Mondelez International, Inc.

Good day and welcome to Mondelez International first quarter 2021 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'd 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. It's 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 the risk factors contained in our 10-K, 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. For first quarter results, we're also presenting growth on a two-year average basis to provide better comparability given the impact of COVID on 2020 results. 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. Before I speak to the agenda, I'd like to notify everyone that we have an upcoming investor call on May 26th, which follows the publication of our annual Snacky Made Right ESG report on May 5th. Both Dirk and our Chief Impact Officer, Chris McGrath, will discuss key components of ESG. They'll talk more about our approach, our targets, and progress on this call, as well as answer your questions. In today's call, Dirk will provide a business and strategy update that Luca will take you through our financial results and outlook. We will close with Q&A. With that, I'll turn the call over to Dirk.

Thank you, Shep, and thanks to everyone for joining the call today. We had a strong start to the year despite lapping our highest growth quarter in 2020 and Q1 reconfirms that we are emerging from COVID even stronger. Our performance demonstrates that our strategy is working and that we have clear growth opportunities in front of us. We are driving a virtuous cycle and producing a consistent track record of growth. As we continue to deliver on our commitments, we are also strengthening our business by accelerating investments, reshaping our portfolio, and simplifying the business while maintaining cost discipline. We are well positioned to accelerate long-term revenue and earnings growth. On slide five, let me walk you through the headlines of our financial results. Top line growth was 3.8%. underpinned by broad-based share gains and excellent execution across all geographies, categories, and brands. Our teams around the world delivered amazing results, with events like Chinese New Year and Easter being clear standouts. In turn, this strong volume and price-driven top line translated into gross profit dollar growth of 5%, also aided by our emerged stronger cost initiatives. We continued to invest in our brands and sales and marketing capabilities to drive our categories. We also increased working media double digits to support further share gains. And a good business converts top-line results into cash, and for the quarter, we generated $700 million which is the best first quarter since the formation of the company, which continues to enable us for strong capital return to our investors. In summary, our first quarter results leave us well positioned to deliver on our full year 2021 outlook and provide increased confidence that we can accelerate our long-term growth rate. On slide six, let me spend a moment on our track record which we expect to continue. Q1 topline results mark another quarter at or above our long-term growth algorithm of 3% plus, now averaging 3.8% growth since late 2018. This is happening because we have fundamentally changed our approach to the business. From a focus on costs and profit margins, we have switched to topline growth and profit dollars, which has driven better and more consistent results. Our local-first commercial approach enables us to move faster and be more consumer-centric. We have entered a virtuous financial algorithm, which allows us to invest more in the business. And lastly, our incentives are better aligned with an ownership and growth mindset with increased accountability and high-quality outcomes. Beyond Q1 results and 2021 expected outcomes, as shown on slide seven, we believe we are uniquely well positioned to thrive in the years ahead with a long runway of growth opportunities and advantaged growth enablers. First, our core categories are attractive and resilient, demonstrating durable growth and significant headroom for future upside. Second, We believe our growth algorithm and our ability to continue to invest behind strong growth propositions is something that sets us apart from our competition and will continue to result in share gains over the years ahead. Third, we are seizing large opportunities in under-indexed channels like e-commerce and discounters. Fourth, we have significant opportunities to expand in high-growth segments, like well-being and premium, and in geographies where we have a strong share of one core category but a much lower share of another. And beyond our core categories, we are building strong platforms in high growth adjacencies such as cakes and pastries or bars. We believe we have distinct advantages that will enable us to seize these opportunities. These include our proven ability to price across the globe, more impactful and high return marketing, increased investments in our brands, ongoing portfolio reshaping to increase our exposure to incremental high growth areas of snacking, continued cost improvements to fuel investments, and increased business clarity and simplifications. On slide eight, you can see the strong progress we have made in Q1 against some of our biggest growth