Mondelez International, Inc. (NASDAQ:MDLZ) Q1 2023 Earnings Call Transcript

Mondelez International, Inc. (NASDAQ:MDLZ) Q1 2023 Earnings Call Transcript April 27, 2023

Operator: Good day, and welcome to the Mondelez International First Quarter 2023 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session I’d now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap: Good afternoon, and thank you 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, 10-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 Q1 2023 earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update followed by review of our financial results and outlook by Luca. We will close with Q&A. I’ll now turn the call over to Dirk.

Dirk Van de Put: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. And I’m pleased to share that we are off to a record start in 2023 with very strong double-digit top line growth in the first quarter, driven by effective pricing and ongoing volume growth. We continue to execute on our long-term strategy and we see robust momentum across geographies and categories. We delivered strong performance in both emerging and developed markets and we successfully implemented circa-80% of our price increases in Europe. Our robust profit dollar growth was driven by volume leverage, cost discipline and pricing to offset cost inflation. Our strategic decision to focus our portfolio on the attractive categories of chocolate, biscuits and baked snacks continues to bear fruit, with consumers gravitating to those categories.

We continue to invest in our brands, in our capabilities and our portfolio reshaping initiatives to accelerate and compound growth on both the top and bottom lines. We are confident that the strength of our brands, our proven strategy, our continued investments, and especially our talented people, position us well to deliver another strong year. Based on the strength of these Q1 results and our latest view across businesses, we are raising our revenue and adjusted earnings outlook to 10% plus for the year. Turning to slide five, you can see that the first quarter showed continued momentum across our entire business. Volume mix for the quarter was more than 3 percentage points, on pace with recent performance, demonstrating the continued strength and resiliency of our beloved brands and categories, even in an inflationary environment.

We delivered organic net revenue growth of $1.5 billion versus prior year. At 19.4% growth, we delivered our best quarter ever, significantly ahead of our already strong 12% in full-year 2022. We also delivered adjusted gross profit dollar growth of $0.5 billion. Again, we are well ahead of last year’s pace with 18.2% growth. We are proud of our team’s continued focus and agility, which enable us to continue investing to drive further growth acceleration with an A&C increase of 19% for the quarter. These results translated into strong adjusted OI growth of close to $300 million, up nearly 21% and again well ahead of last year’s base. We remain confident that our virtuous cycle of strong gross profit dollar growth, fueling local first commercial execution, increasing investments in our iconic brands empowered by winning culture, will continue to consistently deliver attractive growth.

On slide six, a few examples of our brand strategy in action. We continue to invest in our core categories of chocolate, biscuits and baked snacks with strong creative assets, digital personalization at scale, new product launches and great in-store execution. All this continues to strengthen our already strong brand loyalty. It is clear that we are playing in the right categories with attractive growth in volume and dollars combined with solid profitability characteristics. There is also significant headroom in both penetration and per capita consumption in developed and developing markets. We continue to expand the breadth and reach of our chocolate leadership in the attractive and growing Latin America region. For example, we recently launched our chocolate brand, Milka into Colombia.

Additionally, we launched two Milka ice cream products in Argentina in association with Froneri. We are excited about these opportunities to explore a new segment and reach more consumers, while expanding one of our most iconic brands into a new consumption occasion. We hit another milestone in the biscuit category, as Chips Ahoy! a $1 billion brand celebrates its 60th birthday. Our fifth largest brand globally Chips Ahoy! Has delivered almost double-digit revenue growth annually since 2018, yielding positive results from our increased A&C spend during that time period. The brand’s current key markets are the United States and China, where the business is on a $200 million run rate. But Chips Ahoy! also has a sizable presence in Canada, Latin America and Southeast Asia.

We have exciting plans to further expand this franchise, as we grow our leadership in both core biscuits and new shopper bakery innovations around the world. Oreo continues to grow — to show sorry strong momentum across markets, as consumers continue to demonstrate that this iconic brand is truly the world’s favorite cookie. Give & Go is a success story in our baked snacks line. It grew strong double-digits in Q1, driven by solid pricing execution, expansion into adjacencies such as mini donuts and strong category demand. These are just a few examples of our team’s ongoing focus on delivering our growth and acceleration strategy as we continue to reinvest in, and drive our very powerful brands. Now let’s take a look at our chocolate strategy on slide seven.

Tablets remain the centerpiece of our chocolate franchise. Mondelez accounts for more than one-third of this segment’s more than 3 times the size of the number two player. We continue to lead the segment year-after year. 2023 is off to a very strong start, aided by the recent launch of our renovated Milka formulation, the creamiest most tender Milka ever combined with some strong local (ph). Our tablets business is up nearly half a point in market share, with particularly strong growth in Australia, Canada, Germany and Brazil. We are also performing well in the incremental segments of seasonal and gifting chocolate products. We delivered a record selling for the Easter season across markets, with Milka celebrating its first ever Easter in Chile.

