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Presentation

Shep Dunlap: 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, Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we’ll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results.

In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, followed by 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: Thank you, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I’m pleased to share that 2024 is off to a solid start with strong profit delivery. We posted solid top-line results in the first quarter, coupled with strong earnings and free cash flow generation. We continue to see momentum in emerging markets where consumer confidence remains strong and our categories remain resilient. There were a number of one-off factors that affect our sales in the quarter, such as the disruption with some of our European clients and the boycott of Western products in the Middle East and Southeast Asia. We delivered another quarter of strong gross profit dollar growth through ongoing cost discipline and sound pricing.

And we also continued our track record of strong free cash flow generation of more than $1 billion this quarter. To accelerate our strategy of global snacking leadership and drive sustainable long-term growth, we are continuing to invest significantly in our brands and capabilities, driving distribution gains, and harnessing synergies from our recently acquired assets. While our operating environment remains challenging and dynamic, our teams are focused and agile in dealing with the short term as well as executing against our long-term growth strategy. While surprising but temporary, the cocoa inflation does not affect the fact that our categories remain durable and our growth opportunities remain sizable. Turning to Slide 5, you can see that organic net revenue grew 4.2% this quarter with adjusted gross profit dollar growth of 11.6%, enabling us to continue investing in the business.

We continue to increase our A&C spending year-over-year in the high single-digits, which is driving consumer and customer loyalty for our iconic global brands as well as our local jewels. Adjusted EPS grew 16.3% and we generated $1 billion in free cash flow. While many food and beverage segments are showing softness so far this year, and I’m now on Slide 6, our core categories of Chocolate, Biscuit, and Baked Snacks are still demonstrating relatively more resilience and lower elasticity than the broader food universe. Consumer confidence varies by region with North America, and Australia, New Zealand mixed, while Europe is improving and emerging markets remain strong. Shoppers in many markets are becoming increasingly sensitive to the absolute price point, driving them to choose smaller pack sizes in both Biscuits and Chocolates.

And at the same time, consumers in our snacking categories remain very loyal to the brands they know and love. In North America, we’re seeing increased promotional intensity combined with a significant shift in sales to non-tracked channels, including club stores, dollar stores, and emerging e-commerce platforms. Lower-income consumers feel pressured and we see that pressure weighing on their frequency in the category, especially among brands that skew more to that group. In your — sorry, in Europe, consumer confidence is stable. While volume growth has slowed, the Chocolate and Biscuit categories are holding better than the broader FMCG landscape and we’re hearing increased optimism about the go-forward economic outlook. Emerging markets remain a strong growth driver, with consumer confidence driving resilient demand and low elasticity.

Consumers in emerging markets are particularly interested in premium offers, enabling us to expand our range with new on-trend formats and pack sizes. Turning to Slide 7, it is important to underscore that despite short-term marketplace volatility, we remain focused on advancing our long-term growth strategy by reinvesting in our brands and people, driving strong execution, reshaping our portfolio, and scaling sustainable snacking. We continue to increase our focus on our attractive and resilient core categories of Chocolate, Biscuits, and Baked Snacks, and we remain on track to deliver 90% of revenue through these core categories by 2030. For example, we’re investing significantly to support our Cadbury brand’s 200th anniversary in the United Kingdom this year with a multichannel consumer activation promoting the brand promise of generosity.

At the same time, we are strengthening store availability, visibility, and execution around the world. During the first quarter alone, we added around 100,000 directly served stores in emerging markets. We are also harnessing the power of recent acquisitions by capturing synergies and driving growth. For example, we successfully completed a significant system integration in our Ricolino business this quarter, which boost our ability to fully leverage the expanded routes-to-market in Mexico, particularly in the traditional trade. The combined Mondelez and Ricolino system paves the way for significantly expanded distribution in key categories, including Chocolate. Additionally, we are making continued progress on our environmental and social sustainability agenda.

Just a few weeks ago, we earned validation for our net zero by 2050 roadmap from the Science-Based Targets initiative, demonstrating that we are on the right path towards combating climate change. We also delivered significant improvements in advancing our mindful snacking priorities, including enhancing nutrients and ingredient profiles, promoting active lifestyles, and empowering consumers to make more mindful eating choices. I do encourage you to read our Annual Snacking Made Right report now available on our website to learn more about our sustainability strategy and to review our full year sustainability performance data. Before I turn the microphone over to Luca, on Slide 8, I’d like to spend a few minutes putting the recent headlines about cocoa prices and chocolate into perspective.

