Good day, and welcome to the Mondelez International second quarter 2018 earnings conference call. Today's call is scheduled to last about one hour, including remarks by the Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your touch tone phone at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.
Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO, Brian Gladden, our outgoing CFO, and Luca Zaramella, our CFO beginning August 1st. Earlier today, we sent out our press release and presentation slides, which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we'll be referencing our non-GAAP financial measures, unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.
With that, I'll now turn the call over to Dirk.
Thank you, Shep. Good afternoon, and thank you for joining us. We delivered a strong second quarter, building on the momentum we saw in the first quarter. We generated solid top-line growth, strong margin expansion, and double-digit EPS growth. Organic net revenue grew 3.5%, driven by both positive volume growth and solid pricing. This includes a positive impact from lapping last year's malware incident. Our growth was broad-based across our regions and categories. This revenue growth translated into a strong bottom-line performance. Adjusted operating income grew more than 10%, and margin expanded to 16.7%, up 130 basis points. Adjusted EPS increased almost 15% at constant currency. We remain encouraged by industry trends. Snacking growth is improving globally, and our categories are up about 3%. It's particularly encouraging to see that this growth was coming from both developed and emerging markets.
As you know, we have a broad geographic footprint and generate a significant majority of our revenue outside of North America. In a majority of countries around the world, we have a leading position in the highly attractive snacking category as we have a stable of iconic global and local brands. Seeing our categories grow largely everywhere around the world gives me confidence in our ability to drive growth going forward. As I've said over the past eight months, the key to unlocking more value for our shareholders is based on two simple core concepts, putting the consumer at the center of everything we do and executing with excellence every day. These concepts are fundamental to our strategy and our long-term growth framework, which we will talk about in September. I'd like to highlight a few areas that demonstrate strength and continued progress across our geographies and categories.
Starting in Europe, we delivered another solid quarter with strong volume growth. Our biscuit business delivered strong volume growth across most of Western Europe, including Germany, France, Italy, and Spain. Our chocolate brands, Milka, Toblerone, and Côte d'Or, also performed well. Choco-bakery, which includes Milka and Cadbury biscuits, continued its momentum. Once again, Germany was a particular standout, which was up double digits. Our Milka biscuits brand is gaining strong consumer appeal across the country, which gives us confidence in our ability to continue to expand these products into our other regions. In France, we've been running a successful Oreo marketing campaign. Volumes were up mid-single digits. In Eastern Europe, we continue to experience strong chocolate growth, largely thanks to the strength of Milka.
We also saw strong revenue growth in Russia, fueled by the continued success of the Alpen Gold dark and the Milka dark launches, as well as activations around the World Cup. Switching to North America, organic revenue was up 5.7%, which is partially driven by lapping the malware incident from last year. Recent innovations like Oreo Thins Bites and Ritz Crisp & Thins have performed well. Our new innovation strategy is to start small, experiment, and bring brands to scale based on what we learn in the local markets. An example of this would be Trident Vibes, which we launched in a few markets this May. We are encouraged by our progress in North America with expanding margins and improving trends in our U.S. biscuits business. There is still more work to do.
Turning to EMEA, we continue to perform well across a number of key areas where we delivered volume growth and share gains. India continued its run of double-digit revenue growth, supported by strong volume. Expanded distribution in the traditional trade, successful innovation, and strong execution have been driving market share gains, underscoring our market leadership in India chocolate. In China, we delivered mid-single digit growth. We posted good results in biscuits and turned another good quarter of growth and share improvement in gum. Our e-commerce platform in China continues to grow, driven by gifting and personalization. In Latin America, we delivered mid-single digit growth. Mexico, led by strength in both biscuits and gum, turned in solid results. Similar to many other companies, our Brazil business was meaningfully impacted by the trucker strike, which contributed to a high single-digit decline in revenue.
While we are positive on a longer-term outlook for Brazil, we do expect continued volatility for the remainder of the year. Over the past quarter, we also opened two state-of-the-art manufacturing facilities, one in the Czech Republic and one in Bahrain, both focused on servicing our emerging market growth. The factory in Opava, Czech Republic, which will manufacture brands like Oreo, belVita, Milka, and Cadbury biscuits, is a great example of our strong commitment to building a positive impact for people and our planet. Operating as a zero waste to landfill facility, the plant uses as little energy and water as possible. The Oreo cookies that are produced here use sustainable cocoa sourced through our Cocoa Life program. The wheat used in the biscuits is increasingly sourced through our Harmony program, which promotes biodiversity and clean environmental wheat production in Europe.
