Mondelez International Inc (MDLZ) — Q4 2021 Earnings Call Transcript

Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. We're also presenting revenue growth on a 2-year CAGR basis to provide better comparability given the impact of COVID on 2020 results. 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. In today's call, Dirk will provide a business and strategy update, then Luca will take you through our financial results and outlook. We will close with Q&A. Before turning it over to Dirk, I would like to remind you of 2 upcoming investor events. First, we will present virtually on February 22 at CAGNY, focusing on our AMEA region; and second, please save the date for a Mondelez Investor Day on May 10. With that, I'll turn the call over to Dirk.

Thank you, Shep, and thank you, everyone, for joining the call today. I am starting off at Slide 4. 2021 marked another year of strong top and bottom line results. Growth was driven equally by volume and pricing as we leverage the strength of our brands and execution capabilities. We continued to deliver on our long-term growth algorithm, returning nearly $4 billion in capital to shareholders while investing in our growth initiatives, positioning us well to deliver strong performance in 2022 and beyond. The COVID-19 pandemic continues to impact both consumer behavior and the broader operating environment. Against this backdrop, over the past 2 years, consumers continue to choose our trusted and beloved brands for both comfort and sustenance at home and on the go. We have delivered on this strong underlying demand across our brands and geographies with continued strength in execution, activation and innovation. As a result, our cumulative market share remains higher than pre-COVID levels. At the same time, we are continuing to operate in a dynamic environment characterized by global input cost inflation alongside supply chain, labor and transportation disruption. We are effectively mitigating these challenges through ongoing cost discipline and strategic pricing actions. We also continue to execute well against our strategic growth priorities, investing in our brands, capabilities and sustainability initiatives while expanding our portfolio with the addition of several growth accretive acquisitions, Hu, Grenade, Gourmet Food and Chipita, which closed earlier this month. These additions increased our exposure to broader snacking categories and growing profit pools. Along with our financial performance, we made progress in other areas. We continue to advance our ESG goals, setting ambitious new targets for achieving net zero by 2050, and we continue to accelerate our DEI agenda. And none of this would be possible without our people, the best in the CPG industry. We're proud of the way our teams continue to focus on delivering great products to our consumers as pandemic conditions continue to impact both our work lives and our personal lives. I am especially grateful to our frontline teams whose hard work and dedication delights families all over the world. We are confident that the strength of our brands, our proven strategy and our continued investments position us well to achieve our long-term financial targets in 2022 and beyond. Let's take a closer look at the market and macro trends on Slide 5. With the recent rise of the Omicron variant, the rebound in mobility that we saw earlier in 2021 has slowed down in both developed and emerging markets and is expected to remain 10% to 15% below pre-COVID levels in many markets. Time at home and eating at home look likely to remain elevated. In the U.S., for example, 60% of adults are not expecting to eat out more in 2022 than they did in 2021. This positions our core biscuits and chocolate portfolios well as they are skewed towards in-home consumption. The pandemic continues to fuel the desire for comfort and indulgence, benefiting our categories and trusted brands. Overall, as we found in our state of snacking survey released last week, the tendency for daily snacking is up for a third consecutive year. Although 70% of global consumers report concerns about inflation, it has done little to date to change their grocery shopping behavior. This is consistent with the observed price elasticity, which has been much lower than historical levels as well as a continued share weakness for private labels. Let me spend a moment on the current operating environment on Slide 6. Like other companies, we are experiencing cost inflation globally, particularly on transportation costs, dairy, edible oils and packaging. We have implemented material price increases, ensuring that we are significantly hedged across key commodities and we are continuing to drive productivity measures. We continue to manage through significant volatility in the supply chain due to labor shortages at third parties as well as a continuing gap between demand and supply of trucking capacity in containers in places like the U.S. and the U.K. In addition, the U.S. strike in Q3, although resolved, impacted our production output and inventory levels in the quarter. COVID-19 continues to cause disruption in consumer mobility in certain geographies, impacting our gum business and on-the-go products. This currently