Good morning, and welcome to Mondelez International's Third Quarter 2015 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mandely's management and the question and answer session. I'd now like to turn the call over to Mr. Dexter Campbell, Vice President, Investor Relations for Mondelez International. Please go ahead, sir.
Good morning, and thanks for joining us. With me are Irene Rosenfeld, our Chairman and CEO and Brian Gladden, our CFO. Earlier today, we sent out our earnings release and today's slides, which are available on our website, mondolizinternational dotcom. As you know, during this call, we will 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 ks and 10 Q filings for more details on our forward looking statements. Some of today's prepared remarks include non GAAP financial measures. You can find the GAAP to non GAAP reconciliations within our earnings release and at the back of the slide presentation. With that, I'll now turn the call over to Irene.
Thanks, Dexter. Good morning. The Q3 macro environment remained challenging, but we continued to drive top tier margin expansion, while delivering solid organic revenue growth. Specifically, organic revenue grew 3.7%, led by our pricing actions to recover commodity and currency driven input costs, primarily in high inflation markets. Adjusted gross margin increased 180 basis points to 39.1%, driven by strong net productivity and the early benefits of improvements in our supply chain.
We expanded adjusted operating income margin by 170 basis points to 14.1%, while significantly increasing advertising and consumer support. Adjusted EPS was $0.42 flat versus prior year on a constant currency basis. We delivered strong operating gains. However, as expected, these gains were offset by below the line items, including dilution related to the creation of our coffee joint venture, as well as higher taxes. Our performance in the 3rd quarter reflects continued progress in executing our transformation agenda.
We further focused our portfolio. In July, we closed on the joint venture to combine our coffee business with the e master blenders to create Jacob's Dalla Egberts, the largest pure play coffee business in the world. As a result, we received more than $5,000,000,000 of cash, including the benefit of currency hedges and retained a 43.5% interest in the JV. We strengthened our snacks business through 2 bolt on acquisitions, including Kyndo's biscuit business in Vietnam and Enjoy Life Foods, a leader in fast growing allergen free snacks in the U. S.
We'll look for more opportunities in the future to strengthen our snacks business through additional bolt on acquisitions like these. We also continue to aggressively reduce costs to expand margins and provide the fuel to accelerate our growth. In the Q3, we significantly expanded gross margin by generating net productivity of more than 3% of cost of goods sold, including the benefits from the installation of almost 30 lines of the future around the world. In addition, we remain on track to reduce overheads as a percent of revenue by at least 2 50 basis points between 2013 2016, with additional opportunities thereafter. As Brian mentioned at the Barclays Conference in September, we're identifying even more indirect cost savings than our original target.
This sets up well for continued savings beyond 2016. We're also well on our way to migrating more than 40% of back office processes in finance, HR and several other functions to global shared services. For each of these processes, we'll reduce costs on average by half, enabling additional savings through and beyond 2018. As these supply chain and overhead cost savings come through the P and L, we'll continue to expand gross and operating margins, while stepping up investments to drive growth. We're already beginning to see the benefits of this virtuous cycle.
In the
3rd quarter, we increased advertising and consumer support as a percent of revenue by 50 basis points to more than 8.5%. Almost all of our incremental investment was behind our power brands in key markets and categories to backstop our pricing actions, improve our share of voice and accelerate the global rollout of proven innovation platforms, such as Oreo Thins in North America, Base Oreo in Russia, Trident and Belvita in China and Bubly Aerated Chocolate in India. In addition, we continue to invest in route to market expansion, especially in emerging markets, as we look to strengthen our capabilities and position ourselves to capture more than our fair share of growth as the economies in these markets recover. We're encouraged by this progress and remain committed to our strategy and transformation agenda. As we look ahead, there are 3 areas where we want to continue to sharpen our focus going forward, on cost savings, growth and commercial and commercial execution.
So we're also announcing some important organizational changes this morning. We've seen great benefit in consolidating our cost agenda under Brian Gladden, our CFO and our growth agenda under our Chief Growth Officer. We now see a similar opportunity to sharpen our global commercial execution by creating a new role of Chief Commercial Officer or CCO. Today, we're naming Mark Klaus to that position and appointing Kim Cofer, who currently runs our Asia Pacific business as Chief Growth Officer. Mark, in his role as CCO, will oversee the execution of the company's growth plan with oversight over all 5 geographic regions, as well as the global sales function.