We are very excited about this program, and last month, we announced plans to expand our Harmony program to cover 100% of European biscuits by 2022. I also wanted to call out two important events that have happened since our last call. First, we closed the acquisition of Tate's Bake Shop late in the quarter. Tate's is a great fit with our portfolio of iconic brands. It expands our exposure to the fast-growing premium cookie segment with an entrepreneurial team that has created an authentic brand with truly delicious products. Tate's is off to a great start as part of Mondelez International, and we look forward to introducing this exceptional brand to even more consumers. Second, in early July, the Keurig Dr Pepper acquisition was completed. We have a 13.8% ownership in that business.
Our coffee investments have been good contributors to the company, and we'll talk more about them in our September investor meeting. Going forward, our focus remains on executing with excellence and finalizing our strategic review. We look forward to sharing more details regarding our plans with you at our investor day in September. Before turning it over to Brian, I want to extend my gratitude to him as he has been an invaluable partner since I joined the company. During his tenure, Brian's leadership and financial discipline have played a critical role in our journey to become the world's best snacking company. He has built a world-class financial organization, and I know that we are in great hands with Luca Zaramella assuming the role of CFO. With that, I'll turn it over to Brian to share more details on the quarter.
Thanks, Dirk, and good afternoon. We delivered solid top-line and bottom-line results in the second quarter. We continued to see positive momentum in most of our markets and posted broad-based revenue growth across regions and categories. Organic net revenue increased 3.5%, driven in large part by volume growth and balanced pricing. This includes approximately 160 basis points relating to three factors, the positive effect of lapping last year's malware event, the negative impact of the Easter shift into the first quarter, and the negative impact from the trucker strike in Brazil during this quarter. Similarly, for the first half, our organic net revenue growth was 2.9%, including approximately 100 basis points from the previously mentioned items. Both developed and emerging markets continued to perform well for us during the quarter.
Our developed markets were up 2.5% in the quarter, while our strong emerging market footprint continued to deliver for us, with organic net revenues increasing 4.7% with positive volume growth. On a regional basis for the quarter, Europe's organic net revenue increased 2.8% and was volume driven. We continue to deliver strong results in the region, with notable growth in key countries like Germany and Russia, which both grew double digits in biscuits and chocolate. EMEA grew 1.7%, driven by double-digit growth in India and solid growth in China. This strength was tempered by a weaker Ramadan season in the Middle East and soft results in Australia. Latin America grew 3.8% with mid-single-digit growth in Mexico and currency-driven pricing in Argentina.
This was partially offset by the impact of the trucker strike in Brazil that lasted 11 days during May and early June, which resulted in shipping delays and lost consumption. North America increased 5.7%, which reflects the lapping of last year's malware incident. Growth was driven by solid biscuit results, which were partially offset by weak performance in gum. We're encouraged with the progress in North America, but there's still significant work ahead, and we expect to see gradual improvement in this region as we move forward. Now let's review our margin performance. We expanded adjusted OI margins by 130 basis points to 16.7%. Higher gross margins and continued SG&A improvements drove these results. Gross margins expanded due to net productivity, volume leverage, and sequentially improving commodity costs, as we expected. We continue to execute on our ZBB program while selectively investing in key growth activities in our SG&A spend.
On a regional basis, gross margin expansion and cost execution drove margin improvements in three of four regions. Europe margins grew 110 basis points to 19.2%. North America increased by 130 basis points to 20.8%, driven by volume leverage and lower SG&A. Latin America increased by 120 basis points to 15.4%, and EMEA declined by 40 basis points to 15% as a result of lapping a one-time property insurance recovery in the prior year. Moving to category highlights. The snacking category continues to demonstrate healthy momentum, building on the past three quarters with growth of more than 3%. Year-to-date, our biscuits revenue grew 4.3%, with strength in the U.S., France, Russia, and China. Approximately 80% of our revenue grew or held share in this category. In chocolate, our business remains robust, growing 4%. India and Russia delivered double-digit growth, while Germany and the U.K. delivered solid results.
