Mondelez International Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2022

There are 10 speakers on the call.

Operator

Day, and welcome to the Mondelez International Second Quarter 2022 Earnings Conference Call. Today's call is scheduled last about 1 hour, including remarks by Mondelez Management and the question and answer session. To be recorded. I'd now like to turn the call over to Mr. Shep Dunlap, be Vice President, Investor Relations for Mondelez.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, and thanks for joining us. Open. With me today are Dirk Van de Putt, our Chairman and CEO and Luca Zaramella, our CFO. Earlier today, we sent out our press release be recorded. The presentation slides are available on our website, mondolizinternational.com/investors.

Speaker 1

During this call, we'll make 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. To be recorded. Please refer to the cautionary statements and risk factors contained in our 10 ks, Q and 8 ks filings for more details on our forward looking statements.

Speaker 1

As to be recorded. As we

Speaker 2

discuss our results

Speaker 1

today, unless noted as reported, we'll be referencing our non GAAP financial measures, which adjust for provide guidance included in our GAAP results. In addition, we provide our year over year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non GAAP reconciliations within our earnings release and at the back of the presentation. To be recorded. On today's call, Dirk will provide a business and strategy update, then Luca will take you through our financial results and our outlook.

Speaker 1

We will close with Q and A. With that, I'll turn the call over to Dirk.

Speaker 3

Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I'm pleased to share that we have delivered a strong first half of the year Our core chocolate and biscuit businesses continue to demonstrate volume and pricing resilience to as consumers around the world continue to seek out our trusted and iconic brands to meet their snacking needs. And although we may see a more mixed consumer sentiment in the near term, given the macro environment, We expect the consumers to consume more at home and be more selective in the brands they buy, which we believe to be a net positive for our shareholders. We also continue to effectively navigate dynamic operating environment.

Speaker 3

Input cost inflation remains challenging. And although we may see commodity inflation beginning to ease, We expect other costs like wages to show significant inflation. Our strong track record in Having cost efficiency and simplification positions us well to mitigate the impact of these inflationary factors. To At the same time, our consistent results enable us to maintain our course in driving a virtuous cycle to be recorded. We also continue to make great progress in reshaping our portfolio.

Speaker 3

A great example of that is our agreement to acquire Clif Bar, which will improve our position in the attractive and fast growing snack bar category. I'll share some additional context on the exciting in a few minutes. Along with the CLIF acquisition, We announced plans to divest our developed market gum and gum and hauls businesses, allowing us to focus our portfolio We remain confident that the strength of our brands, our proven strategy and our increasing investments position us well to deliver attractive, sustainable growth for the remainder of 2022 and beyond. To Above all, we remain extremely confident in our people, who continue to demonstrate exceptional passion and dedication to serving our consumers, despite ongoing challenges with inflation, supply chain and periodic in COVID conditions. Day in and day out, our 80,000 plus makers and bakers strive to help people snack right.

Speaker 3

To We respect and honor our colleagues around the world and we truly believe that Team Mondelez is a very to continue to drive a virtuous cycle. The strength of our brands, increasing investments, volume growth and significant pricing actions are sustaining top line momentum and solid profitability despite substantial inflation. To We grew revenue this quarter by 13% and 10.7% for the first half of the year. We delivered gross profit growth of 9.7% due to healthy volume growth and pricing actions. To Our A and C investments have increased double digits to gain or hold share across more than half our revenue base to make this leading chocolate brand most tender and creamy ever.

Speaker 3

This program includes an upgraded taste profile, This initiative represents our largest chocolate brand renovation in 25 years. Illustration of the campaign is featured be recorded on our earnings presentation coverage page. We are supporting the launch with a fully integrated 18 month marketing and advertising support program starting in H2 'twenty two. And last, We increased operating income by 8.5% for the quarter and 11.2% for the first half, In late 2018, we launched a new growth plan focused on gross profit dollar growth, local first commercial execution, reflect a virtuous cycle of increasing investments and a new approach to aligning our incentives. We are confident that this approach continue to consistently deliver attractive growth.

Speaker 3

Importantly, we are also delivering strong volume, which is important to us. It is approved that consumers are eating more of our products every day, an indication of sustainable long term growth. Like many companies, as shown on Slide 7, we are experiencing a dynamic operating environment driven by global cost inflation, supply chain volatility and currency headwinds. Let's take a closer look at Elevated input cost inflation, especially in the areas of energy, transportation, packaging, to be recorded in the Q4 of 2018. We recently announced further pricing actions across key markets and continue to take appropriate action to hedge our commodity costs along with ongoing productivity and cost reduction initiatives.