This new structure should simplify and accelerate day to day P and L decision making and trade offs, while focusing investments in those areas that will best drive profitable growth. Tim, in his role as CGO, with responsibility for corporate strategy, the global categories, global marketing and research, development and quality, will lead the development of next generation innovation platforms and new business opportunities to accelerate future growth. Brian, Tim and Mark, together with our region presidents, Daniel Myers and our integrated supply chain teams, will work hand in hand to continue to advance our transformation agenda and accelerate growth on both the top and bottom lines. Now let's take a closer look at our top line results. As I said, organic revenue growth was 3.7%.
Higher prices contributed 7.4 points, with most of the pricing occurring in emerging markets, as we recovered commodity and currency driven input costs to protect profitability. Vol mix was down 3.7 points, largely due to elasticity in response to new pricing actions in markets like Brazil and Russia, as well as a negative 70 basis point impact resulting from our strategic decisions to improve revenue mix. Year to date, the vol mix headwind from those decisions was 90 basis points. For the full year, we expect a headwind of up to 100 basis points as we've shared with you before. Our power brands, which now represent nearly 70% of revenue, delivered solid growth of more than 5%.
Emerging markets were up over 10% due to pricing, with the brick markets growing mid to high single digits. Developed markets declined 0.5%, largely driven by our actions to improve revenue mix. Turning now to our results by region. As I mentioned earlier, pricing in emerging markets drove our growth this quarter. Latin America was up over 17%, driven by inflationary pricing in Venezuela and Brazil was up low to mid single digits as we took additional pricing to recover higher input costs resulting from the recent weakening of the real.
This pricing, along with softer categories as macroeconomic conditions deteriorated, pressured vol mix in Brazil. We anticipated these difficult conditions and managed the business accordingly. As a result, we don't expect to have a material inventory destocking risk. Our EMEA region was up 6%, led primarily by pricing in Russia in response to a sharp devaluation of the ruble. We responded with a series of pricing that led to over 20% growth in Russia this quarter, which was broad based across most categories.
Ball mix declined, however, as categories slowed in response to higher prices and weakening economic conditions. As in Brazil, we're actively managing our inventory levels and do not expect any material dislocation issues. Asia Pacific was up 3% with solid growth in China and Australia, partially offset by weakness in some other markets. China was up mid to high single digits, driven by strong performance in both biscuits and gum. India grew modestly, led by solid chocolate growth in response to our stepped up A and C investments.
Turning to developed markets. Europe was down 1.6%, largely due to our strategic decisions to improve revenue mix. North America was up modestly with solid growth in biscuits and candy, partially offset by continued softness in gum. Turning to our categories, year to date snacks are up approximately 5% and about the same amount if you include powdered beverages and cream cheese. Currency driven pricing remains the key driver of category growth.
While our organic snacks growth is about a point below our categories, that's largely related to the 90 basis point impact of our actions to improve revenue mix. Looking at our overall market share, about 45% of our snacks revenues are gaining or holding share. Although we're not satisfied with this result, we're making sequential progress as expected. As our competitors price, consumers adjust to higher price points and we invest some of our cost savings into incremental marketing support. Let's take a closer look at each of our snacks categories.
Biscuits grew nearly 6.5% year to date, and we grew about 5.5% with strong performance in China, Brazil and Russia. Shares were also strong with about 60% gaining or holding, including increases in both cookies and crackers in the U. S. As well as share gains in Brazil. Power brand revenues were up high single digits, led by Oreo, Tuck, Club Social and Velveeta.
The chocolate category increased about 5.5% year to date, while our revenue grew only about 1%. This reflects the fact that we led significant pricing in most markets in response to rising input costs. Recently, competitors have begun to price. And in select markets like the UK and India, we've stepped up A and C support. As a result, we're beginning to see improvements in both revenue growth and share.
