Q2 2022 Mondelez International Inc Earnings Call
Good day and welcome to the <unk> International second quarter 2022 earnings Conference call.
Today's call is scheduled to last about one hour, including remarks by month lease 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 Middle East.
Go ahead Sir.
Good afternoon, and thanks for joining US with me today are Dirk van de put our chairman and CEO and Lucas Herman Miller our CFO .
Earlier today, we sent out our press release and presentation slides, which are available on our website under leaves international Dot Com slash.
During this call we will 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.
Thanks, Chip and thanks to everyone for joining the call today I will start on slide four.
I'm pleased to share that we have delivered a strong first half of the year.
With robust volume growth.
Pricing execution.
It supports raising our full year growth outlook to 8% plus.
Our core chocolate and biscuit business has continued to demonstrate volume and pricing resilience as 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 consumers 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.
Input cost inflation remains challenging.
Although we may see commodity inflation, beginning to ease we expect other costs like wages to show significant inflation.
Our strong track record in seeing.
Having cost efficiency and simplification positions us well to mitigate the impact of these inflationary factors.
At the same time, our consistent results enabled us to maintain our course in driving a virtuous cycle, where strong net revenue and gross profit.
First a continuous reinvest our brand's distribution capabilities.
Yes.
We also continued to make great progress in reshaping our portfolio.
Great example of that is our agreement to acquire Clif 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.
The 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 investments position us well to deliver attractive sustainable growth for the remainder of 2022 and beyond.
Above all pain.
And extremely confident in our people, who continue to demonstrate exceptional passion and dedication to serving our consumers despite ongoing challenges with inflation.
King and periodic.
In cold conditions.
Day in and day out our 80000, plus makers and bakers strives to help people snack right.
With respect and honor our colleagues around the world and we truly believe that the model is a.
Theme 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 nine 7% due to healthy volume growth and pricing actions.
Our ANC investments have increased double digits.
As to gain or hold share across more than half, our revenue base and positioning us well for future periods.
An example of our commitment to brand investment is the renovation of Milka to make this leading chocolate brand most tenders and creamy ever.
This program includes an upgraded based profile premier thick.
And Brent and distinctive packaging.
Celebrating the brand's alpine sold.
This initiative represents our largest chocolate brand through innovation in 25 years.
Illustration of the campaign is featured on our earnings presentation coverage base.
We are supporting the launch with a fully integrated 18 months marketing and advertising support program.
<unk> and <unk> to 'twenty two.
And last we increased operating income by eight 5% for the quarter ended.
And 11, 2% first half, while delivering great free cash flow results.
As you can see on slide six we delivered 10 points of 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.
In late 2018, we launched a new growth plan focused on gross profit dollar growth.
Local first commercial execution.
The virtuous cycle of increasing investments.
And a new approach to allow incentives. We are that this approach will continue to consistently deliver attractive growth.
Importantly, we are also delivering strong volume, which is important to.
It is approved 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.
Elevated input cost inflation.
Especially in the areas of energy transportation packaging, Reed dairy and edible oils.
To offset these challenges, we recently announced further pricing actions across key markets and continue to appropriate action to hedge our commodity costs, along with ongoing productivity and cost reduction initiatives.
Second we.
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 the 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 dollar, particularly against the British pound.
Good thing on what we can control.
This includes mitigating our translation exposure through currency hedges and net investment hedges.
Delivering a threat.
Real dollar earnings is an ongoing focus and Dolby may see some significant currency since 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 eight.
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 resilience to economic downturns and pricing actions.
This trend continues to play out around the world.
Spike in overall drop in consumer confidence.
Well developed with 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 then important pick me up in fact, almost 40% of UK shoppers say that chocolate isn't.
Necessity and remains one of the best value snack products.
Due to during consumer loyalty category volume growth and penetration is holding up well most of our key development.
Now, let's just have nudged up slightly.
But remained 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-19 levels in our core categories show solid volume and penetration growth despite the price increases.