Our Cadbury team executed another successful virtual Easter egg hunt reaching more than 300,000 people in the United Kingdom, Ireland and South Africa, making our seasonal products even more iconic. We also are growing in the premium chocolate space. For example Toblerone volume is up more than 15% in Q1, fueled by its relaunch with updated on trend positioning. We are further strengthening the Toblerone portfolio with additional offerings including per lean, and personalized gifting. Switching to slide eight, solid execution against our integration playbook is delivering a strong start to the year for our recently acquired businesses. We are pleased that Clif in Q1 posted double-digit revenue growth and grew profitability by more than 1,000 basis points.

We are making strong operational improvements, focusing on enhancing service levels and improving supply chain efficiencies, and we successfully implemented two rounds of pricing. Additionally, we recently announced the consolidation of creative and advertising agencies under a single partner, which will accelerate productivity in our media spend, while continuing to strengthen brand equity and loyalty. Similarly, our Ricolino business continues to demonstrate strong momentum in the fast growing and strategically important Mexican markets and we are making solid progress on integration. Along with our financial performance, I am pleased to share that we continue to make significant progress in our sustainability strategy. We firmly believe that helping to drive positive change at scale is an integral part of value creation with positive returns for all of our stakeholders.

As you can see on slide nine, this quarter, we announced the next chapter of Harmony, our European wheat sustainability program. With regenerative agriculture at its heart, this next chapter aims to mitigate climate change and reverse biodiversity losses, while investing in research, seeking to demonstrate that more sustainable wheat is also better quality meal. Created as the first program of its kind in 2008 with just a handful of farmers, the Harmony program now collaborates with more than 1,300 farmers across seven European countries. Our enhanced program will support these farmers in implementing a strongest charter of more sustainable farming practices such as further diversifying crop rotation, protecting pollinators and other wildlife and reducing pesticide use.

Our goal is to grow 100% of the wheat volume needed for our European biscuit production under our expanded Harmony regenerative charter by 2030. This is just one example of the way that we are fully integrating our sustainability agenda within our day-to-day business operations and growth strategy. I am proud of team Mondelez continued progress in helping to make positive impact on critical environmental and social issues while creating value for shareholders and other stakeholders. With that, I’ll turn it over to Luca to share additional insights on our financials.

Luca Zaramella: Thank you, Dirk and good afternoon. Q1 was a great start to the year, broad-based volume, pricing, profit dollar growth, brand investment, earnings and free cash flow, all indicate that our strategy is sound, and our focus on execution is paying off. Our model is working well, while meaningful opportunities still exist to further drive our long-term ambitions. For the quarter, revenue growth was plus 19.4% with more than 3 points from volume mix. Emerging markets grew more than 25%, with strong performance across the overwhelming majority of countries. 4.5 points of this growth were attributable to volume mix. Developed markets grew 15.8% in Q1 with across the board strength, and more than 2 points of growth coming from volume mix.

To note the customer disruption in Europe was more benign than we anticipated. Turning to portfolio performance on slide 12, chocolate biscuits, gum and candy all posted robust double-digit increases in Q1. Biscuits grew plus 16.9% with positive volume mix, despite substantial price increases. Oreo, Ritz, Chips Ahoy!, Give & Go and Club Social were among brands that delivered double-digit growth. Albeit not contributing to organic growth Clif posted good growth versus last year too. Chocolate grew more than 18% with significant growth across both developed and emerging markets. Volume was positive, despite some customer disruptions in Europe, albeit lower-than-anticipated. Cadbury Dairy Milk, Milka, Lacta and Toblerone all delivered robust growth.

And we had a record Easter selling, that based on preliminary data also resulted in record high sellout. Gum and candy grew 35% with robust growth across all of our key markets. Now let’s review market share performance on slide 13. We held or gained share in 60% of our revenue base, which includes 10 points of headwinds coming from EU customer disruption. The U.S. continues to make service level improvements and in Q1 with good on-shelf availability and case fill rates, resulting in share being flat to last year. Given stabilization of the supply chain, we feel confident that share will continue to improve during the year in the U.S. Turning to page 14, we delivered strong double-digit to OI dollar growth driven by a gross profit increase of more than $540 million.