In fact, in the 3rd quarter, our revenue grew low single digits, up from essentially flat in the first half. Chocolate market share also increased from about 25% growing or holding in the first half to approximately 30% through September. While share performance remains below what we would like, much of this is due to our revenue mix improvements in Europe, including discontinuing low margin chocolate product lines. Going forward, we expect share performance to continue to improve as price gaps narrow and as our A and C investments pay off. The gum and candy category grew The gum and candy category grew nearly 2% year to date.
Our revenue was up 5% with both gum and candy growing mid single digits, led by growth of gum in China and candy in the U. S. So as you can see, we delivered solid top line growth in the quarter, and share has begun to improve in response to increased marketing support in a number of key markets and categories. Let me now turn it over to Brian, who will provide an update on our Q3 margin expansion and earnings growth.
Thanks, Irene, and good morning. We delivered strong margin expansion in the 3rd quarter by executing our transformation agenda in a challenging macroeconomic and consumer environment. Starting with Slide 9, you can see that adjusted gross margin increased 180 basis points to 39 0.1%. This expansion was driven by another quarter of net productivity of more than 3% of COGS. As expected, mark to market of commodity and currency hedging contracts was a 40 basis point headwind in the quarter, largely due to cycling of a gain in the prior year quarter.
Year to date, mark to market is a 20 basis point benefit. Adjusted OI margin grew 170 basis points to 14.1%. We continue to drive down overheads and offset stranded costs from the coffee transaction by leveraging 0 based budgeting and other cost saving tools. These overhead savings as well as lower supply to support our pricing actions and innovation platform launches, as well as to stimulate category growth and improve share performance. As Irene mentioned, we stepped up A and C by 50 basis points to more than 8.5% of revenue.
Based on recent results, our investments are beginning to pay off. We're seeing improvements in our growth and share performance in chocolate in both Europe and India. And in addition, our biscuits revenue in North America has begun to accelerate behind our increased marketing support and innovation. Now let's look at margin improvement by region. As you can see on Slide 10, our cost reduction efforts have driven improvement in adjusted OI margins across all of our regions.
In North America, OI margin was up 130 basis points, largely driven by strong gross margin expansion, which more than offset increased A and C investment. In Europe, margin increased 2 70 basis points as strong net productivity and lower overheads more than offset increased A and C in that market. In Latin America, margin grew 60 basis points, driven by lower overheads. And in Asia Pacific and EMEA, margins increased 3802 10 basis points, respectively, expansion more than offset higher AMC support. Adjusted EPS was $0.42 flat versus the prior year on a constant currency basis.
We delivered strong operating gains of $0.08 which includes a $0.01 benefit from acquisitions and a $0.02 headwind from mark to market as we lapped a gain in the prior year quarter. Below the operating line, lower interest expense and the benefit from a lower share count offset a $0.04 headwind from taxes as we cycled an unusually low effective tax rate in the prior year quarter. Additionally, and as you know, are now reporting our portion of the JDE's net income using the equity method below the line. While we don't expect to provide much regular color on the results of JDE as it's a private company, we've said it would initially be dilutive and it was this quarter. Some of this is driven by the timing of the close and some is simply driven by the timing of integration and synergy execution.
Prior to the closing of the JV, both partners increased shipments to the trade as a precautionary measure to ensure a smooth transition for customers, which affected JDE's 3rd quarter revenue. While we expect we continue to expect the EPS dilution for the next few quarters, we remain confident in the potential of the business and believe it will create significant value for both shareholders. Turning to return of capital. On Slide 12, you can see so far this year, we've returned 3 $800,000,000 of capital to our shareholders. In addition to paying more than $700,000,000 in dividends, we purchased $3,100,000,000 of stock or nearly 80,000,000 shares at an average price of just under $39 a share.
In Q3, we bought back a little over $900,000,000 of stock as we opportunistically stepped up our buyback activity given how our stock traded during the quarter. This means that we have about $6,000,000,000 remaining under the current share repurchase authorization that goes through 2018. Let's turn to our outlook. Given our solid third quarter results, we're reaffirming our 2015 outlook and our 2016 adjusted OI margin target of 15% to 16%. For 2015, we still expect organic net revenue growth of at least 3%.
