Good morning
and thanks for joining us today. For those of you who don't know me I'm Shep Dunlap, Head of Investor Relations. Before I go to the agenda, I need to make a few remarks regarding forward looking statements. This morning we sent out our press release and posted presentation slides for the first presentation. The other ones will come successively at munderliesinternational.com/investors.
Today 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 or risk factors contained in our 10 ks and Q filings for more details on forward looking statements. Some of today's prepared remarks include non GAAP financial measures.
You'll find the GAAP to non GAAP reconciliations on our website and we'll be referencing non GAAP financial measures unless otherwise noted. So now let me get to the agenda. We tried to get a few things based on your feedback accomplished today. We want to make sure that we gave you significant access to the management team which we believe we have. So in addition to both Dirk and Luca, you'll get a chance to hear from each of our region presidents Hubert Weber, our Head of Europe Glenn Walter, our Head of North America Alejandro Lorenzo, our Head of Latin America and Mauricio Rizzodelli, our Head of Asia Pacific, Middle East, Africa as well as Tim Cofer, our Chief Growth Officer.
In addition, we want to make sure that there is plenty of time for Q
and A. So we're going
to have 2 blocks, one with Tim and the Regional President and then one at the end with both Dirk and Luca. We're going to start with Dirk, who will give you a strategic overview, then we'll go into the regional presidents who will double click on their initiatives and their businesses. We'll take a break for about 20 minutes. I'd encourage you to go out and look at the product displays. There's going to be plenty of kids cookies out there for you and the personalized Toblerone make sure you pick up the bags at the back and each of you who registered have one with your name on it out there.
We'll then come back to a Q and A like I said with the regional presidents and Tim and then Luca will tie it all together in terms of the financial envelope and then we'll have
a closing Q and A
session with both Dirk and Luca and Dirk will close with a few remarks. So again, thanks for your time and with that, I'll turn it over to Dirk.
Good morning, everybody. Thank you for joining us and for your interest in the company. I am very excited to have the opportunity to share with you our vision for the future of Mondelez International. Over the past 9 months, we have conducted comprehensive review of the market and our business and we developed a new go forward strategic framework and financial algorithm that will generate strong and sustainable shareholder value in the years to come. Over the last 9 months, as a new CEO coming in from the outside, I spent a lot of my time trying to understand the company, our brands, our people and our operations.
I also connected with consumers, our clients and our partners. And the overarching conclusion is this. We have a history that stretches back many years, but as a company we are quite young. We are still trying to shape our purpose and carving our place in the food world. And most importantly, we are positioned well against favorable trends and we have a strong foundation to convert this potential into profitable growth.
In the 1st 5 years of our existence, we have been appropriately focused on our costs and the structure of our margins. We were very successful and created a strong foundation for further development. But this margin improvement focus has shifted us away from our primary focus and away from something that should be our obsession, which is to delight more consumers with more of our great products every day. And the raw material that we are working with is very powerful. We have a global leadership across our snacking categories.
We have an unrivaled portfolio of global and local brands and snacking as a category will grow 1,000,000,000 of dollars in the years to come. On top, we have a group of talented colleagues that are engaged, resilient and believe in what is possible. But we do need to pursue a shift in our value creation model as well as in our strategic focus. We also need to operate and organize our company in a different way to capture the potential that we have. If we do all this and we are successful at it, I firmly believe that the future of Mondelez International as the leading snacking company in the world is very bright.
As we were defining our go forward strategy, we also reflected quite in quite some depth about our purpose, our reason of being as a company. As consumers around the world and every new generation is inclined to snack more, they have a dilemma attention. They love snacking, but they want to snack the right way. They do not want to choose between eating right and snacking. And helping consumers solve that tension, that is our unique place in food.
Particularly since we are the global leader in snacking, it's our purpose to empower people to snack right. But as they say, a picture is better than a 1,000 words. So let me rather show you a video that explains that purpose that we have.
Thank you. Thank you for all the
times we've cracked, crunched,
Thank you. Thank you for all the times we've cracked, crunched, twisted, munched, dunked, and ummed together.
Thank you for all the years you've shown us the love. Returning that love is what inspires us every day.
We know the way you live is changing the way you eat. Snacking is important. And you don't wanna have to choose between snacking and eating right.
Write for real, everyday life. Write for when all you want is a yummy bite. Right for that feel good moment. And for your well-being. Right for our communities as well as the planet.
That's why at Mondelez International, we want to empower people to snack right by offering wholesome goodness, great tasting, high quality snacks. All around the world, our team of makers and bakers are passionate about bringing you the right snack, the right moment, made the right way.
Snacking made right. This is who we are. This is our future.
Mondelez International. Snacking made right.
Snacking is being seen more and more as the way of eating especially by millennials and Generation Z. All this points to snacking as a behavior that will keep on growing. So our growth opportunity is to provide consumers all around the world with the right snack at the right moment made the right way. We do that by offering a broad range of delicious high quality snacks that nourish life's moments. Today we will take you through our long term vision.
We believe Mondelez International is a strong investment with a model and a strategy that will create attractive sustainable returns. Our plan is to grow our business at a faster rate and is driven by 3 key strategies. 1st, we need to become more consumer centric than ever before. This is a time of big change in consumers' eating habits. What they eat, how they buy, why they buy and where they buy, we need to be on top of this and follow where the consumer is leading us.
2nd, cost pressures are everywhere. Inflation, currency devaluations, competitive pressures. In today's world, it's imperative to run an ever more efficient business that operates at the lowest cost possible. We have made major progress in the last 5 years and we are not planning to take our foot off the pedal. 3rd, it's our people around the world who will drive our consumer focus and our operational excellence.
In today's world speed and agility are key. So we need to empower our people to make things happen fast. Therefore, in a major shift in how we run the company, we are shifting decision making closer to the markets and we are simplifying the ways we work. This will allow us to combine our global benefits of scale with local commercial strength. These strategies will lead to an attractive financial algorithm, 3% plus organic net revenue growth, high single digit EPS growth, a dividend that grows faster than our EPS and a free cash flow of $3,000,000,000 plus a year.
So this is the agenda for today and first I'd like to take a quick look about snacking as a category and why we believe it's an attractive place to be. Snacking is a large and growing behavior around the world. There is about 1 point $2,000,000,000,000 spent on snacking products every day sorry, every year, which is split between packaged snacks and non packaged snacks like fresh fruit. The categories nonbelief plays in are well positioned. They represent about 45% of total packaged snacks and our leadership in our categories also makes us a leader in total packaged snacks.
Important to note is that the growth of snacking is highly correlated to GDP. As GDP rises, so does per capita consumption of snacks. As such, today, snacking outpaces other food categories. And in our category the exposure to private label is limited to about 9% globally as consumers prefer trusted snacks. From a consumption standpoint, we are encouraged to see that our snacking categories are accelerating their growth.
They grew over 2% in 2016 2017 and they are now over 3% in the first half of twenty eighteen. We expect that over the long term our categories will continue to grow approximately 3% and with our global market share of 21%, we are well positioned to lead the future of these categories. Today, over 85% of our portfolio is in snacks, mainly in biscuits and chocolate and you can expect us to keep on increasing the overall percentage of snacks in our portfolio. While we believe the snacking space is appealing and offers a lot of potential, we also recognize that the CPG space has changed dramatically and will continue to change. Power shifts are happening across all facets of the market and to name you know them well, but to name just a few, the emergence of e commerce and the shift towards non grocery channels are changing our route to market models.
Consumers everywhere in the world are increasingly going digital. This changes the way they communicate, but also how they buy and even eat. The availability of 3rd party production and social media has taken away barriers to entry and opened up the space for insurgent brands. The meaning of healthy eating and well-being is more complex than ever before. Consumers want to know where their food comes from and how ingredients are sourced.
And finally, consumer taste and life are increasingly diverging reinforcing our need to be close to our consumers. So to meet these needs, we are adjusting and change our ways of working. For example, we are re energizing our local brands. We are moving towards sustainable sourcing of ingredients through our Harmony Wheat and Cocoa Life sustainability initiatives and approximately 40% of our media is now spent in digital. The second area that I would like to highlight is that we have a strong competitive advantage that positions us to win as leaders in our space.
Since we have grown through big regional and local acquisitions, we have an amazing collection of global and local brands. Whether it's Oreo, Milka, Cadbury, Ritz and there is of course my personal favorites available in the room outside Cote d'Or. I invite you to try it. We have leading brands that consumers really love. You know our $1,000,000,000 plus global brands.
We've talked a lot about the opportunity to continue to grow them. But we also have a very strong lineup of local heritage brands. These brands are part of the local culture and have a very strong emotional connection to consumers. We believe there is an opportunity to unleash them, contemporize them and as such generate stronger overall growth for the company. The breadth of our brand portfolio also enables us to play within a large spectrum of consumer needs from pure indulgence with our chocolate brands to wholesomeness with brands like Belvrita or Triscuit.
And that's exactly what we mean by our new tagline snacking made right. Our brands are right for the realities of everyday life, right for a feel good moment of indulgence up to a boost of energy in the morning. We are a truly global company. More than 3 quarters of our revenue is outside of North America and 37% of our business is in faster growing emerging markets. While per capita consumption in emerging markets is relatively low, the growth is accelerating.
For example, in the first half, we grew double digits both in India and in Eastern Europe. We also saw solid mid single digit to high single digit growth in many of our emerging markets, for example China, Southeast Asia, Mexico. Another key benefit that we have going for us is our cost capabilities. We have built those capabilities through our cost transformation and they are now embedded in the company as part of our DNA.
Over the
past 5 years, we have totally offset and improved our adjusted operating income by 5 50 basis points led by our cost savings initiatives in supply chain reinvention, 0 based budgeting and shared services. We are proud of what we have accomplished in our supply chain. We reduced our number of plants by 30% while we have added 16 lines of the future. These lines of the future are more flexible and more efficient which positions us well to drive future volume led growth. We also created a more efficient organization through our 0 based budgeting approach and a move towards the shared services model.
Going forward, we believe that this mindset and those capabilities will deliver future opportunities to reduce our costs. Putting all this together, we believe we have a solid platform on which we can build providing us the firepower to capitalize on growth opportunities. A more competitive margin structure means that top line growth will have a stronger bottom line effect.
By being in
a higher growth snacking space, we can benefit from volume driven growth to drive our top line which will create extra leverage on top of the current margin. We also have the financial discipline and operational know how to keep on taking costs out of the business. Our balance sheet is strong allowing us to capitalize on external growth or capital investment opportunities. And we have several options in our portfolio to generate even more firepower. In short, this foundation provides us the fuel to drive further top line growth and strong sustainable returns.
So we are in the right space and I think we have the necessary foundation. So what is the recipe to create more growth and strong sustainable returns.
First,
I would like to highlight that we are entering in a new phase in the development of our company. In the last 5 years, we have been successful in delivering increased margin, but now we will shift our focus to growing our top line while still delivering solid shareholder returns. The next 5 years will be defined by a better balance between both top line and bottom line dollar growth. This new era builds on the work from the past 5 years, but it does require some significant changes to how we operate as a company. As I mentioned before, our new approach to growth will be supported by 3 strategic priorities, accelerate consumer centric growth, drive operational excellence and build a winning growth culture.
So let's dive a little deeper into the first strategy. Consumer centric growth is about changing our marketing playbook and approach, better leveraging our great brands and entering into new channels and new geographies. So let me start with how our marketing methodologies is about to change. We have a wide range of brands, Fine tuning the role these brands play in our portfolio offers major opportunity. At the same time, the consumer snacking behavior is complex and changing.
We need to be fully attuned to where consumers are, where they shop, what they buy, when they buy and why they snack. So we have developed a proprietary methodology based on so far interviewing 170,000 consumers. This methodology takes a more holistic view on how consumers snacks across different emotional or functional needs and occasions. As an example, if I would ask you here in the room if you would like a snack, you would imagine how many different answers I would get depending on where you are physically, emotionally, how you feel and so on. So that's what we're trying to understand better.
With this new methodology, we are able to segment snacking in based on all possible drivers like state of hunger, time of the day, location, emotional need, demographics and so on. All this allows us to sharpen our brand positioning, improve our communication, ensure our portfolio remains incremental and avoid overlap. It also identifies innovation and renovation opportunities. All of this is leading to a better consumer connection with increased sales and higher returns on our marketing and innovation investments.
We are
bringing more changes to our marketing approach. A critical element is to reinvent our marketing playbook, consistent with today's digitally empowered consumers. For instance, this means that we build dynamic plans with real time feedback loops. As a result of this investment in digital and analytics capability, things like social intelligence and media personalization at scale, we are seeing a meaningful increase in our ROI averaging 8% improvement per year. This higher ROI gives us the confidence to increase our A and C investment in the coming years.
Another important change is that our brands will play a more expansive role. As I mentioned before, we have a rich stable of global power brands, but we also own many iconic local heritage brands. Our previous strategy focused mainly on global power brands. It starved the local heritage brands of investments leading to a polarized growth picture. So going forward, we will strike a better balance in our brand investments, combining the momentum of our global brands with investment innovation and renovation on our local brands.
A more balanced approach will lead to higher growth. Case in point is our OPAVIA brand in the Czech Republic. It is believed in the biscuit market with a strong heritage, a very emotional connection with local consumers and a very broad portfolio. We recently reinvested in the brand, differentiated it more from competition and we improved it in store visibility. As a result OPAVIO went from mid single digit declines to low single digit growth.
We have many OPAVIA like situations around the world and we see growing evidence that this strategy will accelerate our overall sales. We will also evolve our innovation approach to be more responsive to local consumer needs via agile test and learns and rapid scale after validation. Our own innovation will not only focus on enhancing our leadership in our core categories, but also on extending into new segments and adjacencies. So let me give you three examples of this. Chocolate Bakery, this is a sweet spot between our leading chocolate brands and our biscuit baking capabilities.
It is now a great success. It's more than a $500,000,000 business in Europe and we are expanding it into other markets such as Australia and Brazil. 2nd example is Ritz Crackers. We are also building that brand into a global savory snacks platform. Our recent launch of Ritz, Crisp and Tins in North America has been wildly successful and highly incremental as it sources from savory snacks.
Given its excellent taste and its baked not fried lower fat credentials. And so finally we are extending our iconic Oreo brand, the world's favorite cookie into new forms such as bites and rolled and thin but also in categories like chocolate, ice cream, yogurt and brownies. As a result, this 2,600,000,000 global biscuit brand continues to show strong growth in the first half of the year. To reflect the changing shopping preferences of our consumers, we need to invest in growing and underdeveloped channels across our markets. Of course, e commerce remains an important growth opportunity and we are reiterating our goal to generate $1,000,000,000 in net revenue by 2020 from e commerce.
But also non grocery channels are developing fast. Our regional presence will give you more concrete examples, but we see significant opportunity for expansion for example in the discount channel across Europe. Boosting our presence in these channels will be another driver for our growth. The growth of snacking is concentrated in a few key markets. We will distort our investments towards those geographies which will have the highest impact across global snacking.
We have 15 markets that represent 70% of our revenue. And while we already have a great presence in most of these markets, it is usually in 1 or at best 2 of our categories. This means we have a tremendous opportunity to use our local strength in one category to boost our growth in the others. As an example, we see key growth opportunities in biscuits, for instance in India and Australia and in chocolate in Mexico and Southeast Asia. We will also empower our local teams to grow to move faster, launch more relevant local innovations and hold them accountable for accelerated growth.
