Mondelez International, Inc.

Good day, and welcome to the Mondelez International Fourth Quarter 2020 Year-End Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by number one on your touchtone phone at any time during the call. I would now like to turn the call over to Mr. Shep Dunlap. Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me today are Dirk Vandeput, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable gap measures and gap-to-non-gap reconciliations within our earnings release and at the back of the slide presentation. In today's call, Dirk will provide a business update, and 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 thank you, everyone, for joining the call today. I am pleased to share our full year and Q4 results with you. 2020 was a successful year for Mondelez International, marked by strong performance, even in a challenging external environment. In response to unprecedented conditions caused by COVID-19, we took decisive and swift actions to position the company for continued success in 2021 and beyond. And we delivered on all of our financial commitments for the year. I am proud of our achievements and particularly grateful for the efforts of our teams, including those on our front lines who helped us to achieve these milestones. First of all, we sustained the top line momentum we have achieved since launching our strategy in 2018, delivering another year of 3% plus organic net revenue growth. This led to record market share gains as consumers chose our products and made us clear winners in our largest categories of biscuits and chocolate. Despite COVID-19, we continued executing against our strategic growth agenda and increased investment across our business, in particular in working media and capabilities like e-commerce. We added two very exciting bolt-on acquisitions. Give and Go and You, which give us more exposure to fast-growing snacking adjacencies. Our continued investments were supported by an effective cost mitigation program that offset many of the COVID-19 related costs and helped simplify our business. In spite of the increased investment in costs, we were able to grow operating income faster than revenue and faster than 2019 through volume leverage and cost discipline. We also delivered on our commitment to generate strong cash flow and return $3.1 billion to shareholders. Not only was 2020 a strong financial year, we also made progress in other areas, like ESG, where we delivered on our 2020 ESG goals and set ambitious new targets. We also enhanced the commitments of our existing D&I agenda, and of course, we prioritized the safety of our colleagues throughout the year. Overall, I believe we are very well positioned to sustain growth now and into the future. We entered 2021 with good momentum, record share gains, and as a more efficient organization as a result of our Emerge Stronger initiatives. As such, for 2021, we expect our results to be in line with our long-term financial targets. On slide five, let me walk you through the headlines of our financial results. I'll focus on the full year figures. Our organic net revenue growth was 3.7%. Not only did we show strong growth, we also beat the competition thanks to the strength of our brands with consumers. Our adjusted gross profit grew 3.6% and adjusted operating income grew 4.6%, leading to an adjusted EPS growth of 6.5%. And, as mentioned, free cash flow generation was strong at 3.1 billion versus 3 billion in 2019. This is a strong set of results, a clear demonstration of the strength of our organization and the success of our growth strategy, even during severe external challenges. Turning to slide six, I would like to highlight several of the strategic actions we took to enable our business to emerge stronger from COVID-19. As the extent of the pandemic became clear, we quickly moved to mitigate incremental COVID-related costs and took the opportunity to significantly increase liquidity. We prioritized our capital expenditure behind projects with the highest return potential. We faced costs relating to lockdowns, supply chain disruptions, adaptations to our ways of working, as well as the need for increased PPE. But we were able to offset the majority of these costs through savings across areas like overheads, trade spends, and non-working media. We also took the opportunity to simplify our operations, reducing the number of low-turn SKUs we have in the portfolio, work that will continue into 2021. And finally, to maintain our top-line momentum and brand strength, we invested more in working media while realizing material media efficiencies. Our swift reaction to COVID-19 was a real point of difference for us in 2020. Our teams were focused and agile in their response. We adjusted plans and accelerated some of our strategic initiatives, all of which set us up for success. Turning to slide seven, we have remained focused on our sustainability commitments and our approach to governance. In May 2020, we held our first Snacking Made Right investor call, coinciding with the release of our Snacking Made Right report. We've also engaged with many investors, shareholders, and stakeholders on ESG topics more than ever before. Looking across our ESG agenda, we focus on critical areas like minimizing our environmental impact, which involves using our resources like water and energy more efficiently, as well as reducing waste and emissions. We also promote sustainable ingredients like wheat and cocoa, where we seek to build a more resilient supply chain. Generating a positive social impact is another priority, where we work to foster more inclusion and opportunity with local communities. Our key sustainability achievements for the year include meeting all of our 2020 CO2 emissions and waste reduction goals. Continued working collaboration on advancing a more sustainable future for plastics. Continued investment in our Cocoa Life program, our 400 million commitment to sustainable cocoa, including efforts to prevent child labor. An increased traceability and forest monitoring commitments with our palm oil suppliers. And in terms of social impact as an organization, I am proud of our work in two areas. We established new multi-year global diversity and inclusion commitments, investing in global D&I leadership, as well as plans and programs for our colleagues and communities in which we operate. We also donated nearly 30 million in COVID relief efforts around the world. This was a year where the potential was evident for a company like ours to make an even more positive impact on the world. And I'm glad that we made our contribution. Finally, slide eight, let me share a little more color on our recently announced acquisition of you. We're excited to freely welcome them on board following our minority investment in 2019. This is a fast-growing, well-being snacking brand with a portfolio of on-trend products. Use vegan, paleo-inspired chocolate will be familiar to many in the United States. They are a leader in specialty and premium retailers already. In addition to chocolate products, they have recently expanded into crackers and have plans to enter other snacking adjacencies. Overall, the business is growing high double digits and there is a clear opportunity to scale the business using our distribution and capabilities. You is a great brand and a great fit in our portfolio, bringing us interesting opportunities in the key well-being slash premium areas. With that, I will hand to Luca for more details on our financial performance.

