Mondelez International - Q2 2024

Transcript

Operator (participant)

Please stand by. Your program is about to begin. If you need assistance on today's program, please press star zero. Good day, and welcome to the Mondelēz International Q2 2024 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Mondelēz management and the question and answer session. In order to ask a question, please press the star key, followed by the number one on your telephone keypad at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelēz. Please go ahead, sir.

Shep Dunlap (Senior VP of Investor Relations)

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 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 a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.

Dirk Van de Put (Chairman and CEO)

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 a solid H1 to the year, with strong profit dollar growth, driven by effective cost management and pricing. We also successfully completed our annual pricing in Europe, which helps position us well for the H2 in terms of top line and volume growth. We continue to see momentum in emerging markets, and we are continuing to invest significantly in our brands and capabilities to drive sustainable long-term growth. We continued our track record of strong free cash flow, generating $1.5 billion. While our operating environment remains challenging and dynamic, our teams remain focused and agile in executing against our long-term growth strategy.

We continue to play for the long term in chocolate, biscuits, and baked snacks, because these core categories remain strong consumer favorites, with very high loyalty to our iconic brand portfolio. Within these great categories, our advantage geographic footprint provides additional confidence that we are well-positioned to compound long-term sustainable growth. Turning to slide 5, you can see that organic net revenue grew 2.5% this quarter, with adjusted gross profit dollar growth of 11.3%, enabling us to continue investing in the business. A&C spending is up high single digits, helping to drive consumer and customer loyalty to both our iconic global brands and our local jewels. Adjusted EPS grew 25%. Turning to slide 6. While many food and beverage segments are continuing to experience softness, snacking remains relatively durable.

Consumer trends vary by region, but overall, we are seeing volume growth start to rebound as inflation cools. Consumer incomes are rising, which helps to reduce the inflation-driven financial strain on many households. As a result, private label growth in our categories is decelerating, while branded share growth is improving. In North America, some consumers are seeking snacking options at specific price points to fit within a specific overall ticket size. Other consumers, who are more focused on convenience, look for multi-packs, which offer value as well as variety and versatility. Our proven playbook for price pack architecture allows us to offer a broad range of options to meet each of these consumers' differing definitions of value. As a result, our two largest U.S. brands, Oreo and Ritz, are gaining share year to date. Meanwhile, in Europe, elasticities are moving slightly higher but remain modest.

Consumer confidence is cautiously optimistic and is rising in the Q2 versus the same period last year, as inflation softens and incomes rise behind stable employment. We continue to see positive value growth in biscuits and chocolate. Volume in seasonal chocolate also is growing well, up 0.6% year to date, driven by the performance of seasonal shapes, novelties, and bite-sized products. Consumers continue to demonstrate that holidays like Easter just wouldn't be the same without chocolate, and they are willing to spend accordingly... In emerging markets, modest elasticities continue. Our China business is delivering strong growth in online and social commerce. In Brazil, we're seeing an uptick in elasticities, but the consumer and economy remain resilient. In Mexico, the economic backdrop is healthy, with solid employment and consumer confidence.

Within India, we see some food inflation impacting lower and middle-income households, driving a pullback in spend and causing some downtrading, particularly in biscuits. Overall, our combined emerging markets value and volume share is improving in biscuits and chocolate. Against this backdrop of gradually improving consumer confidence, as you can see on slide 7, we are continuing to deliver against our focused action plan to improve volumes in North America in the H2 of the year. We are already seeing value share improvement in Oreo and Ritz. To further accelerate growth, we are continuing to increase distribution points across food, club, and convenience stores. To meet the right price points, we are also implementing new targeted promotions, as well as a new pack size, priced in the $3-$4 range, to drive continued brand loyalty and value for Oreo, Chips Ahoy! and Ritz.

Additionally, we are continuing to launch compelling activations, like Star Wars Oreo and Oreo Space Dunk, to delight our fans while driving incremental lift. Turning to slide 8. Along with improving biscuit volumes in the H2, we are well positioned to deliver sustainable, long-term growth in chocolate. Recent spikes in the cost of cocoa ingredients have been widely discussed, but we soon expect a market correction to a more sustainable price, as the mid-crop is emerging in line with historical trends, and early signs on the main crop are encouraging. Chocolate remains a great category. It is continuing to grow with volume resiliency and despite increasing prices. Within this great category, we offer some of the world's strongest, most iconic chocolate brands, which include Cadbury Dairy Milk, Milka, Toblerone, Côte d'Or, Marabou, Freia, and Lacta.

