億滋國際 (MDLZ) 2018 Q1 法說會逐字稿

Good day, and welcome to the Mondelez International First Quarter 2018 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 President, Investor Relations for Mondelez. Please go ahead, sir.

Thank you. Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Brian Gladden, 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 will 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 statement 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 will 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.

And with that, I'll now turn the call over to Dirk.

Thank you, Shep. Good afternoon, and thank you for joining us.

I'm pleased to say that 2018 is off to a good start. We have improving top line momentum as well as continued margin and EPS expansion. Specifically, we delivered an organic net revenue growth of 2.4%, which was underpinned by positive volume growth and pricing. We also benefited from the timing of Easter and Chinese New Year. In addition, several of our Power Brands performed well, including Cadbury Dairy Milk, Oreo and Milka. Each was up mid- to high single digits. On the bottom line, our adjusted operating income margin expanded to 16.7%, driven by lower SG&A costs and productivity savings, while the adjusted EPS increased nearly 10% at constant currency.

We are also encouraged by snacking category growth, especially in emerging markets where we generate about 40% of our net revenue. While we certainly have opportunities for improvement, we're moving in the right direction with competitive advantages that set us apart from many of our peers: first, we have a strong stable of iconic brands; second, our geographic footprint is favorably balanced, with about 3/4 of our revenues coming from outside of North America; and third, we maintain leading positions in snacking, where global category growth trends are improving. With these powerful assets, I remain confident that our company is well positioned to succeed.

As I outlined at CAGNY in February, I believe the key to unlocking more value for shareholders is based on a couple of simple concepts. First, we need to put the consumer at the center of everything we do. That means we need to evolve our understanding of when and why consumers snack and how we best deliver on those needs, and second, we must execute with excellence every day.

Over the past few years, our focus has been on significant margin improvement through restructuring, and as we've implemented changes, we have opportunities to improve how we function on a day-to-day basis. These 2 simple mandates are critical to delivering our 2018 plan, and they will underpin the strategic framework to deliver further sustainable growth over the long term that we will talk about in September.

So let me now illustrate with a few examples from the quarter where we're winning in the marketplace. I'll start with Europe where we delivered excellent results in both biscuits and chocolates, driven by strong volume mix.

Across the region, we continue to build our fast-growing chocobakery platform which is up more than 20%. Chocobakery is a franchise that uniquely leverages our strength because it lives at the crossroads between our iconic chocolates and biscuit brands. Combining Milka or Cadbury chocolate with Oreo cookies or Ritz crackers is a consumer proposition that is hard to beat. In addition, our European team executed well on our Easter plans and expanded our gifting and premium platforms in many key markets.

Switching to the U.K. Our chocolate business grew double digits, and here also, our chocobakery platform continued to shine, supported by the launch of Cadbury Freddo biscuits.

In Russia, our business was up mid-teens, with strong results both in biscuits and in chocolates. In fact, our chocolate business recently achieved the #1 position in this growing market. It was fueled by recent Alpen Gold Dark and Milka Dark new product launches which increased our market share by nearly 3 percentage points.

I also want to highlight the great progress of our Cocoa Life sustainable sourcing program which is especially important to many of our consumers in Europe. We know that as we grow our business, we can also grow the positive impact have on people and on the planet, and Cocoa Life is a great example of doing exactly that.

Cocoa Life is a holistic and integrated program that not only has helped to increase cocoa yields but it's also helping farmers in cocoa communities achieve sustainable livelihood. By the end of last year, we reached more than 120,000 cocoa farmers in nearly 1,100 communities in 6 origin markets, and what's more, 35% of our cocoa is now sustainably sourced. So just last week, we announced that our Milka brand in Europe will join Cocoa Life with chocolate tablets displaying the Cocoa Life logo starting from August. Milka will now join other brands that contain sustainably sourced Cocoa Life cocoa, including Cadbury Dairy Milk in the U.K. and Ireland, Côte d'Or in Belgium and France, and Freia and Marabou in the Nordics, and Oreo cookies across Europe.

In addition to Europe, our emerging markets also performed well this quarter, building on the positive trends from the second half of last year. Volumes increased and we gained market share in several important markets. And once again, India was a standout, with revenue up double digits behind strong volume gains. We also increased distribution across the country and coupled that with improved in-store execution and a number of successful new product launches such as Cadbury 5Star and Lickables, which all drove market share gains. And biscuit growth also continued to be strong which was led by Oreo.

