Good day and welcome to the Mondelez International Second Quarter 2021 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 would now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap - Vice President, Investor Relations

Good afternoon and thanks for joining us. With me today are Dirk Van De Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides which are available on our website.

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. We are also presenting revenue growth on a two-year CAGAR basis to provide better comparability, given the impact of COVID on 2020 results. 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.

In today's call. Dirk will provide a business and strategy update, then Luca will take you through our financial results and outlook. We will close with Q&A.

With that, I'll turn the call over to Dirk.

Dirk Van De Put - Chairman and Chief Executive Officer

Thanks, Shep, and thanks to everyone for joining the call today. Firstly, I want to acknowledge our colleagues, our suppliers and our customers around the world who continue to navigate through the pandemic, particularly in markets where COVID vaccines are not yet widely available.

We continue to work hard to accelerate access to vaccines for our colleagues and sincerely appreciate everyone's efforts to maintain the supply and availability of our products. We had a strong first half, executing our strategy well, and leveraging our advantaged enablers to deliver against our growth drivers. This strong first half gives us the confidence to raise our full-year revenue growth outlook to 4% plus. We are seeing improving mobility trends in many places, helping to drive recovery in areas such as World Travel Retail and gum and candy that were negatively impacted last year. We also see continued strong demand for the categories and channels that experienced elevated demand last year due to COVID. Once again this quarter we have demonstrated that our strategy is working as it is driving a virtuous cycle that is consistently delivering a profitable volume-driven top-line and bottom-line growth as well as good returns to our shareholders.

We are leveraging our revenue growth management capability, which is particularly important in this inflationary environment to generate fuel for continue with the investment in our brands and capabilities. And we continue to reshape our portfolio to further increase our focus on snacking as well as to accelerate our long-term growth rates. To this end, we announced in Q2 an agreement to acquire Chipita, which I will speak more about later. After this strong first half of the year and strong previous years, I remain even more confident that we have the right strategy and are taking the right actions to deliver continued and accelerated growth.

Turning to slide 5 and the headlines of our financial performance, we grew revenue by 6.2% in the quarter and 5% for the half, lapping 3.7% growth in the first half of 2020. Despite cost inflation, which continues to be affected in our sector, we grew gross profit faster than revenue. We achieved this through volume leverage, pricing actions, and continued cost discipline. This profitable growth funded another quarter of double-digit increase in working media spend. Our A&C investments combined with our advantaged portfolio of brands and excellent execution continue to deliver strong share performance. On a two-year cumulative basis, we are gaining or holding share across 75% of our revenue year-to-date.

And in terms of cash generation and capital return, we increased our free cash flow by $300 million versus half one of last year and returned $2.4 billion of capital to shareholders, an increase of $0.9 billion versus half one 2020. Adding the Q2 revenue growth to our track record of performance since launching our strategy in late 2018, you can see on slide 6 that we are now averaging a 4% quarterly growth rate. We achieved this by pivoting from a cost and percentage margin focus to a volume-led growth and profit dollar focus by increasing clarity and accountability in the company through a simplified local first commercial model where decisions are made closer to the consumer by stepping up the investment levels in our brands and capabilities and by better aligning our incentives to our strategy to stimulate growth driving behaviors and a winning culture.

Driving sustained growth requires remaining close to the consumer and being informed by consumer insights, which I will discuss on slide 7. As we entered the second half, consumer behavior around the world is still shaped by COVID where gradual shifts in behavior continue to drive strong demand for our snacks. Globally we are some distance away from reaching a new normal. And the recovery is uneven, largely dependent on availability and adoption of vaccines. Comfort and mental wellbeing remain as important as they have been throughout this pandemic. And that is leading consumers to reach for the snack brands they know and love. Variety, convenience, value, and nutrition have returned as decision factors as countries begin to reopen. Mobility is increasing as restrictions ease but at-home consumption remains elevated and it appears that higher levels of working from home and shopping online are here to stay.

More time at home, the desire for trusted and comforting brands and the return of impulse and on the go consumption are driving sustained growth in our core categories. Year-to-date, the biscuit category has a two-year average yearly growth rate of nearly 4%, and chocolate is growing almost 6%. Solidly growing core categories are the first of a long runway of growth opportunities that we have illustrated on slide 8. The runway is long and we are realizing these opportunities by leveraging our strong enablers such as increased brand investment, higher quality, and purpose-led marketing and pricing ability. As a consequence, this quarter, we continue to make progress against our key growth drivers. These include driving category growth and share gains in our core categories through impactful partnerships like the Premier League with Cadbury in the UK, the US Olympic seen with Oreo and the NBA with Trident, also expanding our presence in key channels like digital commerce, which grew 14% this quarter on a reported basis, after close to triple-digit growth last year.

We are also expanding our presence in emerging markets, where we continue to gain distribution in key countries like China and India with another 60,000, and 20,000 stores added this quarter. We are increasing our exposure to high-growth segments where we are underrepresented. For example, premium, where we have recently integrated Tate's onto our US DSD system and are seeing the benefits through accelerated strong double-digit growth this year. And finally, we are also increasing our foothold in adjacent categories like cakes and pastries where we are now realizing the potential of acquisitions like give and go in North America. We are also launching innovations like Oreo muffins.

