Mondelez International, Inc.

Q1 2023 Earnings Conference Call

4/27/2023

spk04: Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good day and welcome to the Mondelez International First Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and a question and answer session. In order to ask a question, please press the star key followed by the number 1 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.
spk09: Good afternoon, and thank you for joining us. With me today are Dirk Vandeput, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our Q1 2023 earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, followed by a review of our financial results and outlook by LUCA. we will close with Q&A. I'll now turn the call over to Dirk.
spk01: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. I'm pleased to share that we are off to a record start in 2023 with very strong double-digit top-line growth in the first quarter, driven by effective pricing and ongoing volume growth. We continue to execute on our long-term strategy and we see robust momentum across geographies and categories. We delivered strong performance in both emerging and developed markets, and we successfully implemented circa 80% of our price increases in Europe. Our robust profit dollar growth was driven by volume leverage, cost discipline, and pricing to offset cost inflation. Our strategic decision to focus our portfolio on the attractive categories of chocolate, biscuits and baked snacks continues to bear fruit with consumers gravitating to those categories. We continue to invest in our brands, in our capabilities and our portfolio reshaping initiatives to accelerate and compound growth on both the top and bottom lines. We are confident that the strength of our brands, our proven strategy our continued investment, and especially our talented people position as well to deliver another strong year. Based on the strength of these Q1 results and our latest view across businesses, we are raising our revenue and adjusted earnings outlook to 10% plus for the year. Turning to slide five, you can see that the first quarter showed continued momentum across our entire business. Volume mix for the quarter was more than 3 percentage points, on pace with recent performance, demonstrating the continued strength and resiliency of our beloved brands and categories, even in an inflationary environment. We delivered organic net revenue growth of 1.5 billion versus prior year. At 19.4% growth, we delivered our best quarter ever, significantly ahead of our already strong 12% in full year 2022. We also delivered adjusted gross profit dollar growth of a half billion dollars. Again, we're well ahead of last year's pace with 18.2% growth. We're proud of our team's continued focus and agility, which enable us to continue investing to drive further growth acceleration with an ANC increase of 19% for the quarter. These results translated into strong adjusted OI growth of close to $300 million, up nearly 21% and again well ahead of last year's pace. We remain confident that our virtuous cycle of strong gross profit dollar growth, fueling local first commercial execution, increasing investment in our iconic brands, empowered by winning culture, will continue to consistently deliver attractive growth. On slide six, a few examples of our brand strategy in action. We continue to invest in our core categories of chocolate, biscuits, and baked snacks with strong creative assets, digital personalization at scale, new product launches, and great in-store execution. All this continues to strengthen our already strong brand loyalty. It is clear that we're playing in the right categories. With attractive growth in volume and dollars, combined with solid profitability characteristics. There is also significant headroom in both penetration and per capita consumption in developed and developing markets. We continue to expand the breadth and reach of our chocolate leadership in the attractive and growing Latin America region. For example, we recently launched our chocolate brand Milka into Colombia. Additionally, we launched two Milka ice cream products in Argentina in association with Froneri. We're excited about these opportunities to explore a new segment and reach more consumers while expanding one of our most iconic brands into a new consumption occasion. We hit another milestone in Binda Biscuits category as Chips Ahoy, a $1 billion brand, celebrates its 60th birthday. Our fifth largest brand globally, Chips Ahoy has delivered almost double-digit revenue growth annually since 2018, yielding positive results from our increased ANC spend during that time period. The brand's current key markets are the United States and China, where the business is on a $200 million run rate. But Chips Ahoy also has a sizable presence in Canada, Latin America, and Southeast Asia. We have exciting plans to further expand this franchise as we grow our leadership in both Core Biscuits and new Choco Bakery innovations around the world. Oreo continues to show strong momentum across markets as consumers continue to demonstrate that this iconic brand is truly the world's favorite cookie. Giving Go is a success story in our baked snacks line It grew strong double digits in Q1, driven by solid pricing execution, expansion into adjacency such as mini donuts, and strong category demand. These are just a few examples of our team's ongoing focus on delivering our growth and acceleration strategy as we continue to reinvest in and drive our very powerful brands. Now let's take a look at our chocolate strategy on slide seven. Tablets remain the centerpiece of our chocolate franchise. Mondelez accounts for more than one-third of this segment, more than three times the size of the number two player, and we continue to lead this segment year after year. 2023 is off to a very strong start, aided by the recent launch of our renovated Milka formulation, the