Mondelez International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

Key Takeaways

  • Mondelez delivered 18% organic net revenue growth in the first half of 2023 and raised its full-year outlook to 12%+ for both organic net revenue and adjusted EPS, driven by effective pricing, volume growth in three of four regions, and disciplined cost management.
  • The company completed planned pricing negotiations in Europe and offset inflation with pricing and cost discipline, leading to strong profit-dollar growth and expected volume rebound and margin recovery in H2 now that pricing is fully implemented.
  • Continued brand innovation and portfolio expansion—such as Oreo Airy Cake gaining 3.5% market share in China, the launch of an under-100-calorie Cadbury Treat, and accelerated performance of Clif Bar—fueled value and volume growth across core categories and accelerated entry into cakes and pastries.
  • Mondelez achieved the #1 digital commerce market share in its top five markets while emerging-market ecommerce grew 40% year-to-date, and investments in revenue growth management tools and teams are capturing value to offset inflation pressures.
  • The company advanced its environmental, social and governance agenda through its “Snacking Made Right” report, making progress on sustainable sourcing of key ingredients, carbon reduction, recyclable packaging, and diversity, equity and inclusion goals.
AI Generated. May Contain Errors.
Earnings Conference Call
Mondelez International Q2 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, and welcome to the Mondelez International Second Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez Management and the question and answer session. At any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us. With me today are Dirk Van de Put, our Chairman and CEO and Luca Zermela, 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.

Speaker 1

Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10 ks, 10 Q and 8 ks filings for more details are forward looking statements. As we discuss our results today, unless noted as reported, We'll be referencing our non GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year over year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non GAAP reconciliations within our earnings release and at the back of the slide presentation.

Speaker 1

Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca. We will close with Q and A. I'll now turn the call over to Dirk. Thanks,

Speaker 2

Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I'm pleased to share that we delivered strong broad based top line growth during the first half of the year. Our strong performance was driven by effective pricing combined with healthy volume growth in 3 of our 4 regions. Europe was the lone exception due to expected disruption driven by retailer negotiation.

Speaker 2

We continue to execute on our long term strategy and we see robust momentum and solid consumer confidence across geographies and categories. We successfully implemented our planned price increases in Europe, closing our customer negotiations in line with expectations. With this behind us, we feel good about the remainder of the year in Europe. We also feel good about continued consumer confidence. We continue to drive robust demand in our core categories across the vast majority of our businesses, resulting in both value and volume growth.

Speaker 2

Our strong profit dollar growth was driven by cost discipline and pricing to offset Cost inflation. We continue to invest in our brands, capabilities and portfolio reshaping initiatives to accelerate and compound growth, and we remain confident that our proven strategy delivered by our world class team Positions us well to deliver another strong year. Based on the strength of our first half performance And our latest view across businesses, we are raising our full year organic net revenue and adjusted EPS growth outlook to 12% plus. Turning to Slide 5, you can see that the first half of twenty twenty three showed continued momentum across our entire business. We delivered first half organic net revenue growth of $2,700,000,000 up nearly 18% versus prior year and significantly ahead of our already strong 12% in full year 2022.

Speaker 2

This includes a 15.8% growth for the quarter. We also delivered adjusted gross profit dollar growth of more than 1,000,000,000 Again, we're well ahead of last year's pace with 18.9% growth. We're proud of our team's continued focus and agility, which enable us to continue investing to drive further growth acceleration. Our A and C investment is increasing 18% in the first half of the year. These results translated into strong adjusted OI growth of close to $600,000,000 up 23% and again, well ahead of last year's pace.

Speaker 2

On Slide 6, you can see a few examples of our brand acceleration Our continued investments in creative asset, personalization at scale and innovation, combined with strong In store execution are resulting in continued sales growth and brand loyalty increases in our core categories of chocolate, biscuits and Big Snacks. For example, in China, we launched Oreo Airy Cake in March, Driven by the strength of the Oreo name as the world's favorite cookie, this new packaged cake already has achieved a 3.5% market share and 80% of the velocity of its leading competitor in large stores. And China is one of our most important emerging markets. This is just one example of numerous innovations to expand our key brands into adjacent spaces and formats. We're also continuing to renovate our recipes to stay a step ahead of changing consumer and customer taste.

Speaker 2

For instance, We recently launched our first under 100 calories Cadbury Treat for adults. This is a great example of our commitment to help consumers We are offering a broader range of portion controlled packs and products, but also our portion control education campaigns, both digitally and on pack. In the Baked Snacks segment, we continue to accelerate both top And bottom line performance in Clif Bar. We remain focused on improving service levels and supply chain efficiencies, while further advancing productivity and effectiveness in our media spend and continuing to strengthen brand equity. We're also continuing to introduce new, culturally relevant flavors to strengthen consumer loyalty for our local JUUL brands.