Compared to developed markets emerging market consumers are less likely to reduce overall consumption of our categories or switch when faced with price increases.
Instead, they are more or less 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 will continue to help us navigate inflationary periods like the one today.
Moving to our efforts around portfolio reshape slide nine.
I'd like to share a bit more color on our recently announced agreement to acquire Clif bar.
Cliff is elitist high growth well being snack bars.
Companies on trend brands, including Cliff Luna and Cliff kits.
Through our global snacking portfolio.
And they are differentiated space.
Each of these brands is strong and healthy.
Hi.
Advocacy and loyalty.
Cliff also enjoys high brand loyalty among the 18 to 24 age group the.
The brand also performed well on key dates to syn <unk> or <unk>.
Critical differentiation across age groups in a category, where many products are sold well.
Cliff is also widely recognized as a leader even wellbeing 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's team to advance our 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 in grenade.
And two a $1 billion plus global snack bar platform factoring cliff.
This gives us an attractive position in a $60 10 market with revenues roughly split between U S and international.
As a significant $700 million plus presence in the U S protein and energy space, which.
Which is expected to continue to grow well over the coming years as a diverse range of consumers increasingly snack bars as meal replacements energy or a better way.
Slide 11 shows that the Clif bar acquisition offers an opportunity for us to 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.
And G as in marketing and advertising to optimize ANC spin.
In terms of growth, we see substantial piece to increase household penetration and distribution in alternatives and e-commerce as well as existing outlet.
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 <unk> 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 M&A.
M&A that increases our exposure to incremental fast growing snacking segment.
Since we announced both strategy in 2018.
Pleated or announced nine acquisitions that strengthen and complement our photo fill and fill key gaps, adding more than $2 $8 billion in annual revenues and averaging growth in the high single digits.
So 2022 in addition to announcing the <unk> transaction, we have closed and integrated our acquisition of Chipita, a high growth European leader in cross sells and baked.
And announced an agreement prior Rico Lino, Mexico's leading company will be both.
These strategic acquisitions will complement and built on our substantial M&A progress in 2021, which brought us.
A leading UK performance nutrition company.
We remain food.
A leading Australian premium biscuits, and Cracker company, and you are well being snacking company.
These acquisitions have been regional in nature.
<unk> largely been be managed by local teams.
This includes the recent <unk> acquisition, which we successfully and rapidly.
At the end of Q2.
We are confident that our strong patient 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.
Thank you Dan and good afternoon.
Our second quarter performance was once again strong with above expectations outcomes across all P&L lines cash.
We delivered revenue growth of 2% with five points coming from volume mix showing that long term approach to supporting our Bryan and investing in capabilities exploit our long runway of opportunities is paying off.
Cancel two souls to show significant strength, posting an increase of more than 22% with great momentum across all our major business units importantly.
Importantly, volume mix drove more than 10 points.
Did that uptake pool, plus eight 1% for the second quarter, which plans in both North America as demand changes with <unk>, but.
Volume mix was also positive in developed market with approximately four points of volume in Europe , while you have to most likely negative given supply chain holds trains.
You can see our portfolio performance on slide 15.
Chocolate and biscuits continued to have strong and durability.
Kathy.
Additionally, gum and candy continue to improve as global mobility increase is coming out of deep amendment.
Biscuits grew 10, 4% for the quarter with nearly two points coming from volume mix.
Emerging markets grew strong double digits, while developed markets increased high single digits.
But deliver strong increase this includes Oreo chips to Holly rates.
Yes.
Chocolate grew more than 2% with increases in both developed and emerging markets, including two digit growth in Europe .
It was driven by robust volume growth of plus 9%.
As consumers continue slower brands as an affordable indulgence, both global and local brands well, including top three data.
Overall in <unk>.
And candy grew nearly 26% Max.
In Mexico at least North Africa, all delivered strong growth.
Now, let's review our market share performance in 16.
We had.
In 55% revenue base during the first half.
20 points of headwind due to the service challenges in the U S. We expect to see gradual improvement in the half of the year.