affects a small portion of emerging markets. Additionally, the rise of the Omicron variant is driving high levels of absenteeism in certain markets while limiting recovery mobility. We are focused on reactivating part of our COVID playbook from the early pandemic days and looking to further simplify our operations to offset this pressure. Although challenging, we are managing effectively through each of these dynamics. We implement our revenue growth management levers and continue to invest in our brands while taking extensive measures to lighten the supply chain disruption. By applying the lessons learned from earlier waves of the pandemic and maintaining our focus on execution, we are confident that we remain well positioned to deliver our growth targets. Turning to Slide 7, you can see that our strategy is continuing to drive a virtuous cycle. Strong volume momentum, combined with brand investments and strategic pricing options, position us well to consistently deliver profitable top and bottom line growth as well as a strong return of capital to our shareholders. We grew revenue by 5.2% in 2021, lapping 3.7% growth in 2020. Volume was once again a big contributor to this growth, which demonstrates the fundamental strength and health of our business. Despite the ongoing impact of cost inflation and supply chain volatility, we delivered gross profit growth of 3.6%. Our working media investments have increased double-digits versus last year on the back of a double-digit increase in 2020. Combined with our advantaged portfolio of brands and our execution activation capabilities, we gained or held share across 75% of our revenue on a 2-year cumulative basis. We increased operating income by 5.8% and delivered $3.2 billion in free cash flow. We view these results as a healthy indicator of our ability to continue to deliver on our long-term growth algorithm. As you can see on Slide 8, we are now averaging a 4.2% quarterly growth rate since the launch of our strategy in September 2018. We're proud of our strong and consistent track record over this time. As we continue to focus on profit dollar growth, local first commercial execution, high return investments and aligned incentives, we are confident that we can continue to consistently deliver attractive growth. On Slide 9, you can see some highlights of our successful execution against our long-term growth drivers. These include delivering our strongest Christmas sales on record in Europe, growing double-digits versus 2020 and 2019, led by Cadbury in the U.K. and Milka in Germany. It also includes continuing to expand distribution in emerging markets, adding 300,000 stores in China and more than 200,000 stores in India. It includes investing to sustain growth in digital commerce, which grew 29% on a reported basis, lapping 75% growth in 2020. Digital commerce now accounts for approximately 6% of revenue, up from 3% in 2019. It also includes expanding our presence in high-growth segments where we are underrepresented, including well-being where we launched breakthrough innovations on key brands like Oreo Zero Sugar in China as well as Cadbury Plant Bar and plant-based Philadelphia in the U.K. As consumer demand for well-being options rises, each of these innovations has a clear potential to expand to additional geographies. We also grew our presence in the premium biscuit space with double-digit growth led by Tate's, which we transitioned successfully to direct store delivery. Additionally, we expanded our presence in close-in adjacencies, such as baked snacks with the successful integration of Give & Go. By realizing revenue and cost synergies, we grew that business double-digit in 2021. We also expanded our presence in snack bars with the acquisition of Grenade in the U.K. Switching to Slide 10. We continue to further enhance and strengthen our portfolio in 2021, expanding our exposure to the growing profit pools in chocolate and biscuits as well as adjacent categories and the well-being and premium segments. We acquired 4 high-growth strategic assets: Chipita baked snacks in Europe, which just closed in January; Grenade well-being snack bars in the U.K.; Gourmet Food premium crackers in Australia; and Hu premium well-being snacks in the U.S. These acquisitions are worth $800 million in annual revenue, and they are well positioned to collectively deliver high single-digit growth for years to come. This takes our total number of acquisitions to 7 since 2018 and contributing over $1.5 billion of revenue. We also earned $1.5 billion in net proceeds from selling down on our beverage assets in 2021, enabling further investment in our brands and growth drivers. Additionally, we are in the process of completing a strategic review of our developed market gum business. We expect to complete that review and have more information to share with you at our May 10 Investor Day. 2021 was a strong year, and we are well positioned for another year of strong shareholder returns in 2022 and beyond. By staying close to our consumers, executing our proven strategy and taking the appropriate actions to navigate input cost inflation and supply chain volatility, I am confident that we can deliver strong performance for years to come.

