Mondelez International Inc (MDLZ) — Q1 2022 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. 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, a reminder that we have an investor update on May 10, and that will begin 9 Eastern, 8 Central where Dirk, Luca, and other senior leaders will talk more about the evolution of our strategy. More details will be on our IR website soon. With that, I’ll turn the call over to Dirk.

Thank you, Shep, and thanks to everyone for joining the call today. I will start on slide 4. I am pleased to share that we have delivered an excellent start to the year with robust volume growth, solid pricing, strong profit dollar growth, and high cash delivery. Strong demand for snacks fueled broad-based growth all around the world, with the chocolate and biscuit categories continuing to demonstrate resilience, and price elasticity remaining below historical levels. We also continue to effectively navigate a dynamic environment characterized by global input cost inflation, as well as lingering disruptions in the supply chain, labor, and transportation. Throughout the quarter, we succeeded in mitigating these challenges through ongoing cost discipline and strategic pricing actions. At the same time, we continue to invest to support our brands, our distribution, our capabilities, and acquisitions. We remain confident that the strength of our brands, our proven strategy, and our continued investments position us well to deliver attractive, sustainable growth for the remainder of 2022 and beyond. It is especially important to note that we remain extremely confident in our people, the very best in the CPG industry. Each and every day, our makers and bakers around the world remain focused on delivering high-quality, great-tasting snacks to enrich the lives of consumers. No matter how the external environment shifts from one quarter to the next, our diverse and dedicated teams continue to deliver the brands our consumers love. Turning to slide 5, you can see that our strategy is continuing to drive a virtuous cycle. The strength of our brands is continuously increasing investments and significant pricing actions, sustaining top-line momentum and solid profitability and positioning us well for another strong year in 2022. Our first quarter results show that we are off to a strong start. We grew revenue this quarter by 8.6%. We delivered gross profit growth of 9.9% due to higher pricing and robust volume. Our A&C investments have increased high single digits, and we gained market share across half of our revenue base. We increased operating income by 13.5% and delivered $1 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 6, we are now averaging a 4.7% quarterly revenue growth rate since 2019. We feel good about this strong and consistent track record. In the second half of 2018, we shifted our paradigm on how to generate elevated growth by focusing on gross profit dollar growth, local first commercial execution, a virtuous cycle of always increasing investments, and a new approach to incentives. We are confident that this approach will continue to consistently deliver attractive growth. We also believe this performance demonstrates not only the strength of our execution but the attractiveness and durability of our core categories of chocolate and biscuit. Against that backdrop, I'm now on slide 7. We are excited to provide some additional details on our recently announced acquisition of Ricolino, the number one sugar confectionery and number four chocolate player in our priority markets of Mexico. This strategic acquisition will enable us to double our size in Mexico, a key priority market for us and Latin America's second largest market after Brazil. Ricolino has a broad portfolio of iconic, widely loved chocolate and candy brands including Ricolino, Vero, La Corona, and Coronado. In addition to the taste of the nation brands, the organization's robust route-to-market infrastructure, which has more than 2,100 DSD routes that serve more than 440,000 traditional trade outlets, will enable us to rapidly expand our share in biscuits and chocolate. We also will benefit from four new manufacturing facilities with strong production capabilities. We expect this acquisition to rapidly drive value. Ricolino has been growing at an 8% CAGR with solid profitability over the past five years and currently delivers more than $500 million in net revenue. Its high strategic fit transforms our business with now 75% of revenues coming from core snacking categories and great opportunities for both revenue and cost synergies. Like other companies, as shown on slide 8, we are experiencing a dynamic operating environment driven by global cost inflation and supply chain volatility. We condemn the war in Ukraine, which is not only causing great human suffering but adds to an already very difficult cost and supply chain environment. Let's take a closer look at each of these dynamics and the steps we are taking to address them. First, we continue to face elevated input cost inflation, especially in the areas of energy, transportation, packaging, wheat, dairy, and edible oils. To offset these challenges, we recently announced further pricing actions across key markets. Additionally, our commodity costs are about 85% hedged for the year and near fully hedged in key areas. We continue to accelerate productivity and throughput initiatives. Second, we continue to manage through volatility in the supply chain, especially in the US, due to labor shortages at third parties, as well as a continuing gap between demand and supply of trucking capacity and containers. To offset these challenges, we are continuing to improve our manufacturing and warehouse capacity, prioritizing key SKUs, and implementing new measures to support employee retention. And third, we are working through numerous challenges related to the ongoing war in Ukraine. I would now like to spend a few minutes addressing our actions to care for and protect our people, as well as our operations in the region. First and foremost, our thoughts are with the people of Ukraine and all those around the world with family, friends, and loved ones who have been impacted. The current situation is devastating, and we condemn this senseless violence. We have taken a number of important steps to protect our colleagues, including strong financial support, border crossing assistance, and help with finding housing. As part of these steps, we are continuing to pay our employees in Ukraine. Additionally, we are stepping up our commitment to relief efforts, dedicating so far $10 million to humanitarian support and food security. This includes donations to international and local aid organizations focused on supporting all people in Ukraine, but also with a specific focus on the communities where we have plans. On top of financial donations, our teams are providing on-the-ground help. For instance, we have helped transfer more than 100 children from Ukraine to Turkey, secured diesel generators to help provide power to critical public facilities, and we are making food available in Ukraine, including product donations and working with distributors. Our two manufacturing operations in Ukraine have been shut down since the war began. Unfortunately, our site in Trostyanets has suffered significant damage due to the substantial military action in the area. Our other site in Ukraine also remains closed. Thankfully, none of our employees were injured at either facility. It is too early to provide you with potential next steps for the facilities, but we will work to make these facilities operational when the local situation allows. In terms of our business in Russia, as a food company, we have scaled back all nonessential activities, including stopping all new capital investments, any planned product launches and line extensions, commercial sponsorships, and advertising. We are focused on local production of shelf-stable packaged snacks that are staples in people's daily lives. We also continue to provide support to our colleagues. With that, I will hand over to Luca for more details on our financials.

