Good day, and welcome to the Mondelez International Third Quarter 2018 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez' management and the question-and-answer session. [Operator Instructions]. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations from Mondelez. Please go ahead, sir.

Thank you. Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelezinternational.com/investors. 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 the risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. And with that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon. We delivered very solid results for the third quarter. We continue to build momentum on the top line while increasing both adjusted growth and operating margin, and we delivered another double-digit increase in adjusted earnings per share. Our third quarter organic net revenue grew 1.2%, which includes 60 basis points of headwind for onetime malware effects last year, and it was supported by positive volume growth. We also delivered adjusted EPS growth of 18% at constant currency and solid free cash flow, which is now $1.1 billion year-to-date. As I laid out at our Investor Day last month, we are excited about the growth potential of snacking. Vibrant categories like chocolate and biscuits are growing faster than other areas in food. I want to thank many of you for attending and giving us an opportunity to share our vision and priorities around growth, execution and culture. Mondelez is well positioned to lead the future of snacking, thanks to our unique portfolio of iconic global and local brands and our advantaged geographic footprint. Nearly 40% of our revenues come from fast-growing emerging markets, which we expect will disproportionately contribute to future snacking growth. In the third quarter, emerging markets continue to show strong momentum and delivered an increase in revenues of 6%. This was driven by positive volume and pricing with particular strength in Russia, India, Mexico, China, South East Asia and Africa. Excluding Argentina, emerging markets grew 4.5%. In North America, as we discussed with you before, we are working to address several issues in our business which, as expected, continue to impact results. On the biscuits consumer side, overall consumption and our share were positive with key brands such as Oreo, Ritz and belVita performing well, but we have more work to do…

Thanks, Dirk, and good afternoon. We performed well across a number of financial metrics and continued to see good revenue and volume momentum as well as solid margin performance that is consistent with our outlook. Organic net revenue increased 1.2%. This top line performance includes a headwind of 60 basis points related to the lapping of the malware recovery. Emerging market performance stands out in the quarter as it was broad-based with strong volume growth. China, India, Mexico, Russia, Southeast Asia and Africa all delivered good results. These results reflect solid execution by our commercial teams as well as robust market dynamics in our categories. On a regional basis for the quarter, Europe's organic net revenue increased 0.2%, though underlying growth was better as these results included approximately 150 basis points of headwind related to the malware incident. Russia posted mid-single-digit revenue growth and share gains in both chocolate and biscuits. And Germany delivered solid growth in biscuit, where the Milka-branded chocobakery portfolio continues to fuel strong performance. AMEA grew 4.6%, with broad-based across all key areas. India and Southeast Asia continue to execute well with high and mid-single-digit growth, while China delivered its fifth consecutive quarter of growth fueled by biscuit and e-commerce. We also saw strong double-digit results in Africa. Latin America grew 4.6%. Although the region was impacted by inflation-driven growth in Argentina, we continued to see good momentum in Mexico, which grew mid-single digits behind both gum and candy. Brazil declined low single-digit in the quarter. We are addressing price gaps and have also made steps around innovation that will help to improve the trajectory of our business in Brazil. North America declined 2%. While we saw positive U.S. biscuits category and share dynamics, we continued to face a number of operational challenges which impacted volume.…

[Operator Instructions]. We will take our first question from the line of Bryan Spillane with Bank of America.

So two questions for me. One, I guess, just specifically in the quarter, it looked, I think relative to where we were, you ended up delivering much better in gross profit dollars, but the SG&A was a little bit higher than, I guess, we expected it to be. So look, if you could just walk us through, was that more marketing? Did you -- were you better than expected and spent more back? Or was there other sort of noise that we should just think about that flowed through SG&A in the quarter? And then I have a follow-up.

