Good day and welcome to the Mondelez International Second Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez 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 Mondelez. Please go ahead, sir.

Good afternoon, and thank you 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 earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, followed by a review of our financial results and outlook by Luca. 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 four. I'm pleased to share that we delivered strong broad-based top-line growth during the first half of the year. Our strong performance was driven by effective pricing combined with healthy volume growth in three of our four regions. Europe was the lone exception due to expected disruption driven by retailer negotiations. We continue to execute on our long-term strategy and we see robust momentum and solid consumer confidence across geographies and categories. We successfully implemented our planned price increases in Europe, closing our customer negotiations in line with expectations. With this behind us, we feel good about the remainder of the year in Europe. We also feel good about continued consumer confidence. We continue to drive robust demand in our core categories across the vast majority of our businesses, resulting in both value and volume growth. Our strong profit dollar growth was driven by cost discipline and pricing to offset cost inflation. We continue to invest in our brands, capabilities and portfolio reshaping initiatives to accelerate and compound growth and we remain confident that our proven strategy delivered by our world-class team positions us well to deliver another strong year. Based on the strength of our first half performance and our latest view across businesses, we are raising our full year organic net revenue and adjusted EPS growth outlook to 12% plus. Turning to slide five. You can see that the first half of 2023 showed continued momentum across our entire business. We delivered the first half organic net revenue growth of $2.7 billion, up nearly 18% versus prior year and significantly ahead of our already strong 12% in full year 2022. This includes a 15.8% growth for the quarter. We also delivered adjusted…

Thank you, Dirk, and good afternoon. Q2 marked another strong quarter for our business. Double-digit organic net revenue growth across each region, sound pricing execution, strong profit dollar growth and significant brand reinvestment enable us to continue driving sustainable value creation. Revenue grew plus 15.8% with strong volume mix growth in North America, Latin America, and EMEA. Overall volume mix was flat for the quarter, despite the expected customer disruption in Europe. Recall last year's Q2 total company volume mix was plus 5%, making this performance even more impressive. Emerging markets grew more than 23%, with strong performance across significant numbers of markets. While developed markets grew 11% with balanced strength from both North America and Europe and despite customer disruption. Turning to portfolio performance on slide 12. Chocolates, Biscuits, Gum and Candy businesses all posted another quarter of double-digit increases in Q2. Biscuits increased plus 13.9%. Oreo, Ritz, Chips Ahoy!, Give & Go, TUC and Club Social all deliver double-digit growth. Clif though not inorganic also posted strong growth. Chocolate grew plus 13.7% with strength in both developed and emerging markets. Cadbury Dairy Milk, Milka, Lacta, Toblerone all delivered double-digit increases. We are very pleased with the performance of our core categories of chocolate and biscuits which albeit impacted in the quarter by customer disruption are on a solid trajectory. For both we expect good volume momentum as we move forward in the year now that negotiations in Europe are behind us. Gum and Candy grew more than 30% with trends across our business units especially in emerging markets. Now let's review market and share performance on slide 13. We held or gained share in 70% of our revenue base. The US continues to make service-level improvements and ended Q2 with good on-shelf availability and inventory levels. Moving to…

[Operator Instructions] And we'll take our first question from Andrew Lazar with Barclays. Your line is open.

Great. Thanks so much. Appreciate it. First off, Dirk, we've heard so far from a bunch of food companies that have reported earnings of some, maybe very recent changes in things like consumer behavior, retailer inventory destocking, competitiveness, and maybe generally greater sluggishness in category volumes as pricing has lapped. I was hoping you could talk a bit about the landscape as it relates to Mondelez specifically. And any changes sort of one way or the other that are notable for you?

