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spk06: Good day and welcome to the Mondaliz International Fourth Quarter 2019 Year-In Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondaliz 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. Shef Benlath, Vice President Investor Relations of Mondaliz. Please go ahead, sir.
spk04: 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, mondalizinternational.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 notes, as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our -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 a progress update against our strategic priorities. Then Luca will take you through the financials and our outlook. We'll close with Q&A. And with that, I'll now turn the call over to Dirk.
spk08: Thank you, Shep, and good afternoon, everybody. Today, I will start off on slide four, called Delivering Long-Term Shareholder Value Creation. 2019 was a great year for Mondalise International. It was the first full year under our new consumer-centric growth strategy, and we delivered strong results on the top and the bottom line while generating significant free cash flow. Our solid execution and targeted investments in both our global and local brands enabled us to meet or exceed all of our financial targets for the year. These results give us increasing conviction that our strategy will create sustained momentum in our business, allowing us to deliver on our long-term financial targets in the years to come. Switching to slide five, recapping the year, here are a few highlights. We delivered organic net revenue growth of 4.1%, which was broad-based across geographies and brands and was driven by both volume and pricing. In terms of geographies, emerging market growth was strong, growing -digit-tags Argentina, and driven primarily by key geographies like China, Russia and India, but also by emerging high-growth markets in Southeast Asia. Developed markets showed robust growth, with both Europe and North America performing well, delivering share gains and driving category growth. Overall, the results reflect the quality of our brand portfolio with our unique combination of both global and local brands benefiting from increased and targeted investments throughout the year. Our adjusted EPS growth was more than 8% for the year, and we are pleased with our full year-free cash flow generation of about 3 billion, which was well ahead of our outlook. Switching to slide six, our strategy is now well embedded in the business. In the past 12 months, we've made great strides in implementing it across the different business units. The rollout of the new strategy was reinforced by a new way of incentivizing our teams, assuring that everybody is clear on what is important. At its core, we are constantly trying to be more consumer-centric, using our new and unique understanding of consumers around the world to develop a more effective and a more consistent approach to marketing. And as a consequence, growth in our global brands has accelerated further, while our local brand growth is now very close to overall category growth. We've also invested in further growth in non-grocery channels like discounters, e-commerce and convenience, as well as in expanding our distribution in fast-growing developing markets like China, India and Russia. As it relates to innovation, we are becoming more agile and faster, trying many new ideas, and in fact rolling out fewer initiatives, but with bigger success. We're clear, too, that strategy only succeeds with outstanding execution. And while we still have a long way to go, I credit a big part of our results to better execution in our commercial as well as our supply chain operations. North America's supply chain in 2019 definitely showed significant improvement. Our European teams executed against the seasonal opportunity like Easter and Christmas better than in recent years. And our teams in India and China reached the highest level of execution in store as well as in the plans. However, the opportunity to constantly improve our execution remains significant, as our recent struggles with our supply chain in Brazil would indicate. As it relates to our operating costs, while we are in the first place trying to leverage volume growth to a lower delivered cost per ton, we still see significant opportunity to optimize many other cost areas. While more and better marketing as well as strongly improved execution have driven our 2019 results, a shift in mindset around the company also has had an important impact. The most important part of this shift was driven by our local first approach, basically empowering local business units to make the right choices for their consumers and their clients. This empowerment has led to clearer accountability and faster decision-making and was reinforced by focused incentives. I am proud of how the teams have embraced this new culture and really believe that this model has great potential for the future. While we are talking about culture, I'd also like to mention a change in the leadership of our Latin American region. We are announcing today that Gustavo Valle will join us as region president Latin America effective February 1st. Gustavo comes from Danone, where he's held numerous positions around the globe. In his last role, he was leading the global dairy and plant-based division. Earlier in his career, he managed the Argentine and Brazilian business and brings with him significant experience in the volatile economies of Latin America. I look forward to working with Gustavo again. Switching to slide seven, while we are excited about our financial results and prospects, in today's world, any consumer business needs to have as strong a social and environmental agenda as a financial agenda. Our own employees, as well as our consumers, demand it, and customers, investors, and other stakeholders expect it. So I'm happy to say that in 2019, we have made great progress in embedding our purpose to empower people to snack right. We announced a new sustainable snacking strategy with new goals and stronger commitments. In cocoa, our biggest commodity, we're committing to sourcing the equivalent of 100% of the cocoa we need for our chocolate brands through our Cocoa Life program by 2025. Today, I'm proud to share that we've achieved 63% by the end of 2019, an increase from 43% in 2018, and with a clear roadmap for the remainder. Earlier this year, we joined other major companies in renewing our commitment to the Paris Climate Accord and have set our path towards further reduction in carbon emissions. Looking towards the consumer, we're focused on making the packaging for all our products 100% recyclable by 2025. And by the end of 2019, we are already at 92%, with some interesting trials underway to unlock the remaining 8% of that journey. Finally, as it relates to the mindful enjoyment of our products, we're committed to increasing our mix of portion-controlled packs to 20% of our total revenues. We're well on the way with 15% already sold in such formats. We know that our future growth and success as a company depends on ensuring people and planet thrive, and we're committed to tracking and reporting on our progress and impact transparently along the way. I look forward to sharing more with you in 2020. And with that, I will hand it over to Luca.
