Mondelez International, Inc. (MDLZ) Earnings Call Transcript & Summary

[Presentation] Ladies and gentlemen, welcome to the Mondelez International conference call. I would now like to hand the conference over to your speaker today, Dirk Van de Put, Chairman and Chief Executive Officer. Sir, please go ahead.

Thank you. Hello to everybody, wherever you are in the world. I am Dirk Van de Put, Chairman and Chief Executive Officer of Mondelez International. I'm pleased to welcome you to the 2020 Annual Mondelez International Shareholders Meeting, which is a bit different this time because we are having it virtually. With me on the line today are the nominated Mondelez International Board of Directors, who I will introduce to you a little later as well as the management team. Listening in are many Mondelez International colleagues. On behalf of all of them, we thank you for your interest in our company, and we wish you and your families the best during these unprecedented times. I'm happy to see that many of you have joined this call. We have planned to host you all in a location in downtown Chicago, not far from our new office in Fulton market. However, due to COVID-19, we moved to a virtual meeting for obvious reasons. Before we turn to the official business of the meeting, I'd like to recognize the brave health care professionals, first responders, grocery store workers, delivery people and all those who are fighting the pandemic and providing essential services to communities around the world. Thank you for everything you do from all of us at Mondelez International. Among the heroes on the front lines are thousands of Mondelez team members, who have worked so hard to safely maintain our operations and help keep the global food supply intact. I want to thank them as well for everything they have done. Let me talk about our priorities during this crisis. To support and protect our frontline colleagues, we've put in place strict protocols, including temperature screening, mask wearing and social distancing measures. We take the safety very seriously, and we'll be applying similar measures in our offices as colleagues start to return to the workplace in the coming weeks. In addition, our teams have donated more than USD 20 million in product and cash to communities in which we operate, and colleagues across the business have gone above and beyond. Our Research and Development teams, for example, have redeployed resources to produce hand sanitizers, and colleagues in our factories use 3D printers to make parts for face shields for health care workers. Finally, we've maintained business continuity. Our front-line colleagues have enabled us to meet unprecedented demand in the first quarter as consumers stay at home. [Technical Difficulty] They are committed and resilient, and our continued success is due to them. Thank you again for all that you are doing. In times like these, we are more committed than ever to our purpose and values as an organization. We exist to empower people to snack right, and our brands are doing part. Oreo, for example, by connecting with consumers around staying playful and positive in these difficult times. And in the U.K., Cadbury continues to communicate around generosity, the original reason the brand was launched over 100 years ago. The ad you saw at the start of the meeting was created in just a week under lockdown conditions. It celebrates the humanity and generosity that is happening throughout the world right now. Turning to our performance. 2019 was an excellent year for Mondelez International and a big step forward for us as a company. Let me share some of the highlights. We delivered top tier total shareholder returns of 40.5%. We met or exceeded all of our financial targets for the year, including organic net revenue growth, adjusted EPS growth and cash flow. A significant change in 2019 was the full implementation of our new local first commercial business unit structure, which helped to drive local accountability and engagement. This, together with the transformation in our marketing approach and increased investments behind our brands, led to an acceleration in growth for both our global brands as well as our local jewels. As a result, we significantly improved our market share with 75% of our businesses holding or gaining share during the year. In addition to organic growth, we acquired Perfect Snacks in July 2019 as well as minority interests in new vegan snacks as well as Uplift Foods. Overall, by investing in our portfolio of local and global brands, we were able to deliver strong top line growth, and we began creating a virtuous cycle that delivers attractive top and bottom line growth and sustained free cash flow generation. At the same time, we have remained focused on our sustainability agenda. As a global snacking leader, we have a responsibility to reduce our impact on the environment, to make a positive contribution to society and to conduct ourselves in an ethical, efficient and inclusive manner. We are making good progress. Here are some of our 2019 milestones. We delivered all of our 2020 environmental reduction goals on CO2, water and waste ahead of schedule, with waste providing $88 million in cost savings in 2019. We eliminated 65,000 tons of packaging as per the end of Q1 2020 and sourced 63% of the volume of cocoa needed for our global chocolate brands through the Cocoa Life program, an increase of 20 points versus 2018. Within our product portfolio, our offering of portion control options for consumers increased to 16% of our snacks net revenues, ahead of our 15% goal for 2020. And our Mondelez International Foundation allocated 100% of its $50 million commitment to community healthy lifestyle programs. You can read more about these areas in our Snacking Made Right report, which we published last week. We also held our first ever global investor sustainability call in which we talked about Mondelez International's approach to Snacking Made Right and the importance of sustainability and well-being to us as a company. In the current COVID-19 pandemic, people will look very closely at how we do business. Now more than ever is a time for companies to do what's right. Turning to 2020. We started the year with strong momentum. The first 2 months of this year were very good for us, and the first quarter overall was strong with record market share gains. In March, the effects of the pandemic began to impact our business globally. In developed markets, we saw a sharp increase in demand as consumers stocked up on essentials and turn to trusted brands and products as a way to find comfort in challenging times. In emerging markets, the situation was a little tougher with lockdowns in certain places impacting our ability to manufacture and sell our products. While some countries like China and seemingly parts of Europe are now returning towards the new normal, we do expect to see some short-term headwinds in the balance of the year. We have set ourselves very clear priorities for the months ahead as we prepare to emerge stronger. First, snacking as a category is growing, and people are turning back to trusted brands in these crisis times. Our portfolio of global and local brands from Oreo, Triscuit and Halls in U.S. or Cadbury, LU and Milka in other parts of the world is a tremendous asset and creates a strong connections with consumers who love our products. Second, thanks to our colleagues on the front lines. We have demonstrated great resilience and proven that we can execute with excellence despite the pandemic. As countries emerge from lockdown and distribution returns to normal, our execution culture will help us to win and consolidate our recent market share gains. We want to continue to invest behind our brands, especially if there is a downturn. We've already begun to prepare by simplifying our portfolio, reducing innovation projects and cutting CapEx. At the same time, we are thinking about price pack architecture and also making our investments work harder with more tailored approach to media spending, for instance. These priorities build on our existing strengths and will create a powerful basis for future growth as we emerge from this crisis. From what I've seen in the past 3 months, I am more confident than ever in our long-term prospects and know we can be stronger together. On that note, I now call the 2020 Annual Meeting of Shareholders to order. Let me introduce Ellen Smith, our Senior Vice President and Chief Counsel, Chief Compliance Officer and Corporate Secretary. She will outline some ground rules for today's meeting and establish a quorum.