Speaker 2

For example, Lacta has been a leader in Brazilian chocolate for over 110 years. Following the successful launch of Lacta Tablets That Brazilians already know and love. The Sonio de Valza Bonbons made with chocolate and cashew Not filling, as well as Ouro Branco candies made with wafers, filled with chocolate cream and covered in white chocolate. These are just a few examples of the innovative ways our teams are driving growth in our iconic chocolate, biscuit and baked snacks franchises, Continuously investing in new formats, pack sizes and flavor combinations that drive incrementality and encourage consumers to experience our brands in new ways. Within the Baked Snacks segment, we're especially excited about our strong performance in the rapidly growing cakes and pastries space.

Speaker 2

Let's take a closer look on Slide 7. Earlier, I mentioned the Oreo Aerie Cake in China as a great example of our brand acceleration efforts in emerging markets. Similarly, in developed markets, we're making solid progress in expanding our successful cookie and chocolate franchises into chocolate bakery, cakes And pastries. For instance, in the United States, Oreo Cakesters are continuing to perform well. Since the recent launch of this fan favorite, it already has earned a 3.7 share of packaged snacks cakes.

Speaker 2

Give and Go is another solid success story in our North America Baked Snacks lineup, where we're continuing to drive distribution and innovation. Share is up 0.5 point year to date, driven by solid pricing execution, expansion into adjacencies such as mini donuts and strong category demand. Meantime, in Europe, 7 Days continues to advance its position as the number one packaged croissant and we have exciting plans to continue to grow its footprint beyond Europe, including recent test and learn trials in a number of emerging markets. Turning to Slide 8. We continue to invest in digital commerce and revenue growth management tools and capabilities to support our brands while strengthening our partnerships with leading customers.

Speaker 2

I'm pleased to share that we have achieved the number one market share position in digital Commerce in our top 5 markets of the United States, China, United Kingdom, France and Brazil, while over delivering in up and coming emerging markets such as India, Philippines, Brazil, Mexico and Poland, which are up 40% year to date. We continue accelerating E B2B capabilities to expand distribution and strengthen our partnerships with key customers. Additionally, our increased investments in Elevating RGM strategies and actions are driving strong value realization, helping to offset inflationary pressures. We have appointed dedicated RGM leadership and teams in all key markets, supported with new proprietary data and analytics assessments, digital tools and a comprehensive training program. We are confident that these ongoing investments We'll deliver sustainable improvements in growth, efficiency and ultimately margin.

Speaker 2

Along with our financial performance, I'm pleased to share that we continue to make significant progress in advancing our environmental, social and governance strategy. In May, we published our annual snacking made right report, reinforcing our 2025 goals and documenting our latest performance in priority areas. These include sourcing key ingredients more sustainably, Reducing carbon emissions and increasing recyclable packaging. We are also improving performance in social impact and diversity, equity and inclusion, both internally and in partnership with our suppliers, as well as helping consumers snack more mindfully through improved portion education and increased focus on single portion packs. We continue to believe that helping to drive positive change at scale Across these important areas is an integral part of value creation with positive returns for all our stakeholders.

Speaker 2

We encourage you to read our snacking made right report for more details and context on our progress. With that, I'll turn it over to Luca to share additional insights on our financials.

Speaker 3

Thank you, Dirk, and good afternoon. Q2 marked another strong quarter for our business. Double digit organic net revenue growth across each region, sound pricing execution, Strong profit dollar growth and significant brand reinvestment enabled us to continue driving sustainable value creation. Revenue grew plus 15.8 percent with strong volumemix growth in North America, Latin America and EMEA. Overall, volume mix was flat for the quarter despite the expected customer disruption in Europe.

Speaker 3

Recall last year's Q2 total company volume mix was plus 5%, making this performance even more impressive. Emerging markets grew more than 23% with strong performance across a significant numbers of markets, while developed markets grew 11% with balanced trends from both North America and Europe and despite customer disruption. Turning to portfolio performance on slide 12. Chocolate biscuits, gum and candy businesses all posted another quarter of double digit increases in Q2. Biscuits increased plus 13.9%.

Speaker 3

Oreo Ritz, Chips Ahoy! Give N Go, Tac and Club Social all delivered double digit growth. Cliff, though not inorganic, also posted Strong growth. Chocolate grew plus 13.7 percent with strength in both developed and emerging markets. Cadbury Dairy Milk, Milka, Lacta, Toblerone all delivered double digit increases.

Speaker 3

We are very pleased with the performance of our core categories Chocolate and Biscuits, which, albeit impacted in the quarter by customer disruption, are on a solid trajectory. For both, we expect good volume momentum as we move forward in the year now that negotiations in Europe are behind us. Gum and Candy grew more than 30% with strength across our business units, especially in emerging markets. Now let's review market and share performance on Slide 13. We held or gained share in 70% of our revenue base.