These results enable us to continue to significantly fund our business for future growth, while also providing strong earnings and cash flow. Moving to regional results on slide 15, we delivered double-digit revenue growth and posted volume mix increases in all regions. This growth, fueled by pricing and volume leverage drove robust OI dollar growth across all regions. Europe grew plus 18.9% with high-single-digital OI growth. We have made progress in lending expected pricing increases with circa 80% of our customers and with lower disruption than we anticipated. We are still planning for some disruption in Q2, which has been factored into our revised outlook as the remaining 20% of our customer base is not done yet. Consumer’s confidence has stabilized in much of the region, with many key countries trending back to spring 2022 levels.

Elasticities of biscuits and chocolate are overall less negative than we anticipated, including in the U.K., where the impact of HFSS is less material than what we had forecasted. Overall, rather than cutting back significantly on size of their basket, consumers are shopping around, to find attractive deals and trading up and down in terms of pack sizes based on their specific needs and consumer occasions. They remain loyal to branded products, particularly in chocolate. Having said that, our focus is now on landing the remaining part of the price increases. North America grew plus 17.3% with OI dollar growth of more than 40%, driven by higher pricing, solid volume mix and strength from our ventures, particularly pleased. We are reassured by the quality of the P&L in the region and by the fact that volume is holding up well, while we still have opportunity of returning market share to steady growth.

AMEA grew plus 13.8% with strong volume mix of nearly 6%. OI dollars increased plus 15.6%. India continues to be a key driver of success in the region and we also have ambitious plans in China that will benefit from a broader reopening after COVID. Latin America grew plus 39%, with OI dollar growth of more than 47%. We are very pleased with the performance in the region with clear progress made over the last couple of years in terms of execution and ability to drive key brands like Oreo to new heights. Ricolino is off to a strong start, but we have not yet realized the benefit of the full integration that will happen towards the end of the year. Next to EPS on slide 16. EPS grew plus 17.3% in constant currency or nearly plus 10% at reported dollars, driven primarily by strong operating gains.

Turning to slide 17, we generated free cash flow of $900 million in Q1, returning $900 million to shareholders through dividends and share repurchases. A few words on our recent KDP sell down on page 19. This investments has been highly successful demonstrating our disciplined and flexible approach to managing our investments and assets over time. Including dividends received and the market value of our remaining stake, this investments has generated a return of approximately 3.3 times our initial investment over a seven year period. We received approximately $1 billion in net proceeds from the most recent sale and now remaining stake is now 3.2%. From an accounting perspective, we will no longer account for these under the equity method, but rather recognizing dividends as the only income as of the dividend record day.

We will adjust out mark-to-market quarterly re-measurement of the stake, in line with the gains that we have been obtained after each sell-down. These adjustments will be recorded in a new P&L line item, which will be below interest expenses. In terms of net EPS impact for 2023, purely on the basis of the different accounting treatment, we expect a headwind of approximately $0.03. I want to reiterate that this is merely accounting driven and not changing the essence of the investment itself. The gain on this sale, which is approximately $0.5 billion will run through the same account that we have used for past share sales. Finally, albeit a subsequent event to the quarter you might have noticed that we sold down also some stock for JDE Peet’s.

The transaction was equivalent to approximately EUR400 million through an equal combination of an outright sale and options at an only net discount of 2% to 3% versus the JDE stock price at the time of the transaction. Options had maturity, which is about six months. Both transactions, put us in a good spot in terms of our leverage and debt profile, and together with the expected proceeds of developed market gum, pretty much balanced the outflows related to the acquisition of Clif and Ricolino. Turning to our outlook on page 20, given the strength of our Q1 results and the overall operating environment across our business we are raising our full-year outlook for revenue growth and EPS. We now expect top line growth of 10% plus, versus our original outlook of 5% to 7%.

EPS growth is expected to be 10% plus versus our previous outlook of high-single-digit growth. In terms of key assumptions, inflation is still expected to increase double-digit for 2023, driven by elevated cost in packaging energy ingredients and labor while lapping favorable hedges in 2022. In terms of interest expenses, we now expect $400 million for the year, given recent coffee transactions. We now expect $0.09 of EPS of headwinds related to ForEx impact for the year versus $0.04 in our previous outlook. The outlook revision reflect our increased confidence in another exceptionally strong year given the resilience of consumer consumption in our categories, more benign elasticities than we planned and share dynamics in enough to, as well as lower actual disruption and better environment in Europe.

Having said that, we might have some more disruption for the remaining pricing, which will potentially affect Q2. Finally, continued strength in our emerging markets is what supports our improved guidance. This current outlook does not consider a material deterioration of geopolitical environment surrounding some areas of our business. With that, let’s open the line for questions.

Q&A Session

Operator: Thank you. And we’ll take our first question from Andrew Lazar with Barclays.

Andrew Lazar: Thanks. Good afternoon, everybody.

Dirk Van de Put: Hi, Andrew.

