Good day, and welcome to the Mondelez International Second Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez management and the question-and-answer session. . I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me today are: Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the presentation. Today's call, Dirk will provide a business and strategy update, then Luca will take you through our financial results and our outlook. We will close with Q&A. With that, I'll turn the call over to Dirk.

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 with robust volume growth and solid pricing execution that supports raising our full year growth outlook to 8% plus. Our core chocolate and biscuit businesses continue to demonstrate volume and pricing resilience. 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. We also continue to effectively navigate a dynamic operating environment. 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. At the same time, our consistent results enable us to maintain our course in driving a virtuous cycle where strong net revenue and gross profit or to continuous investment in our brands, distribution capabilities and acquisitions. We also continue to make great progress in reshaping our portfolio. 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 & Halls businesses, allowing us to focus our portfolio and further invest in our faster-growing businesses of chocolate…

Thank you, Dirk, and good afternoon. Our second quarter performance was once again strong with above expectations, outcomes across all P&L line cash. We delivered revenue growth of plus 19% with 5 points coming from volume mix, showing the term approach to supporting our brands and investing in capabilities exploit our long runway of opportunities is paying off. Emerging market to show significant strength, posting an increase of more than 22% with great momentum across all our major business units. Importantly, volume mix drove more than 10 points of this. Developed market grew plus 8.1% for the second quarter with trends in both and North America as demand trends well throughout the. Volume mix was also positive in developed market, with approximately 4 points of volume in Europe. While U.S are the most likely negative given supply chain constraints. You can see our portfolio performance on Slide 15. Chocolate and biscuits continue to exhibit strong and durability as making CapEx. Additionally, Gum & Candy continue to improve as global mobility increases coming out of the pandemic. Biscuits grew 10.4% for the quarter, with nearly 2 points coming from volume mix. Emerging markets grew strong double digits, while developed markets increased high single digits. -- delivered strong increases include Oreo, Chips Ahoy, redBus. Chocolate grew more than 30%, with increases in both developed and emerging markets including digit growth in Europe. Chocolate was driven by robust volume growth of plus 9% as consumers continue to our brands as an affordable indulgence, both global and local product well, including Cadbury Dairy Milk, overall lands. -- entendre nearly 26% and Mexico East North Africa all delivered strong growth. Now let's review our market share performance in 16. We had or in 55% revenue base during the first half with 20 points of headwind…

. And our first question comes from Bryan Spillane with Bank of America.

Two questions for me. The first one is just maybe, Dirk, if you could step back and just give us sort of the current state of things in the marketplace? And I guess in the context of having such a strong first half and maybe contemplating maybe some deceleration in the second half. Just where do things stand currently as you kind of look across your various markets?

Yes, Bryan. Well, I would say, overall, we feel good about how '22 is panning out for us. As you can see from the presentation, the demand is strong. We have very good volume growth. 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 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 are really good. If I then look to the second half, we feel good about the second half. 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. I think together, we can probably find a way to keep our categories going at a very good rate and create the necessary value. I think competition will be about the same, maybe a difference between those that will invest and those that won't. And then from a pricing perspective, I can, of course, not comment on the 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 if I could follow up on just specifically in Europe. In the prepared remarks you made, there were some comments about some caution around trying to push some price increases through. 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 -- 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?

Yes. Again, Europe, I'll comment first on what we see with our business in the consumer in Europe and then Luca 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. 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. There is really little evidence that, 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. 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. 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?

Yes. So Bryan, a couple of things just to give you a little color. When actually I look at the GP dollar line for Europe, it goes up year-over-year even if marginally. But clearly, the material revenue and volume did translate proportionately into the appropriate gross margin. And that is because quite honestly, we have been a little bit delayed in terms of implementing pricing as compared to when commodity costs kicked in. So I want to reassure you that as we implement these pricing actions and you might still see margins under pressure in Q3 because of potential customer disruption. But as of -- 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&C was up meaningfully in the quarter in Europe because obviously I have about 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.

Our next question will come from Andrew Lazar with Barclays.

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? It certainly seems that way from some of your previous comments, but I just want to make sure there's nothing else or discrete that's preventing that flow through that I'm not aware of.

Yes. No, I think it's a very good question. Thank you, Andrew. I'll give you a little bit of color around how the P&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 $1.6 billion in the first half. It is one of the strongest numbers we have ever posted, the strongest number. Chocolate and biscuits, we are very happy. They are doing very well. I'm impressed with the volume mix that we saw in the first half. And as I said, while we kept on investing in the business, you see that our bottom line and cash flow continue to be strong. The 8% plus top line guidance reflects that confidence. And when you consider that it includes 1 point for the Ukraine prices, 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 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 in 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. 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 to be within the high single-digit limit. I also would like to make a point, which might be overlooking 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&A line being up year-on-year. But realities, overheads are held under control and the line that is increasing by more than 13% is our A&C support to the business.

Great. And then just briefly, Dirk, thanks for the details on Clif. Some investors certainly still question the greater foray into the bar category, and as recently announced with Clif 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 Clif business meaningfully over the next several years such that there is a compelling ROI on the transaction?

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 in the recent months. And Clif, within that category is a very strong position. It's -- it has been for several years the fastest growing in that bar market. We would say that the brand is very strong from our perspective across all age groups. 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, but also improve the quality of the distribution of where Clif is present. We also think we can optimize A&C as well as their cost of goods and their SG&A. We also think that working with them, we can work on RGM and PPA and also make a difference there. We think the transaction price was a 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 that the profitability of last year for Clif 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. And we're already seeing in the first 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 a significant earnout 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. And so we hope that we will see that sort of growth that we have been planning for.

