Good day, and welcome to the Mondelēz International First Quarter 2019 conference call. Today's call is scheduled to last about one hour, including remarks by Mondelēz management and the question and answer session. In order to ask a question, please press star followed by the number one on your touch-tone telephone at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations of Mondelēz. Please go ahead, sir.
Good afternoon, thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website, 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.
In today's call, Dirk will give you an overview of our results as well as a progress update against our strategic priorities. Luca will take you through the financials and our outlook. We will close with Q&A. With that, I'll now turn the call over to Dirk.
Thank you, Shep, good afternoon, everybody. Six months after the launch of our new strategy, I'm encouraged by our performance and the progress that we are making. Our new strategy leverages our unique differentiators. We are a global leader in snacking, we are not in general food. We have an expansive global presence with nearly 75% of our sales outside of North America. We have large and powerful global brands and well-known local brands that resonate with consumers. We've built a culture of cost discipline, which provides a strong platform to leverage future growth. Our teams are rallying behind our clear and focused strategy to accelerate growth and create value for our shareholders. Our new strategic plan builds on these fundamental advantages and is focused on executing on these three strategies to create a more consumer-centric organization.
The first strategy is about accelerating our top-line growth, the second about driving operational excellence, and the third about creating a winning consumer-focused culture. The combination of these three leaves us well positioned to create sustainable long-term shareholder value. I am pleased with our latest financial results, which demonstrate clear progress against these strategies. These results reinforce my confidence in what we can achieve with a consumer-centric mindset and with our people empowered to act with speed and agility. We started 2019 with a strong quarter. In the first three months, we delivered against our key financial metrics. Our top-line growth accelerated to 3.7% with a good balance of volume mix and pricing. Our emerging markets grew at 8%, and we continue to build on our momentum created with our strong execution. India, China, Southeast Asia, Russia, Mexico, and Africa all performed really well, and Brazil returned back to growth.
Our developed markets showed sustained growth at approximately 1%, supported by Europe and a continued improvement in North America. We also expanded gross profit double growth of 4.5%, and we achieved an OI increase of more than 4%. All this enabled us to deliver double-digit adjusted EPS growth for the quarter. We also continued to improve cash generation with free cash flow of $200 million, while we deployed over $1 billion to shareholders through dividends and share buybacks. Let me share with you some more details and examples. Our first strategy, which is consumer-focused growth, is driven by deep and proprietary insights about snacking behaviors and occasions. The first focus area within this strategy is to extend our brands into broader snacking territories. A couple of examples from Q1. We've talked about Choco Bakery, which is a growing cross-category opportunity globally.
This quarter in India, our team expanded our presence in this space with a new Oreo cookie, which is dipped in our Cadbury chocolate. The result is a premium offering, which helps us gain biscuit market share in this key market. Another example is about parents wanting a playful child's treat. We launched Cadbury Little Treasures in the U.K., which is a portion-controlled amount of chocolate combined with a series of collectible toys. The launch was very strong, exceeding our expectations, and helped us to increase overall Cadbury Dairy Milk sales in the U.K. The second focus area of our growth strategy is to make the most of our portfolio by investing in our global and our local brands. A great example here is Pacific Biscuit, which is an iconic historical brand in China and absolutely loved by local consumers. It is also quite uniquely adapted to Chinese tastes.
In this quarter, we expanded the brand into rice wafers, a new segment beyond the core of the brand, and it's performing really well. Our local brands in total contributed solid growth to this quarter, which is an important reversal of the previous trend. I also want to mention that our global brands grew faster as well at mid-single digits. We had strong growth across most global brands, but I want to call out Oreo, our biggest brand, which grew double digits, which is quite remarkable, and also Cadbury Dairy Milk, another one of our big brands, which grew high single digits. The third focus area of our consumer growth strategy is the activation of our new marketing playbook. This is driven by new and proprietary consumer insight.
This is allowing us to refine our campaigns and capture more growth as consumers change how they engage with the brands they care about. A first example here is our new global Oreo campaign, where we use our insights to deliver highly effective local adaptations. In China, for instance, we took the broad global concept of staying playful and made it culturally relevant, connecting Oreo with traditional Chinese occasions. As a result, we've grown China Oreo sales double digits. Another example is in Brazil, where a new campaign for Trident, called Chew to Relax, made use of consumer insights to reposition the gum brand, driving a strong consumption recovery, and help us regain share. A fourth focus area within our consumer growth strategy is about innovation, where we're changing to an agile innovation approach.
This focuses on testing ideas in small launches, capturing learnings, and then scaling them across more markets. An example here, which we're particularly proud of, is our first quarter launch of Pâte Milka in France, which went from idea to market in six months. What we've done here is taking the Milka chocolate brand and expanding it into the broader snacking category of spreads, which is a big opportunity in a country where chocolate spread is a key part of afternoon snacking rituals. We applied an agile approach or approach, which had a record time from idea to market. The last focus area within the growth strategy is reaching the consumer wherever they are, which points to a stronger expansion of our presence in alternative channels, but also geographical white spaces. A great example here is the continued expansion of our distribution in the traditional trade in Indonesia.
