Good day, and welcome to the Mondelēz International Third Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelēz management and the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelēz. Sir, please go ahead.

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. 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, 10-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 certain 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 Q3 2022 earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, then Luca will review our financial results and outlook. We will close with Q&A. I'll now turn the call over to Dirk.

Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I am pleased to share that we delivered another robust quarter with high quality top line growth continued strength in both developed and emerging markets and strong profit dollar growth. This execution, combined with continued acceleration of our strategic initiatives, supports raising our full year revenue growth and adjusted EPS outlook. Reinvesting in our business is one of the best ways we can deploy capital. And I'm happy to say that we continue to increase investments in our brands and capabilities that should reinforce and build upon our strong foundation. We also continue to make great progress in reshaping our portfolio with the full integration of our Chipita business as well as the closing of our acquisitions of Clif Bar and Ricolino. We remain confident that the strength of our brands and our proven strategy position us well to deliver attractive, sustainable growth for the remainder of 2022 and beyond. Above all, we remain extremely confident in our people who remain relentlessly focused on delivering the right snacks for the right moment made the right way to consumers around the world. Turning to Slide 5. You can see that our strategy is continuing to drive a virtuous cycle. We are well positioned to deliver a strong full year '22 performance and long-term revenue growth. This quarter, our revenue growth was 12.1%, which means 11.2% growth year-to-date. The revenue was generated through continued volume growth as well as strong pricing necessary because of ongoing cost inflation, and it demonstrates the resilient demand for our brands. That revenue growth is fueling our gross profit, which is growing 12.8% for the quarter and 10.8% year-to-date. This very strong gross profit growth is allowing us to increase…

Thank you, Dirk, and good afternoon, everyone. Our third quarter results were strong from volume, revenue, profit dollar growth to cash flow generation. In addition, growth was broad-based across categories and brands. We delivered revenue growth of more than 12% with 1 point of growth driven by volume/mix. Emerging markets were a clear highlight for the quarter with broad-based trends on both top and bottom lines. Emerging markets net revenue grew more than 24% in the quarter, with 8 points of that growth coming from volume/mix. Developed markets grew 5.2%. Volume/mix was down 3 points, entirely as a result of customer disruptions in Europe related to pricing negotiation, nearly all of which has since been resolved. Turning to portfolio performance on Slide 13. Our chocolate and biscuit franchises continue to demonstrate their resilience and deliver strong results while ongoing improvements in mobility helped fuel robust gum and candy performance. Biscuits grew 11.5% for the quarter, with nearly 1 point coming from volume, albeit mix was negative as we suffered from customer disruption in Europe. Emerging markets again grew strong double digit, while developed markets increased high single digit. Oreo, Chips Ahoy!, Ritz, Triscuit and Club Social were among brands that deliver outstanding growth. Chocolate grew more than 9%, of which 1.3 points were driven by volume/mix, with increases in both emerging and developed markets. Emerging markets posted exceptional growth of strong double digit. Cadbury Dairy Milk, Toblerone, Lacta and Bis all grew double digits. Gum & Candy grew more than 22%. Brazil, Mexico, Western India and Middle East, North Africa, all performed very well. Now let's review our market share performance on Slide 14. We held or gained share in 45% of our revenue base, which includes 20 points of headwind coming from U.S. supply chain constraints. We are seeing…

Operator, we're ready for the first question.

Operator?

Our first question comes from Bryan Spillane of Bank of America.

All right. Great. Maybe just to start off, Dirk, we've -- obviously, there's been a lot of questions in our world around just current events, current affairs. So could you just give us maybe a little bit of a -- as-you-see-it-now kind of the state of the union in some of your key markets and just how the consumer is holding up and just how all these macro pressures may or may not be affecting the markets as you see it now?

