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

Good morning, everyone. I'm Nik Modi, RBC's HPC, beverage, packaged food and tobacco analyst. And I'm joined by Mondelez International Chairman and CEO, Dirk Van de Put; and Executive VP and CFO, Luca Zaramella. Mondelez is coming off a very strong quarter where they reported 6.4% organic revenue growth with over 13% growth in North America with record share levels and continued strong performance of their local and their global brands. So everyone, grab your Oreos and a glass of milk, and let's get started.

Dirk, Luca, thank you so much for taking the time to spend -- to be with us today.

Thanks, Nik. It's a pleasure to be here.

Thank you.

Excellent. So let's just get right into it and talk about trial. Now the amount of trial Mondelez' portfolio of brands is getting right now is, I would say, unprecedented, and actually may never happen again, hopefully. Hopefully, we don't have any more health pandemics. But since March 1, Numerator's data has identified a projected 13 million new households have purchased Oreos, Teddy Grahams, Barnum Animal Crackers, Newtons and Honey Maid in the U.S. So I just wanted to get your perspective, Dirk, on what you're doing to take advantage of this situation to help convert this trial to repeat. And do you have good intelligence and insight in terms of why the consumers are buying your brands en masse like this outside of just being in stock.

Yes, yes. Yes, so maybe I'll start with the consumer. So what we see and the way we know this is we have household panels where consumers fill out what they consume, and we've also increased quite a bit our interviews with consumers around the world, where it's more of a declared type of consumption. So we've been able to collect some good data now. The first thing that we see is that consumers are at home and as -- more at home. And as a consequence, cookies and crackers, but also chocolate consumption is increasing, tablet chocolate consumption, I would say. Chocolate bar consumption is more on the go. So that's one thing. The occasions that are available, and we see clearly that there's an increase in the number of occasions that consumer snack is enhanced at home. The second point is clearly that, I think from day 1 of the crisis, we have set it as a target that our clients, our retailing clients, needed us more than ever. They were seeing huge demand for the pantry loading, and we made a conscious effort around the world to be there with them, to help them and to shine through execution. And I have to say thank you and congratulations to all the Mondelez teams around the world because they've made a difference. And of course, our supply chain also performed. We paid a lot of attention to the safety and security of our employees. And we were able to keep all our plants running around the world. Here and there, sometimes they were down for a day or 2. But overall, I would say we've done very well with our supply chain. So second point, yes, there was a benefit from us -- for us because we were executing really well. As consumers then started to trial new brands and what you were quoted was correct. They started to drift into newer brands or I would say older brands that they've had -- not had for a while. And we see that, I think, across a number of categories where there is this preference for trusted brands and manufacturers and so sort of they're rediscovering the more traditional brands that we have around the world and maybe reconnecting that to feeling safe, to feeling comfortable, sharing it with their family. And so some of our brands have 50% new consumers. And obviously, we know that there is repeat buying going on, so they're coming back to those brands. So going forward, how are we going to make sure that, that sort of translates into an ongoing consumption? Well, the first thing is that we're not out of the woods yet, as it relates to supply chain challenges if you look around the world. And we are planning to continue at the high level that we currently have. Maybe the focus has shifted from Europe and North America more into Latin America and Africa at the moment, but we still are working very hard to keep our supply chain going and to shine through our execution. The second thing we're doing is that we are planning to increase our investment in the second half. We're doing that by shifting some of the investments from the first half into the second half because, at the moment, it doesn't make a lot of sense if you're struggling to keep your products available to advertise a lot. And so you will see an increased investment in the second half from us. And we're putting some of that investment on the brands I was referring to, but also, of course, on our bigger brands. And we think that by doing that, we will continue to maintain the interest of the consumer in our brands. I also think, if you took a look at it at the moment, we have this dual situation. On one hand, we have increased consumption, what I would say in Europe and in North America, as it relates to biscuits and chocolates because the consumer is sitting at home and there is more consumption occasions. But that is being offset by channels and countries being closed in the emerging markets. And as we go further, I think the consumer will still spend a lot of time at home. I don't think that's behind us. They will be a little bit skeptical about going out, although, this weekend was maybe a bit different. But in general, I would expect the consumer to spend more time at home. And these channels in the emerging markets will open. So I do think we have a chance of seeing that increased trial translating in increased consumption. So that's a little bit the way I look at it.

