Mondelez International, Inc.

Good day and welcome to the Mondelez International Fourth Quarter 2018 Year End Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time during the call. It is now my pleasure to turn the floor over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Thank you. Good afternoon and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO, and Luca Zeramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelizinternational.com forward slash 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 and 10-Q filings for more details on our forward looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures, unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. In today's call, Dirk will give you an overview of our results as well as progress against our strategic priorities. Then Luca will take you through the financials and our 2019 outlook. We will close with Q&A. And with that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon. Last September at our investor day, I shared with you our long-term strategy to refocus the company on sustainable top line growth, which we saw as a natural evolution from our more cost and margin oriented strategy of the last five years. This new strategy leverages our unique difference from other food companies, which is our strong global presence, our iconic brands, and our leaner supply model. But above all, what really sets us apart in today's difficult food environment is our unique position as a global snacking leader. Because we are in snacking, we're not in general food, we are also all over the world, not just in North America, and we have global and local brands that have a unique place in consumers' minds. As such, we are a truly global company operating in attractive, large, and growing markets. And in those markets, we have a strong manufacturing, distribution, and marketing network. This means, for instance, that our scale and strong presence in emerging markets is an asset and a competitive advantage. As an example, in the fourth quarter, our emerging markets grew at .5% and around 6% for the full year. More than 40% of this was volume mix driven, indicating that consumers around the world consume more -the-go snacks and treats. We connect with consumers in those markets through a portfolio of powerful global brands as well as local icons. And in each market, we also strive to be the industry leader in understanding consumers through advanced insights and analytical capabilities. During the last five years, we've gone through a significant restructuring and a cost-focused approach, which has created a solid foundation for investment. These strengths of our company are amplified through our unique group of people who have an incredible capability to really make a difference when they put their minds to it. Witness to that has been our margin improvement over the last five years. 2018 was my first full year as CAO. I joined in November 2017, and today I feel good about what we've achieved in that short term. In the first half of 2018,

we developed

a new strategy that we think will make a difference. In the second half, we started to execute against that strategy, and that has translated into good results and momentum going into 2019. So we are pretty excited about our future. This new strategy creates more growth by focusing on three pillars. First is a new, more consumer-centric marketing and sales. Second, an obsession with operational excellence to optimize our demand fulfillment. But also to drive efficiency and lower our costs. And third, there is a step change in our corporate culture from short-term cost focus to a purpose-driven long-term growth focus. The combination of these three levels of growth creation will lead to what is an attractive long-term financial algorithm. 3% plus organic net revenue growth, high single-digit adjusted EPS growth, dividend growth that exceeds adjusted EPS growth, and over $3 billion of yearly free cash flow. Now, in switching to the highlights of the year, I would characterize 2018 as a strong year for Mondelez. We met or exceeded our financial and strategic commitments. We accelerated our top-line growth with a good balance between volume mix and price. Our execution in emerging markets drove 6% growth. Our local brands are showing improvements as we balance investment with our global brands. We expanded adjusted growth profit dollars in Q4 by approximately 5% on a constant currency basis. This was due to solid productivity, volume leverage, and a good balance of pricing net of cost. We also delivered another year of double-digit adjusted EPS growth, which brings our 5-year average to 18% per year. Our focus on turning profit into cash flow and returning capital to shareholders also paid off. 2018 was a year of strong free cash flow, generating $2.9 billion of cash and returning more than $3 billion to investors. We continued our commitment to our impact strategy and announced our packaging will be recyclable by 2025. I believe this strong 2018 financial performance is just the first indication of what is the potential of this company. Now maybe a few words on our progress against that new strategy I was talking about before. As 2018 came to a strong close, I am pleased to see that many of the elements of our new approach are being put in place. So let me take you maybe through a few highlights. 