, but spread it over time. So I think it has proven to be fairly efficient. Trading down, we expect, though, in Europe, we are concerned by the outlook in Western Europe especially, so that the energy crisis that is coming is essentially a European one that will hit consumer purchasing power. So we are a little bit more concerned for Q4, Q1, Q2 next year to be seen. But so far, so good, but something we are monitoring very closely.

Next question is from Celine Pannuti at JPMorgan.

My first question is in fact a rebound on the volume and mix commentary. Mark, you said in your remarks that you expect next year a healthy development of volume and mix. I would interpret that's clearly above 0 for the RIG in '23. So I just want to know what kind of down-trading impact are you factoring when you are seeing that. My second question, you also mentioned that pricing will accelerate next year. Can we have a bit of a view of what kind of cost inflation you are baking when you say that? And with regard to discussion with retailers, is it getting harder you think, to pass on those price increases?

Yes, Celine, I'm happy to comment. And on the volume mix, I just want to be clear, this did not constitute guidance. And the choice of was we're working on this because we are very much focused on healthy RIG development. And RIG as you know is the sum of volume and mix. And so I wanted to reassure everyone that we're not turning into an organization where it's all about short-term price taking at the expensive RIG. And so we're working on this, but specifically, what we expect then for the next year in a volatile environment like this, I think there's good reason to wait then for February and to give you then our expectations. Likewise, on the pricing, I didn't mean to indicate that our pricing will yet accelerate from here. And so what I was trying to indicate is that pricing will need to continue when it comes to the remainder of this year and next year as we're still in catch-up mode towards repairing and restoring our gross margin. But I didn't want to guide anyone specifically whether the pricing pace would stay the same, accelerate or slow down. So I hope that's helpful.

Next question is from Patrik Schwendimann at Zurcher Kantonalbank.

Patrik Schwendimann at Zurcher Kantonalbank. Again, on the RIG question, would it be a fair assumption to expect a slight negative RIG for the next couple of quarters because of these high comps and because of this SKU effect? That's my first question. And second question, in terms of the margin development, Mark, you have mentioned before that you want to have a full margin recovery over time with today's knowledge, do we believe there's already a first step in the right direction possible in H2 and in '23?

Patrik, I would love to be helpful. But as you know, with our Q3 update, all we're doing is give you the latest on our sales numbers. And so you've seen us confirm our other aspects of the guidance, including the underlying trading operating profit margin, but I wouldn't want to speculate on where we stand now specifically when it comes to improving on that. And for the first question on RIG, maybe I'll hand it over to Francois.

Yes. Patrik, on the RIG, we don't provide any guidance on the RIG by quarter. The only thing is that you know that already, but in Q4, the comps are not necessarily easier than they were in Q3 because, I mean, we had a rig of 4% last year. It was 4.4% in Q3 last year. So it's pretty equivalent. This is almost 2x what we had experienced pre-COVID level. So which means that the pressure on RIG coming from the comps remained at least for 1 quarter, the coming one. So we are really working to preserve RIG, as Mark indicated earlier, to preserve it into positive territories. And we are working on the 2 components as well. Mix is still in positive territories, which is a good indication of our capacity to innovate, our capacity to premiumize as well. This is largely where we are creating value, so very happy with that.

Next question is from Bruno Monteyne at Bernstein.

Just coming back on the first impact you talked about, which is sort of the normalization of the very high demand in several areas during COVID. How many more quarters should we expect of that normalization? Is sort of quarter 4 the last quarter of that normalization? Or you think that can last well into next year? My second question is you did mention that it's largely this normalization. We did also mention some price elasticity and down trading. If you had to look for down trading to private label or price elasticities going badly, which areas do you see it in? And can you quantify how big it is in those potentially problematic areas?

Bruno, so the normalization of COVID, I think probably one more quarter, Q4. After that, I think it starts to normalize because it will lead -- will correspond to the 3-year when start -- when COVID started, so I think that we should be back to within the normal situation. As far as elasticity is concerned, so as we have said, we have not seen much yet. It is, I would say, less a function of geography so far. And if you look at the example of emerging markets, they have proven to be very resilient in spite of the fact that affordability matters more, but that shows the power of our brands as well. So we did not see much elasticity in emerging markets. And so this is -- we are, as I said, from a geography point of view, more concerned about Europe in the next couple of quarters because of the energy crisis. If we look at it by category, wherever we saw a little bit early signs of elasticity is probably in dairy and food. That's probably where we are less premiumized as well. If you take categories where we are more premiumized like coffee, like PetCare, obviously, like water with our premium waters, we saw less elasticity as a consequence.

