Mondelez International, Inc.

Good day and welcome to the Mondalis International Second Quarter 2019 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Mondalis 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. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for Mondalis. Please go ahead, sir.

Good afternoon and thanks for joining us. With me today are Dirk Van de Putt, 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, mondalisinternational.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. As we discuss our results today, unless otherwise noted, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our -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. In today's call, Dirk will give you an overview of our results as well as progress update against our strategic priorities. Then Luca will take you through the financials and our outlook. We'll close with Q&A. With that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon, everybody. Today, we're reporting strong second quarter results as our category leadership position and solid execution allowed us to capitalize on strong snacking fundamentals in most of our key markets. Our first half performance demonstrates that our more consumer-centric approach and focus on our strategic priorities is working. We're delivering volume-driven top-line growth while driving earnings growth and improved cash flow generation. Given this performance, we're raising our full-year outlook for organic net revenue growth to 3% plus, which Luca will discuss in more detail later in the call. As you can see on my first slide, it is clear that our unique position as a global snacking leader and our unique approach to growing our business is driving us forward. We have a strong portfolio of global and local brands combined with an advantaged manufacturing and distribution network. We have leading positions in both developed and emerging markets, and we have talented and committed colleagues who are energized by the progress they are seeing. The combination of these advantages are helping to generate volume growth, which by virtue of our efficient operations, generates more fuel to further invest in expanding our top line as well as create long-term value for our shareholders. We create that value through our consumer-centric growth strategy, a reminder of which is on slide five. Our long-term goal is to deliver attractive dollar profit increase, driven by solid top-line growth as well as free cash flow expansion by focusing our business on three clear priorities. First, to accelerate top-line growth, second, to drive operational excellence, and third, to build a winning growth culture. Turning to the financial results for the second quarter on the next slide, we delivered strong performance against many key metrics. Our top-line growth accelerated to 4.6%, underpinned by solid category performance, improving share trends, and volume growth. Our emerging markets grew 7.6%, while developed markets showed .8% growth. Our adjusted operating income grew in line with revenue, as volume leverage and cost savings were partly reinvested in strengthening our brands and capabilities for the future. We reported high single-digit adjusted EPS growth, and free cash flow reached 581 million since the start of the year. We also continued to make great progress on living our purpose across the organization, including through our sustainability agenda. To talk briefly about our geographies, revenue grew across all four of our regions and was underpinned by market share gains. Our North American business grew 2.5%, led by strong U.S. biscuits results. Our AMIA business grew .7% overall, with strong growth in China and India. Our European business grew 3.9%, boosted by the U.K., Germany, and Russia. And in Latin America, growth was .9% or 4.2%, excluding Argentina. Let me share a little more detail on progress against our strategy, turning to slide 7. We committed to increasing and optimizing investment behind our brands, both global and local, and our channels, in order to create a solid foundation for future growth. Year to date, we have driven a total increase in organic net revenue of over 500 million, and an increase in adjusted operating income of almost 100 million on a constant currency basis. This investment is helping us to maintain strong growth momentum in two of our biggest brands, Oreo and Cadbury Dairy Milk, thanks in part to expansion of distribution in key markets and channels. At the same time, we are putting more emphasis than in the past on our local jewels. For example, Nutter Butter, an iconic U.S. brand that celebrated its 50th anniversary this year, is delivering double-digit growth thanks to fresh investment. We are also fueling channel expansion. We will continue to expand our rural distribution network in major markets like India. This will give us an even stronger competitive advantage in a market where we are already chocolate leaders. In Southeast Asia, further investment in modern traditional trade has enabled us to accelerate our fast-growing chocolate business in countries like Indonesia, resulting in double-digit growth and share gains. We continue to build our e-commerce business as well. Our global e-commerce reported net revenue grew more than 30 percent in the quarter, while our U.S. e-commerce business grew almost 80 percent. We also saw continued strong growth in markets like China, where partnerships with e-tailers are helping us gain share. Operational excellence remains critical to our success. I was particularly pleased to see our Easter execution this year, where during a particularly important time for our chocolate business, we achieved -in-class service levels in key markets across Europe. And when it comes to cost, we are continuing to exercise the muscle we've built over recent years. Cost discipline remains well embedded in our organization thanks to zero-based budgeting, and we're extending efforts to cut other unnecessary costs from our supply chain, including reducing waste in our U.S. manufacturing network. As we head into the second half of the year, our new commercial organization is operating well. Our focus is more local and increasingly consumer-centric, leading to improved speed, execution, and results. By way of example, in changing our organizational structure in Europe, we've made our business planning process much more efficient, with 40 percent fewer meetings required. This has increased the speed of decision-making and keeps our people focused on their growth initiatives. On the next slide, I want to talk about another important pillar of our growth strategy, the acquisition of brands that help us accelerate growth by entering