2019 will be the first full year of increased investment in our growth agenda. But as we saw good momentum as Q4 progressed, we made additional investments in ANC and -to-market. To give you a few examples, we put incremental ANC behind areas like chocolate in India, which grew double digits, biscuits in China, where we saw -single-digit growth, chocolate and biscuits in Russia, which increased double digits for the year, biscuits and chocolate in Germany with low single-digit overall country growth for the year, or chocolate in the UK which posted low single-digit growth, Oreo in the US which posted high single-digit increase for the year, or we invested in our recent Mexico Oreo chocolate launch which has received very positive feedback from our customers. We have also further invested in our research, development and quality capabilities. In Q4 we opened a new R&D technical center in India to drive innovation in chocolate and beverages. And we also expanded our -the-art facility in Wroclaw, Poland, with further investment in gum and candy research capabilities. The creation of the Snack Futures Innovation Hub will help us explore future trends and opportunities. We are also pleased with our recent acquisition of the Tate's premium cookies business, which delivered another quarter of strong double-digit growth. As a second big step in accelerating our consumer-centric growth, we launched our new marketing playbook, which drives shifts in several areas of our commercial approach. While in the past we focused mostly on our global brands, in our new strategy we are achieving a better balance between investment in global brands like Oreo, Milka and Belvita, and local jewels like Fontaneda in Spain or Loo in France, Freya, Maribu in the Nordics, Kindle in Vietnam. The combination of those two is generating stronger growth than focus on global brands alone. All combined, our brands drove overall organic net revenue growth of .5% for the quarter. In our second strategic pillar, which is all about driving operational excellence, we also started to show good progress, particularly as it relates to excellence in our sales channels. To give you some recent examples, we've launched initiatives to drive e-commerce excellence with key partners in China, where online sales were up strong double-digit and overall growth in China was mid-single digits. In India, we are making significant enhancements to our sales and route to market excellence, where we also grew double digits. We are making similar shifts to tap into the significant opportunities in other emerging markets, such as Africa, Southeast Asia, Russia and Mexico, where our investments are accelerating growth. As you know, in recent quarters we have put particular focus on our North American supply chain performance, where we are aiming to significantly improve its operational excellence. Q4 was a good quarter, where our gradual improvement continued in the right direction. An important enabler of our future growth is our third pillar of building a winning growth culture. At the start of 2019, we implemented a new, more locally oriented commercial structure with 13 business units within our existing regional framework. This shift reduces our complexity, improves our speed and encourages more entrepreneurial approaches to marketing, sales and product development. We are encouraging our colleagues to test, learn and scale, which means we are implementing a faster, more cost-effective and locally driven approach to innovation. We are also changing our incentive structure to drive better overall alignment with our key financial metrics of volume and revenue growth, gross profit progression and solid translation into earnings and cash flow. There is also a stronger direct link to local performance versus overall global performance. And another important change here is that we are refocusing the organization on volume and absolute profit dollar growth. We are also making sure that the quality of the financial results is taken into account into our incentives. To further enhance this new consumer oriented, but also performance based culture, we launched the new purpose of the company, empower people to snack right. We believe this will lead to higher engagement as well as new ideas on how we will fulfill our vision of being the best and biggest snacking company. One of the expressions of our new purpose is to make sure we offer the consumer the right snack made the right way. For example, in this quarter we added Brazil to the COCO-LIFE program, which is our signature sustainability approach in chocolate. And we also announced the commitment to make all our packaging around the world recyclable by 2025. So in summary, I find that 2018 was a strong year for us, which has created good momentum in the business as we head into 2019. We are building on this momentum by increasing our investment behind key initiatives. This includes continuing to invest in our brands and portfolio to capture opportunities in broader snacking as well as driving further growth through innovation. We are also focusing our investment in higher growth geographies and under indexed channels. We will amplify this growth by continuing to work on improving execution across our business. And I am also very excited by the energy that our new growth-focused culture is creating across the organization. Our tangible progress and the proof points I see around the world of how we are accelerating sustainable growth underscore my belief and confidence that we are in the right segment with the right footprint and the right portfolio. Snacking is an attractive and growing global trend, and we are well positioned to continue to lead the industry. Let me now turn to Luca for more detail on our Q4 and full year performance.

