Mondelez International, Inc. (MDLZ) Q4 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Mondelez International Fourth Quarter 2022 and Full-Year Earnings Conference Call. Today's call is scheduled to last about one 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 for Mondelez. Sir, please go ahead.

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 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.

Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I am pleased to share that we delivered another record year, not only in size of the company, but also in profit dollar growth. Our strong topline performance was driven by excellent pricing execution and continued volume strength as consumers all over the world remain loyal to our iconic snacking brands. We delivered strong topline performance in both emerging and developed markets while continuing to exercise cost discipline. In keeping with our strategy of achieving global snacking leadership, we continue investing in our brands and capabilities while strengthening our portfolio with important bolt-on acquisitions that increase our exposure to attractive and growing categories and profit pools. We executed well against our long-term algorithm, returning $4 billion in capital to shareholders. Perhaps most importantly, we continue to invest in our people, building a deep and diverse team whose local routes and global insights enable us to stay a step ahead of rapidly changing customer and consumer tastes. We are confident that the strength of our brands, our proven strategy, our continued investments, and especially our great people position us well to achieve our long-term financial targets in 2023 and beyond. Along with our financial performance, I'm pleased to share that we made significant progress towards our environmental, social and governance agenda. You recall from our investor update last spring that we have elevated sustainability as the fourth pillar of our growth acceleration strategy. That's because we firmly believe that helping to drive positive change at scale is an integral part of our value creation with positive returns for all our stakeholders. Let me share a few highlights on Slide 5. First, we continued to advance our leadership in more sustainably sourcing cocoa and wheat, our two most critical ingredients. We launched the next chapter of Cocoa Life, our signature cocoa sourcing program with another $600 million commitment, bringing our total investment to $1 billion. Cocoa Life is working to lift up the people and restore landscapes where cocoa grows. Similarly, we will launch in the first quarter of 2023, an updated vision for our Harmony Wheat program focused on more sustainably sourcing wheat across the European Union. We continued advancing our Light and Right packaging strategy. For example, our Cadbury Dairy Milk chocolate in the United Kingdom, Australia and New Zealand now are wrapped in packaging with more than 30% recycled content. We also continue to make progress on tackling climate change. We expanded our use of renewable energy to reduce our Scope 1 and 2 greenhouse emissions, and in about 80% of farms in our Cocoa Life program in West Africa, we achieved near to no deforestation, reducing Scope 3 emissions. Since 2018, we have reduced our CO2 emissions by more than 20%. We also remain focused on advancing diversity, equity, and inclusion because we firmly believe that diverse perspectives and viewpoints make our company stronger while helping us stay closer to our customers and consumers. As an example, we increase the gender and racial diversity of our Board of Directors with the appointment of industry leading experts. We are proud of team Mondelez continued success in making important impacts on these critical environmental, social and [governments] issues, while creating value for our shareholders and other key stakeholders. Turning to Slide 6, you can see that we had a record year despite challenging operating conditions. We view our strong performance in 2022 as evidence that our long-term strategy continues to deliver for our stakeholders. Organic volume grew 2.7% for the year on pace with recent years, demonstrating the continued strength of our resilient brands and categories even in an inflationary environment. Organic net revenue grew by 12.3%, significantly lapping the prior three years performance with broad-based growth across all regions. We also delivered record adjusted gross profit dollar growth of $1.4 billion. We are proud of our team's ability to offset major cost pressures to enable us to continue investing in the business, which will drive further growth acceleration. Accordingly, we increased A&C investment by double-digit, helping to keep our brand top of mind for both consumers and customers. These pricing cost management an investing activities translated into strong operating income growth of more than $580 million. We remain confident that our virtuous cycle of strong gross profit dollar growth, which fuels local first commercial investment and execution, will continue to consistently deliver attractive profit growth. We are especially confident that