These brands are already the leaders in numerous key markets, and we are continuing to invest in A&C to further accelerate loyalty and growth. At the same time, our proven RGM playbook provides our teams with the necessary agility in offsetting inflation while maintaining solid volume dynamics and protecting share. We remain confident that we are well equipped to continue navigating fluctuating input costs and that we're structurally advantaged to accelerate long-term chocolate growth. Turning to slide 9, it is important to reinforce that while the external environment remains volatile, we remain focused on accelerating our long-term growth strategy. We're continuing to reinvest in our brands, expand distribution, drive M&A, and scale sustainable snacking. We remain on track to deliver 90% of revenue through our core categories of chocolate, biscuits, and baked snacks by 2030, and our teams continue to deliver strong progress against our strategic agenda.

For example, our Oreo marketing team continues to design and deliver exciting, creative activations that capitalize on consumer trends and drive incremental lift. We recently collaborated with Lucasfilm to launch two versions of a special edition Star Wars cookie in the United States, which unites our strong Oreo fan base with the equally strong Star Wars fan community. While both versions are wrapped in identical exterior packaging, consumers don't know which side they're on until they open the pack. This creative and fun approach is driving strong sales, making this collaboration our strongest limited edition yet. This collaboration is the latest example of our strategy to cement the cultural relevance of Oreo with key partners who help us bring their favorite stories to life. We're planning some more exciting, but still top secret, collaborations for the remainder of this year and into 2025.

Along with these marketing activations, we're continuing to strengthen store availability, visibility, and execution around the world. Here in the U.S., for instance, our performance in the club channel is growing mid-single digits, while the value channel is growing double digits. Both are driven by our family-sized multipacks, which offer a great price per cookie or cracker rather than overall package prices. We also are continuing to harness the power of recent acquisitions to capture synergies and drive growth. For example, our Chipita Baked Snacks business is growing high single-digit volume in Europe, led by convenient 7Days croissants that help satisfy consumers on the go across a broad range of snacking occasions. Additionally, we are making continued progress on our environmental and social sustainability agenda. For example, we continue implementing our structured and scientifically validated roadmap to reach net zero carbon by 2050.

As an example, our biscuit manufacturing plant in East Suzhou, China, was recently certified as carbon neutral. The plant has reduced carbon emissions by 16,000 tons, the equivalent of planting 7,000 trees for 100 years. Through implementing new technology solutions, including an innovative system to recycle residual heat and wastewater, as well as a new solar photovoltaic system to generate green electricity. To learn more about our strategy and review our annual performance data in detail, I encourage you to read our Snacking Made Right report, available on our website. On slide 10, before I turn the microphone over to Luca, I'd like to briefly highlight our recently announced strategic partnership with Lotus Bakeries. This exciting initiative includes two main components.

First, we will work with Lotus Bakeries to develop and launch co-branded chocolate products, combining unique, caramelized, crispy Biscoff taste with our iconic global chocolate brands, including Cadbury and Milka. We aim to launch the first products in Europe in early 2025. Second, we will manufacture, market, distribute, and sell the Lotus Biscoff cookie brand in India, starting in the second half of 2025. Partnering with Lotus will enable us to simultaneously scale our sweet biscuit business in the important emerging market of India, while also innovating our strong European chocolate business with new products to grow consumer interest and loyalty. As we strive to lead the future of snacking by winning in chocolate, biscuits, and baked snacks, M&A and ventures remain an important part of our growth strategy. This innovative partnership is a great example of our approach, and we continue to explore additional opportunities.

With that, I'll turn it over to Luca to share additional insights on our financials.

Luca Zaramella (CFO)

Thank you, Dirk, and good afternoon. Q2 marked a solid quarter for the business, with organic net revenue growth across each region, strong profit dollar growth, substantial reinvestment into working media, and robust Free Cash Flow generation and capital return. Revenue grew +2.5%, with strong pricing execution. This number includes 1.3 points of EU customer disruption that is now behind us, and 40 basis points of boycott headwinds in our EMEA region. Developed market volume mix was down -2.2% for the quarter, primarily impacted by Europe customer disruption, with some ongoing softness in the U.S. biscuit business. Total revenue for emerging markets grew +4.5%. Developed markets grew +1.2%. Moving to portfolio performance on slide 13. Biscuits and baked snacks grew +0.8% for the quarter.

Several brands delivered solid growth, including Oreo, Ritz, 7Days, Club Social, and TUC. We saw ongoing softness in parts of the U.S. biscuits portfolio, though we have seen early signs of improvement in brands like Chips Ahoy! over recent weeks, with clear plans to improve the overall biscuit growth in H2, as Dirk mentioned. Chocolate grew +5.6%, with significant growth across both developed and emerging markets. Volume mix was down -2.6%, which was nearly all driven by customer disruption in Europe. Cadbury Dairy Milk, Lacta in Brazil, and Freia and Marabou in the Nordics all posted strong growth during the quarter. Milka also posted solid growth. Gum and candy grew +2.9%, driven by continued momentum and strength in key markets, including China, Brazil, and Western Andean.