Speaker 3

To 2nd, we continue to manage through volatility in the supply chain, especially in the United States, due to labor shortages at 3rd parties as well as a continuing gap in demand and supply of trucking capacity containers. Implement new measures to support employee retention. 3rd, we are working through the impact of the strengthening U. S. Dollars, particularly against the euro and the British pound, but focusing on what we can control.

Speaker 3

This includes mitigating our translation exposure to through currency hedges and net investment hedges. Delivering a trend of real dollar earnings is an ongoing focus And though we may see some significant currency swings in the short term, we have delivered robust real dollar earnings growth Our annual state of snacking survey shows that consumers increasingly prefer snacking over traditional meals. And because snacking plays such an important role in consumers' lives, our core categories of chocolate and biscuits historically have This trend continues to play out around the world despite an overall drop in consumer confidence. While developing consumers express growing frustration With rising prices for a broad range of goods and services, they continue to perceive chocolate and biscuits as affordable indulgences and an important pick me up. In fact, almost 40% of U.

Speaker 3

K. Shoppers say that chocolate is a necessity Category volume growth and penetration is holding up well in most of our key developments. To be recorded. Have notched up slightly, but remain low compared to historical benchmarks. Private labor is either flat or down in the vast majority of our markets and shoppers say they are much less likely to switch to private label in chocolate and biscuits compare to other categories.

Speaker 3

Meantime, in emerging markets, consumer confidence remains relatively strong, recovering to almost pre COVID levels and our core category shows solid volume and penetration growth despite price increases. Compared to developed markets, emerging market consumers are less likely to reduce overall consumption of our categories or switch to commence when faced with price increases. Instead, they are more or less to switch stores to find deals on their favorite brands Overall, we remain confident that the strength of our beloved Moving to our efforts around portfolio reshape on Slide 9. I'd like to share a bit more color on our recently announced agreement to acquire CLIF Bar. CLIF is a leader in high growth, well-being snack bars.

Speaker 3

The company's on trend brands, including CLIF, Luna and CLIF Kids are great addition to our global snacking portfolio And they are differentiated. Each of these brands is strong and healthy, very high Advocacy and loyalty. Cliff also enjoys high brand loyalty among the 18 to 24 age group. The brand also performs well on key taste testing practices, a critical differentiation across age groups in a category where many products don't so well. Cliff is also widely recognized as a leader in well-being and sustainable snacking.

Speaker 3

The company's purpose and culture are well aligned with our purpose of empowering people to snack right. On Slide 10, you can see that we have moved from a small bar business in 2018 to about $300,000,000 last year with the addition of Perfect Snacks and Granade and to a $1,000,000,000 plus global snack bar platform, factoring Cliff. To This gives us an attractive position in a 60% market with revenues roughly split between U. S. And international.

Speaker 3

To has a significant $700,000,000 plus presence in the U. S. Protein and energy space, to Slide 11 shows that the Clif Bar acquisition offers an opportunity for us to build the business through our marketing expertise, operational excellence and financial discipline to create significant value. There are clear and substantial cost synergies, to be recorded in the Q1 of 2019 to optimize A and C spend. In terms of growth, we see substantial to increase household penetration and distribution in alternative and e commerce as well as existing outlets.

Speaker 3

There is also an opportunity to unlock growth through revenue growth management and enhanced in store excellence. And beyond the U. S, there are clear opportunities to drive international growth. We are excited about the announcement to acquire the CLIF business and the top and bottom line growth opportunities that lie ahead. We also see material upside to the returns Cliff is just the latest example of our continuing efforts to reshape our portfolio through strategic M and A that increases Our exposure to incremental fast growing snacking segment.

Speaker 3

Since we announced our strategy in 2018, we have to $2,800,000,000 in annual revenues and averaging growth in the high single digits. So for 2022, In addition to announcing the Cliffs transaction, we have closed and integrated our acquisition of Chipita, a high growth European lead in croissants and baked and announced an agreement by Ricolino, Mexico's leading company, Bimbo Bimbo. These strategic acquisitions will complement and build on our substantial M and A progress in 2021, which brought us Granae, a leading U. K. Performance nutrition company, Gourmet Foods, a leading Australian premium biscuit and cracker company and You, provide a well-being snacking company in Inverness.

Speaker 3

These acquisitions have been regional in nature, to be largely managed by local teams. This includes the recent Chipeta acquisition, which we successfully and rapidly be recorded at the end of Q2. We are confident that executing our strong patient playbook will allow us to drive sustained growth be accretive to our algorithm across the portfolio. With that, I will hand over to Luca for more details on our financials.