Moving to slide 9, let me speak for a minute about the attractiveness of the packaged cakes and pastries category and our expansion into it. This is a 65 billion category, growing at or above the rate of our core snacks categories. It also has attractive profitability. Both cakes and pastries typically have a higher net revenue per kilogram than cookies. It is a close adjacency to our core biscuit capabilities and is a fragmented category which provides a clear opportunity for a company with the right brands and capabilities to gain a leadership position. The number one and number 2 two players have a market share below 10% and following the acquisition of Chipita, we will be the number three player.

And finally, we believe we can add value and premiumize the category by leveraging our brands and you can see a few examples of that on the slide. Starting with LU in Europe, the number one cookie brand in France, which is now building its presence in the cakes and pastries aisles, that includes the well-beloved bird and bird biscuit reimagined as a soft cake, and recently the brand is expanding even further into waffles in the highly incremental pastries space.

On Oreo, we have recently expanded from our core cookies into cupcakes, donuts, and more by leveraging our give-and-go platform in North America, Our products bring the Oreo taste and quality. And finally, Milka, the number one chocolate brand in France, Germany and Austria, which we initially took into the cookie aisle through our chocobakery innovation. Milka has now expanded into soft cakes like brownies and will soon expand into [indecipherable] through the acquisition and you can imagine, we will do the same with Cadbury in the countries where Cadbury is our main chocolate brands. We firmly believe that a leadership position in the cakes and pastries category can contribute to an accelerated growth rate for our company and between our core brands and recent acquisitions, we have the tools to succeed.

Now, let's dive a little deeper on Chipita on slide 10. We are very excited about acquiring this attractive portfolio which is led by the 7 days brands. It is a 600 million business growing high single-digit and skewed towards European emerging markets with strong potential to expand its presence in many other geographies. The portfolio is predominantly prepackaged croissants, which give us greater exposure to the breakfast or pre-lunch consumption occasion. We have clear revenue synergies with Chipita including distribution and co-branding and we believe there is other attractive innovation in the pipeline. We also expect to realize efficiency opportunities. This will be our seventh acquisition since 2018, which will combine to add $1.5 billion of revenue to our business. We also sold down a further 1 billion of KDP stock in Q2, which will part fund the Chipita acquisition. We look forward to welcoming Chipita on board and believe this business can be a strong growth engine.

In conclusion, as you can see from our first-half performance, executing our strategy continues to deliver strong results. I am confident that we are well-positioned to deliver consistent and profitable growth for years to come.

With that, I will hand over to Luca for more details on our financial performance.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Thank you, Dirk, and good afternoon. Our second-quarter performance was strong across the board. We delivered robust top-line growth as the gross profit dollar growth that allows reinvestment in our brands and attractive free cash flow.

Revenue for the quarter increased by 6.2%. Growth was broad-based and volume-led. Pricing, which was favorable across all regions, was also a key contributor. Emerging market performance was strong, growing more than 16%, for the quarter, and more than 5% on a two-year basis, despite India being affected at the beginning of the quarter by COVID-related lockdowns. In India, the situation improved in June, and growth trends have already been restored in line with what we saw in quarter one. Of note, these emerging market results include double-digit growth in Brazil, India, Russia, and Mexico and high single-digit growth in China. We remain encouraged by the resiliency and underlying strength of our emerging market, while we continue to invest behind attractive growth opportunities for the long term. Developed markets also performed well with robust consumption trends continuing. These markets grew 1.3% during Q2 coming off elevated demand in 2020. The two-year average growth for Q2 was nearly 3% and more than 3% for half one.

Turning to slide 13 and portfolio performance, biscuits grew 2.8% in Q2 and 6% on a two-year average. Brazil, Russia, and Mexico posted double-digit growth while Germany grew high single digits in this category. Our North America business declined, low single digits, lapping double-digit growth in 2020. Chocolate grew more than 12% for the quarter with a two-year average of 5.9%. India, Brazil, Germany, and Russia all posted strong results, despite some restrictions in India. Cadbury Milka, Lacta, and Toblerone all grew significantly during the quarter. Toblerone's results reflect growth from improving mobility trends in World Travel Retail, albeit this business is only at around 40% of 2019 levels. Gum and candy posted strong double-digit growth, resulting from improving mobility trends and lapping the big COVID restrictions in 2020. This business grew 28% during the quarter but still declined over 7% on a two-year basis. We expect growth to be better for the second half of the year as mobility generally improves, yet we are still cautious about gum category dynamics. That is still at 80% of the 2019 levels and our full year outlook does not imply a full recovery to pre-COVID.