Our chocolate tactically performed well with 75% of our revenue base holding or gaining share.
Our biscuits category had the gain sharing 40% of our revenue.
Fluids 40 points of headwinds from supply chain constraints in North America, we are already seeing some improvements in service level.
And sure, but we expect these.
<unk> will feasible as the year progresses.
Now on page 17.
We delivered high single digit growth both in terms of gross and operating profit.
Importantly, the overall gross profit dollars delivery allows us to reinvest in agency 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 is solid growth across mass grocery as well as <unk>.
So waste from home and probably paid channels.
So that's driven by nearly 6% volume mix.
Why.
<unk> planned a little over 1%.
By significant commodity pressure as well as the impact of the Ukraine.
The implementation of pricing will allow us to return to profit goal Potently, we continue to invest in agency.
North America grew nine 2% in Q2, driven by higher pricing in biscuits, as well as double digit gum and candy goal.
Volume mix was down 1% as a result of continued supply chain savings.
Somatic, Hawaii based by 3% during the quarter due to higher steam that was announced in early.
EMEA grew 13, 2% for the quarter with strong volume mix growth of eight seven volume showing continued momentum.
Yes.
India grew almost 30% in the quarter driven by chocolate and biscuit.
China increased high single digits.
With restrictions in silicones and.
And southeast Asia delivered single digit goal with double digit growth in chocolate.
EMEA increased <unk> dollars by seven 9% for the quarter as volume driven profit was partially offset by commodities and transportation inflation and reinvestment in ANC.
Latin America grew 33% with double digit volume mix call tactically strength was broad based <unk> increases across the board.
Brazil, Mexico, and Western Andean business unit, all posted very strong double digit increases similar to last quarter.
So our dollars in Latin America increased more than 70% for the quarter. These increases were driven by broad based volume.
Effective pricing to our GM actions and Hyatt and can be savings.
Now on Slide 19, Q2, EPS grew nine 1% at constant currency. This growth was high quality as it was primarily driven by topline related operating gains.
On page <unk>.
We remain focused on driving attractive top and bottom line performance.
The 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 two years has been quite strong both on an absolute and relative basis.
These results are even more impressive these people see that 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 those slide 21.
We believe our 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 dividend over.
Over the past three years, we have increased our dividend 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 had 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 that either drive attractive profitable and sustainable growth for the long term.
That means we remain committed to significantly vesting the idea behind our brands driving volumes generating healthy profit dollar growth.
Our market share.
We believe this discipline.
We create lasting and differentiated value for our consumers customers and shareholders.
We also have a clear focus on earnings.
Earnings growth in tungsten <unk>.
We have done these over the past two years, despite the strong dollar.
So this year is shaping up to be more challenging we believe we are well positioned for restaurants.
Earnings in the years to come.
Now let me provide some color on our revised 2020 to outlook on slide 24.
Given our strong first half results, we now expect 8% plus top line goal.
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 tall that previously were manufactured in the country and exported into Europe .
This can be quantified in approximately one percentage points off the equivalent revenue goal.
Second some elements of customer disruption in Europe .
As a result 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 that have countries where negotiations are underway.
The size of customer disruption is difficult to predict we.
We had factored into our guidance a certain impact which is added to be more pronounced in the third quarter.
Finally, although elasticity as I've been at low levels through.
We are planning for them to return closer to historical levels in the second half as consumers continue to know the game internationally clients and increased pricing across most markets.
Our EPS outlook of mid to high single digits is unchanged.
And risk adjust that 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 goals, our expectations for low double digit cost inflation for full year 2022 are confirmed.
This earnings outlook also reflects <unk>.
<unk> bps headwind from our staff Ukraine operations.
Additionally, this outlook reflects our ongoing commitment to investing in our plans to.
C media not only during this period of elevated pricing, but importantly to drive long term goal.
Our EPS outlook also now factors in 'twenty two Seinfeld.
Related to Forex impact.
Science of these amounts.