While the previously mentioned growth drivers also apply to gum, I thought I would take a minute to discuss our gum business since the category in our business are underperforming. Gum is important to us. If we want to lead the future of snacking, gum constitutes a key part of that universe. Today, gum represents 8% of our total business and has above average margins. In recent months, we have seen a stabilization and even some growth in the gum market.
While gum as a segment is challenging, the consumers need for refreshment is very important. So I would say that instead of a gum problem, we believe we have a refreshment opportunity. Going forward, we will look at our gum and mints business as one and extend our mint brands like Hall's in gum and our gum brands like Stride and Hollywood in mint. By doing so, we will capture a bigger share of the refreshment segment. In several of our emerging markets like Mexico, Brazil and China, gum provides critical mass.
It is one of our bigger categories and growing. We will invest in these markets to keep the growth momentum. In the rest of the markets, we will manage the business with selective investment, innovation and renovation, while driving our overall refreshment strategy. By doing all this, we expect to see a stabilization of our gum business. I've taken you through our consumer centric growth approach, but we see an additional driver of growth in M and A.
M and A will look to expand our scale in high growth geographies. As an example of how we see this working, I would refer to the kindle snack business in Vietnam which we acquired in 2015. On top of further development of the kindle line of products, it also has allowed us for faster development of our global brands and a stronger presence in Southeast Asia. The second priority in M and A is to obtain access to higher growth snacking adjacencies. An example is the recent acquisitions of Tate's Bakeshop which made us enter the fast growing premium cookie segment.
We also continue to see opportunities to add new business capabilities in our core snacking categories like for instance Enjoy Life which gives us a whole range of allergen free snacks. In order to fund future acquisitions, we will continue to evaluate our portfolio. So we are deploying capital in the most effective way possible. This means we may divest certain non core assets, but we are in no hurry. And if we do something, we will do it in a way that makes financial and strategic sense.
Moving on to the second pillar of our strategic plan, which is aimed at giving us the firepower to invest. Operating excellence covers 4 classical areas. First, we will continue of course the three levers of productivity that have boosted our margins in the last 5 years: supply chain optimization, 0 based budgeting and shared services. While we have made huge progress, we believe there are still some opportunities.
You will hear Luca
talk more about our next wave of productivity. The second area is to improve our sales execution in order to get better returns and drive out costs. An example would be Ritz, Crisp and Tins. As I said the product has been highly successful because it's a new taste experience within the Ritz brand. We have been so successful in driving consumption that we have had many shortages which have led to missed sales and margin.
We have more examples like this giving us the opportunity to drive sales and profit by improving everyday execution. The 3rd area is marketing excellence. This is about achieving best in class marketing and making disciplined investments to increase our ROI. And finally, we continue to strive for a world class supply chain. This means focusing on continuous improvement.
In a company of our size, not everything functions as planned and we can still take out a lot of waste and cost leakage. We are looking for daily improvement in execution in every plant, every store and every office. The newer area of operational improvement is digitalization. It includes of course optimization of our supply chain operations, achieving omnichannel excellence or delivering consumer centric digital marketing. For example, on the consumer facing side, we are increasing our use of new technology such as social listening and advanced analytics.
To better understand the consumers' needs and react faster on emerging needs. As an example in our supply chain operations side, we will boost the use of advanced automation, artificial intelligence and 3 d printing to reduce our time to market, reduce our cost or personalize our products. So moving on to our final strategic priority, creating a winning growth culture. Our consumer centric growth and our operational excellence can only work if we implement it successfully around the world. This might sound obvious, but over the past several years due to the margin agenda we were focused on productivity and cost versus top line growth.
So in order to make our growth driven strategy a success, we are fundamentally changing our ways of working to provoke a shift in mindset and behaviors. In order to react faster to the marketplace, we will give our local country teams more autonomy to drive their commercial and innovation agenda and as they are closer to the needs and desires of our consumers. To truly put the local consumer at the center of our decisions, we will go from a centrally led to a locally driven company. This means that our central capabilities need to be in service of our local markets. Also make sure that our local teams can be fast and responsive, we will reduce complexity and overlap in our organization by eliminating non value added legacy processes.
Okay, Siri, let me explain it again.
We are also changing our innovation approach, switching to fast test and learn and then scale fast versus an immediate big launch. This will lead to more projects coming to market faster. We also of course have to invest in the development of new skills and capabilities of our teams. And to be successful in activating this growth potential, we must give all our talented employees the right incentives. So we are creating a reward structure that is fully aligned on our company growth objectives.
So as a summary, we expect that our new strategy underpinned by those 3 key priorities will accelerate revenue growth to 3% plus per year. That will enable the high single digit adjusted EPS growth. This is clearly a shift in our value creation model. For the past 5 years, our cost focus has lifted the company to the next level. We can now build on this and drive a more sustainable higher quality earnings growth approach.
So let me turn the stage now over to our regional President starting with Hubert Weber from our European region who will provide details on how these plans will be implemented at the regional level. After the 4 regional presidents present, we will take a quick break as Shep indicated and when we
come back, we will hold
our first Q and A session. The regional presidents will be joined by Tim Cofer, our Chief Growth Officer, who has been instrumental in developing our growth strategies. And last but not least, our CFO, Luca, will outline how new strategies translate into a new financial algorithm. And of course, we will close-up today with a lengthy Q and A session with me and Luca. So,
over to you, Hubert.
Thank you very much for the introduction, Dirk, and good morning. I'm excited to be here and to talk about our great European business today. In 30 years at what is today Mondelez International, I have had the opportunity to work all over Europe and in North America. In that time, I have held various marketing, sales and general management positions. And for the past more than 5 years, I had the privilege to lead our passionate European team.
Let's start with an overview of today's business. Europe is a powerhouse of Mondelez International. We are the number 1 in snacking and we have market leading positions in both chocolate and biscuits. We have got scale in the major markets and we have a sizable presence both in developed and emerging markets like Russia and Central Europe. Overall, we sell in more than 50 countries.
Our success is built on strong foundations. We've got talented people, a portfolio of iconic brands and a very effective value chain. Let's look more closely at the portfolio, which I'm so proud of. We have some of the strongest brands in the market. What's important here is the combination of powerful global brands and our iconic local brands.
This mix really enforces our market position. Brands like Lou or Corte D'or each have over 100 years of heritage and a strong emotional bond to local consumers in their respective countries. As highlighted by Dirk, our portfolio gives us unique opportunities. First of all, our local biscuit brands have a clear right to win in well-being. The brands come from a tradition of bakeries.
They carry the promise of an inherently natural and authentic product. We will build on this by offering more gluten free, reduced saturated fat and sugar free options in our local biscuit ranges, which you can try outside. We are also dialing up sustainability. Our Harmony Wheat Sustainability program for instance began in France with Lou and is now being scaled across our portfolio. You can see more evidence of the power of our local brands with chocolate.
Brands like Marabu and Freya in Sweden and Norway or Krotzdur in the Benelux countries represent the taste of the nation just like Milka in markets like Germany and Austria and Cadbury in the U. K. And Ireland. Consumers grew up with these brands and they trust them. This allows us to enter new occasions with a taste we know they love.
Great examples of this are adult gifting and praline or Choco Bakery where we've leveraged the taste of chocolate brands across entirely different categories. Speaking of Choco Bakery, this is a good proof point of how we are living the test, learn, scale model in Europe that Dirk referenced. We are developing ideas in one market and then rapidly deploying them elsewhere. Range of milk and Cadbury soft cakes and biscuits. They have been phenomenally successful across many European markets and they continue to grow.
We have built the business to over $500,000,000 in revenue in just 5 years. Turning to our financials, let me first give you a little context. Over the past few years, Mondelez Europe has undergone significant transformation. In 2015, we merged our coffee with DE Master Blenders to create JDE and in 2016, we sold our French candy portfolio. In total, we have divested over 16 factories.
We've also restructured our sales divisions and implemented the global business services model. It's fair to say this heavy agenda distracted us at times from focusing on top line growth. But significant improvement in our margins to industry leading levels. That allowed us to reinvest behind our brands, which you see reflected in the top line growth we have achieved. I'm pleased to say this growth is volume driven.
We've also built capabilities. We've invested $75,000,000 in our chocolate factory in Bournville, U. K. And a further $200,000,000 to build Europe's biggest biscuit factory in Opavar, Czech Republic. And we've got further potential to expand at a greenfield site in Russia.
Let's look forward now and consider the market trends. Here you can see that snacking in Europe has tremendous potential for further growth. Mona Lisa International is well positioned in 2 ways. In our core categories of chocolate and biscuits and candy, we expect robust growth in absolute dollar terms over this time horizon. In addition, we can capture growth in adjacent categories through our licensing business where we work with strong external partners to leverage iconic brands in categories like ice cream and yogurt.
While the European region is very diverse, there are some common themes. Growth looks healthy across Europe's economies, particular in certain Eastern European and Central European countries. With household incomes rising, consumers are exploring new premium experiences such as gifting and they are looking for more authentic and artisanal products that meet their expectations for well-being. In retail, the evolution continues to be rapid. Online consumers increasingly expect an always on shopping experience and we see that proximity and quick delivery models are becoming more the norm.
Finally, in terms of buying patterns, European consumers continue to look for value, while also pursuing more premium experiences. This bifurcation will be very relevant in the future. To give you a better understanding of what to expect, let's turn now to our growth plans. We've got a great model in place in Europe, which gives us a strong platform for future growth. In both emerging and developed markets we are operating at scale.
This gives us huge opportunities to expand both our offering and our distribution in order to grow further. And because of our supply chain and extensive brand portfolio, we are able to leverage brands across categories and to leverage platforms across multiple geographies with relative ease. To showcase the potential I want to cover 3 markets in particular Russia, Germany and the United Kingdom. Russia is a sizable market for Mondelez International. We have a number 1 in chocolate and in biscuits, thanks to a combination of local brands like Jubilee and AltenGold together with Milka, Barney and Oreo.
And we have a very competitive local network with strong positions in discounters, modern trade and traditional trade. We are well positioned to capitalize on the double digit revenue growth, share and profit growth we have achieved. Let me show you how. One pillar of growth is innovation. We will benefit in Russia from innovations already tested and launched in other markets like Milka Dark Milk as well as Choco Bakery.
Growth is also well supported by our core portfolio. On the retail side, discounters are growing very strongly, but we are well represented in the space and growing strongly with them. Finally, it's obvious that Russia is a large country and there is plenty of terrain still to explore. Mid sized cities east of the euros offer white space for us to further exploit. So what's the takeaway?
Russia is a great opportunity for us. It's growing at double digit rates and we have a clear path towards increasing our leadership in snacking. Let me turn to Germany. This is a great business. Germany is Europe's leading chocolate market second only to the U.
S. Globally. We are number 1 in biscuits and chocolate tablets with an ambition to grow in other parts of the chocolate and biscuit categories. We have performed very well here in recent years. We have grown top line and restaged our profitability giving us the space to invest even more.
Germany is a great example of how we have transformed our portfolio. Let me show you how. Looking back our portfolio was effectively Milka tablets plus Jakobs coffee. Fast forward to today, we have a much broader base. At the heart of everything is Milka.
Cookies, brownies and break bars are all thriving. We have grown our biscuit business from 0 to market leadership in 10 years and we have made significant inroads and seasonals. As a result, Millcat Germany revenues have grown mid single digits in the 2015 to 2017 period. And we are responding to consumer demand for the brand to be truly sustainable. We are dialing up the brand's Alpine milk credentials and we are going to source Milka's cocoa needs to our sustainable cocoa life program, which already supplies a large part of our chocolate portfolio.
All of this has been achieved at a substantial margin. I'm so proud of this result. The few we are creating will be invested behind our brands to help us accelerate growth and expand our share of snacking. We have exciting plans on innovation. In biscuits, we want to reinforce our leadership position with innovation.
We are looking at the sweet treat space with Joy Fills for example and savory munching with Chick's Baked Bites. In chocolate, we'll expand into the dark segment relevant as the population ages as well as in parents to kids and adult gifting. In terms of channel expansion, we are well placed. We've got a lot of capabilities with hard discounters in Germany which will serve us well as this channel continues to grow in the future. In summary, Germany is an exciting market.
Our strong brand portfolio gives us further potential to expand into new segments. Finally, let's look at the UK, the home of Cadbury. We leave the sizable snacking market and we've got the best possible brands. We have done a great job in recent years to maximize our potential. This is a profitable cash generating market and is run efficiently for growth.
And we have the best sales and marketing capabilities in the industry. An area I'm particularly proud of is our success in U. K. Biscuits. We've filled a strong pillar here to complement our position to strength of strength in chocolate.
A big driver was the reacquisition of the Cadbury's license in the U. K. From the Burton's Biscuit Company in 2016. Since then, we have continued to expand our offering both in regular biscuit formats, but also in Cadbury branded Choco Bakery offering. Our results have been impressive.
We've significantly grown the business in less than 5 years from around €170,000,000 in 2013 to an estimated €300,000,000 in net revenues by the end of this year. We see potential to further expand our number one position in snacking with more offerings in Choco Bakery, Treat and Parents to Kids as well as by adding more well-being options like lower sugar versions of our popular brands. Twin in the UK will continue to differentiate in how we show up with our brands in store. In a crowded and mature market, we know we need to drive physical and mental availability in order to continue to win. We are doubling down on in store and digital activations that entice consumers.
Our Easter account was very successful as has been our Premier League Soccer partnership and activation. We are also seeking ways to grow our categories with our retail partners. In the discount channel, for instance, we are increasing our offering of low price options while away from home we are looking to position our products more towards the convenience shopper. Finally, in e commerce, we are seeing great results from our direct to consumer gifting channel. Overall, we feel great about U.
K. And the leadership positions we have in chocolate and increasingly in biscuits. Our powerful activation plan and best in class execution give us a lot of confidence for the future. So in summary, we believe Europe has significant growth potential. This is driven by our proven portfolio of global and local iconic brands and platforms.
It builds off our market's leading positions in chocolate and biscuits in key geographies. We will focus on those opportunities with the highest absolute dollar growth potential. We will leverage the scale and distribution opportunities across our geographies and we will use our business model to continue to drive efficiency and profitability. Given the tremendous opportunities we see of the diversity of our region, we are well positioned to grow high single digit in emerging markets and low single digits in developed markets. We are excited about the potential to further grow our business and our market share in the years to come powered by our superior brands and our passionate European team.
Thank you very much and over to you Glenn.
Well, thank you, Hubert and good morning. I'm Glenn Walter and I'm proud to be the newest member of the Mondelez team. I spent the last 20 years working across the Coca Cola Company and InBev and their organization across the U. S, Canada and most recently China and I'm very pleased to be with you today to share our plans for the overall North American business.
This vision is simple.
We have a goal of sustainable profitable growth ahead of the overall snacking category. And we'll accomplish this by focusing our business on the 3 pillars you heard earlier from Dirk consumer centric growth, operational excellence in all that we do and building a winning culture. I'll lay out what we've learned through the strategic process in my 1st 9 months and then we'll talk in detail about how this informs the plans we're not only moving out on today, but into the future. As you can see, the vast majority of our North American business is concentrated in the biscuit category in the U. S.
This is not only a strength you'll hear me build on, but it's an opportunity as we look to the future. As you look at our historical performance, despite a challenging environment, we realized positive margin expansion, up 4.50 basis points since 2013 and this has been enabled by our disciplined productivity capability. As we look to the future, our strategy leverages ongoing progress in this area, but combined more so with strength in top line growth. Now as I mentioned, I've been with Mondelez for 9 months and during this time, I've spent a great deal of effort digging into the business and I'd like to share with you some of those insights. And these not only inform the actions we're taking today, but they're deeply embedded in the strategic plan I'll outline this morning.