Thank you, Dirk, and good afternoon. Our first quarter performance was strong from top to bottom to cash flow. We delivered revenue growth of 8.6%, with nearly four points of that growth coming from volume mix. Emerging markets continue to show great strength, posting an increase of more than 16%, with strengths across all our major business units. Importantly, volume mix dropped nearly 10 points of this growth, with notable performances from Brazil, India, China, and Mexico. Developed markets grew 4.2% for the first quarter, with strength in both Europe and North America as demand remains strong. As for emerging markets, also, our developed market volume mix was positive, but pricing drove a good portion of that growth. Turning to our portfolio performance on slide 11. Chocolate and biscuits continue to demonstrate strong growth and drive our business. Gum and candy also increased significantly as many areas are at or above pre-pandemic levels. Biscuits grew 6.7% for the quarter, with more than two points coming from volume mix. Similarly to Q4, emerging markets were a significant engine of growth in this category. Brazil, Mexico, India, Southeast Asia all grew double digits, while China posted high single-digit growth. Oreo, Chips Ahoy!, HU, and Tae are among those brands that deliver double-digit increases. Chocolate grew more than 8% for the quarter, with increases in both developed and emerging markets. Both global and local brands grew well, including Cadbury, Dairy Milk, Milka, Toblerone, Lacta, and Riz. Gum and candy continued to show improvement with growth of 27% related to mobility increases. China, Brazil, and Mexico were among some of the larger gum businesses posting strong performances. Now let's review our market share performance on slide 12. We held or gained share in approximately 50% of our revenue base during the quarter, with approximately 25 points of high win due to the inventory situation in the US and related out of stock. Our chocolate category continued to do well, with 70% of our revenue base holding or gaining share. While our biscuit category held or gained share in 40% of our revenue base, the impact driven by lower inventory levels in North America following the Q3 strike and continued labor shortages at third-party manufacturers is worth 40 points of headwind. We expect these dynamics to improve as we move into the second half of the year. A few of the notable areas of share gains in Q1 include China, India, Brazil, Mexico, UK, and France Biscuit; UK, Brazil, and South Africa chocolate; and China gum. As we move into Q2, we expect our chocolate share to improve in several key markets in Europe and EMEA due to Easter timing where our portfolio is especially strong. Now turning to page 13. For the quarter, profitability was strong due to higher pricing, strong volume leverage, and the benefit of hedges related to currency and commodities. Turning to regional performance on slide 14. Europe grew 4.9% during the quarter, supported by great execution, a strong Easter performance, and continued recovery in the convenience away-from-home and travel retail channels. Our results were driven by 3.4 points of volume growth with strong increases in many markets, including the UK, as well as Central and Eastern Europe. In chocolate, we delivered our best Easter ever with strong sell-in and sell-out for the UK and Germany. Biscuits also delivered strong mid-single-digit growth. OI dollar growth for the quarter was more than 10%, driven by continued volume leverage, pricing and strong cost control as well as favorable commodity and ForEx hedges. North America grew 7.7% in Q1, driven by higher pricing in biscuits as well as double-digit gum and candy growth. Volume mix was slightly positive despite lower service levels related to third-party labor constraints. North America OI increased by 13.6% during the quarter due to higher pricing. We announced an additional mid-single-digit pricing increase in the US that will become effective early May. EMEA grew 8.9% for the quarter with strong volume growth of 6.4%, showing continued strength across much of the