We are playing for the long term in chocolate because it is fundamentally a great category with very high brand loyalty and low private-label penetration. And within this great category, our business is strong and agile. Record costs for cocoa ingredients and the resulting current and future price increases for customers and consumers, obviously, are generating substantial discussion. Despite this near-term headwind, Chocolate volume continues to grow. And within this growing category, we remain structurally advantaged with large opportunities still ahead. We are confident in our Chocolate business for four main reasons: our cocoa coverage strategies, our approach to pricing, our supply chain, and our iconic brands. First, it is important to underscore that our coverage strategies have proven advantage versus market dynamics in the last few months.

We are fully covered for 2024 and well-protected heading into 2025. Our teams continue to monitor the market very closely to put ourselves in the best position possible. While poor weather and other factors on the supply and demand side have driven prices to unprecedented levels, we believe there will eventually be a market adjustment. We are confident that our teams are putting in place the right strategies to provide future flexibility. Luca will provide some additional details in a few minutes. Second, we continue to implement sound pricing strategies, including both headline pricing and revenue growth management. We remain agile in balancing the need to offset inflation with the need to maintain solid volume dynamics. We are especially focused on protecting critical price points, including low unit price, and other key threshold prices.

Third, we remain confident in our supply chain. Continuity remains our top priority and we are confident in both our own team and our partners with robust work streams to minimize the risk. Finally and perhaps most importantly, we have some of the strongest, most iconic chocolate brands in the world, including Cadbury Dairy Milk, Milka, Cote d’Or, Marabou, Freia, and Lacta to name a few. These brands already are the leaders in numerous key markets and we are well-positioned to accelerate growth in emerging markets. Our research shows that consumers remain extremely loyal to our great brands because chocolate plays an important role in their lives, helping to bring families together, celebrate key milestones, and to enjoy some quiet me time.

In our annual State of Snacking survey conducted in partnership with the Harris Poll, 72% of consumers across 12 countries said that a world without chocolate would be a world without joy. Nearly 60% said that they would rather give up social media for a month than give up chocolate. Our economic portfolio, our — sorry, our iconic portfolio, strong brand loyalty, and advantaged geographic footprint, make us particularly well-positioned to take advantage of these consumer trends. In summary, we are confident that we are well equipped to navigate a relatively short-term headwind and that we are structurally advantaged to accelerate long-term growth in this category. With that, I’ll turn it over to Luca to share additional insights on our financials.

Luca Zaramella: Thank you, Dirk, and good afternoon. Q1 marked a solid quarter for our business with organic net revenue growth across each region, [indiscernible] profit dollar growth, substantial reinvestment into AFC, and great free cash flow generation. Revenue grew 4.2% with strong pricing execution. Volume/mix was varied for the quarter with emerging market flat despite being impacted by some political unrest in the Middle East and some production slowdowns in Mexico related to Ricolino being integrated into SAP. We expect both issues to subside throughout the year and specifically, the Ricolino is almost back on track. On the other side, developed market volume mix was down 3.6% for the quarter, being impacted mostly by Europe customer disruption and the US Biscuit market softness.

On the customer front in Europe, we are happy to report that about 90% of the price is now implemented. One relevant customer alliance is still pending. Total revenue for emerging markets grew plus 8.3%, underpinned by strength across a number of key markets, while developed markets grew 1.4% with solid results from Europe, despite customer disruption and strength from our North America growth channels and Canada. Moving to portfolio performance on Slide 11. Biscuits and Baked Snacks grew 0.6% for the quarter. A number of brands delivered solid growth, including Oreo, Ritz, Tate, and Sundaes. On the flip side, we have seen ongoing softness in US Biscuit, driven primarily by brands that had higher penetration among lower-income households such as Chips Ahoy! This dynamic has impacted frequency and contributed to the decline in volume/mix.

Chocolate grew 5.8% with significant growth across both developed and emerging markets, though mix was down 1.6%, driven by customer disruption in Europe. Cadbury Dairy Milk posted strong growth while we saw solid increases from Milka despite customer disruption. There is an element of Easter timing in these results, but we believe it to be immaterial. We also delivered solid growth with several of our local jewels, including Lacta in Brazil, Freia in Norway, Marabou in Sweden, and Hu in the US. Gum and Candy grew 12.9%, driven by continued momentum and strength in key markets, including China, Mexico, and Western India. Let’s review market share performance on Slide 12. We had or gained share in 40% of our revenue base with strength in Chocolate as well as in Gum and Candy.

This trend was offset by softer results in our US Biscuits business. Turning to regional performance on Slide 13. Europe grew 4.4% in Q1. Execution was strong in the quarter with a number of key countries delivering strong growth through solid pricing and excellent Easter execution, which led to share gains. This trend was partially offset by volume declines associated with expected customer disruption, while dollars were up more than 20% and including significant ESG investment. We have now landed the last — the vast majority of pricing in Europe. One customer alliance is still ongoing, which will cause some additional disruption in Q2, but the business remains in line with our expectations. North America grew 1.3% against an exceptionally strong compare of more than 16% in Q1 last year.

