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Edited Transcript of MDLZ earnings conference call or presentation 30-Apr-19 9:00pm GMT

Q1 2019 Mondelez International Inc Earnings Call

NORTHFIELD May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Mondelez International Inc earnings conference call or presentation Tuesday, April 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dirk Van de Put

Mondelez International, Inc. - Chairman & CEO

* Luca Zaramella

Mondelez International, Inc. - Executive VP & CFO

* Shep Dunlap

Mondelez International, Inc. - VP of IR

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Conference Call Participants

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* Alexia Jane Burland Howard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Andrew Lazar

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Bryan Douglass Spillane

BofA Merrill Lynch, Research Division - MD of Equity Research

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* Dara Warren Mohsenian

Morgan Stanley, Research Division - MD

* David Christopher Driscoll

Citigroup Inc, Research Division - MD and Senior Research Analyst

* Jason M. English

Goldman Sachs Group Inc., Research Division - VP

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Steven A. Strycula

UBS Investment Bank, Research Division - Director and Equity Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Mondelez International First Quarter 2019 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 of Mondelez. Please go ahead, sir.

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Shep Dunlap, Mondelez International, Inc. - VP of IR [2]

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Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO.

Earlier today, we sent out our press release and presentation slides which are available on our website, mondelezinternational.com/investors.

During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements.

Some of today's prepared remarks include non-GAAP financial measures. Today, we'll be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

In today's call, Dirk will give you an overview of our results as well as a progress update against our strategic priorities. Then Luca will take you through the financials and our outlook. We will close with Q&A.

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

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [3]

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Thank you, Shep, and good afternoon, everybody. Six months after the launch of our new strategy, I'm encouraged by our performance and the progress that we are making. Our new strategy leverages our unique differentiators. We are a global leader in snacking, we are not in general food, we have an expansive global presence with nearly 75% of our sales outside of North America, we have large and powerful global brands and well-known local brands that resonate with consumers. And we built a culture of cost discipline which provides a strong platform to leverage future growth. And our teams are rallying behind our clear and focused strategy to accelerate growth and create value for our shareholders.

Our new strategic plan builds on these fundamental advantages and is focused on executing on the 3 strategies to create a more consumer-centric organization. The first strategy is about accelerating our top line growth. The second, about driving operational excellence. And the third, about creating a winning consumer-focused culture. The combination of these 3 leaves us well-positioned to create sustainable, long-term shareholder value.

I am pleased with our latest financial results which demonstrates clear progress against these strategies. These results reinforce my confidence in what we can achieve with a consumer-centric mindset and with our people in power to act with speed and agility.

We started 2019 with a strong quarter. In the first 3 months, we delivered against our key financial metrics. Our top line growth accelerated to 3.7% with a good balance of volume/mix and pricing. Our emerging markets grew at 8%. And we continue to build on our momentum created with our strong execution.

India, China, Southeast Asia, Russia, Mexico and Africa all performed really well and Brazil returned back to growth. Our developed markets showed sustained growth at approximately 1%, supported by Europe and a continued improvement in North America. We also expanded gross profit dollar growth of 4.5% and we achieved an OI increase of more than 4%. All this enabled us to deliver double-digit adjusted EPS growth for the quarter.

We also continued to improve cash generation with free cash flow of $200 million while we deployed over $1 billion to shareholders through dividends and share buybacks.

So let me share with you some more details and examples. Our first strategy, which is consumer-focused growth, is driven by deep and proprietary insights about snacking behaviors and occasions. The first focus area within this strategy is to extend our brands into broader snacking territories.

A couple of examples from Q1. We've talked about chocobakery which is a growing cross category opportunity globally. And this quarter, in India, our team expanded our presence in this space with a new Oreo cookie which is dipped in our Cadbury chocolate. The result is a premium offering which helped us gain biscuit market share in this key market.

Another example is about parents wanting a playful child's treat. So we launched Cadbury Little Treasures in the U.K., which is a portion-controlled amount of chocolate combined with a series of collectible toys. The launch was very strong, exceeding our expectations and helped us to increase overall Cadbury Dairy Milk sales in the U.K.

The second focus area of our growth strategy is to make the most of our portfolio by investing in our global and our local brands. A great example here is Pacific biscuits which is an iconic historical brand in China and absolutely loved by local consumers. It is also quite uniquely adapted to Chinese taste. In this quarter, we expanded the brand into rice wafers, a new segment beyond the core of the brand and it's performing really well.

Our local brands in total contributed solid growth to this quarter, which is an important reversal of the previous trend. I also want to mention that our global brands grew faster as well at mid-single digits. We had strong growth across most global brands but I want to call out Oreo, our biggest brand, which grew double digits, which is quite remarkable. And also Cadbury Dairy Milk, another one of our big brands, which grew high single digits.

The third focus area of our consumer growth strategy is the activation of our new marketing playbook. This is driven by new and proprietary consumer insight. This is allowing us to refine our campaigns and capture more growth as consumers change how they engage with the brands they care about.

The first example here is our new global Oreo campaign where we use our insight to deliver highly effective local adaptation. In China for instance, we took the broad global concept of staying playful and made it culturally relevant, connecting Oreo with traditional Chinese occasions. As a result, we've grown China Oreo sales double digits.

Another example is in Brazil where a new campaign for Trident, called Chew2Relax, made use of consumer insight to reposition the gum brand driving a strong consumption recovery and help us regain share.