Yes, yes. Thank you, Bryan. Well, first, on the results, I would say we have a very strong top line performance, which I think is a testimony to the resilience of our categories, which is important to take into account. We see signs that consumers really want to continue to consume chocolate and biscuits. I think our pricing execution is now really coming through. And on top of all that, we have volume growth, which is quite unique in today's world. Obviously, you've seen that the emerging markets are a highlight in Q3 but also year-to-date with a broad-based strength from China to India to Brazil. We're doing well in all of our emerging markets. Our margins are a little bit impacted by customer disruptions in Europe. Sales in Europe overall were good, but there was some customer disruption so sales could have been better, and that also has affected our margins a little bit. And then our profit, our bottom line is ahead of algorithm and could have been better without that European impact. So we're increasing our view on what the year will look like from a top line and a bottom line perspective. Now particularly that our pricing in Europe is complete and behind us. And so yes, FX is impacting our EPS but we are still showing real growth in -- or growth in real dollars. So overall, I would say the results are good. So if you look a little bit beyond that, what does that mean? From a consumer perspective in the first place, we see in emerging markets consumer sentiment being very solid, very positive. I'm talking about Southeast Asia, India, China even. And so there is a certain optimism. And the degree of strength in the consumer confidence in emerging markets for…

[Operator Instructions] And next, we move to the line of Andrew Lazar with Barclays. My apologies, Andrew. If you could resignal, we'll move next to Ken with JPMorgan.

I recognize it's too early to discuss next year in full and I wouldn't anticipate any specific numbers. But I think a lot of people are looking at maybe some tailwinds and headwinds in a broad sense. And I was hoping to kind of review some of these and see if I'm missing anything big. So on the tailwind side, you'll have wraparound pricing plus new pricing. You should have good organic volumes still on underlying demand. You'll have strong advertising again. Maybe the same dollar inflation but it will be less on a percent basis. And then you'll have the top line benefits from acquisitions, right? And then in terms of headwinds, maybe a little bit less pricing than '22, still some macro uncertainty in Europe and Asia, still some new regulations in the UK. you have to wade through. And then, of course, you'll have FX, higher interest expense and lower pension income. So I know I'm running through all these pretty quickly. I don't mean to put you on the spot, but does anything kind of stand out that's major that I'm missing or getting incorrect in that kind of quick list there?

Yes. Maybe I think the only 1 thing I would add to that equation, Ken, is the synergy that will come to fruition through the acquisitions of Chipita, Ricolino and Clif. And those are not only revenue synergies, as you mentioned, they are also cost synergies and better bottom line. I think in general, the way we think at this point about 2023, it is that consumer demand fundamentals are still strong, and we believe we are in a good place in terms of revenue and demand for next year. As we've just said, we compete in resilient categories. And we have created strong loyalty through the investments we have been making in our brands. I think importantly, as you dissect the regions, emerging markets are doing very well. I think looking at the revenue number, 34%-plus, 8% volume growth in the quarter, it is simply amazing. And it is important to say here that particularly on this, we still have quite a bit of headroom in terms of distribution penetration of our categories and not to mention the value of categories like cakes and pastries and et cetera. I think in terms of the U.S., it is on a good trajectory. I mentioned a little bit the share trajectory that we see going into next year. And as we said, we are about to implement another round of pricing. I think the question mark is a little bit Europe but pricing there is inevitable. We'll see what happens with customers in Q1. But importantly, we have been investing in brands there as well. We have been creating bonds with consumers. And as we said, I think we believe our categories are still a necessity these tough times. So all in all, I think we are going to have an algorithm year, but let's stay tuned because quite frankly, it is a little bit premature at this point in time to give you guidance for 2023.

Next, we can go to the line of Andrew Lazar with Barclays.

Maybe to start off, just picking up on the emerging market commentary. Obviously, the results there remain really standout and probably better than many had surmised or forecast, given how volatile some of these markets can be. Maybe you can just get into a little bit more detail on just a couple of the key largest emerging markets and kind of how you're thinking about how those look as you go forward and what you're sort of building into the forecast? And then I've just got a quick follow-up.