Thank you, Dirk, and good afternoon. Our full year and fourth quarter performance was strong in terms of revenue growth, volume, earnings and free cash flow. We delivered revenue growth for the year and quarter of 5.2% and 5.4%, respectively. Importantly, half of this performance was underpinned by volume. Emerging markets increased 12% for the year and 11% for the quarter with strong performance across significant majority of countries, especially the BRICS. Despite a small group of countries, specifically in Southeast Asia continuing to face COVID-related challenges, overall, we are encouraged about the outlook for our EMs in the near and long term. Developed markets grew 1.6% for the year, coming off an exceptional 2020 and 2.5% for the quarter off a strong comparison. As with our emerging markets, we are encouraged by the sustained performance, particularly in our key core snacks categories. On Slide 13, you can see our portfolio performance. Chocolate and biscuits remain attractive and durable categories with very strong results both pre-pandemic, during the pandemic and, importantly, as we enter 2022. In addition, improved mobility has yielded growth in Gum & Candy versus 2020, approaching a return to pre-pandemic levels in many markets and back to growth versus 2019 in China. Biscuits grew 3% for the year and 3.2% for the quarter. EMs were the big driver of performance, with majority of our AMEA and LA business delivering double-digit or high single-digit growth. This underscores the large long-term opportunity for our EM biscuit businesses as we continue to make investments in A&C portfolio growth and distribution expansion. Both global and local jewels -brand, including Oreo, Chips Ahoy!, Barni and Club Social delivered strong growth. Chocolate grew more than 10% for the year and 8% for the quarter, with significant growth across both developed and emerging markets through both our global and local brands. Chocolate is a great category to be in, and as in biscuits, we continue to make investments in our brands and capabilities to continue to drive its performance for the years to come. Gum & Candy posted 7% growth for the year and more than 11% growth for the quarter as increased mobility resulted in a return to growth in several key markets, especially within Latin America. Now let's review our market share performance on Slide 14. We continue to see good share performance on a 2-year cumulative basis as we prioritize A&C investments and execute well in most markets. We held or gained share in approximately 75% of our revenue base on a 2-year stack. Our biscuits and chocolate categories continue to do well, with 80% of our revenue base holding or gaining share. Overall, share gains versus 2019 were broad-based, with all regions growing share over a 2-year period. A few of the more notable areas of share gains over this time include China, Russia, India, Brazil and Mexico biscuit; U.K., Russia and Australian chocolate; and China gum. As we move into Q1, we expect softer share performance driven by our North American segment as the combination of supply chain constraints from third parties and labor shortages will pressure stocks and service levels. While the immediate effect of the strike is behind us, we have entered 2022 with low stocks, and we are working to rebuild inventory levels, which takes time in this environment, particularly as demand continues to be strong. We expect a gradual improvement of the situation as the year progresses. Now turning to Page 15. For the year, we delivered strong OI dollar growth of almost 6% driven by solid gross profit dollar increases and reduced overheads. For the quarter, profitability was pressured primarily due to the lag between commodities and Forex-related inflation and implementation of pricing actions, specifically in North America where price increases became effective at the beginning of January. Turning to regional performance on Slide 16. Europe grew 5% for the year and 6.5% for the quarter supported by strong execution and activation and continued recovery in the convenience away from home and travel retail channels. Our Q4 results were driven by some growth across major markets, including the U.K., Germany and Russia, underpinned by solid share gains. In chocolate, we delivered record results for the Christmas season, growing double digits against both 2020 and 2019. Biscuits and meals categories also delivered good results, while dollar growth for the year was high single digits driven by continued volume leverage, cost control and strong overhead management. Looking ahead in this region, we expect muted profitability in Q1, with improvement beginning in the second quarter as price increases in a number of countries take effect. North America declined by 0.6% for the year and 0.3% for Q4, lapping very strong high single-digit growth in the previous year. This performance includes healthy growth from our ventures portfolio. Softening in the quarter and second half were also driven by supply chain constraints and low inventory levels due to the strike and third-party labor constraints. North America OI declined by 10.4% for the year and 20% for the quarter due to inflationary pressure and supply chain constraints. As mentioned earlier, we expect sequential improvement as pricing actions go into effect in Q1. AMEA grew 7.3% for the year and 5.8% for the quarter, showing continued strength across most of the region. India grew double digits for the year and continues to execute well as we invest for the future. We continue to extend our leadership position in chocolate, while the growth of our biscuit business continues to outpace larger competitors in the region. China grew low double digits for the year and high single digits for the quarter driven by continued share gains in both biscuits and gum. Australia and New Zealand also did well with solid performances in the year and in the quarter in chocolate and biscuits. AMEA increased OI dollars by more than 13% for the year due to strong volume leverage, productivity and overhead management while also increasing Working Media by double digits. Q4 growth was more muted due to commodity inflation. As in other regions, pricing actions to RGM are being implemented as of Q1. Latin America turned in strong growth for the year of 20.4% and 19.7% for the quarter with overall share gains for 2021. Brazil delivered strong double-digit growth for the year and quarter. Mexico grew high single digits for both the year and the quarter and our Western Andean business grew high single digits for the year and mid-teens for the quarter. Adjusted OI dollars in Latin America increased high double digits for the year and more than 40% for the quarter. These increases were driven by broad-based growth across core snacking categories, effective pricing and the volume and mix impact of higher Gum & Candy. Inflationary pressure remains challenging, but we believe both RGM and volume growth will enable us to largely offset this dynamic in 2022. Moving to EPS. Full year EPS grew 9% at constant currency. This growth was primarily driven by top line-driven operating gains. Turning to free cash flow and capital return on Slide 18. We delivered full year free cash flow of $3.2 billion, which included $300 million higher tax payments year-over-year, some related to our coffee JVs, IPOs and sell-downs. We continue to feel confident about our free cash flow trajectory as we move forward. And for the year, we returned $3.9 billion to shareholders in the form of dividends and share repurchases. Now let me provide some color on our 2022 outlook on Slide 20. We expect to deliver against our long-term growth algorithm that we see as a performance floor, particularly as revenue grows. As you are hearing across all sectors, we anticipate another year of material cost inflation which, in percentage terms, is expected to increase high single digits versus 2021. Pricing will be a larger top line contributor than in the previous years, but we do expect volume growth to also be a positive factor. In this regard, a few more points. Our superior portfolio of brands and the consistent investments we have made and will continue to make in Work Media, marketing and sales, route-to-market and RGM capabilities position us well for sustained growth and profitability in this higher inflation environment. We believe we can continue being an effective driver of category value and volume growth, specifically in biscuits and chocolate. Our focus is not changing as we aim at growing profit dollars and dollar growth underpins our sustainable algorithm, cash flow and capital return. We had a history of cost excellence, which we expect to remain the case for 2022 and going forward. Our algorithm continues to be predicated on brand building and capabilities in sales and marketing also in 2022. All included, for the year, we expect mid-single-digit to high dollar growth and high single-digit EPS growth. Earnings phasing will reflect the current inflationary environment and the sequential introduction of pricing. We expect improved year-over-year gross profit dollar growth as pricing is fully realized and as we implement additional RGM strategies. But we do still expect some pressure in Q1 and partially in Q2. For Q1 specifically, we still expect to face larger supply chain headwinds in North America related to third-party partners and low inventory from last year's strike that should improve as the year progresses. With respect to free cash flow, we expect another year of $3 billion plus. In this outlook, we also expect an ETR in the low to mid-20s based on what we know today, interest expense of approximately $325 million and share repurchases of approximately $2 billion.