into

adjacencies in broader snacking or into more -being-oriented products. So far this year, we've already made investments through our snack futures unit in the Palio vegan chocolate company, U, and in the prebiotics company, Uplift Foods. As you will have seen, we've recently taken a majority stake in Perfect Snacks, the pioneer in refrigerated nutrition bars. A few reasons why we are so excited about this brand. The products have great well-being credentials and offer organic, non-GMO, protein-rich snacks, which are on trend with consumers. The company is growing fast and had 2018 revenues of 17 million. We'll operate Perfect Snacks as a separate business in order to nurture its culture and its spirit. And importantly, key members of the founding family, the Keats, are keeping a significant minority stake and will continue to lead the company. While they remain a separate business, we will offer significant resources to expand distribution. The business is delivering very strong growth and we're excited about the potential with clear opportunities to expand this platform further. Finally, let's turn to our impact on the world around us and our consumers. Our company's purpose to empower consumers to snack right is also reflected in our broad corporate sustainability agenda. In the second quarter, we announced our sustainable and mindful snacking goals. As part of our sustainable snacking strategy, for example, we are committed to sourcing 100% of the cocoa for our chocolate through Cocoa Life and moving to 100% recyclable packaging by 2025. And in order to encourage mindful consumption by our consumers, we will include portion amounts and mindful snacking information on all packages globally by 2025. We're also committed to cutting carbon dioxide emissions from the energy used in manufacturing. To help us achieve that, we announced a partnership with Enel Green Power to purchase energy delivered to the grid from a solar energy farm in the US. This will help us reduce our global manufacturing emissions by around 5%. The feedback on these initiatives from consumers and governments has been positive and underscores the importance for us to continue to lead the way in creating a future where people and the planet thrive. With that, I will hand over to Luca.

Thank you, Dirk, and good afternoon. As you can see on slide 11, we deliver strong performance across all our key metrics. The quarter includes broad-based revenue growth with balanced volume mix and pricing, a solid increase in gross profit, and high single EPS growth. Productivity and over net savings provided the fuel for 50 million of business investments in the first half versus last year to drive sustainable growth. Finally, these good results translated into free cash flow of approximately $600 million year to date. Turning to slide 12, our leading footprint in emerging markets remains a competitive advantage for us and helps drive our strong top-line growth in Q2. These markets grew approximately 8%, marking the fourth consecutive quarter of growth greater than 5%. Excluding inflation-driven growth in Argentina, emerging markets grew 5.4%. China, India, Southeast Asia, Russia, and Mexico were among some of our business units that drove this growth with a nice balance of volume and price. Developed markets also posted good momentum in Q2 with nearly 3% organic net revenue growth driven by strong results out of Europe and notable improvement in North America. Now let's review our profit performance on slide 13. In the second quarter, we increased gross profit by more than 4%. Productivity, volume leverage, and pricing all contributed, and importantly, gross profit grew faster than revenues in three of four regions. We feel very good about our ability to convert additional volume and revenue into gross profit and investing these benefits

to ignite

a virtuous cycle. In Q2, these benefits were partially muted by some operational issues we had in Brazil. I'll talk a bit more about those in a minute. Our gross profit increase translated into solid or high-dollar expansion with volume leverage and cost savings offsetting a step up in investments in the areas of ANC, -to-market, and innovation. Moving to regional performance of slide 14, Europe delivered an excellent quarter with .9% revenue growth driven by strengths in the UK, Germany, and Eastern Europe. Notably, strong in-store execution and marketing activations around Easter enabled a halo effect on our chocolate business and allowed us to exceed our sales expectations and gain market share while driving the category. Philadelphia also performed particularly well as our investments are driving growth. Adjusted to high dollars grew by 5% in Europe due to robust sales and volume leverage alongside ongoing cost discipline. We also invested in ANC and -to-market in the quarter. AMIA grew .7% due to continued strength across much of the region. India delivered another quarter of double-digit growth fueled by strong market dynamics and great execution in both chocolate and biscuits. China grew double digits driven by strong results in biscuits. This includes a balance between global and local brands as both Oreo and Pacific deliver great results. GUM also had a standout quarter with strong growth as we continue to take share. Southeast Asia grew mid-single digits with solid results in biscuits and chocolate. AMIA increased operating income dollars by 5% due to operating gains partially offset by additional investments in high growth potential markets. Latin America grew .9% due in part to inflation driven growth in Argentina and the impact of lapping the trackers strike in Brazil last year. Growth excluding these items was low single digits. Mexico delivered another mid-single increase driven by GUM. Adjusted white dollars in Latin America declined by approximately 13% primarily due to issues in Brazil during