Thank you, Dirk. Good morning. I'm Ellen Smith, Mondelez International's Corporate Secretary, and it is an honor to present the formal portion of our meeting today. You may view today's agenda and meeting procedures posted on the welcome page of the annual meeting website. To conduct an orderly meeting, we will follow the agenda and procedures. Also, because this is a shareholders' meeting, only shareholders or a single authorized representative of a shareholder may submit questions or comments. We will be answering questions from shareholders at 2 points during the meeting. We will address questions pertaining to the 4 items up for a vote before we close the polls and then general questions at the end of the meeting. Shareholders with questions are invited to submit them through the web portal, and we will address as many as time permits during the meeting. To ensure we have the broadest possible dialogue, we will take no more than 3 questions per shareholder, and we will answer questions on the same topic during the meeting only once. Responses to the questions we are unable to cover during the meeting will be posted on our Investor Relations website within 72 hours. You can find the link at www.mondelezinternational.com in the Investors section under News & Events. During this meeting, we are making forward-looking statements about expectations and prospects for Mondelez International's business strategies and performance. These statements are based on our review of the business and the operating environment today. Please note that actual results may differ materially due to a number of risks and uncertainties. Please refer to the Risk Factors section of our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on our website for more information about the inherent limitations in our forward-looking statements. During today's prepared remarks, we are referencing our non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations in our earnings release on the website under the Events and Webcast tab of the Investors section. Finally, we are recording today's proceedings. A replay of the meeting will be available on our website for approximately 1 year from the date of today. And now into business. The Board set March 12, 2020, as a record date for determining shareholders entitled to vote at this meeting. We began distributing meeting materials to shareholders on April 1, 2020. I have an Affidavit from Broadridge certifying the completion of the distribution, and I will include it in the meeting minutes. Our 2020 notice of annual meeting and proxy statement describe the purposes of today's annual meeting. They can be found at www.mondelezinternational.com in the Investor Relations section under News & Events. Please also refer to the agenda and meeting procedures posted on the virtual shareholder meeting site for additional information on how we'll conduct today's meeting. The votes on matters described in our proxy will be independently tabulated by Broadridge. The independent inspector of elections at today's meeting is Hagberg Associates LLC, and it has subscribed to its oath. Hagberg has determined that common stock representing more than 85% of the company's outstanding shares is represented here today. Therefore, a quorum is present, the annual meeting may proceed. Dirk Kirk, back to you.