Thank you dear and good afternoon. It was a good quarter and a good year as we delivered on all our key financial metrics for both periods, especially as it relates to organic top line growth, earnings growth, and free cash flow generation. We are also pleased with the quality of the delivery throughout the year. We have generated broad-based growth with a good balance of volume and pricing. Gross profit on a constant currency basis grew more than revenue in both Q4 and the full year. In Q4 we also started accelerating some investments to further support our brands. So we feel good about the momentum we have coming into 2019. As our teams executed well and made progress toward our strategic roadmap, net revenue increased .4% for the full year and .5% for the fourth quarter. Our strong emerging market footprint propelled our growth for the year, delivering an increase of nearly 6% with clear trends in Russia, India, China, Southeast Asia, Mexico, and Africa. In fact, Brazil was the only notable emerging market where results were sought. Excluding Argentina, emerging markets grew 4.5%. On a regional basis and for the full year, Europe continues to execute well as it delivered net revenue growth of 2.5%. Consistent with recent years, this growth was volume driven and broad-based, with solid increases across biscuits, chocolate, and candy. Russia posted double-digit revenue growth behind share gains in both biscuits and chocolate, while Germany delivered another solid year of growth. Our chocolate bakery business continues to demonstrate the power of test and learn innovation and excellent execution, turning in high single-digit growth for the year and approaching $600 million in annual sales. We are pleased with our capabilities in this region and encourage regarding the opportunity that remains in front of us. AMIA grew .5% and is accelerating with trends coming from several key markets. India delivered double-digit growth powered by great execution, robust market dynamics, share gains, and innovation in chocolate and biscuits. China posted its sixth consecutive quarter of growth, increasing mid-single digits, behind continued momentum and share gains in biscuits and gum. Southeast Asia also turned in robust growth, propelled by demand for biscuits and chocolate, including a strong mooncake season in Q4. We are also pleased with the progress we are making in Africa. Latin America grew 3.6%, impacted by inflation-driven growth in Argentina. However, we delivered another good year in Mexico, posting -single-digit growth, as our gum and candy business executed well. We also delivered growth in the Western-Indian cluster. Brazil declined low single digits, primarily due to competitive dynamics in our powder beverage business. Earlier in the year, the business was also impacted by a national strike. However, we delivered positive results in our Brazilian biscuit business, which grew mid-single digits behind trends in club social and Oreo. And although down for the year, the chocolate business finished on a positive note. We lost single-digit growth in Q4 and share gains. North America grew approximately .5% for the year. U.S. biscuits continue to see good momentum, with low single-digit growth and share gains, driven by brands like Oreo. We are proud that the team delivered material progress for the quarter. That said, there is still work to be done to drive improved levels of consistency, and we continue to expect progress in 2019, albeit no linear. Now let's review our profit performance. In 2018, gross profit dollars grew by approximately 4% on a constant currency basis and ahead of revenue. Gains were driven by continued productivity, volume leverage, and pricing. We look to build on this progress over the long term. Gross profit growth, partially offset by additional investment, drove adjusted operating income dollar expansion of more than 6% on a constant currency basis. This translated into operating income margins of .7% up 60 basis points. In Q4, consistent with our long-term strategy, we invested additional dollars in growth initiatives, including point of sales and holiday season activations in Europe and Asia, ANC investments in Europe and Mexico chocolate, and investments in China and Russia biscuits to sustain and accelerate momentum. Additionally, we spent in some R&D and marketing areas. On a regional basis, gross margin expansion and cost execution drove margin improvements. Europe grew 60 basis points to 19.6%. North America was flat at .3% as higher conversion costs in US factories and customer service and logistics costs limited expansion. Latin America increased by 90 basis points to .4% and AMIA improved by 140 basis points to 14.4%. I'll now briefly cover category highlights. Our tree snacking categories continue to demonstrate solid growth as they have all year, growing at 2.7%. This is the strongest they have been in three years, and we remain encouraged by the underlying trends and untapped opportunities. Overall, we held or gained share in 60% of our business. -to-day biscuits grew 2.8%. Approximately 80% of our revenue grew or held share in this category, including our US, France, China, Germany, and Russia businesses. In chocolate, our business grew 3.5%. Approximately 40% of our revenue grew or held share, including Germany, Russia, China, and India. The percent of businesses growing or holding shares was 50% in Q4, and it is further improving in the latest period. Gum and candy growth was likely positive, reflecting modestly improved results in developed markets. About 40% of our revenue in this business gained or held share, including strength in China gum and solid US candy performance. Now turning to earnings per share. As Dave mentioned, 2018 was another year of strong, adjusted EPS growth. Increasing 15% on a constant currency basis. These results were driven primarily by strong operating gains, share repurchases, taxes, with our JD investments also performing well. I'll now move on to our free cash flow results. For the year, we executed with excellence and delivered 2.9 billion of free cash flow, which was consistent with our outlook and a great outcome despite currency headwinds. This performance was driven by better net income conversion due to strong working capital management. As I mentioned at our Investo Day, this is a critical focus area for me, my team, and the entire company. Turning to capital return. 2018 also marked another year of significant return of capital to our shareholders. We returned 3.4 billion in total, as we repurchased 2 billion in stock and paid 1.4 billion in dividends. This includes an 18% increase to our cash dividends in Q3, as we continue to target dividend growth in excess of earnings. Now let me provide some details around our outlook for 2019, which remains consistent with what we provided at our Investo Day last fall. I'd like to remind you that this is an important year of investment, as we continue to focus on accelerating volume-driven revenue growth for the long term. For the top line, we expect organic net revenue growth of 2 to 3%. With respect to earnings, we expect adjusted earnings per share growth of 3 to 5%, which reflects a step up in investment levels in ANC, sales, R&D, and quality. These investments will reinforce a growth cycle, which we expect to lead to a high single-digit earnings growth over the long term. Our outlook for the free cash flow is approximately 2.8 billion, consistent with our results in 2018. Recall, this outlook includes additional cash tax impact resulting from U.S. tax reform. In this outlook, we also expect our 2019 adjusted effective tax rate to be in the low 20s, and expect interest expense to be approximately $450 million. Reflecting the increasing rate environment. 2019 is an important year for Mondelis International. It will mark the first full year of our new approach to investing behind our strategic growth initiatives. Our new approach will set the stage for our long term growth algorithm of 3% plus organic net revenue growth, with a ramp up in the outer years. High single-digit adjusted EPS, dividends greater than adjusted earnings, and free cash flow of more than 3 billion. With that, let's open the line for questions.

To ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Andrew Lazar with Barclays.

Good afternoon everybody. Hi Andrew.

Hi Andrew.

Hi. Two questions for me if I could. I'll start with, Derek, you've been in the CEO seat for just over a year now. You've recently detailed the company's strategy and growth algorithm along with a new organizational structure to support it. I'm trying to get a sense of how you're feeling about the company's momentum heading into this year. And I ask with particular interest in terms of organic sales trends, because you've got incremental pricing that you've announced, incremental investment that we saw in both 4Q and then expected again throughout this year. I guess if anything it would seem like the organic sales growth target for this year perhaps could end up as a bit conservative. And I wanted to get your perspective on that and then I'll have a quick follow up.

Okay. So, well, I would say a few reflections on how I feel after about a year and three months in the job. Probably the most important for me was to deliver 2018 and I think we over-delivered all that we said we would do. And the quality I think was good. If I think about it, we accelerated our net revenue growth, which was volume driven, and you said that. We also had some good price discipline. We continued to focus on our costs and so we had good gross profit growth. And ROI and EPS growth was solid as well as the free cash flow generation. And on top we were able to start reinvesting in Q4 to sustain the accelerated growth. So I feel good about all that. Second, as you pointed out, we developed our new strategy and financial algorithm for the company, which creates growth on the three levels, more demand creation through a new approach to sales and marketing, more demand fulfillment through better execution, and then new ideas and innovation through a different mindset or a different culture in the company. There's a number of big shifts in the company. One is about the balance between top and bottom line, not just focused on the bottom line. We have a dollars over percentage focus, speed over perfection, and a stronger focus on volume and market share. And it's giving us momentum, as you said. And so that confirms my observation that we have good potential because snacking categories are doing well. They've been probably the best in the last three years in 18. We've got good margin expansion and we've got competitive levels that allow us to unlock investment that are focused to volume growth and we can generate substantial free cash flow. So yeah, of course, that makes you think you're stronger than you were a few years back. Why are you guiding towards the two, three percent top line growth? And yes, we have momentum in emerging markets. And if I think about 2018 and the mix of the pluses and the minuses that we had, overall we probably had a few more pluses as you remember. The main driver of it was that we are lapping the malware year of 2017. So 2019 is a year that we need to, even if we guide towards that two, three percent, we need to step up our growth and we need to solidify our progress. If I would look at today and reflect about 19, probably the mix of risks and opportunities weighs a little bit more towards risk. I'm talking largely the macroeconomics, Brexit, some of the commodities things we're seeing. So we also are stepping up and you probably will point that out, our investments. We're doing that largely so that 2020 will be the year that we're starting to see some good growth. So we feel that the 2019 outlook is appropriate, but we are clearly entering the year with a good momentum.

I'll leave it there. Thanks very much.

Your next question comes from the line of Chris Grow with CIFL.

Hi, good evening.

Hi Chris.

Hi. I have a question for you. You've had pretty strong sustainable growth in your categories over the past few years and including in 2018. Do you expect that category growth rate to continue and that it goes up 2.7 percent for your snacking categories? Is that what you'd expect for 2019 as well?

Yes, yes. In our long-term strategic plan, we estimated that we will be circling around the 3 percent growth. And at this stage, we're not seeing that 2.7 percent has been sort of consistent throughout 2018, what we were saying. And we're not seeing an immediate change for that in going into 2019. So yeah, we reconfirm that.

Okay. And then as you look at your margin performance in 2019, I know there's a much more heavier focus on reinvestment and accelerating revenue growth. So you have cost savings coming through from simplified to grow, and then I suspect you're going to have some more, is it mostly SG&A investments? So could we see a stronger gross margin performance and then maybe some of that giving back, if you will, in the form of SG&A investments when it comes to A&C and route to market and that kind of thing? Is that the way to think about the investment levels in 2019?

So Chris, I think, as we said many times, we are trying to create a little bit of a cultural shift in the company and moving away from simple percentages. The clear commitment we have is to drive gross profit growth and ROI growth and NPS growth. And as you think about that in the past by guiding to gross margin percentages and ROI percentages, we left on the table, we believe, some opportunities. We gave you in the past a couple of examples, namely around channels and incrementality we see there or for that matter also local brands. I think we have what it takes to generate incrementality there and to deliver good return on investment. Make no mistake when we say that we are focusing on dollar growth. It doesn't mean that we will leave outside productivity or the restructuring program that we announced at the Investor Day, the continuation of the current program. Or for that matter, things that we have done quite well like ZBB and NBS over the last few years. So I think as you think about the quality of the P&L in 2019, if you take out the additional investments we have, that are, as we said, in ANC but also in route to market or in quality or in R&D and marketing, I think if you take those out, the shape and the quality of the P&L is very consistent with what we did in 2018.

Okay, that's very helpful. Thanks for that, Coler.

Your next question comes from the line of Brian Spillane with Bank of America.

Good afternoon, everyone. Just two questions for me. One, just in the fourth quarter, the margins in North America were pretty good. And I guess I just wanted to understand, since it sounds like there was some reinvestment there, was there anything else there that was sort of unusual or flowed through in North America, I guess, or was it just the pricing, the P&L that helped? I was just trying to understand the margin performance in North America in the fourth quarter.

The margin was good, as you say, in North America. I think as you think about it, we did make improvements in reliability of the supply chain and the logistics network. And I think as we stabilized the situation a bit in terms of service levels, we were able to deliver efficiencies that in the other part of the year we were not. I think you also saw that there was a little bit of a pricing favorability above and beyond the average of the year. There was some phasing, quite frankly, in there. So I think as you think about pricing, it was round about, the number you have to keep in mind is the number that you see for the year, which is round about 1%. But I think in stepping back and looking into it, quite pleased in North America with the continued momentum we see in biscuits. Still some challenges in categories like gum. But in general, the margin that came through in Q4 was a good news for us and testament to the team that did a nice job by stabilizing the situation in supply chain.