Now, I'll cover our market share performance on slide 14. We continue to see good share performance. Given the unique impact of COVID on results, last quarter we switched to a 2-year cumulative for percentage of revenue, gaining or holding share, as we feel it better depicts how we are truly performing. On a 2-year cumulative basis as of June, we have had or gained shares in 75% of market and category combinations. Biscuits and chocolate, continue to be the primary drivers of this performance as they had or gained in 80% of our revenue base. Notable share gainers on a two-year basis include the US, China, Russia, and Brazil biscuit, and Germany, Russia, and South Africa chocolate. Gum and candy held or gained in 50%, improving since the last quarter, primarily due to the US candy performance.

Now, let's review our profitability on slide 15. Overall profitability was strong in the second quarter and year-to-date, gross profit grew faster than revenue, increasing more than 7% due to strong volume leverage, productivity, line pricing, and revenue growth management initiatives that helped to offset inflation in commodities, logistics, and labor. As we said many times, inflation in commodity costs are higher than we originally anticipated at the start of 2021, but we continue to believe that they are manageable and we are holding to our original stands as far as investments are concerned. Having said that, we are managing gross profit dollars for the year and there might be some pressure points in the second half. In addition, our goal is to end 2022 with a sound profitability level that will enable higher investment in 2022. Operating income dollars also increased by more than 7%.

Moving to regional results on slide 16, Europe revenue grew 5.4% in the quarter and 2% on a two-year basis, we go I dollars or plus 15%. North America declined slightly at minus 0.3% in the quarter with a two-year average growth of 5.2%. Operating income declined minus 7.2% in the quarter because of volume and mixed dynamics as well as some cost inflation that was more pronounced in this region than others. EMEA posted growth of plus 7% and a two-year average of 1.8%, which includes the peak COVID lockdowns in Q2 of last year. India delivered another quarter of exceptional growth despite the challenging start related to lock-downs, growing strong double digits. India grew on a two-year average mid-single-digit.

EMEA operating income dollars grew more than 7% in the quarter due to volume leverage, as well as cost mitigation efforts with substantial brand and working media investment increases. Latin America grew 33.7% in Q2 and 8.9% on a two-year average aided by Brazil that grew by double-digit, while dollar in Latin America grew significantly over previous year due to top-line growth and mix as gum is on a recovery path.

Now, turning to EPS on slide 17. Q2 EPS increased 1.6% at constant currency, driven mostly by operating gains which were partially offset by the lapping of a one-time tax benefit in previous-year quarter. First half EPS increased 8.6% at constant currency, primarily due to operating gains and despite lapping a one-time tax impact last year.

Moving to cash flow and capital return on slide 18. We delivered free cash flow of $700 million in the second quarter, bringing us to $1.4 billion for the first half. We also repurchased approximately 1.5 billion in shares in the first half at attractive prices. Dividend growth remains an important part of our capital allocation approach, and to that hand, we announced another increase of 11% to our cash dividends today. This represents an increase of almost 85% over the past 5 years.

Moving to our outlook on Slide 20, as a result of first-half trends, continued category durability, and healthy demand trends in both emerging and developed markets, we are increasing our full-year net revenue growth to plus 4% plus. With the first half at plus 5%, the implied growth rate for the half two is at least 3%. We remain prudent in the way we plan the business whether it relates to channels such as World Travel Retail and categories like gum, which are beginning to benefit from an improvement in mobility. We are also mindful that there is still a significant degree of volatility on a global basis as many countries find themselves in different stages as it relates to vaccines rollout, COVID transmission, and restrictions.

In terms of EPS, we continue to expect high single-digit growth for the full year. We have not factored in the full benefit of the top line additional growth on EBIT, as we will continue to reinvest the volume-driven upside back in the business to sustain our share performance. We also continue to expect free cash flow generation of $3 billion plus for the year as some additional cost related taxes are now factored into our outlook. Forex translation is now expected to positively impact our reported revenue by approximately 2 percentage points and EPS by $0.09 on the year based on current market rate. As said our updated outlook is based on current conditions and does not factor in a material degradation in the operating environment that could be triggered by a significant worsening of COVID. We also expect to continue executing against our plans in revenue growth management including pricing and simplification in order to offset some of the inflationary costs related to commodities, logistics, and labor that we expect to be incrementally higher in the second half of the year. As already said, we want to enter 2022 with strong margins that will allow the combination of the virtual cycle and high investment level.

To close, we remain focused on consistently executing against our strategy. This means continued investment in our brands, driving core growth, expanding in underserved channels, doubling down on high-growth segments, and capturing new opportunities in closing adjacencies like cakes and pastries and bars.

With that, let's open it up for Q&A.

Question & Answers

Operator

[Operator Instructions] Your first question comes from the line of Ken Goldman with JPMorgan.

Ken Goldman - J.P. Morgan - Analyst

Hi, thank you. Dirk, you mentioned that your plan remains prudent, you talked about global volatility. I'm curious, though, how you see the situation today in some of your key emerging markets and what your outlook is for the rest of the year. Again, I know you don't have a crystal ball, but are there any areas of the world where you might be more optimistic, more concerned? Just trying to get a sense of that.