the

quarter surrounding the consolidation of four plants to two. Production delays and some service delivery issues impacted our gross profit. Our team in Brazil is working to address these issues and we expect improvements over the course of the second half although there will be some headwinds also for Q3. Finally, North America grew .5% in Q2 led by solid results in the U.S. biscuit business. We gained share in biscuits as Oreo and Belvita deliver strong results across multiple channels. We continue to improve service levels and in addition our DSD execution is driving benefits. While we still have work to do to improve consistency we are encouraged by this progress. The North American region grew high by nearly 10% due to effective pricing, waste reduction and overall supply chain execution. Let me spend a moment on category highlights. Our tree snacking categories continue to demonstrate great fundamentals with total category growth of .4% on a -to-date basis. This builds off 2018 momentum and reinforces our confidence that we have shaped the portfolio in the right way to benefit from attractive categories and markets. We also know that in many cases we have helped drive this category strength through our investment and execution. A few examples include U.S. biscuit, Oreo and DSD are two key drivers or Easter execution around the world but especially in the U.K. and Australia or in India where our distribution gains are helping chocolate to make its way into consumption habits throughout the country. Overall we held or gained share in 65% of our business which is an improvement over recent quarters. Our biscuits business grew 3.6%. Approximately 70% of our revenue grew or held share in this category including our U.S., China and India business. In chocolate our business grew 6.6%. Approximately 65% of our revenue grew or held share including the U.K., Australia and Brazil. The execution around this season in many of our key chocolate countries was best in class. Gum and candy revenue grew slightly. About 35% of our revenue in this business gained or held share including strength in China gum and Mexico candy. Now turning to EPS on slide 20. Q2 EPS grew 9%. This growth primarily reflected operating gains driven by strong revenue results as well as income from the JV equity investments and share repurchases. I'll now move on to our cash flow results on slide 21. We delivered -to-day free cash flow of 581 million in line with our plans due to further working capital efficiencies. We are well positioned to deliver on our full year target. Turning to capital deployment on the next slide, we have returned 1.7 billion to our shareholders through the first half. Today we announced an increase to our quarterly cash dividend of 10% consistent with our goal of dividend growth in excess of adjusted EPS. Moving to our outlook, we are increasing our full year organic net revenue growth expectations to 3% plus. This reflects our strong first half results as well as our view that the fundamentals around our categories remain robust and that momentum will continue into the second half. But it also acknowledges that our -to-date revenues was positively affected by an exceptional execution in our Easter season. We are also increasing our outlook for EPS growth to approximately 5%. Let me spend a few words to explain some of the dynamics here. Our EPS delivery in the first half has been strong, but with respect to the second half, it is important to note that we lab two items. The first one is a tax favorability in Q3 last year related to the U.S. tax reform transition period. And the second is the impact of lower tax rates in the Netherlands that benefited JD in Q4 2018. Excluding these two items, our underlying profit performance should be comparable with the first half, where volume leverage upside and gross profit increases will be partially reinvested in growth initiatives. Concerning our overall second half effective tax rate, it is important to note that it is expected to be in line with Q2. We are also updating our interest expense estimate to approximately 400 million. Additional geopolitical disruptions or other disruptive events, including Brexit, are not anticipated within this EPS outlook estimate. Finally, our free cash flow expectations are unchanged. With that, let's open the line for questions.

As a reminder, if you would like to ask a question at this time, simply press star and the number one on your telephone keypad. Your first question comes in the line of Andrew Lazar with Barclays.

Good afternoon, everyone. Just two questions for me. Hi. Good afternoon. First, I guess, just at a high level, Dirk, with the strong first half, I'm curious where you see this as putting Mondelise in the scheme of its broader strategy. I guess, do you see the company as ahead of schedule to return to the stated long-term algorithm? And then second, guidance for a 3% plus organic top line for the full year, as you mentioned, Luca, suggested deceleration from, call it the 4% level in the first half. Are there some discreet items to think through here, particularly given category growth is running above three, or is there also perhaps some conservatism being employed as well? Thank you.

Okay. Thanks for the question, Andrew. I'll maybe reply to the first part, and then Luca can take the second question. So, yes, we are pleased with the performance in the first half. We feel that it's a confirmation of the strong fundamentals that we have, which has to see with our unique position as a global snacking leader. We're in the right categories. We are in the right geographies. We have emerging markets, but also developed markets this quarter doing quite well. We feel that we are successfully executing against our strategy, which is giving good early results and share trends. We wanted to invest in our brands, in our capability, which we are doing and which we can probably increase a little bit for the year. And we know that that's not linear, not all of the effects of that increased investment we will see this year. That's going to build up over time. And then there's the whole change we want to drive in the company becoming more consumer-centric. We've changed our structures to business units with the local first approach, changed the incentives to all to improve speed and execution and results. And yes, I would say that at this stage, we feel that everything is going as planned and probably faster than we would have planned. And we feel that the strategy we put in place and our execution against that strategy is positioning us in a situation where we think that creating sustainable long-term shareholder value is clear. And yeah, we feel pretty good about what's happening in the company at this stage. So maybe Luca, you can talk about the guidance.

Yeah. Thank you, Andrew. I think, you know, when you look at the quality of the overall results, it is, I think, fair to say that probably all around this is one of the best, if not the best quarter since the formation of Mondelis. And clearly, you know, that gives us the confidence in the outlook also going forward. So we remain quite optimistic on the outlook and we clearly anticipate continued momentum in the second half. We have to acknowledge, though, that the first half was positively impacted by what we call the yellow effect on a great Easter execution. As we look around older countries where we have a meaningful chocolate business, and there are many, we clearly draw the category performance in Q2. And we have executed very well from, I would say, supply chain, with the exception of Brazil, which we called out as one exception, to actually being able to set in the marketplace, not only our seasonal products, but also the regular lines. And, you know, as we look at this, we are very, very pleased. We did exceptionally well. And, you know, that is one of the reasons why maybe the second part of the year might be lower than the 4% growth rate that you have seen in the first half. But to be very precise, we didn't have any discrete items in Q2 or 4, that matter, in the first half. Yes, we are lapping the track and strike last year in Brazil, but in the big scheme of things, it's quite immaterial. It is .1 points of growth for Total Mondelis. You didn't ask about profit, but maybe I'll spend a couple of words there as well. Again, we are very pleased with what we saw in the first half, excluding Brazil, gross profit. It's really growing nicely, and we see the virtual cycle coming to fruition. We see volume leverage coming through, productivity, effective pricing. I mean, look at the number we are posting for North America profit, as one example. And we are using the upside to reinvest in the business. The second half, as far as profit goes, it will be comparable to what we have seen so far. But we also want to solidify our business through continued investment. And so there is a little bit more to come in terms of investments. And clearly, where we see momentum, maybe we'll double down to make sure that we generate even more revenue. So maybe we are conservative, but I would say the first half was exceptionally well executed around, for instance, Easter as I called out.

