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July 29, 2020, 6:05 a.m. EDT

10-Q: MONDELEZ INTERNATIONAL, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Description of the Company

We make and sell primarily snacks, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy as well as various cheese & grocery and powdered beverage products. We have operations in approximately 80 countries and sell our products in over 150 countries.

We aim to be the global leader in snacking. Our strategy is to drive long-term growth by focusing on three strategic priorities: accelerating consumer-centric growth, driving operational excellence and creating a winning growth culture. We believe the successful implementation of our strategic priorities and our leveraging our strong foundation of iconic global and local brands, an attractive global footprint, our market leadership in developed and emerging markets, our deep innovation, marketing and distribution capabilities, and our efficiency and sustainability efforts, will drive top- and bottom-line growth, enabling us to continue to create long-term value for our shareholders.

Recent Developments and Significant Items Affecting Comparability

COVID-19

During the first quarter of 2020, we experienced a significant increase in demand and revenue growth in developed markets as consumers increased their food purchases for in-home consumption. Results were particularly strong in modern trade (such as large grocery supermarkets and retail chains) and e-commerce, especially for some categories like biscuits. Other parts of our business were negatively affected by mandated lockdowns and other related restrictions including some of our emerging markets with a greater concentration of traditional trade (such as small family-run stores) as well as our world travel retail (such as international duty-free stores) and foodservice businesses. During the second quarter, we continued to see elevated demand in modern trade, particularly the biscuits category in the North America region due to higher at-home consumption. Lockdowns and other related restrictions continued to have a negative impact on emerging markets with a greater concentration of traditional trade due to store closures (particularly in our Latin America region as well as parts of our AMEA region) as well as in categories like gum and candy, which are more traditionally purchased and consumed out of home. A sharp reduction in global travel continued to negatively impact our world travel retail business, and lower out-of-home consumption continued to negatively impact our foodservice business. We also experienced temporary disruptions in operations in some of our emerging markets that were not material to our consolidated results for the first half of 2020. We discuss these and other impacts of COVID-19 below.

Our Employees, Customers and Communities We have taken a number of actions to promote the health and safety of our employees, customers and consumers, which is our first priority:

We have been hiring frontline employees in the U.S. and other locations to meet additional marketplace demand and promote uninterrupted functioning of our manufacturing, distribution and sales network.

We increased our $15 million global commitment to assist those most impacted by COVID-19 to over $25 million to date. We have been supporting local and global organizations that are responding to food instability and providing emergency relief.

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Our Supply Chain and Operations

We have been able to continue to source raw ingredients, packaging, energy and transportation and deliver our products to our customers.

We have not experienced material disruptions in our workforce; however, mandatory and voluntary stay-at-home restrictions have resulted in increased levels of absenteeism.

Commodity costs have become more volatile due to the COVID-19 outbreak. Although we monitor our exposure to commodity prices and hedge against input price increases, we cannot fully hedge against changes in commodity costs, and our hedging strategies may not protect us from increases in specific raw material costs. We anticipate continued commodity cost volatility as the pandemic continues.

We have experienced temporary disruptions in operations in some of our emerging markets. The disruptions were not material to our consolidated results for the first half of 2020. In the future, the ongoing COVID-19 outbreak could disrupt our global supply chain, operations and routes to market or those of our suppliers, their suppliers, or our co-manufacturers or distributors. These disruptions or our failure to effectively respond to them could increase product or distribution costs, prices and potentially affect the availability of our products.

Our first half of 2020 net revenue and net earnings in U.S. dollars were negatively affected by currency translation losses from a generally stronger U.S. dollar relative to other currencies in the countries in which we operate.

We incurred higher operating costs in the second quarter of 2020 primarily for labor, customer service and logistics, security, personal protective equipment and cleaning. Most other aspects of our global supply chain and operations did not change materially during the first half of 2020. We do not know whether or how our supply chain or operations may be negatively affected if the pandemic persists for an extended period or worsens. As we respond to this evolving situation, we intend to continue to execute on our strategic operating plans. However, disruptions, higher operating costs or uncertainties like those noted above could result in delays or modifications to our plans and initiatives.