our unique growth strategy centered on acceleration and focus will enable us to continue to successfully navigate the dynamic global operating environment, differentiating us from many other food companies. On Slide 7, you can see that despite the volatile environment, we have the right setup and strategy to ensure we deliver against our growth algorithm. Momentum in emerging markets, with particularly China and India showing strong results combined with the resilience of our categories as evidenced by strong volume growth is helping us to offset the challenges that many companies are facing, such as global cost inflation, the energy crisis, recession concerns in Europe and supply chain volatility. Our consumer continues to hold up well across most geographies, prioritizing snacking and buying more volumes of our products despite significant price increases. Our U.S. supply chain is gradually getting back to normal after a long period of sub-optimal customer service triggered by the 2021 strike and the subsequent overall supply chain volatility. We are continuing to implement appropriate incremental price increases across key markets, including Europe. We also continue to take appropriate action to hedge our commodity costs while continuing to advance our ongoing productivity initiatives. All of the above allows us to increase our investment in brands and capabilities every year, which underpin our growth momentum. Our ability to deliver real dollar growth enables us to make sound and choiceful decisions that drive the business forward and position us well for continued future growth. Slide 8 shows that our performance in 2022 gives us confidence that we have not only the right growth plan, but also the right execution to deliver it. Our core categories of chocolate and biscuits remain attractive and durable in both developed and emerging markets. We are accelerating our focus on these core categories because they have attractive growth and profitability characteristics and still a significant headroom in terms of penetration and per capita consumption. Our long-term vision is to generate 90% of revenue through these two core categories. We hit an exciting milestone in the biscuit category this year as Oreo surpassed $4 billion in global net revenue, further solidifying its position as the world's favorite cookie. Our acquisitions of Chipita and Clif Bar helped us expand our footprint in the growing Baked Snacks segment. While our acquisition of Ricolino helped us fill an important geographic white space, establishing a strong foothold in a priority emerging market of Mexico. We also continue to expand our presence in high growth channels, segments and price tiers. For example, silk premium chocolate doubled its prior year penetration in India, while in emerging markets, we added more than 400,000 additional outlets, and we have significant runway ahead of us. These are just a few examples of the ways our teams remain relentlessly focused on delivering the growth and acceleration plan we outlined at our Investor Day last spring. As Slide 9 indicates, we continue working hard to reshape our portfolio, which will accelerate our growth, and I'm pleased to share that we made significant progress in 2022. As we continue to drive focus on chocolate, biscuits and baked snacks, our nine strategic acquisitions since 2018 have enabled us to enter exciting adjacent spaces such as wellbeing and premium. They also have strengthened our presence in key geographies and expanded our trade coverage. Together, these acquisitions add nearly $3 billion in revenues and are all growing high single- or double-digit. Strong execution against our proven integration playbook enabled us to rapidly realize the value of the three acquisitions we closed in 2022. The Chipita business provides us an important platform to further accelerate growth in the attractive biscuits and baked snacks category. Similarly, Clif Bar expands our global snack bar business to more than $1 billion. Additionally, Ricolino Mexico's leading confectionary company doubles the size of our business and more than triples our routes to market in Mexico. Along with successfully integrating these three businesses, we announced in late 2022 the sale of our developed market gum business to Perfetti Van Melle for an implied EBITDA multiple of about 15x. This divesture will help fund these recent acquisitions and streamline our portfolio. We continue to have the Halls business, which has been performing well, but still intend to divest it over time in a way that maximizes value. In conclusion, I'm pleased to reiterate that 2022 was a record year. Our focus and portfolio reshaping strategy is working and we are well positioned to continue driving attractive growth in 2023 and beyond. By continuing to double down on the attractive chocolate, biscuits and baked snacks categories, investing in our iconic brands, focusing on operational execution and cost discipline, and empowering our great people, I am confident that we can deliver strong performance for years to come. With that, I'll turn it over to Luca to share additional insights on our financials.