Okay. Thanks, Andrew. Well, and based on H1, we obviously feel quite good about how our portfolio is performing. We have brought growth in the different regions, in the different categories across most of our brands. The pricing went through quite well, strong pricing, I would say compared to others. We have very good volume mix growth in three out of four regions. And the only region that was disrupted was Europe, but that was due to customer disruption, and we foresee for the second half that we will see solid volume growth in Europe. Our share is increasing, North America is finally recovered. We are gaining share in AMEA. Europe, of course, still a bit of a drag on share, but that's again because of this client disruption. You'll see that our emerging markets are doing quite well, broadly in the top and the bottom-line. So we are generating good gross profit. So we can continue to invest strongly in our brands and in our capabilities. The acquisitions are doing well, I would point to Clif. And yeah we have double-digit growth in adjusted and really PSO. The whole picture for us, looks pretty good. If I look a little bit further on the environment at least in our categories, we see strong consumer confidence. We would say that it's improving in the developed and in the emerging markets and the price sensitivity seems to be plateauing, particularly the emerging market consumer, I would say, is very, very solid. If I think about the competition, I think the big difference between us and the competition will be that we have a very strong top-line combined with some good volume growth and promo levels, we see some increase in promo levels in Biscuit, but it's largely flat and down somewhere…

Yes. No, really, really complete. So I appreciate that. One very quick one for Luca. The company raised constant currency EPS growth expectations to 12% plus from 10 plus. I guess consensus is already relatively close to the 12% mark. So I guess I'm just curious how investors should think about the plus in the guide. Thanks so much.

Thank you, Andrew. Yes. Before I go to the plus part, maybe briefly to provide some color on what underpins the new outlook. I think there are three important drivers to point to in terms of our new outlook. One, it is clearly the strong first half. And importantly, the quality of the results we are posting. I'm particularly happy with the operating part of the EPS growth. Second, I think it is really the underlying broad-based trends of our business, the resilience of our brands. I'm happy with volume and value growth and the continued investment. And third, as we mentioned a few times, Europe with price fully lending and in line with expectations. So maybe a word briefly by geography. Emerging markets are on a roll. We are quite happy. Some pricing is causing some areas of concern in terms of elasticity, but those are the minority of the market and not really important in the big scheme of things. The US and North America are posting a terrific P&L, and we are very pleased with Clif. And Europe has improved profitability already in Q2. But as we said last quarter, at that time, we had 80% of the price implemented. Now that pricing is 100% secured, we expect volume and revenue growth as well as margin improvement for Europe. So quite frankly, there is a good chance that we exceed the 12% plus guidance, but I prefer having another quarter under the belt and then narrow guidance for Q4. If all things play out as we have in mind, as I said, there are good chances we will exceed the guidance. Bear in mind that we want to start 2024 strong. And so if there is upside in terms of profitability and EPS, we might decide to reinvest selectively some of the upside to get really a fast start into 2024, too.

Thanks so much.

Thank you, Andrew.

Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Hey, thanks, operator. Good afternoon, guys.

Hi, Brian.

Hi, Brian.

Hey, I got two questions, one on the net interest guidance and the second one on Clif. So maybe first one for you, Luca. Net interest expense guidance came down again I think by about $20 million versus where we were coming out of 1Q. And I just want to make sure, I think you paid off a $750 million term loan with the KDP proceeds. So is this just simply a function of half a year interest savings on paying the term loan off? Or is there anything else that drove the lower net interest expense?

No, that is it. It is debt coming down. You're going to see a good leverage as we end the year. We plan to be at like 2.5 times debt, which is quite good. And yes, it is as simple as us paying down the term loan.

Okay. Thanks. And then, Dirk, in your prepared comments, you talked about Clif pretty encouragingly, right, in terms of the margins approaching, I guess, the segment level and then there's more synergy. And then it sounds like you're also expanding on revenue. So can you just maybe give us a little bit of a progress report on kind of where you stand with Clif today relative to where it was when you acquired it? Is your integration and is the acquisition model kind of running ahead of expectations? And just how we should think about maybe how impactful Clif might be as we look forward?