Dirk Van De Put - Chairman and Chief Executive Officer

Okay, thanks, Ken. Yeah, a pleasure to go into that. You probably saw that we had a strong emerging market performance in Q2 with 16% growth in the quarter and now with 5% growth on a two-year average basis. It would have been probably higher, but we had a disruption in India COVID cost in May, and so if you look around, I would say, you look at the big markets, we have strong double-digit growth in all the big countries for the quarter, so Brazil, India, Russia and then high single-digit growth in China. So there is nothing there I would say, of those countries and there's always a potential maybe except for China that COVID will cause some volatility, particularly a country like India looks more susceptible to it, but overall they seem to be on a path of a gradual increase. China, I mean they're operating well, COVID seems to be under control, they are returning to mobility, and we've seen constantly improving category performance, and on top, we have strong share gains, sometimes like in gum 3 points year to date. If I look at India, they bounced back in June of the crisis of April and May and daily cases are now 10% of what the peak was. So the short-term risk of further disruption remains significant due to the slow vaccine rollout, the new variants, but if I look at the long-term prospect, I believe they still are very strong and our team there is executing the strategy very well, doing more investments, increasing the range and driving more distribution.

And then, Brazil has very strong growth, double-digit net revenue, and also double-digit on a two-year CAGAR. The COVID nervousness is still there and then chocolate and biscuit consumption is growing while gum and candy, which as you know is very heavily affected by COVID, is still negative by the reduced mobility. In Brazil, we see the vaccine rollout accelerating and is starting to have an impact. And so we expect mobility in Brazil in the second half to be quite strong and we also see some share gains in biscuits in Brazil so in the big markets, I cannot say apart from what I just did that there would be major surprises. I would say at this stage. Southeast Asia is particularly affected. And so that's going to take few months probably. We have transmission speaking in Vietnam and Indonesia. Q2 was flat against 2019, so we have to monitor that very closely and then the Middle East and Africa, in general, they are in growth on a two-year basis but that's also a part of the world that I would say will need to remain careful and I don't think they are fully recovered. If I look at Latin America, the smaller markets, Mexico slight growth on a two-year basis now, had a tough year last year, coming back quite nicely. The rest of the smaller markets, probably not quite there yet, still below the 2019 levels. That's also driven by the fact that our gum and candy business is quite important in those markets.

And then, the European emerging markets, apart from Russia they remain strong. So I would say overall the smaller markets are affected at the moment, but the big emerging markets are doing well. Volatility remains, but I would largely see that in India and Southeast Asia and potentially Africa, but overall I think the mix of our emerging markets over time will keep on showing more stability and a gradual increase versus 2019.

Ken Goldman - J.P. Morgan - Analyst

That is very helpful. Thank you, Dirk. And then quickly, Luca, I was just thinking about the phasing of the third quarter and the fourth quarter from a topline perspective. As we model each of those quarters, are there any one-time headwinds or tailwinds that you'd like us to consider or keep in mind?

Luca Zaramella - Executive Vice President, Chief Financial Officer

I mean the straight answer is no, clearly we are very happy with the strong first half and the 4% plus guidance which implies at least 3% goes for the second half is evenly spread I would say between Q3 and Q4. The 3% plus, or at least 3% in the second half, might appear conservative, and maybe it is, given the first half trends, but as Dirk just finished talking about the emerging markets, we know the situation is still volatile in certain parts of the world and we do not know to which extent gum and candy and World Travel Retail will recover, so we feel quite good about the 4 plus percent, expect the growth to be evenly spread between Q3 and Q4.

Ken Goldman - J.P. Morgan - Analyst

Thank you.

Dirk Van De Put - Chairman and Chief Executive Officer

Thank you, Ken.

Operator

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

Andrew Lazar - Barclays - Analyst

Good evening, everybody.

Dirk Van De Put - Chairman and Chief Executive Officer

Hi, Andrew.

Andrew Lazar - Barclays - Analyst

Hi there, maybe to start with, you talked about how you obviously expect better organic revenue growth for the year and are kind of standing hat on the EPS growth outlook, and I guess it's a combination of reinvestment and some additional inflation. But first off, I was hoping, Luca, you could break down those two for us. Is one of those two maybe a significantly larger portion of the incremental impact to margins in the back half of the year and to the extent it's reinvestment to kind of hold up market share, given you're starting to lap some of the unprecedented market share gains from last year, what are you seeing that helps inform your ability to hold on to some of these share points, or these share wins, as you go forward? Thank you.

Luca Zaramella - Executive Vice President, Chief Financial Officer

So maybe I'll start with this last one. In terms of share gains, the peak of the share gains were last year in Q2 and as we said many times. it was fairly consistent across the board. Our top countries and our middle size countries in both chocolate and biscuit posted tremendous share gains and obviously, the 75%, 80% share gains that we're talking about don't give full justice to the absolute amount of shares.

And so by lapping the peak last year, what I can tell you today is that we are fairly happy with the overall result over the two-year period and we intend to keep it as it is as of Q2 and potentially slightly growing those share gains in the second part of the year. In terms of dynamics, the amount of A&C that we are going to invest for the second part of the year is pretty much in line with what you have seen so far in the first half. Obviously, Q2 last year we kind of cut a little bit A&C because we were impossibilitated to the business in certain places, particularly in emerging markets but when you look on the face of it, the increment in the second part of the year will be lower, but in terms of run rate and absolute numbers. It is absolutely in line with the first part of the year.