Thanks, Ellen. I would now like to introduce our Board of Directors and the management team. Starting with the nominees for our Board of Directors: Lewis Booth, Charles Bunch, Debra Crew, Lois Juliber, Peter May, Jorge Mesquita, Fred Reynolds, Christiana Shi, Patrick Siewert and Jean-François van Boxmeer. I would like to take this opportunity to introduce Michael Todman as Director Nominee. Mr. Todman has brought leadership experience at Whirlpool and is a Director of Newell Brands and Brown-Forman. We believe he will be a strong addition to our Board. John Neubauer and Mark Ketchum are also with us today, and I would like to thank them. We appreciate very much their contributions over the years and wish them well. We also have members from the management team on the line today. Let me also introduce them. Paulette Alviti, Maurizio Brusadelli, Vinz Gruber, Rob Hargrove, Sandra MacQuillan, Minsok Pak, Gerd Pleuhs, Martin Renaud, Gustavo Valle, Glen Walter and Luca Zaramella. To everyone I have just introduced as well as our colleagues across Mondelez International, thank you all for your commitment to our company. Now let's address the official business of the annual meeting. We'll present each of the 4 items of business to be voted on in the order they appear on the agenda. As mentioned earlier, after that, we will answer questions that have been submitted that relate to these 4 items of business. The first item of business is the election of 12 Directors. Ellen?

Thanks, Dirk. On behalf of the Mondelez International Board of Directors, I nominate the 12 nominees set forth in the proxy statement.

I declare the nominations closed. We now turn to Item 2.

On behalf of the Board of Directors, I move the following resolution resolved that the shareholders approve on an advisory basis the compensation paid to the named executive officers as described in the proxy statement.

Item 3.

On behalf of the Board of Directors, I move the following resolution resolved that the shareholders ratify the selection of PricewaterhouseCoopers LLP as the company's independent registered public accountants for the fiscal year ending December 31, 2021.

Item 4.

Item 4 is a shareholder proposal submitted by the AFL-CIO reserve fund to consider employee pay and setting Chief Executive Officer pay. We will now connect with Mr. Brandon Rees, Deputy Director, Corporations and Capital Markets for the AFL-CIO to present the proposal. Out of respect for the other shareholders in attendance and to allow ample time for Q&A, we ask you, Mr. Rees, to please limit your remarks to a period of 3 minutes. Mr. Rees, you are now on the line.