Thank you, Dirk, and good afternoon, everyone. In 2022, we delivered unprecedentedly strong results, starting with double-digit topline growth through both volume and value, which in turn translated into gross profit dollar growth, allowing the investment in the business, solid earnings and cash flow. Growth was also broad-based in terms of regions, categories and brands. Revenue growth was 12.3% and 15.4% for the year and the quarter, respectively. Importantly, nearly 3 points of full-year growth and 1.6 point of Q4 came from volume mix. Emerging markets increased 22% for the year and 24.7% for the quarter with strong performance across a significant majority of countries, including Brazil, China, India, Russia, Mexico, the Western Andean countries, and Southeast Asia. More than 7 points of full-year growth in emerging market was driven by volume mix, confirming the great momentum of these geographies. Developed markets grew 7% for the year, and 10.5% for the quarter. Volume mix in developed markets was flat in Q4 as there were still some ongoing negotiations at the beginning of the quarter in the EU, that resulted in customer disruption, which in turn offset some good momentum in countries like the U.S, Canada, Australia, and others. Those negotiations are now fully closed, but we have just announced another pricing round in Europe. Turning to portfolio performance on Slide 12. Our chocolate and biscuit businesses both delivered double-digit growth, while gum and candy continue to recover with improved mobility. Biscuits grew 11.7% for the year and 18% for the quarter, supported by significant volume growth. Oreo, Ritz, Chips Ahoy!, Tate's, Give & Go and Club Social were among the brands that performed very well. Chocolate grew more than 10% for both the year and quarter with significant growth across both developed and emerging markets. Volume mix was virtually flat in Q4 due to customer disruption in Europe. Emerging market posted exceptional double-digit growth for the year and the quarter. Cadbury Dairy Milk, Milka, Lacta and Toblerone, all delivered robust growth. Gum and candy grew 25% for the year and the quarter. Brazil, Mexico, and the Western Andean area all performed well. Now let's review market share performance on Slide 13. We held or gained share in 40% of our revenue base, which includes 15 points of headwinds coming from the U.S. supply chain, that while improving, still weighs on the full-year share performance. Chocolate held or gained share in 50% of our revenue base. This number include a strong Christmas season, which gains in several key countries, but also reflect customer disruption in Europe. Retailer and consumer activities are now vastly restored in the region, but the price that we just announced might have a negative impact in the first two quarters of 2023 as far as share goes. Our biscuit business held or gained share in 25% of our revenue base. This includes 30 points of headwind from the U.S. supply constraint and customer disruption in Europe. The U.S. made significant service level improvements in the back half of 2022 narrowing share losses and we expect this trajectory to continue to improve in 2023. Turning to Page 14. For the year, we delivered strong double-digit OI dollar growth, driven by a record high increasing gross profit of nearly $1.4 billion. In Q4, we also saw strong double-digit OI and gross profit dollar growth. Moving to regional performance on Slide 15. Europe grew 7.4% for the year and 8.7% for the quarter. Thanks to strong execution, volume mix was flat for the year despite customer disruption in Q3 and Q4. Brand support remains a priority in the region and we have continued to increase our A&C. OI dollars for the year were up 4.3% and 12.4% for the quarter and the year, respectively. Q4 profitability saw a return to growth due to an additional price increase and the emerging market performance within the segment. To close on Europe, we continue to see more pronounced inflation in this region based on energy and other input costs. We also expect to see challenge margins in Q1 given our expectations of customer disruption. Although we saw a small uptick in elasticity for Q4, European consumer has continued to hold up well and the preference for snacking and trusted brands remains strong with elasticity levels below normal. North America grew 12.3% for the full-year and 19.5% for the quarter, higher pricing, robust volume mix and strength from our ventures such as Tate's and Give & Go fueled those increases. Volume mix was 0.8% for the year and 4.2% for the quarter. North America profit increased 18.7% for the year and 37.3% for the quarter due to strong pricing and healthy volume results. Besides the benefits of our pricing execution, the consumer remains resilient and elasticity continues to be well below normal levels. AMEA grew 12.5% for the year and 13.6% for the quarter with strong volume growth for both periods. India grew strong double-digit for the year and quarter, driven by both chocolate and biscuit. China increased high-single digits for the year despite COVID restrictions in certain cities and posted double-digit growth for the quarter. Finally, Southeast Asia also delivered strong double-digit growth for both periods. AMEA increased OI dollars by 9.8% for the year and 8.8% for the quarter continuing their virtual cycle. Latin America grew 31.9% for the year and 37.1% for the quarter with robust volume mix growth coupled with strong price contributions. All key markets posted double-digit increases for the quarter. Latin America has had its strongest year ever in terms of OI delivery. In fact, OI dollars in Latin America grew 48.5% for the year and more than 45% for the quarter. Broad-based volume growth, pricing and ongoing improvements from the gum and candy categories drove these results. Next to EPS on Slide 16. Full-year EPS grew 11.9% in constant currency. This growth was primarily driven by operating gains. And despite very significant currency headwinds, we grew adjusted EPS as reported ForEx by 3.5%. Turning to Slide 17. We delivered $3 billion of free cash flow for the full-year, including a one-time expense of $300 million related to the Clif acquisition and buyout of its employee stock ownership plan. Turning to outlook on Page 19. For the current year, we expect to deliver on or in excess of our long-term algorithm for all variables. There might still be meaningful variability for the year, so we expect plus 5% to plus 7% organic net revenue growth, which stands from the higher pricing. We also expect on our growth to adjusted EPS of high single-digit. Somewhat like 2022, we expect a slightly different shape related to the P&L with higher topline, strong profit dollar growth and lower than historical margin rate given elevated inflation and related pricing away in dollar terms. As far as assumptions grow, we are planning for another year of double-digit inflation with dollars higher than in 2022. This inflation is driven by the continued elevated cost in packaging, energy, ingredients and labor. This input costs are also more pronounced in Europe and some select emerging markets. We also had favorable coverage versus the market in 2022. And although spot rates have been easing in many cases, new hedges are coming at higher levels than what was incorporated in March of last year. We are taking action with a flexible hedging program by using options to minimize risk and volatility, whether commodity rise or fall significantly from current rate. That is to reassure you that in case of commodity price dislocations, we will still be in a position to hit our profit commitment while still investing for growth. In terms of interest expenses, we expect an incremental $90 million for the line associated with the financing of recent acquisitions that we plan to repay later in the year with the developed gum divestiture proceed. We are planning for a net increase in total pension cost of around $25 million as above the line service cost will be lower and below the line element will be worse due to the rising interest rate. Important to note that due to our strong funding levels, we do not have to make additional contributions to our plan. We will also benefit from the higher OI dollar contribution from the acquisitions of Clif and Ricolino and their related synergies. In terms of phasing, we expect Q1 to be lower from a margin rate perspective due to lower volumes in Europe associated with the expected customer disruptions and Chinese New Year phasing. Disruption in Europe might also continue into Q2. We are expecting $0.04 of EPS headwinds related to ForEx. With respect to free cash flow, we expect another strong year with $3.3 billion plus absent any significant one-time non-operating item. In this outlook, we also expect an adjusted effective tax rate in the low to mid-20s based on what we know today and a share repurchase of around $2 billion. With that, let's open the line for questions.