Luca Zaramella: Hi, Andrew.

Andrew Lazar: I guess first-off, Dirk. I was hoping you could double click a little bit on the emerging markets performance, which was obviously dramatically better than I think most certainly modeled and were expecting. Organic sales were up 25% and I guess I’m just looking for some color on some key drivers and maybe more importantly, sort of on the sustainability of the performance and how we should think about that as the year progresses?

Dirk Van de Put: Okay. Yes, so definitely a very strong performance this quarter, but I would say already for several quarters that we have strength in our emerging markets. Our emerging markets for us are about 40% of our business, and as you said 25% growth in Q1. I think it’s important also to see that there has been very strong or solid volume growth around 4%, 4.5% 5%. So it’s not just the pricing. If I go a little bit through the markets, India keeps on growing at a very accelerated pace, strong double-digit, no real signs of a slowdown. Our outlook for ’23 remains optimistic, and we have to invest in capacity increases, which we are doing. But as you know, it’s a combination of the strength of our Cadbury and Oreo franchises who are receiving heavy support with strong innovations and as well a distribution expansion, where we still have a runway for several years to go.

In China, we also have strong momentum. There we also see good share gains. We have in the past quarters been establishing Chips Ahoy! as a second biscuits brands after Oreo business as you noticed, mainly Biscuits and gum. And I think with the post-COVID period now in China, we see the confidence of the consumer going up and we’re expecting a strong year in China also. Same thing as in India, heavy support in our brands, good innovations, building extra capacity and still big upside on increasing our distribution. In Mexico, we now with the acquisition of Ricolino have significantly increased our distribution power. So there we will see the distribution of Mondelez brands increasing significantly in the coming months. We also have double-digit growth in the quarters, and the whole acquisition and integration of Ricolino is on track.

Then maybe adding Brazil. Brazil is also double-digit growth. We continue to see strong demand and we are expanding our distribution also in Brazil. So I would say, overall, the key markets in our emerging markets group are doing well and particularly in Latin America, I would add to that the whole economic environment is pretty strong. Important to note is that they have delivered and are delivering reported dollar growth in top and bottom line. And that the cash flow that we’re generating is also very strong. So the return on our investments in emerging markets is very good. And I would say that we believe that we have a sustainable growth engine that will continue for the foreseeable future. The reasons for that we have stepped up in execution in a major way, we now for several years in a row have continued heavy reinvestment in our business.

We have these distribution opportunities, and I’ve been mentioning and we keep on going deeper and deeper into distribution, setting up routes and presence, which are having a very good return, and we keep on doing that year-after-year. And as I’ve said macroeconomics in Latin America helping, and then also the gum business which during the pandemic suffered is one of the drivers of our growth in Latin America. At this stage consumer confidence is relatively strong. We have high loyalty in our brands and private label in emerging markets remains a relatively small challenge. So we continue to be very optimistic for ‘23 and beyond. We feel that we have plenty of opportunity. We have a lot of headroom for accelerated growth, I would say. The penetration of our categories is very low.

The distribution runway in places like China, India, but even in places like Brazil and Mexico are high. And our brands like Oreo. Oreo, for instance is really exploding in Latin-America, but Cadbury in India, Milka that we are now launching throughout Latin America. So we see all this combined gives us the confidence that we will keep on doing well in our emerging markets.

Andrew Lazar: Really helpful. Appreciate that rundown. And then just super briefly, Luca, just from a guidance standpoint, it does not seem as though your expectations for the remainder of the year have necessarily changed that much and the upward guidance revisions primarily is based on the better than forecast 1Q results. So, I guess my question is, maybe how should investors think about the sort of the plus and the revised 10% plus constant currency EPS growth outlook, like the sort of the puts and takes are things to consider there. Thank you.

Luca Zaramella: Yes, thank you, Andrew, you. Clearly, as we move through the year, we will be lapping materially higher quarter than Q1 last year, which is the only one quarter we had with high single digit. I think we moved obviously sequentially to higher revenue growth throughout the year. Reality is there might be a scenario there where we exceed the 10% floor that we had guided you to in terms of both revenue and EPS, but I think while I feel quite good on the underlying trends of the business, particularly in emerging markets, the strong momentum is there and obviously, we still have headroom to accelerate to a certain extent. I think I’m very pleased obviously with the U.S. and North America, which is on an upward trend.

Excellent pricing execution supply chain improving. I think the watch out is a little bit on the European side. Happy with the improved profit in Q1, which is the result of the 80% of the pricing kicking in, but profitability in Europe is still not where it should be. So the remaining 20% of the pricing that is being implemented is important. Unknowns are in relation to this further pricing that is needed, a potentially related disruption and some macro volatility. But obviously as anywhere else in the business, we continue to invest and that coupled with additional pricing that will kick in should result in top about the line. So look. I think it is very early for us to guide you to something that is materially better than what we are saying at this point, but if everything plays out we might have further opportunities.