Yes. So we've seen in the first half, very strong double-digit revenue growth. And the margins, the OI margin versus previous year is up more than 1,000 basis points. So we've increased prices, some of the first thing I would say. We've increased prices more aggressively than Clif would have done historically. We increased prices in August, in January and another one later in Q1. And so we see low elasticity, I would say. So that's having a big impact. The second big thing that we are doing is the service has improved. We reduced SKUs. And we started to operate the plants a little bit better. And so that has given to a good increase in the service level. Then we changed the promotional plan. That has successfully kicked off. Fourth thing is that our media buying is more efficient than theirs. So we were able to also get some benefits from that. So those are some of the things we've done. The integration is taking place in a number of steps, like a big one is the systems integration later on in the year. But so far, where we have streamlined the teams and we've brought more clarity on how we want to operate the business that is all going well. But as we said in the prepared remarks that the real benefit of the cost synergies is still largely to come. We've already seen some benefits, but it's in the second half of this year and beginning of next year that we will get the real benefit from it. So I would say you can probably make the calculation. It's close to a $1 billion business. That improves its margin by the amount that I was closing. So that will have a reasonable impact on the total company.

Thanks, Dirk. Thanks, Luca.

Thank you. Thank you, Bryan.

Our next question comes from David Palmer with Evercore ISI. Your line is open.

Thank you. A question on Europe pricing and the impact on volume. You mentioned the pricing is complete. How are you thinking about the volume for that region in the second half given that some of that disruption is behind you and you're lapping some disruption in the second half versus '22?

Yes. So as I said, we don't really give volume guidance per region, but we would see some solid volume growth in the second half driven by exactly the factors that you were saying. So we have the pricing negotiations behind us, that pricing will be implemented. The disruption is gone. Last year, in the second half, we increased our prices in Europe, and we had more disruption. We will lap that. So that's going to have a benefit for us. We have elasticities in Europe that are relatively benign. So despite the newly implemented pricing, we don't think that, that's going to have a major effect on the volume. So we're not giving you the number, it's going to be a nice solid volume growth for the second half.

And then I couldn't help but notice you featured cake and pastries a couple of times in your slides. And it seems like a logical extension to have Oreo have a snack cake. But I wonder how big could your aspirations be in that category. It doesn't seem as big as some of your other categories. So I'm wondering, do you see snack cakes and pastries being an ongoing sizable growth contributor? And maybe give us a sense of how you think about the TAM there, the opportunity there and how you're going to go about it. Thanks.

Yes. So well, first of all, cakes and pastries is not a small category. It's not the size of biscuits, but it's not too far away from it. And so it's a big opportunity around the world. It's a very fragmented category with sometimes relatively commoditized products in there. But there is a real opportunity to bring strong brands with high-quality products. And so that's really the play that we're going forward through an Oreo Airy Cake in China or Cakesters here in the US or Give & Go in the fresh section or a Chipita in Europe with pre-packaged croissants for instance. So we think that there is a whole play for us there. At the moment, we're around the 3%, 4% market share of the whole category. So plenty of room to go. With that, we are already the number two player. And so that indicates how fragmented it is. The category itself has been growing quite nicely over the past three years. It is a category that exists across all markets. It covers different occasions than our typical biscuits and chocolate, so that makes it very interesting for them. And so we think with these new quality products and our brands, we can really make a significant impact. And I'm not going to give an exact number, but we would expect that our cake and pastry business in the coming year should double or triple and lift us up to close to a 10% market share. So for us, it's going to be a significant contribution to the growth of the company.

Thank you.

Our next question comes from Ken Goldman with JPMorgan. Your line is open.

Hi. Thank you. I wanted to ask, as we look at the future charts for cocoa and sugar, you might indicate that theoretically, right, down the road, some additional pricing might be needed to offset more inflation. I appreciate you're not in a position today, right, to talk about pricing that hasn't been announced. But just conceptually, is there any reason to think that you wouldn't be able or willing to if needed, raise list prices again, especially if European elasticities, I guess, maybe aren't that bad and you're -- given your commentary about some improve or improving consumer confidence. Thanks.

