Q2 2023 Mondelez International Inc Earnings Call
Okay.
Good day and welcome to the model, we use international second quarter 2023 earnings Conference call. Today's call is scheduled to last about one hour, including remarks by Monday leaves management and the question and answer session in order to ask a question. Please press the star 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 my beliefs. 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 10-Q and 8-K filings for more details are forward looking statements as we do.
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 earnings release and at the back of the slide presentation.
Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca we will close with Q&A.
I'll now turn the call over to Dr.
Thanks, Shep and thanks to everyone for joining the call today I will start on slide four.
I'm pleased to share that we delivered strong broad based top line growth during the first half of the year.
Our strong performance was driven by effective pricing combined with healthy volume growth in three of our four regions.
Europe was the lone exception due to expected disruption driven by retailer negotiation.
We continue to execute on our long term strategy, and we see robust momentum and solid consumer confidence across geographies and categories.
We successfully implemented our planned price increases in Europe closing, our customer negotiations in line with expectations.
With this behind US we feel good about the remainder of the year in Europe .
We also feel good about the continued consumer confidence we continue to drive robust demand in our core categories across the vast majority of our businesses, resulting in both value and volume growth are.
Our strong profit dollar growth was driven by cost discipline and pricing to offset cost inflation.
We continue to invest in our brands capabilities and portfolio reshaping initiatives to accelerate and compound growth and we remain confident that our proven strategy delivered by our world class team positions us well to deliver another strong year.
Based on the strength of our first half performance and our latest view across businesses. We are raising our full year organic net revenue and adjusted EPS growth outlook to 12% plus.
Turning to slide five you can see that the first half of 2023 shows continued momentum across our entire business. We delivered first half organic net revenue growth of two 7 billion up nearly 18% versus prior year and significantly ahead of our already strong.
12% in full year 2022.
This includes a 15, 8% growth for the quarter.
We also delivered adjusted gross profit dollar growth of more than 1 billion again, we're well ahead of last year's pace with 18, 9% growth.
We are proud of our team's continued focus and agility, which enabled us to continue investing to drive further growth acceleration.
Our ANC investments is increasing 18% in the first half of the year.
These results translated into strong adjusted Oi growth of close to $600 million up 23% and again well ahead of last year's pace.
On slide six you can see a few examples of our brands acceleration strategy in action.
Our continued investments in creative asset.
Personalization at scale and innovation combined with strong in store execution are resulting in continued sales growth and brand loyalty increases in our core categories of chocolate biscuits and baked snacks.
For example, in China, We launched Oreo Eric Jake in March.
Driven by the strength of the Oreo name as the world's favorite Cookie. These new packaged cake already has achieved a three 5% market share in 80% of the velocity of its leading competitive in large stores.
And Chinese one of our most important emerging markets.
It is just one example of numerous innovations to expand our key brands into adjacent spaces and formats.
We're also continuing to renovate our recipes to stay a step ahead of changing consumer and customer space. For instance, we recently launched our first under hundred calories Cadbury treats for adults. This is a great example of our commitment to help consumers snack mindfully.
We are offering a broader range of portion control packs and products, but also our portion control education campaigns, both digitally and on pack.
In the baked snacks segment, we continued to accelerate both top and bottom line performance in Clif bar, we remain focused on improving service levels and supply chain efficiencies, while further advancing productivity and effectiveness in our media spend and continuing to strengthen brand equity.
We are also continuing to introduce new culturally relevant flavors to strengthen consumer loyalty for our local jugal brands. For example, like there has been a leader in Brazilian chocolate for over 110 years.
Following the successful launch of Flack, the tablets filter with Oreo, we recently rolled out two new line extensions filled with additional luck that products that Brazilians already know and love.
They're so new defaults are bonbons made with chocolate and cashew nuts filling as well as Udo Branco Kennedy made with wafers feels to be chocolate cream and covered in white chocolate.
These are just a few examples of the innovative ways. Our teams are driving growth in our iconic chocolate biscuits and baked snacks franchises continuously investing in new formats pack sizes and flavor combinations that drive incremental lessee and encourage consumers to experience our brand.
In new ways.
Within the baked snacks segment, we are especially excited about our strong performance in the rapidly growing cakes and phase III space, let's take a closer look on slide seven.
Yeah.
Earlier, I mentioned, the Oreo, Eric Jake in China as a Great example of our brand acceleration efforts in emerging markets.
Similarly in developed markets, we're making solid progress in expanding our successful cookie and chocolate franchises into choco bakery cake and phase threes for instance, in the United States audio cakes theirs are continuing to perform well.