On a reported basis, currency remains a sizable headwind. Based on current spot rates, we estimate currency to have a negative 13 percentage point impact for the year, a little more than our previous estimate of a 12 point impact. We continue to expect to deliver adjusted OI margin of approximately 14%, excluding 20 to 30 basis points of stranded overhead costs from the Coffey transaction. We made good progress in offsetting most of the stranded costs in the quarter and expect to fully offset them by the end of the year. We continue to anticipate double digit adjusted EPS growth on a constant currency basis for the full year.
Based on current spot rates, we estimate a negative currency impact of $0.33 the same as our previous estimate. With respect to free cash flow, excluding items, we still expect it to be approximately $1,000,000,000 for the year. For modeling purposes, we've reduced our interest expense assumption to approximately $700,000,000 down from 750,000,000 dollars We maintained our tax rate guidance in the low 20s for 2015. And while we continue to be opportunistic with our share buyback program, we anticipate repurchasing around $500,000,000 of our shares in the 4th quarter. In this scenario, we would still have approximately $700,000,000 remaining in coffee transaction proceeds to spend in the first half of next year.
So to wrap up, we delivered another solid quarter in a volatile and challenging macroeconomic environment. We're continuing to make excellent progress against our transformation agenda by focusing our portfolio on snacks and aggressively reducing our supply chain and overhead costs. This has enabled us to expand operating margins in each region, while also fueling incremental investments behind our power brands and innovation platforms to drive revenue growth and improve market share in our key markets and categories. As a result, we remain on track to deliver our 20 15 outlook as well as our 2016 margin target of 15% to 16%. As the world's leading snacking company, we're one of few industry players with the assets, leadership and capabilities to deliver strong top and bottom line growth over the long term.
With that, let's open it up for questions.
Thank you. Our first question comes from the line of Andrew Lazar of Barclays.
Hey, Andrew.
Andrew. Two questions from me if I could. First off, with margins continuing to come through as you expect, it seems like the key question will be around really the mix between volume and price. And I guess I thought we'd at least start to see volume get sequentially better for the company, particularly with price gap starting to narrow. But volume got a bit weaker sequentially and we got more price than we'd modeled.
And I guess European volume was still pretty weak despite a very easy year ago comp. So maybe first, could you just update us on the again a little bit more color on the price cap situation in chocolate, and if you need to reassess the strategy there like perhaps what you did in the U. K? Or do you have you seen enough movement in pricing in earnest that you kind of feel like you're going to see these price gaps narrow for real?
Yes. Andrew, there's no question we are seeing our price gaps narrow as we had expected. And as we said in our Q2 call, we do expect bone mix to improve sequentially in the second half. Our underlying business is performing quite well. We're seeing some very encouraging signs as we look at chocolate in the EU, we look at biscuits in North America, we look at chocolate in India, for example.
The factor that really impacted Q3, there's really 2. The first is that we did have to take some additional pricing in markets like Brazil and Russia in response to the significant devaluations of their currencies. And that just created another elasticity impact, which just put a little bit more pressure again in the near term on vol mix. And then the second is just for the luck of the draw, we had a big heatwave this summer in Continental Europe and that did have an impact on our chocolate business. So that as we were starting to see those gaps close and make the necessary investments, the impact of those investments just took a little bit longer than we anticipated.
Net net, we would expect that we should see continued revenue growth and share improvement as we make the investments focused in the key areas I've described and as we exit the
year. Great. Okay. Thank you for that. And then Brian, on the with respect to some of the supply chain work that you're doing, is there a way to give us a directionally even a sense of how much that contributed to 3Q gross margins?
And I guess, more importantly, how that now starts to build as we go forward into 'sixteen?
Yes, Andrew. It's as we've been saying, it clearly is still early days on the supply chain reinvention work and the impact of the lines of the future. I would say the Q3, we've begun to see some of that. But the majority of the we talked about 3% plus net productivity on COGS in the quarter. The majority of that is still driven by base productivity programs.
So this is still one where I think as we've been saying, the majority of the supply chain benefits and all the lines of the future that we've been investing in, as you work your way through start up costs and all the things that go with bringing those lines up, it does take some time and it's really going to be a 'sixteen dynamic where you start to see some of those
line of Robert Musko of Credit Suisse.