In China, we delivered mid-single-digit growth, bolstered by improved sales execution, a good Chinese New Year and strong results from our recent Oreo relaunch. In addition, China's e-commerce net revenues doubled in the quarter. This contributed to another quarter of healthy growth in our global e-commerce net revenues. They were up more than 40%.

South East Asia delivered its 10th consecutive quarter of growth, up high single digits. It was led by a strong performance in Indonesia, driven by Oreo innovation and route-to-market expansion.

And in Latin America, we delivered mid-single-digit growth in Mexico, led by strength in candy, while Brazil biscuits improved, driven by success in our chocobakery business with products such as our new Lacta cookies.

However, these highlights were tempered by our performance in North America. We acknowledge the challenging dynamic in the market, as you're hearing from other CPG companies, but I would emphasize that we're bullish on the long-term strength of our North American franchise and remind you that it represents only 25% of our net revenues. The fundamentals in the region got better last quarter, with positive volume growth and sequential improvements in biscuit consumption and market share. In fact, the demand for our brands was strong. That said, our supply chain has had challenges effectively meeting all that demand, and this, along with our gum mix and overall trade destocking, drove the weaker revenue in North America. As a consequence, higher operating costs are impacting our margins.

I'm pleased to say the North American team is squarely focused on improving execution, and our customer service levels have significantly improved over the past couple of months. I would also note that we're starting to see the competitive advantage that our TST system provides, and we are increasingly confident in its ability to contribute to share gains as our service levels improve. As we said in our last call, we expect gradual progress in North America to continue over the next few quarters.

With that, I'll hand it over to Brian to review our quarterly performance in more detail.

Thanks, Dirk, and good afternoon.

We're pleased with our topline growth in Q1 as we saw improved momentum across much of our business. Organic net revenue increased 2.4%, driven primarily by volume. Three of our 4 regions delivered solid profitable growth with strength in Europe and AMEA. Our top line grew on a reported basis by 5.5% as the benefits of a weaker U.S. dollar versus the euro and British pound are now providing a tailwind to our growth. Power Brand performance remains the driver of our organic net revenue growth, delivering a 2.8% increase, with strong results from brands like Cadbury Dairy Milk, Milka and Oreo.

Continuing the trends we saw in the second half of last year, emerging markets performed well, increasing 5.5%, with a good balance of volume and pricing. Given this represents nearly 40% of our revenues, this is good news for us.

On balance, we're seeing positive pricing for the global business. Increased prices in emerging markets are more than offsetting some negative pricing in developed markets. In Europe, minor price actions have helped contribute to good volume growth, and in North America, pricing is slightly down but consistent with the market dynamics we've seen for the past year or so.

On a regional basis for the quarter, Europe's organic net revenue increased 4.7%. This volume-driven growth was broad based, with strength in both chocolate and biscuits in the majority of the region. We did see a benefit from Easter phasing that will reverse in Q2, but the business is performing well.

AMEA posted growth of 3.6%, with double-digit growth in India, strength in Southeast Asia and solid results in China, which benefited from a good Chinese New Year and the timing of the holiday.

Latin America grew 2.2%, behind the mid-single-digit growth in Mexico, strength in Brazil biscuits and currency-driven pricing in Argentina.

North America declined 1.8%, driven mostly by trade inventory reductions and gum weakness.

Now let's review our margin performance. We delivered a 20 basis point improvement in adjusted OI margin to 16.7%. These results were primarily driven by ongoing SG&A reductions.

Gross margins were pressured by 3 key factors: unfavorable mix, primarily driven by gum weakness; higher commodity costs, with benefits from lower cocoa pricing expected to positively impact our second half margins; and higher supply chain costs in North America.

While the mix challenge will continue, the other 2 pressures should subside as we move into the second half of the year. These dynamics, along with our strong net productivity plans, give us confidence that gross margins will improve as we move through the year.

On a regional basis, cost execution drove margin improvements in 3 of 4 regions. Europe margins grew 50 basis points to 19.2%, AMEA increased by 150 basis points to 16%, and Latin America increased 270 basis points to 18.5%. North America was down 210 basis points to 18.7% as we incurred higher supply chain costs, including freight and logistics inflation.

Now let me provide some category highlights. The snacking category continues to show some encouraging momentum, building on what we saw in the second half of 2017. In fact, growth from snacking was approximately 6%. Adjusting for the timing of the Easter holiday season, however, we estimate underlying consumption growth of approximately 3.4%.