Approximately 60% of our revenue grew or held share in this category. Gum and candy grew less than 1% as the candy business posted low single-digit growth, offset partially by soft but improving gum results. Gum declined in developed markets, partially offset by mid-single-digit growth in emerging markets. About 40% of our revenue in this business gained or held share. Turning to earnings per share, we delivered another strong quarter of adjusted EPS growth, increasing nearly 15% on a constant currency basis. These results were driven by solid volume-driven revenue growth, gross margin improvement, and SG&A discipline. We returned approximately $1 billion in capital to shareholders during the quarter and $1.8 billion year-to-date. For the quarter, we repurchased $650 million in stock and paid more than $300 million in cash dividends.
In addition, we announced an increase in our dividend of 18% today, as we continue to deliver dividend growth that is greater than earnings. Our dividend is up more than 50% over the past three years. Turning to free cash flow. The second quarter was a solid quarter of cash flow generation for the company, driven by continued strong working capital execution and higher cash earnings. Year-to-date, we've generated $650 million in free cash flow, which is approximately $900 million more than the first half of last year. Our team remains focused on delivering approximately $2.8 billion in free cash flow for full-year 2018. Turning to our outlook for the year. We're encouraged by the category growth trends as well as our own revenue growth on a year-to-date basis. Both of these measures are better than our initial expectations coming into the year.
On the other side, we see Brazil, which represents about 6% of our revenue, as more challenging than expected. Taking this into consideration, we're raising our top-line outlook and now expect organic net revenue growth at the high end of our stated range of 1% to 2%. Looking ahead, I'd remind you that the comparisons in the second half are more challenging given category growth comparisons and the positive prior year impact of malware-related shipments. With respect to our adjusted margin, adjusted EPS, and free cash flow commitments, we are maintaining our outlook for the year. Before I turn things over to Dirk to open it up for Q&A, I'd like to make a couple comments regarding the transition of my role to Luca, who will assume the CFO position next week on August 1st.
I believe the company and our shareholders are in great hands with Luca as our new CFO. He has a strong track record of success over the past 20 years with the company and a deep knowledge of our products, markets, operations, competitors, and customers. I've had the opportunity to work closely with him over my time at Mondelez and have incredible respect for his expertise and knowledge. I'm sure you will all enjoy working with Luca. I'll now turn it over to him to say a few words
Thanks, Brian. Good afternoon, everyone. It's a great honor and privilege for me to be the next CFO of Mondelez. I have a great belief in this company, and I am excited to take on this role after over two decades of building my career, working across the company. I've had the opportunity to see emerging and developed markets across Europe, Latin America, as well as in North America and corporate. I'm happy to be working with Dirk and excited to enter the next phase of this company. I have personally learned a great deal from Brian and benefited from his leadership and counsel over the past few years. I look forward to getting to know those on the call over the coming months and quarters. I'll now turn it over to Dirk for some closing comments.
Thanks, Luca. Thanks, Brian. In closing, while we continue to see some volatility across a few emerging markets, we feel very good about the progress we've made in both developed and developing markets. Our business in Europe continued to perform well, while there is more work we need to do in North America, we are working hard to drive improvements in the region and seeing progress. Developing markets across EMEA and Latin America have mostly improved over the past several quarters, except for Brazil, which is expected to remain challenging over the near term. I am encouraged by the momentum that we are seeing in the business and with the strong first half results. We're making good progress with our strategic review and are looking forward to sharing this work in early September. With that, let's open the line for questions.
As a reminder, to ask a question, please press the star key, followed by the number one on your touch-tone phone. Your first question comes from the line of Bryan Spillane with Bank of America.
Hey, good afternoon, everybody. Brian, I want to wish you all the best going forward. It's been a real pleasure working with you. Luca, looking forward to working with you as well.
Thank you, Brian.
I guess I have two questions relative to the revenue outlook balance of the year. In North America, how much progress, or how comfortable do you feel now that you've got service levels back to the sort of levels that you'd expect going forward, meaning you've got back to full service levels, is the first. As we're looking over the balance of the year, I understand the Brazil piece could be a little bit challenging. It just seems like with the momentum in the category getting better, and the momentum potentially set up for improvement in North America as we go forward, why not go above the high end of the range on the organic revenue growth guide?