Yes. Thank you, Bryan. So quite pleased with the gross profit growth, more than 4%. Gross margin, as you said, up 110 basis points, so delivering our commitments. It didn't translate fully into OI margin as last year we had a few positives into the other income line and, this year, we had a few unfavorable items in the other income line that resulted in unfavorable comparisons. But in terms of that specifically, I would say that we did a good job, in the quarter, continuing the cost savings you have seen so far this year, and we have been offsetting inflation. And as far as A&C goes, in general, it is in line with last year, so no major changes. But we have unlocked some more investments, specifically in the quarter in a couple of places where we see good momentum, and there will be more to come in Q4. So it was not -- A&C in total in the quarter, it was not overhead cost, it was the -- some unfavorability this quarter in other income lapping favorability last year as we had asset sales and a little bit of insurance claims that were refunded.

Okay. And then, I guess, as a follow-up to that, Dirk, it's early -- I guess, you're beginning to make early progress against your strategic plan. And I guess, as that's unfolding, could you just sort of give us an idea of how you're thinking about spending levels for 2019 and how should -- we should think about that as we're looking at our models and looking at the opportunities going into next year?

Yes, yes, Bryan. Well, first of all, maybe a little bit on the strategy in general. We had a number of premises in our strategy as we announced it in September. The first one was that snacking is a great place to be in food these days, and the quarter confirmed that with the 2.7% growth of our categories worldwide, even if we had a the significant heat wave in Europe which obviously impacts chocolate sales. And then the other premise was that emerging markets will continue to drive growth, and they were particularly strong in this quarter with 6% growth. So we feel good about those 2 premises, they were confirmed. And then as it relates to the other 3 strategies that we laid out: accelerated consumer-centric growth; we continue with our new marketing playbook; we did a number of innovations that were launched, I talked about a few; and we keep on being focused on M&A, operational excellence. We talked about gross margin. Also, the new organization we're putting in place, the recyclable packaging. And then as it relates to the culture, again, that new organization which pushes accountability closer and the new incentive plan that will reward profit dollars and volume growth. So we're on track, we're making progress on all these 3 strategies and can go deeper into detail if you would like to. But overall, what we're expecting for the spending next year, and we're still, of course, finalizing the plans, but we expect those to be the 4 big areas. The first one would be, of course, A&C; the second one, in overall capabilities of the company; the third one, in quality; and the fourth one, in route to market. The specific levels are probably a little bit early to comment on, but we're expecting those 4 areas to see a significant increase next year.

But fair to say that's still concorporated in the guidance that you gave us for '19 back in September.

Yes, yes, yes. No change there.

Our next question comes from the line of Ken Goldman with JPMorgan.

I'd like to ask 1 quick one and then a broader one, if I can. For the fourth quarter -- or for the second half, I think you said that you expect your operating margin on a pro forma basis to be roughly the same as in the first half of the year. I think that implies maybe an operating margin in the fourth quarter lower than the annual average, maybe something like 16.3, 16.4 on a percent basis. Can you confirm that I'm doing my math there, very quickly? I just want to make sure because -- as we think about the modeling.

Look, I think, and as you think about our margin year-to-date, OI margin is around about 16.8%. I think as we guided the full year to approximately 17%, I would say Q4 is around about in line with the year-to-date number.

Okay. And then I'm following up on that. My broader question is I just wanted to ask about pricing in the U.S. I think the number you had, over 1%, was the best in a few years this quarter, and the comparison was relatively difficult. So can you just help us how to understand a little bit about the balance between list pricing? How much is list pricing driving the success versus lower promotions? I really just want to get a better idea of how sustainable this pricing is because it's obviously a very sensitive topic for many, many CPG companies in the U.S. today.

Look, I think we have work to do in the U.S., quite honestly. But I think pricing and the right balance between volume and pricing is something that we feel quite good about. If you look at the U.S. market and what we have done in biscuit not only this quarter but over the last few quarters, I think you'll see, in consumption terms, a nice balance in biscuit between volume and pricing. So going back to your specific question, we implemented pricing earlier in the year, which was a line pricing increase on some of our local brands, and that is coming in effect now. We have optimized promo spending. And again, I think we found the sweet spot in some of our brands where, I think, there were some inefficient promotions in place. And as I said, we are pleased seeing volume and pricing growth in the marketplace in consumption terms. And we introduced some price pack architecture. So we really used a full array of tools to implement pricing in the U.S. In addition, as we said, we have announced additional pricing across biscuits, gum and candy. And that pricing will be effective as of Q1 next year, and it will be for the vast majority line pricing. I think based on what we see these days, quite happy with the share gains and the balance, as I said. So we have confidence in the fact that this is the right move. And I think, as you look at the sustainability of the category and the ability we have to invest, I think, clearly, given the inflationary pressure we see in some commodities and logistics costs, this is the right thing to do.

