Mondelez International Inc

NASDAQ:MDLZ

Earnings Call Analysis

Modest Revenue Growth with Strategic Investments for Future Gains

In the recent earnings call, the company reported a 2.5% increase in organic net revenue and a robust 25% growth in adjusted EPS. Emerging markets showed strong performance with a 4.5% revenue increase, while developed markets grew by 1.2%. Despite challenges in the European market due to customer disruptions, key brands like OREO and Ritz gained market share. The company also highlighted significant investments in marketing and promotional activities, alongside a strategic partnership with Lotus Bakeries. Looking ahead, the company affirmed its revenue guidance of 3-5% growth, emphasizing its focus on sustainable long-term gains.

Strong First Half Performance

Mondelez International delivered a solid first half of the year, marked by strong profit growth fueled by effective cost management and successful pricing strategies. The company's management emphasized their commitment to long-term growth, particularly in core categories like chocolate, biscuits, and baked snacks, which enjoy high consumer loyalty. Additionally, Mondelez generated $1.5 billion in free cash flow, showcasing their strong cash generation capabilities.

Revenue and Profit Growth

For the second quarter, Mondelez saw an organic net revenue growth of 2.5%, while adjusted gross profit dollars grew by 11.3%. This enabled the company to continue investing in its business, particularly through significant increases in A&C spending. On a broader scale, emerging markets drove a 4.5% revenue increase, while developed markets saw a more modest growth of 1.2%. The company's adjusted EPS also grew impressively by 25%, illustrating robust financial health.

Segment Performance

Mondelez's various product segments exhibited varied performance. Biscuits and baked snacks grew 0.8%, supported by brands such as Oreo, Ritz, and Chips Ahoy!. However, the biscuit portfolio in the U.S. continued to face challenges, although early signs of improvement were noted. Chocolate showed significant growth at 5.6%, with strong contributions from brands like Cadbury Dairy Milk and Lacta. The gum and candy segment grew 2.9%, driven by momentum in markets like China and Brazil.

Regional Insights

In Europe, Mondelez executed strong pricing strategies, leading to a 2.7% revenue growth. The region's performance was partly affected by volume declines due to customer disruptions, but with pricing now stabilized, the outlook for the rest of the year appears positive. North America experienced a slight revenue increase of 0.3%, with plans to introduce more affordably priced product packs to cater to budget-conscious consumers. China's performance stood out with high single-digit growth, driven by brand equity enhancements and distribution gains.

Consumer Trends and Strategies

Consumer behavior varied across regions, but overall, Mondelez observed a resilience in snacking preferences despite broader food and beverage sector softness. As inflation cooled, consumer incomes began to rise, reducing financial strain and decelerating private label growth. In North America, Mondelez plans to strengthen its core brands like Oreo and Ritz through expanded distribution and targeted promotions, which are already showing promising early results.

Challenges and Outlook

Mondelez faces a challenging operating environment with dynamic market conditions and ongoing disruptions in some regions. However, the company remains focused on executing its long-term strategy. While commodity costs, particularly cocoa, are expected to pose headwinds in the second half, Mondelez's prior effective procurement and pricing actions position the company to navigate these challenges. The company has reaffirmed its guidance for the year, expecting to achieve the upper end of its 3% to 5% organic net revenue growth range.

Strategic Partnerships and Innovations

Mondelez announced a strategic partnership with Lotus Bakeries, which will lead to the development and launch of co-branded products combining Lotus's Biscoff with Mondelez's global chocolate brands. This initiative, set to start in Europe by early 2025, is part of Mondelez's strategy to innovate and expand its market presence. Additionally, Mondelez will begin manufacturing and selling Lotus Biscoff cookies in India, starting in the second half of 2025, enhancing its biscuit business in the country.

India Market Focus

In India, Mondelez experienced flat overall growth in Q2, with strong performance in chocolate offset by competitive pressures in biscuits. The company has ambitious plans to expand its product offerings and enhance its distribution, aiming to capture a larger market share. Despite short-term consumption dips due to inflation and competition, Mondelez remains confident in its long-term prospects in the Indian market.

Financial Strategies and Guidance

Mondelez emphasized its commitment to maintaining robust free cash flow and capital return. The company reported $1.5 billion in free cash flow for the first half of the year and repurchased $1.1 billion in stock. Furthermore, Mondelez increased its dividend by 11%, marking nine consecutive years of double-digit dividend growth. Looking ahead, Mondelez plans to maintain selective investments and cost measures to protect its bottom line and continue pursuing sustainable growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Mondelez International Second Quarter 2024 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Mr. Shep Dunlap, Vice Senior Vice President, Investor Relations for Mondelez. Please go ahead, sir.

[Shep Dunlap, executive]

Good afternoon, and thank you for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties.

Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

Today, Dirk will provide a business strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.

[Dirk Van de Put, executive]

Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I am pleased to share that we delivered a solid first half to the year with strong profit dollar growth driven by effective cost management and pricing. We also successfully completed our annual pricing in Europe, which helps position us well for the second half in terms of top line and volume growth. We continue to see momentum in emerging markets and we are continuing to invest significantly in our brands and capabilities to drive sustainable, long-term growth. And we continued our track record of strong free cash flow generating $1.5 billion.