In terms of pricing and inflation, I would say there is going to be more in the second part of the year. To start with, our pipeline of commodities and Forex has been advantageous in the first part of the year and we expect some commodities and Forex impact to be relatively higher in the second part, so there will be some more pressure in Q3 specifically, but we will continue to be very disciplined in terms of cost and pricing and the overall goal for us is to enter 2022, A) with some strong share momentum and too, with some GP level but will enable continued investment.

So as I said, Q3 will be more pressure than Q4 but I think at this point in time, we have line of sight to incremental pricing, we have line of sight to incremental volume and we have line of sight certainly to more of what we call our GM, which is critical for us as we continue to support our brands and with the ultimate goal to again as I said to enter 2022 with a strong momentum.

Andrew Lazar - Barclays - Analyst

Thank you.

Operator

Your next question comes from the line of Nik Modi with RBC Capital Markets.

Nik Modi - RBC Capital Markets - Analyst

Yeah, good afternoon, everyone. So I just wanted to follow up on Andrew's question regarding share gains and a year ago, we were talking a lot about consumer trials and household penetration, and Luca, Dirk, I was hoping you can maybe provide an update on the retention, what you're seeing from some of these new consumers, maybe that can help us provide some perspective around the sustainability of share gain. Thank you.

Dirk Van De Put - Chairman and Chief Executive Officer

Yeah, so if I look at the household penetration in the last 12 months, globally we have an increase of about 150 million households which we are holding onto that is not falling back. The other area that I see is not necessarily going to lead to the share gains but I think it will lead to strong categories, is this combination of an at-home consumption that is slightly lower than it was last year, but still significantly higher than it was in 2019. But that is then sort of a buildup or there is a build on from mobility increases and the impulse channel coming back and giving a strong growth in gum and candy, as well as in biscuit and chocolate, and so that I think would be a second factor that will influence this and then as Luca was saying we are lapping the highest share increases that we had last year. That was of course a combination of our brands and the performance of our brands, but also the fact that our supply chain last year kind of worked better than some of our competitors, that effect we knew over time was going to go away, but in the second half of the year those huge increases driven by our supply chain performance last year are gone, so we'll be lapping market share increases that are milder. And on top, we are expecting as we did in the second quarter, but also in the third and the fourth quarter, to continue to increase our working media spend in a significant way.

So I expect that also to contribute to the market share gains, so what we expect to happen is that by the end of this year, the market share gains that we had at the end of last year will have retained or potentially increased a little bit.

Nik Modi - RBC Capital Markets - Analyst

Excellent. That's very helpful and then just one last question, as we start seeing a surge in cases in the US and obviously other parts of the world have been not as favorable as what the US has seen, are you seeing retailers behave any differently? Is there a fear that supply won't be able to come to the market and people start stocking up, so they are buying inventory in early, any context around that?

Dirk Van De Put - Chairman and Chief Executive Officer

Not really at this stage. We haven't really seen anything. There was a little bit, but not really significantly I would say. Now, if the news continues to worsen, like the CDC saying today that even vaccinated people in certain circumstances should start to wear masks again, the fact that consumers might stay at home longer because the returning to work is not as evident after Labor Day at the moment, I think we might see sort of a repeat of previous situations. I don't think it will lead to massive stocking at home, but the increased consumption at home I think will continue for a while. So at the moment, for instance, the food consumption at home still shows a 15% spend increase versus 2019. I think that will continue well into the third quarter and potentially in the fourth quarter and the out-of-home eating is still not quite there. It is still 5% down, the spending there versus what it was in 2019, but the consumer is venturing out more, which also helps our snacking category so I think overall our categories will benefit. But I do not expect that we will see massive sort of stocking and retailers struggling with replenishment.

Nik Modi - RBC Capital Markets - Analyst

Excellent. Thank you so much. I'll pass it on.

Dirk Van De Put - Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Bryan Spillane with Bank of America.

Bryan Spillane - Bank of America - Analyst

Hey, good afternoon everyone. Just wanted to ask a question about investment levels, I think you talked about part of what's contemplated in the guidance for the full year in '21 is some incremental investment, and wanted to be in a good place to invest for '22 as well. So I guess two questions around that. One is just where are you making those investments just I guess in terms of maybe which product categories or which geographies? And then second, if you could give us a sense of what types of investments those are, so are they product and packaging, is it marketing? Just trying to get an understanding of kind of where and what the investments are.

Luca Zaramella - Executive Vice President, Chief Financial Officer

It is a combination of the strategy we have had all along since the launch of the new strategy in 2018. First and foremost, it is around global brands but also about local brands and so the local Jewels we have around the world are all benefiting from increased A&C. It is about more working media than anything else and so we are reducing consistently over the last couple of years the amount of non-working media that we have in our plants and in our numbers. We are consistently pushing the envelope on renovation of some of these brands and we continue investing in new packaging, in new quality, et cetera, but the overwhelming part of the investments is around working media.