Thank you for the question, Ken. Look, the increase in sugar and cocoa specifically is material. I mean, we are talking about most likely a 30-plus percent if you look at the last 12 months or even more, particularly in cocoa. I think when you look at the quality of the brands, we said the fact that we had invested materially around the world in our brands, the fact that there are strong bonds with consumers and I believe pricing is -- will be a necessity in chocolate. I'm not going to elaborate on the details. Also, bear in mind that particularly in emerging markets, we are going to be very mindful about not vacating price point. And so we will use RGM. And then over the last couple of years, I would say we have learned the ins and outs of implementing pricing around the world. And I think it is needed, and we're going to do it most likely.

Thanks. And then just one quick follow-up. Are there any peculiarities or cadence issues we should think about that are not necessarily obvious? Just as we model 3Q versus 4Q, any timing or headwinds or tailwinds that might not be apparent at first glance, if I could say. Thank you.

No. Look, I don't think there is anything that you're going to see in terms of outliers that are going to cause material issues or material opportunities in Q3. You're going to see a volume rebound in Europe. As a consequence, I think, obviously, there is going to be a better situation for the totality of the company. I'm not going to guide you exactly on gross profit. But you're going to see double-digit, most likely revenue growth and double-digit EBIT growth. Below the line, the items can vary. But I think when you really look at Q3, Q4, you're going to see strong operating gains coming through the P&L. And I didn't talk a lot about cash flow, but very happy with that, too. And you're going to see us delivering the cash flow despite the $400 million headwind related to the coffee KDP sales.

Thank you.

Thank you, Ken.

Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.

Hey, everyone.

Hi, Chris.

So just one follow-up and then just a second question around the guidance commentary. But Luca, I think you said that you expected leverage at the end of the year to be in the 2.5 times range. That would be a historically low level for the company. At that level, how should we be thinking about deployment of capital at that point? You repurchase more shares. You have too many deals recently. And clearly, you're doing great work on Clif. So is there low-hanging fruit on what you've already added? It just stood out to me that you'll be trending toward a historically low level of leverage. And at that point, I think there's going to be probably some observations around what that capacity could be used for. And then just one other quick follow-up on the EPS upside comment for the full year. There was also a comment just around spending back, right? So like how do you think about, as we get through the year, this concept, okay, there could be some upside, but you're also quite committed to the spending back. Like where does that kind of tension play out, right? Volumes get weaker, you're going to spend back more. If not, there's some upside, just maybe any context on that as well. So thanks for that on the leverage and just upside versus investment. Thanks so much.

Yes. No, I think the first thing first is the underlying strength of the EBITDA in the business. So we are converting cash quite well from net income that is coming. And that is the first element of the equation. The second one is the fact that we are going to get $1.3 plus billion of proceeds from the gum sale, and that will further enhance the situation. I'm not going to tell you that we are going to run the company forever at this level of leverage. But reality is, absent M&A I think this is most likely a little bit of a new norm. What you have also to keep in mind is both in the case of Clif and Ricolino, we are doing quite a good job in terms of integration. And I think deployment of capital behind M&A, particularly, has been something that the company has done well. Capital allocation behind fleet, we quoted a few numbers. I think this is a great opportunity, and it shows that we can generate quite a bit of value through M&A. We don't control necessarily time of M&A. But on the M&A, if something comes along, we're going to be on it. Also, bear in mind that there are parts of the portfolio that we might decide eventually to divest down the road. So I think from a leverage standpoint, we are really in a good shape. The EPS upside, the -- one of the things I believe that is delivering volume growth for us, it is the fact that, yes, we price, but we continue to invest in the business, not only in terms of A&C, but also quality and other things. We talked a little bit earlier in the year about the mill carry launch in Europe and the improved formula as one example. And what I meant by EPS upside is we clearly have in mind the fact that we might have a little bit of headroom in terms of profitability. And we want to use a little bit of that headroom selectively in some places to really go after incremental distribution opportunities, to really go after incremental investments such as we get a good start into 2024. It will be on a case by case, but we consistently ask around the business, do you have opportunities to accelerate. And we do it on a quarterly basis, and so stay tuned. You'll learn more as we post Q3 results.