Growth channels, including club and e-commerce, and Canada delivered strong results. However, overall volume mix declined as a result of ongoing softness in Food and Mass. This softness has been consistent with the overall market and driven primarily by less frequency from lower-income households. We are working to ensure our offers and activations continue to provide value to this consumer’s cohort and we continue to build that into our plans moving forward. We remain encouraged by our activation plans in key products such as Oreo, TDP expansion, and growth channels as we move through the year. North America increased by 2.1%. AMEA grew 5.9% for the quarter. China delivered another strong quarter with low double-digit growth, fueled by initiatives to enhance brand equity in our Chips Ahoy! trial.

India grew high single-digits, driven by continued strength in Chocolate and distribution gains, while Australia, New Zealand, and Japan also delivered a robust quarter four growth, coupled with strong share gains. Like last quarter, Cold Coffee in the Middle East and Southeast Asia impacted results. We believe this dynamic would begin to moderate in the second quarter and remainder of the year. And AMEA increased OI dollars by 20.2%, continuing a strong track record of top and bottom-line growth. Latin America grew 7.1% with strong price execution and a slight volume/mix decline of minus 1.2%. It’s important to note that Argentina is now capped at 26% and this is not reflected in the base year comparison for Latin America. Argentina contributed more than 11 points to Latin America growth in Q1 2023, but only 1.8 points in Q1 2024.

So, we expect the underlying growth rate in LatAm to appear understated for this year. Having said that, reported dollars growth continued to be strong for this segment. Volume/mix was softer in the quarter, primarily due to some product availability in Mexico associated with the Ricolino SAP go-live, that resulted in some production temporary slowdowns. These issues are mostly behind us, but we are still working to rebuild inventory. Consumer confidence and demand in Mexico remain quite robust and we expect to see improved volumes as supply chain catches up as Q2 progresses. Brazil LatAm continued to be strong, both in terms of volume/mix and revenue, while Argentina is impacted by unprecedented inflation and subsequent pricing and volume softness.

Latin America delivered organic — OI growth of more than 33%. Strong pricing, and the combination of Gum and Candy momentum drove these results. Turning to Page 14. In Q1, we saw strong double-digit OI and gross profit dollar growth of more than EUR300 million EBIT, driven by top-line strength and ongoing cost efficiency. It is important to note that the impact of cost inflation will be a more significant headwind in the remaining quarters than what we saw in Q1 as a result of our favorable cocoa pipeline compared to the current market prices. Next to EPS on Slide 15. Q1 EPS grew more than 60% in constant currency. Most of this growth was driven by operating gains and despite some currency headwinds, we grew adjusted EPS at reported ForEx by 10.5%.

Turning to Slide 16 and cash flow. We delivered EUR1 billion of free cash flow for the quarter. We also repurchased $600 million in stock during the quarter. We will continue to remain opportunistic for the remainder of the year as it relates to share buybacks. Our balance sheet also remains strong as leverage ended at about 2.5 times. Before moving to our outlook, let me take a moment to discuss cocoa on Slide 18. First, our corporate strategies have proven advantageous versus market dynamics in the last few months. We are fully covered for 2024 and also for a portion on F1 2025. Typically, we are covered for 12 months-plus, but given recent volatility, we have remained slightly shorter in duration. Our teams continue to monitor the market very closely to put ourselves in the best position possible.

It is obvious that the series of conditions on both supply and demand sides have driven costs up at unprecedented levels. We believe there will eventually be a market adjustment, and while we want to protect ourselves, we are putting in place flexible structures that will allow us to participate to potential upside versus current historically high prices. On the other side, we continue to execute against our pricing strategies to offset input cost inflation, using both headline price and revenue growth management. Chocolate has shown strong growth over the past several years with very durable volume and elasticity, despite significant pricing, particularly as we have some of the strongest brands in the category. However, we will remain agile in our approach to pricing in order to balance the need to offset inflation with the need to maintain solid volume dynamics.

This means we will protect critical price points such as low unit price and key thresholds across our footprint. We also remain confident in our supply chain. Supply chain remains priority one, and we are confident in our supply chain and that of our partners with ongoing work streams to minimize risks. Turning to our outlook on Slide 19, our outlook for 2024 remains unchanged. We continue to expect on-algo delivery for revenue, earnings per share, and cash flow. This improves the upper end of our 3% to 5% range for organic net revenue growth, which continues to factor in ongoing customer disruption in Europe and softer growth in parts of the US. Most of our key assumptions remain consistent with what we shared with you in our last call. We continue to expect a high single-digit inflation in 2024.