opportunities. Within our core business, we achieved double-digit growth in Cadbury dairy milk and high single growth in Oreo. Oreo has been growing at a double-digit cagger since 2018 as we activate our plant, Freiburg, and pursue a $1 billion opportunity over the next three years via geographical expansion and share gains. We also delivered mid-single-digit growth in our local jewels, including strong results from Chips Ahoy and Tate's in biscuit, as well as Cote d'Or and Lacta in chocolate. Continued efforts to revitalize brand messaging, packaging, and activations have created a growth engine within a substantial part of our portfolio. Looking at our channel opportunities, the consumer shift to e-commerce continues to accelerate, growing 77% on a reported basis in the first quarter, with share gains in the US, China, and the UK. E-commerce represented approximately 6% of our revenue in Q1. This has not come at the expense of brick and mortar, where we continue to drive distribution gains in key emerging markets like China, where we added 120,000 stores in the last quarter, or in India where we added 60,000. To put that China figure in context, in China biscuits, we are now in 3 million stores out of 6 million that form the Nielsen universe. So we have a huge headroom. And in gum, we are only in 1.9 million of 6 million stores and our leading competitor is in 4.2 million stores. As it relates to the opportunity in high growth segments, we significantly increased our presence in well-being and premium this quarter with the acquisitions of Grenade, Gourmet Food, and You. And finally, we continue to expand in close in adjacencies, becoming the lead manufacturer in the UK snack bars category with Grenade. Since the launch of our strategy, we have enhanced our portfolio by adding nearly $1 billion in revenue with a number of high-growth platforms, as you can see on slide 9. These acquisitions are driving accelerated growth and have a long runway. Our balance sheet provides a great flexibility and optionality, particularly through our coffee JVs. While we are very happy with the results and prospects of both KDP and JDE, our expectation is to increase our exposure to snacking over time. And in 2020, we sold down our stakes in both with 2 billion of net proceeds to convert into highly strategic snacking acquisitions. We are also evaluating our developed market gum business to determine the best way forward. Across these initiatives, we are driving clear outcomes in the form of accelerated growth. Next, I will share some additional colors on these recent acquisitions and how they align with our strategy on slide 10. Our focus has always been to increase our exposure to high growth segments like premium and well-being. enter geographic-wide spaces in our core categories, or expand into fast-growing adjacencies. Most recently, we acquired four fast-growing companies. Grenade, the UK energy protein bar, the leader that is allowing us to expand our snacking portfolio into active nutrition products. It was a missing piece to become the largest player in the 1.2 billion UK snack bar market gourmet foods which is a premium and well-being focused cracker portfolio in Australia this platform allows us to significantly increase our Australia biscuits business and share the brand has tremendous growth potential inside and outside of Australia and is a leader in a highly attractive segment you is a premium, well-being, chocolate-led lifestyle brand that has developed a very strong followership. It is the fastest-moving chocolate brand in whole foods, but currently has limited presence in more conventional retailers, which is a clear opportunity. And Giving Go is an undisputed leader in the large and high-growth in-store bakery segment in North America. It is highly incremental and spans across multiple product forms like cookies, muffins, brownies, and cupcakes. It has strong consumer appeal driven by high quality, freshness, and permissible indulgence. This platform is performing very well, and we believe it will yield good revenue and cost synergies. As we have seen with our prior acquisitions of dates and perfect snacks, These platforms provide leadership positions in new or adjacent categories of increasing relevance with our consumers. They represent large addressable markets, are financially attractive, and create new growth paths for us. Turning to slide 11 and our sustainability commitments and approach. We believe we can create value by building a sustainable snacking company that is focused on sustainably sourced ingredients, minimizing our climate and landscape impact, building a diverse, inclusive, and engaged workforce, selling products that meet the evolving snacking needs of consumers, and result in zero packaging waste. We are confident that our approach is effective as we prioritize according to where we have the largest impact. We focus on breakthrough solutions, and we collaborate where needed. In closing, our strong start to the year gives us increasing conviction that the steps we are taking to evolve our growth strategies are the right ones, and that they will continue to support consistent and profitable growth for many years to come. With that, I will hand to Luca for more details on our financial performance.