While our operating environment remains challenging and dynamic, our teams remain focused and agile in executing against our long-term growth strategy. We continue to play for the long term in chocolate, biscuits and backed snacks because these core categories remain strong consumer favorites with very high loyalty to our iconic brand portfolio. Within these great categories, our advantaged geographic footprint provides additional confidence that we are well positioned to compound long-term sustainable growth.

Turning to Slide 5. You can see that organic net revenue grew 2.5% this quarter with adjusted gross profit dollar growth of 11.3%, enabling us to continue investing in the business. A&C spending is up high single digits, helping to drive consumer and customer loyalty to both our iconic global brands and our local jewels. Adjusted EPS grew 25%. Turning to Slide 6. While many food and beverage segments are continuing to experience softness, snacking remains relatively durable.

Consumer trends vary by region, but overall, we are seeing volume growth start to rebound as inflation cools. Consumer incomes are rising, which helps to reduce the inflation-driven financial strain on many households. As a result, private label growth in our categories is decelerating while branded share growth is improving. In North America, some consumers are seeking snacking options at specific price points to fit within a specific overall ticket size. Other consumers who are more focused on convenience, look for multipacks, which offer value as well as variety and versatility.

Our proven playbook for price pack architecture allows us to offer a broad range of options to meet each of these consumers deferring definitions of value. As a result, our 2 largest U.S. brands, OREO and Ritz are gaining share year-to-date. Meanwhile, in Europe, elasticities are moving slightly higher but remain modest. Consumer confidence is cautiously optimistic and is rising in the second quarter versus the same period last year as inflation softened and incomes rise behind stable employment. We continue to see positive value growth in biscuits and chocolate. Volume in seasonal chocolate also is growing well, up 0.6% year-to-date driven by the performance of seasonal [ shapes ], novelties and bite-size products.

Consumers continue to demonstrate that holidays like Easter just wouldn't be the same without chocolate, and they are willing to spend accordingly. In emerging markets, modest elasticities continue. Our China business is delivering strong growth in online and social commerce. In Brazil, we're seeing an uptick in elasticities but the consumer and economy remain resilient. In Mexico, the economic backdrop is healthy with solid employment and consumer confidence. Within India, we see some food inflation impacting lower and middle-income households driving a pullback in spend and causing some down trading, particularly in biscuits.

Overall, our combined emerging markets value and volume share is improving in biscuits and chocolate. Against this backdrop of gradually improving consumer confidence, as you can see on Slide 7, we are continuing to deliver against our focused action plan to improve volumes in North America in the second half of the year. We are already seeing value share improvement in OREO and Ritz. To further accelerate growth, we are continuing to increase distribution points across food, club and convenience stores. And to meet the right price points, we are also implementing new, targeted promotions as well as a new pack size priced in the $3 to $4 range, to drive continued brand loyalty and value for Oreo, Chips Ahoy! and Ritz.

Additionally, we are continuing to launch compelling activations like Star Wars Oreo and Oreo space dunk to delight our fans while driving incremental lift. Turning to Slide 8. Along with improving biscuit volumes in the second half, we are well positioned to deliver sustainable long-term growth in chocolate. Recent spikes in the cost of cocoa ingredients have been widely discussed, but we soon expect the market correction to a more sustainable price as the mid-crop is emerging in line with historical trends and early signs on the main crop are encouraging.

Chocolate remains a great category. It is continuing to grow with volume resiliency and despite increasing prices. And within this great category, we offer some of the world's strongest, most iconic chocolate brands which include Cadbury Dairy Milk, Milka, Toblerone, Côte d'Or, Marabou, Freia and Lacta. These brands are already the leaders in numerous key markets. and we are continuing to invest in A&C to further accelerate loyalty and growth. At the same time, our proven RGM playbook provides our teams with the necessary agility in offsetting inflation while maintaining solid volume dynamics and protecting shares.

We remain confident that we are well equipped to continue navigating fluctuating input costs and that we're structurally advantaged to accelerate long-term chocolate growth. Turning to Slide 9. It is important to reinforce that while the external environment remains volatile, we remain focused on accelerating our long-term growth strategy. We're continuing to reinvest in our brands, expand distribution, drive M&A and scale sustainable snacking. We remain on track to deliver 90% of revenue through our core categories of chocolate, biscuits and baked snacks by 2030. And our teams continue to deliver strong progress against our strategic agenda.

For example, our OREO marketing team continues to design and deliver exciting creative activations that capitalize on consumer trends and drive incremental lift. We recently collaborated with Lucas film to launch 2 versions of a special edition Star Wars cookie in the United States, which unites our strong OREO fan base with the equally strong Star Wars fan community. While both versions are wrapped in identical exterior packaging, consumers don't know which sites they're on until they open the pack. This creative and fun approach is driving strong sales, making this collaboration our strongest limited edition yet.