It is more skewed towards biscuits and chocolate, but we are also increasing, particularly in some places like China and Latin America gum investments because we want obviously to reap the benefits of increased mobility and so I think it is all around all these global and local brands and that's I think paying back in terms of share gains and certainly in terms of volume and revenue growth.

Bryan Spillane - Bank of America - Analyst

Okay, thank you.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Thank you, Bryan.

Operator

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

Robert Moskow - Credit Suisse - Analyst

Hi, two quick questions, the first is, have you experienced higher freight and logistics costs? Did that occur in 2Q? I didn't hear it called out and if it is, is it showing up an SG&A or is it in COGS? And then the other question was, I just want to confirm about the guidance. It's high single-digit off of a higher EPS base by about $0.03 following the restatement. So I know you said there's a lot of reinvestment. But are you also saying that some of this top-line benefit will drop to the bottom line around the order of $0.03? Thanks.

Luca Zaramella - Executive Vice President, Chief Financial Officer

So the logistics cost and freight cost is a pressure point already in Q2 and it is reported into COGS. It is for the most part a phenomenon that we saw in North America, but it is not only limited to North America. Ocean freights are really on the rise everywhere and it is impossible pretty much to cover for a long period of time. And so we are facing pressure, particularly in that area. Obviously, given the fact that we have in the US a DSD system, which is a captive system, which is on these trucks, etcetera, We are somewhat more insulated than others, but it is definitely a pressure point. We called out in general inflation because there is more than logistics and freight. There is also some packaging cost that is high and in general commands and co-packers are rising costs with us. In terms of EPS, we have been guiding to a high-single digit that is off the base that has been restated. And there is a little bit of an upside, driven by the incremental revenue, but the most part of the upside is being reinvested back in the business. You might imagine, Rob, that as we might implement more pricing around the world and given also the high share that we are retaining, we want to enter 2022, A) with strong share momentum and B) with a level of profitability that is allowing us to continue to reinvest, and if we implement more pricing, obviously we need more support to our brands.

Robert Moskow - Credit Suisse - Analyst

Great, thank you.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Thank you, Rob.

Operator

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

Alexia Howard - Bernstein - Analyst

Good evening, everyone.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Hi, Alexia.

Alexia Howard - Bernstein - Analyst

Hi there, two quick questions for me, I think you mentioned in the press release that you are getting some benefit from manufacturing productivity. I'm curious if that's just operating leverage or whether there are specific manufacturing cost savings that you're seeing around the world and if so where those are and what's going on.

And then my second question is really around just the commentary on the negative mix on both the revenues and the gross margin, was just wondering if you were able to quantify that and qualitatively describe what's happening? Thank you.

Luca Zaramella - Executive Vice President, Chief Financial Officer

So in terms of net productivity with the exclusion of commodities and Forex costs we include everything else in that productivity pretty much, so labor inflation and any other type of inflation that is in there. We are benefiting from the fact that volume is growing 4.4% in the quarter and that is providing leverage in our factories as well, obviously, but I think it's fair to say also that all the actions that we have put in place in the last few years in terms of simplification for instance of the portfolio, the fact that we continue to invest our capex, mostly behind productivity initiatives, is giving us benefits and that is particularly evident in places like Latin America and EMEA that have a good rate of net productivity.

Clearly in the US where, as I said, logistics inflation, which is part of productivity, is higher, is somewhat muting a bit the benefit that we're having in conversion costs. In terms of mix, I called out during the prepared remarks that as you think about World Travel Retail, which is a quarter of a billion-dollar business in 2019 or a little bit less, it is still running at 40% of what it used to be in 2019. And this is a business that runs with a much higher gross profit because it is mostly World Travel Retail which is Toblerone and it is sold at a very premium to the rest of the portfolio.

The other one obviously is gum, I said that it is 80% of what it used to be in 2019. It is 5% of the total revenue that we have. And again, that is a line of business that runs with a GP margin that is relatively higher to the rest of the portfolio. So, I don't want to embark in giving you an exact mix number. What I can tell you is that if we restore the business to the levels of 2019, it will be a material impact and positive impact in terms of dollars that we would drop to the bottom line. As I said, I think about gum running at 20% higher than it is today or World Travel Retail running at 60% higher than it is today, that will be a material benefit to the bottom line and to the profitability.

It is fair to say that you haven't seen a big impact last year or this year because we have been able to offset it through a lot of cost measures that are embedded into the P&L. In fact, when you look at the overhead line. We are very happy with what we have and I think that is the reason why we're holding profit at good levels and increasing it by 10% in the first half, despite double-digit A&C.

Alexia Howard - Bernstein - Analyst

Great, thank you very much. I'll pass it on.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Thank you, Alexia.

Operator

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

Chris Growe - Stifel - Analyst

Hi, good evening.

Dirk Van De Put - Chairman and Chief Executive Officer

Hi, Chris.