Our Liquidity

During the first half of 2020, we generated $1,558 million of cash from operations, or $1,113 million after capital expenditures and as of June 30, 2020, we had $1.6 billion of cash and cash equivalents on hand. Due to the significant uncertainty in the global markets resulting from the COVID-19 outbreak, we have increased our available borrowing capacity under our credit facilities to $6.95 billion as of the date of this filing, and we issued both short-term and long-term debt, in part to fund the second quarter 2020 acquisition of Give & Go and refinance expected debt maturities. We also received cash of ?350 million ($394 million) from our participation in the JDE Peet's initial and secondary public offerings and $185 million from our participation in the KDP secondary offering (see additional information below and in Note 6, Equity Method Investments). As a cautionary measure, in March, we suspended our share repurchase program. In connection with various legislatively authorized tax payment deferral mechanisms available for income tax, indirect tax (such as value-added tax) and payroll tax in a number of jurisdictions, we were able to defer certain of these tax payments, which provided a cash benefit that will reverse when the cash tax payments become due. The benefits associated with the deferral of these tax payments are not material to our financial statements. We continue to have our undrawn credit facilities and other forms of short-term and long-term financing options available (refer to the Liquidity and Capital Resources section).

Based on our current access to cash and financing, we do not anticipate any issue in funding our next long-term debt maturities of approximately $140 million in October 2020 and approximately $760 million in January 2021.

While the commercial paper market experienced a significantly increased level of volatility in March, it has stabilized significantly since the beginning of April and in recent months, we have been able to raise short-term financing from these markets with favorable terms. We have also been able to draw on our available

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credit facilities and access funds through existing lines of credit and intercompany loans. We have issued and may issue additional long-term debt this year. We have been, and we expect to continue to be, in compliance with our debt covenants.

Our Financial Position

In connection with the ongoing pandemic, during the second quarter of 2020, we identified a decline in demand for certain of our brands, primarily in the gum category, that prompted additional evaluation of our indefinite-life intangible assets. We concluded that six brands were impaired and we recorded $90 million of impairment charges. While we did not identify impairment triggers for our other brands, there is significant uncertainty due to the current pandemic. If brand earnings expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future. Refer to Note 5, Goodwill and Intangible Assets, for additional details on our intangible asset impairment evaluation.

Restructuring and implementation activities were in line with our Simplify to Grow Program strategic objectives.

Our equity investments in JDE Peet's and KDP give us additional financial flexibility.

We will continue to monitor the quality of our assets and our overall financial position over coming quarters.

We continue to maintain oversight over our core process controls through our centralized shared service model, and our key controls are operating as designed.

The business and economic environment continues to be volatile and additional impacts may arise that we cannot currently anticipate, particularly as infection rates are still rising. While there is still significant uncertainty about the ongoing impacts of the COVID-19 outbreak on the global economy and on our business, barring material business disruptions or other negative developments, we expect to continue to meet the demand of consumers for our snacks, food and beverage products. However, the elevated consumer demand we experienced primarily in some of our developed market countries in the first half of 2020 may not continue. We are unable to predict how long this sustained demand will last or how significant it will be. We expect the COVID-19 outbreak to result in lower revenues primarily in some of our emerging market countries that have a higher concentration of traditional trade outlets (such as small family-run stores), our gum and candy categories (which are more instant consumption in nature), as well as our world travel retail (such as international duty-free stores) and foodservice businesses. As we continue to proactively manage our business in response to the evolving impacts of the pandemic, we continue to communicate with and support our employees and customers; monitor and take steps to further safeguard our supply chain, operations, technology and assets; protect our liquidity and financial position; work toward our strategic priorities and monitor our financial performance as we seek to position the Company to withstand the current uncertainty related to this pandemic.

JDE Peet's and KDP Equity Method Investment Transactions During the second quarter of 2020, in connection with the JDE Peet's offering of its ordinary shares, we exchanged our 26.4% ownership interest in JDE for a 26.5% equity interest in JDE Peet's. On May 29, 2020, we participated in the JDE Peet's offering and, with the subsequent exercise of the over-allotment option, we sold a total of approximately 11.1 million shares during the second quarter, retaining a 22.9% ownership interest in JDE Peet's. We received ?350 million ($394 million) of total proceeds from the sales of JDE Peet's shares and we recorded a pre-tax gain of $121 million during the second quarter. We also incurred a $261 million tax expense that is payable in 2020 and 2021. Consistent with our accounting for KDP, in connection with JDE Peet's becoming a public company, we changed our accounting principle to reflect our share of JDE historical results and JDE Peet's ongoing results on a one-quarter lag basis while we continue to record dividends when cash is received. We determined a lag was preferable as it enables us to continue to report our quarterly and annual results on a timely basis and to record our share of JDE Peet's ongoing results once JDE Peet's has publicly reported its results. This change was applied retrospectively to all periods presented. Refer to Note 6, Equity Method Investments, and Note 14, Income

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Taxes, for additional information.