In North America, we have several important competitive advantages. First is our incredible portfolio of brands. These are the best brands in their categories. They are iconic and they are loved by our consumers. In the biscuit category, we have a 44 market share and have the number one position with brands that have become synonymous with snacking like Oreo, Ritz, Triscuit and Chips Ahoy!
Simply put, across North America in the Mondelez biscuit category nearly 90% of households have a Mondelez biscuit. While we're incredibly proud of this accomplishment, we remain constructively discontent building upon these strengths as we renovate and innovate our portfolio to meet the current and future snacking needs of our consumers. Secondly, the future success of our brands is closely tied to the strength of our distribution network and the relationships we have with our customers. We see opportunity for both vertical and horizontal growth across traditional food and mass customers, as well as smaller format retailers and e commerce platforms where we're underrepresented today. Admittedly, we have work to do here.
We have to be better at accelerating growth in newer channels through expanded price pack architecture and improved in outlet execution. I'll get into more detail on these in a moment, but this is something we're actively pursuing today. As I further evaluate the business, our U. S. Supply chain and customer service levels represent our greatest area of opportunity.
Over the past 5 years, we've made meaningful investments in our supply chain infrastructure. As an example, our bakery in Salinas, Mexico is the most modern and efficient in the world. However, it does not exemplify or represent the balance of our U. S. Supply chain.
In many cases, we're operating with aged assets that are not properly enabled with technology. And when you combine this with the growth we're realizing today on brands like Oreo, Ritz and Triscuits, it places a great deal of pressure on our ability to manufacture and distribute at the levels we and our customers expect. World class customer service and supply chain Dirk spoke of and we'll do this at an advantage cost. But today despite that urgency, this is a process and it will take time. 3rd, the consumer environment is going through dramatic change.
Our consumers have high expectations of the brands they buy from. They want products without artificial ingredients. They want their products to be available wherever they choose to shop and they want a wide variety of options, whether it's an incredible value, an indulgent experience or new brands that speak directly to their specific needs in the right packages and the right place. And finally, how they engage with their preferred brands is becoming increasingly enabled by technology. Candidly, in the past we've not done enough to take advantage of this shift and it's challenged our top line growth.
I believe that today we are taking the necessary steps to capitalize on these changes in consumer behavior.
So after 9 months with the organization, I see a
business with some very strong assets and marketing capability combined with some very challenging legacy operational issues that we will address. Consequently, we've had difficulty delivering consistent results over time. But I'm confident that the plans we're executing today and we will not only address this at their core, but will allow a more stable environment going forward. So with this backdrop, let me take you through how we're going to drive sustainable profitable growth in North America. At the heart of our consumer centric growth pillar are 3 key areas of focus: building strong brand through our demand spaces capability, winning where consumers are buying, utilizing our advantage route to market and DSD system, and accelerating our digital marketing capability.
We enter this with operational excellence and all that we do, addressing the near term challenges I mentioned across the U. S. Supply chain, as well as positioning the business for profitable growth in the future. And lastly, we sustain and repeat this success through a local first growth oriented winning culture. Our iconic brands are the growth engine of the company and we have clear strategies in place to improve their relevance, to differentiate them from our competition and to invest in the highest growth opportunities.
To do this, we'll focus each brand on clearly defined demand spaces that take a more holistic view of how consumers snack and what drives their purchase decisions. As part of this brand work, we're modernizing our marketing playbook. We're increasing the investments in our brands and we're building next generation marketing capabilities in order to reach our more digitally enabled consumers. We've got some great examples of this work and I'll start with the Oreo brand. Oreo remains incredibly relevant across key demographics and it's one of the most favorite brands among young consumers.
Even as a market leader, Oreo is finding new ways to connect and new consumers to connect with. Our new marketing campaigns generate excitement by creating memorable experiences and shareable moments. For example, on August 13, which was National Left Handers Day, we launched a campaign with special left handed Oreo packs that open from right to left, which is fantastic for you lefties. These packs were on sale at left handedoreo.comgenerating 70,000,000 impressions and 1,600,000 video views. But more importantly, we built relevant, playful, emotional connections with our consumers that translate into profitable growth back on the base brand.
We've also successfully stretched the brand across new consumer needs states creating the delicious fudge covered Oreo thin bites, perfect for indulgent munching, snacking and sharing. The only challenging challenge we're currently facing is delivering on the sharing part. Go and see for yourself, you can pick it up on the display outside, open it up and see how many you share. Because we understand what our consumers want, when they want it and how they want to purchase, innovations like these along with our highly successful licensing partnerships are some of the key drivers behind the profitable growth we're experiencing today. We're also seeing similar success in the iconic Ritz brand.
We're expanding our price pack architecture across channels and snacking occasions, as well as stretching the brand into Ritz Christmas ins, delivering on a delicious savory snack with half the fat of traditional chips. As you heard from Dirk, this product has been very successful far exceeding our initial projections, satisfying existing risk consumers and attracting new households resulting in both revenue and market share growth. And with Style Patch Kids, we're focused on the fastest growing demographics. For instance, Style Patch over indexes with Hispanic and Gen Z consumers. So we started shifting our product mix and where we sell our products to capture these consumers more effectively.
A great example of this is our Sour Patch Kids program with 711, We created a limited edition Sour Patch Watermelon Slurpee. This innovation was very successful for 711 and Sour Patch Kids driving profitable sales for both of our businesses. In some cases, to expand into profitable adjacencies will accelerate our M and A activity where we can exploit growth. And TasteBakeShop as you saw outside is a great example of this providing entry into the fast growing premium cookie segment with an authentic brand that consumers love. I think we'd all agree these are delicious cookies.
Today, while we operate Tate separately, we're accelerating areas of collaboration between our two teams where we can add value. Examples of this are leveraging our DSD system as we're now testing and learning to expand distribution and accelerate growth on the core brand, as well as leveraging additional capabilities across our marketing and procurement teams. And finally, we're really excited at the wide range of possibilities within the Tate's Bakeshop platform to drive accretive innovation in the future. In similar fashion, we've seen strong growth as we build the Enjoy Life brand. With an increasing number of consumers participating in specialty diets, the Enjoy Life brand provides products that are free from gluten, free from allergens and manufactured with all natural non GMO ingredients without compromising on taste or experience.
Year on year, we're realizing double digit consumption growth across retail, e commerce, as well as our direct to consumer platform. Building on this, we know that helpful ingredients, ethical sourcing and the sustainable manufacturing of our products is crucial to ensuring that our brands remain trusted with our consumers. A good example of this is the work we've been doing on Trisket. This 100 plus year old brand has recently been in decline. Earlier this year, we revamped our consumer communication to focus on this 3 simple truths behind Trisket, a brand with 3 simple ingredients, wheat, oil and salt, along with the 3 Michigan families that grow that week delivering a delicious wholesome snack that consumers can enjoy with their favorite toppings or topping less as we say in our current media campaign.
Early results have been very encouraging and we're only just beginning. Our work on Belvita is another great example of building strong relevant brands that meet the needs of our consumers today. A wide range of consumers enjoy the 4 hour plus energy delivery from Belvita across a diverse range of products, whether it's traditional biscuits, sandwiches, munching bites or now the test and learn innovation we're doing with energy bars, Zelveeta continues to connect and deliver for consumers. This emphasis on well-being extends to our core brands as we renovate the portfolio. We've made progress on brands like Oreo using real cocoa, as well as renovating brands like Wheat Thins and Good Thins.
And we'll continue to drive free from high fructose corn syrup and artificial colors and additives across our brands. Now, let's dive into the gum business. This is clearly an area where we've had challenges. While some of this is reflected within the category, our issues have been more amplified. So what have been our learnings?
Over the years, we've had inconsistent marketing communication. We've been late to move on price pack architecture opportunities and we've not delivered on what you heard from DIRTT, strong refreshment innovation. Over the past 9 months, we've gone back to basics with a clear understanding of the consumer needs, invigorating
the debt equity
we've got within Trident and Gentine and we've developed a clear plan to stabilize the gum business. We know delivering on refreshment and bold flavor innovation matters to consumers. Informed by this, we've launched an effective consumer communication campaign across bold refreshment and flavor innovation with Trident Vibes. This product has only been in the market for a few months, but the early results are promising. Our stabilization plan invests in the packaging formats consumers want across both bottles and vials and it explores stretching our core brands into refreshing mints.
We've got a long way to go, but prudently investing in the core with consistent, relevant consumer communication and supporting innovation will bring this business back to stability and the early signs are moving in this direction. As I mentioned earlier, our distribution model is an advantage for our business and we're dedicated to winning no matter where our consumers choose to shop. Consumers expect us to provide them with the products they want, when they want them with exceptional support and excellent in store execution. Our route to market and DSD system are focused across 3 key areas. 1st is expanding our channels of distribution.
Specifically, we have a small format strategy that we're currently implementing across convenience, value, club and drugstore channels to serve these retailers and consumers in a way that drives impulse sales through small format displays, occasion appropriate price pack architecture and flawless in outlet execution. We activated this opportunity earlier this year and we're already seeing early stages of success. Secondly, we'll continue to innovate and evolve our route to market capabilities. Whether this is a warehouse model, a partner model or DSD, we will always scrutinize the optimal routes to market for our products. Investing in our DSD execution capabilities will be important to improving this route to market strategy.
And when I talk about DSD execution, it's really 5 key activities when you break down the value chain. First, you start with order generation, then servicing and merchandising, then logistics, warehousing and finally what we think is the most strategic account development. We're disrupting ourselves across these five areas and driving an advantage DSD system as we expand the reach of our brands into new channels and consumer snacking occasions. Examples to how we're doing this today include the better utilization of technology to generate orders. This creates more time to focus on account development and in some cases allows us to resources into emerging channels.
We're testing and learning with partnerships like sharing economy platforms that match qualified people with specific jobs across merchandising and warehouse functions. Engaging in partnerships like this allow us to continue to be attractive to an ever changing labor market model, while we drive improved levels of service to our customers at a competitive cost. And third, we're exploiting our advantaged DSD execution capability across the entire North American portfolio. As we speak, we're leveraging our DSD system to increase distribution with Plentil, another fantastic savory snack on display. I really encourage you to try that.
It's a lentil based chip from our Enjoy Life family. And this fall, our DSD team will help drive additional displays and speed to market with halls as we execute the cough and cold season. Simply put, our DSD capability has clearly created separation between us and our main competitors across the key growth metrics of consumption, market share, distribution and display execution. Our DSD capability is a key ingredient behind the growth we're realizing on brands like Oreo, Ritz and Triscuit and nothing beats the powerful combination when your air war and ground war are firing on all cylinders and this is exactly what we're doing today and we will build upon in the future. Today, consumer shopping behavior transcends the physical and digital world along their snacking path to purchase And we'll continue to improve the way we market by linking our digital, our traditional and our in store marketing to ensure that we're in reach and a quick away from their snacking desires.
While we have a long way to go today on Amazon, Oreo, Trident and Haul's are the number one brands in their respective categories across cookies, gum and cough drops. One example of our integrated marketing capabilities that I absolutely love was our Olympic partnership. We created can't miss moments across TV, social media and in store displays throughout the Winter Olympics and we did so across 3 of our strongest brands Oreo, Ritz and Chips Ahoy. The results from this integrated campaign drove strong sales and market share growth as we increased household penetration and purchase frequency on the brands. All of this growth work requires us to drive operational excellence in everything we do.
This goes beyond just cost and productivity improvements to include a focus on sales execution and best in class marketing securely anchored in a disciplined portfolio investment strategy. As I mentioned earlier, I can clearly see competitive advantages across our biscuit portfolio within our marketing capabilities and across our DSD system. But in order to deliver sustainable results over time, we must and will address the operational issues we face today in our U. S. Supply chain.
We must accelerate the reach of our brands into smaller format channels and we've got to stabilize our gum business and this is our focus. The evolution of our winning culture ensures we can sustain and repeat our success. The changes we're making to our organization ensure we're aligned with the common goal of accelerating top line growth executed through a more nimble, locally empowered team. In closing, while we have much work to do, I'm really excited about the opportunities ahead. We have a clear goal to return North America to sustainable, profitable growth and we're already seeing some of the early progress on the journey.
I'm confident that we have the structural advantages combined with the clear strategies that position us to win and outperform our competition. This is a great time to be in the snacking business in North America. Thank you for the time this morning. And with that, I'll turn things over to Alejandra.
Thank you, Glenn. Good morning. I'm sure I can see Buen DIA. If you can tell already, I am proud of representing Latin America region year to date. After having a number of roles in the company for over the past 15 years, from running our Brazilian business to our global category biscuits team.
I'm leading this region for the past 20 months and it's truly a long term dream of mine. Why? Because of the potential Latin America has to drive profitable growth for this company. For the past year and a half, we built a strong foundation with a significant step up in adjusted operating income margin. Today, we are poised to invest in growth with a consumer centric mindset at the heart of everything we do.
Let me start with an external view, then I will share some perspective on our current business and close with the most important part, our plans to solidify Latin America as a growth engine for this company. Let's start
with the big picture.
Latin America represents 14% of the company's net revenue. We are a premier leader in snacking with a balanced portfolio across all categories. We have a phenomenal stable of brands to deliver on the promise of snacking made right. We proudly craft brands that people love, Oreo, Milka, Tang, Trident and Philadelphia and local sugars such as Cluso Shell Biscuits and Chocolate with Lacta, just
to name a few.
Great brands that hold number 1 or 2 positions in most markets, which in turn translate into an average market share of 30%. Our business spans 22 countries and 15,000 employees. Brazil is a powerhouse that represents almost half of our revenue. Markets like Mexico, Colombia and Peru offer some fundamentals, positive consumer sentiment and bullish outlooks, all with significant growth potential. Consider this, Mexico has the 10th largest population in the world and a thriving snacks market.
And Colombia's and Argentina's populations are larger than Spain and Canada, which certainly represents an opportunity for sizable growth for us. Additionally, we're proving that we can consistently win in some of the most challenging economic and political environments. A recent example is a transportation strike in Brazil, which we overcame in a matter of weeks. And we will continue to manage and adapt to an ever changing environment. Now turning to our performance.
As Dirk mentioned, NAC's consumption is highly correlated with GDP. Latin America is no exception. As we saw some of our largest economies, such as Brazil and Argentina, a slowdown over the past few years, we had to transform our business to come out of this economic cycle strong. And we did it. As you can see, we added 4 80 basis points to our adjusted operating income margin, achieving top tier in our peer group.
One of the primary drivers was the restructuring of our manufacturing footprint by reducing the number of plants by half and
a much
in 4 milligram scale now in a state of the art facilities. And tight cost management and low overheads are now an inherent part of our DNA. This is giving us the ability to invest behind our brands as economic growth accelerates in the next few years. This margin work and our track record of operational excellence combined with strengthening of our economies put us in a good position as we pivot to a better balance between top and bottom line growth. 5Growth, like everything, starts with the consumer.
As you heard from my colleagues, consumers are demanding more from us. Let's look at what this means for Latin America. We see 4 trends. I really touched on 2 of them. 1st, given the macro backdrop, consumers are seeking value and remain highly sensitive to price due to limited purchasing power.