Our Biscuits business grew 2.7%, with strength in France, Brazil, Russia and China and positive growth in the U.S. Approximately 75% of our year-to-date revenue grew or held share in this category.

In Chocolate, our global business remains strong, growing 4.8%. The U.K., India and Russia all delivered double-digit growth in the quarter. Approximately 70% of our revenue grew or held share in this category.

Gum & Candy was flat as the gum business remains challenged. About 15% of our year-to-date revenue in this business gained or held share.

Turning to earnings per share. We delivered another quarter of strong adjusted EPS growth, up nearly 10% on a constant-currency basis. These results were driven by interest cost favorability, the impact of share repurchases and our operating performance. We returned more than $800 million in capital to shareholders in total. We repurchased $500 million in stock and paid approximately $300 million in cash dividends as we increased our quarterly dividend by 16%.

Turning to free cash flow. Although Q1 is typically a negative cash flow period for us, driven by our business seasonality, we delivered positive free cash flow in the quarter. The approved cash flow was partially driven by the timing related to our year-end working capital balances.

Our team remains focused on generating approximately $2.8 billion in free cash flow for 2018.

Overall, we're maintaining our outlook for the full year. We're encouraged by our top line progress as both our categories and our revenue growth are a bit better than we had anticipated coming into the year. But it's still early as this is just one quarter. However, we would say that the cost environment is tougher than we planned. That's especially true in North America with the rest of our business well positioned on margins. We're still confident that our overall gross margins will improve as we move through the year, and we remain committed to delivering adjusted OI margins of approximately 17% as well as double-digit adjusted EPS growth. You'll see in our presentation that we've lowered our view on the expected tax rate to the low 20% range for the year. Looking ahead to the second quarter, we expect top line growth to be higher than Q1 as we lap the negative impact of the malware incident from last year. I'd also remind you that the second quarter is seasonally more challenged in terms of margins. This year will be also impacted by continued commodity cost headwinds and cost pressure in North America. Given these dynamics, we expect Q2 adjusted OI margins to be sequentially lower than Q1 but in line with our expectations for how the year would play out.

Now let me turn it back to Dirk for some concluding remarks.

Thanks, Brian.

So I would say Q1 performance was good. We saw improved category growth and consumption trends and we had solid performance from our Power Brands. We are optimistic, but it's early in the year, and we still have work to do as we focus on executing on our 2018 plan with excellence.

As it relates to the bigger picture, we feel encouraged about many of the trends we're seeing in some of our biggest markets outside of the U.S. With an international business that represents 75% of our net revenues, we believe we are well positioned to take advantage of these trends over the coming quarters.

Before I conclude, I'd like to update you quickly on the status of our strategic review. As I've told you a few times, we're taking a fresh outside-in look at everything we do. We want to best position ourselves to generate sustainable value creation in the years to come. We are making good progress with the process, and we remain on target to complete this work at the end of the summer. So we'll share more details with you at that time.

With that, let's open the line for questions.

(Operator Instructions) Our first question comes from the line of Andrew Lazar with Barclays.

I was hoping we could start, I guess, with North America just because despite modest expectations coming in, it's probably the segment that was still weaker than most had modeled. I was hoping you could provide us a bit more detail on why, I guess, organic sales would have decelerated sequentially in the region even though we're almost a year out from the initial sort of malware incident. And my sense that with respect to some -- I think you made a comment around some inventory deloading. I guess I was under the impression that, that was harder to sort of get into a problem with the DSD organization, where there's not as much sort of inventory sitting around, so hopefully, that would be the first part of North America.