Since the recent launch of these fan favorite it already has earned $3 seven share of packaged snacks cake.
Given goes another solid success story in our North America baked snacks lineup.
We're continuing to drive distribution and innovation share is up half a point year to date, driven by solid pricing execution expansion into adjacencies, such as mini Donuts and strong category demand.
Meantime in Europe , seven days continues to advance its position as the number one packaged cross sell and we have exciting plans to continue to grow its footprint beyond Europe , including recent test and learn trials in a number of emerging markets.
Turning to slide eight.
We continue to invest in digital commerce, and revenue growth management tools and capabilities to support our brands, while strengthening our partnerships with leading customers.
I am pleased to share that we have achieved the number one market share position in digital commerce in our top five markets of the United States, China, United Kingdom, France, and Brazil, while over delivering in up and coming emerging markets, such as India, Philippines, Brazil, Mexico and Poland.
Which are up 40% year to date.
We continue accelerating E b to b capabilities to expand distribution and strengthen our partnerships with key customers.
Additionally, our increased investments in elevating Archie M strategies and actions are driving strong value realization, helping to offset the inflationary pressures.
<unk> appointed dedicated Archie M leadership and teams in all key markets supported with new proprietary data and analytics assessments digital tools and a comprehensive training program.
We are confident that these ongoing investments will deliver sustainable improvements in growth efficiency and ultimately margin.
Along with our financial performance I'm pleased to share that we continue to make significant progress in advancing our environmental social and governance strategy in May we published our annual Snacking made right report reinforcing our 2025 goals and documenting our latest performance in priority areas.
These include sourcing key ingredients more sustainably, reducing carbon emissions and increasing recyclable packaging we.
We are also improving performance in social impact and diversity equity and inclusion both internally and in partnership with our suppliers as well as helping consumers snack more mindfully through improved portion indication and increased focus on single portion packs.
We continue to believe that helping to drive positive change at scale across these important areas is an integral part of value creation with positive returns for all our stakeholders.
We encourage you to read our snacking made right report for more details and context on our progress.
With that I'll turn it over to Luca to share additional insights on our financials.
Thank you Dirk and good afternoon Q.
Q2 marked another strong quarter for our business double digit organic that's driving our growth across each region sound pricing execution strong profit dollar growth and significant Brent the investment enabled us to continue driving sustainable value creation.
Revenue grew plus 15, 8% with strong volume mix growth in North America, Latin America and EMEA.
Overall volume mix was flat for the quarter, despite the expected customer disruption in Europe .
Last year's Q2 total company volume mix was plus 5%, making this performance even more impressive.
Emerging markets grew more than 23% with strong performance across a significant numbers of markets.
While developed markets grew 11% with balanced plans from both North America, and Europe , and despite customer disruption.
Turning to portfolio performance on slide 12.
Chocolate biscuits gum and candy businesses, all posted another quarter of double digit increases in Q2.
Biscuits increased plus 13, 9%.
Oreo chips Ahoy, given go dark and crop social all deliver double digit growth.
Though not inorganic also posted strong growth.
Chocolate grew plus 13, 7% with strength in both developed and emerging markets.
Cadbury dairy milk Milka last October on all delivered double digit increases.
We are very pleased with the performance of our core categories of chocolate and biscuit, which albeit impacted in the quarter by customer disruption are on a solid trajectory for ball. We expect good volume momentum as we move forward in the now that negotiations in Europe are behind us.
Gum, and candy grew more than 30% with strength across our business units, especially in emerging market.
Now lets review market and share performance on slide 13.
We had a gain sharing 70% of our revenue base.
The U S continues to make service level improvements and ended Q2 with good on shelf availability and inventory levels.
Moving to page 14.
We deliver more than $540 million in gross profit growth or 20% in Q2, driven by topline productivity and cost discipline. This.
This also resulted in year over year gross margin expansion in all regions, except Europe , which was impacted by expected customer disruption now that pricing gets implemented we expect improvements in Europe too.
This growth provides significant fuel to invest behind our brands as well as significant earnings flow through.
Moving to regional performance on Slide 15, we delivered double digit revenue growth in all regions. While also delivering volume mix increases in all regions, but Europe that got impacted by pricing related disruption.
This growth translated into operating leverage NOI dollar growth across the board.
Europe grew plus 13, 1% with double digital I call importantly, pricing has now been lending and we expect this.
This will lead to a better second half volume and margin performance.