And then I guess as a follow up to that, as we're thinking about if service levels are improving in North America and hopefully continue to improve some in 2019, how are you thinking about the balance between investing and spending in North America and then actually being able to service the programs? Do you feel like you're maybe not spending as much or doing as much as you might ordinarily want to if you had full confidence in the ability to service it?

The outlook we have in place at the moment, it clearly has investments in North America. Now having said that, there are still things that we need to look into. As we said in the last call, we implemented pricing and we are about to see the effect in the marketplace. So we need to stay flexible there and see how to best balance investments with pricing. We also were pretty clear that while we believe we are making good progress and we see the product coming through, there is still work to be done in North America. So in general terms, I would say we will invest more behind categories like biscuits or categories like candy, even in gum. The reality is we need to take an inventory of where we stand at the end of Q1 in terms of pricing and supply chain. And then I think we need to adjust if the case.

Okay, great. I'll leave it there. Thank you.

Thank you.

Your next question comes from the line of Ken Goldman with JP Morgan.

Hi, thank you very much. Hi Ken. Hey guys. You know, the primary pushback I get on your stock is valuation and specifically on EV EBITDA. And I think I talked to investors, you know, many of them understand that the value of your joint ventures needs to be added back, but plenty don't, at least not at first glance seem to get that. So to me this issue is increasing, right? Investors are weighing EV EBITDA more heavily because debt levels have risen higher. So I guess my question is this. If thesis is correct that investors are sort of, I guess, punishing companies like Mondelez for relying on unconsolidated operations, does that make you, I guess, internally rethink the value of your joint ventures to your stock price? Or is that not really a way for you to factor that?

Look, I think we can clearly debate if we are over value or under value. I believe when I step back and I look at the opportunities we have as a company and, you know, the quality of the results that we delivered in 2018, I feel quite good about the long-term guidance that we gave. And as a leading snacking company, ability to generate sustainably volume-driven growth of and resulting in revenue of 3%, high single digit EPS and cash flow of 3 billion plus, I think it is something that is quite compelling. My reply to your specific question is, look, the JVs clearly don't roll up into our EBITDA. They are under about 10% of our EPS. I believe that, you know, clearly it was a great investment. I believe there is still upside potential. So I think they are still under value. But the premise of Mondelez, I think tangibly, looking back at 2018 and having us delivering in face of all the forex and twin that we had, a cash flow that was 2.9 billion with a conversion of net income that was exceeding the net income. Excluding the JVs for which we don't get much dividend, 130%. I think that should reassure investors that we have what it takes to win. And again, the premise of us being in emerging markets, seeing emerging markets growing 6% for the year, more than 6% for Q4. 40% of that growth being volume-driven. I mean, I can tell you we are quite pleased. And I think as you think about the evaluation, think about what our potential is as a leading snacking company in emerging markets or for that matter globally. So that would be my reply.

Okay. Thank you for that. And then a quick follow-up. You know, at the end of your prepared remarks, you reiterated your desire to grow dividends ahead of EPS growth. Can you elaborate on why this is the right decision? I mean, it feels to me, you know, as we just talked about, I think investors are increasingly sensitive to debt. You're a company that's also increasingly emphasizing growth and that requires reinvestment. It just maybe feels to me like raising your dividend above earnings isn't the ideal strategy, but I'm just curious to hear the rationale behind a take there.

I think it is the confidence we have in the overall capital structure of the company. If you step back and if you think about the ability we have to generate free cash flow and our commitment that materialized in 2018 of three-plus billion from 2020 on, if you think about the balance sheet flexibility we have at our current leverage, but also, you know, with the fact that we were fairly clear, the coffee stake is an investment for us and, you know, it is not strategic. That gives us flexibility. So if you put the ability we have to generate cash, if you take into account the leverage that we have today, the coffee stake that we have, even in presence of M&A, I think we have what it takes to be able to have the flexibility to do share-buy backs, to get dividends, and also to make M&A. So I think you cannot take one piece. You have to look at all of this together. And all the elements are there pointing in the direction that there is confidence in being able to raise dividends. Last time we did it, it was 18 percent. So we feel good about that.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Good afternoon, everyone.

Hi, Alexia.

Hi. So just a quick question. The emerging market growth, ex-Argentina being in the 4 to 5 percent, still seems a little lackluster. I'm just trying to understand how much of that was Brazilian gum and what's the prognosis there. It sounds as though, you know, if Brazil was downloading with digits and some of the categories were positive, the gum business must have been in quite some trouble. So maybe some commentary there. And then just as a follow-up, some of the household product companies have complained that local competition in places like China has slowed them down quite a bit. What are you seeing out there in China relative to your local competitors? Do you think that's relevant to you? Is that something that you're worried about in terms of getting the emerging markets growing again? Thank you, and I'll pass it on.