Speaker 4

Thank you, Dirk, and good afternoon. Our 2nd quarter performance was once again strong with above expectations reflect the outlook for the Q1 of 2019. We delivered revenue growth of 13% exploit our long run wave opportunities is paying off. Emerging markets to show significant strength, Posting an increase of more than 22% with great momentum across all our major business units. Importantly, volumemix drove more than 10 points of this.

Speaker 4

The decline in the market grew plus 8.1% for the 2nd quarter, with strength in both Europe and North America as demand trends were throughout the quarter. Volumemix was also positive in developed markets with approximately 4 points of volume in Europe, while U. S. Will be most likely negative given supply chain constraints. You can see our portfolio performance on Slide 15.

Speaker 4

Chocolate and biscuits continue to exhibit to be released coming out of the pandemic. Biscuits grew 10.4% for the quarter, with nearly 2 points coming from volumemix. Deliver strong increases, includes Oreo, Chips Ahoy, Brits, Lueb's. Chocolate grew more than 5% With increases in both developed and emerging markets, including double digit growth in Europe. Chocolate was driven by robust volume growth of +9 percent to release the results of the year.

Speaker 4

Consumer and Candy grew nearly 26%. To be released in North Africa all delivered strong growth. Now let's review our market share performance in 2016. We had a fair in 55 percent revenue base during the first half with 20 points of headwind due to the service challenges in the U. S.

Speaker 4

We expect to see gradual improvement in the half of the year. Our chocolate category performed well with 75% of our revenue base Holding or gaining share. Our biscuits category held or gained share in 40% of our revenues, close 40 points of headwinds from supply chain constraints in North America. We are already seeing some improvements in service levels and share, but we expect these ongoing improvements to be visible as the year progresses. Now on Page 17.

Speaker 4

Allowed us to reinvest in A and C by double digits in the quarter and obtain EBIT gains versus last year. To Turning to regional performance on Slide 18. Europe grew 10.8% during the quarter, be recorded by great execution and strong growth across mass grocery as well as convenience, away from home and travel detail channels. To be recorded. The Q1 of 2019 declined a little over 1% to by significant commodity pressure as well as the impact of the Ukraine war.

Speaker 4

The implementation of pricing will allow us to return to profit growth. Importantly, we continue to invest in AMC. North America grew 9.2 1% in Q2, driven by higher pricing in biscuits as well as double digit gum and candy growth. Volumemix was down 1% as a result of continue supply chain constraints. North America OI increased by 0.3% during the quarter due to higher That was announced in early EMEA grew 13.2% for the quarter with strong volume mix growth of 8.7 points, show continued momentum in the quarter.

Speaker 4

India grew almost 30% in the quarter, driven by chocolate and biscuit. China increased high single digit despite COVID restrictions in certain cities and Southeast Asia delivered high single digit growth with double digit growth to be recorded in the Q4 of fiscal 2020. AMEA increased OI dollars by 7.9% for the quarter as volume driven profit was partially offset by commodities, Transportation inflation and reinvestment in A and C. Latin America grew 33% with double digit volumemix growth. Category strength was broad based, small digit increases across the board.

Speaker 4

Brazil, Mexico and our Western Andean business unit all posted very strong double digit increases similar to last quarter. Adequivalent dollar in Latin America increased more than 70 increase the quarter. These increases were driven by broad based volume growth, effective pricing to our GM actions and higher AM and candy sales. To Now, on Slide 19. Q2 EPS grew 9.1% at constant currency.

Speaker 4

This growth was high quality as it was primarily driven by top line related operating gains. To On Page 20, we remain focused on driving attractive top and bottom line performance, to include in real dollar earnings growth. Clearly, this is a challenging year in terms of exceptional currency headwinds to for us and for our industry. By executing against our strategy and focusing on what we can control, our performance over the past 2 years has been quite strong, both on an absolute and relative basis. These results to to drive strong profit dollar growth in constant and real dollar terms.

Speaker 4

Turning to free cash flow and capital return on Slide 21. We delivered first half free cash flow of $1,600,000,000 during the first half as a result of our strong growth and profitability. We also returned $2,500,000,000 to shareholders in the form of dividends and share repurchases over the same period. Our ongoing confidence in the business and cash generation enabled us to also announce a 10% increase to our cash dividend. Over the past 3 years, we have increased our dividend by more than 35%.