Our fourth focus area within our consumer growth strategy is about innovation where we're changing to an agile innovation approach. This focuses on testing ideas in small launches, capturing learning and then scaling them across more markets. An example here which we are particularly proud of is our first quarter launch of PataMilka in France, which went from idea to market in 6 months. What we've done here is taking the Milka chocolate brand and expanding it into the broader snacking category of spreads, which is a big opportunity in a country where chocolate spread is a key part of afternoon snacking rituals. And we applied an agile approach and we set a record time from idea to market.

The last focus area within the growth strategy is reaching the consumer wherever they are, which points to a stronger expansion of our presence in alternative channels but also geographical white spaces. A great example here is the continued expansion of our distribution in traditional trade in Indonesia. This approach is helping drive double-digit sales growth in this promising developing market.

A second example was in our South Central Europe business. This area includes countries such as Romania and Bulgaria but also Serbia, Albania, Bosnia and Croatia. All these countries together add up to more than 50 million inhabitants. The team here expanded our presence in the impulse channel in a major way through investments in route-to-market and sales capabilities as well as A&C and price pack architecture. All this led to solid double-digit growth of the total business in the first quarter.

So now switching to our second strategy, which is aimed at translating our consumer-centric growth model into incremental sales and margins by focusing on improving execution across all elements of our business. This operational excellence strategy can come in the form of sales execution, for instance, where we leverage our customer supply and logistics capabilities to deliver outstanding in-store presence and availability.

As you know, a particular focus here is North America where we are making important improvements to our supply chain. As well as leveraging the power of our direct-to-store distribution model. This has helped fuel results, including low single digit consumption growth and feature and display conversion up double digits, particularly behind the recent launch of the Game of Thrones themed Oreo pack. This pack was displayed prominently ahead of the new season airing in the U.S.

We've also continued to benefit from our investments in our plans. We talked to you about [Côte d'Ivoire] in Brazil at the CAGNY conference. Another example would be our Xuzhou plant in China where our world-class efficiency has helped to drive strong volume growth in that market.

Turning to our last strategy, which is our drive to nurture a winning growth culture. The changes we are making have given our teams a renewed sense of energy, purpose and passion. This is helping them uncover more opportunities to grow.

As I mentioned before, we have launched a nimbler, more empowered business unit commercial organization with the right incentives to drive growth. As a result, our commercial organization is better positioned to meet consumer needs, move fast and act entrepreneurially.

We're also accelerating training across our business, focused on growth capabilities and growth mindset and we're also launching more agile project-based working systems across our different functions. Under these newly empowered teams, we're already seeing benefits like accelerated and more efficient investment in A&C and a better split of our investment in local and global brands as well as higher sales and faster innovation.

Another initiative in the evolution of our culture is to drive step change innovation like creating an internal and an external network. The creation of our SnackFutures innovation adventure hub, which aims to unlock snacking growth opportunities around the world, is off to a great start. We have made minority investments in Uplift Foods, which is focused on prebiotic functional snacks and we also invested in a healthy snacking company called Hu with a portfolio of vegan and paleo chocolate and biscuits.

Finally, I want to talk about our purpose because our 3 strategies are inspired by our company purpose of empowering people to snack right. Snacking Made Right relates to many aspects of our business but not in the least to the impact we have on the world. The journey to empower people to snack right starts with how we source our ingredients. And this is an important focus for me as a leader of this company.

I was fortunate recently to meet farmers and stakeholders we partner with in Ghana and Ivory Coast as part of our Cocoa Life sustainability program. I witnessed firsthand how we are working everyday to strengthen the supply chain for the future and to empower farmers to achieve sustainable livelihoods. I am proud to announce that we will accelerate our sustainable cocoa sourcing program. So we commit that by 2025, 100% of the cocoa we use in our chocolates globally will be sourced through our cocoa life sustainability program. That is an increase from 43% today. This is a huge milestone for our program, our team and our company and also an important step towards further securing sustainable growth for Mondelez International.

So in summary, I feel very confident that we have the right strategies in place to capitalize on the opportunities we see in snacking and in our markets, particularly with our strong emerging market position. And I'm also very pleased to see that we're are executing against those strategies in a way that is bringing tangible improvement in our top line growth, our operational excellence and in our culture.

Our first quarter results demonstrate that we've got momentum as we head into this year of investment. Our categories are performing generally well. And our brands, both local and global, are benefiting from increased investment in advertising, creative and innovation. All of this is very motivating for our teams in the markets. I think they feel empowered, entrusted and ready to perform.

So let me now turn to Luca for more detail on our Q1 performance.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [4]

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Thank you, Dirk, and good afternoon. It was a strong first quarter and start to the year as we built on the progress we saw on the later part of 2018. In quarter 1, we delivered strong organic net revenue growth, a solid increase in gross profit dollars, double-digit earnings increase and positive free cash flow. We also returned more than $1 billion to our shareholders. Growth was broad-based as we posted positive results across each region and business unit driven by another quarter of balanced volume and pricing. It is important to note that the vast majority of Easter shipments happened in Q1, generally eliminating phasing impact between Q1 and Q2.

Adjusted gross profit dollars on a constant-currency basis grew more than revenue in Q1, similar to Q4. And we continue to make critical investments to our business in order to support our long-term strategic initiatives across brands, go to market and innovation, consistently with our plans for the full year.

Organic net revenue increased 3.7% for the first quarter. This increase was driven by solid execution across our business and continued momentum in emerging markets where we posted growth of 8%, with a good balance of volume and pricing. Excluding Argentina, emerging markets grew 6.5%. We delivered strong results across the board in India, China, Southeast Asia, Russia, Mexico and Africa. In addition, Brazil returned to growth this past quarter. We also delivered solid performance in developed markets, supported by growth in Europe and continued steady improvements in the North American business.