Thank you.

Thank you,

Andrew. Your next question comes from Brian Splane with Bank of America.

Hey, good afternoon, everyone. So two questions for me. One, just first one. In North America, pricing was up a little bit more sequentially in the second quarter than it was in the first quarter. I think you said in the prepared remarks that you also had share gains. So I guess two things around that. Relative to this price increase that you took earlier in the year or late last year, has the share performance and the brands responded to that pricing maybe better than you expected? And I guess as we're thinking about kind of the balance of the year, would you expect that level of pricing to hold up the balance of the year?

Yeah, maybe I'll start and then to give you a little bit more perspective on shares and brand dynamics, I think we'll add a little bit of color there. So pricing, yes, it is sequentially better. And by the way, I think if you look across all the regions, it is a little bit sequentially better. So it's not only a North American thing, I would say. But we announced the second wave, quite frankly, towards the end of last year and became partially into effect in Q1. So it is kicking in at its fullest in Q2. And that's why you see the benefit becoming a little bit more pronounced in Q2. As you said, the categories, particularly in biscuits, are reacting well. When you dissect the category dynamics, you see both volume and pricing being positive. And so not really true that you can't price and you're going to lose volume. If you have good marketing bundles and if you support your franchises, that can lead to value and volume growth simultaneously, which is the case. And on top of that, we are driving share.

Yeah, and maybe to add to that on the share. So yes, we are seeing that our biscuits category is in very good shape. North America, as you know, it's 80% of our business. We have outstanding results for brands like Oreo or Belvita, which means that we are driving the category growth. We see the pricing come through, as Luca was commenting, and we are gaining share. We also are seeing clearly that we have the benefit now of DSD. We had excellent execution in DSD in this quarter. And the other thing that has been changing is the retailer's restocking is slowing down. So overall, we feel that there's good momentum in the consumer or in the consumption of our brands. And we feel that this momentum is going to continue. Maybe on North America, which has been a discussion in the past a little bit on the supply chain, because that could throw us off on those share gains that I was talking about. We saw a very good quarter. We are lowering our waste. Our case fill rate is back to a reasonable level. There's more work to be done, but overall, we feel that we really are seeing good progress there. We also have to improve our predictability and the consistency of the supply chain. That has been one of the issues. But again, now for a number of quarters, that has been improved. And we're also focused overall in driving excellence in our core operating processes. So we don't see anything in the internal functioning of the company that would throw us off to continue to gain share in North America.

Okay, great. Thanks for that. And Luca, if I could just follow up on net interest expense, it's down for the year versus the original. Is that a function of refinancing or a movement in rates? Just trying to understand if there's more sensitivity to that as we look forward.

No, I don't think. I mean, you probably and some of your colleagues in Q1, here today we are 180 give or take in terms of interest cost. I think it is going to be in the whole park of 400 million. So I think it was a little bit more of we wanted to be on the safe side. I think in the meantime, interest costs have moved down. And particularly given the commercial paper program we have, we are capturing some benefits versus the original guidance. So I don't see anything material changing in the interest environment going forward. And we will continue to do what we have done so far, which is really getting our interest cost over the last five years down to a very good level considering the investment rate we have. Okay, thank you. Thank you, Brian.

Your next question comes from Chris Groh with Stiefel.

Hi, good evening. Hi. Hi, thank you. I just had a question for you first off on just the broader level of investment you are putting behind the business. And as we think about you gave some good forecast for the second half of profitability and unique factors to keep in mind, as you have outperformed the first half, are your investments even heavier in the second half than they were in the first half as a question? And then just understand how they are going emerging market versus developed market just to get a better sense of that,

please. Yeah. Yeah, so we're trying to get ourselves into this virtuous cycle whereby we invest more. And that investment is concentrated in three areas. One is ANC. The second one is route to market and the third one is R&D. And as we invest more, we want that to generate volume growth together with some pricing. And that then increases our gross profit dollars of which we reinvest part of it and the other part flows down to the bottom line. In 2019, our thinking here is to largely reinvest most of that gross profit in the business. We obviously are going to deliver on the OI increase we had for the year. But this is really a year of trying to get momentum in our brands and protect them for the long term. So if we have the opportunity in the second half, yes, we are planning to invest more. I would also like to say that it's not just a question of investment. What we are also doing is trying to optimize our spending. What that means is that we are paying a lot of attention to our ROI on our investment activities. We implemented the new marketing playbook, which is working well for us. And we are also shifting more of the investment to working media. So the net effect of what we really are spending on media and online is more than the extra amount we are investing. It's a shift within that spending too. So the long answer to your question is yes, we see this year as an investment year, still growing our OI, but we want to catch as much as momentum as we can on our brands. And so with what we've seen coming at us in the second half, we expect that we can do a little bit more. As it relates to emerging markets versus developed markets, I'd say at a high level what is happening is that the very good trend that we've seen in emerging markets, which was now for the fourth quarter in a row of growth of above 5%, continued, they were up 7.6%. And we have very good results in places like India, China, Southeast Asia, Eastern Europe. At this stage, we feel very good about these markets. And we feel that we can continue to drive category development to increase distribution, more investment in the brands. Probably the biggest change came from developed markets versus the previous trend in this quarter, whereby they now grew 2.8%, almost 3%. That was driven obviously by the continued improvement in North America and a very strong Easter season in the UK and Ireland. So what I would say, a good balance of volume and pricing was also clear for us in the developed markets. And we also saw us expanding our margins in those markets this quarter. So overall, I would say very positive signs in both. And nothing on the horizon that would throw us off, except maybe from Brexit or something like that. But we see the momentum in emerging and developed markets continue.