Thank you, Dirk, and good afternoon, everyone. Our first quarter performance was strong across all key financial metrics, building off the strength and momentum of 2020. Revenue grew 3.8%, driven by broad-based growth and a healthy balance of price and volume. On a two-year average basis, we grew 5.1%. Emerging market performance was strong with growth of 10% for the quarter and more than 7% on a two-year basis. Quarter one marks for emerging market a solid comeback from the impact of COVID and proves that our geographical footprint is a long-term sustainable competitive advantage. These results include double-digit growth in Brazil, India, and China, as well as high single-digit increase in Russia. In developed markets, we continue to see solid consumption and are pleased with our performance, given the elevated demand in the previous year quarter. These markets were in positive growth territory for the quarter, while the two-year average growth for was 4%. Turning to slide 14 and performance by category. Biscuits grew plus 3.4% in Q1 and plus 7.6% on a two-year average. Each of our BRIC countries delivered double-digit growth during the quarter, while our large U.S. business posted low single-digit growth against very elevated growth from the previous year. The oil brand, once again, was a clear winner with nearly double-digit growth. Chocolate grew more than 10% for the quarter, with a two-year average of 6.5%. Our large chocolate countries, such as India, the UK, Germany, Brazil, and Russia, all turned in strong results. We are particularly pleased with our Easter performance, considering that mobility restrictions are still in place, for instance, in Europe. From a brand perspective, both Cadbury Dairy Milk and Milka grew double digits. Gum and candy continue to see the impact of restricted mobility. This business declined approximately 16% during the quarter and 8% on a two-year basis. Comparisons will become easier as we move into the second quarter, though we are expecting a gradual recovery. Now I'll cover our market share performance on slide 15. We continue to see good share performance. Given the unique impact of COVID on results, we have switched to a two-year cumulative for percentage of revenue gaining or holding share, as we feel it better depict how we are truly doing. In Q1, we held or gained share in 80% of our revenue. Biscuits and chocolate were the big drivers, holding or gaining share in 85% of our revenue base. Gum and candy held or gained in 35%. Notable share gainers included U.S., China, and Russia biscuits, and Russia and Australia chocolate. It is important to understand that the year-to-date category growth of 3% does not reflect on measured channels. Using the same methodology, the two-year average, category growth rate is approximately 5%. which reflects the elevated demand in Q1 2020, particularly in North America. Now let's review our profitability performance on slide 16. Overall profitability was strong in the first quarter. We grew gross profit by 5% due to strong volume leverage, productivity, and revenue growth management, partially offset by some commodity and logistics increases. Operating income dollars increased nearly 13% due to overhead reduction and simplification efforts, which helped offset COVID-related costs of approximately 25 million. Importantly, we continue to invest in our plans to emit single-digit investments in ANC, including a double-digit increase in working media. Moving to regional performance on slide 17. Europe revenue grew 3.3% in the quarter and 3.8% on a two-year basis. The UK, Germany, and Russia all delivered strong results. OI dollars increased 8.6%. North America declined 2.3% in the quarter with a two-year average growth of 5.6%. Biscuit posted a low single-digit increase on top of strong double-digit growth in the previous year quarter, while gum and candy saw double-digit declines. Our venture business unit, which combines taste, give and go, perfect snacks, you can enjoy life, grew strongly both organically and on a pro forma basis. North America operating income declined 3.6% as a result of volume dynamics. as well as some extra costs to serve due to winter storms in February. AMIA posted exceptional growth of 10.8% and a two-year average of 6.5%. India delivered extraordinary growth underpinned by great execution and robust consumption in chocolate and biscuit. India growth on a two-year average was double-digit and higher than pre-COVID rates. China continued to demonstrate momentum with double-digit growth. These results were driven by continued strength in Biscuit. China growth on a two-year average was double-digit. AMIA operating income dollars grew nearly 37% due to significant volume leverage as well as cost mitigation efforts despite continued working media increases. Latin America grew 7.2% in Q1. and 7.1% on a two-year average. Brazil grew double digits, driven by strong market growth in biscuits and chocolate, as well as good performance in powdered beverages. Easter was executed well by the team. Mexico and West Indies declined mid-single digits due to category softness in gum and candy, while biscuits delivered strong growth. Adjusted white dollars in Latin America grew nearly 10%. Now turning to earning per share on slide 18. Q1 EPS increased more than 10% at constant currency driven mostly by operating gains. Moving to cash flow and capital return on page 19. We deliver free cash flow of 700 million in the first quarter. Higher earnings, lower restructuring, and very strong working capital management with a 10-day improvement in our conversion cycle helped drive these results. We deployed more than $1 billion to repurchase shares at attractive prices during the dislocation in the first two months of the quarter. We also paid out $450 million in dividends, representing an 11% increase versus the previous year. Moving to our outlook on page 21. I would start by saying that we expect the continuation of the same trends and momentum experienced in Q1 going into the rest of the year. Consumers continuing to snack more for both mental and physical well-being. Elevated at home consumption with restrictions fluctuating but still present. Consumers prefer entrusted quality brands. and strength in mass retail and higher sustained e-commerce adoption. We also expect vaccination efforts to help gradually unlock mobility over time, but remain prudent in our planning for parts of the business that will benefit from this, such as world travel retail and gum. Also, some markets are re-establishing lockdowns, and some uncertainty remains. Our strong start to the year and continued recovery in emerging markets provide an increased level of confidence in our ability to deliver a strong 2021. Having said that, COVID still creates an element of uncertainty and volatility. So we are reaffirming our original 2021 outlook or 3% plus revenue growth. If some of the elements of volatility dissipate in the coming months, we might be in a position to revisit the outlook in our Q2 call From the profit standpoint, we expect high single-digit growth for EPS. This reflects our current view of top line, some incremental commodity and transportation inflation for the year that, despite being higher than originally planned, remains manageable. In addition, we will continue investing in the business to propel our virtual cycle. We also continue to expect free cash flow of $3 billion plus. Forex translation is now expected to positively impact our reported revenue by approximately 2% point and EPS by 10 cents on the year. All the elements of the outlook are based on current conditions and do not factor in a material degradation of the operating environment that could be triggered by a significant worsening of COVID. To sum up, we feel good about where we stand and remain focused on delivering on full year commitments. We are winning share. We are driving a virtual cycle with impactful high return investments. We are driving leverage in our business. And emerging and developed markets are performing well. With that, let's open it up for Q&A.

If you would like to ask a question, please press the star key followed by number one on your touchtone phone. Your first question comes from the line of Andrew Lazar with Barclays. Please go ahead.

Great. Good afternoon, and thanks for the question.

Hi, Andrew.

Hi, Andrew. First off, maybe, Dirk, can you talk a little bit about how you feel about the durability of the emerging market performance, given the strength that you saw in the quarter, obviously, but with all that is going on in so many of those emerging markets currently? Mm-hmm.

Yes. Well, just to put the numbers back in front of us, so it's about 10% of growth in the quarter and then 7% on average for the last two years. It was broad-based with double-digit growth in Brazil, in India, in China, and in Russia, or high single-digit in Russia, sorry. And the contribution to the growth was coming from our global brands and from our local brands. So I would say strong across the board, maybe some of the countries where we have a big coming candy business, a little bit less, but we're talking about Mexico or some of the Central American countries or Thailand, but not the big emerging markets. Obviously, the big question is what's going to happen with COVID in these big markets. And is it going to affect the consumer? So if I go through them one by one, um, China is operating well. Um, COVID is, is under control. I would say there is a return to mobility. And if there is a rise, uh, in COVID cases, they, they locked down quickly an area, uh, contract trace and, and then, uh, contact trace or, and move on. So, um, I think China, we can be relatively sure that that is going to continue. The next one, India, the performance was very strong in the first quarter. But at the same time, we've seen near the end of the quarter and then into the second quarter, big rising cases driven by religious festivities, state elections, and then probably some fatigue. At the moment, the restrictions are only about 10%. So 10% of the population is under severe lockdown. And these lower type of restrictions do not materially affect the access to our products. But if the restrictions would be more expanded, that could give us some pockets of disruption to our opinion. But overall, I think life continues. People clearly have migrated to our brands, which are trusted brands, and they offer a lot of food safety also. So we're expecting a strong quarter in India, even in the current circumstances for Q2. And then Brazil, as you know, in Q1 was heavily affected by COVID. We still have a serious impact, but we see chocolate and biscuit consumption clearly growing but of course the gum and candy is still impacted by the lockdowns. In Brazil, just like in the other countries, we're seeing very positive trends in our market shares also. And then Russia, I would say, is also in a relatively difficult COVID situation, but it does not affect consumption. So I feel confident that in these four biggest BU's and then some of the other ones, we will be able to sustain growth. And there's a number of underlying factors that will drive that. One would be, for instance, distribution expansion. In China, we've added 500,000 stores over the last two years. In India, we've done about 360,000 stores. We have huge opportunity in getting to more stores, as I was talking about in the call before. And then India is entering to the Choco Bakery space, too, where we think there's a big opportunity. And our biscuit business is growing very fast. So I think also based on those factors that we feel strong about the emerging markets. Thanks so much for that. Maybe one thing, Andrew, because this is maybe the moment to talk about COVID and the India situation as a side remark. But obviously our hearts go out with everyone in India and the struggle that the country is going through. The safety of our colleagues is our number one priority and we are giving all the support we can to our local team. And this week we are going to donate at least $2 million to the government and to the healthcare workers to provide critical medical infrastructure like oxygenators and and other equipment. So I just wanted to make sure that we are aware of what's going on in India, and as a company, we are planning to do whatever we can to help. Yep, of course.

Thank you for that. And then, Luca, just a quick one. Given 1Q organic sales growth was obviously very strong and above the full year expectation, and it was against the toughest year ago comp, I guess, could the 3% plus full year organic sales growth outlook prove potentially conservative? And I guess potentially also give you more comfort, obviously, in your margin expectations in a rising sort of inflationary environment.

Yeah. So we are clearly encouraged by the strong start to the year and the quality of our results. It's remarkable to see share gains continuing volume and price increasing. both contributing in a meaningful way to top line and profitability and free cash flow ahead of last year. As this just said, we are very happy with emerging markets that have truly come back since the peak of the COVID crisis last year in Q2. And the last three quarters over there have been aligned in terms of trends to the pre-COVID levels or even better. And same goes for developed markets for which consumption is higher than the 2019 baseline. So we are optimistic about the fundamentals and the ability that we have to execute a 2021 plan. But we know, as we've just said in India, there is some volatility and we want to make sure that we don't get ahead of ourselves. And so reaffirming our original plan at this point, we believe this is really the right approach. Having said that, you're right, we are cautiously optimistic about the ability to over-deliver versus the original guidance. But I want to make sure that we don't get ahead of ourselves. It is early in the year. But just to reassure that we have all the investments aligned in the plan, and actually we have unlock some additional investments, particularly in places where I think the situation is experiencing great momentum. In terms of inflation, there is more inflation coming, and so profitability is great in Q1. We believe we are going to hit the numbers as we had originally in mind. But the higher inflation will require some additional pricing and some additional productivity to offset the impact, which I believe at this point is absolutely manageable, given that all these positions are pretty much hedged for 2021. And so, as I said, profitability should be good in line with what we told you at the end of last quarter. And we feel like we can price away the inflation and commit again to a high single-digit DPS as per the original guidelines. Thanks so much. Thank you, Andrew.

Your next question is from the line of Ken Goldman with J.P. Morgan. Please go ahead. Hi. Thank you. Hi, Ken.

Hi. Hi. You know, you've done a number of bolt-on acquisitions in the last couple of years. You highlighted them today. but nothing on the larger side. And I understand you've been pretty clear. You're not really looking to buy anything sizable, but if a larger asset became available, would you, would you consider it or is it really something that's not on your radar right now? Is it just something where you're, I think it's still committed to those smaller size targets for now?

Uh, no, we, we, uh, we remain, um, on our strategy, which, which is the snacking world basically. Um, And we want to execute any acquisition, small or big, clearly as it should help us to accelerate our overall growth rate. So we want to stay in snacking and we want to accelerate our growth rate. So we know where that needs to come from. It has to come from the adjacencies, some of the geographical white spaces, and some of the fast-growing segments that we have in our current markets. So if there would be a larger acquisition that would provide us the opportunity to get bigger in snacking and or get an accelerated growth rate, we're certainly open to it. But it's just very difficult to find and we're hesitant. We would probably be open to get into other areas of snacking, but we are hesitant to get into other food categories which are showing less growth. that makes it much more difficult to find the right sizable acquisitions. But it's absolutely not the case that we're not open to it. We're totally open to it.

Understood. Thank you for that. And then very quickly, you mentioned that the February storms hurt your operating margin in North America. I don't think you quantified that. I know it's tough to be precise sometimes, but is there any way – we could sort of think about how much that affected your margin this quarter. It's important just as we think about, you know, what the non-recurring versus recurring impacts were. Thank you for that.

Yeah, it had a disruption in February, unless you wanted to go, Luca.

No, no, go ahead. Go ahead, Dirk.

Yeah. We had a disruption in February from the Texas storm, but we had a good stock rebuilt in March. So I would say that the The effect for us has been limited. I mean, at the moment itself in February, we saw it clearly. And so those sales that we lost there will not come back. But it's not going to have a major impact on the year, I would say.

Thanks so much.

Your next question is from the line of Robert Mosca with Credit Suisse. Please go ahead.

Hi, thank you. I noticed that Brazil had much better numbers than what we're used to seeing. And I remember you put new management in place in Brazil. Can you give a little more color on what you think the team is doing right there? How sustainable those improvements are? And is there any kind of a model for your other LATAM countries to follow here? or do you think just the environment in Brazil is just more amenable than the others?

Thanks. Yes, Brazil has been doing better, like Luca said, already for several quarters now. It grew double-digit in Q1, and we are expecting good growth again in Q2, and all that within a situation where COVID cases are increasing dramatically. One thing to keep into account before I talk about all the good things that management has been doing is that the composition of our product range in Brazil is fundamentally different from a Mexico or what we call Wacom, which is Colombia, Peru, Chile, and Central America. Those Mexico and Wacom have a very important share of their business is driven by gum and candy. And as a consequence, they suffer more in this crisis. Brazil has a bigger biscuits and chocolate business, and they're doing quite well, increasing market share. We've stepped up investments. We've also improved our customer service. I think the team also has increased or improved their internal process in a big way, made the business much simpler to manage. They've brought in some extra talent. So, yes, clearly management is driving a change in business the way the business is operating and it's showing in the results. I would say for the other businesses, the problem is different from what we had in Brazil. We were not performing in the Brazilian market in biscuits and chocolate. It's largely in Mexico and Wacom. We need to make sure that the gum and candy business comes back. And so we will see how that goes. We see it come back step by step, but it's going to take a while.

Okay, a follow-up on chewing gum. Is there any kind of earnings dilution number in your head that you would find acceptable if you were to divest your developed market chewing gum business? And also, how would you go about splitting it up by keeping your brands and EMs and also, if you were to divest, exit the brands and develop markets?

I can let Luca maybe talk about the dilution. Our developed market business is not that big, and he can talk about that. But splitting it up, I don't think, is from a brand perspective a major issue. It exists with many brands that one company owns a brand in one area and then owns it in another area. It's probably a little bit more difficult but doable as it relates to the supply chain and where the products are being produced. but we think that those factories can stay with the different regions. And then R&D, I think an agreement can always be made that our R&D team continues to provide service and any innovation we do on our brands in one part of the world, we can extend that to the other part of the world. So I think from an operational standpoint, splitting it up, it's doable. It's not a walk in the park, but it's something that I think our teams can manage quite well. Luca?

I think on dilution, quite frankly, it is a little bit premature to talk about what it could be. I mean, we are assessing multiple options. And even within certain scenarios, it might be not an outright sale. And so we have multiple options ahead of us. And quite candidly, we are assessing all of them. So we haven't decided yet. It is 2% of the business, 5% overall, 2% when you look at only emerging markets. And we believe in general terms that if we had to go down the path of, you know, a sale of the business, the increased focus and the outcomes that we could drive through our existing biscuits and chocolate business will over time offset. And obviously we are not going to sell anything below the key value. Those are key fundamental principles that we apply all the times and we will apply even this time. Thank you for the color. Appreciate it. Thank you.

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

Hey, guys. Hi, Dara. Hi, Dara.

So a couple questions. First, you mentioned your ability to price to offset higher commodity costs. I'm wondering if the pressure continues to build incrementally on those fronts going forward. Can you talk about your ability to take pricing in emerging markets where, in theory, there's a weaker consumer post-COVID and just how you think about that on a regional basis in some of the key emerging markets relative to pricing power in developed markets in the U.S. and Europe.

Yeah, maybe I'll start. So I think we are overall starting with a position of strength in our franchises. We have invested quite a bit in the last few years with our consumers and our customers. And we have the living value for both consumers and customers overall. We have a strong portfolio of brands. We have invested in working media that is going double digit, sales execution, route to market, and in capital in our facilities. Having said that, there is higher inflation in the marketplace. And if you look even at this quarter and the composition of pricing and volume, pricing is a little bit more pronounced than it has been historically. So we are pricing more and we are pricing away inflation. We are not necessarily going all the time with these price increases. We use a lot of revenue growth management techniques within the company. Those provide a better impact for consumers and elasticity. We will protect pre-price points, particularly in emerging markets, and price-backed architecture is a key element of price increases throughout both emerging markets and developed markets. We are clearly optimizing promo spending. We are optimizing mix. Mix is still negative in quarter one because of gum and world travel retail. But when you sweep that out and you look at biscuits and chocolate, it is better than it has been in the past. And also we want to improve trade deals ROI. So to cut it short, we feel confident that we can price away inflation and we are never going for the big bang, depending on what the current situation is in terms of commodities and Forex, but it is a gradual implementation of pricing over time. And obviously given where we stand in terms of overall inflation, as we go into next year, we will have to price

Okay, that's helpful. And then from a market share standpoint, it looked like the momentum continued in Q1 on a two-year basis. Can you give us a little more of a near-term update of what you're seeing in March and April as you cycle some of the incremental share gains from last year? And are you seeing any competitive response in the marketplace to the share gains you've seen recently? I guess indirectly that ties to the first question around pricing, but I'd be curious for competitive response. and what you're seeing from competitors. Thanks.

Yes, so overall I would say for this year we're expecting modest gains on the back of the very strong gains that we had last year, but we do expect to continue to increase our market share. In Q1 on a global basis we continue to increase our share not as strong as last year, but still quite good, more than it has been in the past. Of course, as we get into March and April, and in some countries we don't have the full results yet, that's where we start to lap some of our largest step-up in share gains that we had last year. And so it's a bit too early for us to say how that's going to pan out. But overall, we do expect a good year, and the reason being is that some of the Things we're doing like distribution increase, execution against seasonals, increase in our investments, the ROI we're seeing on some of our marketing is all pointing in the right direction. And so we believe that the base is there to continue gaining shares. Another one that I didn't mention but it's the increased penetration of our brands in the last 12 months. We have about 150 million households globally that are now consuming our products. So I don't think that's going to go away right away, and that is going to be the base that is going to help us to continue to gain share. We think it's more helpful since we have a big step up last year, and we will in some markets give back a little bit, I'm assuming in the coming months. So I think the net result over the two years is what is most important. That's why we thought it would be better to start showing the two-year cumulative share. As I said before, we have all the right things in place. We're starting a continuation of that in Q1, and we think that we still will have a good year.

Great. Thank you so much. It's helpful. Yeah.

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

So I wanted to just follow back up on, on the question around the questions around portfolio and, and the gum business. And I guess, I guess two questions there. First one is just the slide where you've, you've talked about a billion dollars of revenue from, from the acquisitions or the contributing a billion of revenue. Can you give us a sense of just what the profit contribution is and, maybe where that stands relative to what you thought when you made the acquisition, just trying to get a better understanding of just how accretive it's been to returns or contribution to profit growth.

Yes, so I would say the group of acquisitions is all on strategy, but it's very different. of where in the development these different brands are. So the profit contribution is largely depending on how big and where they are in their development. So to give you the two extremes, potentially give and go, mature business, strong profitability, growing high single digits in the first quarter, so a big contribution to our profitability. On the other spectrum, I would say you, smaller brand, still investing in getting distribution, in getting the brand built up. Huge potential, fastest selling chocolate brand in Whole Foods, but we need to build up distribution. So for the time being, we're probably going to run a loss on you as we build up the brand. All the other ones, I would say, if I think about Perfect Snacks, Grenade and Tate, they all have strong EBITDA in line or above with the EBITDA of the company. And they are in sort of the $100 million to $150 million mark in sales. And so they all have huge distribution opportunities, which we continue to build with them. And so our expectation is that they are profitable that they will contribute to our overall profitability, but that's not their main role. Their main role is to grow as fast as we possibly can. So hopefully that gives you an idea how we think about it.

Yeah, that's helpful. And then, Luca, maybe just to follow up on Rob Bosco's question, as we're thinking about the potential options for gum, just tax leakage or cash tax return or cash returns, because Mondelez has been very effective at exiting businesses in a very tax-advantaged way over time. And so if you could just kind of maybe give us a little bit of color of how we should think about those considerations, is that the cost basis in this business goes all the way back to when Cadbury bought Adams, right? So I don't even know what the cost basis is. But as we're thinking about exit vehicles, you know, we're really thinking about tax efficiency and maybe those types of structures. And again, this is a business that could be worth, I guess, a billion and a half or more. So Just trying to understand how we should think about the cash inflow potential.

The situation varies upon the structure we are going to use. And it will be different between the US and Europe. I would say overall the tax leakage is manageable if we had to go down that path. And I want to reiterate, it's not a foregone conclusion at this point. but there will be some tax leakage potentially. Again, in the big scheme of things, I think it is something that we can handle, and it will depend upon the structure we might end up using and how the value is allocated between Europe and U.S. Okay. Thank you. Thank you, Brian.

Your next question is from the line of David Palmer with Evercore ISI.

Thanks. You cited how you've been gaining share in most of your business, but you also cited that the core category growth has been 3% or so, so it's not too far behind where you have been. In other words, Global Sweet Snacks has been extremely resilient during this entire pandemic. Could you speak to that? Do you think that there's parts, you know, obviously you've talked about gum and world travel retail as being headwind areas. but there might be others that are tailwinds like Oreos in the U.S., for example. Roll it up for us. Do you think that this pandemic has been a net headwind to your business and something you can get back in future quarters as a tailwind? And I have a follow-up.

I would say the beauty of our business is that despite everything that happens, we are very balanced. And if you look at it, we grew 3.7% last year. We're growing 3.8% in the first quarter of this year. Last year, we saw big gains in biscuits and in chocolate, but we had gum and candy really going the opposite way. We had emerging markets slowing down, but developed markets stepping up. So the balance, the net balance, and I keep on referring to that, net balance has been that in the end for us, there has not been that big of an effect. And that continues into Q1. Now, thinking it through what's going to happen going forward, I believe that it could probably be a tailwind. And the reason why is that I, and I'm talking, let's call it two years from now, In emerging markets, things will come back. Mobility will come back. And we see big growth in snacking. This quarter, as they came back, emerging markets were growing close to 10% for us. So I think there is momentum in emerging markets. Emerging markets are growing 7% on average over the last two years. There is momentum there. And as they get through COVID and the consumer gets back into their normal life, I think we will see a benefit to that. In developed markets, I think consumers will use this as a change in the way they live. And they will not spend as much time in the office, and they will spend more time at home. And we clearly know that as the consumer spends more time at home, that benefits our categories, particularly biscuits, but also chocolates. So if I think about it, not immediately in the next year because there will still be a lot of in and outs, but during the crisis it was kind of a neutral effect. Getting out of it, I think it's going to have a tailwind for us.

Thanks. That's great. And you have such a multifaceted growth agenda. You've talked about a lot of this stuff during the slides, brand bolt-ons, underpenetrated channel push, and global Oreo expansion, you know, adjacencies and the like. Is there – It's been kind of a wild year even already with inflation ramping up, and you've heard about supply chain disruptions, whatever, and obviously the COVID cases in some of your emerging markets. Are your plans at all changing about what you are pushing harder on this year and leaning into? And I'll pass it on.

I mean, overall, we feel that our strategy that we laid out in the second half of 2018 still is very valid. We've made some adaptations to it during the crisis and at the moment we are reviewing it to see if we can build on sort of another level of sophistication and understanding of what really drives it. But the basics are still there. I would say that the areas where we've been working on for sure, is simplifying the business more. We have too many SKUs, too many small innovations, and so on. And that makes life really complicated for our teams and for supply chain. So we've been focused on that. We're also starting to understand our marketing approach better and better. Our brands are really thriving. I think teams have done an incredible job in better understanding purpose of our brands and really then making it come alive. We get great returns on our investments. And so I think we're going to continue that and try to lift that to the next level. As it relates to channels, for sure, we have to adapt our strategy. E-commerce, 77% growth in the first quarter after already a big boom last year. So e-commerce, I think in the coming years, will continue to grow very fast. We think discounters is another area that will be important and we will have to see where the balance between grocery and big stores versus on the go and away from home will pan out and that might require some adaptations. So I would say overall the list of opportunities that we have to grow has not changed and has reconfirmed itself. We might changed sort of the weight or the priority of it, but the ones I went through in the presentation are still very valid. And the enablers of the growth are still very valid and are working for us. So it's more about prioritization than changes, to my opinion.

Thank you.

Your next question is from the line of Alexia Howarth with Bernstein. Please go ahead. Hello there.

Hi. Hi.

Hello there. So can I ask, first of all, on the last earnings call, I seem to remember gross margins were down, I think, about 80 basis points year on year. And there was some trepidation expressed about how gross margins would develop this quarter. Clearly, they came through better than expected, flat year on year on an adjusted basis. Could I ask just what happened that came through better than you anticipated? Was it just pricing relative to input costs in Latin America, or was there something more to it? And then I have a follow-up.

Yeah, I mean, as we saw inflation spiking, we have been doing a little bit more pricing and optimizing the overall revenue growth management mix. And so that's part of the answer. We have delivered a great quarter in terms of productivity. The colleagues that we have around the world working in supply chain are have done a remarkable job. And, you know, the goal for us is really to make sure that while protecting all employees around the world, COVID costs are pretty much absorbed by productivity and happy to report that in the quarter, the COVID costs were only inverted commas, obviously $25 million. And then I think overall, when you look at the composition of profitability, we are very pleased with increasing profitability. You see not only in Latin America, which I think is quite good, and that is on the back of Europe. our teams in Brazil, for instance, optimizing returns on Easter that are this year at historical lows compared to last year, but also, and importantly, all the volume leverage that came through AMIA, which is, again, proving to us, if we didn't know, that while this company has tremendous potential in revenue, That revenue, if it comes through the right mix of price and volume, it delivers tremendous upside to the bottom line. And also, as you saw, Alexa, in terms of cash flow. So it was better than we anticipated. I think it was better because, again, we priced a bit more. Productivity came in strongly and importantly, particularly in EMEA, but not only EMEA. volume was strong, and it was also the case, obviously, in the EU. And in the U.S., when you look at the two-year stock on profit, I think we can call ourselves happy with the delivery of that.

Great. And just as a quick follow-up, you called out unsavorable mix as a negative on the organic sales growth. Was that specifically just gum-related, or was it also World Travel Retail I'm just curious about how that mix is likely to develop over time.

Overall, when you look at total mix, it is because of gum and it is because of world travel retail. Then obviously North America, commands a little bit higher profitability than other places and obviously didn't go as much as other places this quarter. But overall, I would say when you look at the fundamentals of mixed management, we feel quite good both in chocolate and biscuit and hopefully gum and we'll travel retail. We'll come back. Certainly, we will start lapping better numbers in the second part of the year. Great.

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

Thank you, Alexia.

Your next question is from Jason English with Goldman Sachs.

Hey, good evening, folks. Thank you for stopping in.

Hi, Jason.

Hi, Jason. Look, I think you partially answered this in the answer to the last question, but I want to make sure I got it right. On EMEA, this is the highest margin I think we've ever seen from that business with substantial growth. If it's all volume leverage, is it fair to underwrite this is a sustainable profit level? Maybe not every quarter, but This is not sort of unusual that we have to reset lower. And then on the flip side, it's been a couple of years since we've seen an EBIT margin below 20% in North America. It sounded like an answer to Ken Goldman's question, like this weather disruption was kind of a net wash. What drove the margin pressure there? Thank you.

So Jason, the simple answer on EMEA and the remarkable 37% increase that you saw, it is because we have good profitability in India and China that delivered amazing growth in Q1. When you look at the P&L structure of these two companies, it is a sound P&L that allows for reinvestment. And so that came after we invested more in advertising And again, I want to stress the fact that emerging markets can be profitable, can be cash accretive. And AMIA is the point in time. We come from a place where we have invested in supply chain and we have great state-of-the-art facilities in both India and China, as the specific example, and putting volume on top of it. is just going to yield great results also going forward. So that's really when we say emerging markets in action, you look at the EMEA P&L and you realize how that can really come to fruition, not only in this quarter, but for the years to come. And so it is a structural advantage. We just have to keep on being disciplined in pricing and delivering volume. And I think things will take care of themselves if we continue investing in route to market. And Dirk gave you the idea of the opportunities that we still have in these places, whether it is biscuit, for instance, in India, or whether it is number of stores in China and chocolate, obviously. I think in North America, I wouldn't get overly concerned about the margins. I think North America, obviously, this quarter is facing some additional pressure in terms of logistics costs. And you all know that edible oils, wheat, et cetera, they have been going up in terms of cost. But we are taking the necessary measures to optimize profitability and total dollar delivery a little bit more. Again, I don't want to take away the fact that on a two-year average, when you look at the net benefit versus 2019, it is still a 17%, 16% OI increase versus the 2019 baseline, which, again, I think is quite good.

For sure. Thank you. I'll leave it there.

Thank you, Jason.

And your final question is from the line of Chris Grove with Stiefel. Please go ahead.

Hi, good evening. Thanks for the time here. I know we're getting overtime. I just had two follow-ons, if I could, from earlier questions. I wanted to ask, first of all, if we think about the organic revenue for the year, it's clear you're taking a little bit more pricing due to the inflation picking up. As we think about the balance of volume versus pricing, it sounds like pricing is going to be a larger contributor. Have you given a little more color around how much that could contribute to organic revenue growth for the year?

So we come from a place last year where if you look at the numbers, it was 50-50. I think it will be slightly more. Again, I think we need to look at the fundamentals of how we want to run this company. Paolo Davide Farah- Volume is integral part of the incentive scheme for for the countries and for us obviously at the center and for the regions to it is clearly a key contributor in places like a near where we have tremendous leverage potential. There might be other places where we will have to price a little bit more and there will be some volume consequences. So I think you will see still volume growth. It might be slightly less than what happened last year. And importantly, both volumes market share and gross profit dollars are critical part of the incentive scheme. And so it will be the optimization of the three elements that will eventually determine how much we will deliver in pricing versus volume. Remember also in the second part of the year, we will start lapping meaningful volume declines in gum and wool travel retail. And the simple year over year comparison should help that partially offset potentially by tougher comparisons in developed markets, particularly in North America. So I feel quite good in telling you that the balance will still be there. Maybe it will be a little bit more tilted to price this year.

Okay. That's helpful. Thank you. And then just one quick follow-on. We've talked about high growth segments and adjacencies. Most of your M&A activity has been in the U.S. for those six transactions you outlined there. Is that a heavier focus for you outside the U.S.? You had one recently in the U.K. Are you looking outside the U.S. for more of that sort of high-growth segment or adjacency for the business? That's all I have. Thank you.

Yes. In fact, in this year, we did three, and two were outside of the U.S., one in Australia, one in Europe. I would say the focus that we have is As much internationally as in the U.S., there's no clear preference. Probably in the past, things have moved faster in North America than in the rest of the world, but we see a good pipeline, good conversations going on, so in the end, you can expect a good balance between the two. I think that's it. Well, thank you very much for your attention to our earnings. Thank you very much for your investment in the company and for your interest in the company. We obviously look forward to a great continuation of the year and looking forward to talk to you in the coming weeks. Thank you.

Thank you, everyone. Ladies and gentlemen, this does conclude today's earnings conference call. You may now disconnect your lines.