This approach is helping drive double-digit sales growth in this promising developing market. A second example was in our South Central Europe business. This area includes countries such as Romania and Bulgaria, but also Serbia, Albania, Bosnia, and Croatia. All these countries together add up to more than 15 million inhabitants. The team here expanded our presence in the impulse channel in a major way through investments in route to market and sales capabilities, as well as A&C and price pack architecture. All this led to solid double-digit growth of their total business in the first quarter. Now switching to our second strategy, which is aimed at translating our consumer-centric growth model into incremental sales and margins by focusing on improving execution across all elements of our business.
This operational excellence strategy can come in the form of sales execution, for instance, where we leverage our customer supply and logistics capabilities to deliver outstanding in-store presence and availability. As you know, a particular focus here is North America, where we are making important improvements to our supply chain, as well as leveraging the power of our direct-to-store distribution model. This has helped fuel results, including low single-digit consumption growth and feature and display conversion up double digits, particularly behind the recent launch of the "Game of Thrones" themed Oreo pack. This pack was displayed prominently ahead of the new season airing in the U.S. We've also continued to benefit from our investments in our plants.
We talked to you about Curitiba in Brazil at the CAGNY conference. Another example would be our Suzhou plant in China, where our world-class efficiency has helped to drive strong volume growth in that market. Turning to our last strategy, which is our drive to nurture a winning growth culture. The changes we are making have given our teams a renewed sense of energy, purpose, and passion. This is helping them uncover more opportunities to grow. As I mentioned before, we have launched a nimbler, more empowered business unit commercial organization with the right incentives to drive growth. As a result, our commercial organization is better positioned to meet consumer needs, move fast, and act entrepreneurially. We are also accelerating training across our business, focused on growth capabilities and growth mindset. We are also launching more agile project-based working systems across our different functions.
Under these newly empowered teams, we're already seeing benefits like accelerated and more efficient investment in A&C and a better split of our investment in local and global brands, as well as higher sales and faster innovation. Another initiative in the evolution of our culture is to drive step change innovation by creating an internal and an external network. The creation of our SnackFutures Innovation and Venture Hub, which aims to unlock snacking growth opportunities around the world, is off to a great start. We have made minority investments in Uplift Food, which is focused on prebiotic functional snacks. We also invested in a healthy snacking company called Hu, with a portfolio of vegan and paleo chocolate and biscuits. Finally, I want to talk about our purpose because our three strategies are inspired by our company purpose of empowering people to snack right.
Snacking made right relates to many aspects of our business, but not in the least to the impact we have on the world. The journey to empower people to snack right starts with how we source our ingredients. This is an important focus for me as a leader of this company. I was fortunate recently to meet farmers and stakeholders we partner with in Ghana and Ivory Coast as part of our Cocoa Life sustainability program. I witnessed firsthand how we are working every day to strengthen the supply chain for the future and to empower farmers to achieve sustainable livelihoods. I am proud to announce that we will accelerate our sustainable cocoa sourcing program. We commit that by 2025, 100% of the cocoa we use in our chocolates globally will be sourced through our Cocoa Life sustainability program. That is an increase from 43% today.
This is a huge milestone for our program, our team, and our company, and also an important step towards further securing sustainable growth for Mondelēz International. In summary, I feel very confident that we have the right strategies in place to capitalize on the opportunities we see in snacking and in our markets, particularly with our strong emerging market position. I'm also very pleased to see that we're executing against those strategies in a way that is bringing tangible improvement in our top-line growth, our operational excellence, and in our culture. Our first quarter results demonstrate that we've got momentum as we head into this year of investment. Our categories are performing generally well, and our brands, both local and global, are benefiting from increased investment in advertising, creative, and innovation. All of this is very motivating for our teams in the markets.
I think they feel empowered and trusted and ready to perform. Let me now turn to Luca for more detail on our Q1 performance.
Thank you, Dirk, good afternoon. It was a strong first quarter and start to the year as we built on the progress we saw in the later part of 2018. In quarter one, we delivered strong organic net revenue growth, a solid increase in gross profit dollars, double-digit earnings increase, and positive free cash flow. We also returned more than $1 billion to our shareholders. Growth was broad-based as we posted positive results across each region and business unit, driven by another quarter of balanced volume and pricing. It is important to note that the vast majority of Easter shipments happened in Q1, generally eliminating phasing impact between Q1 and Q2. Adjusted gross profit dollars on a constant currency basis grew more than revenue in Q1, similar to Q4.
We continue to make critical investments to our business in order to support our long-term strategic initiatives across brands, go-to market, and innovation, consistently with our plans for the full year. Organic net revenue increased 3.7% for the first quarter. This increase was driven by solid execution across our business and continued momentum in emerging markets, where we posted growth of 8%, with a good balance of volume and pricing. Excluding Argentina, emerging markets grew 6.5%. We delivered strong results across the board in India, China, Southeast Asia, Russia, Mexico, and Africa. In addition, Brazil returned to growth this past quarter. We also delivered solid performance in developed markets, supported by growth in Europe and continued steady improvements in the North American business. On a regional basis, Europe once again demonstrated another quarter of solid execution as it delivered revenue growth of 2.7%, lapping the strongest quarter last year.
This growth was volume driven and broad-based, with solid increases across chocolate, biscuits, and candy. Russia grew double digits, while Germany and the U.K. also delivered solid results. EMEA grew 6.1% due to strengths in several key markets and growth in every business unit. India, once again, delivered a quarter of double-digit growth, powered by a strong market environment and great execution in both chocolate and biscuits. China grew mid-single digits behind great results in both biscuits, as we grow both global and local brands, and gum, where our Stride proposition continues to gain traction with consumers. Southeast Asia posted mid-single digit growth, with good results in biscuits and chocolate. Africa also grew, with chocolate, candy, beverages, and gum all posting growth. Latin America grew 8.4%, due in part to Argentina. Growth, excluding Argentina, was low single digits.