Okay, all right. Thanks, Andrew. Well, before I go a little bit deeper, I would like to say that we feel strongly about the North American business. We think it's well positioned for long-term profitable growth. And the reason that I'm saying that is -- first of all, we are the #1 player in the biscuit market. I think we have great brands with Oreo, belVita, Chips Ahoy! We do have a differentiation from DSD, and we are improving our supply chain capability and performance. We're including recent investments. And we have new leadership in place with Glen Walter, and we are quite pleased with how much progress he is making in the operations. We do see the challenging environment. There's retail pressures as you know. There's changing channel dynamics, shifting more of the business into different channels, and as everybody has talked about, this higher logistics cost. But we're seeing very positive signs as it relates to the consumer in the market. The spending is strong. The snacking categories have been improving. Our consumption is increasing above the market, and we see no real dramatic change in the pricing environment. So Q1, the pricing change is similar to the rest of 2017. So first of all, why is the top line growth negative still? First -- the first reason you'd have to see with mix, we have a mix between gum and biscuits mainly, and the gum business is still in decline. Secondly, these retailers are decreasing inventories. And the reason why we are also experiencing that is they're switching to automatic systems. So our DSD group or sales force cannot necessarily influence that. And thirdly, the pricing, while similar in trend, is still going down roughly about 0.5 percentage point. So pricing wise, as I said, that's in line with what we've seen in the past years. But the -- and we also did some trade promotional spending in a few isolated spaces that had pretty good returns on it. And we're seeing, as a consequence, biscuit consumption and share improvement, so our consumption is up in the market. We don't quite yet see that in revenue because of what I was explaining. So those are largely the reasons I would say that we still are seeing that lag in our revenue.

Got it. One for Brian, as a follow-up would just be, I think, on the last call you had mentioned that your expectation would be that overall gross margin would be -- expand for the full year. Would that still be your expectation? Obviously, I think it would be more second half loaded at this point. But would that still be a reasonable expectation, and if so, kind of what's the key driver there?

It is, Andrew. We still expect that. We fully expected lower margins in the first half and -- as we built our plans and rolled them out. But in the quarter, what I would say the drivers of gross margin were we had some unfavorable mix, and Dirk talked about gum on a global basis. That's one of the challenges. It's higher profitability as you know. I think that'll continue. That's a headwind that we knew about coming into the year and it's about what we expected. Commodity cost is really a timing challenge given the hedge positions we had, given inventory levels in cocoa, especially, but also in dairy and packaging. And as you know, we've been raising prices in the cheese business because of dairy inflation, and we'll begin to sort of lap or get ahead of the inflation in the second quarter. And then the higher supply chain costs in North America. And again, as Dirk said, I mean, I think we believe we'll see sequential improvement there as we work on supply chain cost as we get ahead of freight inflation that you're seeing across the business. So I'd say the biggest driver is the expectation, and frankly, we know it because of where we are in hedge positions. But commodities in the second half will be significantly better than the first half, and then again, getting ahead on supply chain costs in North America. And we're making progress there and we feel good about that. So maybe another way to think about gross margins, I'd say, on an aggregate total global basis, pricing, net productivity and volume leverage were contributors to improving gross margin. So they helped gross margins in the quarter. And then the mix and commodity costs were pressures to gross margin in the quarter. And even though net productivity was helped and positive, it was lower than expected because of the North America dynamic. So we do see that gross margins should improve sequentially as we move through the year, and for the total year, we still believe they should be up.

Your next question comes from the line of Bryan Spillane with Bank of America.

I guess, I wanted to ask about -- you had very good margin expansion in Latin America and AMEA, and I'm assuming some of that is because you had good organic net revenue growth. You had some volume leverage, sales leverage. But can you just talk about the factors there that are sort of helping to improve the margins? And maybe, as we are thinking about going forward, was there something about the first quarter that was just unusually favorable? Or if you continue to sort of pace that similar sort of organic sales growth, would we expect that type of margin expansion for the balance of the year?

Yes, Bryan. I would say, in general, volume is helpful and margins, and it was -- it's good to see some volume growth back in the business. I think when it gets down to it, it's really about executing on net productivity, executing on our net -- our SG&A programs across the company but especially in these markets. And as you know, some of our supply chain work has been -- it was initially more focused in the developed markets, and the latter stages was more in AMEA and Latin America. And you start to see some of that really begin to benefit the business, and we expect some of that to continue. So I think the volume was good. And obviously, there's a bit of a benefit from Easter and some timing and phasing in the quarter, but that is -- it is a help to the P&L and help to the margin rates.

Okay. And just one quick follow up to Andrew's question. Consumption in North America was up in the first quarter. Could you just give us a sense for where the consumption was versus sort of your organic net decline?

Yes. The biscuit category was up 2.2% in Q1. That's about 1.2% higher than in Q4. And we held share, and our consumption increased by 2.5%. So contrast that with our decline of 1.8% in our revenue.

Yes.

Your next question comes from the line of Ken Goldman with JPMorgan.