Speaker 4

To Before I cover our outlook, I wanted to make a comment on our focus now and going forward as it relates to the current environment. To We have and will continue to take action to navigate some of the near term dynamics around inflation and supply chain constraints. However, to We remain true to our strategy and making the right decision to drive attractive, profitable and sustainable growth for the long term. That means we remain committed to significantly vesting behind our brands, driving volumes, generate healthy profit dollar growth and increasing our market share. We believe this discipline to We also have a clear focus on strong earnings growth in constant real terms dollars.

Speaker 4

We have done this over the past 3 years despite the strong dollar. Although this year is shaping up to be more challenging, we believe we are well positioned to attract real dollar earnings in the years to come. Now let me provide some color on our revised 2022 outlook on Slide 24. Given our strong first half results, we now expect 8% plus top line growth. This revised top line outlook factors in a number of considerations, including: the negative full year impact anticipated from the Ukraine war, including revenue losses related to products that previously were manufactured in the country and exported into Europe.

Speaker 4

This can be quantified in approximately 1 percentage point of equivalent revenue growth. 2nd, some elements of customer disruption in Europe as a result of the 2nd wave of price increases. To While we have already been able to agree on most of the planned price increases in Europe, there are still some customers and countries where negotiations are underway. The size of customer disruption is difficult to predict, but we have factored into our guidance a certain impact, Which is expected to be more pronounced in the Q3. Finally, although elasticities have been at low levels to have we are planning for them to return closer to historical levels in the second half to Our EPS outlook of mid to high single digits is unchanged and risk adjusted for additional inflation resulting from the Ukraine war, some customer disruption with respect to pricing and higher levels of elasticity.

Speaker 4

However, given the strength of our first half results and depending on the outcome of our pricing negotiations in Europe, we might finish to be recorded in the upper part of this range. As far as cost inflation goes, our expectations for low double digit cost inflation to be recorded. This earnings outlook also reflects $0.04 of EPS headwind conclude from our Stop Ukraine operations. Additionally, this outlook reflects our ongoing commitment to investing in our brands and media, to Our EPS outlook also now factors in $0.22 of earnings related to ForEx impact. Point 12 dollars of this amount have already been in our first results.

Speaker 4

With respect to free cash flow, our view is unchanged. We continue to expect $3,000,000,000 With that, let's open the line for questions. To

Operator

to. And our first question comes from Brian Spillane with Bank of America. Your line is open.

Speaker 2

Thank you, operator. To Good afternoon, Dirk and Luca. Two questions for me. The first one is just maybe Dirk, if you could step back and just give Sort of the current state of things in the marketplace. And I guess in the context of having such a strong first half and to maybe it's contemplating maybe some deceleration in the second half.

Speaker 2

Just where do things stand currently as you kind of look across

Speaker 3

to Yes. Hello, Brian. Well, I would say overall, we feel Good about how 2022 is panning out for us. As you can see from the presentation, the demand is strong. We have Very good volume growth.

Speaker 3

Chocolate and biscuits are showing good growth. The categories are holding up. The emerging markets are a real growth engine for us and developed markets are solid to with good volume in Europe. And so overall, year to date, our profit Dollar growth is good, double digit and free cash flow is also strong. So I think the numbers of the first half Really good.

Speaker 3

If I then look to the second half, we feel good about the second half. To If I go a little bit about what's going to happen here, I think we will see some Softening of consumer confidence, particularly in developed markets, I would say. But I do expect our categories to remain solid, Probably flat to small growth in volume and then, of course, the effect of pricing. And I think within that, our brands are very strong and have a good connection to the consumer. We will have ongoing conversations with our customers about price increases and we will try to drive A value equation there.

Speaker 3

I think together, we can probably find a way to keep our categories going at a very good rate to and create the necessary value. I think competition will be about the same, maybe a difference between those that will invest to And those that won't. And then from a pricing perspective, I can of course not comment on specifics, but more pricing has to happen. And it's we execute very carefully by market, But it is something that still is in the pipeline. Most of it has been announced and we're now in the discussions and implementation of it.

Speaker 3

Elasticity, as you saw, is low, but we expect an uptick and we've planned, in fact, for the second half of the year, normal elasticity that might pan out that way or not. At this moment, it would look it wouldn't, but we thought it would be a more careful planning stance. And then to From a cost perspective, yes, some commodities are pulling back, but we do expect the near term inflation to remain high. So I would say that our stance for the second half is positive, but careful because we might see a more pronounce consumer reaction. We might have more difficulties getting pricing implemented.