On a regional basis, Europe once again demonstrated another quarter of solid execution as it delivered revenue growth of 2.7%, lapping the strongest quarter last year. This growth was volume driven and broad-based, with solid increases across chocolate, biscuits and candy. Russia grew double digits while Germany and the U.K. also delivered solid results. AMEA grew 6.1% due to strength in several key markets and growth in agribusiness unit. India once again delivered a quarter of double-digit growth, powered by a strong market environment and great execution in both chocolate and biscuit. China grew mid-single digits behind great results in both biscuit as we grow both global and local brands and gum where our Stride proposition continues to gain traction with consumers.

South East Asia posted mid-single-digit growth with good results in biscuits and chocolate. And Africa also grew with chocolate, candy, beverages and gum all posting growth.

Latin America grew 8.4% due in part to Argentina. Growth, excluding Argentina, was low single digits. Mexico delivered mid-single digit growth and Brazil returned to growth in Q1 as a result of strength in chocolate and solid results in biscuit. We are encouraged by the progress we made in Brazil and expect steady improvement throughout the year.

North America grew 0.5% in Q1 due to continued momentum in the U.S. biscuit business, partially offset by gum and Halls declines. We delivered biscuit share gains across nearly all channels driven in part by strong performance and execution behind our Oreo brand.

We made improvements in service levels in the quarter. That said, there is still work to be done to drive better consistency. We continue to expect progress in 2019, albeit not linear with overall modest growth for the year.

Now let's review our profit performance. In the first quarter, we grew adjusted gross profit dollars nearly 5% on a constant-currency basis. This increase was driven by continued productivity, volume leverage and pricing. Gross profit growth offset partially by additional SG&A drove OI dollar expansion of more than 4% on a constant-currency basis. This translated into adjusted OI margin of 16.7%, which is flat versus the previous year and consistent with our expectations.

During the quarter, we made some additional investments in A&C, route-to-market and innovation, in line with our plan. In addition, we also lapped a favorability in indirect taxes matter for the previous year and incurred expenses related to the resolution of some legal and indirect tax matters.

On a regional basis, gross margin expansion and continued cost execution drove profit dollar improvements in 3 of our 4 regions. Europe grew adjusted OI dollars by 8% due to solid volume leverage. AMEA improved operating income dollars by nearly 17% due to strong volume-based growth and productivity.

Latin America OI dollars declined by approximately 19%, mostly due to the prior year impact of an indirect tax matter in Brazil. Finally, North America, which increased adjusted OI dollars by nearly 9% on a constant currency basis due to pricing net of cost and improved service levels which more than offset logistics inflation.

Let me spend a moment on category highlights. Our 3 snacking categories continued to demonstrate solid growth rates, growing on a year-to-date basis by almost 3%. This builds off the momentum of last year and reinforces our confidence that we are participating in an attractive space with the right geographical footprint.

Now moving to shares. Overall, we had or gained shares in 60% of our business. Our Biscuits business grew 3.4%. Approximately 80% of our revenue grew or had share in this category, including our 3 most sizable businesses: U.S., China and France. In chocolate, our business grew 5.9%. Approximately 35% of our revenue grew or had share including Russia and Brazil. It is important to note that we overindex in Easter versus many competitors. So we would expect share performance to improve next quarter. Gum and candy growth was down slightly, reflecting weaker results in the U.S., mostly due to Halls. About 30% of our revenue in this business gained or had share, including strength in China gum and Mexico candy.

Now turning to earnings per share. Q1 EPS grew approximately 13% on a constant-currency basis. This growth primarily reflected operating gains driven by strong revenue results as well as by share repurchases and low taxes rates.

I'll now move on to our free cash flow results. We delivered positive free cash flow for the quarter of $200 million, which was in line with our plans. We continue to execute well on our working capital metrics and net income conversion.

In terms of capital deployment, we returned $1 billion in capital to our shareholders in the first quarter. This included approximately $650 million in share repurchases at an average cost of $44.20 per share and $380 million in dividends.

Moving to the outlook. We are maintaining our organic net revenue growth target of 2% to 3%. We feel good about the quality of the top line results for Q1 and the growth across all the regions. Yet while we are encouraged by the strong results, it is still early in the year. We are also maintaining our view of adjusted earnings per share growth of 3% to 5%. Although we delivered double-digit growth in the first quarter, we did get some benefit from a few items that were below the operating line, including tax and interest that are not expected to contribute in the same way in subsequent quarters. We have also been clear that this is an important year of investments for brands, sales and innovation to drive more sustainable top line growth over the long term.

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

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [5]

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Okay.

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Questions and Answers

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Operator [1]

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

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

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Maybe we'll just pick up on the organic growth piece. Obviously, as you mentioned, it's just the first quarter. But I guess with a strong start to the year, on the organic top line, maybe why is 2% to 3% still the right number for the full year and particularly as pricing seems to be coming through nicely? And as part of that, were there any things that maybe were discrete benefits that you can help quantify to organic growth in the first quarter, whether that's -- you had mentioned a bit of a benefit I think from Easter and perhaps anything related to like a Brexit inventory build and things of that nature?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [3]

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Yes. So I'll start by saying that we are clearly very pleased with the way Q1 played out. And it is a little bit on the momentum we saw in the second half of '18. I think it is also important to taking a look at the result to realize that those were really good quality results. I think the things around the world did a great job. And I'll let Dirk talk maybe a little bit later, but this clearly adds to the conviction of the long-term potential of Mondelez and the merit of the strategy we put together and we presented to you. We were very clear that in 2019, we really want to solidify the progress we saw towards the end of last year. And we believe we really need to see this growth rate above guidance for at least another quarter before we revise our outlook.