spk07: Thank you, dear Ken. Good afternoon. On slide nine is our financial performance for both quarter four and full year. We ended 2019 strongly, continuing the momentum we have created since the beginning of our new strategic plan. This is the case as it relates to organic top line growth that translated into earnings growth and free cash flow. We believe these outcomes to be high quality. Revenue growth was brought based by region, global and local brands, and in terms of developed and emerging markets. As a matter of fact, 12 out of the 13 business units delivered growth in 2019. Importantly, there was a good balance of volume and pricing, both of which are important. Volume allowing us to leverage the great infrastructure we have created with much work over the last few years. And pricing to drive value. This balance results in top line, drove attractive profit dollar growth while enabling reinvestment in our brands. In Q4 and throughout 2019, we also made significant investments in areas like Europe and AMIA to further support our brands and broader growth initiatives, as well as in the biscuits category in North America and certain markets in Latin America. These investments were in line with our original plan and a bit higher in certain areas and delivered unexpected returns and share gains. Turning to slide 10. Overall, we grew 4.1 in both Q4 and in 2019. We deliver strong volume and pricing led growth in virtually all key emerging markets like China, India, Southeast Asia, Russia, Mexico and Africa. In aggregate, emerging markets grew approximately 8% for both the year and the quarter. Excluding inflation driven growth in Argentina, emerging markets grew 6% for the year. These results support our conviction that our emerging markets footprint is a competitive advantage and the investments we have been making in 2019 and previous years are paying off. Developed markets also deliver solid results for the year and quarter with revenue growth of approximately 2%, driven by improved results out of both Europe and North America. We share gains in both regions. As we said in previous calls, particularly in Europe, these results were aided by a longer Easter season and a milder summer than 2018. Now, let's review our profitability performance on slide 11. We increased gross profit by 4% for the full year and .4% in Q4. This gross profit dollar increase enabled a step up in growth investments, focused on working media and route to market capabilities. We also drove solid or high dollar improvements with volume leverage, pricing and cost savings partially offset by growth investments. Moving to regional performance on slide 12 for the full year. Europe executed very well for the year with .7% revenue growth. These results include strong volume driven growth in developed markets such as the UK and Germany, which grew mid single digit, as well as Russia, which posted double digit growth for the full year behind strong volumes and share gains. We delivered consistent execution in chocolate and seasonals throughout the year and the strong execution resulted both in share gains, particularly in our chocolate business, and good category growth. Adjusted or high dollars grew by almost 6% in spite of significant investment in areas like ANC. EU shows the full potential of our model as we drove solid volume driven market growth, gain share and deliver strong gross profit progression that allowed for ANC step up. AMIA grew .3% showing continued strength across much of the region. India grew double digit behind another year of strong execution and investment. We continue to help drive the chocolate market while making progress against our plans of building a larger biscuit platform. China grew high single digits for the year driven by strengths in both biscuits and gum and great execution in both e-commerce as well as the offline channels. Southeast Asia grew mid single digit with solid results in biscuits and chocolate. AMIA increased operating income dollars by more than 9% due to leverage from top line growth. This growth comes despite some significant investments in ANC and route to market. The limited or high growth in Q4 is entirely due to additional investments in ANC and those were enabled by continued strong gross profit growth that we saw throughout the whole year. Again, our algorithm is working quite well in this region. Latin America grew .8% due primarily to inflation driven growth in Argentina. Revenue increased .7% excluding Argentina. Mexico grew mid single digit driven by strong execution and share growth across most categories. In Brazil, we saw a slight decline in revenue driven primarily by a reduction of trade stocks in powder beverages partially offset by lapping the general tracker strike in 2018. We are beginning to take actions in this category including the launch of new marketing communications and product formulations. Adjusted white dollars in Latin America declined by approximately 6%. Primarily due to volume losses in powder beverages in Brazil along with some remaining supply chain costs from our plant transition. We do not expect material plant transition costs to continue in 2020. For the quarter, the significant growth in Ohio is due to lapping some one timers related to Forex contract settling last year and some legal cases. While we are reassured by the solidity of the business in Mexico and the western region and dealing well with the volatility of Argentina, we recognize there is more work to do in Brazil and the focus of Gustavo and team will be mostly on that. Finally, North America grew .2% for the full year and more than 3% in Q4 