Good day and welcome to the Mondelez International Second Quarter 2024 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 -- Senior 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 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 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 4. I am pleased to share that we delivered a solid first half to the year with strong profit dollar growth driven by effective cost management and pricing. We also successfully completed our annual pricing in Europe, which helps position us well for the second half in terms of top line and volume growth. We continue to see momentum in emerging markets, and we're continuing to invest significantly in our brands and capabilities to drive sustainable long-term growth. And we continued our track record of strong free cash flow, generating $1.5 billion. While our operating environment remains challenging and dynamic, our teams remain focused and agile in executing against our long-term growth strategy. We continue to play for the long term in chocolate, biscuits and baked snacks because these core categories remain strong consumer favorites with very high loyalty to our iconic brand portfolio. Within these great categories, our advantaged geographic footprint provides additional confidence that we are well positioned to compound long-term sustainable growth. Turning to Slide 5, you can see that organic net revenue grew 2.5% this quarter, with adjusted gross profit dollar growth of 11.3%, enabling us to continue investing in the business. A&C spending is up high single-digits, helping to drive consumer and customer loyalty to both our iconic global brands and our local jewels. And adjusted EPS grew 25%. Turning to Slide 6. While many food and beverage segments are continuing to experience softness, snacking remains relatively durable. Consumer trends vary by region, but overall we are seeing volume growth start to rebound as inflation cools. Consumer incomes are rising, which helps to reduce the inflation-driven financial strain on many households. As a result, private label growth in our…

Thank you, Dirk, and good afternoon. Q2 marked a solid quarter for the business, with organic net revenue growth across each region, strong profit dollar growth, substantial reinvestment into working media, and robust free cash flow generation and capital return. Revenue grew plus 2.5% with strong pricing execution. This number includes 1.3 points of EU customer disruption that is now behind us and 40 basis points of boycott headwinds in our AMIA region. Developed market volume mix was down minus 2.2% for the quarter, primarily impacted by Europe customer disruption with some ongoing softness in the US Biscuit business. Total revenue for emerging markets grew plus 4.5%. Developed markets grew plus 1.2%. Moving to portfolio performance on Slide 13. Biscuits and baked snacks grew plus 0.8% for the quarter. Several brands delivered solid growth, including Oreo, Ritz, 7Days, Club Social, and TUC. We saw ongoing softness in parts of the US biscuit portfolio, though we have seen early signs of improvement in brands like Chips Ahoy! over recent weeks with clear plans to improve the overall biscuit growth enough to, as Dick mentioned. Chocolate grew plus 5.6% with significant growth across both developed and emerging markets. Volume mix was down minus 2.6%, which was nearly all driven by customer disruption in Europe. Cadbury Dairy Milk, Lacta in Brazil, and Freia and Marabou in the Nordics all posted strong growth during the quarter. Milka also posted solid growth. Gum and candy grew plus 2.9%, driven by continued momentum and strength in key markets including China, Brazil, and Western India. Volume mix in this category was negatively impacted by [calls] (ph) in the US. Let's review market share performance on Slide 14. We had or gained share in 40% of our revenue base with strength in chocolate as well as gum and…

[Operator Instructions] We'll take our first question from Andrew Lazar of Barclays.

Great. Thanks so much. Good afternoon, everybody.

Hi, Andrew.

Hi, there. Maybe to start off, Dirk, last quarter I think you spoke about the need to offer better value to the consumer in parts of the North America segment. In 2Q, volume declines moderated in North America, as did the benefit from pricing. So how do you see the consumer situation in North America currently and do you see the need for a more aggressive price reset? And separately for you, Luca, volume and organic sales growth needs to accelerate sequentially to hit the upper end of the 3% to 5% range for the year in a still challenging environment while unchanged full year EPS guidance despite the 2Q beat implies a deceleration in the back half on EPS. And I was hoping you could bring us through some of the logic behind those dynamics, please.