Okay, thank you for that answer. That was a lot of good color. I had just a quick follow on, which is in relation to the pricing that you achieved this quarter, could we call that sort of a full run rate based on what you've announced so far? Or is there more pricing still to come through that you've announced in the market rather than focus on something you may still announce for the business?

Look, I think, Chris, I'm very sensitive about talking about future pricing actions, and I don't want to signal anything. Just remember that we had some incremental pricing actions that took effect in the second part of last year. And in general terms, what I would say is we have proven that we want to be disciplined in terms of pricing. Last year in the U.S., I think we were the first player to really move. So we will continue to be disciplined on pricing. We believe it is quintessential to the algorithm to support our franchises. So without talking about specifics, we see some places where there is inflation, where there is some commodity and cost pressures, and we will take appropriate pricing actions as we see appropriate.

Okay. Thank you very much.

Your next question comes in the line of Steve Stracolho with UBN.

Good afternoon. So, Luke, at the start off, I appreciate the color on Brazil. I was hoping to get a little more insight as to dimensionalizing how much of a profit drag it was to segment or total company profitability. And how do we think about the recovery rate in the back half? Specifically, is this weighing on your ability to fill customer service rates? Is it causing any kind of distribution losses in Brazil? Color there would be helpful to have a quick follow up for Dirk.

Yeah. So, you know, these operational issues in the quarter adversely impacted the gross profit line by, I would say, 20 to 30 million. So it was a material impact. The simple facts are over the last couple of years at least, Brazil has, as an economy, suffered quite a bit. And the categories where we compete lost quite a bit of volume. So we really underwent a material change in the business. And we featured in the past, you know, Curitiba, which is one of the two plants we have, one in the south and the other one in the north, as being very cost competitive. But the facts are we consolidated four plants down to these two plants. And we had some executional issues that translated first into inefficiencies and product that we had to scrap in the plant, but also in logistics related issues in terms of distribution and ability to have the right product in the right place and also extra cost. The recovery rate, it is hard to give you a specific answer there. What I would say though is I don't think we will be fully solved by the end of Q3. And there might be, you know, improvements in Q4. I feel hopeful that there will be improvements in Q4, albeit I can't tell you exactly what there will be at this point in time. In the overall guidance we gave you, we consider all those things. And so we will provide an update clearly as we post Q3 and as we talk about Q4. But for the time being, I can't say that we will be fully solved by Q3 or Q4.

Thanks. And then for Dirk, we've seen a lot of the global multinational companies that are also showing very good organic sales growth. Reinvest also back into the core business. So to extend you had the ability to pull forward some of the investment spend that you're planning for maybe the start of early fiscal 20 into this year. What are some of the priority country category combinations that we can look for the business to maybe improve or maybe even accelerate the margin?

Thanks. Yeah, I mean, for us, the emerging markets are very important. The reason being that we see that a lot of the snacking growth around the world will be coming from those markets. So for us to invest more in places like India, China, Southeast Asia, Eastern Europe, also Brazil, those are the places where we would think about. At the same time, we do feel that we have very good momentum in North America and we have not necessarily been able to invest a lot more versus the past in North America. So we are planning also there to increase our investment. So that's the way I would describe it. It's about the emerging markets, the ones I mentioned and then North America.

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

Hi, thank you. Hi Ken. Hi, it seems at least it's a possibility of a past about some of the preparation you've done to maybe mitigate the impact. Can you just update us on some of the steps you've taken since? Where do you stand with that? And I imagine it's far too difficult to have any level of certainty here, but if you are any closer to being able to quantify some of the risks of a Brexit, that would be helpful too.

Yes, well, it's difficult to speculate. I can give you an indication of what we think the possible effects are of a Brexit, but to quantify that exactly is a little bit difficult since we do not know which shape or form Brexit will take. Having said that, the UK business is an important business for us. It's also one of our powerhouse businesses. It's a snacking powerhouse with a very strong presence in chocolate, biscuit and candy. It's a market that is doing very well for us. It's very profitable and growing at a very good pace, and particularly the second quarter was a very good quarter for the UK. Like I said, it's very difficult to speculate, but there's different forms of Brexit, and if there is a hard Brexit, there will certainly be implications to our business. In the short term, we are largely talking about supply-related issues, and in Q1, as we were preparing for a potential Brexit in March, we put in motion those plans. What does that mean? It means that we increase the level of raw materials we have in the country. We increase the number of warehousing space we have for finished products. We contract more distribution trucks, and so we're ready to keep our products in distribution no matter what. We did that very well. In fact, the trade called our preparation one of the best, if not the best preparation for a potential Brexit, and we are going to put that plan back in motion. We thought it would cover us very well on the short-term potential effects of disruption in the supply chain. However, there is also a risk that there could be inflation and a currency devaluation as a consequence of Brexit, and those are effects that are much more difficult for us to estimate, and it would lead to a number of other changes that we needed to implement related to pricing, related to sourcing. Those are more the longer-term effects, and as I said, at this stage, very difficult to exactly estimate what the quantitative effect will be. We are ready to deal with these challenges, as you can imagine. We are running scenarios, and we are ready to implement. We do believe that over the long term, this is a very strong market. It's a business that we want to protect, and we are sure that if we have to deal with any short-term or even a little bit longer-term disruption, that in the end, we will be back stronger than before. As you might know, we have a very significant production presence in the UK, and we see ourselves capable in the end to supply the UK from the UK, if need be.