Thank you, Dirk, and good afternoon, everyone. Our 2020 performance was strong in terms of revenue growth, share gains, profitability, and free cash flow. We delivered volume-led revenue growth for the year and the quarter of plus 3.7% and plus 3.2% respectively. Developed markets grew 4.5% for the year and 2.8% for the quarter, underpinned by strong execution and share gains. Emerging markets increased 2.3% for the year, which includes the mid-single-digit decline experienced during the height of COVID disruptions. For the quarter, we posted growth of 4.1%. Some additional color on Q4. In developed markets, we continue to see elevated consumption for our biscuits category in North America, albeit growth has slowed down versus first half. In Europe, we deliver strong Q4 in both chocolate and biscuits, consistent with Q3. In emerging markets, we deliver good growth across the majority of our revenue base, including double digit growth in Eastern Europe and mid single digit growth in AMIA emerging markets. A small group of markets continue to face economic challenges and headwinds related to higher gum and candy exposure. This is predominantly in Latin America, which grew just over 1% in Q4. Overall, we continue to feel good about emerging markets and their future prospects. And in general, they have recovered quite well after the lockdown impacting Q2. Now on slide 11 and portfolio performance. This is an important page as it shows how well the vast majority of our business is performing during the pandemic. The strength of biscuits and chocolate, meals and powder beverages shows that we have an advantage portfolio with a good geographical footprint and that our execution resulting in meaningful share gains has amplified growth above category rates. Biscuits grew nearly 9% for the year and 7% for the quarter. North America was a big growth driver due to elevated demand and brand investment. Europe and EMEA also delivered strong Q4 results. Oil was a clear standout worldwide, growing double digits, and many local jewelers, too, posted high growth this year and increased penetration. Chocolate grew more than 3% for the year and 5% for the quarter. This includes nearly two points of headwinds from world travel retail in the full year and the negative impact of lockdowns in Q2. But overall, this is a great category to be in. And on top, our brands continue to perform very well, both in DMs and EMs, and continue to gain share. Our overall growth rate is negatively impacted by gum and candy and continues to be challenged by reduced on-the-go consumption and mobility restrictions. While we did not see material improvements in Q4 versus Q3, we do expect gradual category improvement through 2021. but we are prudent in terms of those expectations. Now let's review our market and share performance on slide 12. Through consistent execution, a significant step up in working media and portfolio of trusted global and local brands, we posted great share results throughout the year, including in the fourth quarter. For the year, we held our game share in 80% of our revenue base, up from 75% last year. Our largest categories deliver strongly as we held or gained share in 90% of our biscuit revenue base and 80% of our chocolate revenue base. Notable share gainers for the year included U.S., China, and Russia biscuits, U.K., Russia, and Australia chocolate, and China gum. Profitability performance was strong for the year and quarter, especially in light of approximately $250 million of COVID-related costs. Gross profit growth for the year and quarter was driven by strong volume leverage and cost mitigation programs. On the flip side, lower demand in world travel retail and gum resulted in unfavorable mix. Specifically, for Q4, a lag between commodities and forex-related inflation and implementation of pricing weighed on the EGP line. Overall, we feel good about our profitability and the substantial reinvestment we have made in the business to sustain our growth momentum, including double-digit increases in working media to further support our brands and drive our category. Turning to regional performance on slide 14, North America grew 8.6% for the full year and 4.5% in Q4, driven by elevated biscuit consumption and strong share gains. Share gains were supported by significant working media investments and strong DSD execution. GAM was down double digits. North America OI grew more than 19% for the year and nearly 15% during the quarter. Volume leverage, effective pricing, discipline overheads management, and waste reduction drove this performance despite significant COVID-related costs. Europe grew 2.5% for the year and 3% during the four quarter. Our Q4 results were driven by trends across our major markets, including the UK, France, Germany, and Russia, resulting in significant share gains. Strong execution and activations around the Christmas season helped us finish the year positively. We continued to grow our chocolate business, which was up mid-single digit for the year, despite a three-point World Travel Retail headwind. Biscuits and meals categories also turned in a strong performance. OI dollar growth was slightly negative for