There's been some discussion lately in the media about emerging markets potentially slowing down a bit as 2022 progresses. I think no one really knows for sure what will happen. But I'm just curious, it seems like things are fine for you now. But as you look ahead to your major regions or major countries, is there anything that you are particularly worried about, anything that you look at and say, 'Oh, this could get a little worse as we go?' Or is it just sort of, 'Hey, we're planning on steady as she goes?' And I'm just curious what's baked into your guidance potentially for a little bit of not demand destruction but a little bit of a worse sort of consumer around the world, perhaps?

Yes. Well, thanks, Ken. First of all, I would say that around the world, but also in emerging markets, today and for the last 3 years, our core categories have been doing quite well. Chocolate and biscuits have been growing very strongly and, in fact, better than they were before the pandemic. There are a number of factors at work with the consumers that are boosting the consumption and higher snacking. So we see very robust demand. And if I go to our key emerging markets, the BRIC countries, we see that in those 4 countries also very, very clearly. As it relates to investments and support for our brands, we are also continuing to do that in emerging markets. If anything, that's where we increased the most. I think that from a pricing perspective, we have been dealing with pricing in emerging markets over the years, and we know that we have to hit certain price points, and we're very careful with that. Having said that, we have already started to increase prices. In fact, the effects that you see in Q4, any price effects there, are largely coming from our emerging markets. We've increased prices in most emerging markets around the world. As you can see, results have been very good, so we also have that very low elasticity that we are also seeing in the rest of the world. So everything is sort of aiming in the right direction. At this stage, there are no signs that it's slowing down in emerging markets. Obviously, in our projections of our algorithm, we have not taken the same height of performance that we've seen this year in our emerging markets. We've taken that a little bit more conservatively. Based on those two, seeing what we're seeing and the experience that we have and, I believe, us doing all the right things as it relates to pricing, investments, gaining distribution, which is another big driver in emerging markets for us, and the fact that we feel that we have been relatively realistic in what we forecast for emerging markets, we feel pretty good. We think that emerging markets will deliver for us in 2022.

Great. That's clear. And then a quick follow-up, if I can. Luca, you touched on this a bit. But is it reasonable, just given your comments about the phasing of pricing and maybe the timing of inflation too, to think about the flow of your years maybe being a little bit more back-half loaded and perhaps a little bit more challenged in the front half? And if that's true, are there any specific timing issues we should consider other than pricing and inflation just as we model ahead?