Your next question comes from the line of Andrew Lazar with Barclays.

Just two quick ones for me. I'd say, first, to reach 2% organic top line for the full year, I suggest around 1% organic top line in the fourth quarter. Obviously, slower than the 2.3% rate year-to-date and even down sequentially from the third quarter of 1.8%, if you exclude the malware impact. So I guess I'm just trying to get a sense, is there something specific that you see is slowing the organic down in 4Q or really just sort of thinking conservatively at this point?

Look, we are clearly encouraged by the top line evolution. And we see clearly momentum, specifically across emerging markets. We are happy with the volume and pricing balance. Categories, as we said, are quite vibrant, specifically in emerging markets. And you said that I think we want to be thoughtful about the fourth quarter. As you know, that's -- in the U.S., there might still be some challenges even if we see improvements clearly in Q4 and in October, specifically. So I think it is just us wanting to be thoughtful about the fourth quarter, and I think we see light to the 2% even in Q4, quite honestly, around about 2%.

Got it. And then I guess, when you think about the 2% to 3% organic top line growth forecast for 2019, I guess, what is the, at least currently, your category growth expectation that's sort of built into that number? And really what I'm trying to get at is how much in the way of share gains are really needed at this stage, your best guess, to hit that 2% to 3% for next year?

Well, we see the category, so we see them at the moment growing at 2.7%. In our strat plan, we had foreseen that they would be around 3%. Us aiming at 2.5% for next year means that we do not see any market share gain for next year. We are largely aiming to stay in line with the market.

Your next question comes from the line of Alexia Howard with Bernstein.

Can we ask about the product strategy here in the U.S. I've been looking at the Nielsen data, and it seems as though the big launch of the chocolate product a couple of years ago seems to be being undone. Gum seems to be getting a little bit better sequentially. I don't know whether you're putting more investment in there as you also try to migrate one of those brands into the mint segment. Obviously, you've still got the cookie strategy going strongly. I think there may have been some innovations that didn't quite work in crackers. Could you just give us a sort of quick summary of what you're actually focusing on and what the strategy is, product category by product category, here?

Yes. So maybe I'll start with chocolate. Yes, we entered the U.S. chocolate market, which is highly competitive. And we know that it will take some time, but we're trying to leverage the power of the Oreo brand there. I think it's a good example of extending our brands to play in adjacent categories but, obviously, it's going to be a niche type of play. And we see very positive indicators as it relates to Oreo chocolates, a very strong consumer response with the highest repeat rate of any recent innovation in the category. So overall, we think we feel pretty good about it. We just are going through the second year after the launch, and I think it's normal to see a little bit of a decline there. As it relates to gum, yes, the gum market itself has been doing better. We are seeing a very nice category growth coming back in the U.S. And you see a little bit of a better performance from us driven also by a new innovation called Trident Vibes that -- which we have also launched in China under the Stride brand. And we're seeing good results there with an early share taking of 1.2 points. And then, as it relates to cookies, I would say the crackers are relatively flat as we see our shares. But in the rest of the cookie segment, we are seeing quite interesting growth. Oreo is around the mid-single digits. belVita is up quite nicely. Ritz is doing well. So as you saw there, Alexia, we're doing quite well in our cookies approach. But overall, I would say there's some wins and some losses there. But overall, we feel pretty good about how things are going. You didn't mention candy, but Sour Patch Kids is doing quite well in the candy segment. So it's -- yes, there are some ins and outs. But overall, I think, if you look at all the categories, we're increasing our market share.

Our next question comes from the line of Chris Growe with Stifel.

