Q1 2023 Mondelez International Inc Earnings Call

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Good day and welcome to the Master lease International first quarter 2023 earnings conference call.

Today's call is scheduled to last about one hour, including remarks by Monda leaves 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.

Now I'd like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for model leaves. Please go ahead Sir.

Good afternoon, and thank you for joining US with me today are Dirk van de put our chairman and CEO and Luke is there a miller our CFO .

Earlier today, we sent out our press release and presentation slides, which are available on our website.

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 are 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 review of our financial results and outlook by Luca We will close with Q&A.

I'll now turn the call over to Dr.

Thanks, Chip and thanks to everyone for joining the call today I will start on slide four.

And 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.

Isn't by effective pricing and ongoing volume growth we.

We continue to execute on our long term strategy N V C 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 and our.

Our capabilities and our portfolio reshaping initiatives to accelerate in compound growth on both the top and bottom lines.

We are confident that the strength of our brands, our proven strategy, our continuous investments and especially our talented people position us 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 three percentage points on pace with recent performance demonstrating the continued strength and resiliency of our beloved brands in categories, even in an inflationary environment.

We delivered organic net revenue growth of one 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 a billion dollars.

Again, we were well ahead of last year's pace with 18, 2% growth.

We are proud of our team's continuous focus and agility, which enabled 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 investments in our accounting 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 biscuit them baked snacks with strong creative assets digital personalization at scale, new product launches and great in store execution all.

All of this continues to strengthen our already strong brand loyalty.

It is clear that playing in the right categories.

Active 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 American region.

For example, we recently launched our chocolate brands Milka into Colombia.

Additionally, we launched two milk ice cream products in Argentina in association with extraordinary.

We're excited about these opportunities to explore a new segment and reach more consumers, while expanding one of our most economic brands into a new consumption occasion.

We hit another milestone in being the biscuits category as chips Ahoy, a $1 billion brand celebrated its 60 <unk> birthday, our fifth largest brand globally chips ahoy as delivered almost double digit revenue growth annually since 2018, yielding positive freeze.

Else from our increased A&P 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.

Audio continues to grow to show sorry, strong momentum across markets as consumers continue to demonstrate that this iconic brands 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 adjacencies, 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 a very powerful brands.

Now, let's take a look at our chocolate strategy on slide seven.

Tablets remains the centerpiece of our chocolate franchise Monza Liza accounts for more than one third of this segments more than three times the size of the number two player and we continue to lead the segment year after year.

2022 is starting 2023 is off to a very strong start.

Aided by the recent launch of our renovated milka formulation. The Creamiest most tender milka effort combined with some strong local jewels.

Our established business is up nearly half a point in market share with particularly strong growth in Australia, Canada, Germany and Brazil.

We are also performing well in the incremental segments of seasonal and gifting chocolate products.

We delivered a record setting for the Easter season across markets with Milka celebrating its first ever Easter in Chile and Chile.

Our Cadbury theme executed another successful virtual Easter egg hunt, reaching more than 300000 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 update us on trends positioning.

We are further strengthening its toblerone portfolio with additional offerings, including per lean and personalized gifting.

Switching to slide eight.

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 1000 basis points.

We are making strong operational improvements focusing on enhancing service levels and improving supply chain efficiency and we successfully implemented two rounds of pricing.

Additionally, we recently announced the consolidation of creative and emphasizing agencies under a single partner.

Which will accelerate productivity in our media spend while continuing to strengthen brand equity and loyalty.

Similarly, our Ricoh leaner 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 am pleased to share that we continue to make significant progress in our sustainability strategy.

We firmly believe that's 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.

Great. It is 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 pro Granville supports these farmers in implementing a strongest charter.

Of more sustainable farming practices, just yes, further diversify adding crop rotation protecting pollinators and other wildlife and reducing pesticide use.

Our goal is to grow 100% of the weeds volume needed for our European biscuits production under our expanded harmony regenerative chartered by 2030.

This is just one example of the ways that we are fully integrating our sustainability agenda.

Within our day to day business operations and growth strategy.

I'm proud of theme on the lease continuous 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.

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% with more than three points from volume mix.