Although the vast majority of pricing has been landed in Europe, we continue to expect some level of customer disruption sue to — associated with our annual price negotiation process. Interest expense is now expected to be approximately $300 million for the year. We are expecting $0.10 of EPS headwinds related to ForEx impact. In terms of tax rate, we continue to expect an adjusted effective tax rate in the mid-20%s. Share repurchase is expected to be $2 billion with an opportunistic approach. With that, let’s open the line for questions.

Operator: [Operator Instructions] We’ll take our first question from Ken Goldman with J.P. Morgan. Please go ahead. Your line is open.

Ken Goldman: Hi, thank you. You highlighted a few of the challenges in North America at the moment. Just as we think about the path ahead, maybe, how are you considering some of the more important actions that can be taken to protect share? Maybe in light of some of the challenges at the lower-end consumer and also giving your comments about globally sort of protecting some of the price points that are out there. I’m just trying to get a sense for the tactics that might be implemented.

Dirk Van De Put: Yes, Ken. Hi. Oh, yes. I mean, you see that the category is slowing down and that we are losing a little bit of share. I think everybody knows that the consumer is sort of seeing a number of things. There is the persistent inflation. There is the high interest rate. There is the loss of the SNAP. And there’s also the recent not so great job market. So, consumer confidence, which was so and so up to today, I think now we just learned that it took a real dive this month. We see in our categories the elasticity is really going up. Penetration is still pretty good, but people are much more conscious about price points. The frequency is coming down, particularly with the lower income consumers, and particularly the brands that are important for them like Chips Ahoy! can see that they’re losing some market share to private label.

There is, as I just said, some trade down to private label. And then another thing to keep in mind is that there is some big channel shifts taking place to our club or online or into the value channel. So, what are we doing about it? The first thing is that we last year didn’t have a great performance in TDP. So, going forward, we are increasing our TDPs, which will help our volumes going forward and our market share. For those lower income consumers who are buying very carefully and evaluating very carefully when and what and at which price they buy, we will need to become more agile in the promo mechanisms that we will play out. And we’re working hard on finding what works best for us. And that’s kind of different brand by brand and largely talking about what we do on our base packs here.

We will continue to invest in our brands because we increased prices also in March. So, we will increase our investment. We’re launching a number of special packs, a number of additional multi-packs. But also, for instance, in Cliff, we are reducing the size of our multi-packs from six to five or from 12 to 10 units in a multi-pack, which will help the price point we’re selling at. And so, that gives you a little bit of an idea of what we’re planning to do going forward. We assume that in the second half of the year, the consumer will have a better confidence and that we will see gradually the volume and the market share to come back.

Ken Goldman: Great. Thank you for that. And then, Luca, as we look at the remainder of the year, especially just modeling 2Q in particular, are there any unusual puts and takes that maybe aren’t fully or properly factored into Street forecast? Anything we should be more considerate of that maybe we’re not yet?

Luca Zaramella: I don’t think that’s necessarily the case, Ken. I mean, we feel good about reaffirming at this point our original guidance for 2024. And while it is true that the Biscuit category in the US is a little bit softer, we are overall happy with most of the dynamics we see around the world. Importantly for us, Chinese New Year and Easter were quite good, and these are critical consumption events for us. But you should expect categories to continue their trends into Q2 and the latter part of the year. I want to spend a minute talking about pricing. We are at this point in total where we should be. We have implemented the price that we targeted everywhere, including Europe. We still have one main customer to finalize in Europe, which is leading to some disruption in Q2.

So, you should expect that. But overall, in terms of pricing, we are where we had anticipated to be by now. Inflation is in total in line with what we expected, and by now we have locked cocoa for the entirety of 2024. So, we have quite a good visibility on cost. I would have a special call-out here because cocoa costs will escalate throughout the year, particularly in the second half. The acquisitions, we started a little bit softer than expected, particularly in CLIF, and I called out some temporary issues in Ricolino. But you should see a sequential improvement throughout the year. Maybe another couple of points to bear in mind. Elasticities are planned in line with what we have seen in Q1, but we might see a little bit of an uptick, particularly in Chocolate.

But as we mentioned a few times, we will continue to support our brands, and we will not vacate critical price points, particularly in emerging markets. And we have planned for the same type of softness that we have seen in Q1 as far as the Biscuit category goes. But we would expect our share to improve over time as we are revisiting some of the problem mechanics, particularly around brands like Chips Ahoy!. I mentioned that Ricolino is already recovering, so we should see good growth in Latin America going forward. And finally, as far as earnings go, we continue to make progress in removing stranded costs related to the Gum business. So I don’t expect any particular change in dynamics into Q2 specifically, but we should see, particularly on volume, some sequential improvement as we go through the year, as we land some of the price negotiations, particularly in Europe.