driven by improved volumes. We close the year well and deliver strong share results in biscuits with growth in a number of key brands including Oreo, Ritz and Belvita. We continue to make investments in ANC and we are seeing our brands respond favorably mainly when coupled with our excellent DSD execution. The North American region grew high by more than 6% for the year due to leverage, effective pricing and waste reduction with additional ANC mostly in our biscuits brands. North America had strong gross profit delivery throughout the year and Q4 was no exception to that. But again, levels of ANC stepped up in Q4. Turning to category highlights, our three snacking categories continue to demonstrate attractive growth with total category growth of .6% for the year. We did see a more normalized growth in our categories for Q4 at 2.8%. As some of the tailwinds that helped Q2 and Q3, a longer Easter in Q2 and a milder summer in both Q2 and Q3 subsided in the last part of the year. However, we remain encouraged by the health of our categories and believe they can continue to sustain growth of around 3% over the long term. And this is what our long term algorithm is predicated upon. There are a number of very significant areas where we have tried the category growth in 2019. Among those, U.S. biscuits, where we continue to execute better on marketing and execution at point of sales and where we draw both value and volume growth through DSD. UK, India and Russia chocolate, where our renewed marketing bundles on both global and local brands coupled with sales excellence draw substantial value for the category. Overall, we had or gained share in 75% of our business in 2019, which reflects the progress on our broader strategy of volume and share improvement. Overall, our share were up for the year in aggregate, ending several years of losses. And we ended the year on an improved trajectory. By category, our biscuit business grew 4.4%. Approximately 75% of our revenue grew or held share in this category, including our U.S., China, Russia and India businesses. In chocolate, our business grew 5.8%. Approximately 85% of our revenue grew or held share, including the UK, Australia and Russia. Gum and candy revenue grew slightly. About 35% of our revenue in this business gained or held share, including strengths in China and France gum and Russia candy. Now turning to EPS on slide 18. Fulia EPS grew more than 8%. This growth primarily reflected operating gains driven by strong revenue results, income from JV equity stakes, despite some taxing wins in Q4, and lower than expected interest expense driven by accelerated cash flow, focused balance sheet management, and favorable rate environment. I now move on to our free cash flow results on slide 19. We delivered Fulia free cash flow of $3 billion, which was above our outlook and the nearly $200 million improvement over last year due to strong income, continued progress in our cash conversion cycle, as well as lower cash restructuring and capex. On page 20, we returned $3 billion to our shareholders for the full year. This brings us to more than $24 billion in capital return since Mondalisa was formed. Now let me provide some details around our outlook for 2020. At the high level, we expect an own algorithm year four 2020 in terms of our financial outlook. We expect organic net revenue growth of 3% plus. This is predicated on our view of category growth of approximately 3%. Some share gains and revenue growth driven by both volume and pricing. We expect adjusted EPS in the high single digit range. This outlook implies continued growth of gross profit dollars and volume leverage. It also reflects another step up in investment levels, primarily in ANC and sales capabilities, to continue to support sustainable and high quality growth, as well as some cost savings to fund incremental investments. With respect to free cash flow, we are expecting approximately $3 billion. Recall this outlook includes additional cash tax impact resulting from the U.S. tax reform. In this outlook, we also expect our 2020 adjusted effective tax rate to be in the low to mid-20s, and this dressed expense of approximately $380 million. Although we do not provide a quarterly outlook on a key metrics, it is important to know that the following items in terms of phasing will impact 2020. Both Easter and Chinese New Year fall earlier this year when compared to 2019. In terms of -over-year comparisons, our commodity pipeline is relatively more unfavorable in the first part of the year versus the second part of the year, especially in the first quarter. And we have covered most of the key commodities for 2020. We also feel good about overall levels of pricing in the plan. With that, let's open the line for questions.
spk06: Coordinator As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. We'll take our first question from the line of Andrew Lazar with Barclays.
spk01: Andrew Lazar Good evening, everybody.
spk08: Andrew Lazar Hi, Andrew. Andrew Lazar Hi,
spk01: Andrew. Andrew Lazar Hi. Just two for me. First, I'd say obviously, Mondaly has had a much stronger than initially planned 2019, especially on organic sales growth. The company is looking for 3% plus in 2020, which is the long-term algorithm, as you said, though obviously a deceleration from the 4% plus you showed in 2019. I was hoping you could talk a bit to this in terms of where or whether you're building in some conservatism there or if there's something more specific behind it, whether it's, as you said, lapping a lot of Easter and a hotter summer and things of that nature. And then I've got to follow up.