Emerging markets grew more than 25% with strong performance across the overwhelming majority of countries.

Four five points of this growth attributable to volume mix.

Developed markets grew 15, 8% in Q1 with across the board clients in more than two points of growth coming from volume mix.

To know the customer disruption in Europe was more benign than we anticipated.

Turning to portfolio performance on slide 12.

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.

All right chips ahoy, given goal and capsule shall wear them own brands that deliver double digit poll all.

Albeit not contributing to organic growth clip 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 last October on all delivered robust growth and we had a record Easter selling that's based on preliminary data also resulted in record high sellout.

Gum, and candy grew 35% with robust growth across all of our key market.

Now lets review market share performance on slide 13.

We held or gained share in 60% of our revenue base, which includes 10 points of headwinds coming from new customers disruption.

The U S continues to make service level improvement ending Q1 with good on shelf availability and case fill rate, resulting in share being flat to last year.

Given stabilization of the supply chain, we feel confident that <unk> will continue to improve during the in the U S.

Turning to page 14.

We believe our strong double digit Oi 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.

Yeah.

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 why dollar growth across all regions.

Europe , do plus 18, 9% with high single digital idle.

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.

Tumors confidence has stabilized in much of the region with many key countries trending back to spring 2022 levels.

The city is our biscuits and chocolate our overall less negative than we anticipated, including in the U K, where the impact of HFF SaaS is less material than what we had forecasted.

Overall, rather than cutting back significantly on sides of their basket consumers are shopping around.

To find attractive deals and trading up and down in terms of pack sizes based on their specific needs and consumer occasions.

They remain loyal to blended products, particularly in chocolate, having said that our focus is now on landing the remaining part of the price increases.

North America.

17, 3% with a high dollar growth of more than 40% driven by higher pricing solid volume mix and strength from our bankers, particularly cliffs.

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.

EMEA grew plus 13, 8% with strong volume mix.

Nearly 6% Oi dollars increased plus 15, 6%.

India continues to be a key driver of success in the region and that we also have ambitious plans in China that will benefit from a broader really opening up the call date.

Latin America grew plus 39% with Oi 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 New Heights Rico.

I think paulino zone is off to a strong start.

But we have not yet realized the benefit of the full integration that will happen towards the end of the year.

Next to EPS on slide 16.

EPS grew plus 17, 3% in constant currency or nearly plus 10% as reported dollars driven primarily by strong operating gains.

Turning to slide 17.

We generated free cash flow of $900 million in Q1 returned 900 million to shareholders through dividends and share repurchases.

Yeah.

A few words on our recent <unk> sell down on page 19.

These investments has been highly successful demonstrating our disciplined and flexible approach to managing our investments in assets over time.

Including dividends received and the market value of our remaining stake. These investments has generated a return of approximately three three times, our initial investment over a seven year period.

We received approximately 1 billion in net proceeds from the most recent sale and now remaining stake is now three 2%.

From an accounting perspective, we will no longer account for this under the equity method, but rather from nice and <unk> as the only income as of the dividend record date.

We will adjust our mark to market quarterly re measurements of the state in line with the gains that we have been obtained after each sell down.

These adjustments will be recorded in the new P&L line items, 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 three <unk>.

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 $1 billion will run through the same account that we have used for processes.

Finally, all beat a subsequent event to the quarter you might have noticed that we sold down also some stopped for J D piece.

The transaction was equivalent to approximately 400 million euros toward an equal combination of an outright sale and options at an only net discount of 2% to 3% versus the JV stock price at the time of the transaction <unk>.

<unk> cyber maturity, which is about six months.

Both transactions put us in a good spot in terms of our leverage and debt profile and together with the expected proceeds of developed market them pretty much balanced the outflows related to the acquisition of <unk>.

Turning to our outlook on page 20.

Given the strength of our Q1 results and the overall operating environment across our business, we are raising our full 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 your assumptions inflation is still expected to increase double digit for 2023, driven by elevated costs in packaging energy ingredients and labor.

While lapping favorable hedges in 2022.

In terms of this interest expenses, we now expect $400 million for the year given recent coffee transactions.