I want to remind you that this is an investment year and some of the investments we are making are for the benefit of the medium to long term as well. So it will take a little bit of time for those investments to positively affect our revenue. And we clearly remain optimistic about our outlook. But as you said many times, we want to also be thoughtful given some of the uncertainties that might pose risks throughout the year, clearly Brexit is one of those.

We also had some share losses and we need to address those in the remainder of the year. To your specific question, at the time of guidance last quarter, we said that there would be a 50 basis point positive impact due to Easter in the second quarter because of timing. The reality is after that guidance, we sat down with the trade specifically in the U.K. and we decided that ahead of the potential Brexit exit at that line which was March 29, it was better for either one to put the Easter stock in the trade itself, which we did. So in terms of year-over-year, Easter happens to be neutral in terms of shipment of -- on the quarter. So there is no timing effect. And so I think it is, in relative terms, a clean quarter. Again, we are very pleased with the way we see the markets performing. But as I said, it is still early in the year to call out the guidance at this point

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [4]

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Great. That's really helpful. Thank you for that color. And then just very quickly, Dirk, the better overall volume result even in light of the pricing is notable. So I guess where we are in the process of the shifting mindset from more of a cost focus to a growth focus? And I guess how responsible is the new compensation scheme that rewards the volume growth component specifically? Thank you.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [5]

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Thanks, Andrew. Yes, we -- one of the key elements of our strategy was to create volume growth which we haven't had for quite a while for a number of reasons. I think you're only growing as a company if your volume is going up, i.e., that you're selling more product to more consumers. But also because it gives us overhead leverage. We have installed capacity. And to use that better, every extra ton we put through the plants comes at, relatively speaking, lower cost than the previous one.

So we try to help our teams to think differently about this. First of all, there was the incentive plan, which we did a number of changes. And not in the least, we started to reward our teams for volume growth. There's also a better balance between top line and bottom line growth in our incentives. We also pushed down incentives in the sense that before, most people would be rewarded on how the region was performing. We now have people being rewarded at the business unit level. So it's more a direct impact. We -- before, we used to have 60% of their results based on financial results. We've moved that up to 80%. So there is a more direct relation there. And we also made sure that our long-term incentives are very performance-based. So for sure, that has played a role, a big role, I would say, in these results. The other one that is really helping in this sense is the fact that we are focusing more and more on dollar gross profit growth. And that makes you think a little bit different on how you generate that versus the percentage of gross profit. And so that means that, that volume also through that sort of thinking, is being stimulated. So overall, yes, we are at close to 2%, 1.7% volume growth in the quarter. That's pretty good and we want to keep it like that because we can clearly see the benefits.

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Operator [6]

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And your next question comes from Chris Growe with Stifel.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [7]

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I had a question for you, if I could start on pricing. It was obviously quite strong in North America. You discussed the benefit from Argentina in the quarter. Just curious, does that continue across the year so that you continue kind of boost to your price realization for the overall company?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [8]

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Yes. Look, we are very pleased with pricing and the balance we see with volume/mix. As I described pricing last year, we clearly focused on a couple of parts of the world. One was Developing Markets, which Argentina is a component. I think there is a little bit higher pricing this quarter than we saw on average last year. But the simple reality is Argentina in Q1 is lapping last year a relatively benign inflation in ForEx. So the valuation ramped up in the second part of the year. We moved to higher rates of inflation in the second part of the year in Q2 as well.

But the second one about Argentina is we are striking a better balance between pricing and volume. So the volume component is better than we have seen last year. So all in all, I think Argentina will continue growing at a rate that is not going to be necessarily the Q1 rate and -- but excluding Argentina, again, when I look at Developing Markets, that grew 8.5% in the quarter give or take. Excluding Argentina, we are looking at 6.5%, which is clearly building on the great momentum of last year. And the good news is that, that growth rate is comprised both of volume for the vast majority and pricing. So we are very pleased.

The other one is North America where last year we had positive pricing. As I said last year, we used pretty much all the pricing levers promo, price pack architecture and line pricing. We announced toward the end of last year a price increase in the U.S. We are pleased with the way it is going into the market. And again, when we look at biscuits, which is the biggest category we have in the U.S. and we look at consumption, nice numbers in terms of category growth between the volume and pricing, and importantly, with share gains. So we will continue see pricing for the remainder of the year. I think Argentina and the impact associated with it will come down in the quarters to come.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [9]

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Okay. I had just one other quick follow-up. As you put in place the -- more of a focus on the local brands over the Power Brands. I just wanted to understand and it sounds like, Dirk, you had said maybe the level of investment this quarter was what you expected in relation to the strategy. Is that something that's taking effect right away? Is there a pipeline of new products that's to be developed? Is there more marketing to be done there? I just want to understand how that manifests itself in this situation as you kind of tradition your focus as well to some of the local brands.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [10]

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Yes. I'll take that one. Yes, so the first element there is that we are raising our investments about $150 million this year. That largely goes to A&C. And if I would split that between local and global brands, that is more going to local brands than to global brands. We're also investing in route-to-market, India, Russia, China, South Central Europe, yes, we see that as more salespeople, more trucks on the road. And we are also investing in R&D.