Volume mix in this category was negatively impacted by holes in the U.S. Let's review market share performance on slide 14. We gained share in 40% of our revenue base, with strength in chocolate as well as gum and candy. This strength was partially offset by softer results in our U.S. biscuit business, which accounts for approximately 25 percentage points of revenue and disruption in key markets across Europe. Moving to regional performance on slide 15. Europe grew +2.7% in Q2. Execution was strong in the quarter, with a number of key countries delivering growth through solid pricing and in-store execution, which led to share gains. This strength was partially offset by volume declines associated with expected customer disruption. Pricing is now completely landed across all key customers, which positions us well for Q3 and H2 of the year.

OI dollars were up nearly 25%, including significant ABC investment. North America grew +0.3% against a strong compare of more than 12% in the prior year. Growth channels, including club, online, and value, along with Canada, delivered solid growth.... However, overall volume mix declined as some consumers continued to seek out products with lower absolute price points, impacting brands like Chips Ahoy! We have a clear plan to address this dynamic by adding more core packs in the Oreo, Chips Ahoy!, and Ritz within the $3-$4 range, beginning Q4. While other households continue to prefer the attractive unit price offerings that our family and party packs provide. And although early, a recent reformulation and new promotions have led to gradual sales improvement in Chips Ahoy! There is clearly more work to do, but these initial signs are encouraging.

North America OI increased by +3.4%. EMEA grew +4.2% for the quarter. China delivered another strong quarter, with high single-digit growth, fueled by ongoing brand equity enhancement in Oreo, Chips Ahoy!, and Stride, along with distribution gains. India was flat overall, with strong chocolate growth offset by more competitive intensity and down trading in biscuit as a result of higher overall food inflation. Our India team has plans to activate new pack sizes and new value pricing within Oreo to improve growth and share starting next month. Australia, New Zealand, and Japan delivered a robust quarter of growth, coupled with strong share gains. Boycotts in the Middle East and South East Asia remain a headwind to results, which we expect will continue in half two, though this impact will be in the base beginning in Q4.

The overall impact for the region was two percentage points worth of growth. EMEA increased OI dollars by more than 46%, with meaningful ANC increases. Growth base growth, coupled with some upside related to lapping Nigeria currency losses last year, drove this performance. Latin America grew +4.5%, with solid price execution and a decline in volume mix. Note that Argentina pricing has been capped at 26%, unlike Q2 last year, where the country contributed more than 50 points to Latin American growth. Brazil and our Western Andean region both delivered mid-single-digit growth. Mexico growth was modest, in part due to lower flow of public subsidies to households that is expected to resume in the H2. Consumer confidence remains strong in Mexico, while Brazil and the Western Andean countries continue to demonstrate solid growth.

Latin America delivered OI growth of nearly +24%, supported by strong, strong pricing. Turning to page 16. In Q2, we saw strong double-digit OI and gross profit dollar growth. Top line strength, pricing execution, ongoing cost discipline, partly drove these results. Nevertheless, the strong half one results also reflect our favorable cocoa pipeline compared to current market prices, which will clearly reverse and will be a meaningful headwind in the H2. Next to EPS on slide 17. Q2 EPS grew +25% in constant currency. Most of this growth was driven by operating gains, as well as favorable cocoa cost pipeline and coverage strategies. And despite currency headwinds, we grew adjusted EPS at reported Forex by more than 19%. We are holding our EPS call for the year despite these gains, since cocoa will become a more material headwind in the H2.

We continue to demonstrate strong Free Cash Flow and capital deployment, as you can see on our slide 18. We delivered $1.5 billion of Free Cash Flow in the H1. We have repurchased $1.1 billion in stock through the H1, and will remain opportunistic for the remainder of the year. We also announced today that we are raising our dividend by 11%, marking nine consecutive years with a double-digit dividend increase. Before moving to our outlook, let me make a few comments relative to cocoa on slide 20. As we know, this is most top of mind for our investors. Our teams continue to monitor the market very closely to put ourselves in the best position possible.

While we want to protect ourselves, we continue to put flexible structures in place that enable us to participate in potential market price declines versus current historically high prices. In addition, we continue to fine-tune our commercial strategies to ensure long-term sustainable growth while managing through near-term challenges. As guiding principles, we will protect critical price points and key thresholds while broadly utilizing RGM and implementing more pricing in the least elastic segments and consumer occasions. Our objective is to limit elasticity and volume losses while protecting our gross profit dollars to the extent possible, as we believe cocoa prices will adjust eventually. We will also implement cost measures to ensure that we protect our bottom line and ability to invest in the category. It remains too early in the year to provide specifics around 2025. However, there are some key elements and points in time to consider.

The mid-crop has been good and in line with historical trends. Although early signs around the main crop are encouraging, we should get a much clearer indication in September, which will likely act as the next catalyst for cocoa costs. As we get to our Q3 earnings cycles, we expect to be able to share more color around demand, market liquidity, and the range of cost and wins relative to 2025, as well as EPS. I'll close with our outlook on slide 21. Our outlook for 2024 remains unchanged. We continue to expect organic delivery for revenue, earnings per share, and cash flow. Note that this earnings per share includes significantly higher costs related to cocoa for the H2, which is important to factor into your models.