creamiest, most tender Milka ever. combined with some strong local jewels. Our tablets business is up nearly half a point in market share, with particularly strong growth in Australia, Canada, Germany, and Brazil. We're also performing well in the incremental segments of seasonal and gifting chocolate products. We delivered a record selling for the Easter season across markets, with Milka celebrating its first ever Easter in Chile, Our Cadbury team executed another successful virtual Easter egg hunt, reaching more than 300,000 people in the United Kingdom, Ireland, and South Africa, making our seasonal products even more iconic. We also are growing in the premium chocolate space. For example, Toblerone volume is up more than 15% in Q1, fueled by its relaunch with updated on-trend positioning. We are further strengthening the Toblerone portfolio with additional offerings, including per liens and personalized gifting. Switching to slide 8. Solid execution against our integration playbook is delivering a strong start to the year for our recently acquired businesses. We are pleased that Cliff in Q1 posted double-digit revenue growth and grew profitability by more than 1,000 basis points. We're making strong operational improvements, focusing on enhancing service levels and improving supply chain efficiencies, and we successfully implemented two rounds of pricing. Additionally, we recently announced the consolidation of creative and advertising agencies under a single partner, which will accelerate productivity in our media spend while continuing to strengthen brand equity and loyalty. Similarly, our Ricolino business continues to demonstrate strong momentum in the fast-growing and strategically important Mexican market, and we are making solid progress on integration. Along with our financial performance, I'm pleased to share that we continue to make significant progress in our sustainability strategy. we firmly believe that helping to drive positive change at scale is an integral part of value creation with positive returns for all of our stakeholders. As you can see on slide nine, this quarter we announced the next chapter of Harmony, our European wheat sustainability program. With regenerative agriculture at its heart, this next chapter aims to mitigate climate change and reverse biodiversity losses while investing in research seeking to demonstrate that more sustainable wheat is also better quality meat. Created as the first program of its kind in 2008 with just a handful of farmers, the Harmony Program now collaborates with more than 1300 farmers across seven European countries. Our enhanced program will support these farmers in implementing a stronger charter of more sustainable farming practices, such as further diversifying crop rotation, protecting pollinators and other wildlife, and reducing pesticide use. Our goal is to grow 100% of the weed volume needed for our European biscuit production under our expanded Harmony Regenerative Charter by 2030. This is just one example of the way that we are fully integrating our sustainability agenda within our day-to-day business operations and growth strategy. I'm proud of Team Mondelez's continued progress in helping to make positive impact on critical environmental and social issues, while creating value for shareholders and other stakeholders. With that, I'll turn it over to Luca to share additional insights on our financials.
spk03: Thank you, Dirk, and good afternoon. Q1 was a great start to the year. Broad-based volume, pricing, profit dollar growth, brand investment, earnings, and free cash flow all indicate that our strategy is sound and our focus on execution is paying off. Our model is working well, while meaningful opportunities still exist to further drive our long-term ambitions. For the quarter, revenue growth was plus 19.4 percent with more than three points from volume mix. Emerging markets grew more than 25 percent with strong performance across the overwhelming majority of countries. Four and a half points of this growth were attributable to volume mix. Developed markets grew 15.8 percent in Q1 with across the board strength and more than two points of growth coming from volume mix. To note, the customer disruption in Europe was more benign than we anticipated. Turning to portfolio performance on slide 12, chocolate, biscuits, gum, and candy all posted robust double-digit increases in Q1. Biscuits grew plus 16.9% with positive volume mix, despite substantial price increases. Oreo, Ritz, Chips Ahoy, Give and Go, and Club Social were among brands that delivered double-digit growth. Albeit not contributing to organic growth, Cliff posted good growth versus last year, too. Chocolate grew more than 18%, with significant growth across both developed and emerging markets. Volume was positive, despite some customer disruptions in Europe, albeit lower than anticipated. Cadbury dairy milk, Milka, Lacta, and Toblerone all delivered robust growth, and we had a record Easter Celine that, based on preliminary data, also resulted in record high sellout. Gum and candy grew 35% with robust growth across all of our key markets. Now let's review market share performance on slide 13. We held our game share in 60% of our revenue base, which includes 10 points of headwinds coming from EU customer disruption. The U.S. continues to make service-level improvements, ending Q1 with good on-shelf availability and case field rates, resulting in share being flat to last year. Given stabilization of the supply chain, we feel confident that share will continue to improve during the year in the U.S. Turning to page 14, we believe a strong double-digit to high-dollar growth, driven by a gross profit increase of more than $540 million. These results enable us to continue to significantly fund our business for future growth while also providing strong earnings and cash flow. Moving to regional results on slide 15, we delivered double-digit