Mexico delivered mid-single digit growth and Brazil returned to growth in Q1 as a result of trends in chocolate and solid results in biscuits. We are encouraged by the progress we made in Brazil and expect steady improvement throughout the year. North America grew 0.5% in Q1 due to continued momentum in the U.S. biscuit business, partially offset by gum and Halls declines. We delivered biscuit share gains across nearly all channels, driven in part by strong performance and execution behind our Oreo brand. We made improvements in service levels in the quarter. That said, there is still work to be done to drive better consistency. We continue to expect progress in 2019, albeit not linear, with overall modest growth for the year. Now let's review our profit performance. In the first quarter, we grew adjusted gross profit dollars nearly 5% on a constant currency basis.
This increase was driven by continued productivity, volume leverage, and pricing. Gross profit growth, offset partially by additional SG&A, drove OI dollar expansion of more than 4% on a constant currency basis. This translated into adjusted OI margin of 16.7%, which is flat versus the previous year and consistent with our expectations. During the quarter, we made some additional investments in A&C, go-to-market, and innovation in line with our plan. In addition, we also lapped a favorability in indirect taxes matter for the previous year and incurred expenses related to the resolution of some legal and indirect tax matters. On a regional basis, gross margin expansion and continued cost execution drove profit dollar improvements in three of our four regions. Europe grew adjusted OI dollars by 8% due to solid volume leverage. EMEA improved operating income dollars by nearly 17% due to strong volume-based growth and productivity.
Latin America OI dollars declined by approximately 19%, mostly due to the prior year impact of an indirect tax matter in Brazil. Finally, North America, which increased adjusted OI dollars by nearly 9% on a constant currency basis due to pricing net of cost and improved service levels, which more than offset logistics inflation. Let me spend a moment on category highlights. Our three snacking categories continue to demonstrate solid growth rates, growing on a year-to-date basis by almost 3%. This builds off the momentum of last year and reinforces our confidence that we are participating in an attractive space with the right geographical footprint. Now moving to shares. Overall, we had organic shares in 60% of our business. Our biscuit business grew 3.4%.
Approximately 80% of our revenue grew or held share in this category, including our three most sizable businesses, U.S., China, and France. Chocolate, our business grew 5.9%. Approximately 35% of our revenue grew or held share, including Russia and Brazil. It is important to note that we over-index in Easter versus many competitors. We would expect share performance to improve next quarter. Gum and candy growth was down slightly, reflecting weaker results in the U.S., mostly due to Halls. About 30% of our revenue in this business gained or held share, including strengths in China gum and Mexico candy. Now turning to earnings per share. Q1 EPS grew approximately 13% on a constant currency basis. This growth primarily reflected operating gains driven by strong revenue results, as well as by share repurchases and low tax rates. I'll now move on to our free cash flow results.
We delivered positive free cash flow for the quarter of $200 million, which was in line with our plans. We continue to execute well on our working capital metrics and net income conversion. In terms of capital deployment, we returned $1 billion in capital to our shareholders in the first quarter. This included approximately $650 million in share repurchases at an average cost of $44.20 per share, and $380 million in dividends. Moving to the outlook, we are maintaining our organic net revenue growth target of 2%-3%. We feel good about the quality of the top-line results for Q1 and the growth across all the regions. Yet, while we are encouraged by the strong results, it is still early in the year. We are also maintaining our view of adjusted earnings per share growth of 3%-5%.
Although we delivered double-digit growth in the first quarter, we did get some benefit from a few items that were below the operating line, including tax and interest that are not expected to contribute in the same way in subsequent quarters. We have also been clear that this is an important year of investments for brands, sales, and innovation to drive more sustainable top-line growth over the long term. With that, let's open the line for questions. Okay.
At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Andrew Lazar with Barclays.
Good afternoon, everybody.
Hi, Andrew.
Hi, Andrew.
Hi. Maybe we'll just pick up on the organic growth piece. Obviously, as you mentioned, it's just the first quarter. I guess with the strong start to the year, on the organic top line, maybe why is 2%-3% still the right number for the full year, and particularly as pricing seems to be coming through nicely. As part of that, were there any things that maybe were discrete benefits that you can help quantify to organic growth in the first quarter, whether that's, you had mentioned, a bit of a benefit, I think, from Easter and perhaps anything related to, like a Brexit inventory build and things of that nature?
Yeah. I start by saying that, we are clearly very pleased with the way Q1 played out, and it builds a little bit on the momentum we saw in the second half of 2018. I think it is also important to taking a look at the results to realize that those were really good quality results. I think the teams around the world did a great job. I'll let Dirk talk maybe a little bit later, but this clearly adds to the conviction of the long-term potential of Mondelēz and the merit of the strategy we put together and we presented to you. We were very clear that in 2019, we really want to solidify the progress we saw towards the end of last year. We believe we really need to see this growth rate above guidance for at least another quarter before we revise our outlook.