I think the other one I want to hit briefly on which is the assumptions that we’re making around commodities. We still see double-digit inflation rate in 2023, with obviously energy sugar ingredient posing most of the pressure. A good part of these inflationary pressures as I reminded these audience a few times, it is due to the favorable coverage we had in 2022. But in general, overall cost are not coming down materially. The most recent spikes in terms of cocoa and sugar prices are offsetting some of the other benefits that we see. I think you might have in the back of your mind percentage margins too. I said it a few times, we continued to be obsessed with dollar growth in cash and there might be some pressure in percentage terms, particularly in the next couple of quarters, but sequentially we will be much better throughout the year and we plan to end, clearly on the gross margin percentage positivity.

But reality is we’ve driving a strategy that has being proven to be compelling for everyone. I said this about dollar growth.

Andrew Lazar: Great, thank you so much for that.

Dirk Van de Put: Thank you, Andrew.

Operator: And we’ll take our next question from Ken Goldman with JPMorgan.

Ken Goldman: Hey, thank you. I wanted to ask you, most companies that we cover or at least that I cover now, pricing is exceeding their COGS inflation. For you it’s still not a full offset. I think you mentioned that it was only a partial offset to the inflation. So I’m just curious, is there point this year when you do get pricing ahead of inflation? Is there any way to kind of forecast that? I just wanted to kind of get a sense of how we think about some of those potential tailwinds ahead, from that perspective.

Luca Zaramella: I think all-in all, we are quite pleased with the level of pricing that we have at this point in time. If you look at the three major pricing actions, we have taken in places like the U.S., I mean that is something that you see in the P&L with the segment profit growth that we have displayed here, which is 40%. Obviously that number there is synergies coming out of the ventures. But in general, we are happy with the level of pricing. The same in emerging markets overall. You look at Latin America, you realize how disciplined we have been with pricing. The model in AMEA is slightly different in the sense that volume leverage is absolutely critical in some of these places, and so maybe we have been a little bit less aggressive on pricing than we could have been, but all in all the P&L is working very well.

And I think they quoted that A&C year on year is up almost 20%. And that gives you the understanding of how much we are investing in the business and also thinking ahead out of a potential inflationary period. Where pricing is not necessarily where it should be at this point in time, it is Europe. We told you 80% is being — has been implemented already with a little disruption compared to what we had anticipated. There is still 20% to go. But I think once you get that 20% the picture will look quite a bit different than, in fact, Europe is the biggest segment we have. And I don’t want to give the impression that we were shy on pricing, quite the opposite. We have done what was necessary. But obviously in our case we want to keep volume leverage.

I think looking at the 3% plus volume mix is something that is remarkable in Q1 and that leverage into the P&L and the profit dollar growth that we have shown, I think it is a winning formula, at least for us.

Ken Goldman: Great, I’ll pass it on, Thank you.

Dirk Van de Put: Thank you.

Operator: And we’ll take our next question from Bryan Spillane with Bank of America.

Bryan Spillane: All right. Thanks, operator. Good afternoon, everyone. Luca, two quick ones for you. One the clarification, just with the KDP accounting change, is the earnings base that we’re using for ‘22 to calculate the EPS growth for ‘23, is that 289, so $0.06 below previous, or is it $0.03 because I think on one of the slides it said, the net effect was $0.03. So just want to make sure we’re using the right 2022 base as a starting point. Then, I have a follow-up.

Luca Zaramella: Look, the simple answer to that question is we have to take out all the income that was related to KDP last year. And it was roundabout, I think post tax was $90 million give or take. We are replacing that with dividend. And the net effect between a dividend payout, which is roundabout 48% or 50% depending on the base. And the fact that we stripped out earnings last year in the tune of the $90 million, I told you is causing the headwind of $0.03. As we stated the base impact was $0.06 but year-on-year impact is due to accounting is really $0.03.

Bryan Spillane: Okay, okay. Yes so, I guess it’s clear the base is 289, but as we’re adding back you’re capturing $0.03 of that $0.06 headwind back in ‘23, right. So but we’re still starting — our starting point is 289 to start the calculations off of for the forward guide?

Luca Zaramella: That’s correct.