Price points, pack sizes and emotional connection to brands matter today more than ever. Next, consumers are changing the way they shop. Cash and carry on discounters flourished amid the recession. And now they are growing faster than supermarkets. Now those channels like pharmacies are driving significant growth in snacks.
So understanding and most importantly, acting on this trend is key to driving our consumer centric agenda
going forward.
So let's see how these trends translate into growth opportunities for us. Snacks are the place to be in Latin America, a $70,000,000,000 market. Our categories are growing mid single digits, driven primarily by pricing. The expected acceleration of GDP across most markets will in turn enable category growth to continue at 4% to 5%, and with a higher contribution of volume growth to the mix. In fact, we project snacking to grow $13,000,000,000 over the next 4 years, with roughly half coming from our categories.
But not all growth is created equal. We are making absolute growth our obsession. So if the category has high percent growth, but absolute growth is not compelling, it is not a priority for us. Absolute growth drives shareholder value, so we are aligning our employee incentives to drive this culture in our people. Let's now recap our 5 point plan to grow share and top line.
1st, as you heard from Dirk, we are building a local first culture that unleashes the power of both global and local brands with a strong value equation that balances pricing and innovation. A good example is ClubsuCell Cortini, a product developed by our Brazilian team featuring a thinner, crispy texture and locally relevant ingredients like parsley, sundried tomato and fine herbs. 2nd, channel expansion. We have a commanding presence in traditional trade and supermarkets, covering more than 2,400,000 stores across the region. And we will use our new packaging flexibility this during our supply chain transformation to expand into underpenetrated channels.
For example, cash and cash is growing 3 to 4 times faster than other channels and pharmacies means 70,000 new point of sale for us in Brazil and 40,000 in Mexico. 3rd, geographic wide spaces. Looking all, there is a $40,000,000,000 snacks market in Latin America, outside Brazil. And we repeat it, dollars 40,000,000,000 that certainly equates to growth potential for us. So we will aggressively invest in growth in places like Mexico, Argentina and Colombia.
Let's talk about our latest white space move in a moment. 4th, innovation. Innovation will play an important role as we expand our brands into adjacent segments, which we will cover as we discuss our key markets. And last but not least, we will use our price pack architecture to deliver a wider range of price points for multiple snacking locations and also to address the needs of those seeking lower price points. Those are the strategies for the region.
This coupled with further empowerment to the market to drive operational excellence will fuel share growth. Now let's take a closer look at a couple of our key markets, Brazil and Mexico. Let me start with Brazil, a market that still represents significant opportunity for us. This is our largest emerging market across the company. It lays claim to some of the most iconic brands with a unique combination of global franchises and precious local jewels.
For many years, this powerhouse was the main driver of expansion in the region. And despite the challenges that the economy presents, it continues to hold great potential. And let me tell you, we are ready to seize the moment when it comes. Let's take a look at our growth playbook for Brazil. 1st, we will revitalize our top 4 brands, 2 local brands, Lacta and Club Social and 2 global brands, Swident and Tang.
We do so through sharper positioning and advertising, a strong innovation and marketing activation, all based on demand spaces. Increased A and C will be a testament to our confidence in this area. 2nd, will use price pack architecture to deliver a wider range of price points to better suit different budgets. 3rd, we will drive penetration of brands in infancy stations like OREO and 5 Star, both introduced just 3 to 4 years ago. So, as part of our innovation pipeline, we will develop Belvita as our well-being snacking platform and tap into adjacent segments like choco bakery and mints with some of our most iconic brands.
And importantly, you will see us doing more testing and learning going forward. 5th, we will respond to a channel shift through a route to market expansion and a build for purpose portfolio. As said, value channels such as cash and carry and non grocery formats like pharmacies are our priority. Finally and importantly, we will manage non core brands for absolute profit growth and to leverage installed capacity in our plant. There is no doubt that Brazil is still in recovery, but we have a strong foundation, a phenomenal portfolio, a leading route to market, a competitive supply chain and overall strong margins
and cash flow.
All these, fair with our consumer centric playbook, gives me the confidence that we have all it takes to win in Brazil. Now let's take a look at one more market, Mexico, which is key to our growth in Latin America. While currently small business for Mondelez with net revenues of roughly $500,000,000 Mexico represents an exciting opportunity for this company. Mexico is one of the largest snacks markets in the world. This $15,000,000,000 market should grow mid single digits over the next few years with Mondelez categories contributing over 40% to their growth.
We are currently subscale in Mexico, but this means opportunity for us. We have plenty of runway for expansion, building on 13 quarters of consecutive mid single digit growth. We are the market leader in gum, candy and fiber beverages, but we are smelling biscuits with circa 3% share. Expanding Mexico starts by leveraging our strengths. We have a robust manufacturing network with largest gum and candy plants globally in Puebla and the largest in biscuit with Salinas Monterrey.
We have a strong go to market with almost 300,000 stores served directly and we have leadership in the hot zone, which is a competitive edge with 1 per share of this coveted real estate. Our plans to win in Mexico includes the following. 3rd, we will get growth in biscuits and chocolate, harnessing the power of Oreo and our strength in the hot zone. 2nd, we will strengthen our gum offering with investments in quality, marketing and price pack architecture. 3rd, we will drive the recently launched Howard Patch Kids brand and take Tradents and Clorets into adjacent segments like meat, expanding our refreshment repertoire.
And 4th, we will focus on mom and pop and convenience stores. We are expanding input portfolio as well as on no grocery channels like pharmacies. But our most exciting news is the latest white space expansion. 4 of the presses, we are launching Oreo Chocolate in Mexico. For the first time, we will play in this attractive $1,000,000,000 market that is expected to grow over 15% annually in the coming years.
Just a few weeks ago at Computexpo, the premier trade event in Mexico, we launched audio chocolate in 4 formats. This was uploaded by our customers and by the media and it's delicious. I encourage you to try them outside. And this week, we are launching Oreo chocolate in Colombia and Costa Rica, two additional examples of our expansion plans in action. So with a solid foundation, a track record of growth and all of plants in place, I am confident that Mexico will become an even bigger contributor to Latin America and to Mondelez International.
So to wrap up, we are well positioned for accelerated growth. Gaining market share in snacks is our priority. We have a very solid starting point, top tier margins, a robust portfolio, a strong route to market and a much leaner and efficient supply chain. We are building a national local type culture to unleash our portfolio with an absolute profit growth mindset, strong innovation and solid commercial execution. While Brazil remains a key market, it is not our only growth opportunity.
As you can so with the chocolate example for Mexico. As said, leveraging our packaging flexibility would play a critical role as we unlock white space opportunities in categories and channels. In sum, I am confident we have everything it takes to grow mid single digits and to become a powerful consumer centric growth engine for Mondelez International. I hope that after hearing more about our region, you feel the same. Now, I pass it to Mauricio, Jaques.
Thank you, Alejandro. Good morning all. It is a real pleasure to talk to you today about our Asia Pacific, Middle East and Africa Business, a very diverse region that we call EMEA. Before starting, let me introduce myself. As you might tell, I'm originally from Italy, but have lived and worked in many countries around the world in multiple roles across marketing, sales, general management, in all our categories, in developed and in emerging countries.
I'm leading the EMEA region since 2016. I'm very passionate about our business. And I'm certain that by the end of this presentation, you will see the potential in front of us. Let me start by giving you a quick overview of EMEA today. My region represents 22 percent of the company's net revenue or $5,700,000,000
It is home to
2 thirds of the world population and we serve over 70 countries. EMEA is very diverse with many emerging markets, including 2 of the 4 BRIC countries, India and China, but also developed markets like Australia, New Zealand and Japan. We are a leading necking company in the region with leadership presence in many geographies. We are well positioned to capture opportunities in growing economies and in the expanding snacking markets. On top, we have plenty of white spaces opportunities like biscuits in India or chocolate in Southeast Asia and Africa.
White spaces that we could cover in both organic and inorganic ways. In summary, a region with tremendous potential.
Let's look
now at how the region is performing. Over the past years, we had solid performance despite market volatility and we announced growth in the past few quarters. Yes, we have had our fair share of emerging market volatility, including macro challenges, currency devaluations and counter specific factors like India demonetization. But we worked to improve our margin to establish the right capabilities and to set solid fundamentals to accelerate growth. We optimized our manufacturing footprint, created a more agile organization, redeployed and expanded our route to market in China, India, Southeast Asia and Africa to better serve growing channels.
In short, we have a solid base, good business momentum and the right margin structure to invest further and to accelerate top line growth. Let's move now to the expected snacking market and GDP growth in EMEA. We are well positioned to capitalize on the strong emerging market dynamics, where GDP growth projections are the highest. Our footprint and leadership position are in markets like India, China, Southeast Asia and Africa.
And if you take a look
at the snacking market by category on the right,
you can see that we expect about $12,000,000,000
of growth in EMEA over the next 4 years, an opportunity which would become even bigger if we consider the packaged snacks framework. I'd like to discuss now how consumers and the world around us are rapidly changing. You heard us saying in every presentation that we are putting the consumers at the heart of everything we do. And EMEA is no exception.
We are seeing fast growing
emerging markets demographics, driven by population increases and by the fact that our consumers will become more and more affluent. Consumers are shopping more online and in small formats, but traditional trade still remains important. For example, in China, more than 15% of net king purchases are made online. And we continue to grow faster than the market as we developed special partnership programs with retailers. Another example is the growth we are seeing in both premium and various netting in emerging markets.
And you will see us innovate at both ends of the spectrum, reaching many consumers with low unit price products and capturing more sophisticated consumers with premium offers.
Let's move on now to
the growth priorities And let me explain what we are doing to capture the tremendous potential we have in my region. We will focus on igniting our brands. We will activate both global and local brands, leveraging demand based methodology and our local innovation strength. You will see us expand into fast growing segments and in adjacencies across snacking like choco bakery, cakes and salty snacks. To capture some of the potential of segments which we aren't playing in today.
E commerce is a big opportunity. We will continue to focus on driving inputs and growing our presence online across the region, building on our know how and experience in countries like China. And finally, we will focus on expanding our footprint into markets that have high GDP growth and where we expect robust net income growth. This includes continued route to market expansion in markets like China, India and Southeast Asia, but also Africa, focusing not just on what is growing today, but looking ahead to see where growth will be tomorrow. I'd like to share one example to help you visualize our plans to accelerate growth through route to market expansion.
We aim to expand our coverage by 1,300,000 points of sales, mainly in traditional trade across India, China and Southeast Asia. This is roughly a 25% increase versus where we are today. While expanding our footprint, we will continue to drive cost down in our structure to help fund our investments and to fuel growth. Now let's take a closer look at some of the key markets in EMEA, starting with India. India is one of our powerhouses with close to $900,000,000 in net revenue.
We have an enviable position in chocolate with a 67% share growing. We have a solid position in beverages with potential in biscuits white paste, offering a significant runway of opportunities in the $20,000,000,000 packaged next market. We have strong momentum with double digit growth at the top and bottom line, volume driven. We expand margins and we gain shares. In summary, we are one of the best performing FMCG companies.
We have invested in state of the art manufacturing facilities, in multi category capabilities and expanded our market coverage in both urban and rural. From an economic perspective, the environment is stable and features high growth rates, given the increasing middle class and affluent population. We can capitalize on this tremendous growth potential by leveraging our strong brands, scale and local expertise. With this snapshot in our mind, let's take a look at how we are building on our strong leadership position. We have clear programs to further accelerate India.
Let me explain what you see here on the left.
With Ambrex, we will continue to
invest in both the lower as well the upper part of the consumer's pyramid, with multiple price points covering the entire population with our powerful portfolio of brands. Let me show you this. This is a INR5 piece of chocolate or INR0.07 This is a INR10 piece of chocolate. This too represents more than half of the volume of chocolate that we sell in India. But we offer this one, INR150 or almost $2 more premium to the more sophisticated consumers.
And this is what we want to do and continue to book more across the categories.
We are the preferred taste
of the nation in chocolate. And with demand based studies, we will expand in snacking. We have a proven track record on innovation and we will continue to win with it. Lickables, for example, the spoonable chocolate for kids is a big success. In less than 2 years, we have reached 1 fourth of the kids segment, and we are now launching it across the region.
And it is also heat resistant. We will focus on winning where consumers are buying, investing to increase our coverage in urban and rural India. One illustration is our Visi cooler expansion, small fridges to keep our chocolate fresh and visible to the consumer in traditional trade outlets. You can see one of them on the right of the slide. And those are now present in 100,000 of stores in India.
So overall, we feel good about India growth prospects. We have a strong track record and we still see opportunity to grow. Now turning to China. In EMEA, China is our biggest emerging market with approximately $1,000,000,000 in net revenue. The Chinese packaged snacks market is worth around $85,000,000,000 so a huge opportunity.
And we are well placed to win, being the market leader in biscuits and a solid number 2 in gum, only a few years after our market entry. And we recently launched into chocolate, a $2,500,000,000 market despite low per capita consumption compared to developed markets.
We have all the means
to leverage our capabilities as a global chocolate leader. The consumer landscape in China is very interesting and dynamic with continuous changes on how and where consumers eat. And guess what, we are on top of those changes. For example, the new generation of consumers are playing a more active role are developing new habits. This new generation is led by sensitive, spend more for premium products and buy more online.
Well-being and local taste preferences are key consumer drivers. So we would offer more Chinese option for different consumers across our portfolio. We are also growing our e commerce business given the digitally serving nature of consumers.
In fact,
in the first half, our China e commerce business far outpaced the market with net revenue up 90%.
I'd like now to elaborate on
how we are establishing a stronger multi category position in China. First, we are more local, anticipating trends, innovating
with speed
and with local taste preferences in mind. A great example is the recent launch of Oreo Wasabi and Oreo Spicy Chicken. On our first release online, we sold out in 9 hours and the concept has gone viral as you probably heard and read here in U. S. As well.
Another example is in well-being with a strong local brand, Pacific Discuit. The brand that's nationwide awareness and the right credentials, simple, tasty and made with real ingredients. To be the leading brand in the space with strong and innovative programs to stay on trend and remain relevant with Chinese consumers.
Our 3rd component is to
innovate in package snacking. One example is the launch of LOU in premium gifting. Finally, channel and route to market expansion. As digitalization is changing shopper behaviors, we want to be on the leading edge in leveraging data and accelerating online growth. We'll continue to partner with Alibaba and jd.com to grow ahead of our
category by increasing
our presence in online festival like Single Day and also investing in equity campaigns and innovation like our Oreo Music Box. Another
example is our
heavy investment in E B2B to expand our coverage in smaller cities and smaller stores to follow their rapid growth. Think of a B2B as something between a digital wholesaler and a distributor. So in summary, China is a very attractive market for us and we are clear on what we need to grow. Now let's travel to Southeast Asia. Southeast Asia is core and strategic for us.
It is a sizable and profitable business established in a class of countries of 600,000,000 young consumers, growing in number and income, especially in Indonesia, Vietnam and the Philippines. Think that Indonesia alone will have a population equivalent in size to the U. S. In the next years. The macroeconomics are strong and the middle and affluent segments are driving the neck in market growth.
We have scale,
leading position in our categories in key geographies and we see tremendous growth potential in terms of both geographic and category wide space, like chocolate, for example. We want to be the biggest snacking player, also leveraging inorganic opportunities like our Kindo acquisition in Vietnam in 2015. We are well positioned for growth in Southeast Asia. Let me explain our plans to capture this rapidly growing market. First, invest across our brands, both global and local.