the year, driven by unfavorable mix and COVID costs. That said, trends have improved, and we posted nearly 6% OI growth in Q4. AMIA grew 1.7% for the year and 3% for the quarter, showing that the recovery is sustaining across much of the region. India grew low single-digit in the year after declining double-digit in Q2 as a result of severe lockdowns. The country is performing well with double-digit growth in Q4 and the second half, behind strong execution, share gains, and investment. We continue to lead the growth of chocolate in India while expanding our biscuit platform. We are very pleased with the performance of this country. China grew high single digits for the year and quarter, driven by continuous share gains in both biscuits and gum. Trends in Australia chocolate, including share gains, helped drive solid growth in AMIA developed markets for the year. AMIA increased OI dollars by nearly 5% for the year due to strong leverage in the back half. This growth includes the impact of significant increases in ANC and route to market investments. Latin America grew slightly for the year and just over 1% for the quarter. Excluding Argentina, the region declined low single digits in Q4. Given government holds were over 25% of the business before the pandemic, Latin America is the most impacted by lockdowns for both top and bottom line. Brazil posted low single digit growth for the year and mid single digit growth for the quarter. Mexico declined high single digits for the year and low double digits for the quarter. Wacom declined low double digits for the year and the quarter, both due to the weakness of the gum and candy market. Adjustable high dollars in Latin America declined 33% for the year and 66% for the quarter, primarily due to scale losses in the gum and candy category. as well as timing of the commodities and forex pipeline versus pricing. As we expect some improvements in the gum and candy business, as well as better pricing net of costs, profitability for the region should improve beginning in Q1. We have invested more in working media in Q4 and for the year, despite profit pressure. Moving to EPS. Full-year EPS grew 6.5%. This growth primarily reflected operating gains, mostly driven by strong revenue results. Now on slide 19, we deliver fully a free cash flow of 3.1 billion. We continue to put great focus on this area and feel very good about the progress we are making. Turning to slide 20, we return 3.1 billion to shareholders for the year. This includes an 11% increase in our dividend rate and range-dating share repurchases in November after a temporary pause related to COVID volatility. We were also active in the debt capital market, refinancing more than $7 billion at attractive rates while significantly expanding our debt average maturity. Now, let me provide some details around our 2021 outlook. At the high level, we expect a non-algorithm year in terms of our financial outlook. We expect organic net revenue growth of 3% plus. This is predicated on the expectations that we retain our share gains and continue to invest behind working media and marketing and sales capabilities to support our brands and overcome some of the macro weaknesses we are experiencing in a number of our smaller markets. Biscuits and chocolate, from what we see today, should continue to do well in 2021, but we will be lacking some elevated growth in 2020, particularly in developed markets and for biscuits. On the flip side, there should be some recovery of the categories and countries, mostly impacted by COVID. We have been prudent in our assumptions, mostly for gum, as we expect that category to recover more slowly. We usually do not provide quarterly guidance But given Q1 last year was the strongest quarter, we do expect a slower growth rate in Q1 2021. Overall for 2021, our plan is to deliver high quality growth to beat category dynamics by continue to winning share. We expect EPS growth in the high single digit range. This outlook implies continued growth of gross profit dollars, volume leverage, and improve revenue growth management. These outlooks also reflect a step up in commodity and transportation inflation, as well as transactional forex headwinds in certain markets. Despite our expectation that COVID costs will subside in 2021 and our much stronger initiatives will deliver the majority of their benefits, we will reinvest the upside to sustain our share gains and to weather a more recessionary environment. For Q1, we will still face some headwinds in terms of mixed impact on profit and price net of cost dynamics that should improve throughout 2021 as pricing is coming in full effect. With respect to free cash flow, we expect to generate $3 billion plus. This outlook includes the deferred cash tax impact resulting from the participation in the primary offerings of JDPs last year. Headwinds for coffee-related taxes is estimated to be approximately $400 million. In this outlook, we also expect an adjusted effective tax rate in the low to mid-20s, based on what we know today. Interest expenses of approximately $375 million and share repurchases of approximately $2 billion. With that, let's open the line for questions.