This collaboration is the latest example of our strategy to cement the cultural relevance of OREO with key partners who help us bring their favorite stories to life. We're planning some more exciting but still top secret collaborations for the remainder of this year and into 2025. Along with these marketing activations, we are continuing to strengthen store availability, visibility and execution around the world. Here in the U.S., for instance, our performance in the club channel is growing mid-single digits, while the value channel is growing double digits.

Both are driven by our family size multi-packs which offer a great price per cookie or cracker rather than overall package prices. We also are continuing to harness the power of recent acquisitions to capture synergies and drive growth. For example, our Chipita baked snacks business is growing high single-digit volume in Europe, led by convenient 7 Day Croissant that helps satisfy consumers on the go across a broad range of snacking occasions. Additionally, we are making continued progress on our environmental and social sustainability agenda.

For example, we continue implementing our structured and scientifically validated road map to reach net zero carbon by 2050. As an example, our biscuit manufacturing plant in East Suzhou, China was recently certified as carbon neutral. The plant has reduced carbon emissions by 16,000 tons, the equivalent of planting 7,000 trees for 100 years. Through implementing new technology solutions, including an innovative system to recycle, residual heat and wastewater as well as a new seller photo voltage system to generate green electricity.

To learn more about our strategy and review our annual performance data in detail, I encourage you to read our snacking main rights report available on our website. On Slide 10, before I turn the microphone over to Luca, I'd like to briefly highlight our recently announced strategic partnership with Lotus bakeries. This exciting initiative includes 2 main components. First, we will work with Lotus bakeries to develop and launch co-branded chocolate products, combining unique caramelized crispy Biscoff taste with our iconic global chocolate brands, including Cadbury and Milka. We aim to launch the first products in Europe in early 2025.

Second, we will manufacture, market, distribute and sell the Lotus Biscoff cookie brand in India starting in the second half of 2025. Partnering with LOTUS will enable us to simultaneously scale our sweet biscuit business in the important emerging market of India, while also innovating our strong European chocolate business with new products to grow consumer interest and loyalty. As we strive to lead the future of snacking by winning in chocolate, biscuits and baked snacks M&A and ventures remain an important part of our growth strategy. This innovative partnership is a great example of our approach, and we continue to explore additional opportunities. With that, I'll turn it over to Luca to share additional insights on our financials.

[Luca Zaramella, executive]

Thank you, Dirk, and good afternoon. Q2 marked a solid quarter for the business. with organic net revenue growth across each region, strong profit dollar growth, substantial reinvestment into working media and robust free cash flow generation and capital return. Revenue grew plus 2.5%, with strong pricing execution. This number includes 1.3 points of EU customer disruption that is now behind us. and 40 basis points of [ boycott ] headwinds in our EMEA region. Developed market volume mix was down minus 2.2% for the quarter, primarily impacted by Europe customer disruption, with some ongoing softness in the U.S. biscuit business.

Total revenue for emerging markets grew plus 4.5%. Developed markets grew plus 1.2%. Moving to portfolio performance on Slide 13. Biscuits and baked snacks grew plus 0.8% for the quarter. Several brands delivered solid growth, including OREO, RITZ, 7Days, Club Social and [ Tate ]. We saw ongoing softness in parts of the U.S. biscuit portfolio. though we have seen early signs of improvement in brands like Chips Ahoy! over recent weeks with clear plans to improve the overall biscuit growth enough to, as we've mentioned. Chocolate grew plus 5.6%, with significant growth across both developed and emerging markets.

Volume/mix was down minus 2.6%, which was nearly all driven by customer disruption in Europe. Cadbury Dairy Milk; Lacta in Brazil and Freia and Marabou in the Nordics, all posted strong growth during the quarter. Milka also posted solid growth. Gum & Candy grew plus 2.9%, driven by continued momentum and strength in key markets, including China, Brazil and Western Andean. Volume mix in this category was negatively impacted [ by polls ] in the U.S. Let's review market share performance on Slide 14. We held or gain share in 40% of our revenue base with strength in chocolate as well as Gum & Candy. [indiscernible] was partially offset by softer results in our U.S. biscuits business which accounts for approximately 25 percentage points of revenue and disruption in key markets across Europe.

Moving to regional performance on Slide 15. Europe grew plus 2.7% in Q2. Execution was strong in the quarter with a number of key countries delivering growth through solid pricing and in-store execution, which led to share gains. This trend was partially offset by volume declines associated with expected customer disruption. Pricing is now completely in line with across all key customers, which positions us well for Q3 and up 2 of the year. OI dollars were up nearly 25%, including significant ASC investment. North America grew plus 0.3% against a strong compare of more than 12% in the prior year. Growth channels, including club online and value, along with Canada, delivered solid growth.

However, overall volume mix declined as some consumers continue to seek out products with lower absolute price points, impacting brands like Chips Ahoy!. We have a clear plan to address this dynamic by adding more core packs in the OREO, Chips Ahoy! and Ritz within the $3 to $4 range beginning Q4 while other households continue to prefer the attractive unit price offerings that our family and party packs provide. And although early, a recent reformulation and new promotions have led to gradual improvement in Chips Ahoy!. There is clearly more work to do, but these initial signs are encouraging. North America increased by plus 3.4%, EMEA grew plus 4.2% for the quarter. China delivered another strong quarter with high single-digit growth fueled by ongoing brand equity enhancement in OREO, Chips Ahoy! Stride along with distribution gains.