Just had a question for you, if I could. I wanted to ask around the chocolate category where you have seen cocoa cost come down. Are you seeing more competition emerge in that category? I thought you were holding or gaining share, only 40% of the category, yet the sales are strong in the category and for your business as well. So I'm just curious how the competitive dynamic is shaping up in that category.

Yes, the category growth is strong. It's about 3.6%. Our revenue growth was 3.5%, so quite close. Yes, we, at 40%, are holding or gaining share. That is largely due to, I would say, the -- some areas, Australia, New Zealand. We lost some share in France, Sweden. But overall, if I look at the performance, I don't think it's particularly something that we are concerned about. We're seeing big competition showing up. For instance, in chocolates, the overall growth is still quite strong, in mid-single digits overall, but the emerging markets are growing high single digits. And the developed markets maybe took back a little bit in the third quarter. But overall, I think we feel pretty strong about our chocolate performance.

Okay, no areas of price competition emerging as costs get a little more favorable there, certainly in cocoa.

No.

No, I don't think there is really anything to worry about. We are lapping a quite high share number last year in Q3. We gained quite a bit of share across the board. So I think, think about that as phasing. It will come back.

Okay. And I just had a quick question to follow up on North America. And before, we have seen the prior year, obviously, the comp issues. But we have seen of late the consumption data weaken a little bit and yet still very strong in cookies, I would say. Can you just react to that and give a little bit of a feel for how that should shape up in the fourth quarter, given some of the lingering issues you've had in that division?

Yes, the lap for cookies versus last year, there was a big buildup for the hurricane last year. So yes, the overall category growth was a little bit slower, but we attribute that largely to a very tough comparison for last year. Year-to-date, we see the category at 1.9%, with our share being up 0.7%. In the last quarter, our share grew a full point. We expect the category to be coming back to higher levels as we don't have that lap effect anymore. So we have no particular indication that the category would be slowing down.

Your next question comes from the line of Steve Strycula with UBS.

A two part question. I wanted to ask about Latin America and 3 of your bigger businesses there with Brazil, Mexico and Argentina. Given the inflation that we're seeing in some of those markets and volatility around elections, can you talk about how you're managing each of those businesses from both a pricing and a volume strategy and comment on how some of the key competition, whether -- particularly local competition, if it's following? That would be very helpful.

Yes, maybe I'll comment a little bit and then hand it over to Luca specifically on pricing. Overall, in Latin America, we see -- we continue to see very positive organic growth, and I think we're managing well through the emerging market volatility. The revenue growth in Q3 was driven largely by Argentina and Mexico, and Brazil declined. I'll leave it up to Luca to comment a little bit on Argentina and the situation there. Mexico, we are very positive. We had a very solid performance, mid-single-digit, and gum and candy continued to be very strong. And then in Brazil, yes, we had a decline, which was in line with expectations. But the good thing there is that we are addressing some of the chocolate price gaps that we've had in the beginning of the year, and that is helping us to regain some market share in chocolate. So we feel pretty good about that. Overall, I would say, as it relates to management, Mexico, we don't see a particular need. Argentina, seeing the high inflation, yes, we need to be very vigilant. And then -- and again, Luca will comment on that. But Brazil, we feel pretty optimistic about next year in Brazil. We see indications that things will improve, and we are counting on a positive sales growth in Brazil for next year. Luca?

So specifically in Argentina, it is around about 2% of our revenue. And given the high inflationary environment, we are managing it, quite frankly, a little bit differently than the other 2 countries that Dirk mentioned, Brazil and Mexico. It is a disciplined approach, the one we are taking, to protecting cash flow and value. In fact, in the quarter and consistently throughout the year, we did double-digit pricing that drove revenue. We're happy with the way we are protecting cash flow and value in that country. In fact, I can tell you that our margin in the quarter was in line with last year. So it is a fine line between understanding how to price, protecting cash flow and also with the look of not losing too much scale in the country as it is tough to see it, but I think, potentially one day, that is a country with a sound economy that could grow and be a good business for us. So it is a fine balance, but it is a different way of managing it as we have compared to other countries in Latin America.