Thank you, sir. [Operator Instructions] And our first question will come from Andrew Lazar with Barclays. Your line is open.

Great. Thanks so much. Two questions for me, if I could. First, Dirk, maybe you could provide a bit of a state of the union in key markets, especially in Europe in terms of just what you're seeing with the consumer in response to recent pricing and if there's any sort of early update on what you're hearing from the most recently announced pricing in Europe? And then, Luca, you talked a little bit about a different shape to the year than would be typical. And it sounds like that's mostly incremental inflation and sort of the mechanics of pricing impacting margin. But just wanted to make sure that's kind of what you see it as as opposed to anything that could be deemed more structural that we should be concerned about when it comes to sort of the margin percentage compression that could still be the case, I guess, for the full-year a bit. Thanks so much.

Okay. Thank you, Andrew. Yes. I would say we feel good if I look at the total business about the strength of our portfolio and the diversification that we have within that portfolio. So when there are some areas that are bit of a more difficult situation, we always have other areas that compensate for that. And so we can keep on delivering very good results. And it goes across brands, regions and categories for us. I also feel good about the strong topline performance with good execution of our pricing, but also for the year, almost 3 points of volume growth, which is in line with the previous years of volume growth. And I think that is a testimony to the strength of our brands and the categories. Share is obviously below expectations, but there is very good explanations for that because we had disruptions in our U.S. supply chain. And then also in Q3 and Q4, disruption with our European customers because of the price increases. I think also something that we feel particularly good about is our broad-based strength in emerging markets from a top, but also very importantly, from a bottom line perspective. And as you know, we're very focused on growing dollars in the gross profit line and the $1.4 billion is a very strong result, which enables us to offset some of the extra costs we're seeing, but also to significantly continuing to invest in our brands and increase our bottom line. Our margins, of course, are impacted by elevated inflation. It's something that it has a denominated effect as we price against that, but we do expect that over time, margins will come back. And then despite currency headwinds, we are having in constant – or in adjusted EPS, we have double-digit, but we still grew real EPS by 3.5%. So overall, I would say we feel very good about the results. If I look at the consumer – the volume growth rates, which is what we are looking for to see really how strong the categories are holding up really well. We see very good in-home consumption in the U.S. In Europe, there are some signs of a bit of a category slowdown. That's the only region where our categories are slowing in negative volume growth. But I would counter that with very strong volume growth in all our other regions, particularly in places like Brazil, India, China. I think from a competition perspective, we will start to see the differentiation between companies that can continue to invest in their brands and keep a very positive algorithm, while others will have to focus more on costs, and cutting back in this cycle. As it relates to pricing, so the pricing for 2023 in the U.S. has passed and is implemented. So we did that in December. In Europe, we have started discussion with our clients. I would say we are 60% done of what we need to do. So far, so good, but there is obviously still a few weeks and months to go, and we will know more by the end of March, beginning of April, where we stand. But so far, so good, I would say. The other thing I would mention as it relates to the consumer is that the elasticity is still very low. This is a slight uptick in Europe, but still well below the expectations. We are planning for more elasticity in our 2023 outlook, but we still have to see that materialize. The other one, I think is important to mention is that we will have double-digit cost inflation. There's a lot of talk about diminishing inflation. We don't see that at the moment, and that is driven largely by energy, ingredients and labor. Nevertheless, if you take all that together, I think we are positioned well for 2023. Luca will talk a little bit about the different shape of our P&L, but we will be on algorithm with a higher topline, but that is driven to the whole inflationary situation. So maybe Luca, I hand it over to you.