Overall, the consumer remains resilient with elasticity is holding up relatively well in chocolate and biscuit.
While we saw some incremental elasticity in parts of our cheese and grocery business.
North America grew plus 12, 4%, we though I dollar growth of more than 29% driven by higher pricing volume mix of 2% and strength from both our base biscuit business and our ventures, such as given golf perfect snacks NK.
<unk> also posted robust growth and deliver another operating margin increase of double digit percentage points in Q2 versus last year.
Now profitability is approaching the level of total North America, while we still had to generate material synergies both on revenue and cost line.
So cliff is a business that is growing as now some margins and still with meaningful synergy potential.
EMEA grew 13, 2% with solid volume mix growth of more than 3% Oi dollars increased plus four 2%.
India, China Southeast Asia, all posted strong top line growth for the quarter.
Latin America grew more than 37%, we know high dollar growth of nearly 65%.
Mexico, Western Andean countries, and Brazil, all turned in robust quarters.
<unk> remains on track in terms of integration and we expect to begin capturing more benefit towards the end of the year.
Next to EPS on slide 16 in the quarter EPS grew plus 21, 5% in constant currency or nearly 17% as reported.
Turning to slide 17 free cash flow was $1 5 billion in the first half with $1 7 billion in return of capital to shareholders. We also announced today an increase in our dividends up plus 10%, marking a double digit increase in eight of the last nine years of the history of mobile needs.
Turning to our outlook on page 19.
Given the strength of our Q2 and first half, but full months. The successful conclusion of our negotiations in Europe . The strong volume momentum of our brands, we are raising our full year outlook for both revenue growth and adjusted EPS.
We now expect top line growth of 12% plus versus our original outlook of 5% to 7% and most recent outlook of 10% plus.
EPS growth is also expected to be 12% plus versus our prior outlook of 10% plus and the original outlook of high single digit.
No our free cash flow outlook remains unchanged at $3 3 billion, given $400 million in cash taxes related to the sell down and exit of our KCP position.
In terms of key assumptions, we continue to expect that double digit inflation increase for 23, driven by elevated cost in packaging ingredients labor and lapping favorable commodity hedges in 2022.
With respect to interest expense, we now expect 318 million for the year, given recent coffee asset monetization and term loan reductions.
We also expect 'twenty, yet around mid twos in terms of leverage based on current conditions.
As a reminder, given the liquidation of our KCP position in Middle of July there will be no dividend income recorded enough too.
We now expect 11 science of bps of headwinds related to Forex impact for the year versus nine cents in our prior outlook.
The outlook revision reflects our increased confidence in the year ongoing resilience of consumer consumption in our categories.
We believe benign LSD Ecp's continued brand investment and completion of pricing in Europe , as well as half of our emerging markets.
This current outlook, that's not going to see that a material deterioration of geopolitical environment surrounding some areas of our business 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 or move yourself from the queue by pressing star and two.
Once again to ask a question please press the star and one.
And we'll take our first question from Andrew Lazar with Barclays. Your line is open.
Great. Thanks, so much I appreciate it.
First off I am Dirk we've heard.
So far from a bunch of food companies that have reported earnings of some maybe very recent changes in things like consumer.
Tumor behavior retailer inventory destocking competitiveness, and maybe generally greater sluggishness in category volumes as pricing has lapped I was hoping you could talk a bit about the landscape as it relates to model, specifically and any changes one way or the other that are notable for Ya.
Okay.
Thanks, Andrew.
Well.
Based on on H, one, we obviously feel quite good about how our portfolio is performing.
Uh huh.
Brock growth.
The different regions in the different categories across most of our brands.
The pricing went through quite quite well strong pricing I would say compared to others.
We have very good volume mix growth in three out of four regions and the only region that was disrupted was Europe , but that was due to customer disruption.
And we foresee for the second half that we will see solid volume growth in Europe .
Our share is increasing North America is finally recovers.
We are gaining share in.
In EMEA.
Europe of course still a bit of a drag on share, but that's again because of this client disruption.
You'll see that our emerging markets are doing quite well broadly in the top and the bottom line.
So we are generating good gross profit so we can.
<unk> continued to invest strongly in our brands and our capabilities.
The acquisitions are doing well.
0.2 cliff.
And yes, we have.
Double digit growth in.
Adjusted and real EPS, so the whole picture for us looks pretty good if I look a little bit further on the environment.
At least in our categories, we see strong consumer confidence.
We would say that it's improving in the developed in the emerging markets and the price sensitivity seems to be plateauing.