Thank you, Ken. It is mostly pricing and inflation phasing that will drive the gross profit, specifically as a line in the P&L progression throughout the year. Obviously, you saw the number being pressured in Q4. But as you look closely on the segment profitability data that we disclosed, you see that the Q4 GP pressure came mostly from North America, where we have just announced pricing. You will see a sequential progression that is positive in the gross profit line as of Q1, but the most of the benefit to hit our guidance is going to come in the second part of the year. And as I said, there are 2 elements there. One is pricing implementation, and there might be multiple pricing waves. The second one is the fact that, particularly in Europe, pricing will come into effect as of Q2 and in other places as well. Third, it is the fact that inflation, given the favorable commodity pipeline that we had in 2021 in Q1, commodity pressure is most acute in the first half of the year. But you will see a better trend in GP dollar as of Q1 and sequentially, it will improve over the quarters.

Luca, maybe just following up on Ken's questioning, just a couple of sort of bridging from '21 to '22 questions, if you will. If we look, first, have we quantified or can you quantify just how much the acquisitions contribute to earnings growth in '22 versus '21, adjusted EPS growth?

Look, the Chipita acquisition is a material acquisition, obviously, in terms of size but also the number of countries it spans across. It will be fully integrated, but it will take a little bit of time. I will say that, without giving you specific numbers, there is a moderate positive impact on EPS next year, but you will see the full benefit of the revenue and cost synergies as of Q4 and, potentially and obviously, in 2023. So it will be a modest contribution all in all considered.

Okay. And just more of a contribution in '23 versus '22.

Absolutely. I think you're going to see the full benefit, and I think you will be pleased in 2023.

Looking at the items below the operating profit line, in 2021, the contributions from those items, including share repurchases, amounted to about $0.09 in earnings. In reviewing the guidance, it appears that interest expense and the tax rate may pose some challenges. Could you clarify whether we should anticipate any earnings contribution from below the operating profit line, and if so, will this primarily come from share repurchases? I'm trying to understand the extent of the benefits we can expect from below the operating profit line.

Interest costs will be up around about $20 million, $25 million. So it is $0.01 of EPS headwind. Tax rates will be a little bit higher, but not much, and so I would say a slight headwind. Obviously, I can't comment very much on the joint ventures as those are publicly traded vehicles. But the biggest benefit is going to be most likely around share repurchases. In terms of the JVs, I will refer back to what was said about KDP profit guidance for 2022. And I think that's the stance we have taken for that.

Perhaps Luca, could you just comment first on what your outlook or expectation would be in terms of gross margin change year-over-year for the full year? And I guess, to the extent you see some full year gross margin compression, more would need then to come from SG&A leverage to get to your sort of mid-single-digit constant currency EBIT target. So in that case, what would be those SG&A drivers that you would have to lean more heavily on this year potentially, given what your answer on the gross margin is?

Sure. I think you know that we try to move away from gross margin percentages. And I think that has served us well. So talking about gross profit dollars, 2022 is no exception to what we have said consistently throughout the years. We aim at getting at 4-plus percent on that specific line of the P&L. As I said, you're going to see year-over-year GP dollar growth as of Q1, but will be most pronounced in the second part of the year. As you dissect the numbers, you clearly see that the pressure in Q4 on the GP line, which was slightly positive, comes mostly from North America. What you have to believe for the GP line to improve is that the biggest change that has to happen is pricing going into effect in North America. The first indication is that price was accepted by the retailers and we see our prices going up in the marketplace. I feel cautiously positive about that, which is clearly the biggest driver of GP progression over the quarters. In terms of SG&A, we will continue investing in advertising. Obviously, we will be very sensible because there are situations, specifically in North America, where we don't have enough stock. So we are calibrating exactly where we want to spend. But as Dirk said, in emerging markets, we will continue pushing and we will continue pushing in the other regions too. The point here is the last thing we want to do as we implement pricing is cutting back on A&C investment. As far as overheads and productivity, we will continue the great job that we have done over the last few years and particularly in the last couple of years. Excluding the acquisitions, our overlying pure cost SG&A is down both in 2020 and in 2021, and my goal is to keep that line down year-over-year. Productivity obviously is going to be good for the year as we look at it, but I'll be commenting more as we publish Q1 about all these specific lines.

And then Mondelez is guiding to positive volume growth for the full year despite some supply chain challenges and limited shipments in Q1 maybe in the U.S. and Europe and, obviously, the higher pricing. So I guess what sort of elasticity relationship is Mondelez underwriting for the year?

Look, we have been a little bit conservative on elasticity. As Dirk said, elasticity is low at this point in time based on what we see across the board, but we are planning for historical levels. So that's the type of elasticity we have planned. I think you know the number in general, it is onetime elasticity, give or take, but I expect to do better than that.

I guess one of the surprises in the results is that North America shipments were weak. And all of us look at Nielsen retail data, and it looks really, really strong. So what's happening at retail? Is that just strong consumer takeaway and the inventories are getting depleted? Should we expect that retail consumption to then weaken in the first quarter as a result of running out of inventory? Maybe help us bridge why it looks so good from a consumption data? And then I had a quick follow-up.