This includes the upper end of our 3%-5% range for organic net revenue, which considers the impact of completing price negotiations in Europe and plans to drive improvement in half two results in North America. Most of our key assumptions remain consistent with what we shared with you in our last call, with the exception of interest expenses, which is now estimated at $275 million for the full year. With that, let's open the line for questions.

Operator (participant)

At this time, if you would like to ask a question, please press star one now on your telephone keypad. To withdraw yourself from the queue, you may press star two. Again, to ask a question, please press star one. We'll take our first question from Andrew Lazar of Barclays.

Alexia Howard (Analyst)

Great. Thanks so much. Good afternoon, everybody.

Luca Zaramella (CFO)

Hi, Andrew.

Dirk Van de Put (Chairman and CEO)

Hi, Andrew.

Alexia Howard (Analyst)

Hi, there. Maybe to start off, Dirk, last quarter, I think you spoke about the need to offer better value to the consumer in parts of the North America segment. In 2Q, volume declines moderated in North America, as did the benefit from pricing. So how do you see the consumer situation in North America currently, and do you see the need for a more aggressive price reset? And then, and separately for you, Luca, volume and organic sales growth needs to accelerate sequentially to hit the upper end of the 3-5 range for the year in a still challenging environment, while unchanged full-year EPS guidance, despite the 2Q beat, implies a deceleration in the back half on EPS. And I was hoping you could bring us through some of the logic behind those dynamics, please.

Dirk Van de Put (Chairman and CEO)

Okay, I'll start first, Andrew. So, as it relates to the consumer in the U.S., I would say there's sort of three key dynamics to keep in mind. First of all, the category remains soft, but it is stabilizing. And I would say that the consumer is experiencing a tension because they see the overall inflationary picture, they see the food prices that have increased, and they have a feeling of less purchasing power. At the same time, particularly as they see grocery prices stabilizing and their wages being up about 4%, while grocery prices are up 1%, they're starting to have bigger confidence than the same period last year, although these high prices remain a concern for them.

I would also say the other thing that we see in the category, while it's soft, as I said, the elasticities have stabilized since Q4 2023. The second thing about the consumer is that they have changed where they shop. The biscuit category is seeing the largest growth in chains like Value, Club at Walmart, while in grocery, we are seeing a share decline. Probably the most important thing we're seeing about the consumer is that the definition of value has changed for many people. Because if you look two, three years back, it was all about the price per pack, or in fact, the unit price per cookie, and people were drifting more towards family and party-size pack, and that benefited us.

Now, particularly lower-income consumers, they have moved to a basket size that they can afford, and if the biscuit brand that they like can fit in there at the right price point, they will buy it. If not, they will not buy any biscuits. So, these days, we have to be much more aware at which price point we offer a pack. So, what are we gonna do? We don't think we need a full price reset. At the moment, our OI, our operating income, and our cash generation is strong. Our focus is largely on improving our sales and our share in a smart way. We have an opportunity to drive more distribution and displays, and so we need to keep on driving those two, particularly also featured displays.

We are implementing new targeted promotions that are probably gonna offer a little bit more price on brands like Chips Ahoy!, which is probably most affected by the hesitation from the lower-income consumers. And then we will also launch a whole range of new, smaller packs that will offer the consumer an opportunity to buy around $3-$4 for the pack. And so we think that also will make a difference. So more promotions, smaller packs that we will offer, driving distribution, those are the solutions that we are planning for. We're already seeing benefits. Chips Ahoy! is recuperating quite nicely. Oreo and Ritz are increasing their market share. And on top of all that, we will have some very impactful activations. So we talked about Star Wars in the call here.

There's another big one coming up, which I cannot yet announce, but we have some very strong activations on Oreo in the H2. All that together gives us the confidence that we will see a good H2 in North America. Luca?

Luca Zaramella (CFO)

For the first half, we are broadly where we would have expected to be, quite honestly. Revenue might be a little bit softer, but strong profit will allow us to reinvest into some selective additional activities enough to deliver profitable volume growth. I think you rightly pointed out the implied top-line growth for up to which a current guidance requires an acceleration, and that hinges on three main drivers. The number one driver that will impact the most is Europe, that will have to return to volume growth. With disruption behind us, we feel quite good about achieving that.

The team in Europe has proven consistently that they can execute very well, and plans are in place to activate around big key consumer activities like back to school and Christmas. It is also important to remind ourselves that the trade stock pipeline is an opportunity in Europe as we had to pull back on shipments, and so repiping the trade is a material opportunity and something that we are clearly already seeing in July. The second element is the U.S. biscuit positive volume. I have to say, the diagnostics around what is happening to the overall category and the share pressure that we see are clearly giving us an indication of what has to change.