I have a quick follow-up, if I can. Wanted to ask about the different moving pieces with the coffee business, how you've recasted the financials there. What should we be using as the 2017 baseline for all the coffee equity income from last year? And then, ultimately, not specific guidance, but how would you generically guide it for the full year 2018, again, given the change in reporting that you guys put out there?

No, it is a tricky question to guide you on coffee because, clearly, KDP is a publicly traded company. And that is one of the reasons we decided to go on a lag. There was an 8-K earlier in the month, where you can find the detail by quarter. But simply said, the impact of moving us to a lag, it is not going to be material in the year. So I can give you more details, maybe separately, and take you through some of the highlights of the 8-K, but think about consistency with what we said before in the context of double-digit EPS and the synergies that KDP is going to deliver.

Your next question comes from the line of Robert Moskow with Crédit Suisse.

Dirk, I think you mentioned new pricing that's going into effect in first quarter across multiple categories. Can you remind us what markets those price increases are going into effect? And if it's in the U.S., what was the pitch to the trade for raising price? Is it to offset commodities or freight? And did you make any kind of product quality improvements to help justify the increase?

Yes, well, I will first comment on North America. As we explained before, we did -- in the middle of the year, we did an increased spread between a line price increase, price pack architecture and a promotional optimization on the local brands that we have. And then we are doing a price increase across the line at the beginning of next year. The -- we will do more of the same as it relates to those 3 mechanisms of increasing prices, but it's a bit more line price increase at the beginning of the year. We believe that it's the right move for us, seeing the overall environment and the way our categories are behaving at the moment. It will allow us to make the right investments in our brands and in our categories. So at this stage, we think that is probably the best way to do it. Of course, there are cost pressures also related to this as it relates to freight and some commodities, the trade is well aware of that. So they understand that, that is some of the reasons why we are doing those price increases. Around the world, I would say it's a little bit the same story, although less pronounced. We're doing some price increases in other countries, but it is not of the magnitude that we have to do in North America. Luca?

Okay. In chocolate -- go ahead.

Sorry. Excuse me?

I wanted to follow up on chocolate in Europe, whether that is included in the price increases in the first quarter or no pricing?

Look, we cannot comment on specific pricing actions. As we said about pricing, the vast majority of pricing, it is coming in effect in emerging markets, excluding Argentina. We are pleased with what we see there. I think, if you look and extract Argentina from the number of emerging markets, you see a growth that is 4.5%. It is underpinned by pricing, but there is also a nice component of volume. So think about pricing being in effect in emerging markets pretty much on the vast majority of those markets. And we are watching closely volume dynamics because we don't want to lose momentum, and we want to preserve that operating leverage that is the foundation of the plan we presented at the Investor Day.

Your next question comes from the line of David Driscoll with Citi.

One quick clarification. I think you said that the first half operating margin, which I think was 16.7%, and the second half operating margin will be same as first half, but then the full year guidance is like 17%. Can you just clear that up for me just for -- and I hate to be so particular on basis points, but it almost sounds like the 2 pieces of the guidance would mathematically come out with a number below 17%. And maybe that is the right answer. But can you just clear that up right now?

Yes. So as I said, on a year-to-date basis, the margin is 16.8%. I think it was around about 16.7% in the first half. As we guided to approximately 17%, see Q4 pretty much in line with both the first half and the Q3 year-to-date number. So it will be approximately 17%, a little bit below and in line with the full year guidance we gave.

Okay, that's fine. And then on the U.S. pricing that you have going into January 1, what was the size of the price announcements that you made implementing on January 1?

We are not getting into specific details. But as we said, it would be across the 3 categories: biscuit, gum and candies. And it will be different by brand. And we have looked into potential elasticity impacts, and we are trying to strike the right balance between preserving the volume and pricing momentum that we see in the marketplace these days and preserving margins going forward.

A final one for me is, volume was positive on the year-to-date basis but negative in the third quarter. When you move into the fourth quarter, does volume turn positive again, leading us into 2019 with the expectation of positive volumes?