In Indonesia, for example, as we grow our traditional trade coverage, we will be investing in low unit price offerings that leverage our Oreo and local brand biscuit equities. You will see also us growing our Koozie, Jackobs and AFC biscuits, great local favorites. We will continue to innovate locally, both in value and in premium. For example, in Genan, after the successful acquisition of Kindo, our innovation team found a great opportunity to marry our 100 plus year old Oreo brand with a century old Mooncake tradition. The end result is our Oreo Mooncake, a limited edition item for Vietnam's mid autumn festival and innovation exported around the globe including to China and the U.
S. You will see continued route to market expansion in traditional trade and small formats. We also want to lead in the emerging e commerce space, leveraging our experiences in other markets in EMEA. In summary, another exciting and potential source of growth in my region. In conclusion, my goal was to give you the opportunity to feel what we live in EMEA, a very diverse region with solid fundamentals, profitable and already accelerating growth.
We have clear and focused programs to exploit the tremendous potential we have in this part of the world and accelerate our growth to mid single digit with emerging markets growing faster than developed. We are well placed for faster growth and success. Thank you for your attention. Now to Ched.
So let's go ahead and take a 20 minute break and come back at 10 after the hour. Again I'd encourage you to go out and get a feel for the product portfolio and their national flavor we've got out there right now. Again 10:0:30 after the hour. All right, let's go ahead and get started. We've got about half an hour here with Tim and the Regional President to field Q and A.
We'll have people run a mic, so just raise your hand, I'll call on you. If you could keep your hand up when I call on you, we'll get the mics to you as quickly as we can just so everybody can hear it including those on the webcast. One thing I would ask, we are going to have Luca up later to go through the financial overview. So your detailed finance questions might be best placed in the 2nd session. So with that, let's go ahead and get started.
Jason?
Thank you.
Hello, gentlemen. Thank you all for your presentations earlier kind of looking at each of your markets and this is a question for all the regional presidents. Alejandro gave his expectation of what he thought his business could perform in his region over medium term. Would it be possible for the other regional presidents to also get their expectations?
Yes.
So sales growth, what do you think medium term is realistic?
Yes. That's in at the end maybe my accent was strange. Mid single digit for the region with developing countries growing faster than developed for my region.
I mean that's the overall algorithm, developed markets at low single digits and emerging markets at mid single digits.
Okay. And Glenn, for you in North America, we also heard some frustration in terms of the state of the current supply chain. I know that's been an impediment for you getting to sort of what you think your aspirational or realistic long term growth is. How long should we expect that headwind to persist? And to those comments, are they effectively sort of signaling that you're probably not going to be all the way to bright for the
next year
or 2? Thanks for
that Jason. I would say there's a couple of things. The supply chain as I mentioned in the U. S. Specifically is a bit of a mixed story.
So we've got areas where in the past we've made some investments in our advantage assets and those things we're seeing positive results from. We've got other areas across the overall end to end supply chain where whether it's around people, processor, technology, we have episodes that we're not at our best. And those are elements we're addressing today. We brought in individuals to help us do that not only from global capabilities but from outside. In some cases we see early progress, other areas it will take a bit of time.
So I'm not trying to shy away from sort of what's the actual pinpoint. We're moving with speed, but it's something that does sort of preclude us from that sort of linear predictable progression we all want to see in the business. So I would tell you that we're moving out very quickly and it's just going to take
a bit of time. Brian?
Thank you. Maybe Glenn just a follow-up to that. You talked about aged assets across the supply chain, I guess. So can you talk about where there's still investments that need to be made in hard assets and whether that's in manufacturing lines, packaging lines, IT systems, just trying to get a sense of how big of a project it is to sort of get that house renovated?
Sure. It's a little bit of both. And remember, we when you think about being good stewards of capital, there are investments we're making within our network and then we've got strategic partnerships with external manufacturers. So, there are some areas where we've already invested. You heard from a couple of the other regions invested in lines of the future where we're seeing even in the U.
S. Network today, a highly efficient effective lines there. As you know, when you look at a baking line, there are also elements where we're working with some of our suppliers on renovating a portion of the line, so more efficient utilization of capital that gives us better packaging diversity. So when you think about how do I take a great risk Christensen and put that in a recruitment pack that I can then go take to a convenience store customer, We're making those investments as it is today with our partners. And then as we look at our external manufacturers and think about how we form more strategic relationships with them, we're able to sort of leverage their deployment of capital to help us think about our overall capacity as well as the diversity in the portfolio.
So it's a bit of a mix across those. I talked about automation. So within our warehouse and logistics system, we've got a project that we embarked upon now where we're looking at better automation that lets us deploy inventory a more efficient and effective manner. So not only helping with working capital, but quality. So all of those elements, when I think of my past in either Inbev or Coke would be sort of along that natural trajectory of where we see things in the business.
Just how long do you think it will take?
It's rolling. So I mean this is not years years, but it's something that we embarked upon last year and I would say that throughout this year certainly it's a pronounced focus. Andrew, right here in the middle segment, perfect. Thanks. You had mentioned
I think in your discussion around DSD trying to better leverage that system perhaps across some other areas. I think you mentioned something like halls during a seasonal period of time and some other things. It evokes memories of a number of years ago of something that was like wall to wall, which as you know ended up sort of diluting the ESD system from the focus around the core, right, cookies and crackers and whatnot to some other areas of the store that didn't work out. I'm sure that's not actually what you're talking about here, but I want to make sure the learnings from that are being applied to what you're talking about. Maybe a little more specificity there would be helpful.
Sure, thank you
for that Andrew. So absolutely, we do have deep learnings and that's why I wanted to highlight in my comments, if you deconstruct the value chain of DSD, where is the value being created. So, we absolutely do not want to distract our team from what they're doing every day on a scaled biscuit business with nearly 50% of the biscuit category. But if we get very, very clear on where they can influence the path to purchase and create a sort of a much more profitable outcome, whether that is helping to execute a display program or enhancing and plussing up a merchandising program with part of our confection portfolio and incorporating it in a consumer centric way into our biscuits, we want to leverage that. It is not wall to wall where you're stocking individual items and things with obviously an asset we want to drive a strong ROI on.
So we are definitely incorporating those learnings. Michael? Thank you. Can you touch on how
you think about SKU rationalization and if there's any need to optimize your portfolio that way or if that's already well set from what's happened in the past and how should we just think about the outlook for that?
Yes, we've when we look for example the European business given that we have quite a strong history of consolidating the industry many acquisitions, we have worked over the last couple of years on SKU rationalization. So we reduced the SKU count in Europe more than 30% and platformed our products across different brands so that we get to a much more efficient supply chain. You've seen this in the results on our profitability that that has created. That creates on the other hand also the space to consciously invest in certain additional SKUs when you think about gifting, seasonal gifting, etcetera, where packaging solutions, great packaging are playing a role. So we went to kind of a ZBB on SKUs as well and got to the required minimum that we think we need to operate the business and now selectively we are adding but in line with our supply chain capability.
Steve? Hi, good morning. Two part question for Tim and for Glenn. On the DSC business, it's obviously been a part. Industry has been making decisions as to whether to keep DSC or to move away from DSC.
Can you talk about with a
fresh set of eyes what are some of the pros and cons in terms of your evaluation? Clearly, you decided that it's a strategic advantage. And what were the retailers' feedback on some of the moves that have been made in the marketplace more recently that may have shaped your decision? Thank you.
Yes, I would say I mentioned earlier in my career in CPG, I've worked very closely with DST across developed and developing markets. I think it's important to remember without sort of commenting on any specific competitor or customer, we've got tremendous scale with our biscuit business in the U. S. With nearly a 50 share. So DSD is an advantage and as I speak and I connect with our customers, it's certainly a valued asset when you think about the relationship we've got speed to market, labor in stores, in stock condition, the ability to bring new innovation very, very quickly and then to create as you're looking out in the hallways an incredible experience for consumers.
So then when you translate those things into like all right, but how do you know it's delivering consumption growth, market share growth, display growth, overall points of distribution growth would be the natural things that we look at. So again, we will continue to scrutinize what's the fastest, most efficient, highest quality way to get our products to market to the consumer. But right now as we're driving DSD across that scale business, it's very much a part of the growth story. Alexia?
Hi, there. Two quick questions on the regional side. Firstly, the timing of the chocolate rollout in the U. S, I guess, a couple of years ago was somewhat unfortunate because of the cyber attack was probably just as it was intending to ramp up. What are the plans for the chocolate category here in the U.
S. From here on out? And secondly, on Europe, there seems to be a bit of a U. K. Sugar backlash going on right now.
At least I read a lot about that in the press over there. Regulations seem to be being scrutinized over there again. How can you give us the confidence that that's not going to undermine the UK? Thank you.
Great. Can you go for it?
Yes. Sure. Yes. As you've seen, we have a strong focus on the health and well-being in our plan going forward, but also as we speak we have done significant work on health and well-being agenda which covers reformulation to enable lowest possible calorie count and better nutrient profile while delivering the same level of taste experience as well as portion control. So when you reflect on the U.
K. In particular, there's we've introduced Belvita with 40% reduced sugar levels. We just announced 1.5 months ago the launch of Cadbury Dairy Milk with 30% less sugar. And we have also Cadbury versions out there with 0 added sugar. So we provide consumers with the choice that they can select between the nutritional profile as well as the taste experience they want to have.
The most exciting is Cadbury Dairy Milk with 30% less sugar where we are applying a unique new technology that delivers a comparable taste to the classic Cadbury Dairy Milk portfolio. So these are very active contributions to help consumers manage in a better way their calorie intake and their nutritional profile in the
diet. And then just to recap on
the OREO, Chapa, we've had great learnings on this launch in my 9 months. When we launched this product, we've got very, very strong trial, very, very strong repeat. Consumers love the taste of the product. It's informed us
of the strength of the Oreo brand.
So you heard in several of the presentations the ability to really stretch this brand using demand spaces into different occasions. So as you actually look at for example the Halloween this year, you'll see us innovating our price pack architecture with sort of 3 individual consumption sizes. Later this year, we'll be innovating and launching cookies and cream, which Oreo owns as no one else with that equity. So I think that the learnings on how do we as a biscuit leader with very strong equity in the Oreo brand enter the chocolate category that is differentiated and can play to our competitive advantage and I would say that the learnings and the actions we're taking along that path.
Maybe a couple of comments just
to build on both their answers from a lens of how we leverage our global scale for these 2 local initiatives. So I think in the case of sugar reduction, we've invested quite a bit from an R and D standpoint around redeveloping variance within our portfolio that offer that 30%, 40%, 50% less sugar. Hubert gave you examples on chocolate, on biscuit. We are also doing the same on our candy, our gummies, jellies and chews around the world. The work that we've done that you'll see launch on Cadbury Dairy Milk is a bit of a backbone kind of R and D structure, but the ability for us and I would say the intent of that to apply that to the taste of the nation chocolate brands, which we tend to own around the world that you would know well from Milka to Cote D'or to Lacta, etcetera, can be a nice source of competitive advantage and allow us to lead in that space as consumers are looking for those choices.
Importantly, we've learned a lot of lessons in well-being. We're not going to change classic Cadbury Dairy Milk or Lactair, but do we need to offer that variant for that consumer? Absolutely. Then in the case of your Oreo question for the U. S, I'd just remind everyone that this platform of Oreo chocolate taking us out of our biscuit heritage and extending into chocolate is a wildly successful platform around the world circa $400,000,000 from Hubert's batch across Australia into China with Milka Oreo.
You heard Alejandro, he is now extending it into Mexico. We have Oreo variants in Brazil. So this is quite a proven platform and I think again shows the power of Oreo and the ability for that brand to represent more than a biscuit, but a true sweet snacking icon.
Driscoll from Citi. So just two quick questions. A small one here on U. K. And e commerce.
It's been one of the more affected markets by food penetration of e commerce. Can you just talk to us what that's meant to your snack business, lack of trips to the store and the lack of maybe some impulse purchases? How do you see that playing out? And then my bigger question kind of to the panel and maybe
to Tim is a lot
of you have talked about just focusing on profit growth and I think this is to allow more room for the local brands that you have rather than the global brands to see some growth in future periods.
What I'm questioning though is do you
produce these on the lines of the future assets? And if you get a point of volume growth from Vocal Brands, is it worth the same as a point of volume growth from the global power brands that are produced on the lines of the future?
Yes. On the e commerce side both UK and France were early bird markets on e commerce in food. And when you look at food penetration, e commerce penetration in food they are amongst the leading countries and we were early in there. And we are very pleased that both in the U. K.
As well as in France our online market share is higher than our offline market share due to various reasons. When you're early and when you get with the right digital and social capability in contact with the consumer, consumers and shoppers are more loyal online than offline. And that is what we managed to do. And on the ongoing portfolio sales as well as with for example in the U. K.
Our direct to consumer business caprigiftsdirect.com and we are providing also specific gifting offers for consumers. So we are quite happy with that offering. And as I said, we have a higher online share than offline share. So we'll continue that. To your question on the local brands versus the global brands that is what I said earlier, We've worked hard to get to a platforming solutions of products that we can scale across different brands.
So I talked earlier about investing into our plans in Opavon, the greenfield plan which is actually the home of Opavia which is the national leading brand for the Czech Republic as Stoy alluded to. And both the local as well as the global brand SKUs are running from the same line. So we get the same benefits for both local and global brands through smart platforming. And that helps us then also to drive the same profitability on both
offers. Maybe a quick build on both questions then. On e commerce, I would say overall we're very pleased with our progress on e commerce. Uber spoke specifically to the U. K.
As you've seen over the last few quarters, I mean we're growing in the 35% to 40% range on e commerce. When you benchmark that versus snacking overall, that's a gross share position. So we're growing share in all of our key positions across the U. S, the UK, France, China. Those are our 4 biggest markets.
Penetration online and snacking is still underdeveloped versus some of the other certainly hard lines and so on. In the case of China, it's up at 15%, in the case of France at
6% and U. K, U. S.
At 3%. But in all positions as Hubert said and I just mentioned, we're growing share and feel very good both in terms of single item type and bespoke items where we can actually charge a premium and make quite a nice margin and find that highly incremental to a full basket model which is largely a replacement behavior of the brick and mortar shopping and we're finding that net net in terms of the total P and L at about a margin parity position. And then our DTC efforts, we are beginning to scale up our direct to consumer efforts. Hubert mentioned Cadbury Gifts, direct.com. We're building the same on Milka.
I think Glenn mentioned on Enjoy Life. Even this personalized Toblerone is an offering that you can get as well in places like online. So I'm feeling very good. We're investing more and more in capability and in staffing online. And as Dirk mentioned in his presentation, we're well on our way to $1,000,000,000 by 2020.
On your second question, I guess I'll just back up 1 minute to say, we do think that's a meaningful unlock, David, as we think about the next few years versus the last few. And that is as we shift from an appropriate at the time absolute fixation on percent margin to 1 of volume and gross margin dollars incrementally that does unlock a number of different growth avenues that heretofore we might have passed or put on the back burner. That might be channel expansion in certain channels. That might be segment participation in certain segments. That might be geographic participation in certain categories, where on the opening day you look at it and it might be a gross margin percent dilution, but in absolute volume and profit dollars and the ability for us to amortize the capacity that we have, that's an accretive proposition for us.