revenue growth and posted volume mix increases in all regions. This growth, fueled by pricing and volume leverage, drove robust UI dollar growth across all regions. Europe grew plus 18.9%. with high single digital high growth. We have made progress in lending expected pricing increases with circa 80% of our customers, and we lowered disruption than we anticipated. We are still planning for some disruption in Q2, which has been factored into our revised outlook, as the remaining 20% of our customer base is not done yet. Consumer's confidence has stabilized in much of the region, with many key countries trending back to spring 2022 levels. Elasticities of biscuits and chocolate are overall less negative than we anticipated, including in the UK, where the impact of HFSS is less material than what we had forecasted. Overall, rather than cutting back significantly on size of their basket, consumers are shopping around to find attractive deals, and trading up and down in terms of tax sizes based on their specific needs and consumer occasions. They remain loyal to branded products, particularly in chocolate. Having said that, our focus is now on landing the remaining part of the price increases. North America grew plus 17.3 percent, with a high dollar growth of more than 40 percent, driven by higher pricing, solid volume mix, and strength from our ventures, particularly cliff. We are reassured by the quality of the P&L in the region and by the fact that volume is holding up well, while we still have opportunity of returning market share to steady growth. AMIA grew plus 13.8% with strong volume mix of nearly 6%. OI dollars increased plus 15.6%. India continues to be a key driver of success in the region, and we also have ambitious plans in China that will benefit from a broader reopening after COVID. Latin America grew plus 39%, with a high dollar growth of more than 47%. We are very pleased with the performance in the region, with clear progress made over the last couple of years in terms of execution and ability to drive key brands like Oreo to new heights. Ricolino is off to a strong start, but we have not yet realized the benefit of the full integration that will happen toward the end of the year. Next to EPS on slide 16. EPS grew plus 17.3% in constant currency, or nearly plus 10% at reported dollars, driven primarily by strong operating gains. Turning to slide 17. we generated free cash flow of $900 million in Q1, returning $900 million to shareholders through dividends and share repurchases. A few words on our recent KDP sell-down on page 19. This investment has been highly successful, demonstrating our disciplined and flexible approach to managing our investments and assets over time. Including dividends received and the market value of our remaining stake, This investment has generated a return of approximately 3.3 times our initial investment over a seven-year period. We received approximately $1 billion in net proceeds from the most recent sale, and our remaining stake is now 3.2%. From an accounting perspective, we will no longer account for this under the equity method, but rather recognizing dividends as the only income as of the dividend record date. We will adjust out mark-to-market quarterly re-measurements of the stake in line with the gains that we have been obtained after each sell-down. These adjustments will be recorded in a new P&L line item, which will be below interest expenses. In terms of net EPS impact for 2023, purely on the basis of the different accounting treatment, we expect a headwind of approximately $0.03. I want to reiterate that this is merely accounting driven and not changing the essence of the investment itself. The gain on this sale, which is approximately half a billion dollars, will run through the same account that we have used for past share sales. Finally, albeit a subsequent event to the quarter, you might have noticed that we sold down also some stock for JDEPs. The transaction was equivalent to approximately 400 million euros, through an equal combination of an outright sale and options, at an all-in net discount of 2% to 3% versus the JD stock price at the time of the transaction. Options have a maturity which is about six months. Both transactions put us in a good spot in terms of our leverage and that profile, and together with the expected proceeds of developed market gum, pretty much balanced the outflows related to the acquisition of Cliff and Ricolino. Turn into our outlook on page 20. Given the strength of our Q1 results and the overall operating environment across our business, we are raising our three-year outlook for revenue growth and EPS. We now expect top-line growth of 10% plus versus our original outlook of 5% to 7%. EPS growth is expected to be 10% plus versus our previous outlook of high single digit growth. In terms of the assumptions, inflation is still expected to increase double digit for 2023, driven by elevated cost in packaging, energy, ingredients, and labor, while lapping favorable hedges in 2022. In terms of interest expenses, we now expect $400 million for the year, given recent coffee transactions. We now expect $0.09 of EPS of headwinds related to Forex Impact for the year, versus $0.04 in our previous outlook. The outlook revision reflects our increased confidence in another exceptionally strong year. given the resilience of consumer consumption in our categories, more benign elasticities than we planned, and shared dynamics enough too, as well as lower actual disruption and better environment in Europe. Having said that, we might have some more disruption for the remaining pricing, which will potentially affect Q2. Finally, continuous strength in our emerging markets is what supports our improved guidance. This current outlook does not consider a material deterioration of geopolitical environment surrounding some areas of our business. With that, let's open the line for questions.