We now expect 90 bps of headwinds related to Forex impact for the year versus for science 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 share dynamics enough tool 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.

Thank you.

At this time, if you'd like to ask a question. Please press the star and one on your Touchtone phone.

They remove yourself from the queue at any time by pressing star two.

Once again that is star 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.

Thanks, Good afternoon everybody.

Hi, Andrew Andrew.

I guess first off I was hoping you could double click a little bit on the emerging markets performance, which was obviously Darren.

Dramatically better than I think most most certainly model than we're expecting.

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.

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 of around four four and a half 5%. So.

So it's not just pricing if I go a little bit through the markets.

<unk> keeps on growing at a very accelerated pace.

Strong double digit no real signs of slowdown or our outlook for 'twenty three remains optimistic and we have to invest in capacity increases, which we which we are doing them, but as you know it.

A combination of the strength of our Cadbury in Oreo of franchises.

We're receiving heavy support with strong innovations and as well our distribution expansion, where we still have a runway for several years to go.

In China, we also have strong momentum.

There, we also see a good share gains.

We have in the past quarters been establishing our chips ahoy as a second biscuits brands. After audio a business as you know is mainly biscuits and gum and <unk>.

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 same thing as in India heavy supporting our brands good innovations building our extra capacity.

And.

Still a big upsides on increasing our distribution.

In Mexico, we now with the acquisition of re Colino have significantly increased our distribution power. So there we will see the distribution of the Monza leaves brands, increasing significantly in the coming months.

We also have double digit growth in the quarters and the whole acquisition and integration of re choline noise is on track.

And then maybe adding Brazil, Brazil is also double digit growth. We have we continue to see strong demand.

And we are.

Expanding our distribution also in Brazil, So I would say.

But 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're generating is also very strong so the return on our investments 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 reinvestments in our business we.

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 then as I said, Matt.

Macroeconomics in Latin America, helping and then also the gum business, which during the pandemic suffers 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 brands and private label in emerging markets remains a relatively small a challenge. So we will continue to be very optimistic for 'twenty three and beyond we feel that we have plenty of opportunity.

We have.

A lot of headroom for accelerated growth I would say are 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're now launching throughout Latin America. So we see all of this combined so that gives us the confidence that we will keep on doing well in other emerging markets.

Really helpful. I appreciate that rundown and then just Super briefly Luca just from a guidance standpoint.

It does not seem as though your expectations for the remainder of the year have necessarily changed that much in the upward guidance revision, primarily us based on the better than forecast <unk> results. So I guess my question is maybe how should investors think about the sort of the plus and the revised 10% plus constant currency EPS growth outlook.

Like the sort of the puts and takes or things to consider there. Thank you.

Yes. Thank you Andrew clearly as we move through the year.

We'll be lapping materially higher quarter than Q1 last year, which is the only one quarter we had.

With the high single digit I think we obviously sequentially too high you have revenue growth throughout the year.

<unk>.

There might be a scenario, there where we exceed the 10% floor that we.

We had guided you to in terms of both revenue and EPS, but I.

I think while I think quite good on that the underlying trends of the business, particularly in emerging markets the strong momentum.

Is there an.

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 site.

Happy with the improved profit in in Q1.

<unk>, 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 as is important.

Those are in relation to these further pricing that is needed.

Actually 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 talking about the 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 it is.

Point, but if everything plays out we might paths, we might that further opportunities I think the other one I want to briefly all netease.

D a.

The assumptions that we're making around commodities, we still see double digit inflation rates into 2023, with obviously energy sugar ingredient closing most of the pressure.

Part of these inflationary pressure as I remind that this audience a few times. It is due to the favorable coverage we had in 2022.

But in general overall cost I'm, not coming down materially than most recent spikes in terms of slot cocoa and sugar prices are offsetting some of the other benefits that we saw.

C.

I think you might have in the back of your mind percentage margins too.

I've said it a few times, we continue to be obsessed with dollar growth in cash and there might be some pressure in percentage terms, particularly in the next couple of quarters, but sequentially. We will we will be much better throughout the year and we plan to end.

Clearly the year on <unk>.

Gross margin percentage for the.