Ladies and gentlemen, if you have a question at this time, please press the star, the number one key on your touchtone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question is from the line of Andrew Lazar with Barclays. Please go ahead.

Good evening, everybody. Hi, Andrew. Hi, Andrew. Hi. Two-part question, if I could. First, maybe, Dirk, if you could describe maybe some of the key puts and takes that you see regarding the 3% plus organic sales growth guidance for 21. I'm really just trying to get a sense for the level of visibility and maybe if there is some flex there, you know, given how dynamic the environment remains. And secondly, with respect to, you know, Mondelez lapping some of the significant COVID costs of last year and benefiting from the initiatives and the Accelerate initiatives that you've talked about, I guess, would you see room for potential upside to the high single digit constant FX EPS growth guidance? And if not, just curious what the offsets might be. Thank you.

Okay. All right. Thanks, Andrew. So the 3% plus for next year, the first thing that we want to keep in mind is that it's very difficult to predict what's going to happen While I think we delivered quite nicely on our financial commitments in 2020, under the surface, there was a lot of puts and takes. And it looks like that environment, at least for the first half, will continue. So it's very early in the year. We will see what happens with the vaccines and the mobility of the consumer and the at-home consumption and emerging markets. So we don't want to get ahead of ourselves. We do feel confident enough to say that this will be a third consecutive year of delivering on algorithm. And as you might remember, that is a significantly step up from what it was before 2018. If I break it down, as Andrew asked, the tailwind that we see is, first of all, the biscuits and chocolate categories are performing very well. And on top of that, we have broad-based significant share gains. So despite lapping that in 2020, we believe the categories will continue to perform well and that we will still continue to gain market share. The second tailwind I would mention is that we have very solid momentum going into 2021. Our H2 growth rate was above 3%. And so we see that continuing. In H2, we also invested quite heavily. That would be the third tailwind for me with a big step up in our working media. We are going to continue to do that in 2021. So that should also give us a push. And then, yeah, we can't neglect that we will be lapping a week year in gum and candy and in world travel retail and some of the smaller emerging markets so we believe that that will help us also as it relates to headwinds that that we will see uh i would separate them in geographies channels and and categories to start with the categories for us it's about the gum category and and how fast that category will come back it's uh largely based on mobility of the consumer We haven't seen much movement in the second half of the year, so we are not assuming that there will be a big movement in the first half of next year, or this year, sorry. So we want to plan prudently there. As it relates to channels, it's about world travel retail and on-the-go consumption. And for the time being, we've also assumed that in the first half of the year that is not going to come back at a very high rate. And then geographies... We feel that the BRIC markets and other larger emerging markets are performing well, and we see them quite nicely coming back in Q4. But there are some smaller markets like Mexico, Wacom, North Africa, where we will likely be challenged for a while longer, largely because they have a big gum business. So I would say at this stage we feel comfortable with 3% plus. We will see how the situation evolves. But we want to be – we don't want to get ahead of ourselves and see how the first quarter comes along. Thanks very much. The second question I might end over to – thank you, Andrew. The second question I'm going to end over to Luca about EPS and what we see there. Great.

Yeah, thank you. Thank you, Dave. So maybe let me step back for a second and give you the key puts and takes on the profitability line. We count in 2021 on continued volume growth and the leverage effect that is associated with that. You remember that in our algorithm, volume is, together with pricing, a critical component. We want to continue to be disciplined in our pricing approach, and we will leverage all elements of what we call revenue growth management to offset what is a relatively higher cost inflation than what we saw in 2020. I said quite a few times that inflation in 2021 will not be materially different than previous years, but it is moderately higher than what we saw before. And there are certain peaks around currencies, commodities. I mentioned a few times cocoa, grains are experiencing cost spikes and certain transportation costs and packaging. So we are good for most part of the exposure that is well covered. So I don't expect this situation to spiral out of control, but reality is there is a little bit of more cost pressure. On the other cost lines, we will continue to deliver productivities in line with what we have seen in the last couple of years. COVID costs will be more moderate. In 2021, we called out that there will be roughly one-third of what we incurred in 2020. And most of the emerged stronger benefits we carry through 2021. The degree of freedom, so to speak, Andrew, is an investment. And whether we deliver better profit, we will take that upside and we expect to invest even on top of what we have at the current level into 2021 as we really want to sustain share gains and make strides into the strategic agenda that we have. On tax and interest, I think we have been fair in terms of assumptions, and hopefully they were clear. So I think high single digit EPS is what we're going to get. I think importantly on cash flow, just to round up the answer, we have to pay some taxes related to coffee transactions. And what we call a three plus billion dollar is actually an underlying fee cash flow that is around about 3.5. So good numbers also there that clearly rely on profitability and continued working capital management.

Great. Thanks very much. Thank you, Andrew.

The next question is from the line of Ken Goldman with JP Morgan. Please go ahead.

Hi. Thanks, everybody. I wanted to ask about the guidance regarding currency being a 10-cent tailwind to the bottom line this year. I just wanted to make sure I understood, is that 10 cents what you're expecting to flow all the way through to the bottom line? Is that the maximum possible, and you may reinvest some of that? I just wanted to get a better sense of how we should think about modeling that just given your history of sort of reinvesting those additional earnings, so to speak?

Yes, I'll start. It is translation and it is based on current spot rate. So whether they stay here or they improve or they worsen, we're not going to change our stance on the investment posture. At this point in time, the 10 cents is pure upside to EPS.

Okay. I'll follow up offline on that one. And then my second question is I was a little surprised to see the guidance for $2 billion in share repo. I know that's flexible. Um, but you do have, you know, I think three and a half billion on the balance sheet. They're expecting to generate another 3 billion. Why shouldn't we look for a little bit more aggressive buyback in 2021 and what that 2 billion implies?

Because, you know, we keep guidance consistent in terms of what we say in terms of EPS and share by backs. You're right in saying that provides us flexibility. Should cash flow be better? Should we decide to do something more with our coffee and might not have some acquisitions coming along? We will be flexible and we'll fine tune the number. I think the way you have to look at it is should the circumstances stay the same as today? at least we will do $2 billion. Great. Thanks so much.

Your next question is from the line of Steve Powers with Georgia Bank. Please go ahead.

Yes, great. Can you hear me okay? Yes. Great, thanks.

So this question, maybe for you, Luca, I don't know, but I was looking for a little bit more of a bridge in the year-over-year moving gross margins in the quarter. And then to follow on what you're assuming about those moving parts into 21, because in the end, what I'm really trying to understand is, I know you don't manage the gross margin, but it seems with the inflation that is building, even as you catch up, on pricing versus inflation dynamics in Latin America, as you mentioned. It seems like the gross margin being up in 21 could be ambitious. I'd love some color around that. And if you don't think you can improve gross margins, you're not planning on it, then I guess also curious as to what the sources of G&A efficiency might be in the coming year that will enable the EPS flow through as well as the higher working media investments that you called out.