India was flat overall with strong chocolate growth offset by more competitive intensity and down trading in biscuits as a result of higher overall food inflation. Our India team has plans to activate new pack sizes and new value pricing within Oreo to improve growth and share, starting next month. Australia, New Zealand and Japan delivered a robust quarter of growth, coupled with strong share gains. By cost in the Middle East and Southeast Asia remain a headwind to results, which we expect will continue enough to, though this impact will be in the base beginning in Q4. The overall impact for the region was 2 percentage points worth of growth. EMEA increased OI dollars by more than 46%, with meaningful A&C increases.

Gross base growth, coupled with some upsides related to lapping Nigeria currency losses last year drove this performance. Latin America grew plus 4.5%, with solid price execution and a decline in volume mix. Note that Argentina pricing has been capped at 26% unlike Q2 last year where The country contributed more than 50 points to Latin America growth, brazil and our Western Andean region both delivered mid-single-digit growth. Mexico growth was modest. -- in part due to lower flow of public subsidies to households that is expected to resume in the second half. Consumer confidence remains strong in Mexico, while Brazil and the Western Andean countries continue to demonstrate solid growth. Latin America delivered OI growth of nearly plus 24%, supported by strong pricing.

Turning to Page 16. In Q2, we saw strong double-digit OI and gross profit dollar growth, top line strength, pricing execution, ongoing cost discipline partly drove these results. Nevertheless, the strong half one results also reflect our favorable cocoa pipeline compared to current market prices, which will clearly reverse and will be a meaningful headwind in the second half.

Next to EPS on Slide 17. Q2 EPS grew plus 25% in constant currency. Most of this growth was driven by operating gains as well as favorable cocoa cost pipeline and coverage strategies. And despite currency headwinds, we grew adjusted EPS and reported ForEx by more than 19%. We are holding our EPS goal for the year despite these gains since cocoa will become a more material headwind in the second half.

We continue to demonstrate strong free cash flow and capital deployment, as you can see on our Slide 18. We delivered EUR 1.5 billion of free cash flow in half 1. We have repurchased 1.1 billion in stock through half 1 and will remain opportunistic for the remainder of the year. We also announced today that we are raising our dividend by 11%, marking 9 consecutive years with a double-digit dividend increase.

Before moving to our outlook, let me make a few comments relative to Cocoa on Slide 20. As we know, this is the most likely top of mind for our investors. Our teams continue to monitor the market very closely to put ourselves in the best position possible. While we want to protect ourselves, we continue to put flexible structures in place that enable us to participate in potential market price declines versus current historically high prices.

In addition, we continue to fine tune our commercial strategies to ensure long-term sustainable growth while managing through near-term challenges. As guiding principles, we will protect critical price points and key thresholds, while broadly utilizing our GM and implementing more pricing in the least elastic segment and consumer occasions. Our objective is to limit elasticity and volume losses while protecting our gross profit dollars to the extent possible as we believe cocoa prices will adjust eventually.

We will also implement cost measures to ensure that we protect our bottom line and ability to invest in the category. It remains too early in the year to provide specifics around 2025. However, there are some key elements and points in time to consider. The mid-crop has been good and in line with historical trends. And although early signs around the main crop are encouraging, we should get a much clearer indication in September, which will likely act as the next catalyst for cocoa cost.

As we get to our Q3 earnings cycles, we expect to be able to share more color around market liquidity and the range of cost that will relative to 2025 as well as EPS. I'll close with our outlook on Slide 21. Our outlook for '24 remains unchanged. We continue to expect [ on algo ] delivery for revenue, earnings per share and cash flow. Note that this earnings per share include significantly higher costs related to Cocoa for the second half, which is important to factor into our 2 models. This includes the upper end of our 3% to 5% range for organic net revenue, which considers the impact of completing price negotiations in Europe and plans to drive improvement enough to result in North America. Most of our key assumptions remain consistent with what we shared with you in our last call with the exception of interest expenses, which is now estimated at EUR 275 million for the full year. With that, let's open the line for questions.

[Operator]

[Operator Instructions] We'll take our first question from Andrew Lazar of Barclays.

[Andrew Lazar, analyst]

Maybe to start off, Dirk, last quarter, I think you spoke about the need to offer better value to the consumer in parts of the North America segment. In 2Q, volumes decline -- volume declines moderated in North America as did the benefit from pricing. So how do you see the consumer situation in North America currently? And do you see the need for a more aggressive price reset? And then separately for you, Luca, volume and organic sales growth needs to accelerate sequentially to hit the upper end of the 3% to 5% range for the year in a still challenging environment, while unchanged full year EPS guidance despite the 2Q beat implies a deceleration in the back half on EPS. And I was hoping you could bring us through some of the logic behind those dynamics, please.