Good morning. My name is Brandon Rees, and I hereby present our shareholder proposal on behalf of the AFL-CIO. I am honored to move our proposal in memory of BCTGM President, David Durkee, who presented this proposal last year. I also want to express my best wishes for the health and safety of all Mondelez employees and their families during these difficult times due to the COVID-19 pandemic. Many Mondelez employees are essential workers who manufacture Nabisco bakery and snack food products. Demand for Nabisco products has grown tremendously as many households have been subject to stay-at-home orders. Mondelez workers have put their lives on the line to keep our families fed during the COVID-19 pandemic. To them, I say thank you. We welcome and encourage Mondelez's efforts to implement health and safety standards to protect its workforce from the risk of COVID-19. Essential workers need to have a say in workplace safety practices, protection for blowing the whistle on unsafe work, access to training, personal protective equipment, paid sick leave, affordable health care and hazard pay. Social solidarity is key to defeating COVID-19. That is exactly what our shareholder proposal requests when setting CEO pay. Our proposal simply asks the Board to consider how it pays all employees when setting CEO pay. By adopting this proposal, it will help ensure fairness for Mondelez shareholders and employees. In 2019, Mondelez paid its median employee $32,280 in total compensation. In comparison, last year, our company's CEO, Dirk Van de Put, received over $18 million in total compensation. Over the past 3 years, Mondelez's CEO to median worker pay ratio has continued to grow. In 2017, the company reported a pay ratio of 403:1. In 2018, the pay ratio had grown to 489:1. Last year, the pay ratio grew yet again to an unconscionable 561:1. This rising inequality is not sustainable. Pay ratios between CEOs and employees matter. A rising pay ratio is a dispiriting message to the company's workforce. Mondelez's employees deserve a fair return on their work. We urge the Board to consider whether CEO pay is internally aligned with the company's CEO pay practices for all its employees. A reasonable CEO pay package must be consistent with the company's overall compensation philosophy. The success of every company depends on the contributions of all its employees, not just the CEO. This means considering how the company pays the rest of its workforce when setting CEO pay. COVID-19 does not care if you're a corporate CEO or a part-time hourly employee. The danger of COVID-19 shows the importance of social solidarity and the contributions of essential workers. For Mondelez, that should mean considering the pay of its workforce when setting CEO pay levels. Thank you.

At this point, I would like to ask Lois Juliber, our Board member and Chair of our Board Human Resources and Compensation Committee, to share our response.

Thanks, Dirk. And thank you, Mr. Rees, for your interest in our company and your concern for our workers all over the world. As set out in our proxy statement, there are several reasons why we recommend a vote against your proposal. First, we have a well-established approach to executive compensation, which follows established global compensation principles and seeks to be fair for both executive and nonexecutive employees. Our executives do not participate in any executive-only benefit programs. They are offered the same benefit plans as all salaried and hourly nonunion employees within the same geography. The Board's compensation committee, which consists of all -- of independent directors, which means there is no recent relationship with the company, continually reviews our executive compensation to confirm that it continues to align with shareholders' interest. This year, the committee engaged a new compensation consultant, and their first order of business was to review our compensation practices. They came back and strongly supported the fact that our programs support our strategy, motivate our people and are well aligned with our shareholders' interest. Second, we continually engage with our shareholders, and their views inform our compensation approach. Following last year's annual meeting, we spoke with 32 different shareholders representing 41% of our outstanding shares with 4 independent directors, including myself, participating in 20 of these conversations, representing about 34% of our outstanding shares. During these conversations, we solicited input on our compensation programs, which ultimately drove the changes we've made in our programs. In terms of our long-term compensation plan, where the majority of the compensation is in performance shares, we've raised the performance target -- performance level for target payout, and we have capped the awards when shareholder return is negative. In terms of our annual plan, we have included more metrics that better align with our strategy, including metrics around sustainability, package recyclability, diversity, talent and employee engagement. In our discussions with shareholders, they were quite supportive of the proposed changes in our compensation plan. Finally, we regularly assess how our compensation compares with other similarly sized multinational companies, and we make adjustments as necessary to remain attractive and competitive as an employer. Based on these factors and given the breadth of information taken into consideration by our compensation committee, we think our approach is comprehensive and the best way to incentivize performance while aligning with shareholders' interest. We, therefore, recommend our shareholders to vote against this proposal.

Thank you, Lois. All matters to be voted on have now been formally presented. Now we will answer questions submitted that relate to these 4 items. As a reminder, we will answer questions submitted that do not relate to these 4 items during the general Q&A session after the meeting. We are pleased that [ Laura Tom ] from PricewaterhouseCoopers is also attending the meeting and is available to respond to appropriate questions. And with that, I'll turn the microphone over to Tom Armitage, Senior Director of Corporate Communications, to read the first question.

Thank you very much, indeed, Dirk. So we have 2 questions relating to the proposals. The first question is about Proposal 4, and they've asked, is Proposal 4 about the ratio of CEO pay as a ratio to average employee pay, and I think that question has been answered by Mr. Rees' proposal. So you...

Yes, I heard Mr. Rees go through the ratio, so I don't think we have to go through that again.