Summary of Results

Net revenues decreased 2.5% to $5.9 billion in the second quarter of 2020 and increased 0.1% to $12.6 billion in the first six months of 2020 as compared to the same periods in the prior year. During the second quarter and the first six months of 2020, net revenues were significantly impacted by the COVID-19 outbreak and response. In developed markets, particularly North America, demand for our products grew significantly as consumers increased their food purchases for in-home consumption. In some of our emerging markets, where we have a greater concentration of traditional trade, as well as in our gum and candy, world travel retail and foodservice businesses, where we sell products that are typically consumed away from home, net revenues were negatively affected by mandated lockdowns and other related restrictions.

- Net revenue decreased in the second quarter of 2020, driven by the significant impact of unfavorable currency translation, as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year, unfavorable volume/mix, and the May 28, 2019 divestiture of most of our cheese business in the Middle East and Africa. These items were partially offset by higher net pricing and incremental net revenues from our April 1, 2020 acquisition of Give & Go and our July 16, 2019 acquisition of Perfect Snacks.

- Net revenue increased in the first six months of 2020, driven by higher net pricing, favorable volume/mix, and incremental net revenues from our acquisitions of Give & Go and Perfect Snacks. These items were mostly offset by the significant impact of unfavorable currency translation, as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year, and the prior-year divestiture of most of our cheese business in the Middle East and Africa.

Organic Net Revenue, a non-GAAP financial measure, increased 0.7% to $6.1 billion in the second quarter of 2020 and increased 3.7% to $13.0 billion in the first six months of 2020 as compared to same periods in the prior year.

- Organic Net Revenue increased in the second quarter of 2020, due to higher net pricing, partially offset by unfavorable volume/mix.

- Organic Net Revenue increased in the first six months of 2020, due to higher net pricing and favorable volume/mix.

Refer to our Recent Developments and Significant Items Affecting Comparability above and Discussion and Analysis of Historical Results below, including the Results of Operations by Reportable Segment, for additional information. Organic Net Revenue is on a constant currency basis and excludes revenue from acquisitions and divestitures. We use Organic Net Revenue as it provides improved year-over-year comparability of our underlying operating results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section).

Diluted EPS attributable to Mondel?z International decreased 30.9% to $0.38 in the second quarter of 2020 and decreased 26.4% to $0.89 in the first six months of 2020 as compared to the same periods in the prior year.

- Diluted EPS decreased in the second quarter of 2020, primarily driven by costs associated with the JDE Peet's transaction, intangible asset impairment charges, lapping a prior-year net gain on divestiture, lapping prior-year impact from pension participation changes, unfavorable year-over-year mark-to-market impacts from currency and commodity derivatives, a decline from operating activities as a result of COVID-19 related impacts and unfavorable currency translation. These factors were partially offset by a gain on an equity method investment transaction and lower taxes primarily due to non-recurring discrete tax items (refer to Note 14, Income Taxes).

- Diluted EPS decreased during the first six months of 2020, primarily driven by costs associated with the JDE Peet's transaction, unfavorable year-over-year mark-to-market impacts from currency and commodity derivatives, a loss related to an interest rate swap, intangible asset impairment charges, unfavorable currency translation, lapping a prior-year gain on divestiture, lapping a prior-year impact from pension participation changes and a decrease in equity method investment earnings. These

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factors were partially offset by gains on equity method investment transactions, lower taxes associated with operating activities, an increase in benefit plan non-service income, fewer shares outstanding and an increase from operating activities, which were tempered by COVID-19 related impacts.

Adjusted EPS, a non-GAAP financial measure, increased 12.5% to $0.63 in the second quarter of 2020 and increased 4.0% to $1.30 in the first six months of 2020 as compared to the same periods in the prior year. On a constant currency basis, Adjusted EPS increased 16.1% to $0.65 in the second quarter of 2020 and increased 8.0% to $1.35 in the first six months of 2020 as compared to the same periods in the prior year.