Activity by realities, we fast driving a strategy that has been proven to be compelling for everyone. SSD is about dollar growth.

Great. Thank you so much for that.

Thank you Andrew.

And we will take our next question from Ken Goldman with J P. Morgan.

Hey, Thank you.

So I wanted to ask.

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 that it was only a partial offset to the inflation. So I'm. Just curious is there a 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 do we think about some of those potential tailwind ahead from that perspective.

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 <unk> seen the P&L with the segment.

Profit growth.

We have explained we have which is which is 40% obviously that number there is synergies coming out of the.

<unk> bancshares, but in general we.

We are happy with the level of pricing the same.

In emerging markets overall, you look at Latin America, you realize how disciplined we are being with that with pricing. The model in EMEA is slightly different in the sense that our volume leverage is absolutely critical in some of these places and so maybe we had been a little bit less aggressive on pricing than than we could have been.

Oh, no the P&L is walking.

Very well and I think they reported that <unk> year on year is up almost 20% and that gives you the understanding halt 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.

As been implemented already with a lethal disruption compared to what we had anticipated there is still 20% to go but I think once you get that 20% that picture will look quite a bit different than in fact Europe is the biggest segments, we have and.

I don't want to beat the impression that we were shy on 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.

<unk> dollar growth that we are showing I think it is.

And winning formula at least for us.

Great I'll pass it on thank you.

Thank you.

Okay.

And we will take our next question from Bryan Spillane with Bank of America.

Alright, thanks, operator, good afternoon, everyone.

Luca <unk> two quick ones for you wanted clarification, just with the <unk>.

<unk>.

No accounting change is the earnings base that we're using for 'twenty two to calculate.

The EPS growth for 'twenty three is that $2 89, so <unk> below previous or is it <unk> because I think on one of the slides. It said the net effect was <unk>. So I just want to make sure. We're using the right 22 base as a starting point then I have a follow up.

Look the simple answer to that question is we had to take out all the income that was related to ADP last year. It was around about I think plus taxes $90 million give or take.

We are replacing that with <unk>.

Dividend and the net effect between a dividend payout, which.

Is roundabout.

The 8% or 50% depending on the base.

And the fact that we stripped out earnings last year in the tune of the $19 million I told you is causing the headwind of <unk> <unk>.

As we stated the base impact will states by the year on year impact is due to accounting is really <unk>.

Okay. Yeah. So debate I guess, it's clear the basis to 89, but as we're adding back youre, capturing <unk> sense of that.

Of that six headwind back in 23, right. So, but we're still starting our starting point is 289 to start the calculations off of.

For the forward guide.

Thats 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 in percentage margins in the quarter I think it was an $81 million.

Hit the operating income from from currencies, which it 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, just kind of thinking about margin progression percentage margins and gross profit dollars.

It seems like this is the worst of it right unless things changed this quarter in terms of the FX piece in like one tailwind, we should see assuming other things hold us.

Just that that drag from foreign exchange should should become a lot less severe as we move through especially the second half just want make sure I'm thinking about that correctly.

I can tell you that.

Sequentially, the gross margin percentage, albeit I don't like talking about it should improve throughout the year reality today, if I look at gross margin and gross profit dollars accrual throughout North America, Latin America, and as I said, a good portion of EMEA.

I'm very happy with the numbers Im seeing Europe is still impacted by the fact that there is 20% of pricing to go at.

As we implement that the situations should sequentially improve.

Okay, but the <unk>.

FX drag should again, assuming things don't change from here the FX drag should become a less of a much less of an impact than it has been.

Absolutely issued okay, alright cool thanks.

Yeah, well thank you.

And we'll take our next question from David Palmer with Evercore ISI.

Thank you and strong results in so many areas, but I'd be interested to hear if you.

To choose two or three that really drove your increase versus guidance.

Guidance or upside versus your internal expectations, whether those are key.

Current trends or maybe just sources of visibility I would imagine what's going on in Europe with retailer and consumer response to pricing as high on the list, but I'd be interested to hear what also makes that sort of top three.

Yes, the top three for me would be yes for sure Europe , where we were.

Expecting a bigger client disruption.