Speaker 3

But overall, I think what's unique about us is that we are clearly in a virtuous cycle here. We are investing quite strongly as you could see. To That is leading to strong volume growth with some good pricing on top. Our gross profit growth to We think that virtuous cycle will continue, but there might be here and there more difficulties than we've had in the first half. But overall, I think we feel very good about 2022.

Speaker 2

Thanks, Dirk. And if I could follow-up on to Just specifically in Europe, in the prepared remarks you made, there were some comments about some caution around trying to push some price to We know that there's we still have the conflict in the Ukraine and the impact on Russia. So maybe if you could talk a little bit about just to Is Europe kind of more of a concern area for you? And Luca, if you could add, the margins were pretty soft in Europe in the quarter. Is that something we expect over the back half of the year?

Speaker 2

Thank you.

Speaker 3

Yes. Again, Europe, I'll comment first on what we see with our business in the consumer in Europe, and then Luka can talk about the margins. I mean, Europe was strong from a top line perspective. I'll hand it over to Luca for the margins afterwards. The business continues to perform well.

Speaker 3

Our core categories, Our robust penetration is flat. We don't necessarily see consumers walking away from our categories or down trading so far. What we see is that consumers continue to prioritize grocery spending. They're spending less on other categories, But not on grocery. Private label is not particularly increasing.

Speaker 3

There is really little evidence to That is happening. What we do see is that consumers are switching more to discounters. So that's a little bit the overall situation. So, so far so good, I would say. Nothing major happening from a consumer perspective.

Speaker 3

Going forward, yes, we are probably a little bit more concerned about Europe because We still have some pricing to implement of the second pricing round in Europe, about 65% is now agreed, Still 35% under discussion. We think I think we will get there, but then the consumer will be confronted With that extra pricing and we will see what the reaction is going to be there. So I would say we are feeling good so far, but we are Of all the regions around the world, probably more concerned about what's going to happen in the second half in Europe. Luca?

Speaker 4

Yes. So Brian, a couple of things, just to give you a little color. When actually I look at the GP dollar line to Europe, it was up year over year even if marginally. But clearly, the material revenue and volume didn't translate proportionately into the appropriate gross margin and that is because quite honestly, we have been a little bit delayed in terms of implementing to. And you might still see margins under pressure in Q3 because of potential customer disruption.

Speaker 4

But as of to As we look back and as these things will be behind us, margins in Europe will be restored. The other one that is Important for us to notice is that A and C was up meaningfully in the quarter in Europe, because obviously, ahead of price increases, We want to keep consumer engaged. So the simple straight answer is yes, margin was pressured. As we implement pricing, the situation should get back to normal and importantly, we continue investing and that is one of the reasons why actually despite gross profit dollar being up year on year, OI margin OI dollars was down in the quarter.

Speaker 2

All right. Thanks, gentlemen. I'll pass it on.

Speaker 4

Thank you, Brian.

Operator

Thank you. Our next question will come from Andrew Lazar with Barclays. Your line is open.

Speaker 5

Great. Thanks very much. You raised your full year organic outlook growth outlook meaningfully, but kept Obviously, the mid to high single digit constant currency EPS growth guidance. What would be preventing the top line strength from flowing through to profitability more significantly? Or Is there perhaps an element of conservatism built in the model?

Speaker 5

It certainly seems that way from some of your previous comments, but just want to make sure there's nothing

Speaker 4

to Thank you, Andrew. I'll give you a little bit of color around how the P and L came together in our mind in terms of giving you guidance. We continue and I personally continue to feel very confident about 2022 being a very strong year and that is not only in terms of Top line, but also in terms of bottom line and particularly cash flow. You might have noticed $1,600,000,000 in the first half, it is one of the They are doing very well. I mean, I'm impressed with the volume mix that we saw in the first half.

Speaker 4

And as I said, while we kept on investing in the business, You see that our bottom lines and cash flow continue to be strong. The 8% plus top line guidance reflect that Confidence and when you consider that it includes one point for the Ukraine crisis, a potential and Quite frankly, as I said, difficult to estimate impact from customer reaction, and as well as a more normal level of elasticities, you understand really that to The business has an underlying momentum that is quite good, and we are confident in the combination of those trends. On the profit side, look, I said it the last time we talked, I said we might be cautious And we continue to be cautious. But quite frankly, we are now in a much better position than we were the last quarter to really see line of sight to high single digit EPS at this point. I just wanted to be a little bit conservative because Clearly, customer disruption is difficult to predict and then elasticities that are above what we see today can play a role as well.