spk08: Andrew Lazar Okay. Yeah, I think 2019 was a good year for us. We've just went through the numbers, not only because of the numbers, but I think also that it was sort of the first confirmation that our strategy is working. This was the first year, full year with the new strategy for us. We saw a number of signs that we think will continue next year, like the volume growth, like solid gross profit and OI dollar growth, market share gains, continued cost discipline. It was, as you alluded, helped by a later Easter season, which gives us more time in store, and also that we lapped the very hot summer of 2018 in Europe in 2019. So we can see now the markets in the last quarter, or the categories were more at 2.8%, not around the 4% that they were in the middle of the year. I think the unlocks that we have, we will continue to work those, put the consumer first, keep on focusing on our execution, keep on increasing our investments, keep on improving our marketing, activating our local brands. So all that will continue next year. And also what we have done as it relates to responsibilities and goals and better alignment of our incentives, we're making a few more tweaks this year. And we have a number of issues that we need to solve in the first place, Brazil's supply chain, which is going better. But also we have to pay attention to China, for instance. So all that, for us, we're saying the markets or the categories we think will be around 3%. We see ourselves increasing our market share. And so we call it the 3% plus in line with our long-term algorithm. And at the beginning of the year, we are always very thoughtful as we set our targets. And we'll see how the first quarter goes. But at this stage, we feel that it's certainly not in our book a slowdown from this year. We continue as we are, but we do believe that the categories will be a little bit less than they were last year because of the reasons that I said. I think apart from the two watch outs that I mentioned, we see nothing at this stage that would particularly preoccupy us for the start of the year. So overall, I would say for us, it's continue the strategy as we are. Yes, the numbers are a little bit less than they were in 2019, but that was largely driven by the structure of how things came about in 2019. And 20 is a continuation of where we are.
spk01: Got it. Thanks very much.
spk06: I'll leave Brian's plane with BOA.
spk03: Hey, good afternoon, everyone.
spk06: Hi,
spk07: Brian.
spk03: So I guess I wanted to pick up just on the expectation for incremental investment for 2020. So maybe just a couple of points around that. First, if you can kind of maybe size what the incremental investment in 20 would be relative to what it was in 2019. And then I guess as we're thinking about the sources of that, would it sort of suggest that you'd have gross profit dollar growth growing faster than operating profit growth because there's going to be some incremental investment in ANC? Or am I not thinking about that correctly?
spk08: No, I think you're well, it's you're thinking about it correctly. But let me start from the start. And so in 19, our extra investment was about 150 million, largely focused on more ANC route to market as R&D. And we're going to be in the same ballpark in 2020 as extra investment. In 19, we had planned that that extra investment would have an impact on earnings. I don't know if you remember, we said we would be sort of around mid single digit earnings. But then during the year, our sales came in better as expected, we generated more gross profit. And in the end, we were ending the year on an 8% EPS increase. However, we had Brazil that affected us in a way. And in fact, our gross profit could have grown more, and we would have hoped to invest more in 19. So in 20, the extra gross profit that we're adding is slightly higher than we did in 19 in dollars. And we're flowing, let's say 40% of that roughly into ANC and the other investment areas. So it's similar to what it was last year, but we don't have the negative effect of Brazil. And that's why we can continue with that algorithm and deliver high single digit EPS growth.
spk03: That's helpful. And then just in terms of where geographically the spend is going to be, could you just maybe give us a little bit of color on kind of maybe where you emphasized the extra spend in 19 and kind of where the incremental piece is going in 20? And I'll leave it there. Thanks.
spk08: Yes, it goes largely to first of all, the two sources or the two destinations of the money is one in extra marketing media investment, to be very specific, it's all in media. And the second part is in distribution expansion. So the media investment is a little bit across the board in most countries. It's different the level that we do that. But the idea is to continue increasing our media pressure as it relates to the route to market that is more concentrated in the emerging markets, the Indias, the Chinas, the Russians, where we still have a huge opportunity to increase our distribution. I would also like to add that as it relates to those media investments, not only are we increasing the overall spend on ANC, but within that ANC, we're shifting more into media. So we're increasing our working media spend largely through digital. And then also, we constantly are trying to increase our ROI, which increased about 12% in 19 on our media spend. So and on top of that, we have restructured our agency. So we also think that our non-media spend will have higher efficiency and higher quality. So all that together, we have the effect of the higher investment, but also that reshifting, which has a pretty big effect on our media pressure. So that's a little bit how it all comes together.
spk03: That's great. Thank you for that, Coller.
spk08: Okay.
spk06: We'll take our next question from Dara Messinian with Morgan Stanley.
spk09: Hi. Obviously, some pretty strong results in terms of organic sales growth in 2019. But within that, we saw a really solid acceleration in volume growth. So I'd love to hear a bit of a state of the union now that the full year results are in on what drove that in your mind, how sustainable that volume pickup is going forward. You mentioned both volume mix and pricing will be up next year as one, you know, a bigger driver of that organic sales growth than the other. And then secondly on Brazil, have the supply chain issues or those now been resolved and they're behind you? And maybe just give us a little more of an update on how you're managing the powdered beverage business and if we should expect sequential improvement in the first half of the year versus the back half of last year. Or do those strategies take longer to play out? Thanks.