Great. Thank you, Dirk. So I'll move to the second question on this section, which relates to Item 3. A shareholder ask, did you mean to ratify for the fiscal year ending December 31, 2021? So this relates to the election of PwC as our accountant for the fiscal year and the shareholder's asking whether 2021 is the date.

Excuse me. We ratify the auditor every year. So this is for the 2020 year that we ratify them. Was that the question, Tom? I have difficulty hearing you exactly. Yes. So we ratify the auditor for the current fiscal year, which is 2020.

Great. There are no further questions on the resolutions.

Okay. So the polls are now closed. At this time, the Corporate Secretary will present the preliminary report of the inspector of election.

Thank you, Dirk. Based on the preliminary report of the inspector of elections, it appears that as to the first item of business, all 12 nominees to the Board of Directors received more for votes than against votes. Therefore, each has been elected to a term expiring at the 2021 Annual Meeting of Shareholders or until his or her successor has been duly elected or appointed. On the second item, a majority of shares voted were cast for the approval of the compensation paid to the named executive officers as disclosed in our proxy statement. Therefore, the shareholders have approved on an advisory basis that compensation. As to the third item, a majority of shares voted were cast for ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accountants for 2020. Therefore, the shareholders have also ratified that selection. And finally, as to the fourth item, a majority of shares voted were cast against the shareholder proposal on considering employee pay and setting Chief Executive Officer pay. Therefore, the shareholders did not approve the proposal, and the proposal does not pass. Please note that these results are preliminary. We will report final results, including the votes from the meeting today, in a current report on SEC Form 8-K on or before May 19, 2020. We will also post the results on our website.

Thank you, Ellen. With that, we've concluded our official business. So today's annual meeting is adjourned. Now we will take your questions and comments of a more general nature. As noted earlier, in the interest of fairness, we will respond to no more than 3 questions from any single shareholder. Answers to questions that are not addressed will be posted on the Investor Relations section of our website within 72 hours after the end of the meeting. We will also group substantially similar questions by topic and answer them only once. And with that, I'll turn the microphone back to Tom to read the first question.

Great. Thank you, Dirk. So we have a couple of questions, and I'm going to read 2 questions together because they cover a similar topic area. These relate to share buybacks and dividend policy. So the first question reads, Mr. Chairman, the carpenter union pension funds at the collective ownership position of 1,030,400 shares of the company's common stock. As long-term investors, we appreciate the company's actions to aggressively address employee safety issues and the difficulties being experienced by customers and other important corporate stakeholders related to the COVID-19 pandemic. What will the Board's decision criteria be going forward to restart the company's share repurchase plan? Thank you, Mr. Chairman. And then let me read the second question, which is a similar topic area, which relates to dividend. With the COVID-19 pandemic, some companies have implemented a temporary suspension of the dividend. Is this something that Mondelez may consider going forward under the current conditions?

Okay. Thank you, Tom. Yes. Given the uncertainties, we have cautiously decided to switch off our share buybacks. And seeing the circumstances and the importance that we wanted to put on employee safety, we believe that, that was the right thing to do. But at the same time, we are in a very solid financial position with, for instance, $8 billion of revolving credit facilities. We have stakes in coffee. We issued some new bonds. So we feel confident that we can fulfill all obligations, including paying dividends, of course, pending Board's approval. And I also wanted to mention that our credit facility at this stage is mostly undrawn. I also want to point out that in the first quarter, we returned $1.1 billion of capital to our shareholders with $700 million in share repurchases at what we believe to be attractive prices and $400 million in cash dividends. We want to continue dividends because they are an important method of returning cash to our owners. And our long-term strategy, as you know, is to grow our dividends in excess of adjusted earnings growth, and we've grown our dividends about 30% over the last 3 years. Our current payout ratio is about 50%. So we believe there is some more room in this regard. And so I can assure that at this stage, we do not see that, that will change going forward. So that was, I think, what we can say on that subject. Tom, do you have any other questions?

Yes, I do, Dirk. There are questions now relating to the impact of the COVID pandemic on our business. I'm going to, again, group a couple of questions together here. The first part, what country is the greatest opportunity for Mondelez? And which country or countries are experiencing turnaround? And the second part of the question relates to shelf space. Is Mondelez getting increased shelf space in the wake of COVID-19? And will this opportunity continue after the crisis?