Hi, thank you. This will just be kind of a follow-up to Andrew's question. When I looked at Nestle's results, I thought I saw that they had chosen to not price in line with currency in chocolate in Brazil. And given how big of a competitor they are in Latin American markets in general, I was just wondering if this latest price increase that you took, is that one of the things that you might have to reassess? And are there any other, I guess, any other Latin American markets where you see the same dynamic?
Well, first of all, Rob, I would say that our performance in Brazil has been quite strong in the face of some really significant macroeconomic challenges. We've actually grown or held share in all of our categories there. So as we think about the challenges in chocolate, in many respects, 40% of our chocolate business is in Europe and I've been clear about what some of the issues were there. And Nestle did say in their call, as you said, that they did not price, but the facts are, as you start to look at individual SKUs, we are seeing movement. So we continue to monitor each of these key categories in our key markets very carefully.
And if we need to continue to supplement some of our investments in these markets, as we did in the UK and to some extent in Germany, we will continue to do that. But for now, Brazil actually has held up remarkably well growing in the low to mid single digits in the face of some very significant challenges. But most importantly, we are holding or growing our shares in all of our categories there.
And Rob, I would just say, you look at the currency in Brazil, it's in the Q3 currency, it's up almost 60% year over year. And year to date, it's up 35%. I mean it's dramatic. The only other point I'd make Rob is just this is also one of the markets where we put additional A and C as we've seen the opportunity to reinvest in some of this in the growth side of the business.
Yes, Amit, and I can clearly see the good work that you've done in those markets and you can see it in your results. Just broadly broader speaking though, if you look at your peers, they aren't taking pricing up to that degree in emerging markets just in general. So I guess I would hate to see you set yourselves up for setting up price gaps that are bigger than you would hope for and that was the reason for the comment.
Yes, but again Rob, we've got some very clear benchmarks with respect to those gaps. We are seeing them close around the world. The speed at which they close varies a little bit market to market, but I'm quite confident that we are managing the right balance between the margin expansion and driving growth for today and for the future.
Okay. Thank you.
Our next question comes from the line of Chris Growe of Stifel.
Hi, good morning.
Good morning, Chris.
Hi. Just two quick questions if I could please. First would be just to understand the incremental investment in A and C has been pretty significant really all through the year. I think you made a comment Irene about hitting 8.5% of sales. I had been thinking more like 9% plus in terms of where you were headed for.
Does that mean you were short this quarter or is 8.5% more the right number for where you want to be in terms of A and C investment here in 2015?
No, actually, as we said, Chris, we're going to make steady investments in A and C as we see the good returns coming from those investments. We're up significantly versus prior year and we will be for the full year. But we have said that our target for the long term is approximately 10% of revenue. And slowly but surely, we're making our way to those levels. But the good news is we are starting to already see the impact of the investments as a means of backstopping pricing and continuing to build our brand equity.
So It will continue to grow as we have the affordability and as we see strong returns.
And Chris, a lot of discipline around tracking ROI around these incremental investments. And some of them obviously are going to work and deliver great returns and some of them that aren't, we're pairing those back quickly as we move forward. So a very detailed operating mechanism around those A and C investments.
Okay, that's very helpful. And just a quick question, if I could, on your emerging market sales are very strong in the quarter. And I think you mentioned the BRIC countries being up mid to high single digits in the quarter, meaning you had a little bit of acceleration in other emerging markets. You've talked as well about route to market investments. Some of this A and C investment, I assume, is going towards these other markets as well.
I just want to get a sense of white space opportunities, are those in part what's helping drive the better emerging market revenue growth overall? Is that where you'd where we're seeing the benefit coming through on the top line?
Actually, not yet, Chris. The route to market investments we're making today are high return opportunities to expand distribution on proven categories and brands in key markets. And so we've talked about the investments we're making behind merchandising support, things like busy coolers that help us in markets like India, improving our penetration in rural India. As we look at China, we're continuing to expand our traditional freight penetration in Tier 1 and Tier 2 cities and then expanding into Tier 3 and Tier 4 cities. Brazil, we continue to see the North Northeast as a ripe area for investment.