spk04: Thank you. At this time, if you'd like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue. And we'll take our first question from Andrew Lazar with Barclays.
spk12: Thanks. Good afternoon, everybody. Hi, Andrew. Hi, Andrew. I guess first off, Dirk, I was hoping you could double-click a little bit on the emerging markets performance, which was obviously, you know, dramatically better than I think most had certainly modeled and were expecting. Organic sales were up 25%. And I guess I'm just looking for some color on some key drivers and maybe more importantly, sort of on the sustainability of the performance and how we should think about that as the year progresses.
spk01: Okay. Yeah, so definitely a very strong performance this quarter, but I would say already for several quarters that we have strength in our emerging markets. Emerging markets for us are about 40% of our business, and as you said, 25% growth in Q1. I think it's important also to see that there has been very strong or solid volume growth, around 4%, 4.5%, 5%. So it's not just pricing. If I go a little bit through the markets, India keeps on growing at a very accelerated pace. strong double-digit, no real signs of a slowdown. Our outlook for 2023 remains optimistic, and we have to invest in capacity increases, which we are doing. But as you know, it's a combination of the strength of our Cadbury and Oreo franchises, who are receiving heavy support with strong innovations. and as well a distribution expansion where we still have a runway for several years to go. In China, we also have strong momentum. There we also see good share gains. We have, in the past quarters, been establishing Chips Ahoy as a second biscuits brand after Oreo. Business, as you know, is mainly biscuits and gum. I think with the post-COVID period now in China, we see the confidence of the consumer going up and we're expecting a strong year in China also. Same thing as in India, heavy support in our brands, good innovations, building extra capacity, and still a big upside on increasing our distribution. In Mexico, we now, with the acquisition of Ricolino, have significantly increased our distribution power. So there we will see the distribution of the Mondelez brands increasing significantly in the coming months. We also have double-digit growth in the quarter, and the whole acquisition and integration of Ricolino is on track. Then maybe adding Brazil, Brazil is also double-digit growth. We continue to see strong demand. And we are expanding our distribution also in Brazil. So I would say overall, the key markets in our emerging markets group are doing well. And particularly in Latin America, I would add to that that the whole economic environment is pretty strong. Important to note is that they have delivered and are delivering reported dollar growth in top and bottom line, and that the cash flow that we are generating is also very strong. So the return on our investment in emerging markets is very good. And I would say that we believe that we have a sustainable growth engine that will continue for the foreseeable future. The reasons for that, that we have stepped up in execution in a major way, We now, for several years in a row, have continued heavy reinvestment in our business. We have these distribution opportunities that I've been mentioning, and we keep on going deeper and deeper into distribution, setting up routes and presence, which are having a very good return, and we keep on doing it year after year. And as I said, macroeconomics in Latin America are helping, and then also the GUM program business which during the pandemic suffered is one of the drivers of our growth in Latin America. At this stage, consumer confidence is relatively strong. We have high loyalty in our brand, and private label in emerging markets remains a relatively small challenge. So we continue to be very optimistic for 23 and beyond. We feel that we have plenty of opportunity. We have a lot of headroom for accelerated growth, I would say. The penetration of our categories is very low. The distribution runway in places like China, India, but even in places like Brazil and Mexico are high. And our brands like Oreo, Oreo, for instance, is really exploding in Latin America. But Cadbury in India, Milka that we are now launching throughout Latin America. So we see all this combined gives us the confidence that we'll keep on doing well in our emerging markets.
spk12: Really helpful. Appreciate that rundown. And then just super briefly, Luca, just from a guidance standpoint, you know, it does not seem as though your expectations for the remainder of the year have necessarily changed that much and that the upward guidance revision primarily is based on the better than forecast 1Q results. So I guess my question is maybe how should investors think about the sort of the plus aspect in the revised 10% plus constant currency EPS growth outlook, like the sort of the puts and takes or things to consider there. Thank you.