Yes. Thank you for the question, Andrew. And as it relates to the shape of the P&L, particularly on gross margin, you will see some pressure, particularly in the first part of the year, a result of a couple of things. One, it is elevated inflation and us having particularly good coverage in 2022 and lapping the favorable pipeline that we had in commodity terms in 2022, and the fact that clearly, pricing, particularly for Europe, is not fully implemented yet. The new pricing wave I mean. And that is also compounded by the expectation that we will have some customer disruption kicking in towards the end of Q1 and potentially also into Q2. Having said that, I think when you look at the fundamentals of the business, I feel quite good about emerging markets. You saw the stunning number that we printed for Q4 and for the year. The momentum of those emerging markets is continuing into Q1. We started the year quite strongly. I'm quite happy with the U.S. and North America in general. I think there was an excellent pricing execution. And obviously, as the last pricing wave comes into effect into the P&L, that allows for reinvestment in the business. And I think also you will be positively surprised by share throughout the year. Clearly, EU is a little bit of a watch out. Happy to say that the profitability, as you saw in Q4 improved quite a bit compared to Q3 and that is the testament to the team of the pricing that was implemented. But clearly, there are some unknowns in relation to further pricing and potential disruption, and we have commented on consumers in general. So look, the key assumption here is double-digit inflation. Part of it is driven by the favorable coverage we have. And we will stay disciplined in pricing it away. And as I said in the prepared remarks, if commodities take a more benign impact, we will be able to take advantage of it because we have flexible coverage implemented.

Thanks so much.

Thank you, Andrew.

Thank you. Our next question will come from Ken Goldman with JPMorgan. Your line is open.

Hi. Thank you.

Hi, Ken.

I may have missed this, but did you guys by any chance to talk about your expectation of price versus volume mix this year? I recognize it's not something you typically give in guidance, but I'm just trying to get a sense for how to model that a little bit cleaner just given some of the puts and takes?

So I'll give you a little bit of a high-level answer. And the answer is, we have planned for modest volume contribution into 2023, and quite frankly, that is the direct outcome of us planning for historical elasticities rather than what we have seen as of recent. So there might be a little bit of an upside versus that assumption. As you dissect the business a little bit more, I believe you're going to see good volume growth in emerging markets, particularly in countries like China, India, Brazil and so on and so forth. You are going to see volume growth in North America. Clearly, there is an element of us replenish in stock with the trade that has a positive impact. But importantly, I think U.S. biscuit is really on solid ground and all the ventures, namely – Give & Go and paid particularly are really delivering volume growth versus last year. And finally, where I think you're going to see volume pressure is in Europe, and that is the direct outcome of potential customer negotiation disruption and relatively higher elasticity than in other places in the world. So volume leverage, I think, will be one important component of the 2023 P&L shape. Three regions, I believe, will be on positive ground in Europe due to disruption, there might be some volume pressure. Overall, I think you're going to see modest volume growth for the year.

Very helpful. If I can just ask a quick follow-up. You talked about partly the reason for losing share in 2022 was because of your European customer disruptions, are your competitors not being disrupted as much? I'm just curious, are they not pricing up as much as you? Is it more of a timing issue? It just feels like if everyone's pricing up, maybe there shouldn't be share loss, but I'm missing part of that perhaps?

Yes. Well, we have to take into account that our main competitors in Europe are private companies. And what we've seen is that they have not priced as aggressively as we have. We assume that, that eventually will have to come, but that is the main difference between us and competition. And so that is the explanation of the share loss. Some of the – the other competitors have had some events that they lapped of the year before, and that has helped them also to gain some share this year. So those are the two big reasons.

Thank you. Our next question will come from Chris Growe with Stifel. Your line is open.

Hi, good evening. Thank you.

Hi, Chris.

I just had a question for you – hi – on – just a follow-up on Europe. If you look at 2022 fiscal 2022, were you able to get pricing up in line with inflation in Europe? And I guess I'm trying to understand if you look at 2023, is there any sort of catch up in pricing you expect in Europe, if that's possible, which may sort of compound some of these issues with share there?

Chris, I think as you look at the quarterly gating in 2022, you saw the most pressure in terms of profit delivery in Europe in Q3. And in there, there was the fact that we were running out of hedges for the first part of the year and pricing was not fully implemented. As you saw in Q4, profit is up soundly. And in that context, we also increased investments. So as we close the year, the absolute inflation that you would expect annualized compared to the pricing annualized was a wash. The point here is, as we walk into 2023, there are a couple of events that came into play. One, it is the material energy pressure and the fact that in 2022, we had positive coverage in that area. And the second one is the fact, clearly that we have to price again. So all considered the 2022 inflation that was embedded in the base and the pricing wasn't at worse by the end of the year in terms of annual impact. Now going into 2023, there is more pressure coming and subsequent price required. You are going to see some subpar numbers in terms of profit for Europe, most likely in Q1 and Q2 as a result of pricing not fully implemented yet and customer negotiations. But then by Q3 and Q4, there will be a recovery of margins and profitability in Europe. And again, in this context, the last thing we want to do is to cut on investment, and we will continue to invest A&C regardless of pricing negotiations going on.