Just to clarify the first part, Tom, was that what's the greatest opportunity for us in light of the COVID crisis or just in general?

I think the question is in general.

Okay. I think we have many opportunities around the world. And you -- I think you have to make a difference between how much percentage growth we can potentially have in certain countries, but also in dollars, how much growth can we get. And I would like to say that, for instance, the U.S. offers a lot of opportunity for us because the population is growing, snacking is growing, we are doing well. So if you look at dollars growth, at this stage, the U.S. is a -- and Canada is a major contributor to our growth. Of course, emerging markets, and I'm referring there to the Chinas, the Indias, the Brazils, the Russias, those are huge opportunities for us. And of course, these markets, at this stage, are affected by COVID. The lockdowns have been relatively serious. And so temporarily, I would say these markets are affected. But over the long term, those also -- because of their size and because of the fast growth of snacking and our increasing market share, those are also of major importance for us. I would like to point out as it relates to China, while February was a difficult month for us because we were in the middle of the crisis, we have recuperated very fast. March, we were already above last year's sales, and April has been a very good month. So we've shown that after a COVID crisis, we are able to recuperate very fast. As it relates to shelf space, yes. What we have seen so far is that our market shares are increasing substantially. And now in more than 90% of our markets, we are holding or gaining our market share, and the increases are some of the biggest increases in market shares that we've seen in the history of the company. So that's, of course, a number of factors that play a role, but I would say that one of those is the shelf space. We have great sales forces around the world that have been working in the middle of all this, helping our clients, having our products on the shelf, and I cannot say thank you enough and show my appreciation for them. But due to that work, I have to say that our products have had an excellent shelf space. And as a consequence, we've been able to increase our market share. So their work certainly paid off. And I think consumers have appreciated it because in these difficult times, they want to be delighted by their favorite brands, and they certainly have made that happen. Tom, anything else?

Yes, Dirk, thank you. There is a further question relating to share ownership. The shareholder asks specific to a couple of companies here. Currently, BlackRock holds around 6.5% and Vanguard holds around 7.8% of the company's outstanding shares. We commend the company for the disclosure of the investment management services provided by BlackRock to the company's retirement fund. Does the Board see this growing ownership concentration as a positive or negative development as regards long-term corporate planning and performance?

Well, these are clearly 2 very independent subjects, and retirement-related services follow very strong governance rules in relation to who can provide the surface. So providers are selected based on their capabilities and the costs, of course, and there's a very strict separation with share ownership. So I think this is a normal practice that is very well organized and regulated, and many companies have similar situations. So I think we are in the right position here. The other thing maybe to mention is that our employees are represented in these decisions, and they have a say on who will provide us the pension services. Anything else, Tom?

Yes. I have another couple of questions here for you, Dirk. They're mainly relating to our virtual meeting. So one question is, would the company consider online access to future in-person annual meetings for those shareholders who cannot attend?

It's certainly something we can consider. First of all, it's our objective to go back to a live meeting next year, hopefully. But if -- seeing today's meeting that we feel this -- the flow of this meeting and the way we conducted it was beneficial and allowed more shareholders to participate, we can certainly have what's a sort of a dual meeting, live and virtual at the same time, and a hybrid meeting. And we can certainly -- I cannot say yes or not today. I have to work that through with the team, but it's certainly something that we will consider.

Very good. And one of our shareholders asked, how many shareholders are on the line today?

I have no view on that because when we started, I had the last check. So I don't know where we are now because I went into what's called a separate room for the speakers. But at that stage, which was about 15 minutes before we started, there was about 100 shareholders on the line. I suppose that during the call itself, that number was higher. Anything else, Tom?

No. There are no further questions at this time.

Okay. And in case we would receive any more questions, we will post the answers on our website, as I mentioned before. And so with that, we conclude our question-and-answer session. Thank you for joining today and for your continued support and interest in Mondelez International. Our session is now complete.

Ladies and gentlemen, this concludes the program, and you may all disconnect. Everyone, have a great day.