spk03: Yeah, thank you, Andrew. Clearly, as we move through the year, we will be lapping materially higher quarter than Q1 last year, which is the only one quarter we had with high single digits. I think we moved, obviously, sequentially to higher revenue growth throughout the year. The reality is there might be a scenario there where we exceed the 10% floor that we have guided you to in terms of both revenue and EPS. But I think while I feel quite good on the underlying trends of the business, particularly in emerging markets, the strong momentum is there, and obviously we still have headroom to accelerate to a certain extent. I think I'm very pleased, obviously, with the U.S. and North America, which is on an upward trend, excellent pricing execution, supply chain improving. I think the watch out is a little bit on the European side. Happy with the improved profit in Q1. which is the result of the 80% of the pricing kicking in, but profitability in Europe is still not where it should be. So the remaining 20% of the pricing that is being implemented is important. Unknowns are in relation to this further pricing that is needed, a potentially related disruption, and some macro volatility. But obviously, as anywhere else in the business, we continue to invest. And that coupled with additional pricing that will kick in should result in top of bottom line. So look, I think it is very early for us to guide you to something that is materially better than what we are saying at this point. But if everything plays out, we might have further opportunities. I think the other one I want to hit briefly on is the assumptions that we're making around commodities. We still see double-digit inflation rates into 2023 with obviously energy sugar ingredients causing most of the pressure. A good part of this inflationary pressure, as I reminded this audience a few times, it is due to the favorable coverage we had in 2022. But in general, overall costs are not coming down materially. The most recent spikes in terms of cocoa and sugar prices are offsetting some of the other benefits that we see. I think you might have in the back of your mind percentage margins, too. I said it a few times. We continue to be obsessed with dollar growth and cash, and there might be some pressure in percentage terms. particularly in the next couple of quarters, but sequentially we will be much better throughout the year, and we plan to end clearly the year on a gross margin percentage positivity. But the reality is we prefer driving a strategy that has been proven to be compelling for everyone, and that is about dollar growth. Great.
spk12: Thank you so much for that.
spk03: Thank you, Andrew.
spk04: And we'll take our next question from Ken Goldman with JP Morgan.
spk07: Hey, thank you. I wanted to ask, you know, most companies that we cover, or at least that I cover now, pricing is exceeding their COGS inflation. For you, it's still not a full offset. I think you mentioned that it was only a partial offset to the inflation. So I'm just curious, is there... point this year when you do get pricing ahead of inflation? Is there any way to kind of forecast that? I just want to kind of get a sense of how we think about some of those potential tailwinds ahead from that perspective.
spk03: I think all in all, we are quite pleased with the level of pricing that we have at this point in time. If you look at the three major pricing actions we have taken in places like the U.S., I mean, that is... Something that you see in the P&L with the segment profit growth that we have explained here, which is 40%. Obviously, in that number, there is synergies coming out of the ventures. But in general, we are happy with the level of pricing. The same in emerging markets overall. You look at Latin America, you realize how disciplined we have been with pricing. The model in EMEA is likely different in the sense that volume leverage is absolutely critical in some of these places. And so maybe we have been a little bit less aggressive on pricing than we could have been. But all in all, the P&L is working very well. And I think they're quoted that A&C year-on-year is up almost 20%. And that gives you the understanding of how much we are investing in the business and also thinking ahead. out of a potential inflationary period. Where pricing is not necessarily where it should be at this point in time, it is Europe. We told you 80% has been implemented already with a little disruption compared to what we had anticipated. There is still 20% to go. But I think once you get that 20%, the picture will look quite a bit different. And in fact, Europe is the biggest segment we have. And I don't want to give the impression that we were shy on pricing. Quite the opposite. We have done what was necessary. But obviously, in our case, we want to keep volume leverage. I think looking at the 3% plus volume mix is something that is remarkable in Q1. And that leverage into the P&L and the profit dollar growth that we are showing, I think it is a winning formula, at least for us.
spk00: Great. I'll pass it on. Thank you. Thank you.
spk04: And we'll take our next question from Brian Spillane with Bank of America.
spk10: All right. Thanks, operator. Good afternoon, everyone. Luca, two quick ones for you. One, the clarification. Just with the KDP accounting change, Is the earnings base that we're using for 22 to calculate the EPS growth for 23, is that 289, so six cents below previous, or is it three cents? Because I think on one of the slides it said the net effect was three cents. So I just want to make sure we're using the right 22 base as a starting point, and I have a follow-up.
spk03: Look, the simple answer to that question is we have to take out all the income that that was related to KDP last year, and it was around about, I think, post-tax is $90 million, give or take. We are replacing that with dividends, and the net effect between a dividend payout, which is around about 48% or 50%, depending on the days, And the fact that we stripped out earnings last year in the tune of the $90 million I told you is causing the headwind of $0.03. As we restated the base, the impact was $0.06, but the year-on-year impact due to accounting is really $0.03. Is that clear?