spk07: Okay. I'll start maybe to cover a little bit Brazil. So as to volume, clearly we like what we are seeing. We like that offline growth is coming mostly through, you know, a good balance of both volume and pricing. We believe that balance is quite important because it allows us to create value in the marketplace, but at the same time to have the leverage that we need for our algorithm to really fully work. It is pretty much across the board. Maybe looking at the numbers you might say it is a little bit less in emerging markets, but when you strip out Argentina, you really see a good balance of volume and pricing even in emerging markets. We keep on investing on our franchises route to market in quality of our brands. And so we expect that to continue. And we will always try to strike right balance between pricing and volume. So I don't think Q4 was a material exception to the rest of the year. I think, you know, the only one that came back in terms of volume growth in the second part of the year is North America that is executing quite well behind the scenes. And I think that is a very good example of the market that is going to be in the Biscuit both in terms of marketing and I would say in terms of the execution. So I think we will continue seeing that as we continue investing in our franchises. In Brazil, quite frankly, the supply chain issue is for the most part behind us, but there is more work to be done. And on PB's, you want to comment a bit on specifically on what we're doing and how we see that progressing in 2020?
spk08: Yes. So the PB market is starting to recuperate a little bit, but still not that great. And on top of that, Tang, our brand, which was the leading brand, was having some share challenges. So what and as a result of that, we saw some destocking of PB's in the trade because there was less demand for it. So what we're doing is we are launching a new bundle on Tang, going a little bit back to what Tang was in the past. We had probably drifted a little bit too much into new variety, new flavor and so on and more bringing it back to how Tang can really play a role in the daily beverage choice of kids in the family and how it contributes to that. We're increasing our investments. We're launching a new campaign. We're launching, of course, a number of new flavors. But overall, it's a bit too early to say what's going to happen. We're in the middle of the season of Brazil at the moment, but that's what we're doing on powdered beverages.
spk07: In terms of comparison, the second part of the year will be easier in terms of top line because we started the destocking of PB's in the second part. So I think that may be the way you have to think about how it will phase out throughout the year.
spk09: Great. Thanks, guys.
spk07: Thank you,
spk06: Dara. Our next question is from John Baumgartner with Wells Fargo.
spk12: Hi. Good afternoon. Thanks for the question.
spk08: Hi.
spk12: Dirk, I wanted to dig a little bit into the local brands. I guess first off, can you maybe ballpark what percentage of the revenue base there has already been activated with the increased investments and of the brands that have not been activated? How are you thinking about the phasing of the investment uptick between 2020 and maybe 2021 at this point?
spk08: Yeah. So the local brands, I would roughly say about 45% of our portfolio is global brands. About 45% is local brands that we want to activate, and then about 10% is brands that we do not want to activate and largely run them for cash. Of those local brands, those 45%, most of them have been activated. I wouldn't say yet with optimal media spend yet, so that's where we want to increase it. But the ones that we have been able to increase media and reposition them and give them sort of a new purpose, that has worked really well for us. So one of the most striking examples would be Jubilee in Russia, which is a legacy biscuit brand, which was kind of dormant. We've revamped it, and it's now showing double-digit growth and strong market share increase. We see that with a number of brands in Europe. We see that with a number of brands around the world. So I wouldn't say that within that 45%, that part was not activated, and other parts were activated. No, but overall, the local brands are growing .2% versus the global brands. But the local brands are now getting very close to category growth, and we really want them to be in line with category growth. And global brands clearly need to be above that. That's the way we think about it.
spk12: Okay. And then just to follow up on that, where you had increased the investment in those local brands, I'm curious how your competitors are responding. Are you seeing them generally staying rational in terms of pricing and following your lead, doubling down on marketing and innovation of their own? What are the observations there so far in terms of the competitive dynamics?
spk08: Well, we try to avoid to run price promotions and so on on the local brands. So the reaction there has been, I mean, I wouldn't say we're really in a price war, as I think about it around the world. Yeah, as we move some of these local brands, and sometimes we move them more into the sustainability direction and things like that, yeah, there is a reaction of competition trying to do the same. But I think overall, that's very good for the category because that will help the consumer increase its interest in our category. So we're not against it. I think it's a good movement overall.
spk12: Great. Thank you for time.
spk06: Okay. We'll check out our next question from Chris Gurdie with Stiefel.
spk11: Hi, good evening. Hi, I just had a question if I could ask first, and I don't think you've addressed it yet, but just I'm curious what rate of inflation you expect for this year and then related to that, you talked about some pricing, you have some cost savings coming through. Is it pricing that mostly offsets cost inflation for the year or will you need some, maybe you're stupefied to gross savings offsets on that as well?