Yes. Demand remains very strong. However, our growth is affected by supply chain constraints and the timing of some price changes. Our inventory factors into that as well. In North America, we experienced flat growth for the year. Over a two-year compound annual growth rate, we achieved 4%, which is still quite good. In recent quarters, the strike in Q3 left us with low inventory levels. Although we're seeing improvements, it's progressing more slowly than expected due to widespread supply chain disruptions. We anticipate ongoing effects from the strike impacting our availability throughout Q1. We also collaborate more with external manufacturers, who are dealing with labor challenges. We predict continued pressure in this area at least through Q1. Notably, we announced price increases effective January 1, which were not reflected in Q4, but you will see their impact in Q1 reports. We're making strides in enhancing our revenue growth management capabilities. Currently, as you assess Nielsen data, you'll notice improvements due to those price increases. However, looking at last year's Nielsen data reveals the impact of our supply issues. For Q1, we expect improvement in the top line for North America and an increase in margins, albeit sequentially. Pricing has been implemented across the U.S., Canada, and our ventures. We’re simplifying our portfolio and taking steps to boost capacity and utilize more temporary labor to alleviate supply chain pressures. We continue investing in our brands, focusing on those with solid supply. As these initiatives unfold in 2022, we expect both top and bottom line growth to rebound in North America. It's worth noting that while the bottom line will show sequential improvement, year-over-year comparisons will reflect some pressure since Q1 last year was strong. The lower inventory situation I mentioned is a factor. Overall, we anticipate significant improvements in the coming quarters.

Okay. Well, my follow-up, you've been providing us with market share trends on a 2-year basis. But are you going to continue that in 2022? Because I think people will start to judge you more on a year-over-year basis. How will you represent your market share trends?

Yes, we are going back to year-over-year comparisons. During the pandemic, we found two-year comparisons helpful due to unique influences on market share. Now that the situation is improving, we believe it's appropriate to return to normal market share evaluations. For example, looking at 2021, the U.S. strike impacted our market share, but it's crucial to assess the U.S. performance compared to pre-pandemic levels while excluding the strike's effects. In Canada, we were previously out of a listing with a key customer for an extended period, which also influenced our market share. However, we have resumed that relationship, and our market share is expected to recover. Last year in the U.K. chocolate sector, we benefited from a competitor's significant supply chain issues, but their supply chain has since stabilized. We had strong outcomes last year due to our superior supply chain performance compared to our competitors. The primary focus for us is demonstrating the overall growth over the past two years, which has shown a solid increase relative to pre-pandemic times. Moving forward, we will provide year-over-year comparisons unless exceptional circumstances arise, which we will communicate.

I just had a question for you. First, I think, a question for Luca. In relation to your hedging, there was a comment that you're about 70% hedged for the year. I do want to get a sense if that would be considered normal or above or below where you normally would be at this time of the year. And then just to understand, because you're quite hedged in 2021 as well, the degree to which some of these unhedged costs, freight or packaging, things that you can't hedge, are those like a lingering risk to 2022? Or do you have a better read on those costs for the coming year?

Thank you for the question. It's a very good one. 70% is pretty much in line with what we had in last year. It is higher than what it has been historically. And over time, what we have done is we have moved the needle up in terms of going longer because, obviously, that gives us the opportunity at the low levels to buy more. We have the opportunity to sit back and wait until the situation evolves. Most of these hedges are 2 options, and they are not straightforward covered. We still have flexibility, should one of these commodities go over. I don't feel particularly worried about the remaining 30% at this point. But there are parts where there might still be pressure. What we see these days is a little bit more pressure coming out of dairy. We might have to consider additional pricing for that in some places where we sell dairy-based products. We also see some pressure in packaging and some ingredients. The assumption we have, at this point in time for the second part of the year, is inflation that is in line with what we have seen and what we are seeing these days. There could be potentially more, but I don't expect a material number at this point in time. We got a little bit surprised by these unhedgeable commodities and exposures in the second part of last year. We are very vigilant. If in case they go up, we will have to price and we will do so.

Okay. Just one other question in relation to what have been some really strong market share trends, and that's the culmination of a lot of work and marketing and new products and your categories doing so well also. I guess I'm just curious, as you think about your pricing strategy for the coming years, there's a little risk to your market share. Are you taking pricing that largely reflects what your competitors are doing and inflation in that market and, therefore, there shouldn't be a whole lot of movement in share? Just trying to get a sense given how strong it's been, if that could be a bit of a watch point.