Speaker 3

The U. S. Continues to make service level improvements and ended Q2 with good on shelf availability and inventory levels. Moving to Page 14. We delivered more than $540,000,000 in gross profit year over year gross margin expansion in all regions except Europe, which was impacted by expected customer disruption.

Speaker 3

Now that pricing is implemented, we expect improvements in Europe too. This growth provides Significant fuel to invest behind our brands as well as significant earnings flow through. Moving to regional performance on Slide 15. We delivered double digit revenue growth in all regions, while also delivering volume mix increases in all regions but Europe that got impacted by pricing related disruption. This growth translated into operating leverage and OI dollar growth across the board.

Speaker 3

Europe grew plus 13.1 percent with double digit high growth. Importantly, pricing has now been lending, and we expect That this will lead to a better second half volume and margin performance. Overall, the consumer remains resilient with elasticities holding up relatively well in chocolate and biscuit, while we saw some incremental elasticity in part of our cheese and grocery business. North America grew plus 12.4 percent with OI dollar growth of more than 29%, driven by higher pricing, Volume mix of 2% and strength from both our base biscuits business and our ventures, such as Give N Go, Perfect Snacks and KAVE. CLIF also posted robust growth and delivered another Operating margin increased of double digit in percentage points in Q2 versus last year.

Speaker 3

Now profitability is approaching the level of total North America, but we still have to generate material synergies, both on revenue and cost line. So Cliff is a business that is growing, as now some margins and still with meaningful synergy potential. EMEA grew 13.2% with solid volumemix growth of more than 3%. OI dollars increased plus 4.2%. India, China, Southeast Asia All posted strong top line growth for the quarter.

Speaker 3

Latin America grew more than 37 and with OI dollar growth of nearly 65%. Mexico, Western Andean Countries and Brazil all turned in robust quarters. Ricolino remains on track in terms of integration, and we expect to begin capturing more benefits toward the end of the year. Next to EPS on Slide 16. In the quarter, EPS grew plus 21.5% in constant currency or nearly 17% are reported dollars.

Speaker 3

Turning to Slide 17. Free cash flow was $1,500,000,000 in the first half with $1,700,000,000 in return of capital to shareholders. We also announced today an increase in our dividend of plus 10%, marking a double digit increase in 8 of the last 9 years of the history of Mondelez. Turning to our outlook on Page 19. Given the strength of our Q2 and first half performance, The successful conclusion of our negotiations in Europe, the strong volume momentum of our brands, we are raising our full year outlook for both Revenue growth and adjusted EPS.

Speaker 3

We now expect top line growth of 12% plus versus our original outlook of 5% to 7% and most recent outlook of 10% plus. EPS growth is also expected to be 12% plus versus our prior outlook of 10% plus and original outlook Note, our free cash flow outlook remains unchanged at $3,300,000,000 given $400,000,000 in cash taxes related to the sell down and exit of our KDP position. In terms of key assumptions, we continue to expect a double digit inflation increase for 2023, driven by elevated cost in packaging, ingredients, labor and lapping favorable commodity hedges in 2022. With respect to interest expense, We now expect $380,000,000 for the year, given recent coffee asset monetization and term loan reductions. We also expect to end the year around mid-2s in terms of leverage based on current conditions.

Speaker 3

As a reminder, given the liquidation of our KDP position in the middle of July, there will be no dividend income recorded enough to. We now expect $0.11 of EPS of headwinds related to ForEx impact for the year versus $0.09 in our prior outlook. The outlook revision reflects our increased confidence in the year, ongoing resilience of consumer consumptions in our categories, relatively benign elasticities, continued brand reinvestment and completion of pricing in Europe as well as health of our emerging markets. 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.

Operator

And we'll take our first question from Andrew Lazar with Barclays. Your line is open.

Speaker 4

Great. Thanks so much. Appreciate it. First off, Dirk, we've heard so far from a bunch of food companies that have reported earnings of some maybe very recent changes in things like consumer behavior, retailer inventory destocking, competitiveness and maybe generally greater Sluggishness in category volumes as pricing has lapped. I was hoping you could talk a bit about the landscape as it relates to Mondelez specifically And any changes sort of one way or the other that are notable for you.

Speaker 2

Okay. Thanks, Andrew. Well, Based on H1, we obviously feel quite good about how our portfolio is performing. We have Broad growth in the different regions, in the different categories across most of our brands. The pricing went through quite well, strong pricing, I would say, compared to others.

Speaker 2

We have very good volume mix growth in 3 out of 4 regions. And the only region that was Disrupted was Europe, but that was due to customer disruption. And we foresee for the second half that we will see solid volume growth in Europe. Our share is increasing. North America is finally recovered.