Maybe, Bruno, if I can build on a few thoughts here, I think one of the benefits of having a number of brands at different price points is that even when people do trade down, it doesn't mean automatically we're losing those consumers. There's a good chance to catch them at a different price point. And then another thought on private label, I mean, this is a time when you have, of course, several trends now overlaying each other. So one is the post-COVID normalization and the other one is supply chain inflation. As you know, private label did suffer during COVID times. And so there was going to be some recovery to be expected anyways. So not all of the recovery has to do with inflation. Some of it is simply the normalization of their supply chains. And as you can imagine, when you have several of these trends overlaying each other, it's sometimes pretty hard to read out exactly which part is due to which. But do keep in mind that some of it is the normal post-COVID recovery of private label.

Next question is from James Edward Jones at RBC.

Carrying on the private label point, are you able to say anything about the price gap between your brand and private label. Has it narrowed and to what extent has it narrowed? And also on VMS, you attributed to third quarter slowdown obviously it's tough comps. Given the relatively discretionary nature of the category, how confident are you that it's not anything more than that?

So James, I think on VMS, feeling really good that very similar story to what we've seen in Nespresso that we've seen outsized growth here for 2 years when people were really trying, in particular, to strengthen their immune systems. There's plenty of other health objectives that people are pursuing the interest when it comes to Google searches and all sorts of consumer questions on optimizing your health outcomes. That one has not gone away. There's a willingness to pay for that. And so in my opinion, this is truly a lapping issue. And as I mentioned, we properly reflected this when we did deals during the pandemic since we knew about at some point this period of outsized growth was coming to an end. We reflected this in our business models. And we're very happy overall with the branding opportunity that VMS affords. So as Francois indicated, Q4 is still a quarter, but of course, we're seeing RIG-related high comps. But over time, I think with '23 and beyond, you will see the more normalized growth of a category like this shine through. And then with regards to the first question, let me hand it to Francois.

Thanks, Mark. James, on the private label one, so inflationary pressure impact all players in the industry, including private labels. And actually, the pressure is typically more pronounced for private labels since input cost typically represent a higher proportion of their sales. So as a consequence, what we have seen since the beginning of the year is private labels had to implement significantly higher percentage of increase than branded products. It was typically around 2x faster -- more than what we did. So as a consequence, we don't think that the price gap between private labels and branded products as neither narrowed or extended. It's probably the same as before.

And James, maybe one additional thought. So clearly, I mean it's hard to make these statements across all categories and geographies, but I'm also very much in support of what Francois said. The one other one to watch that I think is playing in our favor is the out-of-home and in particular eating out in restaurants or having a coffee at a bar or whatever. So clearly, that's where you're also seeing significant inflation and you're also seeing sometimes additional cost issues because of labor cost and sometimes also truly service quality issues because of labor scarcity. And so I think as families have a harder time here making ends meet, one thing that can be expected is that they reduce the number of out-of-home occasions. And that actually is a bit of a tailwind and will be a bit of a tailwind towards in-home consumption, which, of course, favors us with the stronger market shares in home consumption.

Next question is from Jeremy Fialko at HSBC.

A couple of questions from my side. When you look at the RIG, I think there's been a lot of discussion around kind of elasticity comps, SKU rationalization, et cetera. et cetera. But when you look into subsequent quarters 2023, can you talk about any particular tailwinds that there might be on the RIG side? So for example, the supply chain sorting out the capacity coming online, any areas where you've got easy comps. Perhaps you could elaborate on those areas, if any. And then secondly, on Nespresso, you've obviously been quite confident in terms of the underlying kind of demand. Perhaps you could just then when you look at the market share, so Nespresso, Starbucks then the generics, there's been no real change in terms of the market shares of the kind of different players producing Nespresso compatible capsules and that you are kind of holding or gaining share within that?

Jeremy, I'll hand it to Francois for the second question. On the first one, just let me leave you with a high level of thought, and that is the only one thing in this turbulent time that you can say relative good degree of certainty for '23 is that this pressure from these extraordinarily high comps on RIG that, that one is going to be less in '23 than it was in '22. That's assuming that the COVID pandemic continues to ease now and doesn't get a lot worse. But that's the only thing you can say. On everything else, I think the visibility at this volatile time is so low that at this point, I wouldn't want to speculate on it.