Okay, I'll start first, Andrew. So as it relates to the consumer in the US, I would say there's sort of three key dynamics to keep in mind. First of all, the category remains soft but it is stabilizing. And I would say that the consumer is experiencing a tension because they see the overall inflationary picture. They see the food prices that have increased, and they have a feeling of less purchasing power. At the same time, particularly as they see grocery prices stabilizing and their wages being up about 4% while grocery prices are up 1%, they're starting to have bigger confidence than the same period last year, although these high prices remain a concern for them. And I would also say the other thing that we see in the category, while it's soft, as I said, the elasticities have stabilized since Q4 ‘23. The second thing about the consumer is that they have changed where they shop. So the biscuit category is seeing the largest growth in chains like Value Club at Walmart, while in grocery we are seeing a share decline. And probably the most important thing we're seeing about the consumer is that the definition of value has changed for many people. Because if you look two, three years back, it was all about the price per pack, or in fact the unit price per cookie, and people were drifting more towards family and party sized pack and that benefited us. Now, particularly lower income consumers, they have moved to a basket size that they can afford and if the biscuit brand that they like can fit in there at the right price point, they will buy it. If not, they will not buy any biscuits. So these days we have to be much more…

So, for the first half, we are broadly where we would have expected to be, quite honestly. Revenue might be a little bit softer, but strong profit will allow us to reinvest into some selective additional activities in half two to deliver profitable volume growth. I think you rightly pointed out the implied top line growth for half two which current guidance requires an acceleration. And that hinges on three main drivers. The number one driver that will impact the most is Europe that will have to return to volume growth. With disruption behind us, we feel quite good about achieving that. The team in Europe has proven consistently that they can execute very well and plans are in place to activate around big key consumers' activities like back to school and Christmas. It is also important to remind ourselves that the trade stock pipeline is an opportunity in Europe as we had to pull back on shipments and so the piping the trade is a material opportunity and something that we are clearly already seeing in July. The second element is the US biscuit positive volume. I have to say the diagnostics around what is happening to the overall category and the share pressure that we see are clearly giving us an indication of what has to change. And we truly believe that hitting those price points is going to result in positive outcomes. And again, we start seeing some green shots in the category and in our brands. The third element is that while I do not like to talk much about lapping, last year for the second part of the year, we discontinued some product lines that were material in volume for the give and go business. And I think from now we will be comparing more…

Thanks so much.

Thank you, Andrew.

We'll take our next question from Ken Goldman of JPMorgan.

Hi, thank you. Dirk, I wanted to…

Hi, Ken.

Hi guys. I wanted to clarify a little bit about Europe. You talked about how completing your pricing actions helps position you well in terms of volume growth for the second half. I think you also mentioned that Europe elasticities, those still modest, are moving slightly higher. Excuse me. So I'm just curious if maybe we can elaborate a little bit on what drives your confidence in volume growth just given some of the pricing actions, what seemed to be tougher comparisons and that slightly higher elasticity that you mentioned, if I'm correct on all of those?

Yes, yes. Well, first of all, the consumer, I would say, is cautiously optimistic. I would say in general we feel that the European consumer seems to be in a better place than the North American consumer. They see their incomes rise, the inflation is softening, they see quite stable employment, particularly in the UK is important for us in Europe and there the confidence which was relatively low last year is rising because they feel that their broader economy is doing better and they feel better about their personal finances. And then I would say France and Germany, the other two big countries, we have some mixed views across the economic indicators, but the confidence is also above last year. So, second thing is, yes, there is an uptick in elasticities and there is also more promotions, but I would say the elasticities remain quite modest. And there is a little bit of an increase in promo intensity. We are also seeing the same shift of people buying -- going from hypers and supers to discounters and then we see also these affordable packs at the right price point. So, similar movement as I was talking about in North America. If you look at Q2, our biscuits and baked snacks are already positive in Europe. They're growing their value at 2.8% and volume at 0.8%. In chocolate, we see a strong momentum with seasonal shapes. We also see tablets, bars, and pralines doing well. Back to school and Christmas, of course, in chocolate will be very important. We are continuing to watch the pricing impact. Overall, I would say if you exclude some of the disruption that we saw, the performance in Europe is quite solid. And since that disruption, the pricing has been implemented now, we feel that that solid underlying growth that we see there is going to continue in the second half. So we're expecting quite a good second half. I would also like to mention here that chocolate, despite already seeing quite a bit of prices, remains quite resilient. There's more to come. I've seen the cocoa situation. But overall, volume has been quite solid. We're also planning to continue to invest strongly. Our Easter was very strong, so we have high expectations for back to school and Christmas. And so overall, I would say that I would be surprised if the second half is not a good half for Europe.

Very helpful. Thank you.

Our next question is from Alexia Howard of Bernstein.

Good evening, everyone.

Hi, Alexia.