Bryan Spillane: Okay, okay. And then. I just had a follow-up and I think it’s a follow-up to Ken’s question just now. And just thinking about pricing and percentage margins, in the quarter. I think it was an $81 million hit to operating income from currencies, which it was like $0.06 of the $0.09 for the year. I’m assuming it’s a little bit of a bigger hit at the gross profit line. We were thinking somewhere between 90 to a 100 basis points, maybe a gross margin. So I guess as we’re thinking about margin progression, percentage margins and gross profit dollars. It seems like this is the worst of it, right, unless things change in this quarter in terms of the FX piece and like one tailwind we should see, assuming other things hold is it just that drag from foreign exchange should become a lot less severe as we move through especially the second half. Just want make sure I’m thinking about that correctly.

Luca Zaramella: I can tell you that sequentially the gross margin percentage albeit, I don’t like talking about it, should improve throughout the year. Obviously today, if I look at gross margin and gross profit dollar growth throughout North America, Latin America, and as I said a good portion of AMEA, I’m very happy with the numbers I’m seeing. Europe is still impacted by the fact that there is 20% of pricing to go. And as we implement that the situation should sequentially improve.

Bryan Spillane: Okay, but the FX drag should — again assuming things don’t change from here, the FX drag should become less of a — much less of an impact that it has been?

Luca Zaramella: Absolutely, it should.

Bryan Spillane: Okay, all right. Cool, thanks.

Dirk Van de Put: You’re welcome.

Luca Zaramella: Thank you.

Operator: And we’ll take our next question from David Palmer with Evercore ISI.

David Palmer: Thank you. Strong results in so many areas, but I’d be interested to hear if you had to choose two or three that really drove your increase versus guidance or upside versus your internal expectations, whether those are current trends or maybe just sources of visibility. I would imagine, what’s going on in Europe with retailer and consumer response to pricing is high on the list, but I’d be interested to hear what also makes that sort of top three.

Dirk Van de Put: Yeah, the top three from me would be, yes, for sure Europe, where we were expecting a bigger client disruption, and that did not occur in Q1. As Luca said, we are only 80% done with the price increases, and we still have some negotiations going on. We could still see part of that client disruption in Q2, but that has been included in our outlook for the year. But that’s certainly significantly better than we had anticipated. The second one that I would mention is the US, whereby you see a very solid top line, but the bottom line is probably the strongest increase driven by first of all, an improvement in our supply chain, but then also very strong recovery of Clif bars profitability since the acquisition, and we expect that positive trends for North-America will continue.

And the third one is probably the ongoing strength in emerging markets. I already went there, but if I compare our emerging markets sort of growth of 25%, that stands for me well above any of our colleagues. And that has been going on for several quarters now. So those would be my top three, I would say, of what’s carrying the quarter for us and probably is going to carry the year for us.

David Palmer: Thank you. That’s helpful. I’m wondering to what degree this year, and what you’re seeing going on, maybe internally, not just some of the macros informs how you view your company in the long term growth rate, of your company and to some degree we’ve had COVID obscure what might have been happening in terms of all the changes that have happened and of course you’ve made plenty of acquisitions that are adding to your long term growth rate. So does this make you feel more optimistic that the long term growth rate is heading in the right direction and higher?

Dirk Van de Put: Well. I think the recipe that we have is a strong recipe. We — I went a little bit for instance in emerging markets through the different growth vectors that we have. But the fundamental principle is to make sure that we are well-positioned from a pricing perspective, that we continue to invest heavily in our brands, that we drive distribution, in-store presence, we work RGM. So we seem to have a recipe and a way of working that is really starting to click. So it certainly gives us confidence that we’ve got something going here that is very strong. What that exactly means going-forward because we are in a very particular period where last year and this year, we had to implement significant price increases. And I guess to our delight the consumer has not reacted by buying less product.

They keep on buying the same or more product. But as we get through those price increases, growth will come down. We will have to see what happens with input costs going forward. So it’s difficult to say, but I can certainly say that we are in durable categories that are doing particularly well in the circumstances that we are performing well, within those categories. So we feel very good about our long term algorithm. I think we have to wait a little bit to see where things will pan-out as we get through these price increases and that will be the moment to restate our long term growth algorithm. But so far. I would say very strong and we feel that we are in-line or above our long-term growth outlook algorithm for sure.

David Palmer: Fair enough. Thank you.

Operator: And we’ll take our next question from Alexia Howard with Bernstein.

Alexia Howard: Good evening, everyone.

Dirk Van de Put: Hi, Alexia.

Alexia Howard: Hi, there. So I’ve two quick questions. And first of all, where are we on the cost synergy recouping for the recent deals that you’ve done. It seems as though that was quite a strong benefit to profit growth recently, but I’m just wondering how much more there is.