I want to remind you that this is an investment year, and some of the investments we are making are for the benefit of the medium to long term as well. It will take a little bit of time for those investments to positively affect our revenue. We clearly remain optimistic about our outlook. As we said many times, we want to be also thoughtful given some of the uncertainties that might pose risks throughout the year. Clearly, Brexit is one of those. We also have some share losses, and we need to address those in the remainder of the year. To your specific question, at the time of guidance, last quarter, we said that there would be a 50 basis point positive impact due to Easter in the second quarter because of timing.
Reality is, after that guidance, we sat down with the trade, specifically in the U.K., and we decided that, ahead of the potential Brexit exit deadline, which was March 29, it was better for everyone to put the Easter stock in the trade itself, which we did. In terms of year-over-year, Easter happens to be neutral in terms of shipment on the quarter. There is no timing effect. I think it is, in relative terms, a clean quarter. Again, we are very pleased with the way we see the markets performing. As I said, it is still early in the year to call up the guidance at this point.
Right. That's really helpful. Thank you for that color. Just very quickly, Dirk, the better overall volume result, even in light of the pricing, is notable. I guess, where are we in the process of the shifting mindset from more of a cost focus to a growth focus? I guess, how responsible is the new compensation scheme that rewards the volume growth component specifically? Thank you.
Thanks, Andrew. One of the key elements of our strategy was to create volume growth, which we hadn't had for quite a while, for a number of reasons. I think you're only growing as a company if your volume is going up, i.e., that you're selling more product to more consumers. Also because it gives us overhead leverage. We have installed capacity, and to use that better, every extra ton we put through the plants comes at, relatively speaking, a lower cost than the previous one. We try to help our teams to think differently about this. First of all, there was the incentive plan, which we did a number of changes, and not in the least, we started to reward our teams for volume growth. There's also a better balance between top-line and bottom-line growth in our incentives.
We also pushed down incentives in the sense that before most people would be rewarded on how a region was performing. We now have people being rewarded at the business unit level, so it's more direct impact. Before we used to have 60% of their results based on financial results. We've moved that up to 80%, so there is a more direct relation there, and we also made sure that our long-term incentives are very performance-based. For sure, that has played a role, a big role, I would say, in these results. The other one that is really helping in this sense is the fact that we are focusing more and more on dollar gross profit growth. That makes you think a little bit different on how you generate that versus a percentage of gross profit.
That means that volume, also through that sort of thinking, is being stimulated. Overall, yes, we are at close to 2%, 1.7% volume growth in the quarter. That's pretty good, and we want to keep it like that because we can clearly see the benefits.
Thanks, everyone.
Thank you.
Thanks, Andrew.
Your next question comes from Chris Growe with Stifel.
Hi, good afternoon.
Hi.
Hi.
Hi. I had a question for you, if I could start on pricing. It was obviously quite strong in Latin America, and you discussed the benefit from Argentina in the quarter. Just curious, does that continue across the year? Should that be a continued kind of boost to your price realization for the overall company?
Yeah, look, we are very pleased with pricing and the balance we see with volume mix. As I described pricing last year, we clearly focused on a couple of parts of the world. One was developing markets, which Argentina is a component. I think there is a little bit higher pricing this quarter than we saw on average last year. The simple reality is Argentina in Q1 is lapping last year a relatively benign inflation and Forex. The devaluation ramped up in the second part of the year. We moved to higher rates of inflation in the second part of the year in Q2 as well. The second one about Argentina is we are striking a better balance between pricing and volume. The volume component is better than we have seen last year.
All in all, I think Argentina will continue growing at a rate that is not going to be necessarily the Q1 rate. Excluding Argentina, again, when I look at developing markets that grew 8.5% in the quarter, give or take, excluding Argentina, we are looking at 6.5%, which is clearly building on the great momentum of last year. The good news is that growth rate is comprised both of volume for the vast majority and pricing. We are very pleased. The other one is North America, where last year we had positive pricing. I said, last year, we used pretty much all the pricing levers, promo, price back architecture, and line pricing. We announced toward the end of last year a price increase in the U.S. We are pleased with the way it is going into the market.
Again, when we look at biscuits, which is the biggest category we have in the U.S., and we look at consumption, nice numbers in terms of category growth between volume and pricing, and importantly, with share gains. We will continue to see pricing for the remainder of the year. I think Argentina and the impact associated with it will come down in the quarters to come.
Okay. Thank you for that. I had just one other quick follow-up, which would be, as you put in place more of a focus on the local brands over the power brands, I just wanted to understand, and it sounds like, Luca, you had said maybe that the level of investment this quarter was what you expected in relation to the strategy. Is that something that's taking effect right away? Is there a pipeline of new products that's to be developed? Is there more marketing to be done there? Just want to understand how that manifests itself in the future as you transition your focus as well to some of the local brands.
Yeah, I'll take that one. Yes. The first element there is that we are increasing our investment, about $150 million this year. That largely goes to A&C. If I would split that between local and global brands, that is more going to local brands than to global brands. We're also investing in route to market, India, Russia, China, South Central Europe. If you see that as more salespeople, more trucks on the road, and we're also investing in R&D. The R&D investment is probably taking a little bit more time, but increasing our A&C investment in our brands and giving a little push on our local brands, that is really having an immediate effect. Also the route to market has, of course, immediate effect. We do still believe that the big benefit of that extra investment still has to show up.