Yes, maybe I'll take that and Dirk can also chime in here. Look, reality is we are very pleased with emerging market performance. And I think it has been quite strong all around. When we look a little bit beyond the last three quarters, I would say that all emerging markets pretty much bounced back very well from pre COVID and -- or for COVID. And I think the performance versus pre-2020 has accelerated in those markets. We have been consistently investing and that is paying off. We are not privy to all the P&Ls for emerging markets, but what I can tell you is that they are delivering reported dollar top line growth. They are delivering top and bottom line dollar growth, and importantly, generating quite a bit of cash flow for us. So I think from a return of capital is really something that is remarkable. We still have huge headrooms, I believe, with brands like Oreo, Milka, Cadbury, et cetera. And I believe we will be -- we will continue to be positively surprised by this market also going forward. Look, beyond the usual suspects like India, China, et cetera, and those are markets that continue to do very, very well, we are particularly pleased with markets like Southeast Asia at this point in time. We are particularly pleased with markets like Brazil. We continue to do very, very well and generate solid top and bottom line in those markets. I think WACAM, which is Western Andean region bouncing back from pre COVID, particularly through Gum & Candy. But importantly, the light motive of all these markets is the performance of Oreo, which is just amazing. So I think all in all, I would say I can't call out one specific market here. It is pretty much all of them doing quite well.

And then you've talked about a lot of the -- some of the incremental pricing moves, right, that you've made or are in the process of making to try and better position yourself for what's coming next year. Would we anticipate at this point being in a point to enter the year where you would have all of what you need in place such that there wouldn't be as much of, let's say, a lag to start the new year? Or should we brace ourselves maybe for the sort of consistent lag of getting incremental pricing in before you really fully catch up again to the type of cost inflation that you're looking for next year?

Look, reality is pricing for more than half -- more than 50%, has already been taken or announced. And so as a matter of pricing for next year, you have to think about carryover of announced pricing being for more than 50% done. Obviously, as we said, there is the U.S. coming as of December, and that will add to the 50%. I think in general, your assumption is absolutely correct. The only 1 distinction I would make is Europe. And Europe, I think, will have a little bit of a lag compared to the necessity of pricing because particularly, energy costs are a reality right now. And so you're going to see some margin pressure potentially in Europe in Q1 and potential customer disruption will compound on that. I think for the rest, you are correct.

Next, we go to the line of Robert Moskow with Credit Suisse.

I was hoping you could give a little more color into the logics for this third round of price increase in the U.S. Are you taking it because you have commodity hedges that are rolling over and can no longer protect your costs? Are you taking it because packaging costs are rising higher? Could you be more specific as to that? And then also, are you also trying to price through some of the knock-on elements of inflation, like labor or energy? Or does the logic still just focus on the kind of components of the product?

Your assumption is right. It's a combination of everything you said. So our approach to pricing is that the additional costs we see every year, which could be from a commodity perspective, packaging, labor, transportation, we are trying to price away. So we do have a number of hedges that are coming off. We are careful on the hedging for next year because it could, to our opinion, go both ways. Prices could -- or cost could still go up. We want to hedge the right way against that, but we also need to be careful that commodity costs don't come down and that we can benefit from that. And so the short answer to what you said, it's all of the above. The good news about the third round of pricing in the U.S. is that it's been announced and it's been accepted by the clients. We will see how the consumer reacts, but so far, the two previous price increases, we have not seen a major impact on consumer offtake and penetration and frequency, volume growth and so on is all still very strong. So we have good confidence that this price increase will go through. And then we should be okay unless something happens in our cost picture.

Next, we go to Chris Growe with Stifel.

I just had a couple of questions for you. The first one would just be that you've given some commentary around, obviously, some more pricing in North America. It sounds like a little better volume performance in Europe. I just wanted to understand around those factors and perhaps as others to consider. Would you...

Hello?

Mr. Dickerson. My apologies. Next, we move to Mr. Dickerson with Jefferies.