It's already beginning our first results.
With respect to free cash flow our view is unchanged.
To expect $3 billion.
With that let's open the line for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
And our first question comes from Bryan Spillane with Bank of America. Your line is open.
Thank you operator.
Afternoon, Dirk and Luca too.
Two questions from me. The first one is just maybe if you.
Could step back and just give us sort of the current state of things in the marketplace.
In the context of having such a strong first half and <unk>.
Maybe.
Contemplating maybe some deceleration in the second half.
Things stand currently as you kind of look across.
Your various markets.
Hello, Brian .
Sure.
Well I would say overall, we feel good about how 'twenty two with spanning out for us.
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.
Emerging markets are a real growth engine for us.
And developed markets are solid.
We had good volume in Europe .
And so overall year to date, our profit dollar growth is good.
Double digit free cash flow is also strong so I think the numbers over the first half are really good.
If I then look to the second half, we we feel good about the second half.
If I if I go a little bit about what's 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.
All it.
Robert.
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 van.
<unk> equation, there I think together, we can probably find a way to keep our categories are growing at a very good rate.
And create the necessary value.
I think competition will be about the same.
Maybe a difference between those that invest in those.
<unk>.
And then.
From a pricing perspective, I can of course not.
Comment on specifics, but more pricing has to happen.
Yes.
We executed very carefully by market, but it is something that still is in the pipeline. Most of it has been announced and we are now in the discussions and implementation of it.
Electricity is you saw a slow.
But we expect an uptick every plant in fact for the second half of the year normal elasticity might.
Pan out that way or not at this moment it would look it wouldn't but we thought it would be more careful planning.
And then.
From a cost perspective, yes, some commodities are pulling back, but we do expect a near term inflation to remain high so I would say that our SaaS for the second half is positive, but careful because we might see.
More pronounced consumer reaction.
Half.
More difficulties getting pricing implemented but.
But overall I think.
What's unique about us is that they are clearly in a virtuous cycle here.
We are investing quite strongly as you as you could see.
That is leading to strong volume growth with some some good pricing on top or 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 more difficulties than we've had in the first half.
But overall I think we feel we feel very good about 2002.
Thanks, and if I could follow up on just specifically in Europe .
<unk> remarks, you made some comments about.
Some caution around trying to put some price increases through we know that we'll still have the conflict in the Ukraine and the impact on Russia.
Maybe if you could talk a little bit about just.
Europe kind of more of a concern there 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.
Yes.
Again Europe .
From an <unk>, but 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.
Hand, it over to Luca for the margins afterwards, the business continues to perform well.
Our core categories.
A robust penetration is flat, we don't necessarily see.
Consumers are walking away from our categories are 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 thats a little bit the overall.
Situations. So 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 practice rounds in Europe about 65% is now agreed still 35% under discussion. We think 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 are.
Feeling good so far but we are.
All the regions around the world probably more.
Certainty about what's going to happen in the second half in Europe .
Okay, Yes, so Brian a couple of things.
To give you.
A little color when actually.
At the GP dollars line for Europe .
It goes up even.
Even if marginally, but clearly the material revenue and volume data translate proportionately into.
Appropriate gross margin and that is because.
Because quite honestly, we have been a little bit delayed in terms of implementing pricing.
Compared to when commodity cost kicked in.
So I want to reassure you that.
As we implement these pricing actions you might still see margins under pressure in Q3, because <unk> potential customer disruption, but that's all.
As we look back and as these things will be behind us margins in Europe would be the store. The other one that is important for us to notice is that A&P was up meaningfully in the quarter in Europe , because obviously a high pulp price increases we want to keep consumers engaged so.
The simple answer is yes margin was pressured as we implement pricing the situations.
Get back to normal and importantly, we continue investing in that is one of the reasons why actually despite gross profit dollars being up year on year Oi margin why Oi dollars was down in the quarter.
Alright, Thanks, gentlemen, I'll pass it on.
Thank you Brian .
Thank you.