We want to see an acceleration in the return we get on it. Overall, I would also like to say that we don't see this as a one-off year where we do this. Our overall thinking is that as we invest more this year, we will get higher top-line growth, which will lead to solid gross profit growth, and then we more or less flow half of that to the bottom line and reinvest half of that into our A&C and so on. We see this continuing, getting ourselves into a virtuous circle, and that would mean that every year we increase our investment.
Great. Thank you very much.
Okay. Thank you, Chris.
Your next question is from Bryan Spillane with Bank of America.
Hey, good afternoon, everyone.
Hi, Bryan.
Had a couple of questions related to the balance sheet, I guess. The first one, Luca, looks like total debt in the quarter was up sequentially by about $1 billion. Yet even interest expense came in more favorably. I guess one question related to that is just, is there anything timing related that drove the debt higher in the quarter? Then just the, I guess, the disconnect between interest expense coming down but debt going up?
Look, I'll start by talking about the interest cost. I think on the interest cost, Q1 at $80 million, it came quite frankly, a little bit more favorable than we thought. The reality is we're still benefiting particularly year-over-year from additional net investment hedges that had a positive impact. We are quite pleased with the rates we have in terms of interest cost. I just want to remind you that we have $4.5 billion of euro-denominated debt that is partly coming due in the second part of the year. That debt is at zero cost, actually negative cost for a part of it. We will renew that with a longer tenure, and we would incur an additional interest cost.
Yes, maybe the interest cost guidance of $450 million is a little bit on the conservative side, but I think, again, we have to see how the year plays out. I think there has been a little bit of fluctuations around the interest rate. On the debt, it is true the debt went up. I don't think it went up. I'm looking at net debt, so including cash that we had some additional cash, compared to the end of the year. The reason being that there is particularly in Q1, some seasonality due to Easter falling later, receivables went up a bit. We had a little bit more liquidity in the system. The total debt went up pretty much because we renewed some debt. We have, as you know, still relatively low cash flow compared to the yearly projection.
$200 million in Q1 versus the $2.8 that we are going to generate in the year. We took the opportunity to buy back shares, as I said, at $44. Between share and dividends, we paid a little bit north of $1 billion. The debt went up a bit. I think in terms of leverage, we are in the ballpark of the number we had at the end of last year. I think it is pretty much timing.
I guess as we're thinking about the timing and relative as we're thinking about net debt for the full year, absent something that we don't know about, like an acquisition or somewhere along those lines, you're not expecting net debt to really increase for the year?
Maybe it will increase a bit again, in line with the EBITDA, I would say so, but I wouldn't expect leverage to go up again. We are committed to the credit ratings we have. We just got reaffirmed as one of the agencies reiterated the rating. We feel good where we are. I think you should project the same situation as of the end of last year.
Okay, just one more related one. There's been some stories about the potential for Mondelēz being interested in Arnott's, and obviously I'm not asking you to comment specifically about that, but just a deal that size seems large relative to what you've described in M&A. Maybe either Dirk or Luca, if you could just remind us how you're thinking about M&A, both in terms of strategy, but more just size, how you're thinking about what types of size deals you'd be looking at.
Yes, as we have stated, our preference is for bolt-on acquisitions, looking at the different white spaces that we have around the world. As you go around and you look at biscuit, chocolate, or gum and candy markets, we still have areas where we are not present or not big enough, and that would be our preference to sort of fill in our geographical landscape. We have the same in existing markets where in certain channels, or there are certain areas in our categories like health and wellness, premium, digital businesses that we would be interested in. Overall, we do not expect those to be big deals. In the case of Arnott's, it's Australia, it's biscuit, it's a quite sizable business. It fits in that white space thinking. It's obviously a process that's still ongoing.
It's probably a little bit higher than what we would originally have thought when we thought about acquisitions. At the same time, we have very clear expectations in terms of returns and in terms of leverage, and we want to stay a very disciplined buyer. As long as it fits into the framework that we've set into our strategic plan, we will do so. If it falls out of that, we will not make a deal.
All right. Thanks, everybody.
Thank you, Bryan.
Our next question is from Steve Strycula with UBS.
Hi, good afternoon.
Hi, Steve.
Two-part question. First, for Luca, on an apples-to-apples basis for first quarter, I know you have Argentina, Brexit, and Easter to answer Lazar's question. Would you say if we take those three pieces into consideration, the underlying organic sales number was close to about a 3 percentage point number?
Again, the way I commented on Brexit, we decided to put it, Easter, into the system ahead of a potential exit or even hard Brexit. In terms of shipments, I wouldn't attribute to Brexit, any impact year-over-year. It just happened that Easter this year fell in Q2, and we decided to put sell-in into the system in Q1. Q1 2018 versus 2019, no material changes. I think as I said, Argentina is a little bit higher. We gave you the number between developing markets with or without Argentina. The relevance of Argentina in the quarter is a little bit higher than last year. We expect that to tone down. I would say, look, in shipment terms, I think it is really a clean quarter now. I think you saw the categories, particularly around chocolate, where we have some share challenges.
Part of it is due to timing. We need to work on the shares. As I said, if you're trying to see if there are opportunities in terms of top line for the year, I would say, great start to the year. We are very pleased. As I said, I would like to see the second quarter above guidance for us to be able to call guidance up for the year.
Okay. A follow-up for Dirk. Dirk, you recently did an interview with a German newspaper, and admittedly, my German isn't so fresh. I was hoping you might help bridge a few comments or add some transparency as to what you meant when you were describing some of the opportunities there for big global brands relative to homegrown brands. To wrap up, your comments on the monetization potential for the coffee assets in that paper. Thank you so much.