Thank you, Brian. I think you touched upon the two areas that clearly for the rest of the year require attention from our side. As it relates to North America, yes, we have made some progress. Our supply chain, which is one of the key things that we needed to work on and improve, has shown some good customer service results in the second quarter. We're seeing some good momentum also from our DSD system. It remains, however, a system that still has a few old plants in there, which are a bit finicky. We feel good, but we need to keep on confirming for the rest of the year that we have things under control. We're a bit cautious.
At the same time, we do see an increasing momentum in the categories in North America, our share performance within that has been better in the sense that biscuits is accelerating, we have increased a little bit our share. As it relates to gum, the category is doing better than our share decline has improved a little bit. Yes, we are having a stronger top line. If you take out malware, we are now clearly in positive territory in North America. At the same time, for the remainder of the year, I would say that the comparisons are going to become more difficult because as you will remember, the third quarter had a positive effect last year from malware. Just overall, the comparisons become more difficult.
We feel good about our forecast for North America in the remainder of the year, we want to see what next quarter brings us before thinking through if it should be higher.
Okay. Thank you.
Yeah, maybe about the total company. Clearly, we are encouraged by the evolution of the top line over the last three quarters. As we said in the opening remarks, quite pleased about the fact that it is broad-based, both in terms of categories and regions. Also pleased by the volume and price balance that we see. In general, as you saw, we are improving our revenue outlook for the year. In totality for the company, though, we want to remain thoughtful about the second half. There are still some elements of volatility in emerging markets like Brazil, as we said. North America, good progress, as Dirk said, but improvement is going to be gradual. In terms of comparison, we are lapping higher growth in the second part of last year, and also malware was a positive effect, specifically in Q3 last year.
Your next question comes from the line of Andrew Lazar with Barclays.
Good evening, everybody, and all the best to you, Brian.
Thanks, Andrew.
Wanted to follow up, Dirk, a little bit. I think you'd mentioned in the previous answer, that the DSD system was starting to see some building momentum. I'm just trying to get a sense of are there any, specific metrics that you can point to as of yet that tell you that the company is starting to see maybe what could be a sort of sustainable or substantive advantage from having DSD vis-a-vis competitors that don't just because of all the malware issues, it would seem that that's not obviously been able to be leveraged perhaps in a way that you'd like it to be over the last year.
Yes, Andrew. Well, of course, the best measure for us is our share performance. That is what will give us the clearest measure. We also, of course, look at our customer service and things like out-of-stocks and so on, and that is clearly improving for us. I think also the fact that we are much more clear, on our communication about the fact that we do believe in DSD, and we think it can be a differentiator for us. That has caused us to get more confidence in our teams. If we go a little bit deeper, the things we typically look at is the number of displays that we have, what's going on with our share of shelf. There we see clear improvement and clear increases. Those are the different factors that we look at to be able to understand how DSD is doing for us.
Got it. Thank you for that. Then Brian, gross margin came in quite a bit better than we had modeled. Is part of that just the more positive mix effect from a stronger, developed market performance in this quarter, partially because of lapping malware as opposed to anything else? Because it sequentially improves quite a bit in terms of the year-over-year improvement.
Andrew, that's part of it. Up 60 basis points, we feel pretty good about it. I think we've been saying it as we move through the year, that we expected to see gross margins get a bit better, and we still expect them to be up for the total year. I would say mix has been helpful. Net productivity, and the supply chain execution actually was good in the quarter. Sequentially, we had commodities moving in the right direction. As we said, we had hedges that were rolling off, gave us access to lower price cocoa. That was helpful sequentially. Dairy pricing, we've now pretty much got covered with pricing or dairy increased inflation we have covered with pricing. Volume leverage I think overall has contributed better absorption and better overall margin. I think those are the key drivers.
As I said, we feel good about in the 17% commitment for the year that gross margins will still be up year-over-year. Good progress in the quarter.
Thank you.
Thanks, Andrew.
Thank you.
Your next question comes from the line of David Driscoll with Citi Research.