Particularly the emerging market consumer I would say is very very solid.
If I think about the competition I think the big difference between us and the competition will be that we have a very strong topline combined with some some goods volume growth.
Promo levels, we see some increase in promo levels in biscuit.
Largely flat and down to somewhere else.
We even see promo prices going up faster than non thermal prices in percentage.
From a pricing perspective, we have done what was needed. So most of our 23 pricing has taken.
North America has already done in December of last year Europe was closed in line with expectations in Q2, and our emerging markets are exactly on plan.
And then B elasticity, we don't see a change in the elasticity, which has been low as you know.
We do see consumers shopping around more hoping to find deals the quantity bald per shopping trip is the same but they tend to shop, a little bit less frequently but nothing really that.
Preoccupies us and so to close I would say the volume is strong Europe will recover in the second half.
This will be the strongest H one N. We belief years as we have delivered a small beliefs.
So we think we are we are quiet.
Going quite well there maybe a few words on Europe , which is <unk>.
Probably the most.
Important thing for us.
It's obviously has been for us a very dynamic environment.
The top line as demand has been quite good.
13, 1% growth, but the volume mix was down four five points, but that was due primarily through through the client disruption.
I want to reemphasize that all 2023 clients.
<unk> closed successfully and all the pricing was aligned Atlanta is in line with plan.
We will see some inflationary costs continuing in cocoa and sugar.
Going into 2024.
And we are planning to do some strong investments in the second half in Europe . So if you think that through and you say okay. These pricing negotiations are behind US we are positive on H to it. So what you could expect storage to in Europe is that our volumes will grow we are ready to execute in store, we have plans key promotions.
Now with this negotiation behind US we can go full force again.
I think as a consequence of that and you will see our share improve.
Also start lapping prior year headwinds and our margins will start to recover as the pricing is now fully implemented. So I think three levels of good news volumes share and margins.
Our categories continued to do well consumers seem to prioritize them.
Also in Europe , elasticities remain low despite some strong price inflation.
Yes, if you talk about our cheese, our grocery categories. There, we see a little bit of an uptick in elasticity, but that's a smaller percentage of our business.
Hff's S in the U K looks pretty manageable at this stage.
The consumer is adjusting to the changes that they've seen store.
We see a bigger impact on seasonal and gifting.
But the impact on standard chocolate seems to be miners.
So I would say the main news that we have is that we are expecting a good second half for Europe on top of all the other things.
That gives you a picture Andrew.
No it really really complete so I appreciate that one one very quick one for Luka The company raised.
Instant currency EPS growth expectations to 12% plus from time plus I.
I guess consensus is already relatively close to the 12% Mark So I guess I'm just curious how investors should think about the <unk>.
Plus and in the guide thanks, so much.
Thank you Andrew.
Before I go to the last part maybe briefly to provide some color on what underpins the new outlook.
I think there are three important drivers to point to in terms of our outlook. One is clearly the strong first half and importantly, the quality of the results we're posting.
I am, particularly happy with the operating part of the <unk>.
The EPS growth.
Second I think it is really the underlying broad based strength of our business the resilience of our Bryan some abbvie with volume and.
And volume growth and the continued investment and third as we mentioned a few times Europe with price fully lending and in line with expectations. So.
Maybe a war briefly by geography emerging markets are on our own it all we are quite happy.
Some pricing.
Is causing some areas of concern in terms of.
Elasticity, but those are the minority of the markets are really important in the big scheme of things.
The U S and North America are forcing us to rethink P&L and we are very pleased with cliffs in Europe has improved profitability already in Q2, but as we said last quarter at that time, we had 80% of the price implemented now that pricing is 100% secured we expect volume and revenue growth as well as <unk>.
Margin improvement for Europe .
Quite frankly, there is a good chance that we exceed that 12% plus guidance, but I prefer having another quarter under the belt and then narrow guidance for Q4, all things play out as we have in mind.
As I said there are good chances, we will exceed the guidance bearing in mind that we want to start 2024 strong and so if there is upside in terms of profitability and EPS, we might decide to reinvest selectively some of the upside to get really a fast start.
Starting 2024.
Thanks, so much.
Thank you Andrew.
Our next question comes from Bryan Spillane with Bank of America. Your line is open.
Thanks, operator, good afternoon guys.
Hi, Brian .
Two questions one on the net interest guidance and the second one on cliffs. So maybe first one for you Luca net interest expense guidance came down again.
By about $20 million this quarter.