Okay. Thanks so much.

Thank you.

Our next question comes from Jason English with Goldman Sachs. Your line is open.

Hey, folks. Thanks for calling me in.

Hi, Jason.

Look, I want to pull on that thread you just brought up, the opportunity to drive accelerating growth, invest, find distribution. I believe in the past, you've outlined some of the distribution opportunities you see in front of you in Brazil and Southeast Asia and India as well as the opportunity that's coming on the back of the Ricolino acquisition. Can you update us something on where those opportunities lie, how much progress you've made and how much progress is supposed to be had?

Yes. The opportunities typically lie in the emerging markets in the first place. And so the countries that you should be thinking about are India and China where we have been going at the rate of well over 100,000 to 200,000 new stores every year. That is going to continue, that speed at which we continue to grow. We do the same in Southeast Asia, and we're also looking at opportunities to do something similar in Latin America. So that's the number 1 driver of what we think. And you should think about it at the same pace as what it has been in the last two, three years. The second one is, we call it going broader, which means that we can start to increase the range of our products that are available in stores, also, again, largely in emerging markets. That's another big driver of our distribution. China has started to do that in the last two, three years. And that's going pretty well for us. And so that's a second sort of front that we are working on around the world. And then the last one is the acquisitions where we are starting to do test and learn with these products in different markets around the world. So we have a number of tests and learns going on in Chipita. We have some Grenade test and learn. We will have some Clif test and learns around the world. And we are expecting that from that, we will learn which countries those would have a big opportunity to start being distributed. So that you should see as a third front. In the first two, three years, I wouldn't expect that you would see a major impact on our numbers. But later on, as these things take shape, I think that will start to play a significant role. If I think order of magnitude that you should think about it, if I think about in India or in China, I would say 1/3 of the growth is driven by distribution expansion. So that gives you an order of magnitude.

Powerful stuff. I appreciate it. I'll pass it on.

Thank you.

Thank you, Jason

Our next question comes from John Baumgartner with Mizuho Securities. Your line is open.

Good afternoon. Thanks for the questions.

Hi, John.

Hi, I wanted to stick with the emerging markets, but maybe in the context of local brands. It looks as though the market share growth has stalled out a bit in the last couple of quarters, at least in Europe. And maybe that's a function of the success of global brands sort of crowding out the locals. But if you could elaborate there, just on your resource allocation, where you are at this point, what are the expectations for locals across the portfolio going forward? And how you think about the ability for global and local to grow share simultaneously? Because I think historically, the largest opportunities you have to recover lost share in locals is Eastern Europe, Asia, chocolate biscuits. So curious about your thoughts there. Thank you.

Yes. So well, first of all, I would say Europe, you have to be a bit careful because you have the whole client disruption going through there. So if our share is affected, that has to see with the client disruption. But if I think about the performance of global and local brands, it is true that global brands have started to grow faster, I would say. We have a number of brands, particularly an Oreo, Milka, Cadbury, but also Dryden as a gum brand for example, or Halls, which are recuperating post COVID. So you have a number of global brands who -- the Oreo and Milka category is normal, but then you get an extra boost from things like Trident and Halls, which were not growing that much. We, for instance, are also working very hard on our Toblerone premiumization. So yes, at this stage, global brands are growing faster. They're well into the 20s. While local jewels are probably more in the mid-teens growth, still not bad. But that's a little bit the effect, as I explained to you. Does that mean that we have changed our resource allocation? No, not at all. And if anything, we're pushing our local teams to make sure that our local jewels get significant resources allocated to it because we believe that the opportunity is there. And so I wouldn't read too much into it. For instance, if you look at the 4-year CAGR, our global brands are double digits while our local jewels are high single digits. So very close to each other. And that's really what I point to. So we don't necessarily see anything there that would preoccupy us.