Yes. Well, our pricing is largely driven by what we think is acceptable to the consumer. We don't know what our competitors are planning until they do it. We try to price in line with what we believe our consumers are prepared to pay for our brands. That is different between emerging markets and developed markets. In developed markets where you're largely talking about supermarkets and there is a whole bunch of pricing effects, you have a little more liberty. In emerging markets, we need to hit certain price points. We do a lot of work on RGM price pack architecture and so on. We expect that we will be very sensible. We're working very hard on RGM and better understanding what is possible for pricing for our brands, what is acceptable to the consumer. Many years ago, we had a few episodes where we probably went overboard on pricing. We will step a little more carefully as it relates to pricing. In Q4, we've been pricing in emerging markets. So far, that is working really well for us. We will see what happens in the U.S. and in Europe. At this stage, it feels pretty solid and we don't expect that there will be any major issues. Going forward, second half and into '23, we will see what the inflationary pressure is going to be, but I can assure you that we will step very carefully and make sure that we continue to see volume growth for our brands.

Great. A question on pricing, we can see some clear pricing that you're taking in developed markets here into '22. With the positive volume guidance, I don't want to get too carried away about the incremental pricing, are you thinking that there might be some moderation in pricing from emerging markets in '22 versus '21? Or should that be very similar?

Very similar is the straight answer, David. There are pockets where we don't see the level of inflation that we have for the totality of the company. But in general terms, particularly around Forex, there are places where there is a little bit more inflation. Given all the puts and takes, pricing-wise, you're going to see a level of pricing in emerging markets that is in the same ballpark of 2021, a little bit higher. We implemented, I believe, 2 price waves in places like Russia in 2021. We implemented, I believe, 3 price waves in Brazil. I can go on and talk about Mexico, Southeast Asia and South Africa, where we have implemented multiple rounds in 2021 as well.

Great. And just thinking about your contribution to growth in '22 versus '21, you mentioned how in the last couple of years, perhaps you've gotten some points of distribution gains, particularly in developed markets from smaller brands that may not have had access or might have had more issues with supply chain, even though you gave some of that back in '21. I wonder if you suspect you'll have some tough comparisons in developed markets against smaller brands this year. But then I think about the ability for you to have new product news this year and then the acquired businesses that you've had, they could possibly get into greater distribution. So I'm trying to think about how you're thinking about the puts and takes of what seems to be some headwinds and some tailwinds going into this year.

Yes. First of all, on the smaller brands, that effect is certainly continuing in Q4, and they continue to do well. If we have some supply issues, it is sometimes in those smaller brands, because they keep on selling at the higher levels we had during the pandemic, that sometimes give us some capacity pressure. We are trying to deal with those capacity issues, of course. We are, at the moment, assuming that gradually they will give back a little bit, but we do still think that those brands will keep some of that momentum that we started to see during the pandemic. Our global brands have performed really well this year. This was a year where our global brands outgrew our local brands. Last year, it was the local brands who outgrew the global brands. The recovery of a brand like Toblerone, which is largely sold in world travel retail or Trident, the gum, which is, of course, sold on the go. They were heavily disrupted in 2020. Local brands as I was saying are still doing quite well. They are in the mid-single-digit growth range. We don't see that slowing down going into next year, and there is the additional effect from the acquisitions. Chipita, you won't see that until the acquisition is done for 12 months. You'll see a good year for Give & Go this coming year. Additionally, a brand like Perfect Snacks, which is a snack bar that was affected by the pandemic, we're also expecting that to see good growth. Tate's was transitioned to DSD and saw very strong high double-digit growth here, which we think will continue into next year. Pricing has covered all the brands in the U.S., the global brands, local brands, and the venture brands.

A couple of questions. It looks from everything we see like inflation, well, particularly owners in the U.S., is kind of close to peaking. But it sounds like it's still building in markets like Europe and elsewhere. Can you walk us around the world real quick and tell us what you're seeing in terms of cadence, the level of pace, and magnitude of inflation?

Yes. Sure. I'll take a stab at it. I will start by saying that the inflation is really the highest in the U.S. It might be at the highest point in the U.S. right now; I don't necessarily see it going down in the second part of the year. The majority of the commodities we procure are global, and inflationary pressure is pretty much the same around the world. Logistics costs are on the rise everywhere, but not to the level that we see in the U.S. Packaging-related costs and ingredients are fairly consistent across the world. Inflation is most acute in places where we have seen currencies weakening versus the dollar, in places like Russia and Brazil. Overall, regarding inflationary pressure, yes, there are some peaks. But it is fairly even overall, I would say. There are certain commodities that are more impacted than others. Cocoa, for instance, is a little more benign in 2022 than it has been in 2021. So places where we have a material chocolate business, like in Europe, are going to see, in terms of inflation, a little bit less. I just mentioned dairy in one of the previous questions where there might be further pressures coming up. Hopefully, I gave you a bit of color on how we see costs evolving by region and countries.