And that's one of the things that we're quite excited about and I think one of the unlocks going forward. Finally, I'd reinforce what Hubert said. Many of these local brands, we do have from a backroom standpoint platform. And so, yes, it's a one off OPAVIA in Czech, but guess what, we have Fontaneda in Spain, we have Lija in Netherlands, we have Loo in France, we have Ouro in Italy and the way he produces those 5 brands while they're very local and very special to that culture, it's actually platformed in the backroom and that gives us that scale efficiency.
Great. Chris?
Thank you. Just a quick follow-up perhaps for you for Tim on David's question. If you think about even we think I would say 3 years or 5 years with an increasing focus on local brands, how does the if you think about top line growth only, is it the local old Power Brands definition that slows to those growth the same rate or how with this focus on local brands should those accelerate over and above your 3% top line growth rate is my ultimate question. Yes. Look, we have fantastic momentum on our global power brands and we've talked a lot to you folks over the last few years on that and that continues this year.
You look at the Oreos, the Milka, the Cadbury's, they're growing very nicely well ahead of total Mondelez. The difference here is actually these as Dirk said in his comments, these local brands if we're a bit critical on our own position, we're a bit neglected in that. And in the world of trade offs and in a world of the last few years overwhelming focus on margin and percent margin agenda, they were put a bit on the back burner. What we're discovering particularly in today's world and you would know this as I think an overwhelmingly U. S.
Audience in terms of small brands and insurgent brands is that a little bit of love and quite a bit of marketing through a digital social channel, which actually is not all that expensive can make a big difference. And that was the example that Deer Cave that Hubert's team certainly drove in the Opava biscuit example Opavia. But we have many of those around the world. And so what we're finding is when you give a bit of attention to these brands and activate them locally usually through grassroots or through digital social mobile, you can see a nice bump as we demonstrated there. We don't think that that then you've got your global power brands which of course garner a big chunk of our total advertising media innovation investment.
That mild shift can make a disproportionate return on the top line.
Yes, what we see in Europe is those brands, they come from a strong authentic bakery position. So they are well positioned, have the credentials with the consumer to compete with new startups and in certain brands. So we are well served to put more focus again and balance our portfolio efforts.
And I
had a follow-up if
I could on the EU, which would be that if you as you focus on local brand, you've had great margin improvement in the EU. And I guess, so my question
would be the focus on the
local brands alongside you talked about discount channels, price pack architecture.
Are all
those things supportive of the margin where they are? Or is there some kind of investment level required
to boost
the top line growth in the realm of a higher top line growth rate for the company overall.
No, we are definitely committed to the margin levels where we currently are that you have seen. And our plans will really continue to make use of the platforming I've talked about our advantage assets that we have now and grow more significantly the absolute margin dollars.
Rob?
Hi, thank you. Glenn, I hate to come right back to DSD and supply chain again. But I'd like to know I thought the plan with the lines of the future was to not just open up Salinas but also provide state of the art lines within some of your older facilities in the U. S. So can you give us a little bit of background like what's happened over the past 5 years at those older facilities?
How many lines of the future got put into those? Were there any obstacles to building them out as much as what the company wanted to do? How far along are you and are you behind maybe your global peers in that regard? And then secondly on just back to DSD and sales, you must have done a lot of like asking a lot of questions internally working with your DSD network. Did they feedback to you that their resources have been cut?
I thought I heard that there were some headcount reductions maybe they've been asked to cover more territory with the same level of quality which is always a tough trade off. What resources did they ask for? And what are you giving them that's different now than before?
Sure, sure. Let me touch on
a little bit on the
supply chain and then Tim if you want to add a more historical perspective. We certainly as I mentioned, we have invested in the U. S. Network in lines of the future. So when you think about first of all of the biscuits that consumers in America are purchasing every day, the vast majority of that is sourced from the United States.
And as we had committed and talked about, we have made those investments and where we've made those investments, we certainly are seeing advantages in the system. But there still is a large portion of the U. S. Supply chain network that's not covered by that and that's the approach that we're talking about across people and the technology that will thoughtfully whether it's internally or with external partners look at evolving. On DSD, and this would not be dissimilar from my previous experiences, and again, I don't want to be repetitive, but when you break down those elements, in the past as you think about how do you constantly evolve DSD, we have customers where using technology to generate a demand signal allows you to think about how do I do that work differently?
Do I need the same type of capability or can I fulfill that part of DSD differently and then deploy resource in a different way? So in the past what I've seen in my connecting with our team, I think we've done a good job in identifying how can I use technology to generate a demand signal, how can I be more efficient and effective with tools of our own to deploy merchandising and service support, so we can get the right sort of nexus between cost to serve and high quality in stock conditions? And then your question around tools, we continue to invest in technology for our frontline leaders. So that as a leader in the biscuit category, how can we whether it's using tablets, how can we disseminate those kind of brand strategies into what we want be an outlet condition to look like. So we'll continue to iterate around that space of optimizing DSD and investing where we see growth and value creation.
Okay. Can you give us any numbers on you said what percent of your a large proportion is still not covered by lines of the future. Can you give us any percent as to what it is today, what it was 5 years ago? Yes. I won't
go into the details.
I would say the majority of our assets, I would say we've invested in this advantage network across the North American system. We still have a legacy bid and that's what we're working on. Okay, thanks.
Ken? I have
two questions. One is, how do you go about changing the mindset of managers to shift to the sales growth after 5 years of margin? It's one of these things that everybody always likes to come out with a strategy and say, oh, we're going to change, but you actually have people who need to do the changes. So, is there human resource changes? What's the incentive packages?
How does this change to make people actually do what you guys want them to do?
My first question.
Yes, maybe I'll start. Look, I've had the privilege to look after 3 of these regions and during the time where we were on this 5 year journey around margin build. And the overwhelming focus not just on backroom functions, but commercial functions, marketing, sales, general management was on that need. And guess what, we did it very well and Derek showed it to you and you know the numbers in the hundreds of basis points of expansion that we've done and for that time it was right. But I think all 4 would join me in saying you can't emphasize enough what that took in terms of standing up and making work global business services, doing the supply chain reinvention, embarking on an aggressive and now successful 0 based budgeting campaign across all of our cost packages.
This was quite a bit of internal focused work that we needed to do to get the company truly fit to win and the margin structure at a competitive level where we now feel like we can make those investments. The liberation then to say we're comfortable with that and we built quite a bit of muscle in that area and discipline that will not go away. But if the focus now and quite honestly the time, the mindset time to shift towards an external focus, to focus as Dirk said on consumers, on customers, on brands, marketing and sales excellence, That's actually a shift that and I know these poor guys would agree that our teams are absolutely excited about and very hungry for and now have I think the time to do that. That coupled with as Dirk said a commitment for us to a step up investment in a few areas and the other key shifts that you heard that are balanced of global and local brands, a more agile innovation model, a reinvented marketing playbook. Those all together give us the confidence that it will be different from a growth standpoint.
Last thing I'd say just
a proof point for you, front half twenty eighteen as we sit here today from a market share standpoint, a good barometer of that competitive position. 3 of our 4 regions are in a whole grow share position, which is a little different than we had in prior years. And so as you make that shift I think we're ready and I think our teams are quite hungry.
Yes, I mean as Tim said, thinking about growth is much more exciting. If you think to the commercial team, sales and marketing, I mean, what is happening in India, which is double digit top and bottom line is fantastic and it is a team sport. Everyone is working to making sure that we do better than our competitors and is working very well on engagement, especially as I said on the commercial area. Marketeers, I mean, they think every day what they have to do to gain, to grow and to better than others. And if I look at China, an example, in the e commerce area where we are outpacing the market and growing share, there we have to be even faster.
So, I think you have a
point, but it is much more easier to unleash people and make sure that they really dream big and go faster rather than control everything everywhere and say don't do this, don't do that, prioritize this. And I think it is already happening, as Tim said and will be even more in the future.
Yes. And I can only echo that. It is very liberating to the organization. So the shift is easier than the shift that we've done a couple of years ago. [SPEAKER JOSE
RAFAEL FERNANDEZ:] Probably my view would be, as you were saying incentives, right behavior and we are changing them. That will help us make the change that we need.
My second question is, you talked about a lot of investments. Can you rank them or give some sort of level of investment or focus of investment by some sort of ranking of what is preventing 2019 operating profit or EPS growth from being as high as maybe one would have thought. So if you could just kind of like say, hey, is it capacity utilization rates, is it just marketing, is it regional brands? Somehow kind of just rank them, so we can kind of just understand the investment levels,
that would be great. Thanks.
I mean I'll certainly defer to Luca to get into any more granular specifics and I'm not going to talk numbers here. But this is a plan that's contemplated on increased levels of investment and certainly that means media investment, brand building investment and I think where you're going to see that is in one place the local brands back to where I mentioned earlier feeling fairly good about our support levels on global brands, but think that a little bit of additional investment local will help. You're seeing a different innovation model. We have a number of big innovations that the poor guys took you through here that we think can benefit from it overall. I think there's some geographic white spaces that are very interesting.
Alejandro gave
you one and you know
a few others that we've recently entered. There's some adjacency plays that Dirk highlighted in his commentary from Shuffle Bakery to salty snacks and others that will be important for us. And yes, I think I would say there's some capability investment. One of my roles is obviously the opportunity to look after marketing
for
our company and we are stepping up significantly reinventing our marketing. In the last year I can tell you we made a number of new hires from a talent standpoint. We've got a new CMO. We've got a new Head of Media and Global Digital. I have a new Head of Analytics, I have a new Head of Consumer Insights, 2 new e commerce leaders in the region, big step up in talent levels and in internal capability investment
stood up what we call
a Mondelez Digital Academy and you're seeing a significant investment in people up skilling people and the talents to compete the skills to compete today. And then finally, yes, you'll see some CapEx investment both in terms of growth and in terms of ensuring that our assets are delivering the efficiency that they need. But for any further numbers I'll certainly defer to our CFO.
And maybe building to Tim's point, route to market, As I said in my region, we will increase 25% the coverage of point of sale. So in developing world, your coverage has to be at the best in class level. So, we will invest a lot in improving our coverage for both local, regional and global brands in key developing countries like India as we are doing, Southeast Asia, China, Africa.
Perfect, so we've run past our allotted time, appreciate the questions there, appreciate your time gentlemen and we'll now transition to Luca Zaramella, our CFO to give a financial overview.
Perfect. Thanks, Thad, and good morning, everyone. Today, I'll spend my time taking a closer look at the foundation that we have built over the past several years and why I believe growth of the strong P and L and cash conversion cycle that we have today, coupled with the next wave of cost efficiencies, will result in a compelling long term algorithm. I will also touch on our cash flow goals, our capital allocation priorities as well as the flexibility that we have within our balance sheet and how that flexibility can further enhance what is in our opinion an already compelling value creation model
for our shareholders.
As Dirk said, and I will go into more detail, we are going to run the business in a fundamentally different way, which will unlock value through operating leverage and the continuous improvement mindset. We are starting from a stronger base and we are now pivoting to a more growth oriented model. Rest assured though that we'll retain the cost discipline to provide funds for growth and continue to expand profit. This new algorithm will deliver high quality 3% plus top line growth, high single digit adjusted EPS and $3,000,000,000 plus of free cash flow. Now, let me take you through some more specific elements of the plan, starting with the strong base we will be building upon.
We are building off a
strong track record of margin performance. We made significant improvement to our cost structure over the past 5 years, while raising the competitiveness of our margin levels. In 2013, amid an overall economic slowdown, we recognized margin improvement as a critical priority to create shareholder value. Over the last 5 years, we delivered approximately 600 basis points of margin expansion. And we also delivered average EPS growth of 18% per annum.
We believe this margin and earning performance was especially strong given the challenging operating environment. And now we are seeing growth returning to our categories and we are making the necessary investment to ensure we earn our fair share moving forward. We deliver margin improvement that is best in class, but we dramatically also changed our P and L structure, which now has better gross margins and lower overheads. This was accomplished through unprecedented transformation, starting with the spin, continuing with ZBB, moving to supply chain reinvention, Mondelez Business Services and our coffee transactions, and while overcoming weaker macro and volume dynamics than we originally anticipated. Our transformation as an organization was not just a pure cost exercise.
It was about building an infrastructure and a unique set of capabilities that would enable us to scale up efficiently and generate better leverage with our future growth. We created or improved capabilities across several areas, including procurement, manufacturing, overheads. This requires dramatic changes in our talent, culture and processes. In supply chain, we simplified and modernized much of our footprint. This included closing or selling approximately 50 plants, reducing our supplier base from 100,000 to less than 30,000 and reducing our SKU count by 70%.
We now have nearly 60% of our most important brands on advantage assets. As one measure of this transformation, our volume per employee is up by 15%. We also created a much more cost disciplined culture, achieved top quartile performance across most of our cost packages and streamline multiple processes. ZBB is now an integral part of our budgeting process and the way we prioritize expenses and investments within the company. Our Mondelez business services provide a global and harmonized platform to efficiently address the company's processes.
Let me now spend a moment on working capital efficiency, which is another of the competitive advantages that we have built over time. Working capital is an area that we have been very focused on over the past several years, delivering strong results. We have made improvements across all aspects of our cash conversion cycle, having removed approximately 50 days, which puts us at best in class levels. Having achieved a high level of efficiency in our working capital, the impact on free cash flow will be amplified as we grow our business faster.
And while a lot has
been accomplished, there are still opportunities across our business to drive further improvement. 3rd year, I mentioned our large supply chain reinvention initiative, which drove a significant portion of our margin expansion and improved our capabilities and flexibility, Although it was necessary to drive improved margins and position us for the future operating leverage, it resulted in elevated level of CapEx. Moving forward, we will continue to make ongoing improvements to our supply chain to drive productivity. However, these improvements will be done at a more normalized level of CapEx, which we expect to run-in the mid-three percent range over the next several years. Now let me talk for a moment about capital return.
Over the past 5 years, we delivered substantial value to our shareholders through our return of capital. Since 2013, we returned €20,000,000,000 in cash or more than 30% of our market capitalization. This included reducing our share count by more than 20%. With respect to dividend, we increased our payout by more than 50% over the last 3 years, including the most recent increase of 18 percent that we announced in July. Overall, this compares quite well relative to our peer group.
We continue to target dividend growth greater than earnings and consider return of capital as a priority. Now shifting gear, let's take a look at our long term growth model.
As Vic outlined, we had 3
pillars to our strategy. We are clearly focused on accelerating growth, which is the linchpin of our plan. And as we look at recent trends, we believe there is early evidence that support our transition to a more growth oriented algorithm. We have demonstrated solid door maze momentum across most of our regions over the past several quarters with the right balance of volume growth and pricing. The second element of our strategy is about executing with excellence and improving efficiencies.
We are not done with our work to improve profitability and we will continue to drive cost saving, leverage GBV and operate with a continuous productivity mindset. We plan to reinvest a portion of these savings back into the business, which we believe will deliver more balanced and sustainable mix of earnings growth into the future. The 3rd element of our strategy is about unlocking the potential of our organization by adopting a local first commercial approach, while preserving the advantage of our global scale. Our strategy will lead to compelling returns for our shareholders. As a volume driven revenue growth will translate into profit growth, continued margin expansion and high single digit EPS supported by share repurchases.
In addition, we will target more than €3,000,000,000 per annum in free cash flow as growth gets amplified by our improved margins, negative cash conversion cycle, lower CapEx level and better conversion of net income. And we are targeting dividends to grow more than earnings. In aggregate, we believe all these factors should deliver an attractive return with sustainable and profitable growth translating into sustainable cash generation. We have confidence in our growth algorithm as we see favorable trends in terms of GDP expectations, but also as we have seen a rebound in the health of our core snacking categories that are now growing at approximately 3%. In addition, we are seeing improvement for Mondelez in the emerging market, where several key countries like Russia and India, just to mention a couple, are delivering strong volume driven growth, share gains and are positioned well for the future.