Speaker 2

We are gaining share In EMEA, Europe, of course, still a bit of a drag on share, but that's again because of this client disruption. You see that our emerging markets are doing quite well broadly in the top and the bottom line. So we are generating good gross profit, so we can Continue to invest strongly in our brands and in our capabilities. The acquisitions are doing well. I would point to Cliff.

Speaker 2

And yes, we have double digit growth in adjusted and real EPS. So The whole picture for us looks pretty good. If I look a little bit further on the environment, at least in our categories, we see Strong consumer confidence. We would say that it's improving in the developed and in the emerging markets And the price sensitivity seems to be plateauing, particularly the emerging market consumer, I would say, is very, very solid. If I think about the competition, I think the big difference between us and the competition will be that we have a very strong top line combined with some good volume growth.

Speaker 2

Promo levels, we see some increase in promo levels in biscuit, But it's largely flat and down somewhere else. We even see promo prices going up faster than non promo prices in percentage. From a pricing perspective, we have done as what was needed. So most of our 23 pricing is taken. North America was already done in December of last year.

Speaker 2

Europe was closed in line with expectations in Q2 And emerging markets are exactly on plan. And then the elasticity, we don't see a change in the elasticity, which has been low as you know. We do see consumers shopping around more hoping to find deals. The quantity bought per shopping trip is the same, But they tend to shop a little bit less frequently, but nothing really that preoccupies us. And so to close, I would say the volume is strong.

Speaker 2

Europe will recover in the second half and this will be the strongest H1 and we believe year that we have delivered that as Mondelez. So we think we are quite doing quite well there. Maybe a few words on Europe, which is probably the most Important thing for us, it's obviously has been for us a very dynamic environment. Top line demand has been quite good, 13.1 percent growth, but the volume mix was down 4.5 points, but that was due primarily through that client disruption. I want to reemphasize that all 2023 client negotiations have closed successfully and all the pricing was landed in line with plan.

Speaker 2

We will see some inflationary costs continuing in cocoa and sugar going into 2024. And we are planning to do some strong investments in the second half in Europe. So if you think that Through and you say, okay, these pricing negotiations are behind us. We are positive on H2. And so what you could expect for H2 in Europe is that our volumes will grow.

Speaker 2

We are ready to execute in store. We have planned key promotions because now with this negotiation behind us, we can go full force again. I think as a consequence of that, you will see our share improve. We also start lapping prior year headwinds and our margins will start to recover as the pricing is now fully implemented. So I think three levels of good news, volumes, share and margins.

Speaker 2

Our categories continue to do well. Consumers seem to prioritize them. Also in Europe, elasticities remain low despite some strong price inflation. Yes. If you talk about our cheese or grocery categories, there we see a little bit of an uptick in elasticity, but that's a smaller percentage of our business.

Speaker 2

HFSS in the UK looks pretty manageable at this stage. The consumer is adjusting to the changes that they see in store. We see a bigger impact on seasonals and gifting, but the impact on standard chocolate seems to be minor. So I would say the main news that we have is that we are expecting a good second half for Europe on top of all the other things. Hope that gives you a picture, Andrew.

Speaker 4

Yes, I know, really complete. So I appreciate that. One very quick one for Luca. The company raised constant currency EPS growth expectations to 12% plus from 10% plus. I guess consensus is already Close to the 12% mark.

Speaker 4

So I guess I'm just curious how investors should think about the plus in the guide? Thanks so much.

Speaker 3

Thank you, Andrew. Yes, before I go to the plus part, maybe briefly to provide some color on what underpins the new outlook. I think there are 3 important drivers to point to in terms of Our new outlook, one, it is clearly the strong first half and importantly, the quality of the results we are posting. I'm particularly happy with the operating part of the EPS growth. 2nd, I think it is really the underlying broad Base strength of our business, the resilience of our brands, I'm happy with volume and value growth and the continued investment.

Speaker 3

And 3rd, as we mentioned a few times, Europe with price fully landing and in line with expectations. So maybe I will work briefly by geography. Emerging markets are on a roll. We are quite happy. Some pricing is causing some areas of concern in terms of Elasticity, but those are the minority of the market and not really important in the big scheme of things.

Speaker 3

The U. S. And North America are posting a terrific P and L, and we are very pleased with Cliff. And Europe has improved profitability already in Q2. But as we Expect volume and revenue growth as well as margin improvement for Europe.

Speaker 3

So quite frankly, there is a good chance that we See the 12% plus guidance, but I prefer having another quarter under the belt and then narrow guidance for Q4, if all things play out as we have in mind, as I said, there are good chances we will exceed the guidance. Bear in mind that we want to 2020 4 strong and so if there is upside in terms of profitability and EPS, we might decide to reinvest selectively some of the

Operator

Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Speaker 1

Hey, thanks, operator. Good afternoon, guys.

Speaker 3

Hi, Brian.