Yes, that's very helpful. To return to North America, it's unfortunate that you're experiencing ongoing issues there. My question is whether these challenges are unexpected. Looking at the Nielsen data in relation to Rob Moskow's question, demand appears to be strong. It seems you are actively generating demand since promotional levels are high and increasing year-over-year. This indicates that one part of your organization is working to create demand while another part is unable to meet it, resulting in a disconnect. So I have two questions: Is that an accurate assessment? And if so, what is causing this disconnect?

I would say that, for sure, in the beginning of inflation or the supply chain disruption, which we started to see in August, September of '21, there was clearly a disconnect because our sales teams saw high demand and the supply chain suddenly started to realize that transportation was difficult and that there were other issues going on, a little bit of capacity and labor shortages in our third parties. It took us probably a few months to realize we need to reset here. Since then, the teams have been working quite closely, trying to link whatever demand generation we have with the supply capacity that we have. I expect that in the coming months, we see that starting to work a lot better for us. I would say it's fair, but we've gotten under that now, and we've solved the problem. Going forward, we should be okay. Not sure if there was a second part to the question. That was it, I believe.

I have a question regarding the top line, reflecting on the comments made during the Q&A. Previously, it seemed you were anticipating around 6% to 7% pricing for this year, which was implemented in early January in North America. In response to David Palmer's question, it appears that pricing in most emerging markets will remain consistent with 2021 levels, while there is an expectation of improved pricing in Europe. So, if I consider all of that, would it be accurate to say that pricing for the year could be at least 3%, possibly higher? I'm aiming to understand a reasonable organic growth forecast for the year, beyond your usual long-term guidance of over 3%.

Thank you for the question. We usually don't give the breakdown of pricing and volume, and we try to move away to keep some sort of flexibility. But what I would tell you is that, as I said in the prepared remarks, I see the 3%-plus as a plus in it as a floor. At this point in time, we want to see how Q1 plays out with some price increases and Omicron before we commit to a higher number. Hopefully, we see Q1 coming in, in line with our internal expectations, and we will be in a position to raise the guidance on top line potentially after we see Q1.

Yes, fair enough. I guess I'll try another one. Just in terms of the cash balance, you're kind of ending '21 with a decent amount of cash. Leverage looks to be now a bit sub-3x, and it sounds like gum business is still under a strategic review. So outside of the $2 billion potential in share repo, how are you thinking about just general capital allocation in terms of M&A? Like, do you feel as if, as you get through '21, it's about stabilizing and tucking in Chipita and working on distribution opportunities with acquisitions already done? Or are you still pushing forward in terms of health and wellness premium, et cetera?

Look, the cash position at the end and the net debt position at the end of 2021 is fairly good, because we have done quite a bit of work all around. I'm very happy with leverage being at 2.7x. In January, we have just got a $2 billion check almost for Chipita. Keep that in mind. In terms of capital structure, we will continue generating cash flow, and I'm very happy with the quality of the cash that came in into 2021. The first element, which is the foundation of our capital structure, is there. If we had an acquisition that is similar to Give & Go or Chipita, we will still be able to fund it. We have our coffee stakes. We have all it takes, including potentially switching off share buybacks to be able to phase an acquisition of the level that Give & Go and Chipita had been.

Thank you. Well, in closing, we feel good about our 2021 performance across our key metrics, of course, including the top line growth. We see good volume, profitability was good and the cash generation was excellent. I want to reiterate that we are especially proud of our people, I believe the very best in the CPG industry. By continuing to stay close to our consumers, we are confident that we have a bright future ahead. We remain focused on our consumer-centric growth strategy, that will not change. We will continue to improve our execution and invest in our brands, talent and capabilities. As I look ahead towards '22, we expect continued pockets of volatility related to COVID, inflation or supply chain challenges. We continue to risk-adjust our plans to ensure that we can successfully navigate these periodic disruptions and deliver on our targets. We enter 2022 with good momentum in our categories and the vast majority of our geographies. Our global and local brands are on solid footing with strong levels of investment. We continue to augment the portfolio with growth accretive snacking assets, and we are excited about the opportunities to advance multi-category strength in our key markets. We'll continue to expand distribution in emerging markets, and we're going to further accelerate close-in adjacencies and our high-growth segments. Thank you for your time and for your investment, and see you at the end of Q1.

Thank you, everyone.