So these are near end high payback kinds of route to market investments. That said, we still see white space opportunities for us to take our categories to new markets. And obviously gum in China is a great example, biscuits in India, for example. But as we look at our emerging markets, virtually all of them are 1 or 2 category markets and it would be our expectation over time that we will be able to see all of our categories in each of our key markets and that's what gives us great confidence as we think about the runway of growth opportunities.
Our next question comes from the line of Bryan Spillane of Bank of America.
Hi. Good morning, everyone.
Good morning, Bryan.
I had just a question on Mark Clouse's new role as Chief Commercial Officer. And just wanted a little bit more color on 2 areas. One is, does it also imply or come with the creation of a like a global sales force or just trying to or will Mark be interacting with sales forces at the regional level? And then second, one of the things that is cited in the press release is a focus on day to day P and L decision making. And I guess I kind of read that as maybe a sharper focus on trade promotion spending in a way to kind of make it more efficient.
So is that a correct read on one of the sort of key areas that you expect to see some focus on?
Absolutely, Brian. That's exactly the way to read it. This is not about a global sales consolidation. We believe very strongly that the right aggregation needs to be at the regional level. But think of it more as a center of excellence, the opportunity to take best practices from one market to another.
So in addition to making sure that the terrific growth practices in terms of execution at point of sale, as well as building our capabilities in areas like trade optimization, as you suggest. So all of those things, I believe, will just help to further strengthen what has been very strong commercial execution.
And in terms of the opportunity within trade your trade spend, is it a major opportunity just to improve the efficiency there?
We do see that as a big opportunity. And I think you'll be hearing more about that as time goes on. Obviously, the challenge in any of those decisions is getting the right balance between revenue and trade spending. Our goal is to try to find a way to make the dollars we're spending work harder for us. But that is a focus and we do see that as an opportunity.
Okay. Thank you.
Our next question comes from the line of Eric Kessman of Deutsche Bank.
Good morning.
Hi, Eric. Hi, Eric.
I guess I have a couple of questions. I guess first, Brian, on the JV, it sounded like you were you signaling that that might be more dilutive than you had initially forecast based on the what sounds like a little bit of trade loading in that business or other developments?
I don't we're not really updating a view for ongoing dilution or accretion. We're only 3 months into the JV. We don't really have any new information that would lead us to have a different view on where we see that over a long period of time. We didn't really expect much benefit from the JV as you look at the 1st couple of quarters here. I think we do expect that their performance will improve into the quarter, I'd say, modestly.
And then we move into 'sixteen, obviously, quite a bit as they execute on the integration and synergy plan. So, yes, I mean, there clearly were specific actions that we took both sides of the both partners heading into the close of the joint venture that moved more inventory into the trade. That was intentional to really create a buffer and allow us to feel confident that we could manage through the start up of the new systems and order management and all that went with that the closing process. But nothing new, Eric, in terms of our view of the opportunity here and the accretion dilution at this point.
Okay. Thanks for that. And then I guess both to Irene and to you Brian, the I guess I just I'm not exactly I guess I'm just a little bit concerned about the volume weakness in the quarter. I mean, it's hard from the outside to figure all this out, but you're spending a ton of capital to put in these highly efficient lines. And these efficient lines, I assume the volume that's going that efficiency is a function of the volume that's going through them.
And so to the extent that you have other, I guess, cost savings, your decision to price against currency results in weaker volume. It doesn't look like the ANC had a big impact or a positive impact in the quarter. So I guess, not really sure what the question is, but I just am a little bit concerned that the decision on price versus FX related price versus volume weakness makes this whole transformation less powerful because of the fixed cost absorption not being there? Or maybe you just kind of walk me through why that's not a concern?
Yes. I guess, Eric, it's a fair question, but I would tell you that the impact on our volume is uppermost in our mind, but we constantly are evaluating the opportunity to make sure that the margins of these various franchises are attractive enough to warrant the investment, while recognizing that we do create some dislocation, we are leading pricing in most of these markets. And in markets like Russia, for example, we priced 3 times in the course of this year in response to the significant and rapid devaluation of the ruble. So, I feel very good that we are managing to get our margins and protect our margins where they need to be. We are spending back as appropriate.