spk10: Yeah, so I guess it's clear the base is $2.89, but as we're adding back, you're capturing $0.03 of that. of that $0.06 hit headwind back in 2023, right? But we're still starting. Our starting point is $2.89 to start the calculations for the forward guide. That's correct. Okay, okay. And then I just had a follow-up, and I think it's a follow-up to Ken's question just now. And just thinking about pricing and percentage margins, In the quarter, I think it was an $81 million hit to operating income from currencies, which was like six of the nine cents for the year. I'm assuming it's a little bit of a bigger hit at the gross profit line. We were thinking somewhere between 90 to 100 basis points, maybe a gross margin. So I guess if we're kind of thinking about margin progression, percentage margins, and gross profit dollars, It seems like this is the worst of it, right? Unless things change this quarter in terms of the FX piece and like one tailwind we should see, assuming other things hold, is just that that drag from foreign exchange should become a lot less severe as we move through, especially the second half. Just want to make sure I'm thinking about that correctly.
spk03: I can tell you that sequentially the gross margin percentage, albeit I don't like talking about it, should improve throughout the year. Reality is today, If I look at gross margin and gross profit dollar growth throughout North America, Latin America, and as I said, a good portion of AMIA, I'm very happy with the numbers I'm seeing. Europe is still impacted by the fact that there is 20% of pricing to go. And as we implement that, the situation should sequentially improve.
spk10: Okay, but the FX drag should, again, assuming things don't change from here, the FX drag should become much less of an impact than it has been.
spk01: Absolutely, it should.
spk10: Okay, all right, cool.
spk01: Thanks. You're welcome. Thank you.
spk04: And we'll take our next question from David Palmer with Evercore ISI.
spk06: Thank you. Strong results in so many areas, but I'd be interested to hear you had to choose in two or three that really drove your increase versus in guidance or upside versus your internal expectations whether those are current trends or maybe just sources of visibility I would imagine what's going on in Europe with retailer and consumer response to pricing is high on the list but I'd be interested to hear what also makes that sort of top three and
spk01: yeah, the top three for me would be, yes, for sure, Europe, where we were expecting a bigger client disruption, and that did not occur in Q1. As Luca said, we're only 80% done with the price increases, and we still have some negotiations going on. We could still see a part of that client disruption in but that has been included in our outlook for the year. But that's certainly significantly better than we had anticipated. The second one that I would mention is the U.S., whereby you see a very solid top line, but the bottom line is probably the strongest increase, driven by, first of all, an improvement in our supply chain, but then also a very strong recovery of Clif Bar's profitability since the acquisition. And we expect that that positive trend for North America will continue. And the third one is probably the ongoing strength in emerging markets. I already went there, but if I compare our emerging markets... sort of growth of 25% that stands for me well above any of our colleagues, and that has been going on for several quarters now. So those would be my top three, I would say, of what's carrying the quarter for us and probably is going to carry the year for us.
spk06: Thank you. That's helpful. I'm wondering to what degree this year and what you're seeing going on maybe internally, not just some of the macros, informs how you view your company and the long-term growth rate of your company. And to some degree, we've had COVID obscure what might have been happening in terms of all the changes that have happened. And of course, you've made plenty of acquisitions that are adding to your long-term growth rate. So does this make you feel more optimistic that the long-term growth rate is heading in the right direction and higher?
spk01: Well, I think the recipe that we have is a strong recipe. I went a little bit, for instance, in emerging markets through the different growth vectors that we have. But the fundamental principle is to make sure that we are well positioned from a pricing perspective, that we continue to invest heavily in our brands, that we drive distribution, install presence, we work RGM. So we seem to have a recipe and a way of working that is really starting to click. So it certainly gives us confidence that we've got something going here that is very strong. What that exactly means going forward, because we are in a very particular period where last year and this year we had to implement significant price increases, and I guess to Our delight, the consumer has not reacted by buying less product. They keep on buying the same or more product. But as we get through those price increases, growth will come down. We will have to see what happens with input costs going forward. So it's difficult to say, but I can certainly say that we are in durable categories. that are doing particularly well in these circumstances, that we are performing well within those categories. So we feel very good about our long-term algorithm. I think we have to wait a little bit to see where things will pan out as we get through these price increases, and that will be the moment to restate our long-term growth algorithm. But so far, I would say very strong, and we feel that we are in line or above our long-term growth algorithm for sure.
spk06: Fair enough. Thank you.
spk04: And we'll take our next question from Alexia Howard with Bernstein.
spk05: Good evening, everyone. Hi, Alexia. Hi, there. So two quick questions. First of all, where are we on the cost synergy recouping for the recent deals that you've done? It seems as though that was quite a strong benefit to profit growth recently, but I'm just wondering how much more there is.