Our next question will come from Andrew Lazar with Barclays. Your line is open.
Thanks very much.
You raised your full year organic outlook growth outlook meaningfully, but kept obviously the mid to high single digit constant currency EPS growth guidance.
And what would be preventing the topline strained from flowing through to profitability more significantly or is there perhaps an element of conservatism built in our model and it certainly seems that way from some of your previous comments, but just want make sure there's nothing else or discrete.
Preventing that that flow through then I'm not aware of.
Yes, no I think it's.
Good question. Thank you and I'll give you a little bit of color at all how the P&L came together in our mind in terms of giving you guidance.
We continue on that first of all we continue to feel very confident about 2022 being a very strong year and that is not only in terms salt topline, but also in terms of bottom line and particularly cash flow you might've noticed one 6 billion in the first half with each one of the strongest numbers, we have ever close to be no.
The strongest number.
Chocolate and biscuit, where everybody happy they are doing very well.
Im 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'll see that our bottom line and cash flow continued to be strong.
The 8% plus top line guidance reflects that confidence and when you can see that it includes one point.
For the Ukraine crisis a potential.
Quite frankly, as I said, it's difficult to estimate.
Impactful customer reaction.
As well as a more normal level of <unk>.
Understand really that the business has an underlying momentum that these <unk>.
White goods and we are confident in the combination of all those plants on the profit side look I.
The last time, we talked I said, we might be cautious as we can.
We need to be cautious about quite frankly.
We are now in a much better position than we were last four start 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 elasticity is that bar.
Bob what we see today.
Can play at all as well so I would like to say that in case of the cities that are more benign than a more benign customer.
The auction than the one we have planned and certainly we're going to be within the high single digit.
Amy.
I also would like to make a point, which might be overlooking all these numbers.
It is the fact that we continue to observe very good cost.
Leading the company.
Might be sidetracked by looking at the SG&A line being up year on year, but realities.
Overheads are.
On the control and the like.
Align that is increasing by more than 13% with our agents to support the business.
Great. Thank you for that and then just briefly.
Thanks for the details on Cliff some investors certainly still question the greater foray into the bar category.
And as recently announced with Cliff is perceived as a fairly crowded space in 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.
Thanks, Andrew.
Well, we believe that the category is interesting.
<unk>.
Has the slowdown.
As it relates to the Gulf It because it's.
Very heavily linked to mobility, but clearly the category is coming back.
In the recent months.
And.
Within that category is a very strong position.
Yes.
It's Jeff.
It has been for several years, the fastest growing index in that bond markets.
We would say that the brand is.
Very strong from our perspective across all age groups.
It has organic ingredients.
Great taste.
When we look at the details we believe that there is a big opportunity too.
Expand distribution in existing and alternative channels.
But also improve the quality of the distribution of wealth.
<unk> presence.
We also think we can optimize ANC.
Well as their cost of goods and SG&A.
We also think that working with them, we can work on Archie M and PPA.
And also make a difference there.
We think the transaction price was.
But 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 cliffs is not representative.
As I said, we have a significant opportunity optimize overheads implement an RCM strategy, they've been experiencing supply chain disruption.
And we're already seeing in the first two quarters of this year.
Our 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.
The fact that probably that's important.
Did you see the possibility to add a significant if we would go.
With a substantial top line acceleration and margin expansion so.
We believe that.
As we enter into that acceleration our returns with even go up and so we hope that we will see that sort of growth that we have been planning for.
I guess on my legs.
Okay. Thanks Heather.
Sure.
Thank you.
Our next question will come from Chris Growe with Stifel. Your line is open.
Thank you good evening.
I just had a question for you if I could on 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 do 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 it pricing did not quite keep up with inflation, but just to understand how that fixed cost leveraging might've helped the gross margin in the quarter or may help us going forward.
Look we are very happy with that.
Volume growth on the revenue progression there is an element of clearly some of the business that way.
The fact that you didn't call the khatami's, but reality is the underlying.
Performance of both <unk> and <unk>.