We are also seeing good trends in developed markets as Europe continues to deliver broad based volume driven growth and North America is showing some improvements in its anchor brands. When we talk about growth, there are several components that you have heard today that will enable us to move to a 3% plus long term model. These components include a more balanced investment posture, touching both our global and local brands, coupled with a significant increase in A and C spending, leveraging higher growth geographies where the total profit dollar opportunity is Enhanced channel expansion enabled by our investment in sales, improved supply chain and expanding our routes to market. And having a total snacking focus will allow us to get into snacking adjacencies, rather than our more narrow traditional view of our core categories. In aggregate, we believe there is a substantial opportunity to expand growth that is volume driven over the next several years.
There are several There
are several factors that
reinforce our confidence in delivering high quality, sustainable earnings growth. Our new strategic plan is focused on sustainably growing profit dollars and volume, which will generate leverage benefits in our plans and deliver revenue without significant incremental overheads. However, we will do this in a responsible way. This is not about pursuing growth at any cost that will significantly dilute margins. We will continue to take a disciplined approach to incremental growth opportunities in terms of return on investment, while not impacting the margin of our base business and are confident that this overall framework will result in better returns.
Our ongoing focus on supply chain productivity and cost savings will produce incremental gross profit. Some of these will drop to the bottom line, while we plan to reinvest a significant amount into A and C and route to market to reinforce our competitive advantage. A new growth culture will underpin our model as we become faster with increased focus on local consumers and as we align our incentives to drive both higher profit dollars and cash flow. Let me spend more time talking about the next wave of cost opportunities that are twofold. First, we are moving from the past several years of market transformation to a period of ongoing productivity as a discipline with that mindset embedded in our day to day processes.
Cost savings will always be a focus of this company. Additionally, we have another set of opportunities, which paired with operating leverage will enable us to continue to grow margin, while making the necessary investment to fund our growth agenda. This second element of our cost agenda will require some level of restructuring funding, though certainly lower than in the past.
In general, there are a
few key areas that will drive the majority of these savings.
First, we
are focused on building the next generation procurement capabilities. This means we will become more sophisticated and efficient as we leverage partnerships and digital technology to improve our bidding processes. The second layer of focus is in what we call factory of the future. This means that our opportunities with our factory design that will enable increased efficiency and higher output. We also have significant opportunities to further leverage integrated Lean 6 Sigma and digital technologies to reduce downtime and waste.
3rd,
we have additional network optimization opportunities. 4th is logistics. We are targeting best in class operational efficiency rates. This should improve our fill rate, enhance service and reduce transportation penalty costs, while reducing the impact of inflation. And lastly, we still have meaningful G and A savings opportunities.
This is about removing complexity and increasing speed as much as it is about reducing our cost. Additionally, we will continue to harmonize processes, expand the use of digital tools and consolidate IT applications. These cost buckets are all critical in driving ongoing efficiencies and funding growth investment. And we are confident that these are the right opportunities and that they are very achievable, high return projects that will position our business more favorably over the long term. Now turning to cash flow.
Over the past several years to improve our margin, we invested in CapEx and restructuring to reshape the company and that took a toll on our cash flow. We are now much better positioned to see strong improvements in our reported free cash flow. Beginning this year, There are 4 big drivers that underpin better results in this area. First, we expect cash earnings to grow mid single digits during our planned period. 2nd, our CapEx is expected to be in the mid-three percent range versus the circa 4.5% over the last few years.
3rd, we will have a more modest level of restructuring, approximately EUR 1,300,000,000 over the next 4 years to fund high return projects that I just mentioned. Finally, working capital performance is expected to improve. We are confident in our commitments to improve free cash flow and expect free cash flow to grow along with net income over time as we target 90% income conversion. Turning to capital allocation. We will continue to invest in a disciplined way to generate greatest return for our shareholders.
Our first priority is to continue to invest in the business to drive growth. This includes a step up in A and C and route to market as well as investing in high return restructuring and capital projects. We'll increase our focus on acquisitions opportunities to improve our participation in high growth markets or adjacencies, while also gaining new capabilities. We will continue to return capital to shareholders in the form of share buybacks and dividends. And finally, we will use cash to reduce debt and preserve balance sheet flexibility.
We are comfortable with today's leverage and intend to continue to have access to Tier 2 commercial paper. Now let's take a look at our top investments and the financial flexibility they provide. As a refresher, back in 2015, we combined our coffee business with JAB JD Master Blenders to create JD, a leading global pure play coffee company. As part of the transaction, we received $5,000,000,000 in cash, including $1,000,000,000 in timely ForEx hedge gains. The book value of these investments affirmation was about €5,000,000,000 In March 16, we converted €2,000,000,000 of our investment in JV to partner with JAG and other investors to take Keurig Green Mountain private and diversify into the single serve coffee business here in the U.
S. As you know, Keurig recently merged with Doctor. Petros and Apple to create a broader beverage platform, KDP. JV and Keurig have both been great investments and have performed very well with strong earnings growth and rapid deleveraging. In fact, besides providing earnings to us, their value has increased meaningfully since the original JV was formed.
We had a strong partnership and working relationship with both businesses in addition to both representation. We believe both businesses have compelling strategies and competitive advantages that will drive more value going forward. What we also like about these financial investments is that they provide further optionality and flexibility. While on capital allocation, let me elaborate on our strategy and thought process around M and A. In recent years, we made very few acquisitions.
As we move to a more growth oriented plan, we expect acquisitions to play a larger role. There are several areas where we believe acquisitions can drive further growth in line with our strategic priorities. One area we will consider is adding scale in priority geographies. We also expect to pursue acquisition and partnerships in higher growth snacking adjacencies that are beyond our traditional categories, again, as we see growth opportunities. PACE will be an example of this strategy.
As a third priority, we will look at ways to acquire new capabilities in areas that have broad applications like e commerce or well-being. We will also continue to look at opportunities to divest non core assets that no longer fit well within our broader portfolio. This together with our coffee JV optionality will provide further flexibility. We are excited about our M and A agenda as a potential growth lever and I'd remind you that the impact of any acquisitions should be additive to our goal of 3% plus growth. Rest assured that we will always apply a rigorous financial return approach to our M and A activities.
Now let's talk about capital return. Given our expectations in terms of free cash flow, our balance sheet flexibility, our coffee optionality, we remain committed to returning meaningful capital to shareholders, both in terms of dividends and share repurchases. We just announced an 18% increase and we believe we can continue to provide attractive dividend as we target increases in excess of earnings. We also expect that share repurchases will continue to be an important component of capital return. Our repurchase program also allows further flexibility.
If we have periods where we are heavier with M and A, we have the ability to pull back on share repurchases. On the other hand, if we enter a period of fewer acquisition opportunities or see significant dislocation in firm value, we can be more aggressive. We expect the strategic growth initiatives that you have heard about to yield top line growth of 3% plus. We also expect this growth to be more volume driven than in the past as we put more emphasis on profit dollars than margin percentages. We also expect that our ongoing work on productivity and cost savings coupled with volume leverage will result in high single digit earnings per share growth.
Free cash flow, which is one of my top priorities, is expected to exceed CHF 3,000,000,000 beginning in 2020 with a gradual step up over the planning period. Cash flow generation, coupled with the flexibility we have within our balance sheet, will allow to sustain good capital return to our shareholders. Together, we believe all these elements are attractive from a total return perspective and are sustainable and grounded in realistic set of plans. Now I would like to talk about our outlook for 2019. As I've mentioned, next year will require some stepped up investments as we reinforce a volume driven growth cycle.
These investments include a significant increase in A and C spending as well as sales and marketing and will help us to accelerate and build on the momentum that we are seeing in majority of our core countries. This outlook factors in our expectations of a step up in growth from an already increased 2018, as well as an increase in earnings despite these additional investments. In conclusion, we are very excited about the path ahead. We are starting from a strong base. We have much more competitive margins, far better capabilities around cost and the ability to generate operating leverage when you plug higher growth into our business.
We are now pivoting to a more growth oriented model, which is underpinned by increased level of investments, funded by the next wave of savings as well as a broader set of opportunities given our focus on profit dollars. We are also very focused on driving improved free cash flow generation. Our long term model calls for free cash flow of more than CHF 3,000,000,000 driven by high net income, lower CapEx levels and reduced restructuring. All of these will result in a new Mondelez that will deliver high quality 3% plus growth and high single digit adjusted EPS growth. Thanks for your time.
And now I'll invite Dirk up on stage for some Q and A.
Let's start here with Michael.
Thank you. Just Luca to clarify the cash flow build slide you talked about the mid single digit earnings growth. Was that EBIT or net income and obviously then the bridge to EBIT would at least I mean the EPS would at least be the buybacks but is there how should we think about how to reconcile those together? [SPEAKER MARCELINOIS MARTINEZ
VALLE:] I can think about mid single digit pretty much for both. So in general, I think you should think about EBIT margin expansion over time and EPS as well and net income as well. I think you might have seen there is a component of interest cost increase over time. And I think when you put all things together, JVs, I would tell you the KDP numbers that we have baked into this financial algorithm and outlook, they are consistent with the guidance they provided. So, I think when you think about the total components between EBIT that is growing and net income which is growing pretty much at the same pace and then that will translate into accelerated EPS versus the net income number.
And just one
follow-up on the dividend payout, You've talked about that growing faster than EPS. Do you have a target ratio? How long would that go on for? What's the kind of timeframe
for that?
Look, I don't want to put a target out there yet, but I think we have a track record. I think I gave you enough elements around our capital allocation structure where I think you understand that we have the foundation of the margins today, the conversion of net income into free cash flow. I said pretty much explicitly that we're happy with the leverage ratio we have. We have portfolio and balance sheet flexibility. And I think when you couple all of these things together with the foundation that is a cash flow that as of 2020 will grow in excess of 3,000,000,000 dollars and from there will steadily grow over time.
I think you have enough elements to understand. I believe that as we said, return of capital is a priority now. Think as you think about what we have said, we want to have a little bit of flexibility as well. So, I appreciate that.
Good morning. Vincent Ryan here from Berenberg.
And three questions for
me, please. Firstly, in terms of the midterm targets for above 3% organic sales growth, Surely that does imply just growth in line with the categories.
Do you see further upside to market shares
or are there areas where you think you might be likely to underperform going forward? And also in terms of that growth algorithm, could
you give us a
sense in
terms of what you think in terms of volume versus pricing? Obviously, you do say that you'd like to see an improvement in volumes.
But should we expect to
see pricing under pressure in developed markets, for example? And or will pricing be more limited in emerging markets?
And then
finally, in terms of the growth ambition for the non snacking areas of the portfolio, do you
think there will be do you
see positive growth there or are
you just going to run those particular business areas for
cash or absolute EBIT? Thank you. Thank you. Well, maybe I'll deal with the first one and then you can do the financial algorithm. In fact, the answer of the first is related to your 3rd question.
When we talk about 3% plus growth that is for our whole business and that includes the meals and grocery business. As we look at our snacking portfolio, we obviously have to grow a little bit more which would imply market share gain to offset the slower growth that we see in the mills business. Over the time period of the plan we see the mills business growing not really that much rather flattish performance. And we are not exactly running it for cash, but we
are also not going to
do major investments in it.
And I'll take the volume pricing question. I think as you look over the last few quarters, I think we are fairly pleased with the balance of volume and pricing. And when we always try to get to the right balance, there might be times where one is above the other. But in general think as the right balance between volume and pricing. And also think about you mentioned inflationary pressure and maybe some ForEx pressure.
In general, we are not hand to mouth in terms of ForEx of commodity coverage. So, what we have seen in this outlook is actually reflective of the most recent dynamics in terms of inflation, Forex and commodities. And we will always try that balance. I think the mindset of having focus on margin dollars rather than margin percentages is the exact one this time and as you think about inflation, we will price away inflation over time and in general think about our pricing plus productivity exceeding inflation at commodities cost pressures. Over time, we have the flexibility of our coverage strategies that as I said are quite good for next year.
And then we will always try the best balance between volume and pricing to deliver the best output in terms of income, cash flow and EPS.
Thank you. Rob?
Thank you. Rob Anderson, Deutsche Bank. Just in terms of M and A, there was a lot kind of said with respect to capital allocation, dividend, buyback, flexibility on coffee, potential divestment of non core, but no rush. But I'm just wondering, Dirk, since you've been Mondelez and you
look at the portfolio
and you've set forth this strategy going forward. Do you view as I think Lucas said M
and A being a bigger piece and
you obviously have the firepower from a lot of different ways and source of capital. Do you believe over the next 3 years that Mondelez may look for much larger acquisitions as you said in core markets? That's the first question.
Well yes, I wouldn't immediately say larger acquisition, but we like our strategy. As we explained, we see opportunities for us to expand in high growth geographies. We see opportunities for us to expand into adjacencies. So I would call it more a bolt on type of acquisition strategy than larger acquisitions. We believe that is the right strategy for us and that's really where our mindset is at the moment.
Okay, great. And just quickly in free cash flow with the restructuring the 1.3 I think the slide said inclusive in that is the 0.7 on incremental CapEx, which leaves call it 600 over the next 4 years. Is there a cadence on that? Should we kind of expect that to be a bit more 2019 heavy, 2020 heavy and therefore that kind of limit some of the free
cash flow growth or is that even over time? Yes. [SPEAKER JOSE RAFAEL FERNANDEZ:] Maybe let me correct
that, because
the $1,300,000,000 is operating or it is expenses, it's not operating, it is expenses related to the restructuring program. The $700,000,000 is in addition to the $1,300,000,000 but it is baked into the 3.5% CapEx guidance we have given. So think about restructuring as 2 components, 1.3% expenses and the $700,000,000 of CapEx including in the 3.5%. In terms of phasing, I think it is pretty much fairly spread throughout the suffer analyzing, so from 2019 to 2022. There might be years where we spend a little bit more.
And as I said many times, I think as we look back at the restructuring program we have implemented, there is continuity of that into what we are about to do with the new phase. But reality is we are going to go for high return projects and I think they will have the returns that we expect to generate and we will invest some of that money back into the
business. David?
Great, thank you. So I think the net takeaway to 2018 you're going to go from like 13%, 14% EPS growth to 2019 you're going to go to like 4% growth. I think what you said was that there is significant investments that you're making
in A
and C and I think you said in your script that there is some investments in selling capabilities. So are those the factors that drive the big reduction? I didn't hear anything about inflation or pricing or what's there's other pressures that are affecting the business, but it's a big change. So if you could just spend a minute to talk about how earnings growth changes so much into 2019? And then the question Dirk maybe you could build on at the end of this is that why not lengthen out the period of time in which you make these investments?
I put them all in 2019, why not put them in 2019, 2021 have better earnings growth in any one of those years than a 4% growth in 2019?
Look in general, I mean, you asked several questions here. One is about inflationary pressure and as I said, we see, we acknowledge that there is some inflationary pressure and the most recent dynamics have been baked into the financial outlook. Having said that, bear in mind that we have a comprehensive risk management strategy in terms of managing ForEx and commodity exposures. I would mention coke as one example for us. It is not a big headwind next year as it hit lower numbers as of recent.
We expanded quite a bit coverage into next year.