Luca Zaramella: So let’s start with Clif. We have announced a re-organization, Clif started from a relatively high level of SG&A We have protected and increased A&C and adding which we have been able to obtain Round about $10 million of synergy a year, given better rates that we have. There is already cost opportunities coming into the P&L in the area of selling and administration. The new organization is already in-place. The next step is really to go and get synergies in the area of COGS. So there is still quite a bit of — a lot of opportunity, just for a reference point, as we acquired this business, the EBIT margin was not great. I think today, in Q1, particularly given the pricing, we have taken which is the other area where we brought quite a bit of discipline, the margin is just shy of 20%.

So, it’s quite a good outcome at this point in time. There is still more to come. We are thinking potentially about leveraging DSD and doing other things and obviously the biggest opportunity we see is establishing this brand internationally. So that hasn’t started yet as a work stream. On Ricolino we just got the business. We have CSA’s in-place still with Bimbo. As we implement SAP. And as we move towards the end-of-the year, that’s the moment where we will start getting SG&A costs and COGS synergies, but reality is the biggest opportunity here is to set Oreo through the system and revenue synergy can be very, very material. So there is still more to come on both platforms. And I would say in general in the other ventures, there is still work to be done.

And so potential synergies coming out there too.

Alexia Howard: Great. And then just as a quick follow-up, can you just quantify how much the retailer inventory rebuild benefited North America this quarter. And is there any more to come on that you will pass it on?

Dirk Van de Put: I think there was a slight positivity due to that. But reality is, we had been promoting less-than-optimal. And now that inventory is available, there is opportunity for us to do selective promotions and boost our brands, now that pricing is implemented. So pattern been material, I would say, and obviously in a context where you see this growth rate it is minimal, but we still have opportunities to really replenish stock more and now that we have potentially a little bit of more promotions coming, I think we are in a good position.

Alexia Howard: Great, thank you. I’ll pass it on.

Operator: And we’ll take our next question from Jason English with Goldman Sachs.

Jason English: Hey, good afternoon, folks. Thanks for slotting me in.

Dirk Van de Put: Hi, Jason.

Jason English: Couple of thoughts — hey there. Couple of quick questions. Both also sticking on North-America for a moment. Great news on the margin progression and congrats on that. That’s impressive in such a short-duration. We had been assuming that it was going to be a margin mix drag to both gross margins overall in this segment. With a 1,000 basis-points improvement that you’ve seen so far. Is it still margin dilutive? Are you now closer to parity with this sector?

Luca Zaramella: It is still margin dilutive on the overall segment. But again, as we think about potential opportunities in the years to come. This is another platform that we’re going to integrate into SAP in the second part of the year. I’m sure the margins will get better. Pricing has been announced for the last round, but it hasn’t kicked in yet. And there is now that we have stopped more opportunities to really activate that point of sales must stop leased as we called them, i.e. the right assortment by store is an area of opportunity that we have. So I’m confident that the margins will look quite close to the U.S. business going forward.

Jason English: That’s good to hear and sticking on North America, it seems like supply chain has been this overhang that we’ve been talking about in North America for year upon, year upon year and maybe I’m exaggerating, just because it feels that long. But it’s great that you’re over the hump and you are seeing improvement. Nice to see the sales side of that. How about on the margin side? Clearly this has been costly to the business. How much of a margin drag the supply chain issues been and how much of a tailwind could that be, as you look to sort of rebuild that?

Luca Zaramella: I mean, well. I would say that is the whole — this is a mix going on with the price increases that we have implemented together with some of the extra costs we’re seeing incurred during the pandemic to get the right service and so on. You see in the recuperation face we also promoted less than we were planning because our inventories were low. So it’s quite a complex picture to exactly pinpoint how much was due to the disruption, since we have to go through all these additional effect, but certainly is the case that the headwinds have moderated quite significantly. You know about the labor markets, the logistic situation. Our external manufacturers’ network has improved significantly. So a lot of the cost headwinds that we were facing have now eased.

That still doesn’t mean that the cost have come back. There’s been significant inflation. But I would say the resulting effects from our supply chain, improve, means that our inventory levels are back to the expected level. Service-level are reaching 90%. Our own sales availability is 96%. We still have some issues in our confectionery brands where the demand is higher than anticipated, and also Clif bar the service levels have fully recuperated. So at this stage I would say that the cost effects and the top line effects have largely eased. And we can now start to function normally with higher promotional levels and cost levels that are better. But it’s very difficult for us to estimate exactly what it was. But going forward, things we’re doing is we are increasing our capacity.

We have changed our way of working and our relationship with our external manufacturers. The Inventories are rebuilt. We have simplified our portfolio. We’ve increased our — sorry our warehousing capacity on top of our manufacturing capacity and we have implemented labor strategies for attention, and an improvement in temporary labor. So I think, apart from easing the cost, we’ve also put in place long-term solutions for our supply chain situation. Difficult to give you the exact number, but hopefully you can feel that we’re in a much better spot as it relates to our supply chain in North America.