Dirk, I'm sure one of the things that you're looking at in your strategic review is what to do with some businesses that perhaps are not core or maybe not contributing to growth. And as we look at gum, it's been in free fall. I hope that's not too strong of a term for this company, for years now. It's really only brought up on earnings calls when explaining why North America isn't doing maybe as well as expected. And so it's almost an afterthought, it feels, to at least for some of us on the outside. What would it take for Mondelez to keep this business rather than divesting it? And if it does decide to keep it, what needs to happen to turn this business around? Because it feels like it's been a challenge for the company for so many years at this point.

Yes, I'll take it. I'll take it, Ken. I'd say, as you see in the quarter, it's down low single digits for the company. We're not seeing signs of improvement in developed markets. We've tried obviously innovation, and we've taken some cost out of the business. We've invested in advertising and consumer spending. Emerging markets, the gum business is actually up high single digits with volume-based growth. And there's some good markets like Turkey, Brazil, South Africa that are contributing to that in a good way. So there are some pockets of improvement that we feel pretty good about. It is -- as you would know, it's relatively small. It's about 7% of revenue now. Obviously, good profit margins gives us -- and I think one of the challenges is it gives us scale in some important markets. And as we think about the strategic decision or what we might do in the long term, we obviously have to consider that. There would obviously be stranded costs. There's obviously a short-term dilution associated with the transaction. So I think it's one where it's obviously going to be one of the topics that we spend some time on as we do our strategic work and -- but again, it's -- in the short term, I think you'll see some innovation in a few markets this year. I think we're generally optimistic about some of those. We're taking actions to reduce the cost structure given the growth profile. And as we've talked about, we continue to shift resources, focus to candy and to mints which I think are obviously markets that are growing faster and have equally attractive margins for the business. So it's a complex process and I think it's one that we are working on.

Your next question comes from the line of Alexia Howard with Bernstein.

So 2 quick questions. The first one, you mentioned that the snack category is now reaccelerating which is encouraging. Could you give us some color on where and maybe why that's happening? And then I guess the second question is, you're expecting a strengthening of the top line next quarter and yet you kept the guidance for the full year, the organic revenue growth at 1% to 2%. Are you actually expecting a deceleration in the back half perhaps against tougher comps or are you just being cautious at this point? I would just love to hear some commentary about whether there's something in the back half that might make that tougher.

Thank you, Alexia. I'll do the first part and then Brian will take the second part of your question. So overall, the snacks category improved by 3.4% in the first quarter, and that excludes the Easter timing. In the second half, the comparison will be a little bit more difficult because last year we already saw an improvement of the category in the second half. So we're pretty thoughtful about our targets and the top line. We need to see North America stabilize. And as I've said, the market there also is showing some acceleration. As I look at the world as it relates to snacking, I would say that the emerging markets are -- continued and accelerated. They're now growing high single digits. And then the developed markets also are now low single digits but also an improvement versus 2017. So we see it a little bit across the board. Europe had some very strong growth. U.S., as I talked about. We also saw good results in China. We saw India doing quite well. Mexico, as we talked about. So it's sort of, at this stage, across developed and emerging markets that we are seeing the improvement of the growth of the snacking market.

Yes, Alexia, on the total year outlook as it relates to revenue, I think we obviously are maintaining our outlook for the year at the 1% to 2%. I'd say we would acknowledge some potential upside to the top line if the trends that we're continue. As Dirk just talked about, category growth rates and our top line trajectory are both a bit above what we would have expected. But we want to really watch the global category growth as we normalize for Easter and move to Ramadan. And then our North America business, we want to stabilize that as well. So I think to your question around the second half, I think the second half -- it won't be negative. I think we will see positive growth in the second half. And we'll lap, as we've said, a little bit more challenging comps in the second half. So in general, we're just being a little bit thoughtful and maybe prudent on the top line, and we'll look at it as we move through the year.

Your next question comes from the line of Chris Growe with Stifel.

Just had a question for you, a bit of a follow-on. In terms of this quarter and the benefit from Easter, how much of that -- can you give us an idea of how much some of that kind of shifts between 2Q and 1Q around that phenomenon?

For our revenue, it's in the range of about 50 basis points that moves from -- that you would adjust the first quarter growth by.

Okay, that's great. And then just as a follow-up question then on -- there was a comment about kind of the timing of SG&A spending. So just a general question about SG&A and degree to which that has -- there's some savings in there certainly, but was that depressed a bit for any reason in the quarter? I guess, I'm curious about that. And then how do you balance promotional spending and A&C spending in the quarter? Was there a move more towards promotional spending versus A&C? Just curious how that balance went for the quarter.