Yeah, so clearly in the cost line there was an impact due to COVID extra costs. And I think when I look at the year and I strip that out, what I can tell you is that overall gross profit and gross margins, they were pretty much in line with expectations. There is a big catch. And the catch is the fact that particularly gum and candy suffered a decline that was around about 20%. That category is a category that is quite profitable. And flipping out 20% of the volume in 2020 resulted in a subscale type of category with underabsorption on a few P&L lines. In that regard, what I would say is if I take out COVID and gum and candy, I think the level of profitability is sound. We have a couple of things that we need to bear in mind. We were afraid that we would have a subdued Christmas season, which didn't happen. We had record high shares. uh in in christmas but we spent a little bit more in making sure that the stock was rotating and that's one impact and the second thing is we haven't fully implemented pricing actions in uh quite a few places around the world as we run out of coverage particularly in latin america the exchange rate impact was quite material and we priced ahead of uh running out of coverage and we will price afterwards in in in an attempt to smooth what consumer prices are. So in structural terms, I would say that there is nothing that is concerning me at this point about cross-profit. I think you will see a P&L that makes sense in 2021. The level at which we will see cross-profit in 2021 will obviously depend on the level of recovery of gum and candy, which happens to be something that we don't fully know of and we don't fully control. But in terms of structure, I think gross profit is sound. We have announced pricing actions around the world. We have visibility to the commodity pipeline for the vast majority of it, and Forex we are covered. We delivered, excluding COVID costs, sound productivities in 2020. We count on the same level in 2021. And by the way, when I look at the overhead line, excluding A and C, we did a terrific job in 2020 reducing overhead by almost 50 basis points. And we want to continue cost pressure and keeping the costs in control. So from my side at this point, I would say I feel overall good for 2021 GP. There might be a little bit of timing affecting T1. Okay. Okay. Thank you very much.

Your next question is from the line of Jason English with Goldman Sachs. Please go ahead.

Hey, good evening, folks. Thank you for sliding in. Hi. Congratulations for successfully navigating a pretty crazy year behind us. Let's hope this year is a little less crazy. Thank you so much for the incremental color or all the detail you've given about the underpinning assumptions here to your guidance. Based on the conversations I've had with investors, I'm guessing the one area of debate, or there it's been most hotly debated, is your comment on sustained share gains next year. There's a lot of people who look at your market share performance this year and believe there's a degree of transitory benefit from the reality of you having a DSD organization versus a North America DSD against others with warehouse, a lot of superior service levels, and the scale of your supply chain. Also, once again, allowing superior service levels. and that those benefits naturally will unwind, and you're going to see share pressure in North America or Europe or some of these other DMs where you gain so much. Where do you think that argument is false or where are the risks, and what gives you confidence in your ability to sustain those share gains next year?

Yes, I would say there's a number of arguments. The first one is if you look at the share gains that we – we incurred in the second quarter of 2020. And then you look at what happened in Q3 and Q4, our share gains didn't fade. They remained quite strong. And so we could already have expected that sort of effect that you're describing, Jason, in Q4 of this year. The largest categories that we are in continue to shine, and our performance in there is pretty good. It's not just our gains with our DSD system in the US, but we have 80% of our revenue base around the world where we are gaining and holding share, plus the share gain itself is quite substantial. The share gain in 20 was much higher than in 2019, where we also had a share gain. So if I look, Going forward, what are we going to do to make sure that that effect doesn't happen? First of all, we have investments that are substantially going to increase into 21. Our financial equation can afford it. You've talked a little bit about it, that we constantly reinvest whatever we would over-deliver in our bottom line. And for the time being, we are planning to continue to do that in order to push our growth up. Second, we are having some very good channels effect, particularly in e-commerce. We are also preparing to move very fast in away from home, which will give us a boost. World travel retail and also convenience stores. So that will also give us an extra boost and we will make sure that we move faster than anybody else there. Our customer service is... good and it's very good we had our supply chain perform really well but there's still room for improvement because it was good in the times of COVID it was not as good compared to normal times so we think we will still have an upside from our customer service and then we we're doing a lot of work on RGM in order to protect our key price points and retain consumers we've gained a lot of new consumers into our brands We were quite curious to see what was going to happen again in Q3 and Q4. We were able to retain them and we're counting to be able to do that again into next year. And then we have a very strong program, probably the strongest that I've seen since I'm here in innovation and also in activation. So because of all those reasons, I feel pretty good about our opportunity to continue to continue our momentum in market share going forward.

Thank you. That's really helpful. I'll pass it on. Okay.

Your next question is from the line of Dara Mohosinian with Morgan Stanley. Please go ahead.