region. India grew double digits for the quarter and continues to execute well and reinvest 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 high single digits for the quarter, driven by continued share gains in both biscuits and gum, despite several challenges due to COVID restrictions. Southeast Asia delivered high single-digit growth, with strength in biscuit, chocolate, and beverages. EMEA increased OI dollars by 5.8% for the quarter; volume-driven profit was partially offset by commodities and transportation inflation. Latin America grew more than 25% for the quarter, with strong growth across all categories driven by both strong pricing and volume mix gains. Brazil, Mexico and our Western Andean business unit all posted double-digit increases this quarter. Adjusted OI dollars for Latin America increased more than 30% for the quarter. These increases were driven by broad-based volume growth across core snacking categories, effective pricing through RGM actions, and the mix impact of higher gum and candy sales. Moving to EPS. Q1 EPS grew 13.9% at constant currency. This growth was primarily driven by top line-driven operating gains. Turning to free cash flow and capital return on slide 16. We delivered Q1 free cash flow of €1 billion, driven by strong operating results and further improvements in our cash conversion cycle. We also returned $1.3 billion to shareholders in the form of dividends and share repurchases. Let me make a few comments with respect to the Ukraine. We stopped all business in Ukraine as the war began, including our two plants in the country that produce products for both Ukraine and broader Europe. In total, this represents about $320 million in revenues on a yearly basis. As a result of this business stoppage, we expect asset write-offs and one-time costs of approximately $143 million, which will be excluded from our adjusted results. For the remainder of 2022, we expect about $200 million in revenue headwinds from the loss of revenue in Ukraine as well as losses related to finished goods that our Ukraine plant produces for other countries within Europe, where we do not have supply alternatives yet. The lost revenue is expected to translate into $0.03 lower EPS. Now let me provide some color on our revised 2022 outlook on slide 19. We now expect 4% plus top line growth. This factors in the $200 million or roughly one point of negative impact currently anticipated from the Ukraine war in addition to our expectations that we will return to more historical levels of elasticity later this year. We continue to expect pricing to be a larger driver of top line growth, given its impact in Q1, and we are also announcing price increases across a number of markets for the rest of the year tied to inflation. We now expect input cost inflation in the low double-digit range for 2022 versus our prior view of approximately 8%, despite our coverage approaching 90% for the year. The revised view of inflation reflects the war in Ukraine and the related step-up in cost pressure to our commodity basket, including energy, wheat, oil, and packaging. As I said, we also expect additional pricing in a number of markets connected to this inflation, and these actions could cause an increase in elasticity versus what we are seeing today. As a result, we have planned accordingly. As we gave you guidance for 2022, we had some headroom. So we still feel we have an opportunity to hit high single-digit EPS. But the situation is very volatile. And given these dynamics, we believe it is prudent to call a range of EPS growth between mid-single to high single-digit. This also factors in ongoing investment to support our brands and work in media increases that, in some cases, might be increased, given good business momentum to protect against elasticity driven by incremental price increases. Our outlook also now factors in $0.17 of headwind related to ForEx impact. $0.06 of this amount was included in our first quarter results. With respect to free cash flow, our view is unchanged as we continue to expect another year of €3 billion plus. With that, let's open the line for questions.