And that is not occurring in Q1, as Luca said, we'd only 80% done with the price increases and we still have some negotiations going on.

We could still see part of that client disruption in Q2, 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 you.

Yes.

Bye.

You will see a very solid top line, but the bottom line is probably the strongest.

Increase.

Driven by first of all on improvements in our supply chain, but then also.

Very strong recovery of cliffs virus profitability since the acquisition.

<unk>.

We expect that the positive trends for North America will continue.

And the third one is probably the.

The ongoing strength in emerging markets.

I already went there, but if I compare our emerging markets.

Sort of a growth of 25% that stands for me.

Well above any of our colleagues and that has been going on for several quarters now so that those would be my top three I would say of what.

What's carrying the quarter, Florida, and probably is going to carry the year for us.

Thank you that's helpful I'm wondering.

To what degree this year and what Youre 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 some degree we've had COVID-19 obscure what might've been happening in terms of all the changes that have happened and of course, you've made plenty of acquisitions.

Center.

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 in higher.

Well I think the recipe that we have is a strong recipe we.

I went a little bit for instance, in the 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 in store presence, we work RCM. So.

We seem to have a recipe in our way of working that 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 have to implement significant price increases and I guess to R&D.

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 is difficult to say, but I can certainly say that we are.

Uh huh.

In durable categories that are doing particularly well in the circumstances that we are performing well we are in 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 outlook.

The rhythm, but so far I would say a very strong and we feel that we are in line or above our long term growth algorithm for sure.

Fair enough. Thank you.

And we'll take our next question from Alexia Howard with Bernstein.

Good evening everyone.

Hi, Alexia.

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.

So let's start with please.

We have announced a new organization.

We started from.

Relatively high.

Evel of SG&A.

Have protected and increase ASC, I'm, adding which we have been able to obtain.

Roundabout $10 million of synergy a year given better rates that we have.

There is.

Alrighty.

Cost opportunities coming into the P&L in the area of settling in and administration. The new organization is already in place. The next step is really to go and get.

Synergies, India all of Cogs. So there is still.

Quite a bit of a lot of 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.

70%, so it's quite a good outcome at this point in time.

There are there is still more to come we're thinking potentially about leveraging DSD and doing other things and obviously the biggest opportunity. We see is establishing this brand internationally. So that hasnt started yet.

As a work stream all equally no.

We just felt that business we have.

TSA has in place still with.

With BMO.

As we implement SAP.

And as we move towards the end of the year Thats, the moment, where we will start getting SG&A costs and Cogs synergies, but reality is the biggest opportunity here is to sell Oreo through the system.

And revenues, even as it 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.

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 Nashville, I'll pass it on.

I think there was.

It's like a positive TVT due to that.

But reality is we had been.

Promoting.

Less than optimal and now that inventory is available there is opportunity for us to do selective promotions and.

Boost our brands now that pricing is implemented.

The patent being material I would say and obviously in the context why do you see this growth rate is.

Minimal but.

We still have opportunities to really replenish stock more than now that we have potentially a little bit more.

More promotions coming.

I think we are going to book position.

Great. Thank you I'll pass it on.

Okay.

And we'll take our next question from Jason English with Goldman Sachs.

Hey, good afternoon folks thanks for letting me in.

Hi, This is Bob.

Hi, there a couple of quick questions. Both also sticking on North America for a moment.

Great news on the margin progression in class Congrats on that that's impressive in such a short duration.

We had been assuming that it was going to be a margin mix drag to both gross margins overall in the segment with a 1000 basis points improvement that you've seen so far is it.

It still margin dilutive or you know closer to parity with the segment.

EPS.

They still are margin dilutive on the overall segment.

But again as we think about.

Potential opportunities in the two companies is another platform that we're going to integrate the wip in the second part of the year Im sure. The margins will get will get better and that pricing has been announced for the last sound, but it hasnt kicked in yet.

And.

There is now that we have stopped more opportunities to really activate at point of sale.

Stock lease 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 business going forward.

That's good to hear and stickier.

Sticking on North America. It seems like supply chain has been this overhang that we've been talking about North America for year upon year upon year, and maybe I'm exaggerating just because it fuels that log.