Our next question will come from Chris Growe with Stifel.

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

Look, we are very happy with the volume growth and the revenue progression. There is an element of clearly some of the businesses that were impacted during COVID coming back. The reality is the underlying performance of both biscuits and chocolate is just great. I can't find another word really to qualify it. As you look at the profit, the volume leverage is in there. 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&L and pricing being implemented. And you realize that maybe Europe, it is more challenging than in other places. In the rest of the world, we have been much more proactive in terms of pricing. But it is Europe really impacting 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 last year. I mean, this quarter, we are almost 10%. You look at the profit dollar growth, I think on a year-to-date, we are 11%. You look at the amount of A&C we have put into the P&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 priced earlier in Europe, how good of a P&L group we have, and it would be clearly much, much 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 I think there is still, obviously, as we've said, a few situations where lies pricing needs to be implemented, particularly in Europe. Volume leverage is a critical component of the algorithm, and we will protect it as much as possible. And the benefit is going into the P&L. The point, as I said, if there is a lag between pricing and commodity going into the P&L of Europe.

Okay. And just a quick follow-on. If I think about the second half outlook and a little more cautious view on 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 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 indicator for success for the second half of the year?

Look, the underlying margins is quite good. The inflationary pressure, 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 give you the mid-single digit to high single-digit range as far as EPS goes. But look, as I said, even in presence of may be a customer disruption but with more benign elasticities 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.

Our next question comes from Alexia Howard with Bernstein.

Can we ask to begin with, there wasn't much commentary in the prepared remarks about market share trends, which I know were very strong a couple of years ago and probably 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, where 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. And I have a quick follow-up after that.

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. If I look around the world in AMEA, we have very solid gains in China, in India, multi biscuits. We see also gum in China doing extremely well. Chocolate in South Africa is doing well. In Europe, we are gaining share, mainly driven by France biscuits and U.K. biscuits. Latin America is flat yesterday, 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. So we have gained significant share there. Was our strongest Easter ever. We will have some negative impact in Europe because we were exporting to the European market from our Ukraine factories. And so that will have an effect. We're 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. Our supply chain service levels and the performance of our lines are gradually improving. 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.

Great. And just a quick follow-up. Have you just closed how you're planning to finance the Clif Bar acquisition, whether that's out of debt, cash on hand or any other measures?

Yes. We have released, I think, a couple of weeks back an 8-K where we have secured a little bit of additional term loan. And clearly, that has to function as a bridge to the divestiture of gumin developed market and holds worldwide to be able to deploy those funds for the acquisition of Clif. So that's the idea, and it applies the same to Ricolino. Now there are still other things that might be in play. As you know, we have multiple levels of flexibility within the balance sheet with coffee, with divestitures, et cetera. I think at this point in time, though, I still believe that the $2 billion of share buybacks is secured for the year. So I'm not sure we will go there to fund the acquisitions.

Our next question comes from David Palmer with Evercore ISI.

On Europe, you mentioned that 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? And is that in any part some of the resistance you're picking up from retailer customers on the latest round of price increases?

Well, first, I would say that our categories, biscuits and chocolates are normally quite resilient in these circumstances. We've seen it during COVID, but we have also seen it in 2008 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 fairly 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, the threat of recession. We don't see that in emerging markets, but the question, of course, was about developed. There is no drag on volumes yet. But if you go around the markets in Europe, things are different sometimes. So you, for instance, see a very strong French biscuit market, but you see chocolate in Germany and U.K. affected. And sometimes it has to see with seasonality and things like that and COVID with last year. 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 explained 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 U.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 '20 or '21 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. We don't see anything that is of a major concern, but that doesn't mean it's going to remain like that.

And you mentioned A&C increasing double digits so far this year. Where are you most leaning in with that spend?

Well, the one region where we are not spending more than last year is in North America 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. But overall, I would say it's across the board that we are investing in biscuits and chocolates, mainly.

Our last question will come from Jason English with Goldman Sachs.

Dirk, I believe it was you in prepared comments or maybe it was a 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. 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. Like are there specific things that you're aware of or that we should be aware of that will be headwinds or is gas to pile on the notion of conservatism, are you just sort of prudently assuming that things get worse because the environment is really choppy?

Jason, maybe Dirk will comment on the category themselves. In terms of the guidance, as I said, when you strip out the impact of the Ukrainian war, which is 1 point that it is more pronounced in the second half. When you strip out the higher elasticities, we are planning or which arguably might be on the cautious side. And third, 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, as you look at emerging markets growing in the quarter, 22%, we are not assuming a material slowdown into the second part of the year. It is these 3 elements that I spend out in the prepared remarks and also in some of the answers I gave that impact the rest of the year. Look, the 8 plus, the plus is there for one reason, which is I would might end up doing better than that. And I believe it's there.

Yes. From the category perspective, it was correct, what you was saying we thought that -- what we expect to see is relatively high pricing for 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 in previous years, the category growth was around -- in volume, was around 2%. And then and on top another 2% of pricing in the past. So we would not be that far away from the volume growth that we've been seeing in the past, maybe slightly down. So that's our estimate for the time being for the second half.

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

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

Thank you, everyone.

Thank you, ladies and gentlemen, this does conclude today's call, and we appreciate your participation. You may disconnect at any time.