Chocolate.
Great.
Find another award.
<unk> as you look at the profit the volume leverage easing there.
<unk>, particularly in the case of Europe as you look at the profitability number there is a lag between commodities hitting the P&L.
<unk> pricing being implemented and you.
You realize that.
Maybe in Europe , It is more challenging but in other places and all the rest of the world. We have been much more proactive in terms of spot.
Pricing, but it is Europe really impacting the overall profitability of the company, having said that I still would like that too.
That a couple of points out there, we clearly identify watermark for our our algorithm to walk in.
In terms of gross profit dollars to be 4% flat versus last year I mean this quarter, we have almost.
10%.
You look at the profit dollar growth I think on a year to date, we added 11% you look at the amount of E&C, we have put into the P&L as I said this is double digit yes.
So when you step back I think the question would be if we had price earlier in Europe , how Google all the theaters, we have and it will be much much better and Thats. I think is what is going to happen going forward. If we continue to invest in the business and execute pricing, while we call.
I think there is still obviously as Nick said a few.
Iterations, where plywood 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, if there is a lag between pricing and commodities going into the P&L all of Europe .
Okay. Thank you for that and just a quick follow on.
If I think about the second half outlook in a little more cautious view on margins at least at this point is you've taken revenue up a kept EPS in place is the main item to watch here the consumers' reaction to the pricing as it elasticity, we should be watching or.
Or is the volume performance or anything else that you would just note that we should watch.
Indicator for success for the second half of the year. Thank you.
Look the underlying margin fees.
Right good.
Inflationary pressure I would say is going a little bit because obviously in Q1, we had a more favorable pipeline of commodities, but besides elasticity is as I said there is element Paul what is the impact of customer disruption.
That's where we wanted to be.
The mid single digit to high single digit range as far as EPS goals I look as I said, even in price and salt.
May be a customer of this auction, but more benign elasticity as that bolus that we have planned that are in line with historical norms I think we still have the shelf.
High single digit EPS.
Okay. Okay. Thank you for the time.
Thank you Chris.
Thank you.
Our next question comes from Alexia Howard with Bernstein. Your line is open.
Good evening everyone.
Hi, Alexia.
To begin with there wasn't much commentary in the prepared remarks about market share trends, where China was very strong a couple of years ago, and probably a down year on year.
Some tough comps, but I wonder 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.
Yes.
The answer is relatively straightforward apart from some nits here and there.
The only area, where our market share is down this is in the U S.
And that is driven by the supply chain.
Gradual recovery that we are having.
If I look around the world in EMEA, we have very solid gains in China and India.
Both the biscuits.
We see also gum in China doing extremely well chocolates in South Africa is doing well.
In Europe , we are gaining share.
Mainly driven by <unk>.
Biscuits and UK biscuits.
Latin America is.
Is flat year to date, but they had a major.
Increased last year.
But also they're biscuits are gaining share.
And the Easter period has been particularly strong for us. So we have gained.
A significant share there was our strongest 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 are 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.
And so the the share that we are losing there is purely because of supply chain constraints on for.
Local brands Nila and nothing better premium members Rita.
Our supply chain service levels are and the <unk>.
The format 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.
Overall, I would say longer term you feel.
Very good about continued share gains.
Because of the amount of brand investments, we're doing the ROI, we are getting on those.
Also driving share because of distribution gains in places like China, India Southeast Asia and.
Also have good gains coming from our innovation so.
If you would be able to discuss the U S situation I think you would be able to see a very good situation and the rest of the world.
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.
Yes, we have.
At least I think a couple of weeks back.
On 8-K, where we have secured a little bit of additional.
The term loan and clearly as to function as it breached to the divestiture of developed market and holds worldwide.
To be able to deploy those funds for the acquisition of <unk>. So that's the idea.
And it applies the same.
<unk>.
At equal now.
There are still other things that that might be in play as you know we had multiple levels of flexibility within the balance sheet with coffee with.
Divestitures access at all.