It's great to hear over the hump and Youre seeing improvement.

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 or supply chain issues been and how much of a tailwind can that be as you look to sort of rebuild that.

Well.

I would say the there is the whole there is a mix going on with the price increases that we have implemented together with some of the.

Yeah.

The extra costs, we incur during the pandemic to get the right services and so on.

We see in the recuperation face we also promoted less than we were planning because our inventories were low so its quite a complex picture to exactly pinpoint how much was due to the disruption since we have to go through the all these additional effect, but what certainly is the case that that the <unk>.

The winds have moderated quite a bit.

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 now ease.

That still doesn't mean that the cost have come back.

Significant inflation.

But I would say the the resulting effects.

Our supply chain improvements 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.

Demand is higher than anticipated and also clarify the service level, they're fully recuperated. So at this stage I would say that the cost effects and the top line effects as long as the east 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.

Our increasing our capacity we have changed our <unk>.

They are working in our relationship with our.

External manufacturers.

Inventories are our rebuilds, we have simplified our portfolio.

We've increased our manager sorry.

Their housing capacity on top of our manufacturing capacity and we have implemented labor strategies for attention.

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

Yes. Thank you.

And we will take our next question from John Baumgartner with Mizuho.

Yeah.

Good afternoon, and thanks for the question.

Alright.

Yes, good afternoon, I wanted to ask Luca I wanted to ask about profitability.

Youre heading into reinvestment mode. There you also mentioned the pricing disparities in earlier questions. So I'm curious at this point, how you're thinking about the point at which volume mix growth relative to reinvestment and I guess, what I also think is pretty strong potential for accretive product mix over time when that begins to yield leverage in the region back.

<unk> margin expansion or is a mid teens margin just the structural ceiling for EMEA. Thank you.

Okay.

I don't think there is.

A structural ceiling in EMEA emea's.

Are 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 China of the regions Ron on profit margins that are new.

North of the average of the company, we invest in both businesses is not about 15% of agency 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 <unk>.

Sizeable in volume machine, both from manufacturing standpoint supply chain and safe, but also a negative cash conversion cycle.

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 developing where categories like chocolate or 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 science as you might imagine that in these countries. We are investing both in terms of price volume and support I had all.

Material expansion.

Think it will come and then obviously you have countries like Australia that are.

Again, more mature markets, where volume roles and we're happy with that with Australia overall, but it doesn't grow high single digits or double digits as in other places and they're the evolution of profitability steady so as you think about.

EMEA very happy with the sizeable market that are doing very well.

And that emerging market by happy with Australia. The rest. These said the untapped opportunity. We are looking at and we have the obligation to invest for future growth and margins I think it will come.

Okay. Thanks, Lou would be very helpful.

Thank you John .

And we'll take our last question from Michael Lavery with Piper Sandler.

Okay.

Thank you and 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 of your spending as a percent of sales as a holding about constant.

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 Youre really coming out ahead. How do you think about managing that going forward is it sort of a luxury you want to maintain 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.

Clearly the.

20%.

<unk> B is 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's been a level of investment has been quality of marketing. It has been brand support we in DN <unk>, Brian and it is important that can keep it.

Your line of sight to that and I don't think youre going to see a consistently at 20% ANC increase but at this point in time.

Where we are moving price points, where we are trying.

Trying to retain and increase our consumer pools. It is important that we use these as.

An important accelerator of growth for years to come and Thats. What it is at this point in time.

When.

These inflationary cycle is done.

Things will get more normal I think Walt is a big differentiator is the level of volume and the scale businesses are still going ahead or not.

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're making both in terms of marketing and distribution and so I don't think youre going to see consistent 20% by reality that is still a big opportunity for us to get our brands where they belong.

Isa's hopefully quarter after quarter.

That's great color. Thank you so much.

Thank you.

With that we've come to the end of the call obviously, a strong quarter.

We are looking forward at this stage to a strong year.

Thank you for your attendance and.

Any other questions. Please refer to ship and the IR team.

Okay I can follow up with it thank you.

Thank you everyone.

That concludes today's teleconference. Thank you for your participation you may now disconnect.

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