- Adjusted EPS increased in the second quarter of 2020, driven by lower taxes primarily due to non-recurring discrete tax items, an increase in equity method investment earnings, an increase in benefit plan non-service income, lower interest and other expense, net, and lower shares outstanding, partially offset by a decline from operating activities and unfavorable currency.

- Adjusted EPS increased in the first six months of 2020, driven by lower taxes, an increase in benefit plan non-service income and fewer shares outstanding, partially offset by unfavorable currency and a decrease in equity method investment earnings.

Adjusted EPS and Adjusted EPS on a constant currency basis are non-GAAP financial measures. We use these measures as they provide improved year-over-year comparability of our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section).

Financial Outlook

We seek to achieve profitable, long-term growth and manage our business to attain this goal using our key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. We use these non-GAAP financial metrics and related computations, particularly growth in profit dollars, to evaluate and manage our business and to plan and make near- and long-term operating and strategic decisions. As such, we believe these metrics are useful to investors as they provide supplemental information in addition to our U.S. Generally Accepted Accounting Principles ("U.S. GAAP") financial results. We believe it is useful to provide investors with the same financial information that we use internally to make comparisons of our historical operating results, identify trends in our underlying operating results and evaluate our business. We believe our non-GAAP financial measures should always be considered in relation to our GAAP results. We have provided reconciliations between our GAAP and non-GAAP financial measures in Non-GAAP Financial Measures, which appears later in this section.

In addition to monitoring our key operating metrics, we monitor developments and trends that could impact our revenue and profitability objectives, similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2019 and discussed in the footnotes to our financial statements.

COVID-19. We have been monitoring the COVID-19 outbreak. While its full impact is not yet known, it has had a material negative effect on the economy and could have a material negative effect on our business and results in 2020, particularly if there are significant adverse changes to consumer demand or significant disruptions to the supply, production or distribution of our products or the credit or financial stability of our customers and other business partners. An economic or credit crisis could occur and impair credit availability and our ability to raise capital when needed. A disruption in the financial markets may also have a negative effect on our derivative counterparties and could also impair our banking or other business partners, on whom we rely for access to capital and as counterparties for a number of our derivative contracts. Any of these and other developments could materially harm our business, results of operations and financial condition. We will continue to prioritize the safety of our employees and consumers. As we manage operations during the pandemic, we may continue to incur increased labor, customer service, logistics and other costs. As consumer demand for our products evolves, we could continue to see a shift in product mix that could have a negative impact on results. As discussed in Recent Developments and Significant Items Affecting Comparability, we are working to mitigate any negative impacts to our business from the COVID-19 outbreak, but we may not be able to fully predict or respond to all impacts on a timely basis to prevent near- and long-term adverse impacts to our results.

Brexit. On January 31, 2020, the United Kingdom began the withdrawal process from the European Union under the European and U.K. Parliament approved Withdrawal Agreement. During a transition period

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scheduled to end on December 31, 2020, the United Kingdom will effectively remain in the E.U.'s customs union and single market while a trade deal with the European Union is negotiated. The deadline for extending the transition period was June 30, 2020 and the United Kingdom did not seek an extension. As a result, on December 31, 2020, the United Kingdom will either exit the European Union and begin a new trade relationship with the European Union or will exit without a trade deal. During the transition period, we continue to take protective measures in response to the potential impacts on our results of operations and financial condition. Our exposure to disruptions to our supply chain, the imposition of tariffs and currency devaluation in the United Kingdom could result in a material impact to our consolidated revenue, earnings and cash flow. In the six months ended June 30, 2020, we generated 8.8% of our consolidated net revenues in the United Kingdom and our supply chain in this market relies on imports of raw and packaging materials as well as finished goods. Following the Brexit vote in June 2016, there was significant volatility in the global stock markets and currency exchange rates. The value of the British pound sterling relative to the U.S. dollar declined significantly and negatively affected our translated results reported in U.S. dollars. The volatility in foreign currencies and other markets is expected to continue as the United Kingdom executes its exit from the European Union. If the U.K.'s membership in the European Union terminates without trade and other cross-border operating agreements, there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and other countries, including those in the European Union, shipping delays because of the need for customs inspections and procedures and shortages of certain goods. The United Kingdom will also need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. If the ultimate terms of the U.K.'s separation from the European Union negatively impact the U.K. economy or result in disruptions to sales or our supply chain, the impact to our results of . . .

Jul 29, 2020

COMTEX_368585856/2041/2020-07-29T06:04:56

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