Versus where we were coming out of <unk> and I just want to make sure I think you paid off of $750 million term loan with the KDB proceeds. So is this just simply a function of a half year interest savings on on paying the term loan off is there anything else that drove a lower net interest expense.
No that is it is that coming down.
Youre going to see a good leverage.
As we end the year, we plan to be at like one five times that which is.
Quite good and yeah. It is as simple as us paying down the term loan.
Okay. Thanks, and then Derek in your prepared comments you talked about cliff.
Pretty encouragingly right in terms of the margins.
Approaching I guess the segment level and then there's more synergy and then it sounds like you're also expanding on our revenue. So can you just maybe give us a little bit of a progress report on.
Kind of where you stand with cliffs today relative to where it was when you acquired it.
Yes.
Is your integration and as the as the.
Acquisition model kind of running ahead of expectations and just yeah.
How we should think about maybe how impactful cliff might be.
We look forward.
Yes so.
We have seen.
In the first half very strong double digit revenue growth and the margins the oi margin versus previous year is up more than 1000 basis points.
So.
We've increased prices some of the first thing I would say we've increased prices more aggressively than cliff would have done historically.
We increased prices in August in January and another one later in Q1, and so we see low elasticity I would say so that's having a big impact.
The second Big thing that we're doing is the service has improved we reduced skus.
And we started to operate the plants, a little bit better and so that that is given to.
Good increasing the service level, then we changed the promotional plan that has successfully kicked off.
The fourth thing is that our media buying is more efficient than theirs. So we were able to also get some benefits from that.
So those are some of the things we've done the integration is taking place in a in a number of steps like a big one is the systems integration later on in the year.
But so far where we have.
Streamlining the teams and we've got more clarity on how we want to operate the business that is all going well, but as we said in the prepared remarks that the real benefit of the cost synergies is still largely to come we've already seen some benefits but.
In the second half of this year and beginning of next year that we will get the real benefit from it so.
Yeah.
I would say you can probably make the calculation is close to a $1 billion business that improves it margin by the amount that I was quoting so.
That will have.
Our regional impact on the total company.
Thanks, Derek Thanks Luca.
Okay. Thank you. Thank you Brian .
Our next question comes from David Palmer with Evercore ISI. Your line is open.
Yes.
Thank you a question on Europe pricing and the impact on volume you mentioned that the pricing is complete how are you thinking about the volume for the region in the second half given that.
Some of that disruption is behind you and you're lapping some disruption in the second half versus 22.
Yes, so as I said, we don't really give volume guidance.
Per region, but.
We would see some solid volume growth in the second half.
Driven by exactly the factors that that you were saying.
Saying, so we have the pricing negotiations behind us that pricing will be implemented.
The disruption is gone last year in the second half we increased our prices in Europe , and we had more disruption we will lap that so thats going to have a benefit for us.
We have.
Elasticities in Europe that are relatively benign for the spike.
Newly implemented pricing and we don't think that thats going to have a major effect on the on the volume so.
Im giving you the number it's going to be a nice solid volume growth for the second half.
And then I can.
Didn't help but notice you featured cake and pastries a couple of times in your slides.
It seems like a logical extension to have Oreo have a snack cake.
But I wonder how.
How big could your aspiration be in that category it doesn't seem as big as some of your other categories.
So im wondering do you see snack cakes and pastries being an on going.
Sizable growth contributor and maybe give us a sense of how you think about the Tam there the opportunity there and how youre going to go about it.
Yes, so well first of all case in phase III is not a small category, it's not the size of biscuits, but it's not too far away from it and so it's a big opportunity around the world, It's a very fragmented.
Category with sometimes relatively <unk>.
Commoditized products in there, but there is real opportunity to bring strong brands with high quality products and so that's really the play that we're going forward through an Oreo aerie cake.
In China or this year in the U S or given goal in.
In the fresh section or.
At <unk> in Europe with pre packaged cross sales for instance, so we think that there is a whole play for US there at the moment has been around the three 4% market share of the whole.
Category, So plenty of room to go with that we are already the number two player and.
So that indicates how fragmented it is.
The category itself has been growing quite quite nicely.
Over the past three years.
It is a category that exists across all markets.
It covers different locations than our typical biscuits and chocolate so that makes it very interesting for them.
And so we think these new quality products and our brands, we can really make a significant impact in.
I'm not going to give an exact number but we would expect that our case in phase III business in the coming year should double or triple and lift is up to close to a 10% market share.
So for us, it's going to be a significant contribution to the growth of the company.
Thank you.