Speaker 1

Hey, I got two questions, 1 on the net interest guidance and the second one on Cliff. So maybe first one for you, Luca, net interest expense guidance came down again, I think by about $20,000,000 versus where we were coming out of 1Q. And I just want to make sure, I think you paid off a $750,000,000 term loan with the KDP proceeds. So Is this just simply a function of a half a year interest savings on paying the term loan off? Or is there anything else that drove the lower net interest expense?

Speaker 3

No, that is it. It is debt coming down. You're going to see a good leverage as we end the year. We plan to be at like 2.5 times that, which is quite good. And yes, now it is as simple as us paying down the term loan.

Speaker 1

Okay. Thanks. And then Dirk, in your prepared comments, you talked about Cliff pretty encouragingly, right, in terms of the margins Approaching, I guess, the segment level and then there's more synergy and then it sounds like you're also expanding on revenue. So can you just Maybe give us a little bit of a progress report on kind of where you stand with Cliff today relative to where it was when you acquired it? Is your integration

Speaker 5

and is

Speaker 6

the acquisition model kind

Speaker 1

of running ahead of expectations? And just How we should think about maybe how impactful Cliff might be as we look forward?

Speaker 2

Yes. So we've seen In the first half, very strong double digit revenue growth and the margins, the OI margin versus previous year It's up more than 1,000 basis points. So we've increased Prices, some of the first thing I would say, we've increased prices more aggressively than Cliff would have done historically. We increased prices in August, in January and another one later in Q1. And so we see low elasticity, I would say.

Speaker 2

So that's having a big impact. The second big thing that we're doing is the service has improved. We reduced SKUs And we started to operate the plants a little bit better and so that has given to a good increase in the service level. Then we changed the promotional plan that has successfully kicked off. Fourth thing is that our media buying is more efficient than theirs.

Speaker 2

So we were able to also get some benefits from that. So those are some of the things we've done. The integration It's taking place in a number of steps like a big one is the systems integration later on in the year. But so far where we have streamlined the teams and we brought more clarity on how we want to operate the business that is all Going well. But as we said in the prepared remarks that the real benefit of the cost synergies is still largely to come.

Speaker 2

We've already seen some benefits, but It's in the second half of this year and beginning of next year that we will get the real benefit from it. So I would say you can probably make the calculation. It's close to $1,000,000,000 business that improves its margin by the amount that I was quoting. So That will have a regional impact on the total company.

Speaker 1

Thanks, Dirk. Thanks, Luca.

Speaker 3

Okay. Thank you. Thank you, Brian.

Operator

Our next question comes from David Palmer with Evercore ISI. Your line is open.

Speaker 7

Thank you. A question on Europe pricing and the impact on volume. You mentioned The pricing is complete. How are you thinking about the volume for the region in the second half given that some of that disruption is behind you and you're Lapping some disruption in the second half versus 2022.

Speaker 2

Yes. So as I said, we don't really give the volume guidance per region, but We would see some solid volume growth in the second half, driven by exactly the factors that you were Saying, so we have the pricing negotiations behind us, that pricing will be implemented. The disruption is gone. Last year in the 2nd half, we increased our prices in Europe and we had more disruption. We will lap that.

Speaker 2

So that's going to have a benefit for us. We have elasticities in Europe that are relatively benign. So despite the newly implemented pricing, we don't think that that's going to have a major effect on the volume. So I'll be now giving you the number. It's going to be a nice solid volume growth for the second half.

Speaker 7

And then I couldn't help but notice You featured cake and pastries a couple of times in your slides and it seems like a logical extension to have Oreo, have a snack cake. But I wonder how big could your aspirations be in that category? It doesn't seem as big as some of your other categories. So I'm wondering, do you see Snack Cakes and Pastries being an ongoing sizable growth contributor? And maybe give us a sense How do you think about the TAM there, the opportunity there and how you're going to go about it?

Speaker 7

Thanks.

Speaker 2

Yes. So, well, first Well, cakes and pastries is not a small category. It's not the size of biscuits, but it's not too far away from it. And so it's a big opportunity around the world. It's a very fragmented category with sometimes relatively commoditized products in there, but This is real opportunity to bring strong brands with high quality products.

Speaker 2

And so that's really the play that we're going forward through An Oreo Aerie Cake in China or a cake that's here in the U. S. Or give and go In the fresh section or a Chipeta in Europe with prepackaged croissants, for instance. So We think that there is a whole play for us there. At the moment, we're around the 3%, 4% market share of the whole category, so plenty of room to go.

Speaker 2

With that, we are already the number 2 player. And So that indicates how fragmented it is. The category itself has been growing quite nicely over the past 3 years. It is a category that exists across all markets. It covers Different occasions than our typical biscuits and chocolate, so that makes it very interesting for him.