Good afternoon. Thanks for the question.

Hi.

Hi John.

Maybe, Dirk, just first starting off, just given the volatility we're seeing globally, wondering if you can offer a bit of the state of the union in terms of any notable call-outs across your geographies and categories?

Yes. Well, I would say if I were to phrase it in one phrase, it's a fast-changing and complex environment that our demand is strong, and our momentum is sustained. If I think about the complex environment, we all know about the geopolitical conflict. There are still some pockets of COVID, particularly in China at the moment, but also Southeast Asia. We are seeing record inflation. The supply chain disruption is still present, probably one of the more difficult periods that I have known in my career from an operational perspective. At the same time, the demand for our product is very strong. If you look at the quarter, for instance, in chocolate, we grew our revenues by 8.1%, accompanied by very strong volume growth, which was 5.8%. In biscuits, our biggest category, we grew revenue by 6.7% and volume was 2.2%. All regions performed well. They're all growing 5% or more. We continue to invest in our brands. We did not pull back on our investments. We are going to continue to do that this year because we are in a high pricing environment and we believe we need to keep supporting our brands. Despite all that, we are delivering very good dollar profit growth. We have strong double-digit operating income growth, driven by pricing, RGM, and the volume growth. Emerging markets and developed markets continue to be very strong growth engines for us, with double-digit revenue growth and solid performance in Q1 and also last year, accompanied by 10% volume growth. Strength in China, India, Brazil, and as you know, we believe we still have plenty of opportunity in these markets as it relates to distribution and white space. Developed markets are solid, although we still have constraints in our US supply chain, but we see it gradually improving. There was a significant step-up in North America. We had strong growth, and a step-up in pricing. We are going to implement at the beginning of May another round of mid-single-digit pricing. We are making good progress on supply chain and inventory, but there's still a lot of work to do there. Europe for us was also very good, volume-led growth of 5%. We had record Easter results, which you cannot yet see in our market share result because Easter is later this year, but we know it's a very strong Easter. The consumer in Europe, there are a lot of questions about it, but the underlying data shows that the consumer is still buying our products very strongly. If I summarize it all, I would say, it is a complex environment, but we feel very confident about our future. I think we're in the right categories, we have the right strategy, our brands are strong, and we increased our investment in them every year. We have great people, our execution is good and we have the right mindset. We will have to work through this near-term inflation, which got worse due to the Ukraine situation and the supply chain headwinds we still have to go through. We remain focused on what we can control, our pricing, in-store execution, and very strong cost discipline. I hope that gives you an idea.

Yeah. That's great. Thank you. And just as a follow-up, in terms of the Ricolino acquisition, you touched on it in your remarks a bit, but could you elaborate on the synergy opportunities? And any other elements that attract you to the business that may be less apparent to outsiders? I know Mexico is not a market that's seen a lot of discussion traditionally.

Yes. Well, for us, we consider it as a very high strategic fit for us to become a full snacking player. Mexico is a priority market for us. Our business there is largely in gum and in our meals business. We are interested in becoming a bigger snacking player in Mexico plus the per capita consumption that we have. Roughly comparing to our other emerging markets, Mexico has potential for us, and we are very interested in the chocolate market also. Our biscuit business is developing, but could use some acceleration. So Ricolino offers us a strong route to market, combined with an already strong presence in the market, particularly in confectionery and in chocolate. That helps us to get to our ambition of about 15% to 20% market share in the biscuits and the chocolate market. Starting from their already strong position and combining that with our existing business, the two businesses are about the same size. This will mean for us that we are now 75% a snacking player, which is also very important for us. What you might not have picked up, but which you can probably expect is that there will be a full integration. There is a significant opportunity because of that full integration for revenue and cost synergies, which would be accretive to our growth and margin in Mexico and Latin America. So maybe quickly, a bit of the numbers on Ricolino, so about $500 million in net revenue. In the sugar confectionery and chocolate categories, they have about a 15% share in the combined categories, the number one in confection, number four in chocolate. The two categories together are about $3 billion in Mexico, and the growth of those categories is expected to be 7% for the next five years. Ricolino, we expect because of their iconic local brands, will perform above that, about 8%. You probably will not know any of the brands, but they are very known locally. We are interested in the categories and the brands. Second, as I already mentioned, the route to market, 2,100 plus DSD routes reaching 440,000 mom-and-pop stores. That triples almost quadruples our route to market in Mexico. Of course, we have a very strong modern trade presence ourselves where we can help Ricolino become stronger. We have to keep in mind they also have a high-growth US business. They are the leader in confectionery in Hispanic markets in the US. We believe that there is an opportunity there to significantly increase that business. Ten percent of their sales are coming from the US Hispanic market. As you know, the Hispanic population in the US is growing fast. We're also getting four excellent manufacturing facilities, which will help us produce the necessary products for the growth. So I think that gives you an idea, hopefully.