Ken Goldman: Very helpful. Thank you.

Luca Zaramella: Thank you, Ken.

Operator: We’ll take our next question from Bryan Spillane with Bank of America. Please go ahead. Your line is open.

Bryan Spillane: Hey, thanks, operator. Good afternoon, Dirk, Luca.

Dirk Van De Put: Hi, Bryan.

Luca Zaramella: Hi, Brian.

Bryan Spillane: Hey. So, just my — my first question is just, can you give us a little bit more color or perspective on emerging markets? I mean, you talk about in the prepared remarks how the elasticities have been pretty good, considering how much pricing. So I guess as we’re thinking about balance a year and just contribution to growth in the back half of the year, just give us a little bit more — if you can give us a little bit more color on emerging markets and how we should be thinking about that.

Dirk Van De Put: Yes. Well, just to situate it, about 40% of our sales growth in emerging markets was about 8% in Q1. We are seeing growth in reported dollars, top and bottom-line. So, solid, robust performance. If I look at the different markets, China, we had low double-digit growth with strong share gains. You know that China for us is a combination of selling more in the stores we are already — where we already are, but also a big drive in distribution. That will continue for the rest of the year, and we expect that China will be strong. India, we had high single-digit. Same sort of dynamics, continue to increase our share in the market and increasing our distribution. India probably won’t show the same amount of growth that we’ve seen in previous year.

We expect a bit of a slowdown there, but still expecting a positive year in India. Then Mexico, Luca already commented. Mexico was a bit — was low single-digit, driven by some issues with the system implementation in merging Ricorino with our business. But we are gaining shares. Our offtake is good. We had some issues in supplying the market, and now that the system is done, we will really start to work that route to market expansion. So, we’re expecting, once we get through these short-term issues, that we will see some strong growth in Mexico. And then Brazil was mid-single-digit, gaining share, pretty good gain in distribution. Price points are a bit of a discussion there, but we also expect Brazil to look pretty good. So, in the four biggest emerging markets for us, we feel pretty good about where they are and what we expect for the rest of the year.

There are some watchouts. There is inflationary pressure in Nigeria, Pakistan, Egypt. In the Middle East and Southeast Asia, we have the boycotts of Western products that are affecting us, so not everything is great. But we do believe that emerging markets this year will be giving us sustainable growth. We will get back to volume growth. We feel that the low category penetration that we have and the distribution opportunity that we have will drive this. I think we are also gradually getting into the adjacencies. And we are able at this stage to continue our virtuous investment cycle, where we continue to increase our investment every year. We get good growth, we generate more margin, and the year after we increase our investment. So, overall, it’s not going to be an incredible year in emerging markets, but it’s going to be a very solid year for us in emerging markets.

Bryan Spillane: Thanks, Dirk. And Luca, just one quick one on cocoa. I know here our trading desk kind of has a view that we might be closer to $5,000 by the end of the year. So, I guess to the extent that there’s an expectation that cocoa prices come down, does it pay for you to just sort of wait to hedge? I guess it’s kind of like shorting cocoa. But I think last year you might have held out until the middle of the year before you started locking in. I’m just kind of curious how we should be thinking about and observing what you may be doing to start thinking about cocoa in 2025.

Luca Zaramella: That’s a very good question. So, we truly believe that current cocoa prices are the result of a series of accidental circumstances that over time we believe should go away. I think you all know that the main crop last year was problematic. But as you might have read from multiple sources, the mid-crop is already looking much better. But also on the other side, on the demand side, the industry went a little bit shorter than usual on coverage. And now buying out of necessity to replenish minimum stocks really provides support to the current high prices. I think in this context, we truly believe that the current market structure does not warrant the current market prices. And so the question becomes, when is a correction going to take place?

And most likely the answer is, in September, October, as the data for the new crop becomes available. We cannot stay still until then. We will have to protect ourselves. But our implementation strategy for 2025 is around flexibility. And so we are putting in place very flexible structures, namely pure vanilla call options. We bought a few where price of those options was very affordable, I would say, particularly in light of today’s prices. But we are putting in place multiple structures that would allow us to participate in a potential market correction. So, you’re absolutely right. We believe the market is overreacting, that current prices are not sustainable. And should the correction happen, which we expect towards the end of Q3 most likely, we will be ready to take advantage of lower prices.