[Dirk Van de Put, executive]

Okay. I'll start first, Andrew. So as it relates to the consumer in the U.S., I would say there's sort of 3 key dynamics to keep in mind. First of all, -- the category remains soft, but it is stabilizing. And I would say that the consumer is experiencing attention because they see the overall inflationary picture. They see the food prices that have increased and they have a feeling of less purchasing power.

At the same time, particularly as they see grocery prices stabilizing and their wages being up about 4%, while grocery prices are up 1%. They're starting to have bigger confidence than the same period last year, although these high prices remain a concern for them. And I would also say the other thing that we see in the category, while it's soft, as I said, the elasticities have stabilized since Q4 '23.

The second thing about the consumer is that they have changed where they shop. So the biscuit category is seeing the largest growth in chains like Value Club and Walmart while in grocery, we are seeing a share decline. And probably the most important thing we're seeing about the consumer is that the definition of value has changed for many people because if you look 2, 3 years back, it was all about the price per pack or in fact, the unit price per cookie and people were drifting more towards family and party size pack, and that benefited us.

Now particularly lower income consumers they have moved to a basket size that they can afford. And if the biscuit brand that they like can fit in there at the right price point they will buy. If not, they will not buy any biscuits. So these days, we have to be much more aware at which price points we offer a pack. So what are we going to do, we don't think we need a full price reset. At the moment, our OI, our operating income and our cash generation is strong, where we focus is largely on improving our sales and our share in a smart way.

We have an opportunity to drive more distribution in displays. And so we need to keep on driving those 2, particularly also featured displays. We are implementing new targeted promotions that are probably going to offer a little bit more price on brands like Chips Ahoy!, which is probably most affected by sort of the hesitation from the lower-income consumers. And then we will also launch a whole range of new smaller packs that will offer the consumer an opportunity to buy around $3 to $4 for the pack. And so we think that also will make a difference.

So more promotions, smaller packs that we will offer, driving distribution, those are the solutions that we are planning for. We're already seeing benefits. Chips Ahoy! is recuperating quite nicely. OREO and Ritz are increasing their market share. And on top of all that, we will have some very impactful activations. So we talked about Star Wars in the call here. There's another big one coming up, which I cannot yet announced, but we have some very strong activations on OREO in the second half. All that together gives us the confidence that we will see a good second half in North America. Luca?

[Luca Zaramella, executive]

So for the first half, we are broadly where we would have expected to be, quite honestly, revenue might be a little bit softer, but strong profit will allow us to invest into some selective additional activities enough to deliver profitable volume growth. I think you rightly pointed out the implied top line growth for up to which current guidance requires an acceleration. And that changes on 3 main drivers. The #1 driver that will impact the most these Europe that will have to return to volume growth. . With disruption behind us, we feel quite good about achieving that. The team in Europe has proven consistently that they can execute very well. and plans are in place to activate around big key consumers activities like back-to-school and Christmas. It is also important to remind ourselves that the trade stock pipeline is an opportunity in Europe as we had to pull back on shipments and solid piping the trade is a material opportunity and something that we are clearly already seeing in July.

The second element is the U.S. biscuit positive volume. I have to say the diagnostics around what is happening to the overall category and the share pressure that we see are clearly giving us an indication of what has been changed. And we truly believe that hitting those price points is going to result in positive outcomes. And again, we start seeing some green shoots in the category and in our brands. The third element is that while I do not like to talk much about lapping last year, for the second part of the year, we discontinued some product lines that were material in volume for the give-and-go business.

And I think from now, we will be comparing more to a clean base. And so I think that's the third element to bear in mind. I think all in all, we have, at this point, line of sight to the upper end of our revenue guidance for the year. As far as EPS goes, importantly, we have landed the price in line with our expectations. There might be more selective price that we will be doing in light of [indiscernible] cocoa. But no major deviations expecting on this front. Our commodity cost for the year is almost 100% loss. So no surprises expected on that front either.

As I mentioned a few times, just in mind that we bought Cocoa quite well for this year and that year-to-date cocoa costs are meaningfully better than the 2024 average. So there is more cost coming in the second half. [indiscernible] EPS guidance being kept in line despite the very strong results year-to-date. We will continue to invest in working media in line with the first part of the year, but we will also start optimizing, as we discussed a few times, the nonworking media, which is still an opportunity in this outlook. And finally, we will continue to pursue cost measures and productivities. So all in all, we believe reaffirming guidance is the right thing to do. And again, July is shaping up quite well for us at this point in time. But obviously, as I said, there is more work to do, particularly around the U.S. consumption side.

[Operator]

We'll take our next question from Ken Goldman of JPMorgan.

[Kenneth Goldman, analyst]

I wanted to clarify a little bit about Europe. You talked about how completing your pricing actions helps position you well in terms of volume growth for the second half. I think you also mentioned that Europe elasticities, though still modest, are moving slightly higher. So I'm just curious, if maybe we could elaborate a little bit on what drives your confidence in volume growth? Just given some of the pricing actions, what seemed to be tougher comparisons and that slightly higher elasticity that you mentioned, if I'm correct on all of those.