Yeah. Well, the two comments were not that new. I think the first one as it related to brands was that I have and I think the rest of the management team in the company shares that belief, that the days of the big global brands that cover all areas and under which you can do everything and that will lead to significant growth, that's not necessarily what the future looks like. We can see the phenomenon very clearly with the insurgent brands in the U.S., which is translating itself a little bit around the world. The comment was related to my opinion that we need to keep on growing our global brands. As we explained, we're very happy to have our two biggest brands growing almost both of them double- digit is quite good.
At the same time, we believe local brands more and more will have a significant role to play. They're closer to the local consumers. They feel more connected to it. The comment was meant to say we believe our strategy is the right one. On the coffee assets, the comment there was that they asked me what was the future of our coffee assets in the business. I said that, for the time being, we're very happy with our different investments. We're seeing good growth. We're happy what the management teams are doing there, and they still have some good potential. On the longer term, the comment was that obviously we divested or partially divested our coffee business. We are not running it anymore, and over time, we will exit those assets. We don't know when, but clearly it's something that is in the plan.
Those were the two comments.
Okay, thanks. I'll pass it along.
Okay.
Your next question is from Ken Goldman with JP Morgan.
Hi. Thank you.
Hi.
Hi, Ken.
In North America, there was a fairly significant gap between your takeaway as reported by Nielsen in the quarter and your actual North American sales. I know you addressed this a little bit, but I'm just hoping for a little bit more color, in your view, what the biggest reasons were for maybe the reported numbers coming in a little bit more below takeaway than what some of us expected.
Yes. I don't know which takeaway numbers that you are looking at, but you probably are comparing our biscuit takeaway numbers to our overall net revenue numbers.
No, I'm including everything. It's still a little bit lower.
Yes, it's still a bit lower. I would say our takeaway overall would be around 2%, and the net revenue is 0.5%. Clearly, biscuits are doing very well for us. We have a good category growth. We're increasing our market share, and we clearly see that in the consumption. We do have a much smaller part of our business is related to gum and candy. In the first quarter, we saw a slowdown in those two categories, particularly in candy. We think that's only driven by Easter falling later into the year this year. We think that's going to come back. Gum, as you know, has been always a little bit underperforming. That's clearly a challenge as I bridge. They are not growing at the level that the rest of the consumption is growing.
Particularly hard hit was Halls in the quarter, because of the cold season not being very good, and also that we have some more pressure from Vicks competitive activity. The other factor that you need to take into account is that, the retailers still are lowering their stock levels, and that shows up in our net revenue but doesn't show up in the consumption numbers. That's clearly something that plays a role for us. Those are largely the biggest factors. There's potentially also a little bit of non-measured channels that don't show up in the consumption numbers that you see, which were not growing to the same rate. That also causes that difference between the two. Those would be the big reasons, but we were able to perfectly make that bridge between our net revenue and what we're seeing in consumption.
Okay. Thank you very much for that. That's helpful. My follow-up will be quick. In terms of the destocking you've seen, which certainly isn't limited to Mondelēz, any idea when we can expect a little bit of a slowdown there? I mean, there can't be destocking forever, and yet it seems to be happening for longer than what maybe some companies were anticipating.
Yes. First of all, some of the roll-outs were not the whole country at the same time. That certainly plays a role. The roll-outs were spread over more than one year. The second effect that you have there is, it's an automatic system, and as that automatic system sees, for instance, our gum sales go down, that will lead to lower stock levels, de-referencing some of our SKUs. That sort of has an extra effect in the year. As our sales will start to go up, that will probably lead to a slight increase of our stock levels in the trade over time. We do believe that this difference between our net revenue and the consumption we see will disappear in the coming months or quarters, and that it will be more evened out.
Just to follow up and make sure, and I apologize for hogging the call a little bit. Just to make sure I understand, if your takeaway numbers in Nielsen are disappointing in a certain category, the customers will automatically order less? I knew there was something in there, but I just want to make sure that that's what you're sort of suggesting.
They don't order less. In a way they do, but they will lower their stock level, because if the sales go down, they need to have less stock. You see an effect from that, too.
What Luca was saying, yeah, is that in gum specifically, we see a little bit of trade reassessing their stock position. As consumption goes down in our SKUs, they adjust stock down. He was just referring to gum for that comment, I assume.
Yeah.
Thank you.
Our next question is from Jason English with Goldman Sachs.
Hey, good evening, folks. Thank you for the question.
Hi.
I've got two questions. First, a quick one. Is your business going to be affected by the price controls implemented in Argentina? If so, what are the implications there?
I think, the answer to that question is, at this point, no. I think as the relatively new president came into play, actually all price controls were removed. I think the exchange rate environment is, in terms of ability to move money out of the country and to remit money abroad, has been better than in the past. The simple answer is no. We don't have price-controlled categories at this point in time, but we don't know clearly what lies ahead.
Got it. Thank you. My second question, I totally appreciate and respect your focus on gross profit dollar growth. I'm still trying to make sure that I understand my margin bridges. I was a bit surprised that we didn't see a bit more margin strength this quarter, given the sequential acceleration of price and given the still pretty easy comp that you're cycling against here in the first quarter. Can you walk us through some of the puts and takes that you're seeing there, in terms of inflation, productivity, and maybe some mix drags between gum. Are you pushing into local brands or investing, et cetera?