Hi.

Hi there, So just a couple of quick ones. On the ERP transition, is that something that's going to be rolled out across different regions or is it something that's going to affect particular categories at a particular point? Should we be worried about the impact of that transition for 2025?

So it is a program that will be completed over a four-year time frame. And the reason why that is, is a couple of things. One is we will use a staggered approach and we will be able to implement it in part of the business first and rolling off resources eventually from that part of the business and rolling on those resources into the next wave of countries that will be impacted. We will also make a big distinction between some modules of SAP versus others, so we will not necessarily take even by region a big bank approach. And we believe that the preparation we have been doing for the last, I would say, 18 months positions as well in terms of successful execution. So we have tried to minimize all potential issues by going broad in one region or by going broad in the world of SAP. And we believe, given also the resources we have internally, and importantly, the ones we have secure through SAP and Accenture, that we will have a good opportunity to execute as well.

Great. And then as a follow-up, I'm just curious about the long-term free cash flow guidance. It's been sitting, I think, at this $3 billion level for some time, even as your earnings growth has obviously played out quite nicely in recent years. You've obviously got guidance of $3.5 billion this year. What are the puts and takes or what are the criteria that you would use when you're thinking about whether that guidance of free cash flow could be raised at some point down the road?

The answer is yes. We will have a couple of one-timers in the second part of the year and that is really what drives the $3.5 billion. But both last year where we had to pay some taxes related to coffee, and this year where we have a potential one-timer that we will be paying most likely off in August, I would say, if you strip those out that are clearly one-time impacts, I mean, our cash flow is running at $4 billion plus. So we feel quite good about it. Cash conversion cycle continues to be top notch. We continue to improve days outstanding and one of the reasons why we believe SAP and o9, which is the other platform around supply and demand planning that we are implementing with this ERP program is going to be beneficial to us is around inventory, which is an area that has material opportunities in it. So the answer is certainly we can strive for more than $4 billion on an ongoing basis.

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

Thank you, Alexia.

We'll take our next question from Michael Lavery of Piper Sandler.

Thank you. Good evening. I just wanted to come back to cocoa for a second. That slide you laid out is really helpful at the end of the presentation. I was wondering if you could give us a sense of how much you might be placing a bet on prices rolling over in September. Put a little differently, have you been securing for ‘25 kind of as normal, which I would roughly maybe put you at about half or a little bit more covered at this time of year? Or are you trying to position for a move that you see it sounds like you might expect to come a little bit later in the year?

Yes, look, we believe there is going to be a correction. I mean even today if you take the stock price of today which is around about GBP6,500 per ton, and compare it to next year Q4, there is a gap of GBP2,200, which is clearly material. So the market, in light of the mid-crop, and importantly of the evolution of the main crop sees a clear adjustment of prices going forward. And I think there might be even more than this. Obviously, we are not going to go blind into 2025. We cannot wait and bet on the main crop to be good. And we have been certainly improving and increasing our physical coverage into 2025. We have around about one quarter of our positions into 2025 covered to futures. And you might imagine we have covered outer in the year to take advantage of this inverted curve, which means how big of a discount you get, the further you go out versus today's fault. The rest is covered through a series of derivatives that allow us to participate in a potential market correction. So at this point in time, whichever way you look at it, we have protection for the most part of our positions into 2025. And on the other side, we have secured also some physical forward positions that I believe will position as well compared to the market eventual cocoa price adjustments that might happen or not.

Okay, that's very helpful. And just following up on BISCOFF, it sounds like a very interesting partnership. Can you give a little better sense of maybe the structure? It sounds like it's not a JV, perhaps it's cross-licensing, maybe a little bit of just how it works, and then also kind of what its potential could be. Obviously at the moment it's initially going to be Europe and India, but could it go global? Are there reasons that it's got any geographic limitations?