Speaker 4

So I would like to say that in case of Elasticities that are more benign and more benign customer reaction than the one we have planned. Certainly, we're going be within the high single digit remit. I also would like to make a point, which might be overlooked All these numbers is and it is the fact that we continue to observe very good cost discipline in the company. You might be sidetracked by looking at the SG and A line being up year on year, but reality is overheads is Our health under control and the line that is increasing by more than 13% is our A and C support to the business.

Speaker 5

Great. Thank you for that. And then just briefly Dirk, thanks for the details on Cliff. Some investors certainly still question the greater foray into the bar category And as recently announced with Cliff is, it's perceived as a fairly crowded space and one maybe where it can be tougher to sort of differentiate. I guess what underpins your confidence in being able to drive the profitability of that Cliffs business meaningfully over the next several years Such that there is a compelling ROI on the transaction.

Speaker 5

Thanks so much.

Speaker 3

Thanks, Andrew. Well, we believe that the category is interesting and it had a slowdown As it relates to the COVID, because it's very heavily linked to mobility, but clearly the category is coming back to in the recent months. And Cliff within that category is a very strong position. To It has been for several years the fastest growing in that bar market. To We would say that the brand is very strong from our perspective Across all age groups.

Speaker 3

It has organic ingredients. It has a great taste. When we look at the details, we believe that there is a big opportunity to expand distribution in existing and alternative channels, to but also improve the quality of the distribution of where Cliff is present. We also think we can optimize A and C as well as their cost of goods and their SG and A. We also think that working with them, we can work on RGM and PPA to and also make a difference there.

Speaker 3

We think that the transaction price was to The fair premium for a very scarce high growth quality asset in North America. So we feel good about the value that we're getting there. I would say the profitability of last year for Cliff is not representative. As I said, we have a significant opportunity to optimize overheads, implement an RGM strategy. They've been experiencing supply chain disruption.

Speaker 3

And we are already seeing in the first to 2 quarters of this year, a much improved profitability for the business. So we feel that the business is completely coming back to normal and then we can add on the many synergies that we see from our side. So the earn out is another factor probably that's important. We did see the possibility to add to If we would go with a substantial top line acceleration and margin expansion. So, we believe that as we would enter into that acceleration, our returns would even go up.

Speaker 3

And so we hope that we will see that sort of growth that we have been planning for. Thank you so much. Okay. Thanks, Andrew. Sure.

Operator

To. Thank you. Our next question will come from Chris Growe with Stifel. Your line is open.

Speaker 6

Thank you. Good evening. I just had a question for you, if I could, on around this quarter with this accelerating rate of volume growth In relation to accelerating pricing, which is obviously very encouraging. I wonder if you could discuss that broadly and what you think drove that incremental volume as the pricing went higher. But then also with that stronger volume growth should come better fixed cost leverage.

Speaker 6

And with the gross margin being down a little bit sequentially, to I realize that pricing did not quite keep up with inflation, but just understand how that fixed cost leveraging might have helped the gross margin in the quarter or may help it going forward?

Speaker 4

Look, we are very happy with the volume growth and the revenue progression. There is an element to Clearly, some of the businesses that were impacted during COVID coming back. But reality is the underlying to performance of both biscuits and chocolate, it's just great. I can't Find another word really to qualify it. As you look at the profit, the volume leverage is in there.

Speaker 4

The point is, particularly in the case of Europe, as you look at the profitability number, there is a lag between commodities hitting the P and L to and pricing being implemented. And you realize that maybe in Europe, it is more challenging than in other places. The rest of the world, we have been much more proactive in terms of pricing, but it is Europe really impacting to the overall profitability of the company. Having said that, I still would like to get a couple of points out there. We clearly identified the watermark for our algorithm to work in terms of gross profit dollars to be 4% plus versus to I mean, this quarter, we are almost 10%.

Speaker 4

You look at the profit dollar growth, I think on a year to date, we are 11%. To You look at the amount of A and C we have put into the P and L, as I said, it is double digit year on year. So when you step back, I think the question would be, if we had price earlier in Europe, how good of a P and L would we have? And it will be clearly much, That's better. And that I think is what is going to happen going forward if we continue to invest in the business and execute pricing well because to I think there is still, obviously, as we've said, a few situations where price needs to be implemented, to particularly in Europe.

Speaker 4

Volume leverage is a critical component of the algorithm, and we will protect it as much as possible, to and the benefit is going into the P and L. The point, as I said, is there is a lag between pricing and commodity going into the P and L of Europe.