Now, I don’t want to give you the false impression that we are not going to have inflation in cocoa in 2025, because reality is, in 2024 we are covered at materially better prices than current market. So, you might want to take a look at the total mark-to-market in the non-GAAP to adjusted GAAP results.

Bryan Spillane: Yes. Thanks, Luca. Appreciate that. Yes, we were looking at that. Actually, Pete Galbo pointed out to me just how big the game was. So, definitely get that piece. All right. I’ll let you guys go. Thank you.

Luca Zaramella: Thank you, Bryan.

Operator: We’ll take our next question from Robert Moskow with TD Cowen. Please go ahead. Your line is open.

Robert Moskow: Hey there. Thanks for the question. I guess one of the more pleasant surprises is that European chocolate retail data looks very, very strong. The elasticity looks de minimis. And I want to know if that — if you think that will help in your negotiations with retailers heading into 2025. Are the retailers happy with how the category is performing, how the consumer is handling the pricing so far? Does that does that help at all?

Dirk Van De Put: Yes. Of course, it does help in the sense that so far the elasticity is relatively benign. We’ve got a good performance. Despite some disruptions, growth has been solid, I would say. And we have increased our market share. We do have to take into account that Easter came earlier. We had a very strong Easter from our side, but it came early. So, some of the numbers you’re seeing are influenced versus last year with an earlier Easter. But overall, I would say that this certainly is better than you would have expected. So, it shouldn’t be a surprise in a way, because we know that the chocolate market can be very resilient. We also are continuing to invest quite heavily. And consumer confidence in Europe, I would say, is stable.

There is some uptick in elasticity, but overall, it’s better than you would have expected. And maybe even a little bit more positive than what we currently are seeing in the US. Going forward, I think it helps to see a strong category that we are performing well. We — of course, the retailers see the cocoa pricing as well as we do. So, it will help the discussions going forward. I wouldn’t say that it’s going to be simple. But there will be an understanding that if cocoa prices remain relatively high, that there will need to be more price increases that need to be implemented. And I think we’re helped by the data that we can provide. And we also have to see what’s going to happen with elasticity going forward as the new Chocolate prices get implemented.

Because when you have seasonal, like Easter, the consumer is not necessarily fully aware of the price difference. When they start to see their tablets now in the normal shelf, that’s when they will fully realize elasticity. So, we will need to see where that is heading. But overall, yes, very positive on what is going on with Chocolate in Europe.

Robert Moskow: Okay, great. Thank you.

Operator: We’ll take our next question from Steve Powers with Deutsche Bank. Please go ahead. Your line is open.

Steve Powers: Great. Thanks. Good evening, guys. I wanted to talk a bit about —

Dirk Van De Put: Hi.

Luca Zaramella: Hi.

Steve Powers: Hi. I wanted to talk a bit about the gross margin. I thought coming into this year, you actually expected the gross margin to start out slower in the first quarter and actually sort of improve year-over-year as we went into the year. It seems like we’re setting up for a different, maybe an opposite dynamic. So, maybe if you could just expand on what drove the gross margin higher this quarter, and then how do you expect the cadence of gross margin to evolve over the course of the year.

Luca Zaramella: Yes. So, as I said, both in the prepared remarks and in my first answer to Ken’s question, we are very happy with the level of pricing we have taken so far. And so we are absolutely on plan. On the cost side, I commented about the fact that the cocoa price escalation will be more visible in the second part of the year. So, I’m not sure you will continue seeing the type of gross profit dollar expansion and gross margin that you saw in Q1 into the second half because the cocoa prices will hit a little bit harder in — particularly in Q4. So, I wouldn’t read too much into that. I think the way you have to think about it is, are we happy with expanding gross profit dollars almost 12%? Absolutely. Are you happy — are we happy with the reported dollar gross profit that we see?

Absolutely. We are pricing in a very disciplined manner around the world. We are doing our GM, so that is bearing its fruit. But you’re going to see some compression, particularly in Q4. So, don’t expect like 2.5 points of gross profit expansion from now to the end of the year for sure.

Steve Powers: Yes. Okay. Very good. Thanks. And actually, Dirk, if I could build on your comments just a minute ago on Europe. I’m curious, I mean, understanding that the retail negotiations have gone maybe a little bit better than you had originally assumed, but it seems like demand, as you say, is stable, maybe a little bit better than expected. I guess, is it better than you would have expected? And if so, does that — how does that influence your plans for the balance of the year? Are you leaning in a bit harder into Europe to take advantage of that — those better conditions?