The R&D investment is probably taking a little bit more time. But increasing our A&C investment in our brands and giving a little push on our local brands, that is really having an immediate effect. And also the route-to-market has, of course, an immediate effect. But we do still believe that the big benefit of that extra investment still has to show up. So we want to see an acceleration in the return we get on it. And overall, I would also like to say that we don't see this as a one-off year where we do this. Our overall thinking is that as we invest more this year, we will get higher top line growth, which will lead to solid gross profit growth and then we, more or less, flow half of that to the bottom line and reinvest half of that into our A&C and so one. So we see this continuing, getting ourselves into a virtuous circle and that would mean that every year, we increase our investment.

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Operator [11]

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Your next question is from Bryan Spillane with Bank of America.

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Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [12]

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I had a couple of questions related to the balance sheet, I guess. The first one, Luca, looks like total debt in the quarter was up sequentially by about $1 billion. And yet even interest expense came in more favorably. So I guess one question related to that is just is there anything timing related that drove the debt higher in the quarter? And then just, I guess, the disconnect between interest expense coming down but debt going up?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [13]

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Look, I'll start by talking about the interest cost. I think on the interest cost, Q1 at $80 million, it came quite frankly a little bit more favorable than we thought. The reality is we are still benefiting particularly year-over-year from additional net investment hedges that had a positive impact.

We are quite pleased with the rate we have in terms of interest cost. I would just want to remind you that we had $4.5 billion of euro-denominated debt. That is partly coming due in the second part of the year. That debt is at 0 cost, actually negative cost for a part of it and we will renew that with a longer tenure. We would incur an additional interest cost. So yes, maybe the interest cost guidance of $450 million is a little bit on the conservative side. But I think again, we have to see how the year plays out. I think there has been a little bit of fluctuations around interest rate.

On the debt, it is true the debt went up. I don't think it went up. I'm looking at net debt. So including cash that we had some additional cash compared to the end of the year. And the reason being that there is particular in Q1 some seasonality due to Easter falling later. Receivables went up a bit. So we had a little bit more liquidity in the system. But the total debt went up pretty much because we renew some debt. We have, as you know, low -- still relatively low cash flow compared to the yearly projections. So $200 million in Q1 versus the $2.8 billion that we are going to generate in the year. And then we took the opportunity to buy back shares. As I said at 44. So between share and dividends, we paid a little bit north of $1 billion. So the debt went up a bit. I think in terms of leverage, we are in the ballpark of the number we had at the end of last year. So I think it is pretty much timing.

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Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [14]

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And so I guess as we're thinking about the timing and relative as we're thinking about net debt for the full year, absent something that we don't know about like an acquisition or somewhere along those lines, you're not expecting net debt to really increase for the year?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [15]

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Maybe it will increase a bit again in line with EBITDA, I would say. But I wouldn't expect leverage to go up again. We are committed to the credit ratings we have. We just got -- reaffirmed as one of the agencies' rating. So we feel good where we are. I think you should project the same situation as of the end of last year.

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Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [16]

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Okay. And just one more related one. There's been some stories about the potential for Mondelez being interested in Arnott's and obviously I'm not asking you to comment specifically about that. But just a deal that size seems large relative to what you described in M&A. So maybe either, Dirk or Luca, if you could just remind us how you're thinking about M&A both in terms of strategy but more just size, how you're thinking about what types of size of deals you'd be looking at?

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [17]

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Yes. As we have stated, our preference is for bolt-on acquisitions, looking at the different white spaces that we have around the world. As you go around and you look at biscuits, chocolate or gum and candy markets, they still have areas where we are not present or are not big enough and that would be our preference, to sort of fill in our geographical landscape.

We have the same in existing markets where in certain channels, or there are certain areas in our categories like health and wellness, premium, digital businesses that we would be interested in. But overall, we do not expect those to be big deals. In the case of Arnott's, it's Australia, it's biscuit, it's quite a sizable business, it fits in that wide space thinking. It's obviously a process that's still ongoing. It's probably a little bit higher than what we would originally thought when we thought about acquisitions. But at the same time, we have very clear expectations in terms of returns and in terms of leverage and we want to stay a very disciplined buyer. So as long as it fits into the same framework that we set into our strategic plan, we will do so. But if it falls out of that, we will not make a deal.

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Operator [18]

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And your next question is from Steve Strycula with UBS.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [19]

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So two-part question. First, for Luca, just to -- on an apples-to-apples basis for first quarter, I know you have Argentina, Brexit and Easter, to Andrew Lazar's question, would you say if we kind of take those 3 pieces into consideration, the underlying organic sales number was close to about a 3 percentage point number?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [20]

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Again, I -- the way I commented on Brexit, it was -- we decided to put it Easter into the system ahead of a potential exit or even hard Brexit. So in terms of shipment, I wouldn't attribute to Brexit an impact year-over-year. It just happened that Easter this year fell in Q2 and we decided to put [Celine] into the system in Q1. So Q1 '18 versus '19, no material changes. I think as I said, Argentina is a little bit higher. We gave you the number between Developing Markets with or without Argentina. The relevance of Argentina in the quarter is a little bit higher than last year. We expect that to come down. So I would say, look, in shipment terms, I think it is really a clean quarter now. I think you saw the categories, particularly around Chocolate, where we have some share challenges. Part of it is due to timing. We need to work on the shares. And as I said, if you're trying to see if there are opportunities in terms of top line for the year, I would say great start to the year. We are very pleased. As I said, I would like to see the second quarter above guidance for us to be able to call guidance out for the year.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [21]

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Okay. And then a follow-up for Dirk. Dirk, you recently did an interview with a German newspaper. And admittedly, my German isn't so fresh. So I was hoping you might help bridge a few comments or add some transparency as to what you meant when you were describing some of the opportunities that for big global brands relative to homegrown brands? And then to wrap up, your comments on the monetization potential for the coffee assets in that paper.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [22]

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Yes. Well, the 2 comments were not that new. I think the first one as it related to brands was that I have -- and I think the rest of the management team and the company shares that belief that the days of the big global brands that cover all areas and on the reach you can do everything and that will lead to significant growth, that's not necessarily what the future looks like and we can see the phenomenon very clearly with the insertion brands in the U.S. which is translating in sales a little bit around the world. So the comment was related to my opinion that we need to keep on growing our global brands. And as we explained, we are very happy to have our 2 biggest brands growing almost both of them double digits is quite good. But at the same time, we believe local brands more and more will have a significant role to play. They are closer to the global consumers. They feel more connected to it. And so the comment was meant to say we believe our strategy is the right one.