[Dirk Van de Put, executive]

Yes, yes. Well, first of all, the consumer, I would say, is cautiously optimistic. I would say in general, we feel that the European consumer seems to be in a better place than the North American consumer. They see their incomes rise. The inflation is softening. They see quite stable employment, particularly in the U.K. is important for us in Europe. And there, the confidence which was relatively low last year is rising because they feel that their broader economy is doing better, and they feel better about their personal finances.

And then I would say, France and Germany, the other 2 big countries, we have some mixed views across the economic indicators, but the confidence is also above last year. So second thing is, yes, there is an uptick in elasticities and there is also more promotions. But I would say the elasticities remain quite modest. And there is a little bit of an increase in promo intensity. We're also seeing the same shift of people buying -- going from hypers and supers to discounters. And then we see also these affordable packs at the right price point.

So similar movement, as I was talking about in North America. If you look at Q2, our biscuits and baked snacks are already positive in Europe. They're growing their value at 2.8% and volume at 0.8%. In chocolate, we see a strong momentum with seasonal shapes. We also see tablet, bars and pralines doing well. Back-to-school and Christmas, of course, in chocolate will be very important. And we are continuing to watch the pricing impact. But overall, I would say, if you exclude some of the disruption that we saw, the performance in Europe is quite solid.

And since that disruption in the pricing has been implemented now, we feel that, that solid underlying growth that we see there is going to continue in the second half. So we're expecting quite a good second half. I would also like to mention here that chocolate despite already seeing quite a bit of prices remains quite resilient. There's more to come, seen the cocoa situation. But overall, volume has been quite solid. We're also planning to continue to invest strongly our Easter was very strong. So we have high expectations for back-to-school and Christmas. And so overall, I would say that I would be surprised if the second half is not a good half for Europe.

[Operator]

Our next question is from Alexia Howard of Bernstein. .

[Alexia Howard, analyst]

So just a couple of quick ones. On the ERP transition, is that something that's going to be rolled out across different regions? Or is it something that's going to affect particular categories at a particular point, should we be worried about the impact of that transition for 2025?

[Luca Zaramella, executive]

So it is a problem that will be completed over a 4-year time frame. And the reason why that is a couple of things. One is we will use a staggered approach, and we will be able to implement that in part of the business first and rolling out resources eventually from that part of the business and holding onto those resources into the next wave of chances that will be impacted. We will also make a big distinction between some modules of SAP versus others. So we will not necessarily take even by region, a big bank approach. . And we believe that the preparation we had been doing for the last, I would say, 18 months positions us well in terms of successful execution. So we've tried to minimize all potential issues by going broadly in one region or by road in the world of SAP. And we believe given also the sources we have internally and importantly, the ones we have secured through [indiscernible] and Accenture that we will have a good opportunity to execute as well.

[Alexia Howard, analyst]

Great. And then as a follow-up, I'm just curious about the long-term free cash flow guidance. It's been sitting, I think, at this $3 billion level for some time, even as your earnings growth has obviously played out quite nicely in recent years. You've obviously got guidance of $3.5 billion this year. What are the puts and takes? Or what are the criteria that you would use when you're thinking about whether that guidance of free cash flow could be raised at some point down the road.

[Luca Zaramella, executive]

The answer is yes. We will have a couple of onetimers in the second part of the year. And that is really what drives the 3.5. But both last year where we had to pay some taxes related to coffee. And this year, where we have potential one-timer that we will be paying most likely off in August, I would say. If you strip those out, that are clearly a onetime impact. I mean our cash flow is running at $4 billion plus. So we feel quite good about it. cash conversion cycle continues to be top notch. We continue to improve days outstanding. And one of the reasons why we believe SAP and o9, which is the other platform around supply and demand planning that we are implementing with this ERP program is going to be beneficial to us is arounding banker, which is an area that has material opportunities in it. So the answer is certainly, we can strive for more than $4 billion on an ongoing basis.

[Operator]

We'll take our next question from Michael Lavery of Piper Sandler.

[Michael Lavery, analyst]

Just wanted to come back to cocoa for a second. That slide you laid out is really helpful at the end of the presentation. I was wondering if you could give us a sense of how much you might be placing a bet on prices rolling over in September. Put it a little differently, have you been securing for '25 kind of as normal, which I think would roughly maybe put you at about half or a little bit more covered at this time of the year. Or are you trying to position for a move that you see -- it sounds like you might expect to come a little bit later in the year?

[Luca Zaramella, executive]

Yes. Look, we believe there is going to be a correction. I mean even today, if you take the spot price of today, which is [ round about ] 6,500 GBP per ton and compare it to next year, Q4, there is a gap of 2,200 pounds, which is clearly material. So the market in light of the mid-crop and importantly, of the evolution of the main crop sees a clear adjustment of prices going forward. And I think there might be even more than this.