Yes. Look, I think we've put some trade promotional spend in play in both North America and in Europe. You would've seen that. It's one of the contributors to the pricing dynamic. I think we feel pretty good about -- as you look at the consumption results in both of those regions that it seemed to pay back good returns, and we'll continue to look at that. I'd say on A&C, no real change to our posture. I'd say on the total year we expect to be about flat. I think there's a little -- it looks a little down in the first quarter and that's mostly driven by phasing of how we would have booked those costs over the last year in 2017. So I'd say relatively flat on A&C and a little bit more on trade promotional spend, and you saw how it played out in consumption in the top line.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Dirk, I guess 2 questions. One was, I think you made a comment that Glen Walter was making progress at Nabisco and that you're pleased with the progress. Can you give me some more specifics as to what he's -- like the top 2 or 3 things that he's focused on. That will be helpful. And then also I think there's a comment here that delivery and service costs will start to ease in the second half of the year. And can you give me a sense of what's driving that easing of pressure?

Yes. So it started really with the malware deduction last summer, which threw us off, and we were several weeks without really having a clear view on where our inventory was and how much we were selling to our clients. On top of that, we've had issues in our North American plant as it relates to waste. We were having too much waste, and so they were not really running as expected. And then the third thing that came in there is that we saw, as I mentioned, the demands increasing. So those 3 factors were the ones that influenced us at the end of last year and also still in the beginning of this year. We are returning to good service. We're back to where we should be. We also have reestablished normal inventory, but we did that by incurring extra costs. So things we had to do was increase manpower, but also going to more overtime just to make sure that we assure the right service, we have the right inventories and we have solved our system problems. The issue that we had with our clients at the end of last year resulted in some returns and a charge of some allowances since we didn't provide the right service into the first quarter of this year. And then on top of that, you've seen the higher freight and logistics cost that we talked about. So we're back, but the costs are still there. They're improving. We still need to get our plant performance under control. So when I said that Glenn is doing well, the first thing that he was focused on is make sure that we get our customer service back in line and that we are delivering what we should be delivering which is happening. The second thing he is doing is focusing on our performance in our plants and making sure that we get that improved. And the third thing that he is working hard on is to make sure that our plans, as it relates to our brands, are clear and that we assure an excellent execution during the rest of the year. So those are the 3 things that he's working on. He's very operationally oriented, and I can clearly see the progress we're making.

Okay. And what's driving the cost improvement on service and freight?

The cost improvement on service and freight, well, the one thing that we will certainly do is improve our performance and our waste in our plants. The freight and logistics, we are working on negotiating better -- using private shipment as much as we can and switching to rail. But we will still see an effect of the cost of freight and logistics.

Your next question comes from the line of David Driscoll with Citi.

I wanted to ask a little bit more about Europe. Organic revenues up very strong in the quarter, but I didn't -- I don't think you said what the Easter impact was in Europe. I think you answered Growe's question and said it was about 50 basis points to the full company in the first quarter, comes out of second quarter. But specifically to Europe, can you quantify that number? And then really where I want to go with this is I want to just understand that 4.7% and how you think about the kind of ongoing growth rate in Europe.

Yes, so the organic net revenue growth that we saw in Europe was close to 5%. We saw an Easter effect in there, so I would say that you're in low single digits as it relates to our real growth. The volume and mix continues to be quite solid, and so we also continued to gain share in several of our markets. And the reason why that is happening is that we are having solid execution and we're having very good growth opportunities in -- particularly in 2 areas. One is the segment that we call chocobakery which is sort of in between our chocolate and our biscuit brands, and that is growing over 20%. And seasonals where we are every year executing better on our seasonal range. And so that has driven a margin expansion of about 50 basis points. Obviously, the -- if you dive a little bit deeper, it's -- the chocolate category, which is doing -- well, growing better than the biscuit category, although we're very happy with our biscuit performance, too, we're seeing quite good volume mix there. That category is now high single-digit growth. If you exclude Easter, we are probably mid-single digits. And our share is increasing, particularly in the U.K., which is our biggest market, but also in a market like Russia for instance.

Yes, David. I would -- as you would expect, Europe is our biggest region impacted by Easter, and it's in the range of -- 2.5 points of the growth was driven by Easter.

And that just comes straight out of the second quarter for modeling purposes?

Yes.