On the coffee assets, the comment there was the what was the future of our coffee assets in the business. I said that for the time being, we're very happy with our different investments. We're seeing good growth. We are happy what the management teams are doing there and they still have some good potential. The -- on the longer term, the comment was that obviously we divested or partially divested our coffee business. We are not running it anymore. And over time we will exit those assets. We don't know when. But clearly, we -- it's something that is in the plans. Those were the 2 comments.

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Operator [23]

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And your next question is from Ken Goldman with JPMorgan.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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In North America, there was a fairly significant gap between your take away as reported by Nielsen in the quarter and your actual North American sales. I know you addressed this a little bit. But I'm just hoping for a little bit more color in your view, were the biggest reasons were for maybe the reported numbers coming in a little bit more below takeaway than what some of us expected.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [25]

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Yes. Yes, and I don't know which takeaway numbers that you are looking at. But you probably are comparing our biscuit take away numbers to our overall net revenue numbers.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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No. I'm including everything. It's still a little bit lower.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [27]

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Yes. It's still a bit lower. I would say, our takeaway overall would be around 2% and then the net revenue is 0.5%. The -- clearly, biscuits are doing very well for us. We have a good category growth. We've been increasing our market share. And we clearly see that in the consumption. We do have -- a much smaller part of our business is related to gum and candy. And in the first quarter, we saw a slowdown in those 2 categories, particularly in candy. We think that's only driven by Easter falling later into the year this year. We think that's going to come back in gum, as you know has been always a little bit underperforming. So that's clearly a challenge. As I reached, they are not going at that level that the rest of the consumption is growing. Particularly hard hit was Halls in the quarter because of the cold season not being very good and also that we have some more pressure from VICKS competitor that's very wealthy. The other factor that you need to take into account is that the retailers still are lowering their stock levels and that shows up in our net revenue but doesn't show up in the consumption numbers. So that's clearly something that played a role for us. So those are largely the biggest factors.

There's potentially also a little bit of nonmeasured channels that don't show up in the consumption numbers that you see, which were not growing to the same rate. So that also causes that difference between the 2. Those would be the big reasons, but we were able to perfectly make that bridge between our net revenue that we're seeing in consumption.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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Okay. That's very helpful. My follow-up will be quick. In terms of the destocking you've seen which certainly isn't limited to Mondelez, any idea when we can expect a little bit of a slowdown there? I mean there can't be destocking forever and yet it seems to be happening for longer than what maybe some companies were anticipating?

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [29]

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Yes. So first of all, the -- some of the rollouts were not the whole country at the same time. So that certainly plays a role. Then also, the systems are now -- so the rollouts were spread over more than 1 year. The second effect that you have there is it's an automatic system. And as that automatic system sees for instance, our gum sales go down, that will lead to lower stock levels and dereferencing some of our SKUs. And so that sort of has an extra effect in the year. As our sales will start to go up, that will probably lead to a slight increase of our stock levels in the trade over time. So we do believe that this difference between our net revenue and the consumption we see will disappear in the coming months or quarters and that it will be more evened out.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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So just to follow-up and make sure, and I apologize for having the call a little bit. But just to make sure I understand, if your take away numbers in Nielsen are disappointing in a certain category, the customers will automatically order less? I knew there was something in there. But I just want to make sure that that's what you're sort of suggesting.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [31]

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They don't order less. Yes, in a way they do, but they will lower their stock level because if the sales go down, they need to have less stock. So you're seeing an effect from that, too.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [32]

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Well, what we're saying, yes, in gum specifically, we see a little bit of trade reassessing their stock position and thus consumption goes down. In our SKUs, they adjust top-down. So he was justifying to gum for that comment, I assume.

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Operator [33]

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And your next question is from Jason English with Goldman Sachs.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [34]

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I've got 2 questions. First, a quick one. Is your business going to be affected by the price controls implemented in Argentina? And if so, what are the implications there?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [35]

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I think the answer to that question is at this point, no. I think as the new, relatively new pricing came into play actually all price controls were removed. I think the exchange rate environment is, in terms of ability to move money out of the country and to remit money abroad has been better than in the past. So the simple answer is no. We don't have price control categories at this point in time. But we don't know clearly what lies ahead.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [36]

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Got it. And then my second question, I totally appreciate and respect your focus on gross profit dollar growth. But I'm still trying to make sure that I understand my margin bridges. And I was a bit surprised that we didn't see a bit more margin strength this quarter given the sequential acceleration of price and given this still pretty easy comp that you're cycling against here in the first quarter. Can you walk us through some of the puts and takes that you're seeing there, in terms of inflation, productivity and maybe some mix drags between gum, wheat, are you pushing into local brands or investing, et cetera?