spk03: So let's start with Cliff. We have announced a new organization. Cliff started from a relatively high level of SG&A. We have protected and increased ANC, an area in which we have been able to obtain around about $10 million of synergy a year, given better rates that we have. There is already... cost opportunities coming into the P&L in the area of selling and administration. The new organization is already in place. The next step is really to go and get synergies in the area of COGS. So there is still quite a bit of an opportunity. Just for a reference point, as we acquired this business, the EBIT margin was not great I think today in Q1, particularly given the pricing we have taken, which is the other area where we brought quite a bit of discipline, the margin is just shy of 20%. It's quite a good outcome at this point in time. There is still more to come. We are thinking potentially about leveraging DSD and doing other things. Obviously, the biggest opportunity we see is establishing this brand internationally. That hasn't started yet as a work stream. On Ricolino, we just got the business. We have TSAs in place still with BIMBO. As we implement SAP and as we move towards the end of the year, that's the moment where we will start getting SG&A costs and cost synergies. But reality is the biggest opportunity here is to sell Oreo through the system, and revenue synergy can be very, very material. So there is still more to come on both platforms. And I would say in general, in the other ventures, there is still work to be done, and so potential synergies coming out there too.
spk05: Great. And then just as a quick follow-up, Can you just quantify how much the retailer inventory rebuild benefited North America this quarter, and is there any more to come on that? And I'll pass it on.
spk03: I think there was, like, positivity due to that. But reality is we have been promoting less than optimal, and now that inventory is available, there is opportunity for us to do selected promotions and boost our brands now that pricing is implemented. So it hasn't been material, I would say, and obviously in a context where you see this growth rate, it is minimal. But we still have opportunities to really replenish stock more. And now that we have potentially a little bit of more promotions coming, I think we are in a good position.
spk05: Great. Thank you. I'll pass it on.
spk04: And we'll take our next question from Jason English with Goldman Sachs.
spk02: Hey, good afternoon, folks. Thanks for slotting me in. Hi, Jason. Hey, there. A couple of quick questions, both also sticking on North America for a moment. Great news on the margin progression on cliff. Congrats on that. That's impressive in such a short duration. We had been assuming that it was going to be a margin mixed drag to both Drost margins overall and the segment with a thousand basis points improvement that you've seen so far. Is it still margin dilutive or are you now closer to parity with the segment?
spk03: It is still margin dilutive on the overall segment. But again, as we think about potential opportunities in the year to come, this is another platform that we are going to integrate into SIP in the second part of the year. I'm sure the margins will get better. And pricing has been announced for the last round, but it hasn't kicked in yet. And there is now that we have stock more opportunities to really activate that point of sales, mass stock list as we call them, i.e. the right assortment by store is an area of opportunity that we have. So I'm confident that the margins will look quite close to the U.S.
spk02: business. That's good to hear. And sticking on North America, it seems like supply chain has been this overhang that we've been talking about in North America for year upon year upon year. And maybe I'm exaggerating just because it feels that long. But it's great that you're over the hump and you're seeing improvement. And we're nice to see the sales side of that. How about on the margin side? Clearly, this has been costly to the business. How much of a margin drag have supply chain issues been And how much of a tailwind can that be as you look to sort of rebuild that?
spk01: Well, I would say there's a mix going on with the price increases that we have implemented together with some of the extra costs we had to incur during the pandemic to get the right service and so on. You see, in the recuperation phase, we also promoted less than we were planning because our inventories were low. So it's quite a complex picture to exactly pinpoint how much was due to the disruption since we had to go through all these additional effects. But certainly is the case that the headwinds have moderated quite significantly. You know about the labor markets, the logistic situation. Our external manufacturers network has improved significantly. So a lot of the cost headwinds that we were facing have now eased. That still doesn't mean that the costs have come back. There's been significant inflation. But I would say the resulting effects from our supply chain improvement, that our inventory levels are back to the expected level, service level are reaching 90%. Our on-shelf availability is 96%. We still have some issues in our confectionery brands where the demand is higher than anticipated. And also Cliff Bar, the service levels have fully recuperated. So at this stage, I would say that the cost effects and the top-line effects have largely eased, and we can now start to function normally with higher promotional levels and cost levels that are better. But it's very difficult for us to estimate exactly what it was. But going forward, things we're doing is we are increasing our capacity. We have changed our way of working and our relationship with our external manufacturers. The inventories are rebuilt. We have simplified our portfolio. We've increased our warehousing capacity on top of our manufacturing capacity, and we have implemented labor strategies for attention and an improvement in temporary labor. So I think apart from easing the cost, we've also put in place long-term solutions for our supply chain situation. Difficult to give you the exact number, but hopefully you can feel that we are in a much better spot as it relates to our supply chain in North America. Yeah, for sure.