Dirk Van De Put: Yes. I would say, first of all, as it relates to the client negotiations, they largely are going exactly as we would have expected. As we know that we had — as we knew that we had increased prices, we foresee that in our forecast for the year. And at the moment, it’s playing out as expected. As Luca mentioned, there’s still one buying group that we need to finish. Hopefully, we will do that in the coming weeks. And then we should be done for a while. As it relates to the current situation in Europe, obviously, there will be a recuperation because we have not been delivering for a while some clients. And as we get agreements, we start to fill the pipeline again. So that will help us. But overall, I would say that we are not expecting to see for the full year a big difference in our European performance.

We’re not expecting to see an upside. We are convinced that we have more stability. We feel more assured about delivering what we are expecting to deliver in Europe. But we’re not counting yet on an upside for the year.

Steve Powers: Okay. Thank you very much.

Dirk Van De Put: Okay.

Operator: We’ll take our next question from Alexia Howard with Bernstein. Please go ahead. Your line is open.

Luca Zaramella: Alexia, are you there?

Operator: And Alexia, your line may be muted.

Shep Dunlap: Let’s go to the next question.

Operator: Our next question comes from Chris Carey with Wells Fargo Securities.

Christopher Carey: Hi, everyone.

Dirk Van De Put: Hi.

Luca Zaramella: Hi, Chris.

Christopher Carey: Dirk, in the comments that you made around the consumer in North America, elasticity is picking up a little bit and some expectations into Q2 in the back half of the year, I guess I’m just trying to understand a couple of things. First, in Q1, is there anything within the portfolio that you would deem not elasticity-related? You mentioned some competitive activity in CLIF that you’re going to be responding to. Say, anything competitively or fundamentally that you would point to that you would see improving into Q2, where it gives you a little bit of confidence in North America? And then the second thing would just be regarding the consumer into the back half of the year. Did I catch you right that there’s an expectation that the consumer in North America gets a little bit better and that your volume trends as such should improve sequentially?

So, perhaps just any help on portfolio dynamics in the quarter and also just, I guess, more of like the macro and the consumer.

Dirk Van De Put: Yes. Well, I would say that if you look at the market share evolution, the brand that’s most affected is Chips Ahoy!, and Chips Ahoy! is the most susceptible to private label. And Oreo or belVita are gaining market share. And so I would say, if there’s anything that’s pointing, I wouldn’t call it necessarily not susceptible to elasticity. We see some elasticity on those brands, too. But overall, the activations that we have and the interest we’re getting from the consumer on those two brands offset the elasticity effect that we’re having. As it relates to what we need to do going forward, it’s largely now trying to figure out in which way can we get the frequency, particularly from the lower income consumers that we would like to see.

So, price points certainly play a role, and we will need to work shorter with promotions, longer term probably working on the size of our packs to make sure that we hit those right price points. Because if we see anything in the elasticity, it is that we have surpassed certain price points and that that is having a big effect. Now, I would say, that movement is happening already. So, that’s what we gradually will expect to improve in the coming months, i.e. that our promotional and pricing strategy gets better, that we understand better how to get the frequency and the volume from the consumer. I’m also expecting that the overall consumer confidence in the second half of the year will improve. That will have an effect for us. These are lapping effect.

Last year, we had 16% growth in North America. Of course, that plays a role. The lapping later in the year will be easier. Those are the things that I would see that make me believe that the second half of the year will look better for us in North America.

Christopher Carey: Okay. Thank you. One quick follow-up on cocoa. Luca, you gave a lot of helpful commentary around some of the things that you’re going to be doing or are doing now contractually. And you also have an expectation in September and October. I guess the question is, what if cocoa sustains these really high levels that we don’t see the fundamental break expected going into next year? Is it still appropriate to think about pricing as the core mechanism to cover the inflation or given the lead time that you have to prepare? Maybe there are other alternatives like accelerated savings, RGM, the sorts of things that you can do when you have many months to prepare for such cycles, if indeed you believe that the cocoa prices at some point will eventually break. So, it’s just more game theory. But any context on that would be helpful.

Luca Zaramella: Yes. I believe it’s absolutely critical for us to get ready for potentially cocoa staying at these levels. I just want though to call out one thing, which is, the forward curve for cocoa is heavily inverted. And that means in general that even today we could potentially get physical coverage into 2025 at cheaper prices than the current spot price that we see today. But rest assured that as a Company, we are looking at all possible scenarios. And as a matter of fact, we are taking a fresher look at some of the costs we have, making sure that we try to understand the level of flexibility that we have. We are looking thoroughly into additional RGM. We will stay absolutely true to the concept of protecting price point, particularly in emerging markets.