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [37]

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Yes. Look, I think it is clear that we are trying to move the mindset from gross margin percentages to gross profit dollars or from that matter, from OI percentages to OI dollars. I think the gross profit line was in line with expectations, it grew 4.5% which is ahead of revenue. We added 30 basis points of gross margin. As I dissect the business on the gross margin line, quite frankly, we are very pleased with what we are seeing in 3 regions out of 4. There is Latin America that is facing some pressure. And last year, we did cover strategies for ForEx that were absolutely exceptional and we are lapping quite positive ForEx rates in Latin America in Q1.

But with the exclusion of Latin America, quite frankly, I see strength across all the other 3 regions. And volume leverage is coming into play. Pricing that, of course, is positive. And clearly, we delivered productivity.

Below the line or below gross profit, we invested in A&C in overhead markets in R&D as we've said. But -- and we also delivered cost savings in the overhead line. So on the line savings, both in gross profit and overhead is quite good, in line with expectations. We happen to lap a little bit of one time as last year for some VAT related benefits that we got into the P&L.

And as I made -- and as I said in my remarks, we are also -- we have made accruals in Q1 in relation to some legal matters and again, indirect taxes. So the year-over-year impact is around about $40 million. So when I exclude these items, I think the P&L that we delivered in Q1 was great. On Latin America, I wouldn't be, at this point, overly concerned. We achieved what we have in plan and thus Brazil specifically speaks up for the remainder of the year, we should be benefiting from better leverage as well there. So it might be a little bit below what you had in mind but it is in line with what we had internally. And importantly, I see 3 regions on solid ground.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [38]

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Very good. Thank you, and congrats on the strong start.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [39]

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Thank you, Jason.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [40]

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Thanks, Jason.

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Operator [41]

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Your next question comes from Dara Mohsenian with Morgan Stanley.

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Dara Warren Mohsenian, Morgan Stanley, Research Division - MD [42]

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I wanted to get a bit more detail on the pricing environment in Latin America, some of the key markets ex Argentina. It was a big sequential improvement in trends. So did Brazil and Mexico see some sequential improvement in Q1 versus Q4? And maybe just detail the competitive environment you're seeing there particularly in Brazil. And then from a volume standpoint, we're still seeing declines in Latin America versus very healthy growth you're seeing in other emerging markets around the world and a lot of progress we are seeing in some of the other regions. So just curious if we should get more of a balance between volume and pricing going forward in Latin America and your ability to accelerate volume growth there like we've seen in some of the other regions?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [43]

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Yes, maybe I'll start with the volume part of the question, and Dirk can give you a little bit of flavor around both Brazil and Mexico and what we are seeing. Yes, look. Latin America has historically shown negative volume. I think if you look at the volume/mix this quarter, it happens to be a little bit better than what you have seen in the last few years. Remember that we used the full array of pricing tools to price the marketplace. So one component of volume is downsizing. And there is an impact specifically in Brazil around that. But all in all, I think you should expect also for the remainder of the year, a little bit of volume pressure. Having said that, I think there should be sequential improvement.

In Argentina, as I said, in one of the previous questions, volume came in better than last year. We are striking a much better balance between volume and pricing. And I think this move to gross profit dollars and the opportunity we have to optimize reliable, consistent and repeatable volume growth, I think it is quintessential to the model. So I think all in all, we are also pleased with the volume dynamics we are seeing overall in Latin America. And hopefully, we see an improvement in the remainder of the year. On the Brazil/Mexico, Dirk, if you want to...

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [44]

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Yes. So one observation on Latin America was that all our business units grew at the same time. In fact, all our business units around the world have grown. So that made the quarter quite appealing to it. To talk a little bit more about Brazil, we feel that Brazil is on an uptick, it's improving. It's not totally stable yet. There's certainly a number of macro uncertainties that are still there. But overall, we see the business return back to growth which we felt good about.

As we look at categories, the chocolate category was in slight decline. But that of course includes the impact of a late Easter. And in terms of our Q1 revenue, our chocolate grew high single digits. One of the successes there was the launch of a product called Bis Xtra under our Bis brand and there was a new type of wafer covered with chocolate that's doing very well there.

As it relates to the gum category, we saw high single-digit revenue growth. This was driven also -- sorry, the category was growing and our revenue was growing largely driven by Trident. And Trident launched a new campaign called Chew2Relax and that had a significant impact.

And then also Beverages is very important for us and where we also see the category getting back to growth which was not the case last year, here we lost a little bit of share in the past year and we're starting to recover but we still have some recovery to do. So overall in Brazil, I would say surprising situation because the origin of your question is relatively healthy. It's not as big as it is in Argentina and largely in line with our expectations.

By the way, the overall effect, Luca, for Argentina, on our result I think compared to last year, growth was 0.2 -- so there is an effect but it's not that dramatic, I would say as you might expect.

And then maybe to talk about Mexico a little bit, Mexico, we see a very good situation. We're growing mid-single digits and pricing is relatively mitigated there also. So I would say if you look at Latin America where the pricing is higher than it has been in the past year, is largely in Argentina. The rest looks largely in line with expectations.

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Operator [45]

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And your next question is from the line of Alexia Howard with Bernstein.