There is
investment in the plan and the investment is, as I said, not only about A and C, it is about route to market. I think you heard us talking about quality around our products, reformulations and renovation of our core bundles. And I think in simple terms, think about EBIT still growing for next year, low single digits. So, I think you have to think about I would say pretty much margins in line with 2018. Below the line as I said JV is planned in line with what the guidance was for KDP.
On the other side, I wouldn't elaborate much. There was another element that we put on the table today, which is interest cost pressure. I think we are very pleased with the work that we have done in the interest cost line over the last few years. I happen to be the treasurer, so I'm very happy with that. And about Verily, when you look at the total interest cost, we have one of the lowest in the industry compared to our credit rating.
Now having said that, we have also flexibility we build flexibility over time in our debt structure in terms of commercial paper and that exposes us to the fact that interest cost is on the rise. And then next year, we will have to refinance some debt that is literally at 0 cost these days. And we will take that opportunity to extend maturities and put a little bit of longer debt structure and that will impact a little bit the interest cost line. In terms of taxes to finish it off, I think in line pretty much with this year. I think when you do the math, all of that will lead to the EPS guidance we have given.
So, fundamentally, I believe when you look at the margin structure in the P and L and what happens above and below the line, structurally all the elements are there. The differential point for 2019 is that you heard Maurizio talking about India, China, you heard Alejandro talking about some of the opportunities we have in developing markets. Obviously, you heard Europe, great momentum as well. We want to capitalize on those opportunities and we see momentum, we want to step up investment and really get this volume driven cycle going because in the end, I think that is what drives shareholders value given that it gives us the operating leverage that we have missed over the last 5 years and it is now a great addition to the Algoilo.
The last 5 years have been about margin expansion. You're moving into a growth phase. How is the incentive compensation system for the company changing to encourage that? Thank you.
The change that we've already implemented this year was to bring down the incentives to a local country level before most people would be incentivized on regional performance. So we are pushing down in line with the accountability that we are pushing down in the organization. We have already done that. Going forward we are clearly focused on a number of growth views that we have like we talked about sort of a balance between volume and price type of and mix type of driven growth, focus on gross profit dollars, operating profit dollars. So before our incentives would be more on the percentages.
They will now be on the dollar type of incentives. Brian?
Thanks. Just a couple of questions to follow-up. First, I think on the slide for 2019, you talked about I think a $0.07 EPS headwind from foreign exchange, but I didn't see any change to what your expectations are for 2018.
So I
guess first question, Justin, is there any change at that any more negative for the 2018 base?
Look, we kept that purposely out of the chart because we're going to talk about Q3 in few weeks. So, we'll give you specificity around ForEx there. I would simply say that what we gave you in terms of the Q2 impact on both revenue and EPS, despite some puts and takes, I think it is pretty much there. So, I think you saw the first half of the year with positive ForEx impact that's reversing out in the second part and having pretty much a carryover impact into next year. Okay.
And then you
gave us
the what you're spending on extending the restructuring program, but I don't think you gave us what the savings are. So, can you give us a sense of kind of what the payback is? How much savings you expect to generate?
Look, I think we purposely didn't put it out there. But as I said, rest assured that we will have always a disciplined approach to returns and payback. And in general, I think as you think about these, it is 2 components. It is supply chain, which has an ongoing set of productivity programs, plus some restructuring. All of that will put us at best in class productivity delivery for in our industry, I believe.
I think as we said, there is inflationary pressure and we will more than offset those inflationary pressures obviously, making sure there is return and incremental return. But we will drop partly to the bottom line and partly we will reinvest. On G and A, I think as I said, it is the way to think about the program, it is really twofold. It is clearly about going after further opportunities in terms of G and A, but it is also shifting a little bit the commercial model and being able to invest more in some of the local big market and creating that mentality that is agile, closer to consumers, whereby I believe we will be better served in the long term. So, as you think about G and A, it is not only a cost return element there, there is also this effectiveness that is quite critical.
Okay. And then just the last one on the interest expense, it steps up next year. Will it step up in years beyond that or are there more is there more maturities coming due that might be more expensive or just how should we think about the evolution of the interest expense line?
Look, in general, I think as I said, think about us keeping the leverage that we have. So by the virtue of the fact that we will grow EBITDA, most likely we will keep or we will increase the absolute level of debt. But there are other maturities that are coming up. Now, I don't think we haven't talked about that. It is again in the financial outlook.
And most importantly, as you might have read or as you will read some of our official reports, you will see that we have not been interest costs for the upcoming years for what is coming due now. I think as we think about the flexibility we have in the balance sheet, I think maybe that might change over time as
well. We've got Andrew.
Just a quick
one on gross margin in 2019. If you've got call it 3% organic sales growth or 2% to 3% and call it 3% EBIT growth, you're stepping up the marketing spend and go to market spending. Does that suggest that gross margin still expands year over year? And if so, I just want to get a sense of how that jives with the sort of the dollar growth focus starting to kick in versus just the margin percentage focus? Okay.
Look, in general, as you have understood, we are trying to move away from percentage margin guidance. I think in the past that has a little bit narrowed the frame of where we could have operated both in terms of percentages versus dollars, but also giving guidance on specific P and L lines. I think in general, as you think about that, we are really trying to drive a cultural change within the company where we want to drive absolute dollars and better return on investment in general. Now having said that, we will keep on having absolute cost discipline. I think you heard Deep talking about it.
You certainly heard me talking about it. And so the simple way to think about that is that over time, there will be EBIT expansion that is ahead of revenue. And as such, there is EBIT margin expansion. On gross margin, really, I wouldn't like to comment. I think we made clear commitments for this year.
I think I appreciate what you said about us and our gross margin expansion in Q2. But as we move into the New Year, I think think about us really driving better dollars, better EPS, better return on invested capital.
Rob?
Hi, thanks. Look, one of my perceptions about the overhead reductions over the past few years is that there was an expansion of Mondelez Global Business Services or MBS I guess And that had centralized a lot of back office activity in centers of excellence. Where are you now in that journey? And does this new strategy to give the local regions more capabilities, Does that kind of put an end to some of those activities or does it reverse any of them? Is there more you can do to centralize?
So the straight answer is absolutely not. It doesn't reverse it. I mean think about as I said MBS as a critical platform. And I don't think necessarily that putting more into it will it is not only by putting more into it that will drive better savings and better opportunities going forward. Think about the digital transformation we are having these days and think about having consolidated in one platform all your back office processes and how quickly you can scale up opportunities and obtain productivities.
Think also about the fact that in some of these services, we are fully outsourced. We have a strict partnership with few key players in the world and those are leading edge partners and they are doing business with us and with others and we can fast apply what they see in other industries that are maybe more leading edge than us and scale up benefit. So we are not going to do any of that. I think there are incremental opportunities in terms of putting more into MBS, but it won't be at the scale of what we have done over the last 5 years. I want to give you the message that we will keep as Mondelez leveraging our global scale and it is not only about MDS, for instance, it is about procurement.
I think I'm very excited with what lies ahead in terms of procurement capabilities and how we can use that to deliver more savings and better earnings to the company. And can I ask a
follow-up for Dirk?
You started your presentation by talking about surveys of interviews with 170,000 different consumers around the globe and their how they snack and also that people are snacking 6 times a day. But when you go into the back room, you see all the products back there. I mean, what percent of these products do you think people really do snack multiple times during the day? Most of it is very indulgent. And when you did your strategic review, did you think that one of your one of the concerns might be is that, hey, our portfolio is overly indulgent.
People feel very guilty. I know I did. Still feeling it. So what percentage is maybe either lighter snacking or products that like our Velveeta that people could use for meal replacement. Did you think of it that way?
Yes. First of all, quickly to link in with what Luca was saying, when we say we will drive more local decision making, we're largely talking about the commercial side of the business. As it relates to the supply chain side or the shared services side, we will keep on using all the global scale benefits that we have. And so we're not undoing any of those. The way it works is that the same consumers doing the same day can have different needs.
And even in the same consumption moment or the same, what we call demand space, there are different types of snacks that you could use. So you could foresee that somebody in the afternoon could have an Oreo but they also the biggest competitor there could be gummy bears for instance very strangely that's usually a family setting. So the conclusions of this that there is different moments during a day that a consumer will want. There may be the same consumer could want different snacks and those will go from very wholesome to sometimes very indulgent. Do we feel that at the moment in our current range we are fulfilling enough of the wholesome or health and wellness part?
No we don't and we know that we have to increase our offering in that area. But the gap might not be as big as you perceive where every consumer wants a healthy snack all day long that is certainly not the case.
I have two questions. One is for Dirk, I think more of kind of a global question. The CEO of Pepsi
some months ago talked about the huge disruption in consumer product companies. And I think a change from maybe a stronger manufacturer like Mondelez going more to the consumer who's more demanding and discerning and also the retailers with Amazon private label. And how does Mondelez growth with these changes? And does that really imply that M and A should be larger, so you can compete on a bigger basis with the Amazons of the world and offer more to your customers?
That's the
first question. The second question was,
we're
talking about the change to e commerce. And I think one question that wasn't answered is as you go to e commerce, the gentleman said there's less trips to the store and so there's less impulse buying. So does that net net decrease your sales even though maybe your internet sales going up so much? Thank you. Okay.
I would say, yes, there is I talked about it. There is big change in the CPG model occurring and I would concur with what the Pepsi CEO has said. Does that mean that we need to do M and A at a larger scale to compete as a bigger company with Amazon, I don't necessarily think so. I think more of it as our need to offer a bigger and a better range of products to our consumers as I was just giving the example that we have to be FAPA Health and Wellness offering. I think there is other areas premium, gifting that are also interesting development areas for us.
So we will see more of our M and A strategy as trying to fill in the gaps that we have in our portfolio, but we are not necessarily trying to achieve double the scale of what we have today. We just want to make sure that we have the right products for the right time. As it relates to e commerce and let's impulse, first of all on e commerce there is also impulse you can create. It's different. But as you shop, as you would shop in a supermarket, we can create the same impulse moments in a way that as you go through your shopping list that you think if you buy milk, we might suggest that you buy an Oreo with that and that's the typical impulse.
So we're trying to recreate on e commerce a little bit the same conditions as we would have in the store. There will be less trips to the store. But on the other side, I would say the consumer is shifting into other channels, more convenience, more out of home eating. So impulse there will still be there and that is certainly a segment that is growing for us.
Maybe just to complement on e commerce, also think about the opportunity that e commerce unlocks for us in terms of premium personalization. And most likely those proposition commands higher margins. And again, that is incremental revenue and incremental margin that is accretive in terms of top and bottom to today's world or today's reality as that moves and decreases.
Thank you. Dirk, can you talk about the competitive environment in emerging markets between biscuits and chocolate? I mean, it seems to me that in the case of biscuits, it's mostly local, very fragmented. In the case chocolate it is more consolidated, larger global players and what that means for innovation and growth strategies. And the second question, which is related to that, over the years, you get many companies about talk about white space opportunities and growing through adjacencies.
Now you're moving decision to a local level. So on the commercial side, how are you going to control what's going to be the disciplined tools in place to prioritize what those opportunities are. And the example I always give is Cadbury back in the day, George Stitzer saw a dominant position in chocolate in the UK and decided to enter gum, right? And that did not work. Obviously, really it's very strong there.
But what are the metrics or tools that you're looking at to say, okay, chocolate in Mexico makes sense and it doesn't make sense and what else? Thanks. First of all, on the emerging markets, you're right. The competition is exactly as you said. It is more local players in biscuits and it is more global players in chocolate.
What it means for the competitive environment for us is that as it relates to biscuits, we usually we are at the higher price point than the local competition and it means that we need to work hard on our value chain and on the range of products that we are offering playing with more premium or more value type of offerings and make sure that the quality of our products is at a higher level than that of the competition. As it relates to chocolate, while we don't have necessarily huge global chocolate brands, we are in a position that we have usually the local strong chocolate brand. And I think we are in a good position there playing on to the heritage, the culture, sort of the taste of the nation that we talked about and compete in that way, being very innovative and doing new things at a faster base than our local competition sorry our global competition. They tend to stick with the same product and try to sell it around the world. I think we have much more flexibility to provide much more locally adapted products in our range.
As it relates to control and how to make decisions, the reality is that we are going to about 15 of those business units that we are talking about and that still is a manageable type of markets. We will be able as a leadership team jointly and our regional presidents play a big role in there to stay close enough to see where the priorities are set and how we decide to compete in certain markets. We also talked about the test and learn. So the idea here is to instead of taking big launches and big risks right away to test a little bit of water, see if a gum would work on a smaller scale in the country and if we feel that the extraction then we scale up. If there is not we will do something somewhere else.
And so we have got already a big number of test and learn initiatives going on around the world exactly trying to figure out where do we feel we can be successful.
Do we have time for one more, maybe just go to Steve? So, Joe, I got a question for
you, but first thank you for making taste more widely distributed.
So to follow-up on your earlier question that
I think in the first session, how do we think about MONOLEZ's growth into chocolate in 2 of the largest markets in the world, China and the U. S? What were your early stage learnings? What resource is either from a supply standpoint or marketing do you really need to move the needle in each of these respective markets?
Well, they're clearly very big chocolate markets. We also we haven't really played in that market for a long time and recently we decided to enter each market. I would say that is more trying to be a player where we can be a player, but that is not a play to be a 15%, 20% participant in that market. I think the markets are big. There's heavy competition and it would be very tough for us to really go.
So that would be one of those cases where I would say, let's be clever about this, let's carve out the area that we can play that we can be successful, make that a success and maybe build from there. But let's not bet the farm on this. This is probably not the battle that we want to fight at this moment.
Okay. Yes, Halstead. Yes, Halstead. I don't know if
you can make some closing remarks.
So we told you that it would go on until 1. I think you owe us 1 hour. We are happy that we had a very packed morning. I hope you were able to learn from the regional presidents from Luca and myself that we are very excited about the future of Mondelez. In fact, representing the entire organization of the company here, I think the whole organization is very energized by our new strategic plan.
As we told you, we have strong leadership in our key categories. We have an I think unparalleled portfolio of global and local brands and we have a solid footprint in fast growing markets. So we believe we are uniquely positioned to lead the future of snacking. We showed you that we are entering a new phase in the development of our company and so the next five years will be defined by a better balance between top and bottom line growth. We are confident that we have a very strong strategic plan that will accelerate our growth and that will drive attractive total returns.
And we told you about our 3 strategic priorities that we have. It is a departure from the past. Things will be different. And as we said, the first quick step we are taking is go back to what consumer goods companies are really all about. That is about being consumer centric.
This will be characterized by a much broader snacking approach, reinvented marketing approach and an increased AIC investment.
We told you
that we will support both our global and our local brands. We will accelerate our expansion into the underdeveloped channels and in the high growth markets and that M and A will play a bigger role in becoming a dedicated snacking company. Don't get it wrong, we will continue to reduce costs by focusing on operational excellence and continuous improvement of our operations. And last but certainly not the least, we will achieve this new growth ambition by changing the way we run the company. So we are switching to this local first commercial mindset and we are planning to move with more speed, agility and simplicity.
All this will be underpinned by new growth related KPIs and incentives and as well as driving that famous profit and gross margin dollar. I think this strategy leads to an attractive financial algorithm where volume and stronger net revenue growth will generate a higher quality high single digit EPS growth. I do hope you share the same enthusiasm for the future of the company. Thanks again for joining us this morning and thanks again for your interest in the company.