Speaker 6

Okay. Thank you for that. And just a quick follow on. If I think about the second half outlook and a little more cautious view on to Margins, at least at this point as you've taken revenue up and kept EPS in place. Is the main item to watch here the consumers' reaction to the to Consumer's reaction to the pricing, is it elasticity we should be watching or is the volume performance or anything else that you would just note that we should watch as an Indicator for success for the second half of the year.

Speaker 6

Thank you.

Speaker 4

Look, the underlying margins is quite good. The inflationary pressure, Sure, I would say is going a little bit up because obviously in Q1 we had a more favorable pipeline of commodities. But besides elasticities, as I said, there is this element of what is the impact of customer disruption. And so that's where we wanted to review the mid single digit to high single digit range as far as EPS goes. Look, as I said, even in presence of maybe a customer disruption, but with more benign to specific than those that we have planned that are in line with historical norms, I think we still have a shot at getting to high single digit EPS.

Speaker 6

To Okay. Thank you for the time.

Speaker 4

Thank you, Chris.

Operator

Thank you. To Our next question comes from Alexia Howard with Bernstein. Your line is open.

Speaker 7

Good evening, everyone.

Speaker 3

Hi, Alexia. Hi, Alexia.

Speaker 7

Hi, there. To Can I ask to begin with, there wasn't much commentary in the prepared remarks about market share trends, which I know were very be strong a couple of years ago and probably a down year on year against some tough comps? But I wondered whether you could just make some commentary on that, particularly given what we're seeing in North America to I think it's down, but maybe because of supply chain constraints. But I'd also be curious about market share trends in other parts of the world as well. Thank you.

Speaker 7

And I have a quick follow-up

Speaker 3

Yes. The answer is relatively straightforward. Apart From some nits here and there, the only area where our market share is down is in the U. S. And that is driven by the supply chain gradual recovery that we're having.

Speaker 3

If I look around the world, In EMEA, we have very solid gains. In China, in India, Bolte Biscuits, to we see also gum in China doing extremely well, chocolates in South Africa is doing well. In Europe, we are gaining share, Mainly driven by France Biscuits and UK Biscuits. Latin America It's flat year to date, but they had a major increase last year, but also their biscuits are gaining share. And the Easter period has been particularly strong for us.

Speaker 3

So we've gained significant share there, so our strongest Easter to We will have some negative impact in Europe because we were exporting to the European markets from our Ukraine to release and so that will have an effect. We are working on alternative sourcing, but until the end of the year, we will have some disruption from that. Now if I look to the U. S, so the share that we're losing there is purely because of supply chain constraints and it's on 4 local brands, Nilla, Nutter Butter, Premium and Belvita. To Our supply chain service levels and the performance of our lines are gradually improving.

Speaker 3

To And so we are expecting to see some share improvement in North America in the second half of the year. And overall, I would say longer term, we feel very good about continued share gains Because of the amount of brand investments we're doing, the ROI we're getting on those, we are also Driving share because of distribution gains in places like China, India, Southeast Asia, and we also have good gains coming from our innovation. So if you would be able to discard the U. S. Situation, I think you would be able to see a very good situation in the rest of the world.

Speaker 7

To Great. Thank you very much. And just a quick follow-up. Have you disclosed how you're planning to finance the Cliffs Bar acquisition, whether that's out of Debt, cash on hand or any other measures.

Speaker 4

Yes. We have released, I think, a couple of weeks back an 8 ks where we have to be issued as a bridge to the divestiture of gum in developed market and holds worldwide to be able to deploy those to Now there are still other things that might be in play. As you know, we have multiple levels of We believe that the $2,000,000,000 of share buybacks is secured for the year. So I'm not sure we will go there to fund the acquisitions.

Speaker 7

Great. Thank you very much. I'll pass it on.

Speaker 4

You bet.

Operator

Thank you. Our next Question comes from David Palmer with Evercore ISI. Your line is open.

Speaker 8

Thanks. On Europe, you mentioned organic sales and Volume trends are remaining strong and you showed that pretty lousy consumer confidence numbers over there though. And so it does seem to be Maybe even more than the U. S, a period of some data looking worse than others. But are you seeing any countries or categories where price elasticity is picking up and you're seeing some trade down?

Speaker 8

And is that in any part Some of the resistance you're picking up from retailer customers on the latest round of price increases?

Speaker 3

To Well, first, I would say that our categories biscuits and chocolate are Normally quite resilient in these circumstances. We've seen it during COVID, but we've also seen it in 2,008 to and in previous recessions because it's a small indulgence that consumers find difficult to forget or to leave behind. And then the presence of private label is Relatively limited in our categories. So that might be at the start of it, that might be one of the reasons why Our categories and our performance continues to look very strong. If you then look at consumer confidence, I think We do see a softening and consumers clearly talk about the inflation, the interest rates, to We don't see that in emerging markets, but the question of course was about developed.