Yeah, look, I think it is clear that we are trying to move the mindset from gross margin percentage to gross profit dollars, or for that matter, from OI percent to OI dollars. I think the gross profit line was in line with expectations. It grew 4.5%, which is ahead of revenue. We added 30 basis points of gross margin. As I dissect the business on the gross margin line, quite frankly, we are very pleased with what we are seeing in three regions out of four. There is Latin America that is facing some pressure. Last year, we did cover strategies for Forex that were absolutely exceptional. We are lapping quite positive Forex rates in Latin America in Q1. With the exclusion of Latin America, quite frankly, I see strength across all the other three regions, and volume leverage is coming into play.
Pricing net of cost is positive. Clearly, we deliver productivity. Below the line or below gross profit, we invested in A&C, in go-to-market, in R&D, as Dirk said. We also deliver cost savings in the overhead line. Underlying savings both in gross profit and overheads is quite good, in line with expectations. We happened to lap a little bit of one-timers last year for some VAT-related benefits that we got into the P&L. As I said in my remarks, we have made accruals in Q1 in relation to some legal matters and again, indirect taxes. The year-over-year impact is around about $40 million. When I exclude these items, I think the P&L that we delivered in Q1 was great. On Latin America, I wouldn't be at this point overly concerned. We achieved what we have in plan.
As Brazil specifically picks up for the remainder of the year, we should be benefiting from better leverage as well there. It might be a little bit below what you had in mind, but it is in line with what we had internally. Importantly, I see three regions on solid ground.
Very good. Thank you. Congrats on the strong start.
Thank you, Jason.
Your next question comes from Dara Mohsenian with Morgan Stanley.
Hey, guys.
Hi.
I wanted to get a bit more detail on the pricing environment in Latin America in some of the key markets ex Argentina, because it was a big sequential improvement in trends. Did Brazil and Mexico see some sequential improvement in Q1 versus Q4? Maybe just detail the competitive environment you're seeing there, particularly in Brazil. From a volume standpoint, we're still seeing declines in Latin America versus very healthy growth you're seeing in other emerging markets around the world and a lot of progress we've seen in some of the other regions. Just curious on if we should get more of a balance between volume and pricing going forward in Latin America and your ability to accelerate volume growth there like we've seen in some of the other regions. Thanks.
Yeah, maybe I'll start with the volume part of the question, Dirk can give you a little bit of flavor around both Brazil and Mexico and what we're seeing. Yeah, look, Latin America has historically shown negative volume. I think if you look at the volume mix this quarter, it happens to be a little bit better than what you have seen in the last few years. Remember that we use the full array of pricing tools to price in the marketplace. One component of volume is downsizing, and there is an impact specifically in Brazil around that. All in all, I think you should expect also for the remainder of the year, a little bit of volume pressure. Having said that, I think there should be a sequential improvement.
In Argentina, as I said in one of the previous questions, volume came in better than last year. We are striking a much better balance between volume and pricing. I think this move to gross profit dollars and the opportunity we have to optimize reliable, consistent, and repeatable volume growth, I think it is quintessential to the model. I think all in all, we are also pleased with the volume dynamics we are seeing overall in Latin America. Hopefully, we see an improvement in the remainder of the year. On the Brazil, Mexico bit, if you want to
One observation on Latin America was that all our business units grew at the same time. In fact, all our business units around the world had growth, so that made the quarter quite appealing to it. To talk a little bit more about Brazil, we feel that Brazil is on an uptick. It's improving. It's not totally stable yet. There's certainly a number of macro uncertainties that are still there. Overall, we saw the business return back to growth, which we felt good about. As we look at categories, the chocolate category was in slight decline, but that, of course, includes the impact of a late Easter. In terms of our Q1 revenue, our chocolate grew high single digits.
One of the successes there was the launch of a product called Bis Extra under our Bis brand, and that was a new type of wafer covered with chocolate that's doing very well there. As it relates to the gum category, we saw high single-digit revenue growth. The category was growing, and our revenue was growing, largely driven by Trident. Trident launched a new campaign called Chew to Relax, and that had a significant impact. Then also, powdered beverages is very important for us, and where we also see the category getting back to growth, which was not the case last year. There, we lost a little bit of share in the past year, and we're starting to recover, but we still have some recovery to do. Overall in Brazil, I would say the pricing situation, because that was the origin of your question, is relatively healthy.
It's not as big as it is in Argentina and largely in line with our expectations. By the way, the overall effect look of Argentina on our results is, I think compared to last year's growth, was 0.2% extra. There is an effect, but it's not that dramatic, I would say, as you might expect. Then maybe to talk about Mexico a little bit. Mexico, we see a very good situation. We are growing mid-single digits, and pricing is relatively mitigated there also. I would say if you look at Latin America, where the pricing is higher than it has been in the past years is largely in Argentina. The rest looks largely in line with expectations.
Great. Thanks. It's very helpful.
Okay. Thank you.
Your next question is from the line of Alexia Howard with Bernstein.
Good evening, everyone.
Hi, Alexia.
Hi, Alexia.