And as I said at the in response to the earlier question, the aggregate Q3 results mask some of the impact that our spending is having. Take chocolate in Europe, for example, We chose to delay some of that spending until September rather than into the summer because of the fact that we had an unusually hot summer. And therefore, not a surprise that it is just starting to have an impact now. So I think if you start to look at our shares over the last 4 week period, we're seeing very strong response as the categories in a number of these markets are now growing. You think about markets like India, for example, think about the UK, our latest 12 week share is up 1.3 after share losses up until that point.
The latest 4 weeks were up 3 point 6 points. So we're seeing very strong indications that we're getting a good return on the A and C investments. We are carefully monitoring the volume pricing relationship because as you rightly point out, fixed cost absorption is important to us. But in the face of what we're doing, we're generating net productivity of over 3% of cost of goods sold. So I feel pretty comfortable.
The algorithm is working and we should see improved performance, particularly on shares as we move into as we exit the year.
And Eric, I would just say on the as you think about capacity and what we're doing with the supply chain, I mean, we're making real time adjustments to the capacity, where it goes, how much is volume related versus, in some cases actually closing down capacity sooner and pulling in some of those programs given what's going on in the overall market and category growth and volume growth.
Our next question
Just two questions. One, just to focus on the EMEA region. You're obviously taking more pricing and you were able to protect profit dollars year on year this quarter. Just curious if you can give any give us any guidance of how we should think about your objectives going forward over the next several quarters given currency macro pressure? Are you going to look to continue to manage toward protecting profit dollars or margins?
And then as you move toward a period of fairly easy margin comparisons, is it feasible to expect margins to maybe remain the kind of low double digit levels we've seen over the past 6 months?
So I guess the first answer to the first question, Matthew, is that we are seeing the margins improve in response to our pricing actions. We are monitoring the balance very carefully. And as we said it a couple of times, the reaction that we're getting to these pricing actions is pretty much in line with our elasticity assumptions.
Yes. I think it's a volatile market. There's no question. So I mean as the year has played out, it's played out differently than I think we expected. In some cases, we're having to make real time in quarter decisions on pricing.
But the agenda in terms of getting supply chain in the right place, in terms of getting the right products in the market, I mean, those are all the things that we're focused on. We will have a period of some easier compares given we're lapping some of that volatility in the 1st part of next year.
I will say, if you look at markets like Russia, where as I said, we priced 3 times in the course of this year in response to the significant devaluation, our shares are holding up remarkably well. And the reason for that is we have continued to invest in our marketing support as well as innovation. And that playbook is working well for us around the world.
Okay, great. But fair to say we may still continue to see some of that same level of margin volatility or it's hard to say that may not occur?
It's hard to predict what happens in those markets. I think that's the reality. Okay.
I think, I mean EMEA, of course, is a massive case in point. So I think the volatility we're seeing there is more extreme than almost anywhere in the world. But again, our focus is to keep our eyes on the markets, to understand where we stand from a share perspective and where we feel the need to supplement our investment, we're making those choices.
Okay, thanks. And Irene, could you just talk a little bit about the retail environment in the UK? There's been some renewed reports suggesting factor looking out over the next year factor looking out over the next year?
I don't think so, Matthew. I mean, the European retail environment is challenging and I think we have been able to hold our own quite well. They're interested in some of the very same things that our retailers around the world are interested in, what's happening in health and wellness, what's happening on the innovation front. And as long as we continue to drive traffic to their stores, we're an important partner. I'd also tell you that we're increasingly we're increasing our e commerce business with partners, a number of partners in the UK who are very much at the forefront of this click and collect initiative that you hear about.
And so I think the combination of all of those things gives us great continued improvement in our overall revenue and share trends.
Okay, great. Thanks, Irene.
Our next question comes from the line of Alexia Howard of Bernstein.
Good morning, everyone.
Hey Alexia.
Hi there. We've been hearing a little bit about some organizational structural changes that you might have put in place? And maybe the impact it may have on headcount? I mean, we'll see that in the 10 ks when it's published next year. Any order of magnitude would be very helpful.
Thank you.