Great. Thank you very much.

Your next question comes from Jason English with Goldman Sachs.

Hey, good morning, folks. Real quick, I will just build off of Ken's question, then I have an entirely separate question. The UK government in March announced a temporary, well, some sort of proposal for temporary relief in the situation of a hard Brexit on import tariffs for up to 12 months that would appear to apply to most food products. Do you believe that would be applicable to your business, and could that be a powerful mitigator of any sort of near-term disruption?

Look, we did quite extensive analysis on these. We don't believe even after a temporary period, there will be material tariffs impacting our business, given the structure of our imports into the country. As Nick said, we have a material presence in the UK to start with, but also, given what we import and the shape and form of what we import, we don't believe there will be material ongoing tariffs at this point in time based on what we know at this point. So I would say not only temporarily, but also in the long term, there will be most likely no material tariffs impacts for us at this point in time, that's what we see. I think as Nick said, a hard Brexit might hamper consumer confidence. There will be most likely an immediate currency valuation on top of what we have seen these last couple of days, but we will also see potentially inflation running up into the countries, and that might lead to a consumer situation that might be detrimental not only to our business, but to the overall economy. So it's hard to say exactly what will happen, but that's really what we need to watch for, and that's how we want to take as a company a long-term stance, making sure that we protect the business we have there, which is quite a good business.

Sure, that makes a lot of sense. Thank you. And then pivoting to my second line of questioning, it's really around gross margins. I understand the Brazil math. It looks like it was somewhere in the magnitude of 30 to 50 basis point drag on GMs this quarter, but the lack of margin flow through on the accelerating price growth is nonetheless a little bit surprising. Can you walk us through the puts and takes, like where is productivity coming in, where is inflation, where is sort of reinvestment in products or expansion into other lower margin verticals that can mix down? What are all those takes that are holding back GMs?

I would say, and we are clearly not going to disclose gross margin or gross profit by region, but I can reassure you that as I look at pretty much all P&Ls by category and business unit around the world, I can tell you the vast majority of those P&Ls make a lot of sense. You see broad-based growth and you see a nice balance of volume and pricing. The volume effect and the leverage that it provides to our supply chain is coming into effect, and we see continued cost savings into COX and overheads. In some cases, clearly there are better outcomes than in others, but overall I would say, again, as I look around the world, we are quite in a good place in terms of GP growth. I think on a -to-date basis, we are 20 bips up in total company. Again, when you add back the potential impact of Brazil and the fact that in terms of pure percentage margins, places like Argentina are becoming a little bit more dilutive than we have seen in the past. I think when you consider those effects, I think we can say we are quite pleased. You look at the UI growth in Q2, North America growing almost 10 percent, you look at you and Amiya 5 percent after we made material investments in the ANC line. I think all in all, the algorithm as we envisage in the first place is coming to fruition. It's not that we are not delivering the savings that volume leverage isn't there. It is the fact that this specific quarter we had, Latin America being an outlier.

Okay. Thank you.

Thank you, Jason.

Your next question comes from David Palmer with Evercore ISI.

Thanks. Good evening. Two quick ones for me as well. Good evening. Hi. First on chocolate, your chocolate business was holding or gaining share, I think it was about 35 to 40 percent of its markets last year and now those numbers look more like two-thirds of that business are holding or gaining share. That's a nice improvement. Could you talk about the biggest factors that have really turned your market share trends in chocolate around?

Yes. Yes. Well, we over index in the Easter and particularly in Europe. What you saw in the first quarter was that it's kind of a normal trend in our business. Easter this year was not in the first quarter, it was in the second quarter. Last year was in the first quarter, so you saw that difference. Then in the second quarter, we had an excellent execution of Easter and that is really what is giving us the boost in the market share. So we are now, year to date, we are sort of evened out and we saw some very good progress in our chocolate market share, but it's completely due to our Easter execution.

Got it. And then second, you've talked in the past about a more decentralized management approach and that was going to dovetail with a greater attention to and perhaps spend behind some of your regional power brands, not just your global ones. Has that shift already begun and is that a factor in your results this year or is that something more of a longer curve to it?

No, that shift has started and so we've increased our overall investment and I would say a large chunk, I can't put an exact percentage on it, but I would call it maybe 70, 80% is going into those local brands and we've seen a clear change of trend since we started to do that. So local brands or regional brands in the past would have been negative for us. They're now positive and they have been accelerating every quarter in their growth. So the intention was there. We are executing and we're seeing the effect already very clearly in our results.

And do you think that that will be continuing to go an area of improvement even from these levels?

I would expect that we still have some upside. At the moment they are growing in line with or even slightly above the categories, but these are brands that have not received a lot of investment for years. If you take into account, we started about nine months ago with investing in them, so we haven't even seen a full year of investment and we're also not only increasing the investment, but we're doing a number of innovations, launching a number of healthier products with cleaner ingredients and so on. So we're also renovating these brands. So I do think that they still have a runway to increase the level of their growth.