And, we truly believe that hitting those price points is going to result in in positive outcomes. And again, we start seeing some green shoots in in the category and in our brands. The third element is that while I do not like to talk much about laggards, last year, for the second part of the year, we discontinued some product lines that were material in volume for the Give & Go business. And I think from now we will be comparing more to a clean base. And so I think that's the third element to bear in mind. I think all in all, we have, at this point, line of sight to the upper end of our revenue guidance for the year.

As far as EPS goes, importantly, we have landed the price in line with our expectations. There might be more selective price that we will be doing in light of heightened cocoa, but no major deviations expecting on this front. Our commodity cost for the year is almost 100% locked, so no surprises expected on that front either. As I mentioned a few times, just bear in mind that we bought cocoa quite well for this year, and that year-to-date, cocoa costs are meaningfully better than the 2024 average. So there is more cost coming in the H2, ergo, the EPS guidance being kept in line despite the very strong results year to date.

We will continue to invest in working media in line with the first part of the year, but we will also start optimizing, as we discussed a few times, the non-working media, which is still an opportunity in this outlook. And finally, we will continue to pursue cost measures and productivities. So all in all, we believe reaffirming guidance is the right thing to do. And again, July is shaping up quite well for us at this point in time. But obviously, as I said, there is more work to do, particularly around the U.S. consumption side.

Alexia Howard (Analyst)

Thanks so much.

Luca Zaramella (CFO)

Thank you, Andrew.

Operator (participant)

We'll take our next question from Ken Goldman of JPMorgan.

Alexia Howard (Analyst)

Hi, thank you. Dirk, I wanted to-

Dirk Van de Put (Chairman and CEO)

Hi, Ken.

Alexia Howard (Analyst)

Hi, guys. I wanted to clarify a little bit about Europe. You talked about how completing your pricing actions helped position you well in terms of volume growth for the H2. I think you also mentioned that Europe elasticities, though still modest, are moving slightly higher. Excuse me. So I'm just curious if maybe we could elaborate a little bit on, you know, what drives your confidence in volume growth, just given some of the pricing actions, you know, what seemed to be tougher comparisons and that slightly higher elasticity that you mentioned, if I'm correct on all of those?

Dirk Van de Put (Chairman and CEO)

Yes, yes. Well, first of all, the consumer, I would say, is cautiously optimistic. I would say in general, we feel that the European consumer seems to be in a better place than the North American consumer. They see their incomes rise, the inflation is softening, they see quite stable employment. Particularly in the UK is important for us in Europe, and there, the confidence, which was relatively low last year, is rising because they feel that their broader economy is doing better, and they feel better about their personal finances. And then, I would say France and Germany, the other two big countries, we have some mixed views across the economic indicators, but the confidence is also above last year, so.

Second thing is, yes, there is an uptick in elasticities, and there is also more promotions. But I would say the elasticities remain quite modest. And there is a little bit of an increase in promo intensity. We're also seeing the same shift of people buying, going from hypers and supers to discounters. And then we see also these affordable packs at the right price point. So similar movement as I was talking about in North America. If you look at Q2, our biscuits and baked snacks are already positive in Europe. They're growing their value at 2.8% and the volume at 0.8. In chocolate, we see a strong momentum with seasonal shapes. We also see tablets, bars and pralines doing well.

Back to school and Christmas, of course, in chocolate will be very important. And we are continuing to watch the pricing impact. But overall, I would say, if you exclude some of the disruption that we saw, the performance in Europe is quite solid. And since that disruption, the pricing has been implemented now, we feel that that solid underlying growth that we see there is going to continue in the H2. So we're expecting quite a good H2. I would also like to mention here that chocolate, despite already seeing quite a bit of crisis, remains quite resilient. There's more to come, seeing the cocoa situation. But overall, volume has been quite solid. We're also planning to continue to invest strongly.

Our Easter was very strong, so we have high expectations for back to school and Christmas. And so overall, I would say that, I would be surprised if the H2 is not a good half for Europe.

Alexia Howard (Analyst)

Very helpful. Thank you.

Operator (participant)

Our next question is from Alexia Howard of Bernstein.

Alexia Howard (Analyst)

Good evening, everyone.

Dirk Van de Put (Chairman and CEO)

Hi, Alexia.

Luca Zaramella (CFO)

Hi.

Alexia Howard (Analyst)

Hi there. Just a couple of quick ones. On the ERP transition, is that something that's gonna be rolled out across different regions, or is it something that's gonna affect particular categories at a particular point? Should we be worried about the impact of that transition for 2025?