Chris Growe - Stifel - Analyst

Hi guys, just two questions for you. The first one would just be in relation to the degree of cost inflation, I'm just trying to get a sense of how it differs if it differs between developed and emerging markets. And I guess related to that. I'm seeing very strong pricing in Latin America, a little bit more in Asia, but very limited pricing in Europe and in North America, starting to see that pricing pick up based on the inflation in the second half of the year.

Dirk Van De Put - Chairman and Chief Executive Officer

Look, it's difficult for me to make statements about future pricing as it boils down to segment pricing and profitability. What I would tell you is we are seeing pressure in the commodity market. And so what we see in commodities like sugar, edible oils, packaging, material, resins cost, etcetera, those are common to all markets around the world. To that, I would add that in some developing markets, Forex pressure is compounding and so if you think about the Russian ruble, there is more cost pressure in some of these developing markets. Certainly in the US, when we look at labor costs, when we look at packaging costs, when we look at edible oils and logistics and freight, there is clearly a material impact. As I said, I don't want to start making comments about future pricing, but what I can tell you is that in general terms; A) we have developed great capabilities around revenue growth management and North America is most likely leading the pack in that area, and second, I will tell you that not any different than any other segments we operate in all the business that we have is trying to enter 2022 with a level of profitability that allows continued reinvestment and I would leave it there because as I said, I don't want to give any indication of future pricing by segment.

Chris Growe - Stifel - Analyst

I understand. Thank you for that color that you can give. And just a quick follow-on in relation to Bryan's question earlier about the investment. I think you just said about how you're trying to be in a position to be able to reinvest again next year in 2022. I assume you're going to reinvest every year frankly, and I think that's hopefully going to help drive the strong revenue growth. I just want to add a little more color as you're thinking about 2022, is it a heavier rate of reinvestment you foresee or is just a normal course of continued investment that you're calling out for next year?

Dirk Van De Put - Chairman and Chief Executive Officer

No, in general, what we're trying to do and of course it's a little bit up or down every year, is to take half of the extra gross profit that we generate in dollars every year and reinvest it in the business, that's the ideal format, let's say, that we are trying to achieve, and we're not planning to change that next year. As you can imagine, we will have to deal with the inflation that we see, as Luca was explaining, so we will have to do more pricing and we might have a little bit more pressure on our gross profit line. So for the remainder of the year, we are expecting that we will do better from a topline perspective, We will see significant growth in our gross profit line, but we are expecting that most of it we will have to reinvest in the business. That's what we mean to get ourselves into the ideal position at the start of next year, but then next year, we're expecting to do exactly what I explained, continue our current way of looking at things and no expectation of increasing investment significantly next year. Now, on a year-over-year basis, that's usually a 7 to 8 sometimes double-digit increase of our investments, that formula that I was talking about.

Chris Growe - Stifel - Analyst

That makes sense. Thanks so much for your time tonight.

Operator

Your next question comes from the line of Michael Lavery with Piper Sandler.

Michael Lavery - Piper Sandler - Analyst

Good afternoon and thank you.

Dirk Van De Put - Chairman and Chief Executive Officer

Hi.

Michael Lavery - Piper Sandler - Analyst

Just wanted to follow up on innovation and SKU rationalizations and maybe try to tie them together a little bit, 1) just could you give a sense of your progress on SKU rationalizations? I know the 25% you were cutting is big, but it clearly hasn't slowed the organic growth. Then I'm also curious, a little bit related to that, on innovation, what your learnings are from that process, and if it changes how you think about screening or gaining your launches and just what implications it might have as you look at new products?

Dirk Van De Put - Chairman and Chief Executive Officer

First of all, on SKU rationalization, there are really three levels of how you should think about SKU rationalization. First of all, there is stopping production and so not producing certain SKUs anymore. Secondly, then having those SKUs not an inventory anymore and then third, having those SKUs not in the store anymore.

So those are the three levels. Where we are at the moment is that of that 25%, most of it, the production has been stopped. We are gradually running out of inventory. We didn't want to write off the inventory, which would give us a big cost effect, and then it's now starting to show up in store. In store, we are not yet down 25%, but it's increasing rapidly. The effect of that sort of trickle reduction is going to be that I don't think you will see an effect on our top line and that it really should go by almost unnoticed that we have 25% less SKUs. Keep in mind also that 25% was kind of 2% or 3% of our total net revenue and if we manage it well in store and keep the same shelf space and replace those 25% with faster rotating SKUs, we could even gain sales.

On innovation, in a business like ours, innovation is kind of three things. It's, first of all, what we call renovation. Its existing SKUs that we have to renovate, update, make more interesting. Second, there is then innovation within the core news flavors and so on. And then there is what we call innovation beyond the core, which is new to market type of segments or new types of products.

What we've been aiming for in our innovation approach is that renovation part and that sort of new flavors part. That's where we believe we can reduce a little bit the amount of activity that we have and we've been doing that also around the 25% mark, and that has led to bigger renovations or bigger sort of within the core innovations and we're seeing the benefits from that and it's clearly showing up in the way our net revenue growth is being composed.

Where we still have work to do is what we call beyond the core. We are working that hard. We are trying to shift some resources to that. That requires a longer lead time, requires more investment, but over time can give significant growth for the company. So what I would say here also, the 25% reduction has given an upside to us and we are very happy with the way our innovation contribution to growth is panning out at the moment.