Thank you.

Your next question comes from Robert Moscow with Credits please.

Hi, thanks. I just wanted to clarify a couple of things. I think you said that the second half you expected to be similar to the first and were you referring to sales and operating income growth both? Because they're both running at around 4% x currency. And then secondly, I'm still trying to answer. Your gross profit dollars x currency are up .4% year to date. That's about $200 million. Is the answer something along the lines of half of that or some percentage of that? I know you don't want to give us an exact number, but I'm just trying to figure it out.

Yeah, so when I said, when I was talking about the profile being comparable, I was talking more about gross profit and NOI. We gave you the couple of items that are masking a little bit the underlying performance of our EPS and they relate as I said to taxes. So I was really referring to the bottom line more than the top line. What I said on the top line is that we clearly see momentum in the business and we anticipate continued momentum in the second half both in terms of categories and as one of your colleagues said, also in terms of share, we are quite pleased with what we saw in chocolate. But having said that, the first half was positively impacted by what we call the halo effect of a great Easter execution and that is why the second part of the year might be lower than the 4% growth rate of the first half. As it relates to the level of investments, as we said, for the year we intend to invest, give or take $150 million. I gave you enough elements to say how the second part of the year will look like in terms of GP and NOI growth. And then we made the reference to what we spent in the first half. So there is more to come in the second half. But we will continue to invest both on global and local brands. We said we are investing in A&C. As Dick said, it's not only the amount of money, it's the quality of what we are doing, elevating the emotional connections of our brands. But also in route to markets or in route to markets in places like India, Russia, we continue to invest and we want to continue to invest. Finally, in R&D, we are also making material investments specifically around test and learn methodologies, agile methodologies. We gave you a few examples of things we are doing. So I think you have enough elements to understand how Q3 and Q4 will look like in terms of GP and NOI.

Just to be clear, the $150 million is the reinvestment for the total year?

Yes, it is.

Great. Thank you.

Your next question is from David Driscoll with City Research.

Great. Thank you and good evening.

Hi, David.

Appreciate you guys getting me in and I see what time we are on the hour. Just a couple of points. The first one is this nice job on the first half of the year so far. And then I wanted just to ask a little bit about North America. The margin in the quarter, just a little bit more than 22% segment margin, I believe that might be a record margin for North America. Given the problems that happened on the malware attack, etc., can you just take us up to date as to what really was the key driver for that margin? And would you expect that margin has upside in the future as you continue your progression on cost and lines of the future, etc.?

Look, I think if I have to take back and really tell you what is the difference in Q2 versus other quarters in North America, it is we have created a lot of discipline around key processes for the company, starting with demand planning, making sure that we shape up the money in a way that makes sense in terms of cost. Instead of shipping products from branch to branch, we are governing through a better forecast, through a better governance, all those flows of goods that in a context where we have more than 50 branches and quite a few SKUs in biscuit, governing that is clearly key. We have created a lot of discipline and visibility and transparency around waste. Waste for us is not only what we generate in a plant, but also returns of goods. I can tell you there is a material benefit coming through as Glenn and the team have established processes to govern again waste. And third, but not less important, it is the fact that by having visibility and good understanding of how demand is shaping, our factories are able to predict more reliably what they need to produce and when. And so we have more efficient runs in the company. There is clearly also pricing coming through in a context where last year we saw inflation. We priced promptly, I believe, but the full benefit of pricing didn't come through last year. So now you have a more balanced situation in terms of pricing that net of cost. So these four elements are coming through. Do I think we can improve? Absolutely. I think we can improve. As we said, North America is one of the networks where we will be making more investments going forward. And so I think in terms of upside potential, there is more to come.

That was a very thorough answer. One follow on relating to outside North America, but relates to chocolate. We've heard a number of US chocolate companies taking price increases in the United States. You guys, of course, have your major chocolate operations in Europe and elsewhere. Can we draw any parallels between the price increases that we're seeing in the United States in chocolate, where those price increases might be applicable to your chocolate operations outside the United States? Or would you really disabuse me of that notion and say that these things are more unconnected than that? But it feels like North America and Europe should have some kind of connection in terms of chocolate pricing. But just love to hear your thought process.

Look, again, it's really, it would be good for me to comment on future pricing actions in places like Europe. Again, that is too sensitive of a subject. I think there are a couple of things, though, that are very clear at this point in time. One, it is that there is quite a bit of inflation, not only in the US, but all around the world in terms of specifically two items. One, it is logistics cost, and the second one is labor cost. And so I think over time, we have to make sure that we price that away. It might not happen in the short term, but over time, we have proven that we have the discipline to price those costs away. The second part, I think it is very important to know that in terms of the way we procure cocoa, we are never hand to mouth. And this year, for instance, cocoa prices went up for us, but we were able to secure cocoa at a very reasonable price. But I think it is fair to say that given some of the proposals that are coming out of the Cold War in Ghana, there is a spike in cocoa costs. And concepts like the living income differential are putting a little bit of pressure in the market, and the cost of cocoa has gone up. So I think I've given you enough elements for you to draw some conclusions, but for me to be able to talk about specific pricing actions, I think it is really hard.

I really appreciate the comments. Thank you, guys.

Thank you. Thank you.