Our next question comes from Ken Goldman with J P. Morgan Your line is open hi.
Thank you.
I wanted to ask you know as we look at the futures charts for cocoa and sugar they might indicate that.
Theoretically right down the road, some additional pricing might be needed to offset more inflation.
I appreciate you're not in a position today right to talk about pricing that hasn't been announced but just conceptually.
Is there any reason to think that you wouldnt be able or willing to.
If needed raise list prices again, especially if European elastic elasticities, I guess, maybe aren't that bad and you're given your commentary about some improver or improving consumer confidence.
Thank you for the question Ken.
No.
The increase in sugar and Coco specifically.
<unk> I mean, we're talking about.
Most likely at 30 plus percent.
If you look at the last 12 months.
Or or even more particularly coal coal.
I think when you look at the quality of the brands. We said the fact that we had invested materially.
Around the world in our brands and the fact that there are strong balance with consumers and I believe pricing is will be a necessity in in chocolate.
Im not going to elaborate on the details.
Also bear in mind that particularly in emerging markets.
We are going to be very mindful about <unk> price points, and so we will use our gn and.
And then over the last couple of years I would say, we had to learn the ins and outs of implementing pricing around the world.
I think it is needed and we're going to do is most likely.
Thanks, and then just one quick follow up are there any peculiar already use or cadence issues, we should think about.
Or not necessarily obvious just as we model <unk> versus <unk>, any timing or headwind or tailwind that might not be apparent at first glass plants.
Thank you.
No look I don't think there is anything.
Youre going to see informed salt far outliers that are going to cause material issues or material opportunities in now in Q3, Youre going to see a volume rebounding in Europe as a consequence, I think obviously there is going to be a bank or situations for.
The totality of the company.
I'll now what our guide you exactly on on gross profit, but youre going to see.
Double digit.
Most likely revenue growth in <unk> and <unk>.
Double digit EBIT go below the line items.
But I think when you really look at Q3, Q4, youre going to see a solid operating gains coming through the P&L.
I didn't talk.
What about cash flow, but very happy with that too.
And youre going to see us delivering the cash flow, despite the $400 million headwinds related to the coffee K DP.
Yes.
Thank you.
Thank you Ken.
Okay.
Yeah.
Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.
Okay.
Hey, everyone.
Hi, guys.
No.
So just just one follow up on that just a.
Second question around the guidance commentary.
Luke I think you said that you expected leverage at <unk>.
We ended the year to be in the two five times range.
That would be.
Historically low level for the company.
That level.
Should we be thinking about deployment.
Of capital at that point.
<unk> repurchased more shares.
Many deals recently.
Clearly youre doing great work on quick so is there low hanging fruit on what you've already.
Yeah, just just stood out to me that youll be trending toward a historically low level of leverage.
At that point, I think there's going to be probably some observation.
That.
That capacity could be used for and then just one other quick follow up.
The EPS upside.
Comment for the full year. There was also a comment just around spending back right.
How do you think about as we get through the year. This concept, okay. There could be some upside, but youre also quite committed to this.
Pending back like where does that kind of.
Tension.
Play out right points get weaker you're going to spend back more if not some upside just yet.
Maybe any context on that as well so thanks for that on the on the leverage and just the upside versus our investment. Thanks. So much.
Yes, no I think the first thing first is the underlying strength of the EBITDA in the business. So we are converting cash at quite wild from net income that is that these commie entity is the first element of the equation.
The second one is the fact that.
We are going to get $1 three plus billion dollars of proceeds from the <unk> sale and.
That will further enhance the situation.
I'm not going to tell you that we are going to run the company forever at this level of leverage but reality is absent M&A.
This is most likely a little bit of a new normal.
What you have.
Also to keep in mind. These both in the case of belief in the casino.
We are doing quite a good job in terms of integration and I think deployment of capital behind M&A, particularly as being something that the company has done well.
Capital allocation.
Behind <unk>, we quoted a few numbers I think this is this is a great opportunity and it shows that we can generate quite a bit of value through M&A, we don't control necessarily time all of M&A, but on the M&A if something comes along we're going to be on it.
Somebody in mind that there are parts of the portfolio that we might decide eventually.
Divest down down the road. So I think from a leverage standpoint, we are really in a good shape the EPS upside.
The one of the things I believe that is sad.
EBIT volume Gulf crossing piece, the fact that yes, food price, but we continue to invest in the business not only in terms salt.
But also quality and other things, we talk a little bit earlier in the year about the military launch.