Thank you, Luca. I have one more question for you. In looking at the guidance for 2022, it seems there’s a stronger top line despite the situation in Ukraine and a wider range for EPS. It appears there’s a significant amount of uncertainty factored into the model. I understand the forecast is quite challenging. How should we approach the various factors at play, and where do you see potential conservatism in your outlook regarding modeling any downside? Thank you.

Thank you, John. As I said in the prepared remarks, I think it is fair to say that we feel quite confident about 2022 being another good year, both in terms of top and bottom lines, despite the numerous challenges that are thrown at us. I think we've mentioned how vibrant our chocolate and biscuit businesses are. When you look at volume mix and the pricing that is kicking in, it is the testament really of the big investments we have been making over the last few years and the fact that our franchises are very strong. It is undeniable that the geopolitical environment is driving additional costs. Just to give you a reference, inflation is now expected to be double-digit versus the high single digits we had originally estimated. That will result in additional and multiple pricing waves across the board, across all our categories. As we price away unprecedented inflation, clearly, the watch-out is elasticity. I want to make sure that you realize that we have planned for historical elasticities for the remainder part of the year. At this point in time, we are not seeing that level of elasticity, but our brands are as strong as they have ever been. We certainly have an opportunity to do better on our revenue guidance. But again, if you eliminate the Ukrainian impact, you realize that we are two points ahead of the original guidance on net revenue that we gave you at the beginning of the year. On the profit side, as we guided to high single-digit EPS, we had built into some cushion in our forecast. We still have an opportunity to meet high single-digit EPS growth. But the situation is tighter than before because of the inflation and the Ukrainian-related business losses, which accounts for around about $0.13 of EPS. That is why we are now giving you a range to accommodate for further headwinds that might come our way. But in case of elasticities being more benign and more aligned to what we see today, and in the case of costs not worsening materially versus the double-digit inflation I mentioned, high single digit would be within reach. We want to get to high single-digit EPS. For instance, we are doubling down on cost initiatives. There are streams within the company to ensure that on the productivity and cost control side, we do even better than we have been doing in the last few years. Hopefully, if the situation doesn’t worsen and the elasticities are better, high single digit would be within reach.

Thanks, Luca. Thanks, Dirk. Very helpful.

Thank you, John.

Hi, thank you. I hope that your employees and their families in Ukraine are safe and doing as well as they can under the circumstances. I would back up what John was getting at; it does feel very low, 4% seems almost punitively low given Q1's strength. My question, again, just to back up what he was suggesting, if your pricing is going to accelerate, and it was almost 5% in the first quarter, and you're guiding to volumes being positive for the year, just mathematically, how do we get to 4%? It just feels like that's almost too low if those two elements of guidance are there. I hope that makes sense.

I mean, from your logic, it really makes sense. The point here though is: A, we have one point of headwind related to the Ukrainian business stoppage. You might imagine that, in places like Russia, there are restrictions both in terms of importing. We have scaled back operations. Volume there is going to be negative as well. On top of that, as we have multiple pricing waves, we have planned for higher elasticity than what we are seeing at the moment. If we get better elasticities and implement the pricing policy as we have done in the last few rounds, there is an opportunity to increase revenue. But I wanted to be cautious because the situation is quite fluid. You might imagine that in some places, we are seeing price increases even greater than double-digit levels. Elasticity remains to be seen at these levels, and I wanted to be cautious.

And just to clarify, though, when you say that elasticity is being baked in at a higher level than today and back to normal levels, and you talk about Ukraine and Russia, and I understand there's some uncertainty in there too. That is all baked into your estimate of volume hopefully being positive for the year, nonetheless, correct?

Yes. Yes, it is.

Okay. And then just one last quick one for me. As we think about the remaining quarters, are there any considerations we should have, Luca, in mind when modeling each quarter, whether in terms of top line comparisons that may not be obvious, whether hard or easy with the pace of inflation?

Look, the only one thing you have to bear in mind is that last year in Q3, we had the strike impact in the US, which obviously affected some of the revenue phasing in the US. But besides that, the only one thing that you need to think about is the sequential pricing being higher throughout the quarters.

Okay. Thanks so much.

Thank you, Ken.