Yes. So there's three main components to the partnership. The first one is that we're going to co-brand chocolate products with BISCOFF. And BISCOFF is not yet a very big brand in North America, but it's quite a big brand in Europe. It's one of the biggest biscuits brands, and it has a quite unique taste and also quite unique consumption moment. And the combination of a chocolate bar with BISCOFF filling or with pieces of BISCOFF in there is quite delicious. So that's the first one. To give you an idea, we already have a similar line which uses Oreo as the filling and we are talking about several hundred millions of sales in Europe for that line. So we have the same expectations for the BISCOFF line. And if that is a success in Europe, we will obviously want to extend that around the world into our other chocolate brands. And the first launch of this product will be in early 2025. And that will help us with excitement, building excitement around the chocolate market. Then secondly, BISCOFF is looking for global distribution, and there's certain countries where that is not easy to get. So we will manufacture, distribute and sell BISCOFF in India as a first country. It's going to start in the second half of 2025. It's very interesting for us because at the moment our biscuit business in India is really built around Oreo and this is going to give us a second big brand, very different from Oreo, very different audience, very different consumption moment, largely with coffee or tea in India. And so we think it's going to be an ideal complement to keep on building a strong biscuits business in India. And that clearly is a test to see if we would do other countries around the world. And so yeah, it's not a joint venture, it's a cross sort of licensing of our brands to each other.

Okay, that's really helpful. [indiscernible] Delta and people go crazy for them on there. So you've probably got at least a better head start in the US than you may know. But, I’ll pass it on.

Thank you, Okay.

[Operator Instructions] We'll move next to Tom Palmer of Citi. Your line is open.

Hi, thanks for the question.

Hi.

I think a quarter ago, you talked about volume being a flattish year-over-year in 2024. I just wanted to confirm, is this still the expectation? And then any help as to how much maybe some of the more non-recurring items like the disruptions in Europe or the subsidy timing in Mexico might have weighed on volumes in the second quarter because so we could think about kind of an entry run rate at least for the third quarter?

Yes. I think the expectation it is still around having a sort of flattish volume mix for the year and in terms of one-timers as I said, there is 1.3 points of expected -- of disruption that happened in Q2. The whole 4 points of volume mix in Europe are attributable to the consumer -- or the customer disruption, sorry. There is another component which is about the Middle East conflict that impacted on about 3 percentage points for the quarter. The other one, as I said, that you need to bear in mind, is the impact of give and go and this continuation that we had in Q4 last year. But also importantly, last year we had a carryover of the first half disruption in Europe into half two. And that was around about $100 million of revenue impact. So when you strip out all these impacts, you clearly see a much better linearity of the volume mix and revenue. And when you come to terms that the actions that the US is taking around consumers and packs, I think we have clearly an expectation that these improve volume mix in the second half and improve revenue in the second half.

Okay, thanks for that detail. And just on the A&C side, I know you talked about some meaningful step-ups here in the first half of the year. I think if we look at the timing of some of the step-ups last year, it was maybe a little bit second half weighted at least in terms of the dollar spend. Does that become maybe less of a headwind in terms of the year-over-year pressure as we think about the back half of the year in terms of the flow through to earnings?

There might be a little bit of an upside in relation to the fact that, as we mentioned, we are taking a deeper look at all the non-working media part of A&C. I don't expect it to be material for the second part of the year. And importantly, we will continue still investing in our working media. So I don't expect a material upside in terms of P&L impact due to lower A&C in the second part of the year.

All right. Thank you.

You're welcome.

We'll take our next question from Peter Galbo of Bank of America.

Hey, Dirk, Luca. Good afternoon, guys. Thanks for taking my question.

Hi, Peter.

Hi. Luca, I was just wondering if you could maybe unpack the Mexico comments a bit more. I think we've heard kind of different things from different companies this quarter related to Mexico. Some have mentioned the subsidy timing that you called out. Others have seen maybe more of a normalization after such a strong kind of several years in Mexico. So just curious, A, if maybe there's a bit of both going on there at this point, or if truly you think that the subsidy piece was a blip and you've already seen a re-acceleration into July? Thanks very much.

Yes, I mean, overall the market conditions in Mexico for us are healthy. For instance, the biscuits and the chocolate category both saw mid-single-digit increase in value. Gum and meals also performed quite well. I would say the economy is doing well. There is good employment. There was a lower flow because of the elections of public subsidies to the households that we think will start to normalize in H2. But in general, if you look at minimum wage has doubled in the last years in Mexico. So the overall climate is very positive as it relates to the consumer. If you look at the low single-digit Q2 growth that we had, that largely came from our candy and our chocolate business, which was offset by growth in gum and meals. And particularly in candy, we think that there probably our price points are a little bit too high. We will need to work on those. In chocolate, a little bit the same. And we need to make sure that we're well positioned for the Christmas season there. Again, gum and meals are doing very well, and also the biscuit growth for us was quite strong. The Oreo distribution, which is critical because of the Ricolino partnership that we have, is growing well, and Oreo is growing also in single digits in Mexico. So I would say the, I think that this effect of the subsidy certainly affected candy and chocolate. Overall, we remain quite positive. We think there will be a gradual recovery in H2. The long-term opportunity for growth remains quite significant. The integration with Ricolino is going well, and their route to market will enable us our ambition to grow market share, particularly for biscuits and chocolates. There's also a US business related to Ricolino, which of course is not the subject of the question, but that one also is important because it positions Ricolino as the leader of the Hispanic US candy market. But overall I would say I think it's a temporary issue driven by these subsidies. And in the second half I'm expecting to see a good recuperation in Mexico.