Okay. One last for me is just on inflation. Can you quantify, Brian, your expectation for inflation for 2018? And then I think I heard you right that you said cocoa would actually be favorable in the back half of the year. Can you marry that up with the spot cocoa market and the very dramatic inflation that we see in cocoa prices?

Yes. So in terms of commodities, in general, I mean, as I said, they were unfavorable versus the prior year in the first quarter. Most of that came from higher dairy, higher packaging costs. And as we said, one of the drivers of our gross margin weakness was this dynamic. We've been pricing for the dairy inflation, and again, we get through that as we get through the middle of the year. Our -- as it relates to cocoa, our all-in cost for the first quarter net of hedges was up from -- versus the prior year. So that would be different than obviously what you see in the spot market. And that's driven by hedges that we've had in place from last year and obviously inventory we entered the year with. We do see the cocoa costs helping in the second half, but it's still a little bit of a challenge in the second quarter given hedges that again that were put in place last year. So wouldn't necessarily match up with what you see in the spot market. So it's really all about the timing of when we put hedges on. And we've got pretty much the rest of the year locked and we know what that is, and we know it's going to be favorable year-over-year and favorable sequentially.

Your next question comes from the line of John Baumgartner with Wells Fargo.

Dirk, I wanted to ask about chocolate. I mean, the market share performance, 70%, where you're holding or gaining. I think it's the best you've had dating back to the Mondelez-Kraft days. So can you speak a bit more to what's underpinning this between normalized price gaps, redistribution, maybe the innovation? And then with the new innovation, which is presumably at a positive mix, is the portfolio's complexion changing to an extent where can you preserve these market share gains as you go to the next upswing in the cost inflation and pricing?

Yes. So obviously, Europe is our biggest chocolate market. And in relation to the question before, I've gone through that. So pricing was pretty good for us as it relates to chocolate. The category itself, as I talked about, grew about 11.9%. If you exclude Easter, we think it's about probably 5%. And our revenue growth, which, of course, has a lag versus the consumption growth, was around 5%, 4.8%. So yes, it is true that this is probably our highest sort of maintaining and -- or increasing, sorry, share, which was 65% in Q4. I would say the reasons -- I need to go a little bit around the world to give you the reasons why that is happening. In the U.K., we have very strong execution. As I talked about in the previous call, we're sponsoring the Premier ship. We launched a new campaign, and we're seeing share increases there. So we feel that, that is something that is going to continue. We've repositioned the brand, and that seems to be working quite well for us. If I go to India, which is another big chocolate market for us, where we have sort of 2/3 of the market, our shares are increasing quite strongly there. And that is a mixture of new launches that we've done, something called 5Star 3D or some new varieties on our Silk, which is our premium range. We are also getting some traction on our product we call Lickables, which is a combination of chocolate and a toy. And we're also expanding our distribution there because of the potential that we still have in the traditional trade. So that's giving us double-digit increases. If I switch to Russia, which is another big chocolate market, there, we also are gaining several share points. That is driven by the launch of 2 brands of dark chocolate at the end of last year, Alpen Gold and Milka. So just like in U.K. and India, I would think that the Russian momentum is also going to continue. And then we have, as another big market, is Australia for us. Again, more than 1%, almost 2 share points gain. There, I would say it's driven by a strong Easter execution. It's probably not that repetitive. I think we just executed well, and the market there is doing well for the first part of the year. But in general, it's a slower market. And then the other big market that we have, but there, we are losing share, that's in Brazil because there's very aggressive competitor promotions. The category is growing largely by price increases, but there, we are -- we have lost some market share. And that's the only market of the big chocolate markets where we are present that I would say that we are losing share. And in the others that I talked about, I do believe we have momentum and that we will be able to maintain that for the rest of the year.

Yes, John, I would just say, if you look over the last 2 years, maybe 2.5 years, we've been pretty close to 60%, 70% gaining holding and gaining share mostly in this category. So once we lap the pricing that was required with the last round of cocoa inflation 3 years ago, I think we've been in great position and we've seen good momentum in chocolate across the board.

Great. And then Brian, just a quick one on gross margin outlook. Is there anything that's impactful for you in 2018 in terms of transactional FX?

Not really. For the most part, as you would expect, we have our exposures hedged on the transactional side, and most of the year is already locked in. So it's incorporated in our outlook, and I'd say it's relatively minor.

Your next question comes from the line of David Palmer with RBC Capital Markets.