Okay. Thank you for all that color. That was a good answer there. Then the other question I have was just in relation to China. You had a strong performance there this quarter and through the year. Is that a tough comp for 2023? Or if we see some improvement in mobility and travel, should that help China grow at even faster rate in 2023?

I wouldn't say that we are immediately planning for a faster rate in China. But certainly, if you look at the country coming out of the COVID situation and the restrictions starting to ease and the travel restrictions being lifted, on top of that, our plants are open and operational, which was not always the case during the past year. So I think that we will be having a good supply situation, we do have some increased costs, and we will have to deal with that through price increase. But overall, I would expect China to continue with a high single-digit to double-digit growth for next year. The gum business, we expect to come back and we would continue on momentum with the biscuit growth that we've seen. We continue to increase our market share. I see no reason why that would not continue next year also. And so apart from the pricing, all the other indicators for China are pretty positive for us. Not quite sure if that really immediately translates in acceleration, but high-single digits to low double-digit is doable for China for next year.

Maybe just one little add. There is a little bit of phasing as it relates to Chinese New Year. So in Q1, you're not going to see double-digit revenue growth. But as Dirk said, the fundamentals of the business are very strong, and the team is executing extremely well in the country.

Thank you. Our next question will come from Jason English with Goldman Sachs. Your line is open.

Hey, good morning folks. A couple of questions…

Hi, Jason.

Hey, there. Congrats on the strong finish to the year, by the way. First, on the China New Year, can you help me understand that a little bit more? Is it that you shift, you pulled more into the fourth quarter, so we don't get the benefit in Q1? And also on timing, the North America volume was very robust, certainly more robust than we expected. Is there anything unique or one-time in nature that's helped the health volume in that region this quarter?

So let's tackle maybe this last one first. As you think about volume in the U.S., clearly, the share situation is improving. The category despite double-digit pricing is posting volume growth, particularly in Q4. So we saw value and volume growing within the category, as I said, shall improve, but importantly, we are also recuperating service level, and that clearly helps a bit. So I believe all in all, there is a strong foundation in the biscuit business in the U.S. And the second element that has to be taken into account is the fact that what we call ventures, namely Give & Go, Hu and also Tate's are delivering volume and value growth. And we are clearly taking advantage of synergies, particularly in the case of Tate's, we are very pleased with the fact that, that platform going into DSD has delivered material revenue and bottom line growth. And clearly, in the case of Give & Go, we are seeing after price increases, the category thriving and that drives really the volume. In terms of Chinese New Year, China was north of 10% in Q4. And there was, I would say, 3, 4 points of contribution coming out of that 10-plus percent due to Chinese New Year. Clearly, that is a reversal in Q1. But again, fundamentally, the business remains very sound. I think you're going to see continued share gains. And we're not talking about small share gains in the category of biscuits. And again, as the country reopens, one of the things that we missed throughout 2022 was gum growing. And Gum is going to come most likely positive in 2023, and that will help also the bottom line because margins in gum are higher than in biscuits. So hopefully, that addresses your question.

Yes. Very helpful. And a good segue into my second question is you brought up gum in margin mix. As we bridge out your margins for the fourth quarter, we've got a very big hole in our margin bridge, suggesting that we're meaningfully underestimating the amount of inflation, or there's some unusual cost or perhaps some much larger mix headwinds than you've contested with for the rest of the year. Can you unpack it for us and give us a little more color because with the price you got and the acceleration, it was just surprising to see margins move so much further south?

Yes, I don't think – I mean, mix was positive. So I don't think mix in general is a problem. I think you saw gum and candy growing 25%, that's margin-accretive. I think what was underestimated in general in the modeling that I saw around it is the impact of inflation and the subsequent price that was coming out of it. As we price away dollar for dollar and not for percentage margins, I think the – there was an underestimation of both pricing and the inflation despite the fact that we said very clearly, inflation was double-digit. I think the way you have to think about it is you wouldn't have expected for the year a 3% volume growth, you wouldn't have expected a 1.6% volume mix in Q4, which, by the way, when adjusted for the customer disruption due to Europe in Q4 is again down about 3%. So I think versus what you had in mind, there is much better volume. There is higher inflation, there is higher pricing and the fact that we price dollar for dollar creates a little bit of pressure on the percentage margin. I think in terms of OI margin, you see a good number because obviously, also cost below the line have been kept in control or below GP, I mean. And so that's really all the put and takes that you have within the shape of the P&L.

Thank you. Our next question will come from Alexia Howard with Bernstein. Your line is open.