Maybe just kind of a broader question for you, Dirk, around A&C. Obviously, we keep hearing a lot of people think promotional activities going need to increase because you see still increase, but I've heard a lot of C-level managers from food companies, CPG companies say actually now price as well as elasticity stays benign, don't need to increase promotional side while at the same time on a low basis as we saw in Q3. You obviously continue to really invest behind your brands. So I guess kind of quick, almost two-part question. One is just kind of what's the current perspective on kind of go-forward promotional needs with the competitive backdrop? And then two, should we be thinking as we go forward, let's say, even two years or three years that of that rate of that year-over-year A&C spend could kind of mimic the rate of the year-over-year revenue growth spend as you may have some needs, especially with some of the recent acquisitions? Or is there operational leverage that could come out of that? That's it.

Yes. Well, I would say that in the current environment where we have to increase our prices quite substantially, it is important for us to keep on increasing our A&C spending because we need to make sure that the consumer has trust in our brands and really want to consume them. And we can clearly see the effects of this year after year increasing in our spending. We can now see -- although overall, there's not that much movement into private label, in the market where there is a little bit of movement in private label, it's not so much coming from our brand. And I think that is a reflection from the spending that we've had. Going forward, particularly since we're seeing an acceleration in our top line, particularly since we're seeing our volume working for us, I would say we don't really anticipate that we're going to change that formula. You know the way we think about this. We grow our gross profit at an X percentage. But this quarter is quite strong, I would say. And we then want to flow half of that back into investing in the business and half of that in the bottom line. I don't think that will necessarily change. It's working for us and the business is accelerating. As it relates to the acquisitions, obviously, we have foreseen, in some of the acquisitions, a significant investment because we do have cost synergies, which as Luca said, will start to show up next year in our results. But we also have top line synergies. And we feel that some of the brands have quite good potential, but they might need some investments. So we're going to use the same formula as it relates to acquisitions as we are using on the rest of the business. Will, over time, we do a constant measurement, which is about advertising sufficiency? That still shows that increasing our advertising will lead to increased volume, will lead to increased net revenue growth. And so as long as we can confirm that picture, we feel that this is the right track for us. As soon as we would see that, that is not the case anymore. Obviously, we would not keep on increasing our A&C. But at this stage, I think it's working. We don't see a reason to change it.

We return to the line of Chris Growe with Stifel.

Okay. You got me now. Yes, if you didn't like that question, you didn't have to cut me off. I'm only kidding. So I was just going to ask about the gross margin and just to understand with more price -- with pricing -- more pricing coming in North America, it sounds like a little better volume performance in Europe. Should we expect a better balance of pricing and cost inflation in the fourth quarter and therefore, some sequential gross margin improvement?

Look, I think as a matter of fact, we don't give much guidance around gross margin. But the way you have to think about it is there is gross profit growth in terms of dollars that we commit to and that we are going to deliver. As you think about gross margin percentage, I think particularly, the U.S., Latin America and AMEA are on, I believe, a solid ground. Obviously, in Europe, you're going to see the benefit of pricing but do not necessarily neglect the fact that particularly around energy, there is more costs coming our way. Now for the year, we are 100% covered in terms of commodities and ForEx, so we have visibility. I think you're still going to see a little bit of margin pressure in Q4. But importantly, you're going to see strong dollar growth, and you're going to see that flowing partly to the bottom line. We will continue to invest. And as I said, as you think about particularly Chipita and if you think about Clif, there will be some synergies coming our way.

Okay. And just one other question on -- there was a comment about mix being a bit of a drag. I just want to understand, is that geographic mix? Or is that something you're seeing in terms of your product assortment, your SKUs? Any kind of trade down or smaller pack sizes, that kind of thing?

No, I don't think that it is anything concerning. What I said as it relates to biscuits is that volume was up but volume/mix was partially down. And the reason for that is that mix in Europe because of customer disruption caused a little bit of the problem. So there were product lines, particularly in France and other places, that are more profitable than others around the world, and those were mostly impacted by customer disruption. We have also to realize that customer disruption in terms of margins is a little bit higher because obviously, we still have fixed costs. And so the marginal contribution of those lines is a little bit higher. But mix is not a concern. And as we will start seeing biscuit growing volume more consistently most likely in the U.S., I think you're going to see the benefit of mix coming through. But there is nothing really to worry about down-trading or anything else.