spk07: So, you know, I think when you look at the last couple of years, we have seen quite a bit of inflation pressure, mostly around, I would say, transportation costs, labor costs, and I would add Forex to that. Clearly with the dollar strengthening, there was a big inflation component attached to that. Commodities were a little bit more favorable than the last five years, over the last couple of years, I would say. As we move forward, we see a little bit of more normal inflation pressure around labor and clearly there are differences around the world. There are, you know, economies like India where labor inflation is quite high, but overall for the company, it is a little bit lower in that area. But clearly we see a little bit more of a commodity driven inflation, particularly around cocoa. Dairy is another one. And packaging costs as well. So all in all, we expect commodities, Forex and inflation to be in 2020 in the ballpark of what we have seen in 2019. And so we expect, obviously, to price that away. In the short term, I think we as a company do a good job in putting in place good coverage strategies. So we have never had to mouth in terms of some of these commodities or even some packaging inflation can be covered well through various instruments. And so in the short term, we will always try to strike the best balance between our volume, our pricing, and our inflation. In the long term or in the medium term, we really want to price it away. I can't give you the exact number in terms of pricing. We don't guide to a breakdown between what we say in terms of revenue and volume and pricing. But I think it is fair to say I don't see dynamics changing dramatically into 2020. What we do in terms of productivity and cost savings initiatives, reality is what we would like to do is for that money to be half invested back into the business and fund ANC and route to market investment. And the rest will be dropped to the bottom line. So that's the way we think. We see productivity and cost saving initiatives to be the real upside to margin and stepped up investments.
spk11: Okay, thank you for that. I had just one other quick question, which would be, and I think it gets classified under route to market investments, but you've had an expansion of distribution and some of the faster growth channels. You talk about the US and club stores and discount stores. I think that's also occurring in the emerging markets. I'm just curious, is that an incremental investment level for you? Is that costing more? Is that part of your investment in 2020 as well? And should we see that be a contributor to revenue growth?
spk08: Yes, we are, if I would summarize what we did in 2019, which we are largely repeating in 20, maybe even increasing a little bit in the developed markets, that would be particularly around seasonals that we try to have better and stronger in store presence. And then also going into the, what we call the alternative growth channels in the US, that would be convenience, for instance, and put a bit more manpower, a bit more investment in there. In the emerging markets, it largely has to see with physical distribution, opening more distribution centers, having more trucks on the road, putting more coolers in the stores in India. But also in China, for instance, it means going into third tier cities, setting up sales teams there, and starting to cover these cities. So for instance, in China, we've added about 140,000 new stores this year, and we are seeing a lot of growth in China. So it does help our revenue clearly. I mean, we're seeing well above category growth in China, and we are seeing very strong double digit growth in India. And we are counting that our distribution expansion is helping us. And at the same time, in the developed markets, we want to continue that shift into more seasonals and more alternative growth channels, which also will help our revenue growth.
spk06: We'll take our next question from Steve Straculia with UBS.
spk05: Hi, good afternoon. So, Dirk, a quick question for you to kick off. As you think about the outlook for 2020 in your guidance for 3% plus growth, how should we think about how you evaluated macro considerations, whether it be what's kind of unfolding in front of us in China right now, or even what some of the other multinational companies have cited with macro softness in select countries across South America? I know that you've called out discrete issues for the powdered beverage category, but I'd love to hear your view on those two macro situations, and then have a quick follow up for Luca.
spk08: Okay. So, if I start with maybe the developed markets, if we see a little bit of a pullback in developed markets, which we don't see at the moment, to be honest, we see some very vibrant growth in Europe and in the US. So, it's clearly not visible for us. But I would say our snacking categories are a little bit more resilient if there would be a pullback in the economy than other FMCG categories. Trade tensions between the US and others are really not currently impacting us. Brexit, I would say, is a risk, although I don't see it in 2020. But if there would be no deal near the end of the year, that would be possibly a disruptor. But I assume at this stage that they will find a deal and that it will be a relatively smooth transition. In the emerging markets, and I know that some of our colleagues are seeing different impacts there, we are not feeling an impact in India or in China, but we would probably be a bit more cautious around projections for Latin America. Obviously, we have a high inflationary environment in Argentina, which we are largely managing to protect our scale and our absolute profit generation, as well as our cash flow in the country. And we do know and we see it, of course, that there is more volatility in emerging markets, but we feel that the growth opportunities far outweigh the risks of that. You have to also take into account that snacking behavior and snacking demand is still growing very fast in these markets and there's still a lot of runway there. And then I would overall say that our categories are showing an acceleration into 2019. We're forecasting them at 3%, which is our long-term expectation for our categories. We don't see that at the moment as being a risk because we believe that there is still a lot of opportunity for consumers to keep on snacking more. And for instance, our study we recently did about the market clearly showed that the behavior is on the uptick. So overall, I would say we cannot confirm some of the other impressions that you've heard from some of our colleagues. We feel pretty good about what we're seeing around the world.