Speaker 3

There is no drag on volumes yet, but if you go around the markets in Europe, things are different sometimes. So you're free to see a very strong French biscuit market, but You see chocolate in Germany and U. K. Affected. And sometimes that has to see with seasonality and things like that and COVID last year.

Speaker 3

But overall, I would say from the consumer consumption perspective, it's a mixed bag. But overall, it remains relatively mitigated the effect. The elasticities Are slightly up versus Q1, but they are still below the historical benchmark. We do expect higher levels as I explain in years ago, but it's still nothing that is as high as it used to be before. So for instance, if I look at to U.

Speaker 3

K. Chocolate, that's probably where we see the highest elasticity so far, But it's declining the elasticity and we are now about 10% below the 2020 or 2021 levels as it relates to elasticity. Now again, we have to see higher price increases in Europe for the second half. So we will see what happens there. But so far, there is really nothing from a penetration standpoint from switching to private label, getting out of the category.

Speaker 3

We don't see anything that is of a major concern, but that doesn't mean it's going to remain like that.

Speaker 8

To and you mentioned thanks for that. And you mentioned AMC increasing double digits so far this year. Where are you most leaning in with that spend?

Speaker 2

To Well,

Speaker 3

the one region where we are not spending more than last year is in North America to So far because of our supply chain disruption and it didn't make sense. We first have to improve our customer service. But then in the rest of the world, I would say it's about equally split. There are Some markets where we particularly want to focus on the growth that we see ahead of us. So there's a slight disruption here and there for higher investment.

Speaker 3

But overall, I would say it's across the board that we are investing in biscuits and chocolates mainly.

Speaker 4

To Thank you. Thank you.

Operator

Thank you. Our last Question will come from Jason English with Goldman Sachs. Your line is open.

Speaker 9

Hey folks, thanks for squeezing me in.

Speaker 1

Hi Jason.

Speaker 9

Hey guys. So Dirk, I believe it was you in prepared comments or maybe it was in response to question, I forget. But you referenced an outlook for your categories to kind of maintain maybe flat modest volume growth and then price on top of it through the back half of the year. Yet your guidance implies that you expect your own volume to be down sort of low to mid single digits in the back half. And I was hoping you could unpack that for us.

Speaker 9

Like are there Specific things that you're aware of or that we should be aware of that will be headwinds? Or as I guess to pile on the notion of conservatism, Are you just sort of prudently assuming that things get worse because the environment is really choppy?

Speaker 4

Hey, Jason, maybe to Dirk will comment on the category themselves. In terms of the guidance, as I said, to When you strip out the impact of the Ukrainian war, which is one point and it is more pronounced to be in the second half. When you strip out the higher elasticities we are planning for, which arguably Might be on the cautious side. And 3rd, when you strip out the impact of the customer disruption, Pretty much the underlying trends of the first half are the same as of the second half. So I want to reassure you that in terms of slowdown, as you look at Some of the numbers for chocolate and biscuits.

Speaker 4

As you look at emerging markets growing in the quarter 22%, we are not assuming a material slowdown into the 2nd part of the year. It is these three elements that I spelled out in the prepared remarks and also in some of The answers I gave that impact the rest of the year. Look, the A to The plus is there for one reason, which is we might end up doing better than that. And I believe it's there.

Speaker 3

Yes. From the category perspective, it was correct what you were saying. We thought that What we expect to see is relatively high pricing, so probably in the 8% to 10% range, maybe even double digit pricing. And that would be accompanied by flat to maybe a 1% volume growth. Now you have to keep into account that So that's our estimate for the time being for the second half.

Speaker 9

Got it. That's really helpful. Thanks a lot guys and congrats on a good quarter.

Speaker 4

Thank you.

Speaker 3

Thank you, Mason.

Speaker 4

To be recorded.

Operator

Thank you. I would now like to turn the call back over to our speakers for any additional or closing remarks.

Speaker 3

Well, thank you. Happy to have been able to inform you about a great first half of the year. Obviously, more to come, to But thank you for your interest in the company and looking forward to talk to you in the coming weeks.

Speaker 4

Thank you, everyone.

Operator

Thank you, ladies and gentlemen. This does conclude today's call and we appreciate your participation.

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Earnings Conference Call
Mondelez International Q2 2022
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