Hey, good evening, guys. Hi, Dara. Hi, Dara. So the clarity on market share was helpful. I was just wondering, could you – parse down the 2021 organic sales growth you're expecting you know how much market share gains are you expecting after the strong gains we saw in in 2020 is it a similar magnitude it sounds like maybe perhaps it's continuing but smaller and then second just on category growth are you expecting an acceleration in category growth overall in 2021 relative to 2020 Obviously, there were some areas like gum or chocolate in travel retail that were down significantly. There are other areas like biscuits that improved sequentially in 2020. So just sort of curious for overall category growth, how are you thinking about that growth in 2021 relative to 2020 and if you see any acceleration there overall?

Yes. Well, I would say as it relates to organic sales growth and share gains, We are planning to continue share gains, but not to the magnitude that we've seen in 2020. We don't communicate on the magnitude. We just give the countries where we've gained or increased our market share. But we expect that the share gain will be of a lesser magnitude. I can tell you that. And I think it's a reasonable assumption. As it relates to the category growth rates, in the measured channels, it was 3.1% for 2020, which was a slight decline versus 2019, where we saw 3.6%. And then, of course, you had the unmeasured channels, which were declining, like away from home and world travel retail. So... likely if you would add those channels to it, you were probably looking at a total growth, very, very minor growth. And most of our outperformance of the category was driven by our market share gains in 2020. I think in 21, what we are expecting at least is some reversion to the norm with the customers going back into the unmeasured channels from the measured channels. And so as the restriction ease, so that will mean that the measure channel growth will slow next year, but that the combination of the two will remain about the same, maybe slightly less. And so we don't have to count on as much share gains to get to the growth that we're talking about. I hope that's helpful.

Great. That's very helpful. And then just one other question. On the A&C line, clearly you guys ramped up in the second half of the year after a pullback in the first half. I'm wondering, did you see the same efforts in terms of increased ad spend generally from competitors? How are you feeling about your share of voice in the marketplace on the ad spend front in the back half of the year and leaving 2020? Thanks.

I don't know if Luca wants to say something about our investments, but as it relates to competition, I can quickly comment on that. Yes, they are also increasing their spend, so I would say our share of voice has remained about the same, and everybody has done a little bit the same, I would say. Didn't spend that much in Q2 and came back in H2. So I don't see any major differences there, but But I cannot predict what's going to happen in the beginning of the year. I just know what we are about to do. So maybe, Luca, you want to talk a little bit about our overall investments?

Yeah. So in terms of investments, Dara, you're right. We stepped it up, particularly in the second half. I think you've seen the material that we called out that working media is growing 17%. We plan to keep the same level and increase it in 2021-2022. So we are building on a continuous investment in working media, which importantly comes together with improved ROI, which means high quality media we are putting behind our brand. We are investing more in digital, which in general terms commands a little bit more ROI than other regular channels. And third, Again, the essence of diverting non-working media into working media improves the overall spending ROI. So there is a compounded effect between increasing investment and having a better return on what we spend. And again, I think Vic said it well, when we look at market and share, in Q4, we didn't slow down overall for the company. And what that means is that, yes, we had... clear advantages in terms of supply chain at the beginning of the crisis. But as the situation normalized for us and for other competitors, people continue to favor our franchises to others. And I think one of the drivers is clearly the fact that we have invested more, that we have more meaningful innovation, and that we are activating effectively a point of sales. Great, thanks. Thank you, Dara.

Your next question is from the line of Brian Selang with Bank of America. Please go ahead.

Good evening, everyone. A couple of quick ones for me. First, Luke, I don't know if I missed it or not, but did you give guidance for 21 on capital spending?

No, I didn't, but I think it is 3.5%. That's the number you have to have in mind.

Okay. And then second one, just... You know, with regard to kind of modeling out revenues for 2021, you know, in 2020, developed markets grew faster than developing and emerging markets. In particular, you know, you grew over 8% in North America. So we're kind of thinking about contribution and that balance in 21. Would we expect that to flip? Are you expecting emerging market, developing and emerging to grow faster than developed? And then second, you know, North America, given how strong that comp is, is that something you could actually grow off of in 21?

We usually don't provide segment guidance, and I would like to stay away from that. But I think what you're saying makes sense. Now, I think you have to bear in mind that within developed markets, Europe wasn't stellar in Q2. you know that Europe has world travel retail in it that got a material impact. So I expect Europe to grow. I think in the case of North America, obviously we are lapping 13%, 11%, I believe, respectively in Q1 and Q2. So that would be the toughest comparison. But then, you know, in the second part of the year, numbers are easier. And hopefully as GAM comes back, we will have a positive impact. we are putting together and we have put together actually quite good plans for the three acquisition platforms that we acquired in the last few years. And so I think there is more to come in terms of North America and developed markets, but I wouldn't draw the conclusion that it is all bundled together because North America grew double-digit in the first half. In emerging markets, again, I'm really happy about what I'm seeing. China grew nicely in Q4, almost double digit, it was just shy of double digit. India grew more than 10%. So did Russia. Brazil grew high single digit. So I'm positive about the evolution of developing markets overall. Clearly, there are some of them, particularly in Latin America, that are impacted by gum and candy. But again, As we start lacking Q2, numbers there should be better. I think as you step back and you look at 3.1% category growth in 2020, you know, we have always said categories will grow 3% or so. I think you should expect the same type of category growth with all the puts and takes. Clearly, biscuit being a little bit lower, but candy being much more positive. you should expect a neighborhood, a category growth in the neighborhood of 3%, and on top of that, web shares.