Speaker 2

And so we think with this new Quality products in our brands, we can really make a significant impact. And I'm not going to give an exact number, but We would expect that our cakes and pastry business in the coming year should double or triple and lift us up to close to a 10% market share. So for us, it's going to be a significant contribution to the growth of the company.

Speaker 7

Thank you.

Operator

Our next question comes from Ken Goldman with JPMorgan. Your line is

Speaker 8

open. Hi, thank you. I wanted to ask, as we look at the futures charts for Cocoa and Sugar, they might indicate That theoretically, right down the road, some additional pricing might be needed to offset more inflation. I appreciate your But not in a position today, right, to talk about pricing that hasn't been announced. But just conceptually, is there any reason to think that you wouldn't be able or willing If needed, raise list prices again, especially if European elasticities, I guess, maybe aren't that bad and you're given your commentary about

Speaker 9

[SPEAKER JOSE RAFAEL FERNANDEZ:] Some improving consumer confidence. Thanks. [SPEAKER JOSE RAFAEL FERNANDEZ:]

Speaker 3

Thank you for the question, Ken. Look, the increase in sugar and cocoa specifically is material. I mean, we are talking about Most likely a 30 plus percent if you look at the last 12 months or even more particularly in Cocoa. I think when you look at the quality of the brands we sell, the fact that we have invested materially around the world in our brands, the fact that there are Strong bounce with consumers, and I believe pricing is will be a necessity in chocolate. I'm not going to elaborate on the details.

Speaker 3

Also bear in mind that particularly in emerging markets, We are going to be very mindful about not vacating price points, and so we will use RGM. And then over the last Couple of years, I would say, we have learned the ins and outs of implementing pricing around the world. And I think it is needed and we're going to do it most likely.

Speaker 8

Thanks. And then just one quick follow-up. Are there any peculiarities or cadence issues we should think about That are not necessarily obvious, just as we model 3Q versus 4Q, any timing or headwinds or tailwinds that might not be apparent at

Speaker 7

first glance, if I could say it? Thank you. No, I'll Glass plants, if I could say it. Thank you.

Speaker 3

No, look, I don't think there is anything that you're You're going to see in terms of outliers that are going to cause material issues or material opportunities in Q3. You're going to see a volume rebound in Europe. As a consequence, I think, obviously, there is going to be a better situation for the I'm not going to guide you exactly on gross profit, but you're going to see Double digit, most likely revenue growth and double digit EBIT growth. Below the line, the items can vary. But I think when you really look at Q3, Q4, you're going to see strong operating gains coming through the P and Ls.

Speaker 3

And I didn't talk a lot about cash flow, but very happy with that too. And you're going to see us delivering the cash Despite the $400,000,000 headwinds related to the coffee KDP sale.

Speaker 8

Thank you.

Speaker 3

Thank you, Ken.

Operator

Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.

Speaker 10

Hey, everyone.

Speaker 3

Hi, Chris.

Speaker 10

So just One follow-up and then just a second question around the guidance commentary. But Luca, I think you said that you expected leverage At the end of the year to be in the 2.5 times range, that would be historically low level for the At that level, how should we be thinking about deployment Of capital at that point, if you repurchased more shares, you have too many deals recently and clearly you're doing great work on CLIF. So is there Low hanging fruit on what you've already added. It just stood out to me that you'll be treading toward historically low level on leverage. And At that point, I think there's going to be probably some observations around what that capacity could be used And then just one other quick follow-up on the EPS upside Comment for the full year, there was also a comment just around spending back, right?

Speaker 10

So like how do you think about as we get through the year, This concept, okay, there could be some upside, but you're also quite committed to spending back. Like where does that kind of tension Play out, right? If volumes get weaker, you're going to spend back more. If not, there's some upside. Just maybe any context on that as well.

Speaker 10

So thanks for that on the leverage and Just upside versus investment? Thanks so much.

Speaker 3

Yes. No, I think the first thing first is The underlying strength of the EBITDA in the business. So we are converting cash Quite well from net income that is coming and that is the first element of the equation. The second one is the fact that we are going to get $1,300,000,000 of proceeds from the gum sale and that will further enhance the situation. I'm not going to tell you that we're going to run the company forever at this Level of leverage, but reality is absent M and A.

Speaker 3

I think this is most likely a little bit of a new norm. What you have also to keep in mind is both in the case of Cliff and Vicolino, We are doing quite a good job in terms of integration. And I think deployment of capital behind M and A particularly has been Something that the company has done well. Capital allocation behind fleet, we quoted a few I think this is a great opportunity and it shows that we can generate quite a bit of value through M and A. We don't control necessarily time of M and A, but on the M and A, if something comes along, we're going to be on it.