In Europe , and the improved Formula as one example, a multi mine by EPS upside. This we clearly have in mind. The fact that we might have a little bit of headroom in terms of profitability and we want to use a little bit of debt had from selectively in some places to really go after incremental.
Some opportunities to really go after incremental investments such as we get.
A good start into into 2024, it will be on a case by case, but we consistently asked around the business do you have opportunities to accelerate.
We do it on a quarterly basis and so stay tuned.
You'll learn more as we post Q3 results.
Okay. Thanks, so much thank you.
You.
Our next question comes from Jason English with Goldman Sachs. Your line is open.
Okay.
Okay folks thanks for fitting me in.
Thanks, Jason.
Look I want to pull on that Friday, you just brought up the opportunity to drive accelerated growth.
Invest five distribution I believe in the past you've outlined some of the distribution opportunities you see in front of you in Brazil, and Southeast Asia and India.
As well as the opportunity is coming on the back of the <unk> acquisition can you update us.
Why are those opportunities lie how much progress you've made and how much progress is left to be had.
Yes.
The opportunity is typically lie in the emerging markets in the first place and so the countries that you should be thinking about India and China.
We have been growing at.
Right.
Well over a 101002.
200000, new stores every year.
That is going to continue that speed at which we are.
<unk> and <unk>.
To grow.
Do the same in southeast Asia, and we're also looking at opportunities to do something similar in Latin America. So that's the number one driver of of what we think you should think about it is at the same pace as what it has been in the last two or three years.
The second one is.
We call it.
Going broader which means that we can start to increase the range of our products that are available in stores also again largely in emerging markets. That's another big driver of our distribution China has started to do that in the last two or three years and there is growing pretty pretty well for us and so that's a second.
Sort of fronts that we are working on around the world and then the last one is the acquisitions, where we are starting to.
The test and learn with these products in different markets around the world. So we have a number of test and learns going on in Jupiter.
We have some grenades test and learn we will have some cliff test and learns around the world and we are expecting that from that we will learn which countries those would have a big opportunity to start.
Being distributed so you should see as a third front in the first two or three years I wouldn't expect that you would see a major impact on our numbers.
But later on as these things take shape I think thats really starts to play a significant role.
If I think order of magnitude.
<unk> II that you should think about it if I think about in India or China.
I would say a third of their growth.
Driven by distribution expansion.
So that gives you an order of magnitude.
Helpful. I appreciate it I'll pass it on thank you.
Thank you James.
Okay.
Our next question comes from John Baumgartner with Mizuho Securities. Your line is open.
Good afternoon, thanks for the question.
Hi, Joe.
I wanted to stick with what the emerging markets, but maybe in the context of local brands. It looks as though the market share growth has stalled out a bit in the last couple of quarters.
In Europe , and maybe that's a function of the success of global brands sort of crowding out the locals, but if you could elaborate there just on your resource allocation, where you are at this point what are the expectations for locals across the portfolio going forward and how you think about the ability for global and local to grow share simultaneously because I think historically you've.
The largest opportunities you have to recover lost share and locals as eastern Europe Asia Chocolate biscuit. So curious about your thoughts there. Thank you.
Yes so.
Well first of all I would say Europe , you have to be a bit careful because you have the whole client disruption going through through there. So if our share has affected that has to see with the client disruption but.
If I think about the performance of global and local brands.
It is through that global brands have started to grow faster I would say, we have a number of brands, particularly in Oreo Milka and Cadbury, but also drive and as a gun breath for their for example, our halls, which are recuperating recuperating post COVID-19. So you have a number of <unk>.
Global brands.
The Oreo Milka and Cadbury is normal, but then you get an extra boost from things like driving in halls, which we're not growing that much. We for instance are also working very hard on our toblerone premium amortization. So yes at this stage global brands are growing faster than valeant.
Well into the Twenty's.
Local jewels are probably more in the mid teens growth still not not bad.
But that's a little bit the effect.
Playing to you does that mean that we have changed our resource allocation no narrow at all and if anything we are pushing our local teams to make sure that our local jewels get cigna.
Significant.
Resources allocated to it because we believe that the opportunity is there.
And so I wouldn't read too much into it for instance, if you look at the four year CAGR.
Our global brands.
Double digit while our local jewels are high single digits, so very close to each other and Thats really what I, what I would point to it so.
You don't necessarily see anything there.
Preoccupy us.
Thank you Doug.
Okay.
Thank you.
Our last question comes from Michael Laughery with Piper Sandler Your line is open.
Oh.
Thank you and good afternoon.