I don't want to beat the dead horse on chocolate and Europe, in particular. But you mentioned that your cocoa inputs were going to be down the second half. We see commodity prices for cocoa up lately, up significantly, kind of bouncing from the bottom. Are you in a position to be taking perhaps less price than the competition, perhaps not having to lead in your pricing like you did in the past and perhaps in a good spot with your own contracted costs?

Yes, look, I don't -- we're not going to get into specifics around what we might do on pricing, David. I think, again, we feel like we're in a good position in terms of our cocoa costs as we look at, at least the next -- the rest of this year. I think as you see, we're managing the chocolate business for growth right now. But again, we feel like we've got the right cost position, and we'll manage that as we go through the year. But nothing specific on pricing.

And Dirk, you've talked about executing with excellence, and I think people have in their mind the U.S. DSD in the wake of the malware issue as an area of potential improvement in the near term. But you probably are talking about some other potential wins there, some other areas of near-term improvement that you have in mind. What other areas would you point to for an opportunity there?

I would say, in general, it's the shift in focus that we are going to go through as a company where in the last 3, 4 years, we have been very focused on our margin improvement. And we've restructured, we've closed plants, we've revamped our organization, we went through MBS. And so that takes a lot of energy in a company, and we've done well. But now, we're getting to the end of that. And so we are -- as a company, we see the potential now to really start focusing more on the relationship with our clients, the execution in the stores and so on. So that I would say is one of the biggest shifts. As I think about other areas that is for us possible, one of the areas that I talked about is waste. We have a lot of waste in 2 areas, in the plans, mainly in North America, but also commercial waste, meaning that we have inventories that we need to destroy sometimes or we don't execute as well on the plans that we have and that leads to some loss of opportunities. So that's another area where I would expect us to do much better going forward. And then in general in emerging markets, it's a game of gaining distribution and being excellent in thousands of stores. And that is sort of a day-to-day execution, almost, you have to do it like an army. And we are -- continue to increase our focus on that. And India, as an example, shows that if we do that well and we compare it with increase of distribution, that we can have quite some progress from that. Those would be 3 examples of where I see excellence in execution really coming through.

And our last question comes from the line of Rob Dickerson with Deutsche Bank.

Dirk, I just had a question regarding Power Brands versus non-Power Brands. And I think specifically, I've heard you say before, as you go through this strategic review, like there may be areas and brands where you might want to lean into a little bit per se that maybe aren't your larger Power Brands. And I'm just curious, is that -- I guess the direct question is, like, why does that logic work if your Power Brands continue to outgrow your non-Power Brands, number one? And number two, if a large amount of the capital allocation we've seen over the last 3 years, your restructuring program, goes into these lines in the future, why not scale back some of the kind of secondary, tertiary brands and just go all Power Brands?

Yes. I would say by deciding on focusing on the Power Brands, what we've done is we've distorted some of the spending. And so internally, our portfolio now, you have on one hand the Power Brands, which are doing well, but we have also the non-Power Brands, which are probably declining more than they would if they would get a little bit of support. And some of these -- and I would probably call it the tail brands at the moment, that category, we can still split up. That is brands that are really old and it's difficult to revamp them. There's other brands which are usually very important in the different countries around the world that we have and that because of our focus on Power Brands, we have neglected it a little bit. And those brands still have a lot of potential. And what we want to do is re-shift a little bit more of the spending of the Power Brands back into these, what I would call local heritage brands. And where we have done that modernizing the packaging, modernizing the communication, using much more digital, we have seen quite interesting growth. And so as a consequence, we're starting to see a little bit of better growth coming out of that group of brands. So we're expecting to explore further that direction. It still will mean that we are going to remain very focused on our Power Brands, but we believe that there are ways in which we cannot have the same decline in the rest of the portfolio and get some growth out of some of the brands there. And the overall mix we see is going to be better if we do that.

Okay, great. Very helpful. And then quick one for you, Brian. In terms of the KDP transaction, I think you mentioned before that it should be somewhat accretive. I'm just -- is that baked into your guidance for this year? Or should there -- should we expect accretion from that transaction on top of current guidance whenever that deal closes?

Yes. Look, we said it's accretive in the first full year, which -- as we expect that, that's -- that'll be half of it this year, half of it next year. I would say it's immaterial to the current outlook. It's not that much of an accretion that you would see it in the numbers, but it is slightly accretive.

Ladies and gentlemen, this concludes today's call. Thank you for your participation, and we ask that you please disconnect.