Great. Thanks very much. I wanted to dig in a little bit on North America. Organic there was close to 8% in the quarter. Consumption or takeaway has been closer to maybe 4% or so. I guess, given some of the supply chain issues that you're still dealing with, how have you been shipping so far ahead of consumption, and I guess, also still losing market share in that market? I'm just trying to get a better handle on that.

Yes. Well, Andrew, we do have a number of businesses in North America, our ventures, which are not followed by Nielsen. So if we think about Give & Go, for instance, or even Perfect Bar. They don't have the same coverage as the rest of our business. You will also imagine that, we came out of the strike, and we had subsequent high demand that our inventory levels in the trade were not as high as we would like them to be. The combination of those two factors give that difference between the 4% and the 8% that you were talking about.

Thank you for that. Luca, could you explain the difference between high single-digit constant currency EPS growth and mid to high single-digit growth, if that’s how it turns out? You mentioned three key factors. I think you indicated that $0.03 was related to Russia-Ukraine. It sounds like there might be another ten cents tied to supply chain issues. Could you clarify what the cost inflation impact would be? I'm trying to understand how we get from high single digits to potentially something lower. Thank you very much.

It is another $0.10 of cost pressure due to the loss of the Ukrainian business, the revenue impact from last year's plant operations in Ukraine, and the additional costs stemming from the Ukraine war. In total, this amounts to $0.13 in EPS. As previously mentioned, achieving high single-digit EPS growth at this stage depends on elasticity. If the elasticity turns out to be better than what we've included in our forecast, we could see high single-digit EPS. Conversely, if the elasticity aligns more with historical levels, we can expect slightly lower growth than high single digits in EPS.

And the supply chain piece, I didn't know if that was included in the $0.13 because you have those three buckets on that slide?

Yeah, it is all included in there.

Okay. Thanks very much.

Welcome.

Thanks, operator, and good afternoon Dirk and Luca.

Hi Bryan.

So a couple of questions, quick ones, I hope. First is just maybe a follow-up to Ken Goldman's question about phasing through the year. I think on slide 19, there's a comment in there that says you're expecting year-over-year profit dollar growth throughout 2022. Was that meant to be like each quarter? Is there any kind of variability in terms of, I guess, margin or profit growth per quarter? Just trying to understand if there's anything more behind that bullet?

No, don't read too much into that. Obviously, we are expecting OI dollar growth throughout the quarters. We have to see how cost evolves throughout the quarters because, as I said, we have baked into the forecast, the current cost levels. We are pretty much well covered for commodities for the remainder of the year. At this point, I would say, yes, that's the idea, depending, as I said a few times, on elasticity there might be some bumps in the road, but that's the plan at the moment.

Okay. And then the second question is about how you are preparing for the potential unavailability of certain input costs or other resources. Given the expected scarcity of wheat and possibly some other raw materials, has this been considered in your forecast? Is there any associated risk as we continue through the year?

That is factored into the plan. At this exact moment in time, clearly, we are facing some shortages, but they have not been a material impact yet to the business. The plan in terms we have is extra cost will get us the commodities we need. You might have heard about the palm oil issue in Indonesia. That is not a material issue for us at this point in time. We are clearly monitoring the situation very closely. In terms of wheat, the wheat coming out of Ukraine is mostly going into the Middle East and North Africa for us. The total wheat we procure for the company is $600 million, $700 million. In the big scheme of things, we believe that, in total, wheat is not going to be a material problem in terms of supply. It hasn't been yet, but we have to see how the crop evolves and what can still be sourced out of Ukraine, particularly for our Middle East and North African business.

And just if I could follow up on that. If we're looking at maybe some of the petrochemical related, like packaging, especially in Europe, given just all of the disruption in energy there. Is there any risk around just availability of packaging, especially in Europe?

We are facing some issues on specific items, but the issues are not broad-based. Paper and especially in places like Asia, it is under a lot of pressure at this point. But again, in terms of supply, we have some issues here and there, but nothing that racks up to a material number for the company yet. And I hope it stays that way.

Yeah. So do I. All right. Thanks, Luca. Thanks, Dirk.

Thank you.

Thanks.

Hi. Good evening.

Hi Chris.

I just had two questions for you, if I could, please. The first one, I'm just curious about just to dig a bit more into the pricing. Europe was an area where I think you've talked before about some pricing coming into place after Easter, like in April. I just want to get a sense of that we should see that pick up in the second quarter. It has historically been a very difficult area to get pricing. Is that an area where you think your pricing can offset inflation broadly in Europe?