Good morning, everyone.

Hi, Alexia.

Hi, there. Can I stick with Europe with two questions? The first one, I think you mentioned the category slowdown. And I can't remember whether that was biscuits or chocolate. But is that to do with the high-fat sugar and salt initiative in the U.K.? Or is it just weakness in the consumer in general? And then I have a follow-up?

Maybe we'll do first the categories and then I didn't quite understand the question on the weakness of the consumer in the U.K.

Yes. She says it is HFSS or something else.

Okay. So from a category perspective, in Europe, our category performance is obviously different from what we see the overall categories to do. I would say both biscuits and chocolate are showing slightly negative, minus 2%, minus 3%, the overall category in Q4, and that is probably a consequence of the consumer feeling some recession. We're a little bit worse than that driven by customer disruption. But I think that as we go through the first quarter of next year, I think that will gradually come back. I'm talking about the category here. So it's probably understandable seeing the economical situation in Europe that we see a little bit of a slowdown there. As it relates to the U.K., what we see with HFSS is, first of all, there's two limitations that come from HFSS. One is the limit on the location where HFSS products can be sold in the store. And the other one is a promotion and advertising limitation. The second one is not yet being implemented, that will be in October 2024. But so far, we have the change in store. And so it means that you don't find them in checkouts in the queuing area, no more at the store entrants, no more [indiscernible] and so on. If you look at our business there, which is mainly a chocolate business, it is about 60% plant purchase and about 40% is impulse. And obviously, the impulse is affected by this because you have less interruption locations in the store. But the 60% of plant, of course, continues. We have been partnering with the stores to offset this by finding new secondary promotional locations, making our brands stan6d out in the aisle, moving the singles category, which was the checkouts to the food-to-go areas and so on. So overall, I would say that the initial signs, while showing an effect on sales in the category and for our business, it is less or less bad than we would have expected. So in-store execution seems to be helping and it's helping to mitigate the less off-shelf display that we have. Smaller stores are sort of suffering a little bit more because they have less space to make up for what was lost. So if I look at the category volumes they're down 1.1%, which is not that bad in December for the last 12 weeks, down about 4.5%. But if you take into account that the off-shelf distribution is down by about 30% because of those locations. I would say that the category is holding up quite well as it relates to the changes we're seeing in-store. And so I would say, yes, there is an effect, but it's far from the magnitude that we could have taken, and I'm expecting that the consumer gets used to this new setup of the stores that the volume growth will come back.

Great. And there’s a super quick follow-up. I'm curious about these customer disruptions in Europe continuing into, I think you said the first quarter and 2Q, I thought all the pricing had to be done in the first couple of months of the year. So I thought all those customer disruptions were kind of in the fourth quarter rather than bleeding into the first half of the year. What's happening there? And I'll pass it on.

Yes, there are some specific laws in France where, for instance, you have to be done with pricing negotiations by the end of February, reality is particularly on promotions and promotional calendars, there might still be negotiations underway and besides France, other countries can obviously, in terms of negotiations go a little bit longer. So we have announced pricing, we are clearly in active talks with most of the customers, by the way, successful implementation of pricing in places like the U.K., in the Nordics, in Southern Europe, namely Italy and Spain, predominantly. But clearly, places like France and Germany, there is still some ongoing negotiations. And we expect some of the disruption happening in March and potentially spinning over into Q2. That was a little bit the pattern we saw between Q3 and Q4 this year in 2022, sorry. And we expect the equivalent of that in 2023.

Thank you. Our next question will come from Cody Ross with UBS. Your line is open.

Good evening. Thanks for taking our questions. I just want to go back to Jason's question earlier on the consumption or at least your shipments trend stronger than consumption in the developed markets. What is driving that? Was there any pull forward ahead of your price increases that you have going into the market in December and then again in 1Q? And then I have a follow-up? Thank you.

The simple straight answer is no. When you look at the European segment, I think you saw a volume decline of – volume mix decline of 4%. So the last thing we did was to preempt the trade before future price increases. So no question, particularly in that segment. As you look at North America, when you dissect the performance of volume growth of North America, as I said, the category has positive volume dynamics. In that context, we are delivering better share. And the third element is, we are improving customer service level and increasing to sound levels that are not sound yet. The retailer-related stock. So the last thing we did was to increase trade stock ahead of price increases. This is all stock that is being sold and consumed by consumers.

Thank you. That's helpful. And then there were recently headlines in the news about a grocer asking food companies to lower prices on the back of moderating inflation historically on the back of inflationary cycles, would you consider rolling back price increases? Or do you expect to lean more heavily into promotions? And if it is promotions, can you just update us on what you're seeing from the promotional environment? Thank you.