Great. Thank you, and good evening. I wanted to ask about the non-power brands. I think in the quarter, guys, but correct me if I'm off because you don't actually print this on the slides, but I think maybe growth of the non-power brands was maybe a little bit less than 1%. Dirk, now that you've been at the company for a while, can you give us some comments as to what you see as the role of these non-power brands? Should they be flattish or low growth? Do you need to invest more in them to get them moving? Just the final point on this question is, if not, if the answers aren't positive to some of those, then perhaps some of these should be divestiture candidates as they would enhance the revenue growth on the residual business. Would appreciate your thoughts.
Yes, David. I would say this is a little piece of what we're looking for at the new strategy. We will talk more about it in September. The way I look at it is we are a company that is composed of power brands, which are global brands that are clearly on trend and that are doing well and provide the majority of our growth. We have also a number of other brands, largely local brands. Those you can indeed divide up in 2 categories. There's the ones that are quite loved, that have potential, they can play an authenticity or a health and wellness role. We probably have not invested enough in them, that's one of the areas where we are trying to make a change.
There is probably a number of them that are not as appealing and that really don't have a clear future. Yeah, we need to see what we need to do with those. You start to see already a little bit of that. Europe has started to shift some of their investment into some of those local brands, and we're getting some good traction from that. I don't think they're going to grow 3%, 4%, but to see them somewhere around 1%, maybe a little bit above that on an ongoing basis, we would be quite happy if that is what these brands are going to do for us.
Thank you. One follow-up. On the emerging markets, I think if I read the data right, volumes were down. How concerning is this, and do you expect volume growth to be positive for the emerging markets in the second half?
I think when you look at that, take into consideration the fact that in those numbers, there are a couple of drivers. One is Argentina, where clearly we price according to inflation, and there is a volume implication there. The other one that came into play in the quarter, it is in the Philippines, where we had to price for a beverage tax. The pricing we took was quite high. It was around about 100%, so there was a volume impact. We are quite pleased to see the likes of China.
India and Russia actually growing volume. In general, I would say as you strip out some of the outliers I've just mentioned, we feel quite good with the volume momentum we see, even in developing markets.
David, if you look at emerging in total, volume mix was positive up 1% in the quarter.
Great. Thank you very much. Brian, thanks for everything and good luck.
Thank you.
Your next question comes from the line of Jason English with Goldman Sachs.
Hey, good evening, folks.
Hi, Jason.
Hey, guys. I'll just echo the sentiment. Brian, congratulations, and it's great to see you walking out on a high note with the company kind of humming overall.
Thank you.
In terms of the performance, it's great to see the sales accelerating. I know there's some noise in there. I think in the disclosure in your slides, about 160 basis points of benefit this quarter on organic. Could a dial in that back around 1.9, I think, for the quarter and for the year to date, if we strip out that noise, which is relatively solid. If we compare it to your end market growth of 3.1%, you're still lagging by around 100 basis points, which is about what you've been lagging for the last few years. Yet, you're showing your percentage of sales, at least in snacks, that are gaining or holding, materially improving. 65%, we haven't seen that, I think, since maybe 2013. What's the disconnect with those two data points? Why is your average market share number kind of getting better?
I presume the answer is because that 35% that's losing is substantial. If so, what are some of the drags? How should we think about their impact going forward?
Yeah, Jason, it's Brian. I'll take it. As you think about it, I think we've sort of got the math at about a 70 basis points disconnect between category growth and AR growth. There's really two drivers. We are net still in aggregate losing some share. It's mostly in Brazil. U.S. Gum contributes, those are probably the two biggest. Then, as we talked about in the first quarter, there's an inventory trade reduction that played out in the North America business. Those are the two biggest drivers that would explain the delta. I'd say we feel pretty good about the fact that the share performance in almost everywhere else in the world is actually improving, I think we see this gap closing over time.
Very good. That's helpful. You mentioned Brazil. Maybe you can elaborate a little bit more on there, because as we listen to various companies, the messaging's kind of all over the place. Some suggesting it's better today than last year, some suggesting it's still really choppy. What are you guys seeing in the marketplace? You kind of sound a somewhat cautionary note. Is that driven more by end market growth, more by market share? Can you just give us a little more context and color around that?