Speaker 3

Also bear in mind that there are parts of the portfolio that we might decide eventually to divest down the road. So I think from a leverage standpoint, we are really in a good shape. EPS upside, the one of the things I believe that is Delivering volume growth for us, it is the fact that, yes, we price, but we continue to invest in the business, not only in terms of A and C, but also quality and other things. We talked a little bit earlier in the year about the milk re launch In Europe and the improved formula is one example. And what I meant by DPS upside is we clearly have In mind the fact that we might have a little bit of headroom in terms of profitability and we want to use a little bit of that headroom selectively in some places to really go after incremental distribution opportunities, to really go after incremental investments such as we get a good start into 2024.

Speaker 3

It will be on a case by case, but we consistently ask around the business, We have opportunities to accelerate and we do it on a quarterly basis and so stay tuned, you'll learn more as we post Q3 results.

Speaker 10

Okay. Thanks so much.

Speaker 3

Thank you.

Operator

Our next question comes from Jason English with Goldman Sachs. Your line is open.

Speaker 9

Hey folks, thanks for letting me in. Hi, Jason. Hi, Jason. Luke, I want to pull on Brad, you just brought up the opportunity to drive accelerating growth, invest, find distribution. I believe in the past you've outlined some of the distribution You see in front of you in Brazil and Southeast Asia and India, as well as the opportunities coming on the back of the Richelina acquisition.

Speaker 9

Can you update us on Where those opportunities lie? How much progress you've made? And how much progress is left to be had?

Speaker 2

Yes. The opportunities typically lie in the emerging markets in the first place. And so the countries that you should be thinking about are India and China, where we have been going at the rate of well over 100,000 to 200,000 new stores That is going to continue. That speed at which we continue to grow. We do the same in Southeast Asia and we're also looking at opportunities to do something similar in Latin America.

Speaker 2

So that's the number one driver of what we think and you should think about it as at the same pace as what it has been in the last 2, 3 years. The second one is We call it going broader, which means that we can start to increase the range of our products that are available In stores, also again largely in emerging markets, that's another big driver of our distribution. China has started to do that in the last 2, 3 years. That's going pretty well for us. And so that's a second sort of front that we are working on around the world.

Speaker 2

And then the last one is the acquisitions where we are starting to do test and learn with these products in different markets around the world. So we have a number of test and learns going on in Chipeta. We have some grenade test and learns. We will have some cliff Test and learns around the world, and we are expecting that from that we will learn which countries those would have A big opportunity to start being distributed. So that you should see as a third front.

Speaker 2

In the 1st 2 years, I wouldn't expect that you would see a major Impact on our numbers, but later on as these things take shape, I think that will start to play a significant role. If I think order of magnitude that you should think about it, if I think about an India or a China, I would say a third of their growth is driven by distribution expansion. So that gives you an order of magnitude.

Speaker 9

That's the stuff. I appreciate it. I'll pass it on.

Speaker 2

Thank you. Thank you, James.

Operator

Our next question comes from John Baumgartner with Mizuho Securities. Your line is open.

Speaker 6

Good afternoon. Thanks for the question. Hi, Jones.

Speaker 3

Hi. Hi.

Speaker 6

I wanted to stick with the emerging markets, but maybe in the context of local brands. It looks as though the market share growth has stalled out a bit in the last couple of quarters, at least in Europe. And maybe that's a function of the success of global brands sort of crowding out the locals. But if you could elaborate, Dirk, just on your resource allocation, where you are at this point, what are the expectations for locals across the portfolio going forward And how you think about the ability for Global and Local to grow share simultaneously? Because I think historically, the largest opportunities you have to recover lost Share and locals is Eastern Europe, Asia, chocolate biscuit.

Speaker 6

So curious about your thoughts there. Thank you.

Speaker 2

Yes. So First of all, I would say Europe, you have to be a bit careful because you have the whole client disruption going through there. So if our share is affected, That has to see with the client disruption. But if I think about the performance of global and local brands, It is true that global brands have started to grow faster, I would say. We have a number of brands, particularly an Oreo, a Milka, Cadbury, But also Trident as a gum brand, for example, or Hals, which are recuperating post COVID.

Speaker 2

So you have a number of Global Brands, the OREA Milk category is normal, but then you get an extra boost from things like Trident and HALF's, which were not growing That much. We, for instance, are also working very hard on our Toblerone premiumization. So yes, at this stage, global brands are growing Faster, they're well into the 20s, while local jewels are probably more in the mid teens growth, still not bad. But that's a little bit the effect as I explained to you. Does that mean that we have changed our resource allocation?

Speaker 2

No, not at all. And if anything, we're We're pushing our local teams to make sure that our local jewels get significant resources allocated to it because we believe that The opportunity is there. And so I wouldn't read too much into it. For instance, if you look at the 4 year CAGR, Our global brands are double digits, while our local jewels are high single digits, so very close to each other. And that's really what I would point to.

Speaker 2

So we don't necessarily see anything there that would preoccupy us.

Speaker 3

Thank you, Dirk. Okay. Thank you.