Luca Zaramella (CFO)

It is a program that will be completed over a 4-year time frame. The reason why that is, is a couple of things. One is, we will use a staggered approach, and we will be able to implement it in part of the business first, and rolling out resources eventually from that part of the business, and rolling on those resources into the next wave of countries that will be impacted. We will also make a big distinction between some modules of SAP versus others. So we will not necessarily take, even by region, a big bang approach. We believe that the preparation we have been doing for the last, I would say, 18 months, positions us well in terms of successful execution.

So, we have tried to minimize all potential issues by going broad in one region or by going broad in the world of SAP. And we believe, given also the resources we have internally, and importantly, the ones we have secured through SAP and Accenture, that we will have a good opportunity to execute this well.

Alexia Howard (Analyst)

Great. And then as a follow-up, I'm just curious about the long-term Free Cash Flow guidance. It, it's been sitting, I think, at this $3 billion level for some time, even as your earnings growth has obviously played out quite nicely in recent years. You've obviously got guidance of $3.5 billion this year. What are the puts and takes, or what are the criteria that would you would use when you're thinking about whether that guidance for Free Cash Flow could be raised at some point down the road?

Luca Zaramella (CFO)

The answer is, yes. We will have, you know, a couple of one-timers in the second part of the year, and that is really what drives the 3.5. But both last year, where we had to pay some taxes related to coffee, and this year, where we have a potential one-timer that we will be paying most likely off in in August, I would say. If you strip those out, that are clearly a one-time impact, I mean, our cash flow is running at $4 billion flat. So we feel quite good about it. Cash conversion cycle continues to be top-notch. We continue to improve days outstanding.

One of the reasons why we believe SAP and o9, which is the other platform around supply and demand planning that we are implementing with this ERP program, is going to be beneficial to us, is around inventory, which is an area that has material opportunities in it. The answer is certainly we can strive for more than $4 billion on an ongoing basis.

Alexia Howard (Analyst)

Great. Thank you very much. I'll pass it on.

Luca Zaramella (CFO)

Thank you, Alexia.

Operator (participant)

We'll take our next question from Michael Lavery of Piper Sandler.

Michael Lavery (Analyst)

... Thank you. Good evening. Just wanted to come back to cocoa for a second. That, that slide you laid out is, is really helpful at the end of the presentation. Was wondering if you could give us a sense of how much you might be placing a bet on prices rolling over in September? Put a little differently, have you been securing for 25 kind of as normal, which I think would roughly maybe put you at about half or, or a little bit more covered at this time of year? Or, or are you trying to position for a, a move that, that you see it sounds like you might expect to come, a little bit later in the year.

Luca Zaramella (CFO)

Yes. Look, we believe, there is going to be a correction. I mean, even today, if you take, the spot price of today, which is around about 6,500 GBP per ton, and compare it to, next year, Q4, there is a gap of 2,200 pounds, which is, clearly material. So the market, in light of the mid-crop and importantly of, the evolution of the main crop, sees, a clear adjustment of prices going forward. And I think there is, there might be even, even more than this. Obviously, we are not gonna go, blind into 2025. We cannot wait and bet on, the, main crop to be good. And we have been certainly, improving and increasing our physical coverage into 2025.

We have around about one quarter of our positions into 2025 covered through futures, and you might imagine we have covered out in the years to take advantage of this inverted curve, which means how big of a discount you get the further you go out versus today's spot. The rest is covered through a series of derivatives that allow us to participate in a potential market correction. So at this point in time, whichever way you look at it, we have protection for the most part of our positions into 2025, and on the other side, we have secured also some physical forward positions that I believe will position us well compared to the market eventual focal price adjustments that might happen or not.

Michael Lavery (Analyst)

Okay, that's very helpful. And just following up on Biscoff, it sounds like a very interesting partnership. Can you give a little better sense of maybe the structure? It sounds like it's not a JV, but perhaps it's a cross-licensing. Maybe a little bit of just how it works, and then also kind of what its potential could be. Obviously, at the moment, it's initially gonna be Europe and India, but could it go global? Are there, you know, reasons that it's got any geographic limitations?

Dirk Van de Put (Chairman and CEO)

Yes. So there's two main components to the partnership. So the first one is that we're gonna co-brand chocolate products with Biscoff. And Biscoff is not yet a very big brand in North America, but it's quite a big brand in Europe. It's one of the biggest biscuits brands, and it has a quite unique taste and also quite unique consumption moment. And the combination of a chocolate bar with Biscoff filling or with pieces of Biscoff in there is quite delicious. So that's the first one. To give you an idea, we already have a similar line, which uses Oreo as the filling, and we're talking about several 100 millions of sales in Europe for that line. So we have the same expectations for the Biscoff line.

And if that is a success in Europe, we will obviously want to extend that around the world into our other chocolate brands. And the first launch of this product will be in early 2025, and that will help us with the excitement, building excitement around the chocolate market. Then secondly, Biscoff is looking for global distribution, and there's certain countries where that is not easy to get. So we will manufacture, distribute, and sell Biscoff in India as a first country. It's gonna start in the H2 of 2025. It's very interesting for us because at the moment, our biscuit business in India is really built around Oreo, and this will go...