Great. Thanks, Dirk. That's helpful. And Luca, just maybe a quick one. We've had some questions come in. Obviously the kind of over-delivery on gross margin in the first half and I think that there was an expectation kind of coming out of the fourth quarter of this year that you'd be down -- gross margins kind of basis or more than basis points, actual points on a year-over-year basis as we exit ‘24 and just wanted to see if that's kind of still the expectation given the cocoa inflation in 2H. Thanks very much.

Yes, I think, look, we moved away from giving guidance in terms of gross margin percentage. What I will tell you is we are going to have a year that is ahead in terms of gross profit dollar growth delivery compared to our usual algorithm. I think in the end, what will really matter is the amount of pricing we would have implemented and how much pricing we're going to take into next year in light of whatever cocoa is going to be come the end of 2024. So we are very happy. I have to be honest with the level of profitability we have achieved in the first part of the year. There, would have suggested, I believe, under normal circumstances that we have upside to the guidance we gave you. But reality is cocoa is a material headwind in the second part of the year. And the reality is we might have to selectively invest in some of the activities that you have been hearing throughout the call. It is not a massive investment. It doesn't take away that in terms of profitability and ability to reinvest in A&C, we have done, I believe, a very good job but we prefer maybe to be cautious around the level of profit going forward because again cocoa prices as we have secured them in the first part of the year are clearly much lower than the current spot price and 2025 price for cocoa would suggest.

Great. Thanks, guys.

Thank you.

We'll take a question from Matt Smith, Stifel.

Hi. Good afternoon. Just a quick...

Hi.

I wanted to ask a question about the performance in India. You mentioned volumes are relatively flat in the market this quarter with a bit of a step-up in elasticity. Can you talk about how you're approaching distribution point opportunities in this type of consumer environment? You continue to see good progress on expanding your distribution in the market.

Yes, yes. So in India, if I give you a little bit of a background, so we're looking at flat growth in Q2, mid-single-digit in H1. Chocolate growth is continuing well, a high single-digit, good gross margin improvement. Cadbury Dairy Milk continues to be a strong leader of the market despite the fact that we've already implemented some pricing. It's mainly in biscuits where India is being affected. So we have seen a consumption dip because there is more intense competition and consumers are clearly moving to lower price points. And our biscuit business is largely built around Oreo, which I would call a more premium biscuit in the Indian market. If I look at the stores, so since 2019, we've deployed more than 700,000 visi coolers. In 2023, we added 180,000 stores to our coverage and about 100,000 new visi coolers. In H1 in ‘24, we've already added another 140,000 stores and 90,000 visi coolers. So that's a very strong performance compared to ‘23. Still, if you take into account, there's 9 million food retail outlets. We now cover about 2.3 million directly and just over 3 million if we take our indirect coverage. So we still have a huge headroom. So I would say, yes, there is a bit of a slowdown after three years of inflation. A group of the consumers, particularly in biscuits, is a bit more careful in their consumption, but we don't see that as something that would slow down our focus on expanding our distribution. In India, we're going to continue to work as we've been working in the previous years, placing those visi coolers, driving our distribution, because we are very confident that gradually the consumer will start to buy Oreo again. And our chocolate business, as I mentioned, keeps on doing very well.

Thank you, Dirk. I'll leave it there and pass it on.

This does conclude our question-and-answer session. I'm happy to return the call to Dirk Van de Put for any closing comments.

Well, I thank everybody for their attendance to the call. I would call it again a solid second quarter, and our expectations are for an improved H2 and looking forward to see you at the end of Q3.

Thank you, everyone.

Thank you. This does conclude today's conference. You may now disconnect your lines. And everyone, have a great day.