Hi.
I just wanted to follow up.
Dave Palmer's question about.
And maybe specifically just with given go you mentioned, how bringing branded and quality products with sort of the key to unlocking share gains and growth there, but fresh seems less branded maybe.
Maybe sometimes very little branding is that opportunity there how much can you push that.
Certain sub segments, and then as far as geographically expanding that is there an opportunity for that as well.
Yes.
Yes, when I talked about the branded parts.
Talking more about the packaged cakes in phase III.
And so if you think about giving go as a fresh business.
Brand is can play a role and I can explain you a little bit how we think about that.
But it's largely driven through innovation I would say the growth of the <unk> business and extra distribution.
So you have to.
Think about giving go as apply as a player that makes many cases basically so a mini cupcakes mini muffins, many brown the mini donuts and Thats a very interesting segment is the <unk> segment.
And they.
They do a great job in offering a quality product, we can make those products with some of our ingredients. So you can imagine a cupcake.
Oreo.
On top of it and so the branding can play a role there.
<unk> also start to develop their own brands. So it can play a role in giving go but Europe salvation is correct that it's more in the packaged.
Part of things now the in store bakery is very interesting for retailers in North America, but it's also happening in other parts of the World Reverting Australia for instance.
One of the retailers, they're the main interest supposed to talk to us about in store bakery, and how we could activate it together with them.
The reason being that.
The other big benefit of giving gold business is that it saves on labor.
So you now get a product to deliver to your store that is freeze and thaw and you can avoid all the labor in store and so that drives a big interest from the retailer on top the consumer sees it as fresh there is high interest. It's a section they want to increase so I would certainly confirm that there is a growing interest around the world for fresh bakery.
Oh, that's great great color. Thank you.
Just a follow up on emerging markets too.
Sounds like there's strength broadly.
Even in China, but can you just help us understand the Chinese consumer a little bit as well.
Is your performance there doing well a function of a relatively low kind of accessible price point is it more food at home that's doing well.
Can you just maybe unpack a little bit where the Chinese consumer is and how that fits with your portfolio.
Yes, yes, so China grew double digits for us in Q2.
One of the key effects that you need to think about is that we have a big gun business they're in.
And as we are coming out of Covid kind of strange nobody talks about Kobe anymore in China, but.
<unk>.
The mobility is coming back and so we have growth coming on our gum business and on top of that we have had a continued strong biscuit growth, which is more at home consumption.
In both cases, we are increasing our share.
Biscuits is up almost one point in Q2 through a very strong brand activations have been particularly happy with the success that chips Ahoy is having now is a second big biscuit brands next to Oreo in China, and then gum share is up two five points.
Where we started to do some very targeted activations in lower tier cities.
Other thing Thats particular about Chinese of digital Commerce is about 20% of sales.
In Q2 digital commerce is starting to starting to grow quite considerably, but 23% growth rate, so that all points towards or on the go consumption because in China.
Commerce is can be sometimes delivered in a very short period of time, but also hope consumption of offshore of course, the other thing to explain our China growth is that distribution expansion I was talking about in the previous question. So in Q2 alone. We have added 60, new stores in the Super <unk>.
Many channels as a part of that both deeper route to market strategy.
And then the last one I would point to is innovation, we launched that Oreo cake.
Talked about it in the prepared remarks.
And thats that expansion into into baked snacks encased in phase III for us so.
So those are all of those elements that are driving our Chinese growth.
It's pretty solid for the.
Quarters and years to come we can work on all these fronts we.
We can continue to add distribution will be still a huge opportunity we have some interesting innovations coming up.
We're getting better and better on our digital commerce, and I think the gum category will really rebounds in the coming months.
And that will be a boost to our growth there.
As it relates to the consumer the consumer is clearly.
The confidence is going up.
But certainly they are not yet to the bullishness that they have pre pandemic.
They're not cutting back on volumes, but they are clearly shopping around more trying to find better deals and they're also trading up and down as it relates to the back side. We also see a shift to smaller stores because the quantity that they buy is smaller and they shop more frequently.
So I would say we are very encouraged by our China business. We have several fronts that allow us to grow we've done that in the previous year those fronts have not being effective and I believe that you will see some very good results from coming from China in the second half of the year.
That's great great color. Thanks, so much.
Okay, well. Thank you with that I think we can conclude the call for the second quarter. Thank you so much for assisting and thank you for the confidence in the company.
Thank you everyone.
This does conclude today's program. Thank you for your participation and you may disconnect at any time.
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