Excellent. Very helpful. And just kind of piggybacking on that. If you think about the trial as one thing, right, the category growth. But you're also gaining share in a lot of markets, and that was not the case several years ago. So can you just touch on some of the organizational design changes that you've made at Mondelez since coming over? How that has impacted your share performance, not just this quarter, but as we think about the last few quarters?

Yes. First of all, I want to point out that we changed our strategy. We shifted from a more cost orientation to a bigger top line orientation, started to change our marketing approach, changed our organization and increased our investment. And the market share increase started to show itself in the second half of last year, and we reported on it already at the end of the fourth quarter. So the market share gains are not just a phenomenon of COVID. What did happen in the first quarter, and we see it continue in the second quarter of this year, is that, that market share gains that we saw last year have accelerated and quite extraordinary. I would say, we're seeing the biggest market share gains in the history of the company. I do think that what we put in place with our new strategy has benefited us in the current situation. So if you think about it, we shifted our organizational design to more local decision-making, and we created a number of BUs, business units, around the world and empowered them and pushed them to be agile and to really play on the local situation, and that has helped us in this crisis. We changed our incentives for the second year in a row now with high emphasis on market share. And it's a meaningful compensation metric. So our teams are incentivized to gain market share. Yes, as I said, executional excellence played a role. We are doing well in this crisis. And our service levels and availability and particularly the effect, for instance, that we have DSD in the U.S. helps us. And then for the second half, we see that increase in investment I was talking about and the fact what we just were talking about, trials. And so I think it is not just COVID. It's a consequence of our strategy. We are trying to -- or not trying to, we are going to lean in. We're not cutting back. We're not saying, okay, we gained the market share. Now we can ease. No, no, we're going to do more because of that increased investment that I was talking about. And we want to make sure that we are also -- the messaging around our brand is very related to the moment. So we changed the marketing approach for some of our key brands, like Cadbury or Oreo, linking it specifically to this COVID situation. We've also started to switch the media that we use, advertising more on the e-commerce channels. Because you, of course, you see e-commerce going up. And so we are doing a number of other things that would make it easier for the consumers to stay in our brands, like there's simplifying our SKU portfolio. We are strengthening our e-commerce capability, launching a number of SKUs, especially for e-commerce. So we want to make sure that it's easy for the consumer to stay in our brands. So all that combined give us high hopes that these market share gains will stick. And hopefully, we can even increase them. So far, we see an acceleration of the market share gains.

Very helpful. Thank you for the perspective, Dirk Luca, maybe shifting over to you on the cost side. In the first quarter, you indicated COVID-related costs were about $50 million. So can you just talk about what really drove that increase? And how we should be thinking about costs, as we move into the back half of the year?

Yes. The situation in -- particularly in March, was with a lot of headwinds related to COVID and there were pretty much a couple of situations that manifested themselves in, one, in developed market and another one in developing markets. In developed markets, clearly, both in Europe and in the U.S., we were faced with heightened demand, and we had to get some temporary labor, pay for overtime. And given the fact that we had a sales force operating on the ground, we put additional incentives for them. There was also an element of absenteeism that came up, and that clearly created a little bit of extra cost. On the flip side, on -- in our emerging markets, there was, in certain places like India, a complete lockdown. And we decided purposely to keep the operation running because shutting down plants temporarily and then having to resume production later would have been more costly. And that, again, created a little bit of pressure in the P&L. I think to couple -- I think to add on all of that, in places like the U.S., clearly where the consumption was and is quite high, we had -- we can work, and we incurred incremental logistics costs. So those are the costs that we faced in Q1. And as we enter Q2, some of these costs subside a bit. But others, they increased. And so I would say, given the length of COVID so far, you will see increased cost in Q2, along the lines of -- in nature of what you have seen in Q1. It is obvious that these costs are manifesting themselves at its peak in Q2. We don't expect such high cost continuing into the second part of the year, even if there will be some incremental costs related to COVID in the second part of the year. Think about all the protection measures that have to be in place to ensure that our employees work in a safe environment. But it is also important to notice that we have put in place a material amount of initiatives in order for us to offset these costs. And particularly in the area of overheads, we will continue optimizing the spending around some cost packages, namely travel. We have taken a clear look at all our projects for the remainder of the year. And we have prioritized projects that are critical for us to execute versus others that, given the context we're operating in, are not necessary. We are optimizing consultants costs as an example. And we are taking a look at all the initiatives that we have plant by plant to optimize the efficiency of those plants. One of the things that we have realized is that by simplifying the portfolio, our plants can run much more efficiently. And so even in presence of a certain level of absenteeism, the output per person can still increase if we simplify and optimize the portfolio. We are also taking a look at all the promotional initiatives that we have. And so in a context where we have record-high market share and where offtake is quite high in the U.S. or in Europe, does it make sense to promote at the level that we had planned before? And the answer is no, and we are optimizing the promotional spending. And then as Dirk said, we are taking A&C and redeploying funds from Q2, where, in some cases, we can't keep up with demand. In others, we are inabilitated to operate because there is a country shutdown, and we are using those funds to put into the P&L for the second part of the year and continue those share gains. So the concept of protecting our share gains as much as we can, optimizing our cost savings, being able to offset the incremental costs related to COVID and invest in A&C to fuel the circle is what is ahead for us in the second part of the year in terms of action plan for the company.