Michael Lavery - Piper Sandler - Analyst

Really great color. Thank you so much.

Dirk Van De Put - Chairman and Chief Executive Officer

Thank you.

Operator

Okay. And your last question comes from the line of Ken Zaslow with Bank of Montreal.

Ken Zaslow - Montreal - Analyst

Hey good evening guys.

Dirk Van De Put - Chairman and Chief Executive Officer

Hi, Ken.

Ken Zaslow - Montreal - Analyst

Just a couple of questions, one is, what have you seen with price elasticity to customers and how it is different than in the past? Second question would be, when you think about your acquisitions, your bolt on acquisitions, how much incremental sales growth do you think that's added and how much will it add going forward?

Dirk Van De Put - Chairman and Chief Executive Officer

And the first question, elasticity, if we see elasticity numbers, given prices, raises, sorry, again I didn't understand the question, the first one. It was a bit interrupted for me. But from an elasticity perspective, our categories are showing of what I would say an average elasticity from what I've seen to other food categories. And it depends a little bit where you are in which market around the world. In developed markets where most of the sales are through supermarkets and done in larger packs, there are price points, but they're probably not as solid and for instance in Germany the price per kilo is extremely important while in France, the exact price point where the pack normally sold is much more important and so it's a mixed picture, but I would say we can more easily move things up or down and then again when we talk about pricing, you should not just think about direct price increase. It's also what we call price pack architecture. It's the amount and the depth of promotions that we have, and it's some of the trade activities that we deploy. So pricing is a big word or is sort of a grouping of a number of activities, which might not necessarily immediately translate in an elasticity effect for the consumer who suddenly sees the price change. In emerging markets, it's slightly different. There it's really about price points and you need to maintain those price points.

So in general, what we do there is we work much harder on productivities, reducing of packaging, improving the cost of our ingredients, improving, the cost of our distribution and so on, also making sure that we work hard on price pack architecture and so on. So that's a bit more of a difficult approach where you need to stick to the price points and usually when you have to move away from a price point the elasticity effect shows quite considerably in your volumes and so the game is played slightly different there. So I hope that explains a little bit, the two ways that we manage elasticity, but I would say in North America and Europe in general the way we're doing it and as you've probably heard in previous discussions our price movements are bigger than previous year, but not massive and that's thanks to that RGM approach I would say, we are able to deal with the elasticity that comes from it and an example is the 4% plus volume growth we've seen in this quarter. As it relates to acquisitions, acquisitions that we've done so far have added about $1.5 billion to our top line. The idea is that they grow high single-digit and so you can probably calculate what they add to our top-line growth. I would say it's probably in the order of 0.3% growth.

Our plan is to continue to do bolt-on acquisitions. It's difficult to say how much and when and at which growth rate. But in general, when we announced our strategy, we always said that we were counting on a 3% plus organic growth and then we would complement that with growth through acquisition. In that thinking, we were thinking that about 0.5, 0.6 of growth would come eventually from acquisition, so that's more or less what we have in mind. We haven't done that many acquisitions yet and it will probably still take us a few years before we get a significant math that would lead to that 0.5, 0.6, but that's sort of our thinking as it relates to the contribution of acquisition.

Ken Zaslow - Montreal - Analyst

Great. I appreciate it. I just have a quick one, just to add, at what level of sales growth would you not reinvest that would fall to the bottom line? And I'm not guiding you anywhere, but if it was 5% would you drop it down? Is it 6% percent, is it 4.5%? And then I'll leave it there. And I really appreciate your time.

Luca Zaramella - Executive Vice President, Chief Financial Officer

Look, the idea is to get - the algorithm we have in mind is 3% plus on the top line. It is under normal circumstances 4% to 5% GP dollars, and then we take half of it. We reinvest it and half of it, we drop it to EBIT, and then that should deliver the EPS growth of high-single digit, Clearly as you look at this year, we are ahead on top and bottom line. But as we said very clearly what we want to do is to sustain the market share gains and potentially additional pricing that is coming and enter 2022 with the level of confidence that we can still have this virtual cycle we are in and that we want to protect.

Ken Zaslow - Montreal - Analyst

Great. I appreciate you guys. Thank you.

Dirk Van De Put - Chairman and Chief Executive Officer

Okay, thank you. And I think with that we can conclude the call. I would like to reiterate that it was a great quarter, solid top line growth, good gross margin and gross profit growth, significant reinvestment in the business and I think a strong bottom line. Going forward, we will see a bit more inflation pressure and our intent is that we will deliver a higher top line growth, 4% plus as we said, and that any additional margins that we have, that we would reinvest it in the business so that we can enter 2022 with a great share position, as well as a great margin position which will allow us to continue our virtuous circle in 2022. Thank you for the interest in the business, looking forward to take you through the results of Q3 and Q4, and thank you, of course, for all your questions. And that's it. Thank you.

Operator

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MONDELEZ INTERNATIONAL INC

Q2 2021

Earnings Transcript

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