Operator

Our last question comes from Michael Lavery with Piper Sandler. Your line is open.

Speaker 5

Thank you. Good afternoon.

Speaker 10

Hi. Hi.

Speaker 5

I just wanted to follow-up Dave Palmer's question about Bakery and maybe specifically just with Give and Go, you mentioned how bringing branded and quality products was sort of the key Unlocking share gains and growth there, but fresh seems less branded and maybe sometimes very little branding. Is there opportunity there? How much can you push that maybe in at least certain subsegments? And then as far as geographically expanding that, is there an opportunity for that as well?

Speaker 2

Yes. Well, yes, when I talked about the branded part, I was talking more about the packaged cakes and pastries. And so if you think about give and go as a fresh business, branded can play a role and I Can explain you a little bit how we think about that. But it's largely driven through innovation, I would say, Growth of the Grieve and Go business and extra distribution. So you have to think about Grieve and Go as a player that makes Many cakes and pastries, so mini cupcakes, mini muffins, mini brownies, mini donuts.

Speaker 2

And that's a very interesting segment. It's a 2 bite segment. And they do a great job in offering a quality product. Now we can make those products With some of our ingredients, so you can imagine a cupcake with Oreo on top of it. And so the branding can play a role.

Speaker 2

They've also started to develop their own brands. So it can play a role in give and go, but your observation is correct that it's More in the packaged part of things. Now the in store bakery is very interesting for retailers in North America, but it's So happening in other parts of the world. We were in Australia, for instance, and one of the retailers there, their main interest was to talk To us about in store bakery and how we could activate it together with them. The reason being that The other big benefit of give and go business is that it saves on labor.

Speaker 2

So you now get a product delivered to your store that is freeze and thaw And you can avoid all the labor in store. And so that drives a big interest from the retailer on top. The consumer sees it as fresh. There is high interest. It's a They want to increase.

Speaker 2

So I would certainly confirm that there is a growing interest around the world for Fresh Bakery.

Speaker 5

That's great color. Thank you. And just a follow-up on emerging markets too. It sounds like there's strength broadly, Even in China, but can you just help us understand the Chinese consumer a little bit? Is your performance there doing well a function of A relatively low kind of accessible price point.

Speaker 5

Is it more food at home that's doing well? Can you Maybe unpack a little bit where the Chinese consumer is and how that fits with your portfolio?

Speaker 2

Yes. Yes. So China grew double digit for us in Q2. One of the key effects that you need to think about is that we have a big gun business there. And as we are coming out of COVID, Kind of strange, nobody talks about COVID anymore in China, but the mobility is coming back and so we have growth coming on our gum business.

Speaker 2

On top of that, we have had a continued strong biscuit growth, which is more home consumption. In both cases, we are increasing our share. Biscuits is up almost one point in Q2 Through very strong brand activations and we're particularly happy with the success that Chips Ahoy! Is having now as our 2nd big biscuit brand next to Oreo in China. And then gum share is up 2.5 points, where we started to do some very targeted activations in lower tier cities.

Speaker 2

The other thing that's particular about China is that digital commerce is about 20% of sales. And in Q2, digital commerce It's starting to grow quite considerably at 23% growth rate. So that all points towards Or on the go consumption because in China, the digital commerce is can be sometimes delivered in a very short period of time, but also home consumption Sure, of course. The other thing to explain our China growth is that distribution expansion I was talking about in the previous question. So in Q2 alone, we've added 60,000 new stores in the super and mini channels as a part of that go deeper route to market And the last one I would point to is innovation.

Speaker 2

We launched that Oreo Aerie Cake, talked about it in the prepared remarks. And that's that expansion into baked snacks and cakes and pastries for us. So those are all the elements that are driving our Chinese growth. I think it's pretty solid for the quarters and years to come. We can work on all these fronts.

Speaker 2

We can continue to add distribution. We still have huge opportunity. We have some interesting innovations coming up. We're getting better and better on our digital commerce. And I think the gum category will really rebound in the coming months and that will be a boost to our growth there.

Speaker 2

As it relates to the consumer, the consumer is clearly the confidence is going up, But certainly, they are not yet to the bullishness that they had pre pandemic. They're not cutting back on volumes, But they are clearly shopping around more, trying to find better deals and they're also trading up and down as it relates to the back size. We also see a shift to smaller stores because the quantity that they buy is smaller and they shop more frequently. So I would say we are very encouraged by our China business. We have several fronts that allow us to grow.

Speaker 2

We've done that in the previous years. Those Fronts have not been affected and I believe that you will see some very good results coming from China in the second half of the year.

Speaker 5

That's great, great color. Thanks so much.

Speaker 2

Okay. Well, thank you. With that, I think we can conclude the call for the Q2. Thank you so much

Operator

This does conclude today's program. Thank you for your participation and you may disconnect at any time.

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