spk02: Thank you very much. I'll pass it on. Yeah, thank you.
spk04: And we'll take our next question from John Baumgartner with Mizzuro.
spk11: Good afternoon. Thanks for the question. Hi, good afternoon.
spk04: I wanted to ask,
spk11: Yeah, good afternoon. I wanted to ask, Luca, I wanted to ask about profitability in EMEA. You're heavy into reinvestment mode there. You also mentioned the pricing disparities in an earlier question. So I'm curious, at this point, how you're thinking about the point at which vol mix growth relative to reinvestment, and I guess what I also think is pretty strong potential for a creative product mix over time, when that begins to yield leverage and tip the region back to margin expansions. Or is a mid-teens margin just the structural ceiling for EMEA? Thank you.
spk03: I don't think there is a structural ceiling in EMEA. EMEA is quite good in terms of profitability overall. I think when you look very closely to EMEA, there are a set of countries that are, I call them cash machines. The India or the China of the regions run on profit margins that are north of the average of the company. We invest in both businesses, run about 15% of ANC as a percentage of revenue, which is materially higher than the average of the company. And we have cash conversion cycles whereby by growing these companies, not only we get the volume leverage that runs through a very sizable and oil machine, both from my manufacturing standpoint, supply chain and sales, but also on negative cash conversion cycle, the cash throughput is impressive. There are countries where we have a little bit less material scale, the likes of Southeast Asia. There are certain countries in Southeast Asia where the business is still developing, where categories like chocolate are not well established yet, and we are investing to make these categories much bigger for us. And there I think it is a matter of time because the scale and the volume we are adding will get to a point where the P&L will make perfect sense. You might imagine that in these countries we are investing both in terms of price point and support ahead of material expansion that I think it will come. And then obviously you have countries like Australia that are, again, more mature markets where volume grows. And we're happy with Australia overall. But it doesn't grow high single digit or double digit as in other places. And there the evolution of profitability is steady. So as you think about AMIA, very happy with this sizable market that are doing very well. in our emerging market, very happy with Australia. The rest is the untapped opportunity we are looking at, and we have the obligation to invest for future growth and margins. I think it will come.
spk12: Thanks, Luca. Very helpful.
spk00: Thank you, John.
spk04: And we'll take our last question from Michael Lavery with Piper Sandler.
spk08: Thank you. Good afternoon. Hi, Michael. Just wanted to understand, I love like on slide five how clear it is that your ANC spending is almost identical to your sales growth. So clearly your percentage, your spending as a percent of sales is holding about constant. But you get really some operating leverage there just given... the amount of pricing that's driving the top line growth. And so on a per unit basis, you're really coming out ahead. How do you think about managing that going forward? Is it sort of a luxury you want to maintain? Could some of that maybe get adjusted to fall to the bottom line or just help us understand how brand spending might evolve given how that dynamic sets it up?
spk03: Clearly, the 20% might be something that is on the high side. Now, I can tell you one thing. One of the biggest differentiators of this company over the last three years, it has been level of investment, it has been quality of marketing, it has been brand support. We, in the end, sell brands, and it is important that we keep line of sight to that. And I don't think you're going to see consistently a 20% ANC increase. But at this point in time, where we are moving price point, where we are trying to retain and increase our consumer pools, it is important that we use this as an important accelerator of growth for the years to come. And that's what it is at this point in time. When this inflationary cycle is done and things will get more normal, I think what is a big differentiator is the level of volume and the scale businesses are still going to have or not have. In our case, if you look consistently over the last few quarters, we have been growing volume, and there is a correlation between the level of investments we are making, both in terms of marketing and distributions. And so I don't think you're going to see consistently 20%, but reality is that is still a big opportunity for us to get our brand to where they belong, which is higher sales, hopefully quarter after quarter.
spk08: That's great color. Thank you so much.
spk01: Thank you. Thank you. With that, we've come to the end of the call. Obviously a strong quarter. We're looking forward at this stage to a strong year. Thank you for your attendance, and any other questions, please refer to Shep and the IR team, which we can follow up with. Thank you.
spk03: Thank you, everyone.
spk04: That concludes today's teleconference. Thank you for your participation. You may
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