Yes. I would say, first of all, Brazil is important for us, as it probably is for some other companies, too. It's about 6% of our revenue. We certainly see heightened volatility. You had the trucker strike in this quarter, which has kind of thrown off the quarter, probably had about a $20 million impact on the top line. We think that was lost consumption as the product was not in the store and the consumer really couldn't get to the store. We don't think in a category like snacking, that is going to come back. That's going to affect the rest of the year. You've probably seen that the exchange rate also has started to move. That is giving us some volatility. There's also some social and political unrest in Brazil.
On the short term, for the rest of the year, we sort of expecting that the consumer confidence and the consumer behavior will be affected. We expect more disruption and a bit of a difficult time for the second half of the year. On top of that, we've reported on this a few times, we're doing quite well in biscuits and in gum, but in the chocolate markets, we've had some heavy competitive pressure. We are faced with that also. Longer term, I think, yes, the observation that Brazil is doing better, that the GDP is improving. I would say probably over the midterm, we are more positive about Brazil, but I wouldn't dare to say that the second half of the year will already bring us a much improved situation.
Understood. Thanks a lot, guys. I'll pass it on.
Okay.
Thanks, Jason.
Your next question comes from the line of Robert Moskow with Credit Suisse.
Hi. I guess I'll ask about the cocoa cost comment. You said that hedges rolled over, Brian, which was a benefit to gross margin in the second quarter, we're all kind of looking at cocoa cost as being inflationary. I know you have hedges that protect you for a while, and protect Mondelez for a while. What's the outlook for when the costs start to get higher instead of lower for the margin profile?
Yeah. Look, I think, Rob, it's moved around a little bit. It's actually down a little recently. When you look at it in the scale of sort of a five-year cycle of where cocoa's been, it's actually pretty reasonably priced, and we feel okay with that, and we've been locking in a little bit longer than we otherwise would, given that dynamic. It's going to be slightly favorable for us in the second half of the year, sequentially and year-over-year. First half of next year feels about the same based on what we have in place already. We're not really worried about where cocoa is. It hasn't moved a whole lot. I'd say dairy has come down a little bit. If you look more broadly, not a whole lot of new changes to the commodity environment for us, in terms of our key commodities.
Crude oil has obviously moved up, that affects us in some parts of our supply chain, we've got some long-term hedges in place there as well. As we said, coming into the year, commodity is relatively benign, year-over-year, I would say that's still the case. I would say, as you would have heard from several other companies, clearly there is some building inflation pressure in some other parts of the supply chain. When you look at logistics and packaging and even labor costs around the world, I would say that's looking to be more inflationary as you move over the next couple of years. That's something that, as we look at the strat plan and start talking about how we plan the business, we're going to have to take into account. As you look at 2018, I'd say relatively benign right now.
Can I ask you to opine on wheat inflation also in your last conference call here as CFO?
Going forward or what we're seeing right now?
What you're seeing right now.
Not a big challenge for us.
Not a big challenge. Okay. Best wishes, Brian. Great working with you.
Thanks, Robert.
Your next question comes from the line of Chris Growe with Stifel.
Hi, good afternoon.
Hi, Chris.
Brian, all my congratulations as well. Wish you all the best. I wanted to ask if I could, sure, about emerging markets and the discussion before about volume being up in the emerging markets. I'm curious if you took out Brazil, how much of a weight was that on sales growth for the quarter? Emerging markets still were pretty solid, just a little below where they were in the first quarter. I'm just trying to get a little sense of how that one market might have really distorted the data this quarter.
Yeah, I think Brazil clearly was impacted by the trucker strike. We feel quite good about majority of the emerging markets. You look at Russia grew quite highly around about 15% in the quarter, it was quite a good number. We are gaining share. The categories are doing well. India, the same, volume-driven growth. China, mid-single digit growth. In general, as we look at developing markets, I think we feel quite good. I would say that excluding Brazil and a couple of other markets, namely some markets in the Middle East, all the rest grew solidly in Q2.
Yeah.