Look, this quarter comps are clearly affected by the malware additional shipments last year. But I can assure you that the underlying dynamics are pretty much unchanged versus the previous quarters. I think you should look at the year-to-date volume and pricing balance. And as you look at that, I think what you see is that growth is half attributable to volume and the other half is pricing. Think about those dynamics continuing in Q4, but don't look at Q3 and draw the conclusion that volume was soft because we are lapping malware last year. And I think, again, as you look at the dynamics of emerging markets, Europe and Latin America, it is, quite frankly, in line with what we have seen so far this year.

And then I would like to add that for 2019, we have studied the elasticity of our price increases quite carefully, so we don't provide any specific guidance on split between volume mix and pricing. But we are working towards that goal of a volume-led growth over the long term, and we feel that the current dynamic we're seeing of the positive volume mix year-to-date that we can continue that into next year.

And our last question comes from the line of Rob Dickerson with Deutsche Bank.

So I guess, just to, I guess, beat the horse till he's dead, excuse my phrase. Just in terms of 2019 and, as we have stressed, the price increase across the categories, the expectation would that there would still be a balance between the pricing and the volume? Or are we thinking even though the goal, obviously, the target is to have volume-driven top line longer term, that maybe in '19, it's a little bit more tilted to pricing upfront? Is that fair? That's my first question.

Yes. And just that it's -- we're counting on the same good balance between volume mix and pricing to continue into next year. We will see how the things play out. But at the moment, we are planning for something similar to this year. As we said, we have means of playing around with promotional spending, and that allows us to play around with how much we will get from volume. So I wouldn't expect that it's going to be a huge change for next year. At this stage, we feel pretty confident that the current formula, and it's working for us, that we can extend it into 2019.

Okay, fair. And then just housekeeping items, and that's all I have, is, from the Investor Day, I believe you had said the expectation was, essentially into next year, favorable trends in terms of GDP improvements, which would drive, let's call it, that 3% category growth. It seems like snacking may be -- all-in may be driven more by biscuits, and Q3 came in a bit. It sounds like the category growth is a bit below what the strat plan showed, as you said. So I guess the first question is, is there anything that really kind of changed in terms of biscuit growth trajectory into '19? And is that partially driven off of different GDP expectations? And then just secondly and simplistically, it looked like the currency effect for next year that you had mentioned at your Investor Day was the same that you put out today. But it did seem like the currency complex changed a bit over the past two months. So I'm just curious if there were any go-forward currency shifts relative to two months ago for '19. That's it.

Yes, let me start maybe with the forex impact. The forex impact is the same as we had for Investor Day, but it happened to be a coincidence. There were various puts and takes. And I can tell you that, in general, with the profit component of emerging markets, EPS was improved. But we had the eurozone that lost a bit. So it happens to be the same. It was refreshed as of last week. So the number is the same, but it is a coincidence. In terms of categories, look, I think the guidance we gave you in terms of top line for next year, which is 2% to 2.3%, calls for a category dynamic that is in line with what we have seen this year and in line, certainly, with the 2.7% on a year-to-date basis. There might be puts and takes, but that is where we see the category, the snacking category, playing out for us this year and next year.

Okay. So in closing, I'm proud of the work of our teams across the business and the results that we are currently seeing. We are very encouraged by the progress in our emerging markets, which were particularly strong this quarter, and of course, where we see the significant amount of our future growth to be derived. Europe remains a solid business for us. And there is work to do in North America, but I'm also confident in the opportunity for that business to start growing. I would say that our new long-term strategy is generating excitement in our business. We are building from a position of leadership in our markets, and we are taking steps to further strengthen our capabilities and capture opportunity, as we explained. I'm here thinking particularly of the change in our commercial model, which is more consumer-focused and will drive greater local accountability. I'm also excited about the test, learn and scale approach that we are taking in innovation and then our increased focus on M&A, and that is a good example of what is more to come. And we also mentioned that we are planting the seeds for future growth with the launch of our new SnackFutures platform, of which we will inform you more in the coming weeks. And there is -- overall, incentive structure is changing. So we feel good about this quarter and then good about the coming quarters and next year. So I look forward to sharing more of our progress with you in the quarters to come, and thank you for your interest in the company.

This concludes today's call. You may now disconnect.