Yeah. We've talked about the higher inflationary impact. We took pricing across all our markets in Q1, including Europe. The demand for the category is pretty robust. But it's likely that we will have to take another price increase in Europe. We are going out to the clients right now. That is probably reflected in our forecast, and we're trying to be prudent there because that is not happening a lot in Europe. We will have to see what the reaction is, and we have taken a cautious approach on any potential effects from that. We do expect that we will be able in Europe and in most of our markets to price away most of the inflation of this year and be ready at the beginning of next year to whatever gap exists with the cost picture for 2023, that we will also be able to do that pricing. That leads to what Luca was saying, significant pricing increases around the world. As we were also saying so far so good, elasticity has been quite low. The second area where we're trying to be careful is planning for historical levels. At the beginning of 2023, the basket for the US consumer will be up compared to the beginning of 2021 more than 20%. We forecast that elasticity will return to historical levels. Our categories have historically been very resilient. Despite this high inflation and high pricing, consumers continue to prioritize grocery spending. It's more on personal items, clothing, eating out, travel. Those are the items where they're trying to save. So that also gives us confidence to implement the pricing and continue with the volumes. But again, we're trying to be careful and cautious, and we will have to see how it goes. It is a very volatile environment at the moment.

Okay. Thank you for that. I had just one quick follow-on. Did you give a level of inflation for the first quarter? I think we're looking at double-digit inflation now for the year. Does that pick up as we go through the remaining quarters, or was the first quarter at that level? I'm just trying to get a sense of the gross margin. Does that get a little more challenging before it gets better before the pricing comes in place, or is that a function of inflation picking up here?

The level of inflation is higher in Q1 for obvious reasons because last year, inflation picked up materially towards the second part of the year. The level of gross margin in Q1 reflects three key elements. One, it is the additional pricing. When you look at the US business, you see a level of revenue that is 8% with modest volume mix impact, which means there is 8% pricing kicking in. The second element is good volume growth in Q1 that provides leverage. The third level is the protection in terms of hedges that we have put in place in terms of commodities and ForEx. As you think about inflation going down in the remainder of the year, it will go down year-on-year, but the level is still going to be higher in terms of absolute dollars, and we will have to price accordingly. The volume might not be as high as the 4% that you saw in Q1. That will play into the gross margin evolution over the quarter. Assuming that you're going to see an 80 basis point decline given all the pricing we are about to take may not be realistic. The goal we have is that we want to enter 2023 with the level of pricing at current commodity and ForEx cost that allows us to have a level of pricing that is more aligned to historical levels.

Okay. That’s very helpful. Thank you for your time.

Thank you, Chris.

Good evening folks. Thanks for slotting me in.

Hi Jason.

Hi Jason.

I guess a couple of quick questions. First, to follow-up on the next wave of pricing in Europe. Have you approached the trade yet? How is it going? Because I believe this is close to sort of on-charter territory to be pushing through multiple rounds, at least in Continental Europe in the course of one year.

Yeah, it's just brand new, so I cannot give you any feeling yet of where that stands. I think it's important to realize that we are in an extraordinary situation, and we will have all the necessary conversations with our trade partners and make sure that it's a win-win for everybody involved. But it's too early to give you an idea of where the negotiations will lead.

Got it. Okay. And the DSD route to Mexico that you're acquiring sounds really interesting. Can you give us a little more color on what your current route to market is? And whether or not, I assume these are all company-owned; can you confirm that? And how long, or should we expect, but how long do you think it will take for you to reroute the entire network to maximize the loads of these trucks?

Okay. The DSD is an own system. There are some contact points between our current network and Ricolino. We will have to carve out and create a little bit of additional infrastructure on our side, but nothing that is worrisome at this point. I feel quite good about the reach that Ricolino is going to have with 2,100 DSD routes achieving 440,000 mom-and-pop stores. When you look at our biscuit business in Mexico, being at 5% share of total market, the opportunity lies there. Our Mexico sales complement the strong modern trade presence with our modern trade presence. We feel like between revenue and cost synergies, this is going to be a material enhancement to the value of Mondelez. So we are very, very excited. On top of that, the brands are very strong. As Dirk said, particularly in the US, we see tremendous opportunities in pushing this brand through what is a cohort that is growing and has tremendous potential.