It's gonna give us a second big brand, very different from Oreo, very different audience, very different consumption moment, largely with coffee or tea in India. And so, we think it's gonna be an ideal complement to keep on building a strong biscuits business in India. And that clearly is a test to see if we would do other countries around the world. And so, yeah, it's not a joint venture, it's a cross sort of licensing of our brands to each other.

Michael Lavery (Analyst)

Okay, that's really helpful. I fly Delta, and people go crazy for them on there, so you've probably got at least a better head start in the U.S. than you may know. But, thank you very much.

Dirk Van de Put (Chairman and CEO)

Okay.

Operator (participant)

Once again, to ask a question, that is star one on your telephone keypad. We would ask that you please mute your line after posing your question. Thank you. We'll move next to Thomas Palmer of Citi. Your line is open.

Thomas Palmer (Analyst)

Hi, thanks for the question. I think a quarter ago, a quarter ago, you talked about volume being flatish year-over-year in 2024. I just wanted to confirm, is this still the expectation? And then, any help as to how much maybe some of the more non-recurring items, like the disruptions in Europe or the subsidy timing in Mexico, might have weighed on volumes in the Q2, 'cause so we could think about-

... kind of an entry run rate, at least, for the Q3?

Luca Zaramella (CFO)

Yes, I think the expectation it is still around having a sort of, you know, flattish volume mix for the year. And in terms of one-timers, as I said, there is 1.3 points of expected disruption that happened in Q2. The whole 4 points of volume mix in Europe are attributable to the consumer or the customer disruption, sorry. There is another component which is about the Middle East conflict that impacted around about 0.3 percentage points for the quarter. The other one, as I said, that you need to bear in mind, is the impact of Give & Go and then discontinuation that we had in Q4 last year.

But also importantly, last year, we had a carryover of the H1 disruption in Europe into H2, and that was around about $100 million of a revenue impact. So when, yeah, you strip out all these impacts, you clearly see a much better linearity of the volume mix and revenue. And when you come to terms that the actions that the U.S. is taking around consumers and packs, I think we have clearly an expectation that is improved volume mix in the H2 and improved revenue in the H2.

Thomas Palmer (Analyst)

Okay, thanks, thanks for that detail. And just on the AMC side, I know you talked about some meaningful step-ups here in the H1 of the year. I think if we look at the timing of some of the step-ups last year, it was maybe a little bit H2 weighted, at least in terms of the dollar spend. Does that become maybe less of a headwind in terms of the year-over-year pressure as we think about the back half of the year in terms of the flow through to earnings?

Luca Zaramella (CFO)

There might be a little bit of an upside, in relation to the fact that, as we mentioned, we are taking a deeper look at, all the non-working media part of AMC. I don't expect it to be material for the second part of the year, and importantly, we will continue still investing in, in our working media. So I don't expect, a material upside, in terms of P&L impact due to, lower AMC in the second part of the year.

Thomas Palmer (Analyst)

All right. Thank you.

Luca Zaramella (CFO)

You're welcome.

Operator (participant)

We'll take our next question from Peter Galbo of Bank of America.

Peter Galbo (Director)

Hey, Dirk, Luca. Good afternoon, guys. Thanks for taking the question.

Luca Zaramella (CFO)

Hi. Hi, Peter.

Peter Galbo (Director)

Hi, Luca. I was just wondering if you could maybe unpack the Mexico comments a bit more. I think we've heard kind of different things from different companies this quarter related to Mexico. Some have mentioned the subsidy timing, you know, that you called out. Others have seen maybe more of a normalization after such a strong kind of several years in Mexico. So just curious, you know, if maybe there's a bit of both going on there at this point, or if truly, you know, you think that the subsidy piece was a blip, and you've already seen a re-acceleration into July. Thanks very much.

Dirk Van de Put (Chairman and CEO)

Yes, I mean, overall, the market conditions in Mexico for us are healthy. For instance, the biscuits and the chocolate category both saw mid-single digit increase in value. Gum and meals also performed quite well. I would say the economy is doing well. There is good employment. There was a lower flow because of the elections of public subsidies to the households. That, we think will start to normalize in H2. But in general, if you look at, minimum wage has doubled in the last years in Mexico. So the overall climate is very positive as it relates to the consumer. If you look at the low single digits Q2 growth that we had, that largely came from our candy and our chocolate business, which were...

Which was offset by growth in gum and meals. And particularly in candy, we think that there probably our price points are a little bit too high, and we will need to work on those. In chocolate, a little bit the same, and we need to make sure that we're well-positioned for the Christmas season there. Again, gum and meals are doing very well, and also the biscuit growth for us was quite strong. The Oreo distribution, which is critical because of the Ricolino partnership that we have, is growing well, and Oreo was growing also mid-single digits in Mexico. So I would say the. I think that this effect of the subsidy certainly affected candy and chocolate. Overall, we remain quite positive.