Next, we go to the line of Pamela Kaufman with Morgan Stanley.

So your full year guidance for at least 10% organic sales growth implies that Q4 slows to high single-digit growth compared to over 11% organic sales growth year-to-date. So how should we think about the degree of conservatism in your outlook? And have you seen any changes in the operating backdrop that make you more cautious about the near-term trends?

I mean, your math is right, obviously. The implied Q4 growth is 7%-plus, but importantly, there is a plus in there. So we might have more than 7%, which is something that obviously we might have. Reality is we are about to implement pricing actions and what we want is to end the year, particularly on the trade stock side, on a good position. We don't want the trade of retailers to be impacted by more stock. And so you might call us conservative and we will see. Reality is into the current guidance, which is 10%-plus on both revenue and EPS, I think we feel quite comfortable that there might be a little bit of upside. But we will try to make sure that we end the year in the right place in light of 2023.

Great. And then can you talk about the drivers of your market share improvement and earlier expectations for market share improvement in the U.S.? Where are you in rebuilding capacity on inventory levels on some of the brands where you saw capacity constraints shortages?

Yes. So as we said in the last month, we've already seen market share gains. We expect that to continue and we expect a good tailwind market share-wise into 2023. The overall industry headwinds are moderating. That is helping. So logistic challenges have improved. Still a little bit of issues on cross-border transportation from Mexico. But within the U.S., we're doing quite well. The labor market is easing, so our third-party manufacturers are having an easier time with that. And so I would say turnover is still high but we are continuing to be at a good staffing in the plant. As a consequence of all that and us sort of focusing on the key SKUs, doing a number of changes in our factories, making sure that we have longer runs of SKUs and so on, our service levels have consistently improved now every single month in the quarter. So we're now back in the high 70s, nothing here to brag about but clearly improving. The consequence of that is that trade inventory levels are continuing to recover, so we have less out of stocks, and that starts to show in consumer offtake. Most of our biscuits brands are already in positive share territory. In September, our biscuit share was up, as I said, and we expect that share growth to accelerate in Q4 because the on-shelf availability recovery is going quite well now. On top, we will increase our A&C investment in the fourth quarter in the U.S. We, so far, had held back a little bit because of those supply chain issues. But now to accompany the price increase, we're going to significantly step up our investments. So we expect that we will enter '23 with a good momentum in the U.S.

Our final question for today comes from the line of John Baumgartner with Mizuho.

I just wanted to come back to emerging markets and specifically the vol/mix component of growth there. Can you just speak a bit more to the breakdown between the contributions from underlying consumption? I guess just from the COVID recovery but then also specific to your investments, whether it's distribution growth, innovation, the local jewels, regaining share. How would you rank order the contributors to vol/mix? And then should we expect any change to the balance of those drivers going forward?

Yes. So I think it's a mixture of the two in the sense that we have very strong investment in our brands. We have a confident consumer in emerging markets, and that is leading to robust volume growth. They are also more used to an inflationary environment. And I'm talking about the consumer but also about our teams to constantly, year after year, deal with this pricing and RGM. So that is leading to very robust volume growth, I would say. Our volume in Q3 is up 7%, which is quite extraordinary. The other thing I would say is that we are also increasing our distribution, which is an added benefit. If you think about China or India, we're literally adding tens of thousands of stores every year through our distribution and that obviously helps. The third thing that I would mention is the strength of Oreo and the fact that we are investing now across the board a little bit more in Oreo, and we're seeing good results from that, so Oreo's becoming very strong for us in these markets. And we -- for instance, in Mexico, we expect to see some big effects from Ricolino where we are tripling our route to market. So that will start to play a role also. So I would say it's a combination of very good investment, confident consumer, careful management of RGM. We are not doing across-the-board price increases but playing it very careful in the different countries, combining with good distribution gains. That is what's leading to that strength in emerging markets for us.

This does conclude today's program. We thank you for your participation. You may disconnect your lines at any time.