Yeah. Sounds compelling. Thank you. I’ll pass it on.

Thank you, Jason.

Thank you. Good evening.

Hi.

Hi.

I just was curious if you could dissect the volume mix a little bit and maybe help us understand if there's any notable mix shifts to keep in mind as we think about the volumes. Are you seeing downgrading? Obviously, the elasticities have held up really well so far. When you lump those together, we don't get as much a sense of the split. Can you give an idea a little bit of how that breaks out?

Look, in total for the company, the mix component is very, very neutral. It hasn't been a problem. It hasn't been an upside either. The simple way to think about it is North America is one of the most profitable operations that we have. As I address the question of Andrew Lazar, Dirk said that the new businesses we acquired are up, while our biscuit business in terms of volume is still below last year. One reason for this is we are lapping tremendous growth last year in terms of volume. The supply-related issues we have are causing quite a bit of volume track compared to what it could be otherwise. On the flip side, as you saw, gum is growing very healthily as a category, with growth of 27%, and that number is mix accretive. The other one that is mix accretive is world travel retail, which is picking up nicely quarter after quarter, albeit it is not yet at the level before the pandemic. These are the three key mix components: North America volume being down because of supply chain issues, gum being up, and world travel retail being up. All the rest in terms of mix, I would say, is fairly neutral in its totality, and these three elements offset each other.

Okay, that's great. That's really helpful. And can I just follow-up on the buybacks? You still have a pretty elevated cash balance relative to historical levels. But even with the Ricolino deal, you're still expecting about $2 billion for this year. You've said you'll finance that deal with debt and cash. Is it a good portion of debt? Even with $750 million of buybacks already in Q1, could there potentially be upside to that $2 billion number over the course of the year?

Let's stay tuned. At this point, I feel that we have what it takes to be able to fund the $2 billion of buybacks. I'll provide a little bit more color around this at our Investor Day.

Okay, great. Thanks so much.

Thank you.

Good evening everyone.

Hey Alexia.

Hi Alexia.

I got a couple of questions. Firstly, on the emerging markets, the biggest pushbacks that I get at the moment is people concerned that as food prices escalate around the world, and the cost of basic food becomes a higher proportion of people's income in a lot of these low-income countries, that could choke off sales of more discretionary items like packaged snack food. How do you respond to that in terms of your confidence of sustained growth in the emerging markets in the face of that dynamic over the next year or so? And then I have a quick follow-up.

Yes. I think as I was saying before, we see that in developed and emerging markets, the shift that the consumer is making as they confront inflationary pressures. They are more focused on spending in discretionary items like eating out, travel, and so on. We see that also in emerging markets where, at this moment, there is food inflation, but we don't see a reduction in the basket of what they're buying. The discretionary part of snacking is not so discretionary anymore with the modern consumers. Snacking is a big part of what they do. For instance, in China, as people are going into lockdowns, we see an increase in salted biscuits happening because they considered it a staple of their diet. I wouldn't assume that snacks are discretionary. There are whole parts of snacking that are part of how consumers eat these days. We also work very carefully and particularly in places like India or Brazil; our RGM approach is very developed. They have a whole plan to absorb the different inflations that they see. The price increase might not be as direct as you would assume for the consumer. Because of those three elements, I think you will continue to see very strong performance in our emerging markets. We see no effect whatsoever from the price increases. In fact, the volume increase was 10%. You can never say never, but so far, so good.

Great. Thank you very much. And then just finally, any quick preview comments about the Investor Day next month? I know, you've just mentioned that there might be something around the share buybacks, but is there anything else that we should be expecting? And thank you very much for the question. I look forward to seeing you next month.

Sure. Alexia, this is Shep. A few things, I mean, look, I think this is more evolutionary in terms of the strategy and what you're going to hear, certainly going to get a deep dive especially with respect to biscuit and chocolate. You will also hear a little bit more about capital allocation just in general in terms of how we're thinking about that. Additionally, you can expect to hear from some other folks on the team regarding our efforts around marketing, what we're doing with the sales organization, and supply chain. So hopefully, we'll cover all bases. That will give you an idea of where our heads are at as we look to accelerate going forward and give you some proof points to leverage off.

Great. Thank you very much. See you in a few weeks' time.

Thank you, everybody. Thanks for your presence here. We're looking forward to seeing all of you during our Investor Day on 10th of May.

Thank you, everyone.