spk05: Thanks. Very helpful. And then a quick question for Luca. Did I miss in your prepared remarks for fiscal 20 guidance what the EBIT dollar outlook would be on a constant currency basis to kind of get to the algorithm here on EPS?
spk07: Look, we purposely didn't go there necessarily. We gave you enough elements. I think you commented a bit on what type of gross profit growth this is for the year. Obviously, we expect gross profit to be the source of funding for ASC and RUTOMarket. The long-term algorithm implies strong -single-digit high and low growth. And again, I think in 2020, if you do the math, we should be around about there. We believe in the end, the way we are running the business, which is we want to have volume growth, we want to have share gains amplifying a category growth that is projected and exiting the year last year, it was 2.8 percent, so around about 3. I think that gives us together with cost savings and investments in the business, the ability for us by not even counting much on below the OI or EBIT line items, gives us the ability to achieve the high single-digit EPS that is part of the guidance we gave for 2020 and importantly, the three-plus billion dollar free cash flow that is long-term guidance for cash.
spk08: Steve, just before we switch to the next question, did your question also consider the coronavirus in China? Was that because I largely talked about the economies that we see around the world, but maybe it's also good that I comment a little bit on China and the virus situation for us. So quickly, China is about a one billion net revenue country for us, so about 4.5 percent. We are very strong 2019 and it contributed to our growth. We do believe there will be an impact on our Q1 revenue, but it's really too early to quantify for us at this point. We are monitoring the situation closely and we'll update you in case there is something that we need to report. The outbreak has come during Chinese New Year, which is a time of high consumption. Our selling was in line with expectations, was quite good. We now have to see in the coming weeks what has happened with the sell-out during Chinese New Year. The other thing that is happening is that normally today our factories, we have four factories in China. Two of our factories are in a region where we normally would have started up factories again. The local government has asked to keep our factories closed for another 10 days in order to not have too much of a risk with infection. We also have voluntarily put some travel restrictions to our own people to travel less within China and also for our global people to travel less to China. But overall, I would like to point out that we do believe that this could have a short-term impact, but long-term we continue to be very convinced for the outlook of the Chinese market for us.
spk05: Great, thank you. Thank you,
spk06: Steve. Our next question is from Jason English with Goldman Sachs.
spk10: Hey folks, thanks for squeezing me in. Much appreciated and happy belated new year. Two things for me. First, congrats on a solid year. It's great to see the momentum, particularly on your core business, biscuits and chocolate, performing quite nicely. The gum and confection side though continues to languish on market share side. Can you touch on if any plans you have to resuscitate that business? That's question one. And then second question, in the context of overall the business doing pretty solid with the portfolio you have, can you also then touch on your strategic ambitions as we think about M&A and some of the investments that you have out there, the potential to monetize them, the potential to reallocate some of those to build your portfolio in new areas? Just update us on your broader thought process on strategic direction. Thank you.
spk08: Okay. Well, what I do is maybe I'll talk about gum and candy and then Luca can talk a little bit about our M&A and strategic investments. So there is a clear distinction this year in 19 between gum and candy. On gum, what has changed or not changed is the fact that we're doing very well in emerging markets where we are gaining shares in our gum business. We have year to date very good revenue growth. We gain shares, particularly in China, which is our second biggest gum market in the world and in Brazil, we are gaining share. It is clearly not the strongest category in those markets, but it is positive growth for the positive share for us in emerging markets. We continue to be challenged in developed markets, largely in the US. Europe is clearly seeing a better situation, but it's the US that continues to be very difficult for us. The category is displaying now low growth, but it's growing, but we are still losing some share and we have some fundamental category challenges and we have some brand challenges. I would say that on our major brand, Trident, things are quite okay. It's in the smaller brands, which we are gradually, I would say, flush out of the system. That's what is causing this continued share loss for us. As it relates to candy, I would say the reason why candy was not as vibrant this year was largely due to the US market where we had a capacity issue. That capacity issue is now solved and we expect a much better 2020 for our candy business in the
spk10: US.
spk08: I would say that as we look at the future plans for gum, it's a difficult situation for us because gum is very profitable and gives scale in key markets. It's not something that we can just shift aside. We are working on a number of initiatives to address that share decline. First of all, as I said, strengthening our core brands like Stride in China or Trident in the US, improving quality, changing the positioning, improving the positioning. We're doing expansion into mints that, of course, doesn't solve our gum problem, but that does reinforce the brand. We're having very good results with that in, for instance, France with Hollywood. Then we have started to launch a number of new experiences, new reasons to chew, particularly in Brazil. We are also seeing some very good traction on that. We have the first sort of test and learns as it relates to renew the initiatives on gum. We have to see how they'll span out in 2020. Maybe, Luca, you can talk about that.