Hey there. Two quick ones. First of all, on the A&C spend, how much was it up this quarter, and how much are you expecting it to be up for the full year, either in percentage terms or dollar terms? Is it going to accelerate from here, or was there a big burst this quarter and then it slows down? My second question, just coming back to the beginning of the Q&A, you mentioned that one of the reasons that you didn't want to raise guidance for the full year is it's early and there are clearly some risks on the horizon, and Brexit is one of them. Is that the main one, or are there other uncertainties out there that you're keeping an eye on? Thank you. I'll pass it on.
Thank you for the question, Alexia. On A&C, it was up in Q1. We're not going to start giving you details by A&C spending. As particularly we look at working A&C, which is dollars we spend behind initiatives, online or television, et cetera, that was up quite a bit year-over-year. I expect that increase to continue for the remainder of the year. Actually, the overall A&C spending is going to sequentially increase in the quarters to come. Nothing that wasn't expected. It is baked into the guidance. To your second question, Brexit is clearly unknown at this point in time, and it is the biggest risk that we know of. As I learned many times in my life, sometimes the unexpected comes as well. There are a few elections around the world.
I don't know the outcomes of those yet, but there might be some uncertainties. Again, as I look at the categories, they are displaying solid growth in many places. We are fairly pleased with developing market. Having said that, given it is just one quarter, we decided to keep guidance the same.
Perfect. Thank you very much. I'll pass it on.
Okay. Thanks, Alexia.
Our last question is from the line of David Driscoll with Citi.
Great. Thank you, and good evening.
Hi, David.
Hi, David.
I got a couple of questions here that I wanted to ask. Just going back on Bryan's question about the debt, can you just go over how much of that EUR debt has a negative interest rate? What is that negative interest rate, and when do you actually refi it? I'm still struggling with the $80 million interest expense in the quarter and how we get to this $450 million. You made the comment, "Well, maybe that's a little bit conservative." Can you help me figure out how conservative?
Look, just let's get the number straight on the debt. The net debt that we had at the end of last year was around about $17.3 billion, okay? It was a total leverage of 3.3 times on EBITDA. At the end of Q1, net debt inclusive of cash, which I said increased around the world because of seasonality, specifically around Easter, it was $17.8 billion with a leverage that was around about 3.4 times. Those are the numbers. On the interest rate and the cost, $80 million is clearly a number that if you multiply by four, doesn't get you the guidance we gave on interest rate. Having said that, there is an impact on net investment hedges, and particularly year-over-year, that impact is going to subside.
It was not uncommon, particularly on short tenure debt, to be able to borrow money in Europe at a negative interest cost. I'm not going to give you the details of what it is, but it is negative, so we are getting paid for that. As we renew that debt at current rates, we are going to incur a cost. Not last, we are going to increase tenure of the debt we're going to issue in the second part of the year. That is causing a little bit of an interest cost
A headwind that we have projected this year. As I said, I believe we're going to be a little bit better than the $450 million. I think, again, it is still early in the year, given some uncertainties. Remember, we have multiple interest cost components in here. We have short-term borrowings that we do around the world. There is the net investment hedges. There is CP, commercial paper. The free cash flow came in better in Q1 than last year. There is upside, most likely. I think it is early for me to quantify it. I wouldn't expect a massive number here, though, in terms of upside.
That's very helpful. On the phasing of the investments this year, I think it's around $150 million. Did the first quarter more or less get its proportional share? Did 25% of that $150 million go into Q1? I'm really just trying to get a sense here for the pacing of these investments. Previously, I think you guys had said that you did expect it would be rather even throughout the year, now that we've got one quarter in the books, I was hoping you could update us on that one. Dirk, I had one final one.
Hu were about to bite on this one earlier in the questions, I'd like you just to talk about that cookie growth in the United States, the six and a half points of volume growth that we're seeing in the Nielsen data, and just the sustainability of that kind of takeaway and what's driving it. It's pretty special. Obviously, it's in cookies and not in the other portions of the U.S. business, I'm still just curious as to what's driving it and the sustainability of that cookie growth. Thank you.
Okay. Well, as it relates to the investments, it is evenly spread. If anything, the first quarter was probably a bit lower than its fair share. It is not that we had an extraordinary spending in this quarter, and now it tampers down. I would say we're expecting, as Luca said, a sequential increase of the spending as we go through the quarters. As it relates to what we're seeing, yes, obviously that's not captured in our consumption numbers that you see, You're referring to a report that I think came out recently. We do see quite some substantial increase of consumption. I would say in biscuits in North America. I think that's sort of a particular situation. We have Easter is in those numbers, That's going to have an effect.
We also just ran a very successful promotion on Oreo, the Game of Thrones edition, which is a one-off. I'm expecting as those big effects sort of passes, that consumption will go back to the normal three-ish% that we're seeing. Yes, we clearly have seen in April a big boost in consumption, and we're quite happy about that.
Well, congratulations, and thank you, guys.
Thank you.
Thank you.
I will now turn the call back over to Dirk.
Okay, thank you. As I said at the outset, I feel good about our performance in this first quarter and the progress we're making against the strategic plan. We're encouraged by this strong start, and we believe we are well-positioned to deliver on our financial commitments and keep on funding our future growth. We want to continue to invest for the long term to support our brands, our sales, our innovation, and our quality. We think we are entering into that virtuous circle that we're talking about to build this sustainable momentum and keep on creating value for our shareholders for many years to come. Thank you for your time. Thank you for your interest in the company, and talk to you in about a quarter.
Thank you.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.