Yes, Alexia. Look, I think it's
these are the initiatives we've been talking about for a while. When you think about overhead reductions, when you think about what we're doing with ZBB, I mean, the 2 big ones that we've spent time talking about, clearly, a shared services model that we even mentioned in the comments today, where we're moving a significant proportion of our backroom processes around finance and HR and some other functions to outsource partners in most cases. But that's causing significant changes in our org model and disruption around the world. But that's something that we've spent a lot of time working through a process to execute that and we feel good about really how that's going. The second one is really moving to the category model and that's something that we've been doing over the last, frankly, a couple of years and really changing the structure of how we run the businesses at the region level and in the countries.
So that is work that's been going on and frankly will continue as we optimize around a category driven model. Those are the 2 big ones and not really providing a lot more detail in terms of specific actions that go behind that.
Okay. Thank you very much. I'll pass it on.
Thanks, Alexia.
Our next question comes from the line of David Driscoll of Citigroup.
Great. Thank you and good morning.
Okay, David.
Brian, I think the guidance means that the 4th quarter operating margin If my updated model here is done correctly and the quick math and if that's right, then the real question is that for 20 16, you guys reiterated this 15% to 16% margin. I mean, we are here in October and so I feel like 'sixteen is a stone's throw away. To go to the top end of that, to go to 16%, I mean, it's almost like 200 basis points or rounding here, 200 basis points of improvement to get to that top end. That seems like quite a lot. At this point, kind of given a slow backdrop, Irene, a clear desire by the company to want to keep investing in the business in these white spaces around the world.
Doesn't that top end seem like a stretch at this point? Is that fair? Or are there some comments that you can provide here?
Yes. Appreciate the question, David. We're not obviously not going to provide an outlook for next year at this point. I would tell you, your math makes sense as you think about the Q4. I would tell you it's a prudent view of how we think about the Q4 given the volatility that we see in the business and some of the markets as we've called out.
But it also allows us to have some flexibility around what levels we want to reinvest and add additional A and C to the business to get that balance between the top line and bottom line and get some growth back. So we feel great about the progress with supply chain and shared services as being key elements that are going to provide additional upside as we head into next year. We're at a point where we've seen pretty significant improvement. If you look at year to date margin improvements, it gives us confidence that that sort of a jump is reachable. So we're building on the momentum we have this year and we'll update you on how we think about 'sixteen as we close out the year.
Okay. Thank you.
We have time for one more question. Our final question will come from the line of Kenneth Beslow of BMO Capital Markets.
Hey, good morning, everyone. Just finishing up on
a couple of quick questions.
One is Salinas. Can you give us an update on that? And how are the other projects of the reconfiguration going in certain areas Bahrain and around the world?
Yes, so far so good. We announced $130,000,000 investment last quarter in Salinas. It is our one of the key drivers of our improvement in North American margins over time. And so far so good. So as we said, most of our supply chain investments, as we think about the progress we're making in Bahrain, in China, in Europe, all around the world, we're making some very good progress on the investments that we've made.
And there'll be a key driver, as Brian just said, it'll be a key driver of our performance as we go into 2016 and then into 'seventeen, 'eighteen.
And
my final question is on inventory management, I know you guys have changed it over the last couple of years. Can you give a little bit more in-depth idea of what has actually changed because this seems to be a problem with many other companies and you guys have obviously navigated quite successfully over the last year, year and a half. And just kind of figuring out what makes you guys more successful at this and what has changed?
Well, I think, Ken, we learned our lesson the hard way. And the facts are, we're not doing anything Herculean. We are simply making sure we have the data and we are looking at it at all levels of the company on a regular basis. And I think what we discovered in markets like China, for example, it's a fairly complex supply chain, and therefore keeping our eye on the pulse of the business is critically important. I referenced Brazil and Russia in my remarks because they're volatile and it's imperative that we monitor continue to experience volatility in this challenging macro environment that we're well positioned to manage our businesses and continue to deliver our
So that's been an important So that's been an important addition to the process.
Great. I appreciate it. Thank you, guys.
That was our final question. I would now like to turn the floor back over to management for any additional or closing remarks.
Hi, this is Dexter. Thanks for everybody for joining. We'll be available for questions later on to the day. And again, thank you for joining the call.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful