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spk01: Good day and welcome to the Mondelez International second quarter 2022 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.
spk08: 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, mondeliseinternational.com forward slash investments. 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, 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 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 GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the presentation. Today's call, Dirk will provide a business and strategy update, then Luca will take you through our financial results and our outlook. We will close with Q&A. With that, I'll turn the call over to Dirk.
spk03: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. pleased to share that we have delivered a strong first half of the year with robust volume growth and solid pricing execution that supports raising our full year growth outlook to 8% plus. Our core chocolate and biscuit businesses continue to demonstrate volume and pricing resilience. Consumers around the world continue to seek out our trusted and iconic brands to meet their snacking needs. And although we may see a more mixed consumer sentiment in the near term, given the macro environment, we expect the consumer to consume more at home and be more selective in the brands they buy, which we believe to be a net positive for us. We also continue to effectively navigate dynamic operating environment. Input cost inflation remains challenging, And although we may see commodity inflation beginning to ease, we expect other costs like wages to show significant inflation. Our strong track record in pricing, having cost efficiency and simplification, positions us well to mitigate the impact of these inflationary factors. At the same time, our consistent results enable us to maintain our course in driving a virtuous cycle where strong net revenue and gross profit continuously invest in our brands, distribution capabilities, and . We also continue to make great progress in reshaping our portfolio. A great example of that is our agreement to acquire Cliff Bar, which will improve our position in the attractive and fast-growing snack bar category. I'll share some additional context on the exciting in a few minutes. Along with the Cliff acquisition, we announced plans to divest our developed market gum and gum halls businesses, allowing us to focus our portfolio and further invest in our faster growing businesses of chocolate and biscuits. We remain confident that the strength of our brands, our proven strategy, and our increasing investment position us well to deliver attractive, sustainable growth for the remainder of 2022 and beyond. Above all, we remain extremely confident in our people, who continue to demonstrate exceptional passion and dedication to serving our consumers, despite ongoing challenges with inflation, supply chain, and periodic space in COVID conditions. Day in and day out, our 80,000-plus makers and bakers strive to help people snack right. We respect and honor our colleagues around the world, and we truly believe that Team Mondelez is a very good team in the consumer packaged goods industry. Turning to slide five, you can see that our strategy is continuing to drive a virtuous cycle. The strength of our brands, increasing investments, volume growth, and significant pricing actions are sustaining top-line momentum and solid profitability despite substantial inflation. We grew revenue this quarter by 13% and 10.7% for the first half of the year. We delivered gross profit growth of 9.7% due to healthy volume growth and pricing actions. Our ANC investments have increased double-digit to gain or hold share across more than half our revenue base and positioning as well for future periods. An example of our commitment to brand investment is the renovation of Milka to make this leading chocolate brand most tender and creamy ever. This program includes an upgraded taste profile, creamier texture, and vibrant and distinctive packaging, celebrating the brand's alpine soul. This initiative represents our largest chocolate brand renovation in 25 years. Illustration of the campaign is featured on our earnings presentation coverage page. We are supporting the launch with a fully integrated 18-month marketing and advertising support program starting in H222. And last, we increased operating income by 8.5% for the quarter and 11.2% in the first half, while delivering great free cash flow results. As you can see on slide six, we delivered 10.6% growth during the first half of the year. We view this strong performance as evidence that our long-term strategy continues to pay off. In late 2018, we launched a new growth plan focused on gross profit dollar growth local first commercial execution, a virtuous cycle of increasing investment, and a new approach to allow incentives. We are confident that this approach will continue to consistently deliver attractive growth. Importantly, we are also delivering strong volume, which is important to us all. It is a proof that consumers are eating more of our products every day and an indication of sustainable long-term growth. Like many companies, as shown on slide seven, we are experiencing a dynamic operating environment driven by global cost inflation, supply chain volatility, and currency headwinds. Let's take a closer look at each of these dynamics and the steps we are taking to address them. First, we continue to face elevated input cost inflation, especially in the areas of energy, transportation, packaging, wheat, dairy, and edible oils. To offset these challenges, we recently announced further pricing actions across key markets and continue to do appropriate action to hedge our commodity costs along with ongoing productivity and cost reduction initiatives. Second, we continue to manage through volatility in the supply chain, especially in the United States, due to labor shortages at third parties as well as a continuing gap in demand and supply of trucking capacity containers. Although we do have more work to do, we are making progress against our plans to unlock manufacturing warehouse capacity, improve service levels, and implement new measures to support employee retention. Third, we are working through the impact of the strengthening U.S. dollars, particularly against the US dollar and the British pound, but focusing on what we can control. This includes mitigating our translation exposure through currency hedges and net investment hedges. Delivering real-dollar earnings is an ongoing focus, and though we may see some significant currency gains in the short term, we have delivered robust real-dollar earnings growth over the past several years. Turning to our categories and the consumer on page 8. Our annual state of snacking survey shows that consumers increasingly prefer snacking over traditional meals. And because snacking plays such an important role in consumers' lives, our core categories of chocolate and biscuits historically have shown resilience to economic downturns and pricing actions. This trend continues to play out around the world, despite an overall drop in consumer confidence. While developed biscuit consumers express growing frustration with rising prices for a broad range of goods and services, they continue to perceive chocolate and biscuits as affordable indulgences and an important pick-me-up. In fact, almost 40% of UK shoppers say that chocolate is a necessity and remains one of the best value snack products. Due to enduring consumer loyalty, category volume growth, and penetration is holding up well in most of our key developers. Elasticities have nudged up slightly, but remain low compared to historical benchmarks. Private label is either flat or down in the vast majority of our markets, and shoppers say they are much less likely to switch to private label in chocolate and biscuits compared to other categories. Meantime, in emerging markets, consumer confidence remains relatively strong, recovering to almost pre-COVID levels, and our core category shows solid volume and penetration growth despite price increases. Compared to developed markets, emerging market consumers are less likely to reduce overall consumption of our categories or switch trends when faced with price increases. Instead, they are more likely to switch stores to find deals on their favorite brands or look for different sizes. Overall, we remain confident that the strength of our beloved and trusted brands will continue to help us navigate inflationary periods like the one we are experiencing today. Moving to our efforts around portfolio reshaping on slide 9, I'd like to share a bit more color on our recently announced agreement to acquire Cliff Bar. Cliff is a leader in high-growth, well-being snack bars. The company's on-trend brands, including Cliff, Luna, and Cliff Kids, are great additions to our global snacking portfolio, and they are differentiated from each other. Each of these brands is strong and healthy, and has very high effectiveness. advocacy, and loyalty. Cliff also enjoys high brand loyalty among the 18 to 24 age group. The brand also performs well on key taste purchasing criteria, a critical differentiation across age groups in a category where many products don't perform so well. Cliff is also widely recognized as a leader in well-being and sustainable snacking. The company's purpose and culture are well aligned with our purpose of empowering people to snack right. We look forward to working with the passionate, dedicated Cliff team to advance our shared goals. On slide 10, you can see that we have moved from a small bar business in 2018 to about $300 million last year with the addition of Perfect Snacks and Grenade and to a $1 billion-plus global snack bar platform factoring Cliff. This gives us an attractive position in a 60 million market with revenues roughly split between US and international. It has a significant 700 million plus presence in the US protein and energy space, which is expected to continue to grow well over the coming years as a diverse range of consumers increasingly count snack bars as meal replacements, energy, or a better way Slide 11 shows that the Clif Bar acquisition offers an opportunity for us to build business through our marketing expertise, operational excellence, and financial discipline to create significant value. There are clear and substantial cost synergies, which include leveraging our experience with logistics and warehousing, reducing waste in existing plants, and synergies in marketing and advertising to optimize ANC spend. In terms of growth, we see substantial opportunities to increase household penetration and distribution in alternatives and e-commerce, as well as existing outlets. There is also an opportunity to unlock growth through revenue growth management and enhanced in-store excellence. And beyond the U.S., there are clear opportunities to drive international growth. We are excited about the announcement to acquire the Cliff business and the top and bottom line growth opportunities that lie ahead. We also see material upside to the returns versus our low cost of capital. Moving to slide 12. This is just the latest example of our continuing efforts to reshape our portfolio through strategic M&A that increases our exposure to incremental, fast-growing snacking segments. Since we announced our strategy in 2018, we have completed or announced nine acquisitions that strengthen and complement our portfolio and fill key gaps, adding more than 2.8 billion in annual revenues and averaging growth in the high single digits. So, for 2022, in addition to announcing the Cliff transaction, we have closed and integrated our acquisition of Chipita, a high-growth European leader in croissants and baked snacks, and announced an agreement via Ricolino Mexico's leading company, Popimbo. These strategic acquisitions will complement and build on our substantial M&A progress in 2021, which brought us Grenada, a leading UK performance nutrition company, Gourmet Foods, a leading Australian premium biscuit and cracker company, and You, a well-being snacking company. These acquisitions have been regional in nature, It can largely be managed by local teams. This includes the recent Chipita acquisition, which we successfully and rapidly created at the end of Q2. We are confident that executing our strong innovation playbook will allow us to drive sustained growth, accretive to our algorithm, across the portfolio. With that, I will hand over to Luca for more details on our financials.
spk02: Thank you, Dirk, and good afternoon. Our second quarter performance was once again strong, with above-expectations outcomes across all P&L lines in cash. We delivered revenue growth of plus 10%, with five points coming from volume mix, showing that our long-term approach to supporting our brands and investing in capabilities to exploit our long-run wave of opportunities is paying off. American markets continued to show significant strength, posting an increase of more than 22%, with great momentum across all our major business units. Importantly, volume mix drove more than 10 points of this. Development market grew plus 8.1% for the second quarter, with strength in both Europe and North America, as demand trends were throughout the quarter. Volume mix was also positive in developed markets, with approximately four points of volume in Europe, while U.S. volume was slightly negative, given supply chain constraints. You can see our portfolio performance on slide 15. Chocolate and biscuits continued to exhibit strong endurability as supply chain constraints. Additionally, gum and candy continued to improve, as global mobility increases coming out of the pandemic. Biscuits grew 10.4% for the quarter, with nearly two points coming from volume mix. Emerging markets grew strong double-digit, while developed markets increased high single-digit. Brands that delivered strong increases include Oreo, Chips Ahoy, Ritz, Louie's. Chocolate grew more than 30%, with increases in both developed and emerging markets. including digit growth in Europe. Chocolate was driven by robust volume growth of plus 9%, as consumers continued to use our brands as an affordable indulgence. Both global and local brands did well, including Cadbury Dairy, Milk, Oberon, Lacquer, and Bees. Chocolate and candy grew nearly 26%. In Mexico, East, North Africa, all delivered strong growth. Now let's review our market share performance in 2016. We held our share in 55% revenue base during the first half with 20 points of headwind due to the service challenges in the US. We expect to see gradual improvement in the half of the year. Our chocolate category performed well with 75% of our revenue base holding or gaining share. Our biscuit category held or gained share in 40% of our revenues, which includes 40 points of headwinds from supply chain constraints in North America. We are already seeing some improvements in service levels and share, but we expect these improvements to be visible as the year progresses. Now on page 17. We delivered high single-digit growth, both in terms of gross and operating profits, Importantly, the overall gross profit dollars delivery allowed us to reinvest in AMC by double digits in the quarter and obtain EBIT gains versus last year. Turning to regional performance on slide 18, Europe grew 10.8% during the quarter, supported by great execution and strong growth across mass grocery, as well as convenience away from home and travel-detailed channels. White dollars for the quarter declined a little over 1%, driven by significant commodity pressure, as well as the impact of the Ukraine war. The implementation of pricing will allow us to return to profit growth. Importantly, we continue to invest in AMC. North America grew 9.2% in Q2, driven by higher pricing in biscuits, as well as double-digit gum and candy growth. Volume mix was down 1% as a result of continued supply chain constraints. North America oil increased by 0.3% during the quarter due to higher pricing that was announced in early May. India grew 13.2% for the quarter with strong volume mix growth of 8.7 points, showing continued momentum in the quarter. India grew almost 30% in the quarter, driven by chocolate and biscuits. China increased high single digits, restrictions in certain cities, and Southeast Asia delivered single-digit growth with double-digit growth in biscuits and chocolate. AMIA increased oil dollars by 7.9% for the quarter, as volume-driven profit was partially offset by commodities, transportation inflation, and reinvestment in ANC. Latin America grew 33% with double-digit volume mix growth. Category strength was broad-based. double-digit increases across the board. Brazil, Mexico, and our Western Andean business unit all posted very strong double-digit increases, similar to last quarter. Dollars in Latin America increased more than 70% for the quarter. These increases were driven by broad-based, volume-driven growth, effective pricing through our GM actions, and high income and candy sales. Now, yes, on slide 19. Q2 EPS grew 9.1% at constant currency. This growth was high quality, as it was primarily driven by top line related operating gains. On page 20, we remain focused on driving attractive top and bottom line performance, including real dollar earnings growth. Clearly, this is a challenging year in terms of exceptional currency headwinds for us and for our industry. By executing against our strategy, and focusing on what we can control, our performance over the past three years has been quite strong, both on an absolute and relative basis. These results are even more impressive if you consider we invested materially in our brands and capabilities. Going forward, we will continue to take actions to drive strong profit dollar growth in constant and real dollar terms. Turning to free cash flow and capital return on slide 21. We delivered first half free cash flow of $1.6 billion during the first half as a result of our strong growth and profitability. We also returned $2.5 billion to shareholders in the form of dividends and share repurchases over the same period. Our ongoing confidence in the business and cash generation enabled us to also announce a 10% increase to our cash dividends. Over the past three years, we have increased our dividends by more than 35%. Before I cover our outlook, I wanted to make a comment on our focus now and going forward as it relates to the current environment. We have and will continue to take action to navigate some of the near-term dynamics around inflation and supply chain constraints. we remain true to our strategy and making the right decisions to drive attractive, profitable, and sustainable growth for the long term. That means we remain committed to significantly investing behind our brands, driving volumes, generating healthy profit-dollar growth, and increasing our market share. We believe this discipline will create lasting and differentiated value for our consumers, customers, and shareholders. We also have a clear focus on strong earnings growth in constant real-terms dollars. We have done this over the past three years, despite a strong dollar. Although this year is shaping up to be more challenging, we believe we are well-positioned to attract real-dollar earnings in the years to come. Now let me provide some color on our revised 2022 outlook on slide 24. Given our strong first half results, we now expect 8% plus top line growth. This revised top line outlook factors in a number of considerations, including the negative full year impact anticipated from the Ukraine war, including revenue losses related to products that previously were manufactured in the country and exported into Europe. This can be quantified in approximately one percentage point of equivalent revenue goal. Second, some elements of customer disruption in Europe. As a result, a second wave of price increases. While we have already been able to agree on most of the planned price increases in Europe, there are still some customers and countries where negotiations are underway. The size of customer disruption is difficult to predict, but we have factored into our guidance a certain impact, which is expected to be more pronounced in the third quarter. Finally, although elasticities have been at low levels through half, we are planning for them to return closer to historical levels in the second half. as consumers continue to navigate inflationary trends and increase pricing across most markets. Our EPS outlook of mid to high-level digits remains unchanged and risk adjusted for additional inflation resulting from the Ukraine war, some customer disruption with respect to pricing and higher levels of elasticity. However, given the strength of our first half results and depending on the outcome of our pricing negotiations in Europe, we might finish the upper part of this range. As far as cost inflation goes, our expectations for low double-digit cost inflation for full year 2022 are confirmed. This earnings outlook also reflects four cents of EPS headwinds from our stop Ukraine operations. Additionally, this outlook reflects our ongoing commitment to investing in our brands and media, not only during this period of elevated pricing, but importantly, to drive long-term growth. Our EPS outlook also now factors in $0.22 related to Forex Impact. $0.12 of this amount has already been in our first results. With respect to free cash flow, our view is unchanged. We continue to expect 3 billion points. With that, let's open the line for questions.
spk01: At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. And our first question comes from Brian Spillane with Bank of America. Your line is open.
spk09: Oh, thank you, Operator. Good afternoon, Dirk and Luca. Two questions for me. The first one is just maybe, Dirk, if you could step back and just give us sort of, you know, the current state of things in the marketplace. And I guess, you know, in the context of having such a strong first half and, you know, maybe, you know – contemplating maybe some deceleration in the second half. Just where do things stand currently, you know, as you kind of look across your various markets?
spk03: Yes. Hello, Brian. Well, I would say overall we feel good about how 22 is panning out for us. As you can see from the presentation, the demand is strong. We have very good volume growth. chocolate and biscuits are showing good growth the categories are holding up the emerging markets are a real growth engine for us and developed markets are solid with good volume in Europe and so overall year to date our profit dollar growth is good double digit and free cash flow is also strong so I think The numbers of the first half are really good. If I then look to the second half, we feel good about the second half. If I go a little bit about what's going to happen here, I think we will see some softening of consumer confidence, particularly in developed markets, I would say. But I do expect our categories to remain solid, probably flat to small growth in volume. and then, of course, the effect of pricing. And I think within that, our brands are very strong and have a good connection to the consumer. We will have ongoing conversations with our customers about price increases, and we will try to drive a value equation there. I think together we can probably find a way to keep our categories going at a very good rate and continue create the necessary value. I think competition will be about the same. Maybe a difference between those that will invest and those that won't. And then from a pricing perspective, I can, of course, not comment on the specifics, but more pricing has to happen. And we execute very carefully by market. but it is something that still is in the pipeline. Most of it has been announced, and we're now in the discussions and implementation of it. Elasticity, as you saw, is low, but we expect an uptick, and we've planned, in fact, for the second half of the year, normal elasticity that might pan out that way or not. At this moment, it would look it wouldn't, but we thought it would be a more careful planning stance. And then From a cost perspective, yes, some commodities are pulling back, but we do expect the near-term inflation to remain high. So I would say that our stance for the second half is positive, but careful, because we might see a more pronounced consumer reaction. We might have more difficulties getting pricing implemented. But overall, I think what's unique about us is that we are clearly in a virtuous cycle here. We are investing quite strongly, as you could see. That is leading to strong volume growth with some good pricing on top. Our gross profit growth is good, which allows us to make those investments. And then that is then leading to a good bottom line. We think that virtuous cycle will continue. but there might be here and there more difficulties than we've had in the first half. But overall, I think we feel very good about 22.
spk09: Thanks, Dirk. And if I could follow up on just specifically in Europe, you know, the prepared marks you made, there were some comments about, you know, some caution around trying to push some price increases through. We know that we still have the conflict in the Ukraine and the impact on Russia. So maybe if we talk a little bit about just, is Europe kind of more of a concern area for you? And Luca, if you could add, the margins were pretty soft in Europe in the quarter. Is that something we expect over the back half of the year? Thank you.
spk03: Yeah. Again, Europe, I'll comment first on what we see with our business and the consumer in Europe, and then Luca can talk about the margins. I mean, Europe was strong from a top-line perspective, I'll hand it over to Luca for the margins afterwards. The business continues to perform well. Our core categories are robust. Penetration is flat. We don't necessarily see consumers walking away from our categories or down trading so far. What we see is that consumers continue to prioritize grocery spending. They're spending less on other categories, but not on grocery. private label is not particularly increasing. There is really little evidence that that is happening. What we do see is that consumers are switching more to discounters. So that's a little bit the overall situation. So far, so good, I would say. Nothing major happening from a consumer perspective. Going forward, yes, we are probably a little bit more concerned about Europe because we still have some pricing to implement of the second pricing round in Europe. About 65% is now agreed, still 35% under discussion. I think we will get there, but then the consumer will be confronted with that extra pricing and we will see what the reaction is going to be there. So I would say we're feeling good so far, but we are, of all the regions around the world, probably more concerned about what's going to happen in the second half in Europe. Luca?
spk02: Yeah, so Brian, a couple of things just to give you a little color. When actually I look at the GP dollar line for Europe, it was up year on year, even if marginally, but clearly the material revenue and volume didn't translate proportionally into the appropriate gross margin and that is because, quite honestly, we have been a little bit delayed in terms of implementing pricing as compared to when commodity costs kicked in. So I want to reassure you that as we implement these pricing actions, and you might still see margins under pressure in Q3 because of potential customer disruption, but as we look back and as these things will be behind us, margins in Europe will be restored. The other one that is important for us to notice is that ANC was up meaningfully in the quarter in Europe, because obviously ahead of price increases, we want to keep consumer engaged. So the simple straight answer is yes, margin was pressured. As we implement pricing, the situation should get back to normal, and importantly, we continue investing. And that is one of the reasons why, actually, despite gross profit dollar being up year on year, OI margin or why OI dollars was down in the quarter.
spk09: All right. Thanks, gentlemen. I'll pass it on.
spk02: Thank you, Brian.
spk01: Thank you. Our next question will come from Andrew Lazar with Barclays. Your line is open.
spk07: Great. Thanks very much. You know, you raised your fully organic outlook, growth outlook meaningfully, but kept obviously the mid to high single digit constant currency EPS growth guidance. What would be preventing the top line strength from flowing through to profitability more significantly? Or, you know, is there perhaps an element of conservatism built in the model? It certainly seems that way from some of your previous comments, but just want to make sure there's nothing else or discreet, you know, that's preventing that flow through that I'm not aware of.
spk02: Yeah, no, I think it's a very good question. Thank you, Andrew. I'll give you a little bit of color around how the P&L came together in our mind in terms of giving you guidance. We continue and I personally continue to feel very confident about 2022 being a very strong year. And that is not only in terms of top line, but also in terms of bottom line. And particularly cash flow, you might have noticed 1.6 billion in the first half. It is one of the strongest numbers we have ever posted. It's not the strongest number. Chocolate and biscuits, we are very happy. They are doing very well. I mean, I'm impressed with the volume mix that we saw in the first half. And as I said, while we kept on investing in the business, you see that our bottom lines and cash flow continue to be strong. The 8% plus top-line guidance reflects that confidence, and when you consider that it includes one point for the Ukraine crisis, a potential and, quite frankly, as I said, difficult to estimate impact from customer reaction, as well as a more normal level of elasticity, you understand really that the business has an underlying momentum that is quite good, and we are confident. in the continuation of those trends. On the profit side, look, I said it the last time we talked, I said we might be cautious and we continue to be cautious, but quite frankly, we are now in a much better position than we were the last quarter to really see line of sight to high single-digit EPS at this point. I just wanted to be a little bit conservative because Clearly, customer disruption is difficult to predict, and then elasticities that are above what we see today can play a role as well. So I would like to say that in case of elasticities that are more benign and a more benign customer reaction than the one we have planned, certainly we're going to be within the high single-digit remit. I also would like to make a point which might be overlooked in all these numbers is, and it is the fact that we continue to observe very good cost discipline in the company. You might be sidetracked by looking at the SG&A line being up year on year, but reality is overheads are held under control and the line that is increasing by more than 13% is our ANC support to the business.
spk07: Great. Thank you for that. And then just briefly, Dirk, thanks for the details on Cliff. You know, some investors certainly still question the greater foray into the bar category. And as recently announced with Cliff, it's perceived as a fairly crowded space and one maybe where it can be tougher to sort of differentiate I guess what underpins your confidence in being able to drive the profitability of that cliff business meaningfully over the next several years such that there is a compelling ROI on the transaction? Thanks so much.
spk03: Thanks, Andrew. Well, we believe that the category is interesting and it has a slowdown as it relates to the COVID because it's a very heavily linked to mobility, but clearly the category is coming back in the recent months. And Cliff, within that category, is a very strong position. It has been for several years the fastest growing in that bar market. We would say that the brand is very strong from our perspective across all age groups. It has organic ingredients. It has great taste. When we look at the details, we believe that there is a big opportunity to expand distribution in existing and alternative channels, but also improve the quality of the distribution of where CLIF is present. We also think we can optimize ANC as well as their cost of goods and their SG&A. We also think that working with them, we can work on RGM and PPA and also make a difference there. We think that the transaction price was a fair premium for a very scarce high-growth quality asset in North America, so we feel good about the value that we're getting there. I would say the profitability of last year for Cliff is not representative. As I said, we have a significant opportunity to optimize overheads, implement an RGM strategy. They've been experiencing supply chain disruption. And we're already seeing in the first two quarters of this year a much improved profitability for the business. So we feel that the business is completely coming back to normal. and then we can add on the many synergies that we see from our side. So the earn out is another factor probably that's important. We did see the possibility to add a significant earn out if we would go with a substantial top line acceleration and margin expansion. So we believe that As we would enter into that acceleration, our returns would even go up. And so we hope that we will see that sort of growth that we have been planning for. Thanks so much. Okay. Thanks, Andrew. Sure.
spk01: Thank you. Our next question will come from Chris Groh with Steeple. Your line is open.
spk04: Thank you. Good evening. I just had a question for you, if I could, around this quarter with this accelerating rate of volume growth in relation to accelerating pricing, which is obviously very encouraging. I wonder if you could discuss that broadly and what you think drove that incremental volume as the pricing went higher. But then also, with that stronger volume growth should come better fixed cost leverage. And with the gross margin being down a little bit sequentially, I realize that pricing did not quite keep up with inflation. But just understand how that fixed cost leveraging might have helped the gross margin of the quarter or may help it going forward?
spk02: Look, we are very happy with the volume growth and the revenue progression. There is an element of clearly some of the business that were impacted during COVID coming back. But reality is the underlying performance of both Biscuit and Biscuit chocolate, it's just great. I can't find another word really to qualify it. As you look at the profit, the volume leverage is in there. The point is, particularly in the case of Europe, as you look at the profitability number, there is a lag between commodities hitting the P&L and pricing being implemented. And you realize that Maybe in Europe it is more challenging than in other places. In all the rest of the world, we have been much more proactive in terms of pricing. But it is Europe really impacting the overall profitability of the company. Having said that, I still would like to get a couple of points out there. We clearly identified the watermark for our algorithm to work in terms of gross profit dollars to be 4% plus versus last year. I mean, this quarter, we are almost 10%. You look at the profit dollar growth, I think on a year-to-date, we are 11%. You look at the amount of ANC we have put into the P&L. As I said, it is double digit year on year. So when you step back, I think the question would be if we had price earlier in Europe, how good of a T&R would we have? And it would be clearly much, much better. And that I think is what is going to happen going forward if we continue to invest in the business and execute pricing well, because I think there is still, obviously, as Vic said, a few situations where flight pricing needs to be implemented, particularly in Europe. Volume leverage is a critical component of the algorithm, and we will protect it as much as possible, and the benefit is going into the P&L The point, as I said, is there is a lag between pricing and commodity going into the P&L of Europe.
spk04: Okay, thank you for that. And just a quick follow-on. If I think about the second half outlook and a little more cautious view on margins, at least at this point, as you've taken revenue up but kept EPS in place, Is the main item to watch here the consumer's reaction to the pricing? Is it elasticity we should be watching or is the volume performance? Anything else that you would just note that we should watch as an indicator for success for the second half of the year? Thank you.
spk02: Look, the underlying margins is quite good. The inflationary pressure, I would say, is going a little bit up because obviously in Q1 we had a more favorable pipeline of commodities. But besides elasticities, as I said, there is this element of what is the impact of customer disruption. And so that's where we wanted to give you the mid single digit to high single digit range as far as EPS goes. But look, as I said, even in presence of maybe a customer disruption, but with more benign elasticities than those that we have planned that are in line with historical norms, I think we still have a shot at getting to high single-digit DPS.
spk04: Okay, thank you for the time. Thank you, Chris.
spk01: Thank you. Our next question comes from Alexia Howard with Bernstein. Your line is open. Good evening, everyone.
spk03: Hi, Alexia. Hi, Alexia.
spk00: Hi there. Can I ask to begin with, there wasn't much commentary in the prepared remarks about market share trends, which I know were very strong a couple of years ago and probably a down year on year against some tough comps. But I wondered whether you could just make some commentary on that, particularly given what we're seeing in North America, where I think it's down, but maybe because of supply chain constraints. But I'd also be curious about market share trends in other parts of the world as well. Thank you. And I have a quick follow up after that.
spk03: Yes, the answer is relatively straightforward. Apart from some nits here and there, the only area where our market share is down is in the US, and that is driven by the supply chain gradual recovery that we're having. If I look around the world, in AMIA we have very solid gains, in China, in India, both the biscuits we see also gum in China doing extremely well chocolate in South Africa is doing well in Europe we are gaining share mainly driven by France biscuits and UK biscuits and Latin America is is flat here today but they had a major increase last year but also their biscuits are gaining share And the Easter period has been particularly strong for us, so we've gained a significant share there. It was our strongest Easter ever. We will have some negative impact in Europe because we were exporting to the European markets from our Ukraine factories, and so that will have an effect. We're working on alternative sourcing, but until the end of the year, we will have some disruption from that. Now, if I look to the U.S., So the share that we're losing there is purely because of supply chain constraints, and it's on four local brands, Nila, Nutterberg, Premium, and Belvita. Our supply chain service levels and the performance of our lines are gradually improving, and so we are expecting to see some share improvement in North America in the second half of the year. And overall, I would say longer term, we feel very good about continued share gains because of the amount of brand investments we're doing, the ROI we're getting on those. We are also driving share because of distribution gains in places like China, India, Southeast Asia. And we also have good gains coming from our innovation. So if you would be able to discard the U.S. situation, I think you would be able to see a very good situation in the rest of the world.
spk00: Great. Thank you very much. And just a quick follow-up. Have you disclosed how you're planning to finance the Clif Bar acquisition, whether that's out of debt, cash on hand, or any other measures?
spk02: Yeah, we have... released i think a couple of weeks back uh an 8k where we have uh secure a little bit of additional uh term loan and clearly that has to uh function as a bridge to the divestiture of gum he developed market and holds worldwide uh to be able to deploy those funds towards the acquisition of uh of cliff so that's the idea uh and it applies the same uh to um Ricolino. Now, there are still other things that might be in play. As you know, we have multiple levels of flexibility within the balance sheet with coffee, with divestitures, etc. I think at this point in time, though, I still believe that the $2 billion of share buybacks is secure for the year, so I'm not sure we will go there to fund the acquisitions.
spk00: Great. Thank you very much. I'll pass it on.
spk02: Thank you, Alexia.
spk01: Thank you. Our next question comes from David Palmer with Evercore ISI. Your line is open.
spk05: Thanks. On Europe, you mentioned organic sales and volume trends are remaining strong, and you showed that. Pretty lousy consumer confidence numbers over there, though, and so it does seem to be maybe even worse than the U.S., a period of some data looking worse than others. But are you seeing any countries or categories where price elasticity is picking up and you're seeing some trade down? And is that in any part some of the resistance you're picking up from retailer customers on the latest round of price increases?
spk03: Well, first I would say that our categories, biscuits and chocolate, are normally quite resilient categories. in these circumstances. We've seen it during COVID, but we've also seen it in 2008 and in previous recessions because it's a small indulgence that consumers find difficult to forget or to leave behind. And then the presence of private label is relatively limited in our categories. That might be at the start of it. That might be one of the reasons why our categories and our performance continues to look very strong. If you then look at consumer confidence, I think we do see a softening, and consumers clearly talk about the inflation, the interest rates, the threat of recession. We don't see that in emerging markets, but the question, of course, was about developed markets. there is no drag on volumes, uh, yet, but if you go around the markets in Europe, um, things are different sometimes. So you, for instance, see a very strong French biscuit market. Um, but you, you see chocolate in Germany and UK, uh, affected. Um, and sometimes that has to see with seasonality and, and things like that. They go with last year, but, but overall, I would say from, um, um, consumer consumption perspective, it's a mixed bag. But overall, it remains relatively mitigated, the effect. The elasticities are slightly up versus Q1, but they are still below the historical benchmark. We do expect higher levels, as I explained in years to go, but it's still nothing that is as high as it used to be before. So, for instance, if I look at UK chocolate, that's probably where we see the highest elasticity so far, but it's declining the elasticity, and we are now about 10% below the 2021 levels as it relates to elasticity. Now, again, we have to see higher price increases in Europe for the second half, so we will see what happens there. But so far, there is really nothing from a penetration standpoint, from switching to private label, getting out of the category. We don't see anything that is of a major concern, but that doesn't mean it's going to remain like that.
spk05: And you mentioned, thanks for that, and you mentioned ANC increasing double digits so far this year. Where are you most leaning in with that spend?
spk03: Well, the one region where we are not spending more than last year is in North America so far because of our supply chain disruption, and it didn't make sense. We first have to improve our customer service. But then in the rest of the world, I would say it's about equally split. There are some markets where we particularly want to focus on the growth that we see ahead of us, so there's a slight disruption here and there for higher investment, but overall I would say it's across the board that we are investing in biscuits and chocolates mainly.
spk02: Thank you. Thank you.
spk01: Thank you. Our last question will come from Jason English with Goldman Sachs. Your line is open.
spk06: Hey, folks. Thanks for squeezing me in. Hi, Jason. Hey, guys. So, Dirk, I believe it was you in prepared comments, or maybe it was in response to a question. I forget. But you referenced an outlook for your categories to kind of maintain maybe flat, modest volume growth and then price on top of it through the back half of the year. Yet your guidance implies that you expect your own volume to be down sort of low to mid-single digits in the back half, right? And I was hoping you could unpack that for us. Are there specific things that you're aware of or that we should be aware of that will be headwinds? Or, I guess to pile on the notion of conservatism, are you just sort of prudently assuming that things get worse because the environment's really choppy?
spk02: Hey, Jason, maybe Dirk will comment on the category themselves. In terms of the guidance, as I said, when you strip out the impact of the Ukrainian war, which is one point, and it is more pronounced in the second half. When you strip out the higher elasticities we are planning for, which arguably might be on the cautious side. And third, when you strip out the impact of the customer disruption Pretty much the underlying trends of the first half are the same as of the second half. So I want to reassure you that in terms of slowdown, as you look at some of the numbers for chocolate and biscuits, as you look at emerging markets growing in the quarter 22%, we are not assuming a material slowdown into the second part of the year. It is these three elements that I spelled out in the prepared remarks and also in some of the answers I gave. that impact the rest of the year. Look, the eight plus, the plus is there for one reason, which is we might end up doing better than that. And I believe it's there.
spk03: Yeah, from the category perspective, it was correct what you were saying. We thought that... what we expect to see is relatively high pricing, so probably in the 8% to 10% range, maybe even double-digit pricing, and that would be accompanied by flat to maybe a 1% volume growth. Now, you have to keep into account that in previous years, the category growth in volume was around 2%, and then add on top another 2% of pricing in the past. So we would not be that far away from the volume growth that we've been seeing in the past, maybe slightly down. So that's our estimate for the time being for the second half.
spk06: Got it. That's really helpful. Thanks a lot, guys, and congrats on a good quarter. Thank you.
spk01: Thank you. I would now like to turn the call back over to our speakers for any additional or closing remarks.
spk03: Well, thank you. Happy to have been able to inform you about a great first half of the year. Obviously, more to come, but thank you for your interest in the company and looking forward to talk to you in the coming weeks.
spk02: Thank you, everyone.
spk01: Thank you, ladies and gentlemen. This does conclude today's call and we appreciate your participation. You may disconnect at any time.
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