We have time for one more question. Your final question comes from Rob Dickerson with Deutsche Bank.

Great. Thank you for fitting me in. Hey, how are you? A couple of questions. I guess the first question is just regarding the top line guidance. Somebody said potential implied slight deceleration if that does happen in the back half versus the 401 we saw in the first half. The question I have, though, is it doesn't seem like pricing would necessarily be decelerating, just given the actions we're seeing flowing through in North America, maybe Latin America as well. There's not much in Europe, but other parts of, let's say your other overall end market basis is still seeing decent pricing. So then I look at it and I say, well, okay, then obviously it would be more volume mixed, and there could be some nuance as to why. But again, when I look in the first half, the first half, the volume performance and growth terms, volume mix was essentially similar to what we saw in the first half of last year. And then if we look at the back half, the volume mix was a little bit easier last year to compare against. So the question, even though wordy, is basically if there is deceleration, it seems like kind of what you're saying is maybe there's a little risk of nuanced volume deceleration in the back half of the year because the first half was impacted by a well-executed Easter, doesn't seem like pricing would decelerate, but then that's off of an easier second half compare. So why would volumes really accelerate that much if the compare is easier and if pricing isn't coming down, why would organic sales really decelerate? Thanks. I have one more.

Yeah, look, as we said, I don't think this is about you know, not having confidence in the second part of the year or seeing momentum slowing down or as Andrew asked the first question, having some discrete items in the first half that will turn into, you know, issues in the second part. This is nothing around any of these topics. Again, it is the recognition of the fact that in the 4.1 percent we had on a -to-date basis in the first half, there was a clear execution gain related to Easter and that is why the second part of the year might be lower than the 4 percent we see in the first half. But I think in the end, we have to feel good about the solidity of our categories. The fact that the growth of the business is broad-based, again, it is not about a quarter at 4.6 percent that I like. Obviously, I like the 4.6 percent, but it is the good quality of results all around. I haven't seen, you know, these types of volume mix and price gains in a long, long time. I was very pleased with the share gains that we start seeing. Chocolate is fantastic. You know, we are still losing a bit of share in places like India where we have a 65 percent share, but, you know, if I take out India, all the big markets, they are growing share and, you know, the same is applicable to biscuits. So this is not about saying the second part of the year

we will have

a slow down or it is about recognizing that in the first half there was a positive impact due to Easter.

Okay. Fair enough. And then one other question. I have two questions. One is a little bit more substantive. The first question is on just your JV piece, right, total income from equity investments. In the first half, you know, year over year, it is up, say, 30 percent. So obviously, something is going well there. If you could just provide any color as to why they will be performing so well, one, and then two, is that, you know, a run rate that we should be thinking about at least in the near term for the back half? And I ask just given, you know, it is obviously material to your total income.

Look, we are very pleased with coffee. It is fair to say that they have performed very, very well. So in Q2 and the first half, as you said, earnings grew respectively 40 and 25 percent. As KDP is getting the synergies, and this should be no surprise, you know, we are reporting KDP on a lag. So to understand what is going to happen in Q3 for KDP, you have to look at Q2. And JD is capitalizing on a successful business model and single-serve Nespresso compatible business, which is doing very, very well, and it is taking share in the major markets in Europe mostly. The company is also generating good cash flow, and they are delivering fast, and so there is a subsequent interest cost saving. So nothing has really changed in what we see in JD and KDP. They are good financial investments for us. They doubled in value since the inception of the JV, and as we said many times, there is more upside potential for both businesses, and we like clearly the clarity, the vision, the potential, and the flexibility those investments offer.

So it doesn't sound like there is much urgency, let's say, or any change to the strategic optionality stall process, right? They are doing well. Obviously Q1, Q2, they have done very well, unless we really need the cash for some reason. Let's just keep letting them do well. That is pretty much that.

Yeah. I mean, we have good shareholder rights over both companies. Specifically for JD, we could propose a price to JAB for which they have the right of first refusal, and then if the value is not accepted, we could take JD public through an IPO, and clearly we would love to have a public mark for both investments, as we believe there is more value. So yeah, you're right. Nothing at this point has really changed. We see more upside potential for both companies.

Okay, super. And then one last quick one is just when you said back half profit would be similar to first half. Profit means a lot of different things, and maybe I just don't get it. Sometimes I don't. Is that you're just you're literally just saying operating profit or is that gross profit or is that just net profit, like net income would be similar on a dollar basis back half versus second half? That's it. Thanks.

Yeah, I think, you know, the shape of the P&L will be similar to the first half. I would say I would leave it at that. Clearly there is a little bit more investment coming in the second part of the year, but broad stroke, the shape of the P&L is going to be similar.

Okay, super. Thank you so much.

Thank you.

Thank you. And as I said at the outset, I'm proud of this quarter's results and of the work, the hard work of my colleagues across the globe. I think this quarter and this first half show how our leadership position and strategy is helping to drive the strength of snacking categories around the world and creating value for our shareholders. And we do all this while remaining committed to deliver on our promise to create a future where people and the planet thrive. This first half helps us to remain focused on our long term objective of generating volume driven top line growth of 3% plus and fueled by virtuous circle of increasing investment which generates solid sustainable operating income growth. Our progress to date gives me further confidence in the validity of our strategy and our long term prospects. Thank you for your interest in the company.

Thank you. This does conclude today's conference call. You may now disconnect.