Obviously, we are not going to go blind into 2025. We cannot wait and that on the main crop to be good. And we have been certainly improving and increasing our physical coverage into 2025. We have around about 1/4 of our positions into 2025 over to futures. And you might imagine we have covered out there in the year to take advantage of this inverted curve, which means how big of a discount do you get the further you go out versus today's fault. The rest is covered through a series of derivatives that allow us to participate in a potential market correction. So at this point in time, whichever way you look at it, we have protection for the most part of our positions into 2025. And on the other side, we have secured also some physical forward positions that I believe will provision as well compared to the market eventual cocoa price adjustments that might happen or not.

[Michael Lavery, analyst]

Okay. That's very helpful. And just following up on Biscoff. It sounds like a very interesting partnership. Can you give a little better sense of maybe the structure. It sounds like it's not a JV, but perhaps across licensing. Maybe a little bit of just how it works? And then also kind of what its potential to be obviously, at the moment, it's initially going to be Europe and India, but could it go global? Are there reasons that it's got any geographic limitations?

[Dirk Van de Put, executive]

Yes. So there's 2 main components to the partnership. So the first one is that, we're going to co-brand chocolate products with Biscoff. And Biscoff is not yet a very big brand in North America, but it's quite a big brand in Europe. It's one of the biggest biscuits brands, and it is -- it has a quite unique taste and also quite unique consumption moment. And the combination of a chocolate bar with Biscoff filling or with pieces of Biscoff in there is quite delicious. So that's the first one.

To give you an idea, we already have a similar line, which uses OREO as the filling, and we're talking about several hundred millions of sales in Europe for that line. So we have the same expectations for the Biscoff line. And if that is a success in Europe, we will obviously want to extend that around the world into our other chocolate brands. And the first launch of this product will be in early 2025. And that will help us with excitement -- building excitement around the chocolate market.

Then secondly, the Biscoff is looking for global distribution. And there's certain countries where that is not easy to get through, we will manufacture, distribute and sell Biscoff in India as a first country. It's going to start in the second half of 2025. It's very interesting for us because at the moment, our biscuit business in India is really built around OREO and this will -- is going to give us a second big brand, very different from OREO, very different audience, very different consumption moment, largely with coffee or tea in India.

And so we think it's going to be an ideal complement to keep on building a strong biscuits business in India. And that clearly is a test to see if we would do other countries around the world. And so yes, it's not a joint venture. It's a cross sort of licensing of our brands to each other.

[Michael Lavery, analyst]

Okay. That's really helpful. I fly Delta and people go crazy for them on there. So you've probably got at least a better [ head start ] in the U.S. than you may know.

[Operator]

[Operator Instructions] We'll move next to Tom Palmer of Citi.

[Thomas Palmer, analyst]

Thanks for the question. I think a quarter ago, you talked about volume being flattish year-over-year in 2024. I just wanted to confirm, is this still the expectation? And then any help as to how much maybe some of the more nonrecurring items like the disruptions in Europe or the subsidy timing in Mexico might have weighed on volumes in the second quarter, so we could think about kind of an entry run rate, at least for the third quarter.

[Luca Zaramella, executive]

Yes. I think the expectation, it is still around having a sort of flattish volume mix for the year. And in terms of onetimers, as I said, there is 1.3 points of disruption that happened in Q2. The whole 4 points of volume mix in Europe are attributable to the consumer -- or the customer disruption, sorry. There is another component, which is about the Middle East conflict that impacted on [indiscernible] 3 percentage points for the quarter.

The other one, as I said, that you need to bear in mind is the impact of Give & Go and the discontinuation that we had in Q4 last year, but also importantly, last year, we had a carryover of the first half disruption in Europe into half 2. And that was around about $100 million of revenue impact. So when you strip out all these impacts, you clearly see a much better linearity of the volume mix and revenue. And when you come to terms that the actions that the U.S. is taking around consumers and packs, I think we have clearly an expectation that this improved volume mix in the second half and improved revenue in the second half.

[Thomas Palmer, analyst]

And just on the A&C side, I know we -- you talked about some meaningful step-ups here in the first half of the year. I think if we look at the timing of some of the step-ups last year, it was maybe a little bit second half weighted, at least in terms of the dollar spend. Does that become, maybe, less of a headwind in terms of the year-over-year pressure as we think about the back half of the year in terms of the flow-through to earnings?

[Luca Zaramella, executive]

There might be a little bit of an upside in relation to the fact that, as we mentioned, we are taking a deeper look at all the nonworking media part of A&C. I don't expect it to be material for the second part of the year. And importantly, we will continue still investing in our working media. So I don't expect a material upside in terms of P&L impact due to lower A&C in the second part of the year.

[Operator]

We'll take our next question from Peter Galbo of Bank of America.

[Unknown Analyst]

Luca, I was just wondering, if you could maybe unpack the Mexico comments a bit more. I think we've heard kind of different things from different companies this quarter related to Mexico. Some have mentioned the subsidy timing that you called out, others have seen maybe more of a normalization after such a strong kind of several years in Mexico. So just curious, a, if maybe there's a bit of bolt going on there at this point? Or if truly, you think that the subsidy piece was a blip and you've already seen a reacceleration into July.