We are not going to move the LUP, low unit price points in India, for instance. But we will be looking into potential RGM in terms of promo, in terms of downsizing, etc. So to say that we will have to make sure that elasticity stays in control. In the end, we are going to be managing 2025 in light of what we think a more plausible cocoa level is, despite the fact that it might feel very high, because we fundamentally believe that in a couple of years’ time tops, the cocoa price will correct. And at that point in time, we will have to have retained our volume, our share, our competitive advantage both in developed and in emerging markets. And that’s the way we are looking at this. But rest assured, we are looking at all possible scenarios. And we’re going to be sitting down soon with the teams to make sure that we put in place already all the possible actions that would allow us to go through a potential worst-case scenario in 2025.

Shep Dunlap: Next question, please.

Operator: We’ll take our next question from Rob Dickerson with Jefferies. Please go ahead. Your line is open.

Rob Dickerson: All right.

Shep Dunlap: Rob, are you there?

Operator: One moment. Let me return — yes. Rob, please check your mute function.

Rob Dickerson: Can you hear me?

Operator: Yes, we can.

Dirk Van De Put: Yes.

Luca Zaramella: Yes.

Rob Dickerson: Oh, great. Thank you. Sorry about that. So, just one quick one on cocoa again, Luca. Just in terms of your comments around maybe the mid-crop coming in a little bit better. Your kind of expectation maybe things could ease and improve a little bit kind of in the almost pre-main crop period. I mean I — kind of what you’re saying is just the expectation here is that supply should be up, right? I mean we’re clearly running at a deficit but then we should assume that supply should be up in the next main crop. Is that fair?

Luca Zaramella: Yes. I think that’s fair. I mean when you look closely at the numbers, Ivory Coast and Ghana, the main crop was down year-on-year and about 20%. The total cocoa supply was positive as aware, in total it was down minus 10%. Do I expect the main crop to be down 20% in Africa or 10% in total again? I don’t think that’s a plausible scenario at this point in time. But as I said, we will know more as we get closer to the main crop, but fundamentally nothing has really happened that structurally impairs the production capability of Africa specifically to that level. So, yes I’m hopeful that there will be a better main crop and I think you will see prices for cocoa adjusting. Having said that, we are looking into all possible scenarios and we are going to be implementing some non-regret opportunities that we see before year end, but we’ll have to wait for us to be able to tell you what those are and I think as we move throughout the year, we’ll keep you updated on what we see for cocoa into 2025.

Rob Dickerson: All right. Lovely. And then just quickly on the top-line, I think originally Q1, you had said might be below the algo for the year just kind of given some of the European disruption, but I think Europe did better than we all probably saw it. North America is a bit softer, so I’m just curious, are you still thinking there could be slightly positive volume mix for the Company for the year? And then, I think you’ve also said likely for each of the segments once we ex out some of the European disruptions. And then lastly, I think you had also originally said it was probably more high-end of the 3% to 5% sales growth, so just curious in the volume piece and then if you’re still at the high end.

Luca Zaramella: Look, the volume piece is, we expect volume to be flattish for the year. Reality is, as we gave guidance, we had a little bit of headroom as you might expect. I think that headroom is still for the most part there. We’ll have to see how a couple of ticket items play out for the remainder of the year, particularly the boycott in AMIA as it relates to some of our brands. How will that play out in the quarters to come. And the other thing is, the share recovery particularly in the US. I feel confident about the plans that the US is putting in place. I think we are moving a little bit the price points of Chips Ahoy! and that would allow us to recuperate share and volume, and Chips Ahoy! is the number one driver of the volume declines that you see in the North American segment.

But then, we will have to see how elasticity plays out as well. I feel quite good about the Latin American business. As I called out, I think three out of the four business units and the only one that is declining in volume in real terms is Argentina, but the other three are doing quite well. We feel good about China. I think India we’re going to see some slowdowns, but all in all, it should be fine. And then, I could go around the globe and tell you that reality is, once we land the final customer in Europe, we hopefully see some re-piping of the straight stock and hopefully the Chocolate market will continue displaying acceptable elasticity. So, a long answer to say expect flattish volume but reality is there are some puts and takes and we want to keep some flexibility within the plan.

Rob Dickerson: All right. Great. Thank you so much. Appreciate it.

Luca Zaramella: You’re welcome.

Operator: And this does conclude our Q&A segment. I will turn the call to our speakers for any closing comments.

Dirk Van De Put: No, thank you for listening at the call. I would conclude by saying that, we had a solid first quarter and we feel confident for the rest of the year that we will have an on-algorithm year. And looking-forward, if you have any questions, our IR department will be happy to help you. And looking-forward to see you next quarter for the results that we have then. Thank you.

Luca Zaramella: Thank you, everyone.

Operator: This does conclude today’s program. Thank you for your participation and you may now disconnect.