We think there will be a gradual recovery in H2. The long-term opportunity for growth remains quite significant. The integration with Ricolino is going well, and their route to market will enable us our ambition to grow market share, particularly for biscuits and chocolate. There's also a U.S. business related to Ricolino, which of course is not the subject of the question, but that one also is important because it positions Ricolino as the leader of the Hispanic U.S. candy market. But overall, I would say I think it's a temporary issue driven by these subsidies, and in the H2, I'm expecting to see a good recuperation in Mexico.

Peter Galbo (Director)

... Great. Thanks, Dirk, that's helpful. And Luca, just maybe a quick one. We've had some questions come in, obviously, the kind of over-delivery on gross margin in the H1, and I think that there was an expectation kind of coming out of, you know, the Q4 of this year, that you'd be down gross margins kind of, you know, basis or more than basis points, actual points, on a year-over-year basis as we exit 2024. And just wanted to see if that's kind of still the expectation, given the cocoa inflation in 2H. Thanks very much.

Luca Zaramella (CFO)

Yes. I think, look, we moved away from giving guidance in terms of gross margin percentage. What I would tell you is we are gonna have a year that is ahead in terms of gross profit dollar growth delivery compared to our usual algorithm. I think in the end what will really matter is the amount of pricing we would have implemented and how much pricing we are gonna take into next year in light of whatever cocoa is going to be come the end of 2024. So we are very happy, I have to be honest, with the level of profitability we have achieved in the first part of the year. That would have suggested, I believe, under normal circumstances, that we have upside to the guidance we gave you.

But reality is, cocoa is a material headwind in the second part of the year, and reality is we might have to selectively invest in some of the activities that you have been hearing throughout the call. It is not a massive investment. It doesn't take away that in terms of, profitability and ability to reinvest in ANC, we have done, I believe, a very good job. But, we prefer maybe to be cautious around the level of profit going forward, because again, cocoa prices, as we have secured them in the first part of the year, are clearly much lower than, the current, spot price, and 2025 price, for cocoa would suggest.

Peter Galbo (Director)

Great. Thanks, guys.

Luca Zaramella (CFO)

Thank you.

Operator (participant)

We'll take a question from Matthew Smith, Stifel.

Matthew Smith (Managing Director)

Hi, good afternoon.

Dirk Van de Put (Chairman and CEO)

Hi, hi.

Matthew Smith (Managing Director)

I wanted to ask a question about the performance in India. You mentioned volumes are relatively flat in the market this quarter, with a bit of a step up in elasticity. Can you talk about how you're approaching distribution point opportunities in this type of consumer environment? Are you continuing to see good progress on expanding your distribution in the market?

Dirk Van de Put (Chairman and CEO)

Yes, yes. So, in India, if I give you a little bit of a background, so we're looking at flat growth in Q2, mid-single digit in H1. Chocolate growth is continuing well, high single digit, good gross margin improvement. Cadbury Dairy Milk continues to be a strong leader of the market, despite the fact that we've already implemented some pricing. It's mainly in biscuits where India is being affected. So we have seen a consumption dip, because there is more intense competition, and consumers are clearly moving to lower price points. And our biscuit business is largely built around Oreo, which I would call a more premium biscuit in the Indian market.

If I look at the stores, so since 2019, we've deployed more than 700,000 Visicoolers. In 2023, we added 180,000 stores to our coverage, and about 100,000 new Visicoolers. In H1 in 2024, we've already added another 140,000 stores and 90,000 Visicoolers. So that's a very strong performance compared to 2023. Still, if you take into account, there's 9 million food retail outlets. We now cover about 2.3 million directly, and just over 3 million if we take our indirect coverage, so we still have a huge headroom.

So I would say, yes, there is a bit of a slowdown after three years of inflation, particularly a group of the consumers, particularly in biscuits, is a bit more careful in their consumption. But we don't see that as something that would slow down our focus on expanding our distribution in India. We're gonna continue to work as we've been working in the previous years, placing those Visicoolers, driving our distribution, because we are very confident that gradually the consumer will start to buy Oreo again. And our chocolate business, as I mentioned, keeps on doing very well.

Matthew Smith (Managing Director)

Thank you, Dirk. I'll leave it there and pass it on.

Operator (participant)

Okay. This does conclude our question and answer session. I'm happy to return the call to Dirk Van de Put for any closing comments.

Dirk Van de Put (Chairman and CEO)

Well, I thank everybody for their attendance to the call. I would call it again a solid Q2, and our expectations are for an improved H2, and looking forward to see you at the end of Q3.

Luca Zaramella (CFO)

Thank you, everyone.

Operator (participant)

Thank you. This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.