At this point in time, though I still believe that the $2 billion of share buybacks.
Is secure.
So I'm not sure we would go back to fund the acquisitions.
Thank you very much I'll pass it on.
Alexia.
Thank you.
Our next question comes from David Palmer with Evercore ISI. Your line is open.
Thanks on Europe .
The organic sales and volume trends are remaining strong and showed that pretty.
Pretty lousy consumer confidence numbers over there though.
So it does seem to be.
Maybe even more 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 youre 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.
Well first I would say that our categories biscuits and chocolates.
Normally quite resilient in the circumstances, we've seen it.
During COVID-19, but we've also seen it in 2008.
And in previous recessions, because it's a.
A small indulgence.
Consumers find.
Find difficult to to forget to leave.
Leave behind and.
And then the the presence of private label is relatively limited in our categories. So.
That might be it.
At the start of it that might be one of the reasons why our categories and our performance continues to look very strong and then look at the consumers' confidence I think.
We do see a softening.
<unk>.
And.
Consumers clearly talk about the inflation and the interest rates the threat of recession.
We don't see that in emerging markets, where the question of course was about developed.
There is no drag on volumes, yet, but if you go around the markets in Europe .
Things are different sometimes so you're free to see a very strong French biscuit market.
But you you see chocolate in Germany and UK.
Affect that.
And sometimes that has to see with seasonality and things like that that go with last year, but overall I would say from.
The 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 high levels as I explained in years ago, but still nothing that is.
As high as it used to be before.
So for instance, if I look at you.
K chocolate, that's probably where we see the highest.
Elasticity, so far but it's declining 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 we don't see anything that is a major concern but.
That doesn't mean, it's going to remain like that.
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.
No.
The one region, where we are not spending more than last year as 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 all about equally.
Split the Asa.
Some markets, where we were.
Particularly want to focus on on the growth that we see ahead of us so theres, a slight disruption here and there for higher investment, but overall I would say it's.
It's across the board that we are investing in biscuits and chocolates mainly.
Thank you.
Thank you.
Thank you.
Our last question will come from Jason English with Goldman Sachs. Your line is open.
Hey, folks thanks for squeezing me in.
Hi, Jason Hey, guys. So 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.
Your guidance implies that you expect to your own volume to be down sort of low to mid single digits in the back half.
I was hoping you could unpack that for us like are there specific things that youre aware of that are that we should be aware of that will be headwinds or is I guess to pile onto the notion of conservatism or you just sort of prudently assuming that things get worse, because the environment is really choppy.
Jason maybe.
The comment on the categories themselves in terms of the guidance.
As I said.
When you strip out the impact.
The Ukrainian war, which is one point that it is more pronounced in the second half when you strip out the.
Higher elasticity, as we are planning or which arguably might be on the cautious side and third when you strip out the impact all the customer disruption pretty much the underlying clients of the first half are the same as of the second half. So I won't be assure you bet in terms salt slowed down.
As you look at some of the numbers for chocolate and biscuit as you look at emerging markets growing in the core of a 22% we are not assuming <unk>.
PD is a slowdown into the second part of it is these.
These three elements that I spoke about.
In the prepared remarks, and also in some of the answers I D debt.
<unk>.
Yes for the year.
Look at the eight plus the philosophy is therefore, one reason, which is we might end up doing better than that.
And I believe its there.
Yes from the category perspective.
Curt.
Correct.
Saying.
Yes.
We thought that.
What we expect to see is relatively high pricing for probably in the 8% to 10% range, maybe even double digit pricing and that that would be accompanied by flat to maybe a 1% volume growth you have to keep into account that in previous years the category growth was around volume.
It was around 2% and then add on top of 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 thats our estimates for the time being for the second half.
Got it that's really helpful. Thanks, a lot guys and congrats on a good quarter.
Okay.
Thank you I would now like to turn the call back over to our speakers for any additional or closing remarks.
Well thank you.
Happy to have been able to inform you about the 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.
Thank you everyone.
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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