Yes. So the request was in the U.S. And as we explained before, we are certainly not seeing for 2023, our costs coming down. We still are seeing double-digit inflation in our cost. We just implemented a price increase in the U.S. We're implementing price increases in Europe. So we are not in a situation where we can say that costs are coming down, if anything, they're up versus last year. From a promotional perspective, since we are rebuilding our customer service and our inventories in clients, there is no need for us to promote more. In fact, what we've done in last month is promote less to get our customer service back up. As long as volume continues to be this strong, we are not planning to increase our promotional pressure at all.

Thank you. Our last question will come from Steve Powers with Deutsche Bank. Your line is open.

Great, thank you. Shifting gears a bit. On Slide 9, you talk about the accelerating benefits to total company organic growth from recent acquisitions. And I guess I was hoping you could talk a little bit more about plans and expected contributions from Clif and Chipita and Ricolino in 2023, but I was also hoping you could talk about the profitability of growth from those newly acquired businesses and how that compares at this point to base portfolio profitability, whether you describe the relative bottom line contributions as fairly comparable and proportional or whether there’s still remains upfront investment on the newer additions that will dampen profit margins for a time? Thank you.

Yes. So I can maybe take you through the way we're thinking about the contribution to growth from businesses like Clif and Ricolino, and then Luca can talk a little bit about the margins. So as it relates to Clif Bar, we've taken over in August. We have strong results driven by good demand and good pricing, we had strong double-digit revenue growth, and we had high double-digit EBIT growth in the fourth quarter. We started to implement pricing, which was not normal for them. So we've done two pricing actions last year, and we've seen minimal volume elasticity. We've also started to prioritize the SKUs in their portfolio and working on their supply chain. So we are seeing good supply recovery through Q3, and now we're starting with the integration of the businesses and find the cost and the revenue synergies. So we have a full integration team in place, we have a wide variety of opportunities already identified. As it relates to future growth, I think we have a strong position in the U.S. in the protein and the energy bar space. It's a $16 billion market, which is growing very fast. We have an opportunity to expand through Clif, but also to a business like Grenade in Europe in this space and its well being oriented. It's ESG-focused. So it's right on the money as it relates to consumer interest. But even in the North America, we think that Clif has a huge opportunity for expansion, better distribution, and we are going to complement that with the international opportunity. So I would say that explains a little bit the Clif thinking. As it relates to Ricolino it's a very different type of setup that closed in November so far, well above expectations, top and bottom line. There's a very high strategic fit to in a category perspective that is very complementary to our categories. It allows us to enter chocolate and reinforce our biscuit business in Mexico. One of the biggest benefits is that we can triple our route to markets, which is going to add a significant amount of stores. We will be present in 440,000 plus stores. And they also have a good growth U.S. business, which we are planning to give a boost through our U.S. organization, particularly, of course, in the U.S. Hispanic market. It's a full integration Ricolino Clif is a partial integration. Ricolino will be a full integration and merger of our business with theirs. So there is a significant opportunity for top and cost synergies, and so that will have a big effect on margins. Maybe I'll leave it at that on what those two will do for us. So Luca talk a little bit about the financials.

Yes. So I guess you were asking a little bit in terms of relative profitability of these platforms compared to the rest of Mondelez. I would say that Clif, which is almost a $1 billion platform projected into 2023 has sound gross margins at this point in time, given the fact that as we've said, we are about to implement another wave of pricing same dynamics that we saw in our U.S. business, little elasticity so far. So I think the P&L is going to shape up quite well. In terms of gross margin, the North American segment has the highest gross margin of Mondelez, particularly because of the DSD system that is quite effective from that standpoint. But Clif has gross margin that, albeit a little bit below the average of North America they are above the average of the company. So that is really a sound platform in terms of potential and profitability. Importantly, there are material synergies we are after – we just announced a new organization in place. And clearly, there will be some testing going on the platform through DSD and I think if you see what happened with Tate's this is quite promising potentially. In terms of Ricolino it is a $600 million, $700 million platform. It is growing double-digit at the moment. And in terms of margins, I think it's more important to say that the combination of both platforms between our existing business and Ricolino will step change materially the profitability of Mexico. And I think particularly in route to market and cost synergies, there is a big benefit to come now. We are in the process of combining the two companies. So the fruition into the P&L will come towards the second part of the year.

I think that brings us to the end. Thank you very much for your presence and for your interest in the company. Obviously, if there's any other questions, Shep, and Philippe will be ready to answer them and looking forward to a good first quarter of the year. Thank you.

Thank you, everyone.

Thank you, ladies and gentlemen. This does conclude today's Mondelez International Fourth Quarter 2022 and Full Earning Year Conference Call. You may disconnect at any time, and we appreciate your participation.