spk07: Maybe let's start with coffee. I would start by saying that the JVs are performing well and are very attractive at this point in time in terms of what we have always described as a financial investment. There will be a point in time where we will exit those investments. They are good investments. They continue to perform quite strongly. We had a good earnings growth related to them in 2019, and we are expecting solid earnings growth into 2020. The category itself continues to be attractive. I think in the past we commented a bit into how much we would welcome an IPO of JD. I think that would establish a public mark for that investment. We believe that eventually will improve our value overall as Mondelez, as it is a good asset. I think it will allow you guys to do a proper sum of the parts analysis for Mondelez. By a way of a sub way for that, I would say also that JD is truly a great company. Still quite a bit of untapped potential. It's a compelling growth story as a company. It is a little bit more than I think. It is a company that has a big presence in the premium segment through what we call instant coffee and on demand as well as a professional presence in terms of away from home and servicing other occasions than in home consumption. We feel quite good about those. The timing of the exit, as we always said, will depend upon how much potential we still see in companies and an appropriate use of funds, which potentially is better M&A and assets that we like in the snacking landscape globally. We will remain disciplined in terms of M&A. We have discussed that our preference at this point in time is on both terms. We are looking at premium well-being areas, adjacencies, and trying to fill some of the portfolio gaps we have both geographically and category-wise in some places around the world. We believe that by staying disciplined, we will have the ability to fill some of these gaps and step up even more our growth rate on the top line and on earnings as well.
spk10: Great. Thank you so much.
spk07: Thank you, Jason.
spk06: We'll take our final question from Ken Vaston with Bank of Montreal.
spk02: Good afternoon, everyone. I just have two quick questions. One is on the investment, at what point do they become self-funding? I know they've had good returns, but how do you think about the years in which that'll just kind of be a virtuous cycle? And the second question I have is, in Europe, what have the utilization rates been in the facilities and where are they now and where they look to be? Because it seems like that part of the opportunity that you guys continue to leverage over time is as you get more volume through it, there's operating leverage. And I'll leave it at those two.
spk08: Okay, maybe I'll talk about the investments and then Luca can talk about the operating leverage. So when the investments become self-funding, I think it's still a little bit of a way for us. We feel that we have potential to drive the categories around the world and we see good reaction, good return on investment still. And so as we are trying to develop a long term algorithm that is repeatable year after year, at this stage, it feels that the algorithm allows us to keep on adding more investment every year and hopefully that translates into strong capital. And so I would say at a certain stage, extra investments will not generate more growth and then we have to start questioning it. But at this stage, it's working really well for us.
spk07: So it is self-funding. I mean, for the algorithm to work and for us to be able to deliver upon the premise of share growth, high single digit EPS and three billion of cash flow, that algorithm itself includes a level of investments which is factored in and it is allowing us to hit on all those numbers. I think in the end, the measure of success for us is whether we will be able to deliver share gains consistently. And the second one is if we increase our volume consistently, all of that came to fruition in 2019.
spk08: Then the second part of the question, there was a little bit of a disturbance in the line. Could you repeat it maybe? I think I got it. It was about... Yeah.
spk02: On the European side, it seems like you keep on getting margin expansion. Basically, the assets have been put together through acquisitions. As you keep on getting leverage and do some restructuring a little bit, it sounds like the utilization rates should continue to increase. Where have they been? Where are they? And where are they going? I guess is kind of what I'm thinking.
spk07: Yeah. Look, I think in general terms, we don't comment on capacity utilization. I think that would be a bit too much of a comment, I would say. Look, we have invested quite a bit in terms of both creating a more nimble and a more flexible organization, both in overheads and infrastructure. It's not only legacy sites. We invested in brand new sites in Europe. Europe, I remind you, is a little bit more than continental Europe or UK. It is also Russia in our case. I would characterize the old status of the facilities in Europe quite good. It can be further optimized, but we still have available capacity in terms of continuing growing the big blockbuster brands that we have. Milka is one example, Cadbury, Oreo, but also the local brands. I think that's what we are working on.
spk02: Great. Thank you very much.
spk08: Thank you. Well, in conclusion, I would say that 2019 was a major step forward for the company. It was the first full year of executing our new strategy. We've successfully launched and driven this more consumer-centric approach to get growth across our organization. As a result, we're building an effective local first culture that is delivering. We are a good finish to the year with broad-based revenue growth and strong earnings and cashflow. The momentum we've created across our brands and our geographies this past year reinforces our confidence that we have in our strategy, our people, and our ability to execute. There is certainly more work to do and a long way of opportunities is ahead of us, but we believe that the early success combined with the attractive category dynamics and further targeted investments provides us greater confidence that we can deliver sustained long-term growth and attractive total returns. With that, I would like to end the call. Thank you for assisting.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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