[Dirk Van de Put, executive]

Yes. I mean overall, the market conditions in Mexico for us are healthy. For instance, the biscuits and the chocolate category, both are mid-single-digit increase in value, gum and meals also performed quite well. I would say the economy is doing well. There is good employment. There was a lower flow because of the elections of public subsidies to the household that we think will start to normalize in H2. But in general, if you look at minimum wage has doubled in the last years in Mexico. So the overall climate is very positive as it relates to the consumer. If you look at the low single-digit Q2 growth that we had, that largely came from our candy and our chocolate business. which was offset by growth in government meals. And particularly in candy, we think that there probably our price points are a little bit too high.

We will need to work on those. In chocolate, a little bit the same. And we need to make sure that we're well positioned for the Christmas season there. Again, government meals are doing very well and also the biscuit growth for us was quite strong. The OREO distribution, which is critical because of the Ricolino partnership that we have is growing well. And OREO was growing also mid-single digits in Mexico. So I would say the -- I think that this effect of the subsidy certainly affected candy and chocolate Overall, we remain quite positive. We think there will be a gradual recovery in H2. The long-term opportunity for growth remains quite significant. The integration with Ricolino is going well, and their route to market will enable us our ambition to grow market share, particularly for biscuits and chocolate. There's also a U.S. business related to Ricolino which, of course, is not the subject of the question. But that one also is important because it positions Ricolino as the leader of the Hispanic U.S. candy market. But overall, I would say I think it's a temporary issue driven by these subsidies and in the second half, I'm expecting to see a good recuperation in Mexico.

[Unknown Analyst]

Great. That's helpful. And Luca, just maybe a quick one. We've had some questions come in. Obviously, the kind of over-delivery on gross margin in the first half, and I think that there was an expectation kind of coming out of the fourth quarter of this year that you'd be down gross margins kind of basis. More than basis points actual points on a year-over-year basis as we exit '24. And just wanted to see if that's kind of still the expectation given the cocoa inflation at 2H.

[Luca Zaramella, executive]

Yes. I think, look, we moved away from giving guidance in terms of gross margin percentage. What I would tell you is, we are going to have a year that is ahead in terms of gross profit dollar growth delivery compared to our usual algorithm. I think in the end, what will really matter is the amount of pricing we would have implemented and how much pricing we are going to take into next year in light of whatever cohort is going to be come the end of 2024.

So we are very happy. I have to be honest with the level of profitability we have achieved in the first part of the year. There, that suggested, I believe, under normal circumstances that we have upside to the guidance we gave you. But reality is cocoa is a material headwind in the second half of the year. And reality is we might have to selectively invest in some of the activities that you have been hearing throughout the call. It is not a massive investment. It doesn't take away that in terms of profitability and ability to reinvest in A&C. We have done, I believe, a very good job. But we prefer maybe to be cautious around the level of profit going forward because, again, cocoa prices, as we have secured them in the first part of the year are clearly much lower than the current spot price and 2025 price for cocoa would suggest.

[Operator]

We'll take a question from Matt Smith, Stifel.

[Matthew Smith, analyst]

Just I wanted to ask a question about the performance in India. You mentioned volumes are relatively flat in the market this quarter with a bit of a step-up in Elasticity. Can you talk about how you're approaching distribution point opportunities in this type of consumer environment? Are you continuing to see good progress on expanding your distribution in the market.

[Dirk Van de Put, executive]

Yes, yes. So in India, if I give you a little bit of background, so we're looking at flat growth in Q2, mid-single-digit Chocolate growth is continuing well, high single digit, good gross margin improvement. Cadbury Dairy Milk continues to be a strong leader of the market. despite the fact that we've already implemented some pricing, it's mainly in biscuits where India is being affected. So we have seen a consumption dip because there is more intense competition and consumers are clearly moving to lower price points. and our biscuit business is largely built around OREO, which I would call a more premium biscuit in the Indian market. If I look at the stores, so since 2019, we've deployed more than 700,000 visi-coolers. In 2023, we added 180,000 stores to our coverage and about 100,000 new visi-coolers. In H1 in '24, we've already added another 140,000 stores and 90,000 visi-coolers. So that's a very strong performance compared to '23. Still, if you take into account there's 9 million food retail outlets we now cover about 2.3 million directly and just over $3 million if we take our indirect coverage. So we still have a huge headroom. So I would say yes, there is a bit of a slowdown after 3 years of inflation, particularly a group of the consumers, particularly in biscuits, is a bit more careful in their consumption.

We don't see that as something that would slow down our focus on expanding our distribution in India. We're going to continue to work as we've been working in the previous years, placing those visi-coolers driving our distribution because we are very confident that gradually the consumer will start to buy OREO again. And our chocolate business, as I mentioned, keeps on doing very well.

[Operator]

This does conclude our question-and-answer session. I'm happy to return the call to Dirk Van de Put for any closing comments.

[Dirk Van de Put, executive]

Well, I thank everybody for their attendance to the call. I would call it again a solid second quarter, and our expectations are for an improved and looking forward to see you at the end of Q3.

[Luca Zaramella, executive]

Thank you, everyone .

[Operator]

Thank you. This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.