Oh, that's great. Thanks, Luca. Appreciate the call.

Thank you.

Your next question is from the line of John Baumgartner with Wells Fargo. Please go ahead.

Good afternoon. Thanks for the question. Hi, John. Hi. You know, Luca, a two-parter for me. First off, reinvestment has been a big theme behind the top-line improvement over the past two years and again here in 2021. And I'm wondering if you could speak to what's driving the higher return on spending for media investment. You know, how much do you attribute to just straight cost improvements from agency consolidations? And then how much from other aspects, whether it's better quality programming from the local first or even better installation that better leverages that media spend?

Yeah, maybe I'll let Dirk take this one. I mean, I have a point of view, but I think Dirk is the expert here. So, yeah, Dirk.

Yes. Well, first of all, we have been shifting around in our ANC budget. What we've done is we have increased our working media and the balance was, in my opinion, a little bit off. So, The net effect in media has been significant, as Luca was commenting in last year, and we're continuing that effect in 2021. On top of that, we're increasing our overall budget, and so we've increased the percentage of ANC, of net revenue, in 2020, and we're going to do the same in 2021. The third driver of our increased ROI is a bigger switch to digital. So we are now well above 50% of our investment is in digital and we know that we can drive a much better effect and much better targeting of our consumers. And then the last effect I would say for our increase in ROI is the fact that we've done a lot of work on our brands, worked on purpose, we worked on communication, we've done A number of things that really have had a big effect, call it Oreo, Cadbury, Milka, really some big strides. For instance, to mention the Lady Gaga Oreo that's going to hit stores today. I think that's generating a lot of buzz, and we've done many of these things. There is some effect, but it's minor. Well, minor is maybe a big word. It is not the biggest driver on agency sales. rationalization, if I can say it, and some margin negotiation. So there is some of that in there, but that is certainly not the biggest driver of what we've done.

Thanks, Dirk. I'll look for the Lady Gaga. I appreciate that. And then secondly, just to follow up there, going back to FX, we've seen FX headwinds for a number of years now, and I'm curious, to the extent that those may now reverse in your favor, For translation, yes, but also maybe even driving some trickle-down benefits operationally where maybe it relieves some of them to take pricing in foreign markets. To what extent do you think the market doesn't fully appreciate the potential benefits from that on EPS or even volume growth in your stock valuation?

Thank you, John, for the question. clearly we lead it to the stock market to determine the fair value of Mondelez. But let me provide some perspective. The pick up of 10 cents in EPS due to translation clearly add to the great progress we have made as a company, I believe over the last three years. And it is fair to say that while the valuation has improved in the last three years, we still stand behind in terms of peer average and best in class. And so that gap, hopefully over time, will close. When I consider the brands that we have, the geographic portfolio, the category exposure, our track record over the last three years, I would say that we are well positioned. And I would assume that over time that should be reflected in our valuation. And the same conclusion, quite frankly, is if you do a sum of the parts. So I think when I step back and I look at the quality of the EPS, the 10 cents of EPS that we're adding, the current spot rate, I think there should be upside, but obviously I leave it to the market to decide. I think you had also a point about transaction forex, what we call transaction forex, and clearly transaction forex is a benefit for all the businesses we have around the world. But remember, we are covert, and it is embedded into the guidance we gave. So hopefully I addressed a couple of points you were asking. Yes. Thanks, Luca. Thanks, Eric. Thank you.

Your next question is from the line of Chris Grove with Stifel. Please go ahead.

Hi. Good evening. Hi, Chris. Hi. Hi. Hello. I just want to ask you if I could, and I've just been following on the discussion you've had around costs and pricing. I guess just from a high level, do you expect pricing to offset inflation for the year? You did talk about pricing kind of catching up with costs. And then just to think about would pricing, as it's been typical, represent roughly half of your organic revenue growth for the year? Would that be a reasonable assumption for the year?

Yeah, maybe there will be a little bit more, slightly more component of pricing, given the fact that, as we said, there is a timing effect in Q4 that should be fully recuperated into 2021. But I don't think it is going to be a major one. I think the 50-50 split is still something that is plausible. Maybe in Q1 it will be a little bit less. I think to your question about are you offsetting all your costs, I think the number one qualifier should be with or without COVID. And, you know, without COVID and the fact that COVID is subsiding, we will be fully offsetting the cost inflation. Over time, as we enter the year and as we get close to the end of 2021, I expect the run rate of gross profit to be at the same level as it would have been without COVID. So that has always been the intention. Over time, we want to be price disciplined. We will price away inflation. And we believe that is one of the building blocks of us being able to invest more in the company.

Okay, thank you for that color, and then just a quick follow-on. You've talked about implementing a pretty meaningful SKU reduction program, and I just want to get a sense, and perhaps this fits in with that answer, but does that provide, is that occurring as you expected, and is that a volume weight for the year, but you're seeing a much better mix improvement? I just want to get a sense of where we stand on the SKU reduction program.