Okay. Well, on Brazil, yes. Brazil was, of the emerging markets, probably the one that didn't perform as we would have hoped in 2018. But we feel that over the medium term, the growth prospects for Brazil are quite good. It wasn't really because of gum that 2018 was more difficult for us. It was really driven by two things. First, there was a bit of a price scuffle, I would say, in the chocolate category, which we're getting through. We see, at the moment, we see good volume growth in chocolate in Brazil. We addressed the price gaps, and we started to gain share in the last quarter. In biscuits, we were largely flat as it relates to share. So it was really on top of the chocolate issue, it was the powdered beverages, which in Brazil we are seeing a colder summer. So a slowdown in Q4, and we're expecting the same in Q1 of our powdered beverages sales. And then on top, overall, the powdered beverage category is doing a little bit less than cold drinks in general. And then us within that category losing some market share. So that was the real driver for Brazil. As it relates to China, we obviously, like everybody else, have the local competition. But we're pretty happy with our performance in China. We had another solid quarter, which is the sixth consecutive quarter of growth for us in China. All of our categories are growing. In gum, we are increasing our market share quite considerably, because we launched a new product called Stride Waves, which is the same as the Trident Vibes here in the US. And then in chocolate, we launched our Milka Magic Cup, and there also we have about a half a point of market share gains. And then in biscuits, where we have the most local competition, we have been really doing well, with more than a one point gain of our market share combined between online and offline. We've got some pretty heavy growth going on in our e-commerce business in China, which is up almost 80% for the year. So overall, yes, there is a competition, but at this stage we feel like we're doing quite well in China.

Great.

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

Okay.

The next question comes from the line of Robert Moskow with Credit Suisse.

Hi. Two quick questions. You mentioned ANC investments in the quarter. I don't know if I heard you quantify how much ANC was up year over year. Can you give us a sense of what it was in the quarter and then the year ago? I'm sorry, for the overall year, how much it was up? And then secondly, pricing down a lot in Europe, my impression is that, especially in the UK, that a lot of pricing needs to go higher to offset higher input costs. And then, of course, the Brexit situation might make that, accentuate that. Do you have a contingency plan if there's a hard Brexit this year? Thanks.

Thank you, Robert. So maybe we'll take the Brexit. I'll start by commenting a bit on your ANC question and pricing. As we said, we activated more investments in Q4, but we are not going to quantify it. By the way, it was ANC, and as we saw, good momentum in India chocolate, in China biscuits and gum, in Russia chocolate and biscuits. We gained in Russia alone more than two points of share in the last 12 months. So as we saw these economies doing very well, as we saw volume-driven growth, I think we put more ANC and I think it was the right decision. As we said, we are trying to invest in our local brands as well, but it was not only ANC. I think if you look at what we did in Q4, for instance, we spent money in seasonal activation in big countries like the UK, Germany, and for instance, in India and Australia. But we also spent in route to market, and finally we had investments in marketing and R&D. I think if you think about the quantum, it was clearly material as you saw, the quality of the earnings. We had cross-margin growing 90 basis points for the quarter. Half of it dropped to the bottom line, so we reinvested quite a bit. Going forward, we will reinvest even more. The difference is going to be that it will involve more countries and more brands. As to pricing, I wouldn't get quite frankly very fixated on the Q4 pricing impact for Europe. There was some phasing in there. What I can tell you is that in general, the total pricing for the company was in the right place. Europe specifically was able to generate nice cross-profit growth, so cross-margin was up in Europe again. It was puts and takes between pricing and commodities at Forex that we had effectively covered for Europe. I don't think there is much to worry at this point in time on pricing in Europe, with the exception of maybe Brexit that Divke is going to talk about in a minute.

As it relates to Brexit, yes, the UK is an important business for us. We have a very good team there that is very solid. I think they are very well equipped to weather through this situation. We don't know, and that is the difficulty of Brexit. We don't quite know what is going to happen here, so we have to really prepare for the worst and hope for the best. The worst is clearly a hard Brexit. We are assessing all the potential scenarios. We do feel that Brexit will for sure have a short-term and a medium-term impact. Over the long term, we believe that it will stabilize itself and we will come back to where we are today. Obviously, there is a huge difference between a hard Brexit and a softer Brexit. As it relates to the hard Brexit, our contingency plan is quite extensive. It is focused on the disruption and ease of the flow of the goods. We have invested in additional resources in logistics operations. That means we have rented many more trucks, much more warehousing space, increased our inventories, and made sure that we are capable, even in difficult circumstances, to maintain our customer service. We are very focused on demand planning. We have also increased our additional raw and packaging materials in the UK and in Europe. Brexit could come with other effects, like a devaluation or tariffs, maybe a loss of consumer confidence in the first part. Those types of things we have not included in our current guidance. We are preparing for it in case it would happen. I hope that yesterday's vote helps a little bit to avoid the hard Brexit. As it relates to pricing, I think we will have to see what happens, particularly with Brexit itself, to make decisions. At the moment, our pricing is adapted to the current situation, but we are ready to adapt the pricing as Brexit starts to happen.

Thank

you very much.

Okay. Your next

question comes from the line of Jason English with Goldman Sachs.

Hi, good evening, folks.

Hi.

Thanks for sliding me in. I appreciate that you are focused on the holistic portfolio now and don't want to spend time dwelling on the legacy sort of power brands versus non-power brands, but I am going to try anyways because the strategy clearly is one of trying to activate the periphery of the portfolio. I would love to get a bit more context of how it is working so far. Is there any sort of performance metric you can give us in how these non-power brands are progressing as you extend the investment?