Thank you, Dirk.

Okay.

Thank you.

Our last question comes from Michael Lavery with Piper Sandler. Your line is open.

Thank you. Good afternoon . I just wanted to follow up Dave Palmer's question about bakery. And maybe specifically, just with Give & Go, you mentioned how bringing branded and quality products was sort of the key to unlocking share gains and growth there. But fresh seems less branded and maybe sometimes very little branding. Is it opportunity there? How much can you push that maybe in certain sub-segments? And then as far as geographically explaining that, is there an opportunity for that as well?

Yes. Well, yes, when I talked about the branded part, I was talking more about the packaged cakes and pastries. And so if you think about Give & Go as a fresh business, branded can play a role, and I can explain you a little bit how we think about that. But it's largely driven through innovation, I would say, the growth of the Give & Go business and extra distribution. So you have to think about Give & Go as a player that makes mini cakes and pastries, so mini cupcakes, mini muffins, mini brownies, mini doughnuts. And that's a very interesting segment. It's a to-buy segment, and they do a great job in offering a quality product. We can make those products with some of our ingredients. So you can imagine a cupcake with Oreo on top of it. And so the branding can play a role. They've also started to develop their own brands. So it can play a role in Give & Go, but your observation is correct that it's more in the packaged part of things. Now the in-store bakery is very interesting for retailers in North America, but it's also happening in other parts of the world. We were in Australia, for instance, and one of the retailers there, their main interest was to talk to us about in-store bakery and how we could activate it together with them. The reason being that the other big benefit of Give & Go business is that it saves on labor. So you now get a product delivered to your store that is freeze and thaw, and you can avoid all the labor in store, and so that drives a big interest from the retailer on top. The consumer sees it as fresh. There is high interest. It's a section they want to increase. So I would certainly confirm that there is a growing interest around the world for fresh bakery.

That's great color. And just a follow-up on emerging markets, too. It sounds like there's strength broadly even in China. But can you just help us understand the Chinese consumer a little bit? Is your performance there doing well a function of a relatively low kind of accessible price point? Is it more food at home that's doing well? Can you just maybe unpack a little bit where the Chinese consumer is and how that fits with your portfolio?

Yes, yes. So China grew double digit for us in Q2. One of the key effects that you need to think about is that we have a big gum business there. And as we are coming out of COVID, kind of strange. Nobody talks about COVID anymore in China, but the mobility is coming back, and so we have growth coming on our gum business. And on top of that, we have had a continued strong biscuit growth, which is more home consumption. In both cases, we are increasing our share. Biscuit is up almost 1 point in Q2 through very strong brand activations, and we're particularly happy with the success that Chips Ahoy! is having now as our second big biscuit brand next to Oreo in China. And then gum share is up 2.5 points, where we started to do some very targeted activations in lower-tier cities. The other thing that's particular about Chinese that digital commerce is about 20% of sales. And in Q2, digital commerce is starting to -- started to grow quite considerably at a 23% growth rate. So that all points towards on-the-go consumption because in China, digital commerce can be sometimes delivered in a very short period of time, but also home consumption offshore -- of course. The other thing to explain our China growth is that distribution expansion I was talking about in the previous question. So in Q2 alone, we've added 60,000 new stores in the super and mini channels as a part of that go deeper route-to-market strategy. And the last one I would point to is innovation. We launched that Oreo Airy Cake. I talked about it in the prepared remarks. And that's that expansion into baked snacks and cakes and pastries for us. So those are all the elements…

That's great color. Thanks so much.

Okay. Well, thank you. With that, I think we can conclude the call for the second quarter. Thank you so much for assisting and thank you for the confidence in the company.

Thank you, everyone.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.