Okay. Just a quick question, if I could, in relation to some of the SG&A related savings, some of the benefit coming through to the operating margin. Are those cost saving driven? I guess related to that, I'm curious if are you moving some of your advertising dollars out to promotional spending still? Is that something you've done earlier in the year? Just curious how that's playing out and where you're investing those dollars.
I'd say two things. We continue to work overheads, and ZBB continues to deliver for us. We are reinvesting some dollars within overheads into some growth activities. A&C, I'd say A&C is down slightly in the quarter, and I'd say mostly timing related. As we've said, we expect the total year to be roughly flat with 2017, and we'll probably have some higher spending in the second half of the year.
Okay. Thank you.
Thanks, Chris.
Your next question comes from the line of David Palmer with RBC.
Thanks. Good evening, all the best, Brian.
Thanks, David.
Dirk, just to follow up to your answer to Jason's question on Brazil. It sounded like the trucking strike hit your shelf presence, the comment was, or at least part of this was that would have a carryover impact to consumption. Am I getting that right? Does that mean the trucking strike is hurting certain players like Mondelez more than others, meaning this is having a carryover effect to market share rather than just a category or consumer issue?
No, what I meant is that during those 11 days, the consumer bought less product because on one hand, there was less product available. On the other hand, since it was a massive issue, consumers didn't get to the store. Since we're in snacking and in food market, if they don't have their cookies for today, they won't eat them, and they won't catch up going forward. They will still consume going forward. Those 11 days, we probably have lost for the year. There is no ongoing effect on consumption for us.
Shouldn't be an impact in the second half at all.
Okay, got it. Thank you on that. Then just to follow up on the comments you made about the Middle East and a weaker Ramadan season weighing on the EMEA results, how much of a slowdown in the quarter was a transitory issue, and what is your general outlook for that region? Thanks.
Well, I would say that if I look at EMEA overall, all the signs are very positive. For the first half, EMEA is up 2.7%. We have very good growth in India with double digits. We have China, mid-single digits. Southeast Asia is also growing quite solidly. It really boils down to the Middle East and Australia. Middle East has declined double digits because of the category softness And also some of the economic conditions. The Middle East has been a tough region for us for a longer period of time. A lot of the subsidies are gone, and some of the competitors didn't price and so on. On top of that, we were cautious with our Ramadan season, and so we see some effects of that. Australia also declined. That was due to Easter phasing, some challenging market conditions, and increased competitive activity.
I'm expecting Australia to come back. The Middle East, the softer Ramadan, of course, will not continue, but it's still a region where clearly consumer confidence and consumer spending is affected at the moment.
I think, David, we managed the Ramadan fairly well. I mean, to the point where I don't see a carryover inventory challenge with how we managed through Ramadan. I think we were cautious coming into the season.
Got it. Thank you.
Your next question comes from the line of Steven Strycula with UBS.
Hi. Two questions from me. One is a clarification on going back over Brazil. It's very clear that the lost consumption for 11 days, what I'm trying to get a better feel for is, are you commenting that as a result of that strike, was there broader consumer confidence lost in that region that is impairing maybe out-the-door consumption trends for the remainder of the year, along with politics on a local region basis? Can you just clarify if there's any broader underlying trend change for the consumer?
I wouldn't say that I see a bigger effect on consumer confidence or consumer spending going forward. We do have a little bit of a devaluation, so that will affect consumer prices in Brazil. Apart from that, I think we remain cautious, but we do not see any signs that consumer offtake is affected in a major way. Of course, you have the elections that are coming up, which causes usually some volatility, especially in the run-up to the election. For all those reasons, we are a little bit cautious at the moment, but at this stage, we don't see an effect on the consumer offtake.
Got you. Getting back to a question that Jason English asked, to get to that end market 3% category growth rate over the medium to longer term, does that require dipping into maybe some lower margin pockets of growth, lower ASP products to really capture that runway? Do you not view them as mutually exclusive in that if you fix the U.S. and fix Brazil, that you should be able to find that runway and still be able to expand margin simultaneously? Thank you.
Yes. We don't see the first thing you mentioned, we don't necessarily see that as a must to get to that 3% growth. I think if we get the U.S. closer to the market growth and the same in Brazil, we should be very close to the 3% market growth.
Thanks, Steve.
Your next question comes from the line of John Baumgartner with Wells Fargo.