Yes, we can explain that a little bit. I wouldn't say it is the periphery of the portfolio. Our non-power brands or our non-global brands are sometimes quite important, and we are really using them in synergy to try to cover as many aspects of the consumer needs that exist. For instance, in Russia, we have become leaders in chocolate by using the combination of Alpen Gold and Milka to be the winners in the market. So it is more than the periphery. It is really playing off brands against each other and making sure that we activate all of those brands. That is still, of course, a work in progress, but I would say that we have seen the power brands continuing largely on their trend of about 3% growth, and then we have seen the local brands go up from a negative growth in the past to close to a 1% growth in the last quarter. That is sort of the shift we are seeing, and obviously that is only after about four months of activation of those local brands. So we are expecting to see more growth in 2019.

Excellent. Thank you for sharing that. I want to come back to a comment you made in prepared remarks about empowering people to snack right. I guess snack right means lots of things to lots of people, but to me it seems to connote a degree of health and wellness, which is not something I think comes top of mind when we think about your portfolio. Can you talk about the context around that statement in terms of your vision and whether or not it does entail a bigger push in health and wellness? If so, how much of this would be strategic M&A and priority versus organic?

It means many things. It does have a health and wellness connotation, but if I take it up one step, it is a recognition that the same consumer, depending on the moment of the day and the situation in which he or she finds himself, can make different decisions. When we say right, we mean that we want to offer the right product for the right occasion. We see as we look around at what is going on and what is growing in percentage, it is the more health and wellness oriented categories, but in dollars it is still the old biscuits, chocolate, ice cream and categories like that that are getting the biggest growth. As it relates to health and wellness, yes, we clearly have an intent to do several things. It probably starts with constantly trying to improve the ingredients on our product, the sourcing of our raw materials, and maybe that is not necessarily health related, but we are thinking about Cocoa Life or Harmony wheat programs that we have, which are about more sustainability of the raw materials and so on, but I think that is also these days something that the consumer appreciates as we do that in our brand. We will also eliminate as much as we can fat and salt and things like that, and yes, we will need to have more pure health oriented brands. We have several, Belvita would be the one that comes most to mind, but we have clearly an intent apart from continuing to improve our current brands, to launch more health oriented options under our current brands, or to launch new brands, and you are right, that might have to be partially also through M&A, but I would not say it is more biased in one or another direction. It is a little bit of a whole spectrum of activities that we have in mind.

Got it. Thank you guys.

Thank you, Jason.

Your next question comes from the line of Steve Stracula with UBS.

Hi, good evening, and I hope everyone in Chicago is staying warm.

Yes, in the office we are okay.

I figured Shep was handing out hand warmers or something like that around the boardroom table. So my question for Dirk to kick it off would be, how do I think about some of the more impactful investments in ANC and just in your broader route to market you are making this year, specifically, Dirk, what are the key markets where Salesforce headcount for Mondeley's employees increasing, and then which emerging markets with local iconic brands matter most in your opinion? Then I have a short follow up for Luka.

Yes. Well, I would say that where the manpower matters is largely in emerging markets, the reason being that a lot of the sales are still happening to mom and pop and smaller stores, which you have to physically cover. And so the countries that come to mind to be able to do that are of course India, but even Russia, Southeast Asia, Africa, the Middle East, those are the markets where we are planning to invest overall in how we cover the stores and get a bigger universe of coverage. It's not only people, it's also driven by the equipment that we might need, trucks or in-store display equipment in the hotter climates. For our chocolate business we need coolers. So that's really what we mean when we say we are going to invest in route to market. And I think I took you through the markets that we are going to do that. As it relates to the significant emerging markets for us, well, we are seeing at the moment, we are seeing double digit growth in India, we are seeing double digit growth in Russia. We talked about Brazil that wasn't 18, wasn't a great year, but that's a key market for us. We are also, China of course, we need to look at the opportunity we have to meet single digit, but we would like to increase that. And then the markets where I would say our presence, all those markets I've talked about, there's probably close to a billion dollars for us, more or less give or take. Southeast Asia, there's still a few markets there where our presence is not as big as it should be or market share is not as big as it should be. So we are also planning to do quite some investments in there.

Okay, great. And then Lucas, since you are trying to direct our attention to focus more on profit dollar growth as an industry, or as a company, how should we think about for 19 EBIT dollar trends on a constant currency basis?

Look, again, I think if you look at the guidance we gave in terms of EPS 3 to 5%, we guided on interest cost at 450. You can work it back up and see that it is, I guess, around about the same EPS growth that you have. There are puts and takes obviously, but that's what it is.

All right, thank you. Congratulations to the quarter.

Thank you, Dave.

Your next question comes from the line of David Diskell with Citi.

Great, thank you and good evening.

Hi, David. Hi, David.

Hi. Two small modeling questions and then just one bigger question. What's your inflation forecast for 2019? And then on the organic revenue forecast of 2 to 3, would it be correct to assume that that would skew towards pricing as opposed to vol mix? And then I have a follow-up, please.