Okay, yes, the short answer to that is yes. We are on track, and it's really part of a broader simplification program in order to drive both top line and bottom line. So it's a reduction of SKUs, reduction of the number of innovation initiatives by doing bigger innovation initiatives, and then also a strategic review of our brands. We are aiming for 25% reduction in every region. There is no skew to one category or another. And so in the sense that we have stopped manufacturing, so we don't make any more, we've already achieved a double-digit reduction in 20. I need to take into account, for instance, that in Europe, those changes can only be done in the first quarter of the new year. So they are going to do their SKU reductions right now. And we also have to do it at a certain rhythm because we are protecting our shelf space and trying to minimize waste. And so we will, going forward, once we reach the level we were aiming for, keep the lower SKU count and we're going to apply a very strict one-in-one-out approach to new products. Important to mention is probably that we are not expecting any negative top line effect. Since these 25% only represent 2-3% and with keeping our shelf space we should be fine. And going forward there's a number of benefits as it relates to less complexity in manufacturing for instance, better customer service, reduction of our inventories, And also more sales we expect since we have more space for our top-selling SKUs. So it's going to support the delivery of our long-term algorithm. It won't be transformative from a margin perspective, to our opinion, though. It will help. It will improve. But it's not that you will see a massively improved gross margin. Okay.

That's great, Collar. Thanks so much for your time. Okay. Thank you for your question.

And your final question comes from the line of Rob Dickerson with Jefferies. Please go ahead.

Great. Thanks so much for putting me in. You know, Dirk, I guess this is, you know, a broader question kind of just in terms of portfolio position going forward. Obviously, you know, you continue to do very well with the brand that you have. For the same time, you know, we've seen some new innovation, like the gluten-free cookie, the gluten-free Oreo recently, and then obviously the full acquisition of Hue. You continue to, you know, call out, you know, well-being, sustainability is obviously a focus. You know, and one could argue that kind of over time, you know, even if your core brands continue to do well, there's still a lot of opportunity and distribution opportunity kind of more in that kind of well-being side. So just kind of Maybe if you could just spend a little time just providing some color, kind of how you think about that internally. How do you leverage your capabilities, R&D, survey work, what have you, to kind of always make sure that you're on trend going forward with the brands you have, but now also with the new brands. And then maybe if you could kind of tie in then how you would also be thinking about go forward acquisition opportunities? Kind of close to the core or still kind of maybe a little bit broader on the well-being side? That's it. Thanks.

Okay. It links in a little bit with that question about SKU. So the way we look at it is if we launch new SKUs or new sub-brands or new brands or buy brands, they need to have a certain level of sales right now, and they need to have the potential to grow to a certain level. So as you do that analysis, there is certainly an amount of health and wellness in that mix, but it certainly wouldn't be, to be honest, at this stage, the majority of what we do. Every year it's more, but we're trying to very carefully manage the balance between more indulgence and more health and wellness over time in order to keep our mixed growth rate, if I can call it like that. Because what you have is that health and wellness is growing faster, but it's smaller. And so if you look at the mixed growth rate, we need to do both. And at the moment, we need to do a lot more of indulgence. As it relates to how we're thinking about it from an innovation, R&D, and acquisition perspective, Clearly, we want to continue to increase our exposure to health and wellness, particularly if we think about the next 10 years, let's say. I do expect that that mixture between indulgence and health and wellness will continue to balance more and more versus health and wellness. We will accompany that mix, and so we need to launch more and acquire more in that sense. The big areas that we are looking at internally with our R&D team and also externally is one is that example of Oreo gluten-free. It has to see with the ingredients, the nutritional composition, what can we improve, how can we gradually get products that the health-conscious consumers are more interested in. So it's sort of an upgrading of our current portfolio. And then we do have a number of products in market, very, very small tests with products. We developed ourselves in house, completely new breakthrough type of products, new brands that will take time to develop, but we are also in there and that goes much further than sort of cleaning up your ingredient or improving your ingredient panel. And then the, the, we use mainly acquisitions to really take a big foothold in some of the big health and wellness spaces. So Perfect Bar is considered one of the healthiest bars in the market. Then You is very particularly focused on the paleo, vegan segment. And we will continue to do that in the U.S. and around the world. And those are sort of the big lines of what we are we're trying to do. There's a number of other areas that are going on. So, for instance, portion control, we think, is part of health and wellness. So over time, we are trying to reduce the portions that we sell or that the consumer consumes. We talked about the Better For You credentials, but All Natural is another one that is quite big. Local sourcing, in a way, the consumer is considering as healthy. And then there's, of course, the functional benefits, energy bites and things like that. But I would say the big groups of what we are focused on in health and wellness were the ones that I was going through before. But, yeah, you will see a very balanced approach in gradually introducing more health and wellness products from our side. Okay.

Very helpful. I appreciate it. Thank you.

Okay.

There are no more questions.

I think that's the end. Yeah. Sorry. Go ahead.

And there are no more questions at this time. I would like to turn the call back to management for closing remarks.

I was jumping the gun here. Well, thank you very much for your time, your interest in the company. We feel good where we've ended 2020. We feel good about 2021. We have momentum. We feel we are coming from a position of strength. And so we hope to be able to provide you some good news as we go through the year. Thank you. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your line.