Hi, good afternoon. Thanks for the question. Brian, I wanted to come back to margins for a second, and specifically gum and candy. I can remember Cadbury became pretty aggressive in attacking the overhead there prior to the acquisition. Now after owning the business for almost a decade, I also think you've done quite a bit in terms of getting the systems and back offices where they need to be. Can you just talk a little bit about how the cost structure benchmarks in the G&C business, where you see the opportunities for further margin expansion going forward, and how we think about the drivers there?
Look, John, I think the gum and candy business continues to be a very high margin business for us. I think as we've looked at it over time, there are some elements of that business that have a higher cost structure. I mean, it's a more intense go-to-market model. The route to market costs more. As you think about the core gross margins of the business, it's still a very good business. I think over time, as we've seen the growth slow and the category shrink in some cases, we have taken some cost out, and we've worked to try and maintain those margins. It is still a contributor to the P&L. It still drives very strong cash flow, and it's still a good margin business.
I think over time, we have continued to take more cost out, and it has benefited from a lot of the bigger cost reductions and G&A reductions that we've done across the whole company as well.
Going forward in terms of the SG&A, where do you see any further opportunities there? I mean, is it more on the outsourcing side with the sales function?
For the whole company, John?
Just gum and candy.
Look, I think that'll be a topic that I know that Dirk and Luca and the team will talk to you about how we think about gum. In some markets, it continues to be a pretty important element of our go-to-market capability and the scale that we have in those markets. I think there's places where there are opportunities to grow. As you know, that business in the emerging markets has continued to show growth for us. Continued growth in some of the emerging markets with high margins, that's a good thing. You can expect to hear more about that, I think, in September with the team.
Great. Thanks, Brian. All the best.
All right. Thanks.
At this time, we have time for one more question. The final question comes from Kenneth Zaslow with Bank of Montreal.
Hey, good afternoon, everybody. Brian, best of luck to you and congratulations.
Thanks, Ken.
My question is just kind of laying on there, the last question was, can you talk about the anecdotes or what you're doing in Europe to actually enhance the margins? Is it a closure of facilities? Is there a utilization rate that you're actually improving? Is it simple sourcing? It seems like there still is plenty of opportunity in Europe. I know you don't want to go forward, but can you give some anecdotes and some history of where we're going with this and some of the examples of what you're doing?
Ken, look, I think much of the agenda in Europe has been what we've talked about on a global basis, right? Supply chain reinvention, building capacity and capability with lines of the future that have lower conversion costs and more efficiency. We've obviously done that and added capability in Europe. We've also closed down some facilities, and that's contributed as well. They have been, as you've seen, sort of the best example of a place where we've seen volume growth that's given us leverage in the P&L, and that's helped the margins as well. Everything we've done with shared services and G&A reductions, Europe has done that, too. I think it's the broader global agenda coupled with volume growth, and a good starting point from a competitiveness standpoint has really helped that business to shine.
As we look at the margins in the Europe business, they compare incredibly well to other peer companies in Europe. The team has done a very good job with that.
I would agree with you. I guess my point, more than anything else, is as the margins have expanded to the levels they have, as you said, they're exceeding your peers, it doesn't sound like there's really a limit or near-term limit to them. Is that a fair way of thinking about it? Or is there a reduction of or deceleration of margin expansion opportunities?
Well, I mean, there's a fair portion of that that's been the transformation of the company that has contributed. With a restructuring-driven program that's taken a lot of cost out, we're obviously going to be in a different phase of the transformation and then not have nearly the supply chain reinvention opportunity in a place like Europe. I think the volume growth will continue to be the big lever point for them. If we can grow on what is a competitive cost structure, I think you'll see margin expansion in Europe going forward.
Great. I really appreciate it. Thank you, guys.
Thanks.
Well, I think we've reached the end. Thank you for dialing in. Again, I would like to thank Brian, wish him all the best. It was great to have him here. As you can imagine, he's had a big impact on the performance of this company over the last four years. I'm, of course, welcoming Luca, and he's looking forward to work with all of you. Thank you for investing in the company.
Thanks, everyone.
Thank you.
Thank you. This concludes the Mondelez International Second Quarter 2018 Earnings Conference Call. You may now disconnect.