Jason English: Yes, for sure. Thank you very much. I’ll pass it on.

Dirk Van de Put: Yes, thank you.

Operator: And we’ll take our next question from John Baumgartner with Mizuho.

John Baumgartner: Good afternoon. Thanks for the question. I wanted to ask…

Dirk Van de Put: Hi, good afternoon.

John Baumgartner: Yes, good afternoon. I wanted to ask, Luca. I wanted to ask about profitability in AMEA. You’re heavy into reinvestment mode there. You also mentioned the pricing disparities in earlier question. So I’m curious at this point how you’re thinking about the point at which volume mix growth relative to reinvestment. And I guess what I also think is pretty strong potential for accretive product mix over time. When that begin to yield leverage and sets you back to margin expansion? Or is a mid-teens margin just structural ceiling for AMEA? Thank you.

Luca Zaramella: I don’t think there is a structural ceiling in AMEA. AMEA is Quite good in terms of profitability overall. I think when you look very closely to AMEA there are a set of countries that are — I call them cash machines. The India or the China of the regions run on profit margins that are north of the average of the company. We invest in both businesses, roundabout 15% probably and see as a percentage of revenue, which is materially higher than the average of the company and we have cash conversion cycles whereby by growing these companies, not only we get the volume leverage that runs through a very sizable and bold machine both from a manufacturing standpoint, supply chain and sales, but also on negative cash conversion cycle, the cash throughput is impressive.

There are countries where we have a little bit less material scale, the likes of Southeast Asia. There are certain countries in Southeast Asia, where the business is still developing, where categories like chocolates are not well established yet. And we are investing to make these categories much bigger for us. And there I think it is a matter of time, because the scale and the volume. We are adding will get to a point where the P&L will make perfect sense. As you might imagine that in these countries, we are investing both in terms of price points and support ahead of material expansion that I think it will come. And then obviously you have countries like Australia that are again, more mature markets where volume grows and we are happy with Australia overall.

But it doesn’t grow high-single-digit or double-digits as in other places, and there the evolution of profitability is fair. So as you think about AMEA, very happy with the sizable markets that are doing very well. In that emerging markets, like happy with Australia, the rest is the untapped opportunity. We are looking at and we have the obligation to invest for future growth and margins. I think it will come.

John Baumgartner: Thanks, Luca. Very helpful.

Luca Zaramella: Thank you, John.

Operator: And we’ll take our last question from Michael Lavery with Piper Sandler.

Michael Lavery: Thank you. Good afternoon.

Dirk Van de Put: Hi Michael.

Michael Lavery: Just wanted to understand, I love like on slide five how clear it is that your A&C spending is almost identical to your sales growth. So clearly, the percentage of your spending as a percent of sales is holding about constant. But you get really some operating leverage there just given the amount of pricing that’s driving the top line growth. And so, on a per unit basis you’re really coming out ahead. How do you think about managing that going forward? Is it sort of a luxury, you want to maintain. Some of that may be get adjusted to fall to the bottom-line or just help us understand how spending might evolve given how that dynamic sets it up.

Luca Zaramella: Clearly the 20% might be something that is on the high side. Now I can tell you one thing. One of the biggest differentiators of this company over the last three years, it has been level of investment. It has been quality of marketing, it has been brand support. We in the end sell brands and it is important that we keep line of sight to that. And I don’t think you’re going to see a consistently at 20% A&C increase, but at this point in time, where we are moving price points, where we are trying to retain and increase our consumer pools, it is important that we use these as an important accelerator of growth for years to come. And that’s what it is at this point in time. When this inflationary cycle is done and good things will get more normal.

I think what is a big differentiator is the level of volume and the scale, businesses are still going to have or not have. In our case, if you look consistently over the last few quarters, we have been growing volume. And there is a correlation between the level of investments we are making, both in terms of marketing and distribution. And so I don’t think you’re going to see consistent in 20% but realities that is still a big opportunity for us to get our brands where they belong, which is higher sales hop3rully quarter-after-quarter.

Michael Lavery: That’s great color. Thank you so much.

Luca Zaramella: Thank you.

Luca Zaramella: Thank you. With that we’ve come through the end of the goal obviously a strong quarter. We’re looking-forward at this stage to a strong year. Thank you for your attendance and. Any other questions. Please refer to Shep in the IR team which we can follow-up with. Thank you.

Dirk Van de Put: Thank you, everyone.

Operator: That concludes today’s teleconference. Thank you for your participation. You may now disconnect.