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Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [46]

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So 2 quick ones. First of all, on the A&C spend. How much was it up this quarter and how much are you expecting it to be up for the full year, either in percentage terms or dollar terms? Is it going to accelerate from here or was there a big burst this quarter and then it slows down? And then my second question, just coming back to the beginning of the Q&A, you mentioned that one of the reasons that you didn't want to raise guidance for the full year is it's early and there are clearly some risks on the horizon and Brexit is one of them. Is that the main one or are there are other uncertainties out there that you're keeping an eye on? Thank you, and I'll pass it on.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [47]

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Thank you for the question, Alexia. So on A&C, it was up in Q1. We are not going to start giving you details by A&C spending. But as particularly we look at work in A&C which is dollars we spend behind initiatives online, or television, et cetera, that was up quite a bit year-over-year. I expect that increase to continue for the remainder of the year. And actually, the overall A&C spending is going to sequentially increase in the quarters to come. Nothing that wasn't expected, it is baked into the guidance.

To your second question, yes, Brexit is clearly unknown at this point in time and it is the biggest risk that we know of. But as I normally times in my life, I mean, sometimes the unexpected comes as well. And so there are a few elections around the world. I don't know the outcomes of those yet. But there might be some uncertainties. Again, as I look at the categories, they are displaying solid growth in many places. We are fairly pleased with developing market. Having said that, given it is just one quarter, we decided to keep guidance the same.

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Operator [48]

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And your last question is from the line of David Driscoll with Citi.

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David Christopher Driscoll, Citigroup Inc, Research Division - MD and Senior Research Analyst [49]

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I wanted to -- I got a couple of questions here that I wanted to ask. On -- just going back on Brian's question about the debt. Can you just go over how much of debt, euro debt, has a negative interest rate? What is that negative interest rate? And when do you actually refi it? I'm still struggling with the $80 million interest expense in the quarter and how we get to this $450 million. And then you made the comment, well, maybe that's a little bit conservative. Can you help me figure out how conservative?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [50]

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Look, just -- let's get the number straight on the debt. The net debt that we had at the end of last year was around about $17.3 billion, okay? And it was a total leverage of 3.3x on EBITDA. At the end of Q1, net debt inclusive of cash which I said increased around the world because of seasonality specifically around Easter, it was $17.8 billion with the leverage that was around about 3.4x. So those are the numbers.

On the interest rate and the cost, $80 million is clearly a number that if you multiply it by 4 doesn't get you the guidance we gave on interest rate. Having said that, there is an impact on net investment hedges. And particularly year-over-year, that impact is going to subside. And then it was not uncommon particularly on short tenure debt to be able to borrow money in Europe at a negative interest cost. I'm not going to give you the details of what it is. But it is negative, so we are getting paid for that. And as we renew that debt at current rates, we are going to incur costs. And not last, we're going to increase tenure of the debt we're going to issue for in the second part of the year. So that is causing a little bit of an interest cost headwind that we have projected this year. As I said, I believe we're going to be a little bit better than the $450 million. But I think again it is still early in the year given some uncertainties. Remember, we have multiple interest cost components in the year. We have short-term borrowings that we do around the world. There is the net investment hedges. There is CP, commercial paper. The free cash flow came in better in Q1 than last year. So there is upside, most likely. I think it is early for me to quantify it. I wouldn't expect to -- a massive number here though there in terms of upside

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David Christopher Driscoll, Citigroup Inc, Research Division - MD and Senior Research Analyst [51]

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That's very helpful. On the phasing of the investments this year, and I think it's around $150 million, did the first quarter more or less get its proportional share? Did 25% of that $150 million go into Q1? Then I'm just really trying to get a sense here for the pacing of these investments. Previously, I think you guys had said that you did expect it would be rather even throughout the year. But now that we've got 1 quarter in the books, I was hoping you could update us on that one. And then, Dirk, I had one final one. You were about to bite on this one earlier in the questions. But I'd like you just to talk about that cookie growth in the United States, the 6.5 points of volume growth that we're seeing in the Nielsen data. And just the sustainability of that kind of take away and what's driving it. It's pretty special. Obviously, it's in cookies and not in the other portions of the U.S. business. But I'm still just curious as to what's driving it in the sustainability of that cookie growth?

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [52]

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Okay. Well, as it relates to the investments, it is evenly spread. If anything, the first quarter was probably a bit lower than its fair share. So it is not that we have an extraordinary spending in this quarter and now it tempers down, I would say. We're expecting, as Luca said, a sequential increase of the spending as we go through the quarters. As it relates to what we're seeing, yes, we -- obviously, that's not captured in our consumption numbers that you see. But you're referring to a report that I think came out recently. We do see quite some substantial increase of consumption.

I would say in biscuits in North America, the -- I think that's sort of a particular situation. We have Easter is in those numbers so that's going to have an effect. We also just ran a very successful promotion on Oreo, the Game of Thrones edition, which is a one-off. So I'm expecting as those big effects sort of passes, that consumption will go back to the normal 3-ish percent that we're seeing. But yes, we clearly have seen in April a big boost in consumption and we are quite happy about that.

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David Christopher Driscoll, Citigroup Inc, Research Division - MD and Senior Research Analyst [53]

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Well, congratulations and thank you, guys.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [54]

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Thank you.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [55]

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Thank you.

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Operator [56]

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And I will now turn the call back over to Dirk.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [57]

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Okay. Thank you. So as I said at the outset, I feel good about our performance in this first quarter and the progress we're making, our strategic plan. We're encouraged by this strong start and we believe we are well-positioned to deliver on our financial commitments and keep on funding our future growth. We want to continue to invest for the long term to support our brands, our sales, our innovation and our quality. And we think we are entering into that virtuous circle that we're talking about to build the sustainable momentum and keep on creating value for our shareholders for many years to come. So thank you for your time. Thank you for your interest in the company, and I'll talk to you in about a quarter.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [58]

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Thank you.

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Operator [59]

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This does conclude today's conference call. Thank you for your participation. You may now disconnect.