Look, on the inflation, we are not going to break that out in terms of composition of cost inflation, forex inflation, commodity. I think as you model, think about commodities being pretty much in line with what we have seen this year in terms of inflation. There is clearly logistics cost that is creating a little bit of a pressure point. That was one of the key drivers that drove us increasing pricing in North America for 2019. But we also see some packaging and the forex to a certain extent is one of the components that is creating a little bit of pressure in terms of inflation. And again, we are taking action, obviously. Clearly, we are covering our exchange rate exposure throughout the year. We have good coverage at this point. I think we took advantage of some of the dips that we saw recently, for instance, for the Brazilian REIs. On the composition of the 2 to 3%, I prefer not to go there. We are not going to give guidance on that specifically. Clearly, as you think about what we said in the context of Investor's Day, we believe that volume growth is the right thing. When you think about the various regions, I think we will continue seeing good momentum in terms of volume in the EU, same in AMIA. L.A., clearly, there is Argentina and some inflationary pressure. And in North America, we need to wait and see what happens with the price increase as it becomes effective in the marketplace. And so I think there we have to see if the elasticity we model is the right one or if it is better or worse.

And then on the investments that you are making in 2019, can you give us some color on the pacing of those investments? And then also one clarification on your fourth quarter comment. I believe you used the phrase something like you accelerated your investments and they began in the fourth quarter. Does that mean that the dollar amount of investments in 2019 is now less because some of it took place in the fourth quarter? Or is it just in aggregate going up because you had flexibility in the fourth quarter? But again, please don't forget the pacing part of the investment question for 2019. Thank you.

No, I didn't forget the pacing. So let me answer that first. I think as you think about it, it is fairly even throughout the various quarters. Bear in mind that there are seasonal events throughout the year. So Easter, for instance, happens to fall in 2019 a little bit later than it did in 2018. So it is a Q2 event and there are other seasonal events. But specifically on ANC, it is equally phased throughout the quarter, I would say, give or take.

The other part was does it mean we are going to reduce our investment in 2019? And no, the answer to that no. It is clear that the investment base of 2019 is going to increase on that in 2020. Maybe not at the same pace as in 2019, but we are trying to change our circle here to a virtuous circle. So our objective is to keep on going and in that way increase our top line growth.

Thank you very much.

No problem. Thank you.

And our final question comes from the line of David Palmer with RBC Capital Markets.

Thanks. Just a real general one on execution. You have talked about trying to improve that execution and accountability by pushing some decision making down to the regional level. It looks like from the outside, like Europe has been executing pretty well. Perhaps that will be tested by higher input prices and that requiring pricing, which is never easy there. And then conversely, North America has seemingly struggled far longer than it should have post malware, especially with some of the competition pretty distracted. But it seems to be in a little bit of an early stage here of getting its act together. Could you perhaps just walk us around the world or the regions as you see where the execution is today and where you see it going?

Yes, and maybe before I do that, we look at execution in more than general execution. We're trying to split that up in several different groups, if I can. And of course there is the supply chain execution and that has to see with how good are we buying our raw materials and our packs, how good are we running our plants, how well are we doing our demand planning and our deployment and so on and so on. And as you can imagine, there's always areas there where anywhere in the world people can improve. But apart from the supply chain, it also has to see with commercial execution that goes from marketing and our ROI and our marketing activities around the world and how are we going to drive that and can we use the latest technology to drive that. And that's an in-store presence and that improvement of our route to market that we were talking about. So it's wider than you might think. If I go around the world, I would say in general we have an objective in all regions of the world to clearly increase our ROI and our marketing and our sales activities. And everybody has an opportunity there. As it relates to the execution in the supply chain, you're right. In general our supply chain in Europe is clearly performing better and a well-oiled machine. And the US is getting there or North America is getting there, but it's going to take a little bit of time. And you have to take into account that they are still using some of our older factories to do so. But as it relates to the rest of the world, I would say Latin America is making big strides as it relates to their supply chain and it's working very well. And in EMEA we are also pretty happy with where we stand, the differences between the different countries, but also going quite well. But I think you cannot see this as a black and white, they're doing it well or they're not doing it well. And I think that's the challenge. Every single region can lift itself to the next level. And that's really the challenge. If you're in a company like ours, we focus on margin and cost to just make sure that we're running our plants in a better way, we run our supply chain in a better way, get the waste out of there, bring down overtime, run our lines optimally. That's really what we're talking about here. And I can tell you that anywhere in the world we have opportunity to improve that. It's more difficult in some areas, but the opportunity to my opinion is quite big like it would be in any other big company to my opinion.

That's great. Thank you.

I think that brings us to the end of today. So in closing I would say that 2018 was a great year for us. We had good top line growth, we had solid profitability, we improved our free cash flow, we created and set in motion a new strategy that I think is the right approach and it's the right time to deliver higher quality sustainable growth for the company. As I look at 2019 and the year ahead, I am encouraged by the help of our snacking markets and the categories in which we operate. I think our teams are energized, we're happy about what we've achieved, we're excited about the future. And I think the new structure and incentive plans we've put in place are giving people the liberty and the potential to really go and do and make things happen. It will be a year of investment as we pointed out, but we think it's the right thing to do because we believe we can lift this business to a higher level of growth and that will lead to better returns for investors. So I look forward to continue to share our progress. I will probably see you all in Cagney and thank you again for your interest in the company.

This concludes today's call. You may now disconnect.