Very helpful perspective. Thank you, Luca. Dirk, maybe shifting over to you. Just obviously, e-commerce has been a key theme, click and collect, just direct-to-consumer. How is Mondelez preparing for this new normal, especially when considering some of the impulse-oriented nature of many of your brands?

Yes. Well, first of all, on the channel evolution during this COVID situation, obviously, we've seen, like many other companies, a large increase, a major increase in our e-commerce sales. We see that in the first place in North America. We see it also in Europe, but a little bit less in Asia, I would say. China, for instance, we saw a good increase, but not as dramatic as we've seen it in North America. I -- obviously, the knowledge that e-commerce was going to get stronger and bigger as the months go by or the years go by was clear to us. So we've been building up our e-commerce capabilities for a while, and I would call them strong and getting better every month. Our performance has been good. We are gaining share in all of our categories and in the country combinations, category country combinations. So share gain has been good. In about half of our key countries, our share in e-commerce is higher than it is in the sort of brick-and-mortar stores. In the other half, we're still a little bit below. We can catch up. We've seen most of the growth happening with the omnichannel retailers, clearly, in the recent months, but also last year. So the Walmarts, the Krogers or the Tesco in the U.K. or Carrefour in France. But we are also performing well with the e-tailers like Amazon and Alibaba. But clearly, the bulk of our sales is with the omnichannel retailers. The 2 or 3 big things that we are really focusing on at the moment to make sure that we keep on growing not only our overall business, but also our share within e-commerce is the following: but the first one is the packs. Consumers tend to buy bigger, larger pack sizes online, so you need to have special pack sizes, not all of them, but you need to have a good amount that really fits with what the consumer needs. So you need to understand what they need. So for instance, in the U.S., in Q1, we've launched 20 new online-exclusive SKUs, and they have contributed meaningfully to that growth that I was talking about. The second area that we are focused on is that your advertising needs to be as close to that e-commerce moment as possible. So I would say we are -- we've already been shifting a lot more advertising into digital, but we are now shifting more of our advertising into the e-commerce side. Because there, you can have the advertising right together with the moment of purchase. And we see that is having very beneficial effect for us. So that shift is taking place, and that is also driving our e-commerce sales. And then three, it's the capability of our people. The understanding of how snacking works online and how our brands work best online, that is something that we are constantly trying to improve and share learnings around the world, and it's a great channel to quickly learn on what works and what doesn't work. So we're trying to make sure that we learn as fast as we can. So overall, we feel pretty good about e-commerce, about our situation, how we are doing and the evolution of it within the company. The one thing that I also would like to say is that our margins on our e-commerce business are the same. We've worked hard on that, that they are the same as in our brick-and-mortar business.

Very helpful color. Luca, maybe shifting over to you, when you think about your portfolio and your strategy in both the emerging markets and developed markets, and how you think about that in a recessionary environment? What gives you confidence at this point that your long-term algorithm is still the right one when we see the kind of economic figure that we're seeing right now?

Yes. So the -- we believe that -- and we more than believe, quite honestly. We know that our categories are durable in even under the most, I would say, severe circumstances. I think these days, you can tell not only our categories where we are. We have the freedom to operate. They are doing quite well. But on top of that, we are gaining material share. So we believe that the advantage that was there before in terms of portfolio of categories, certainly of brand, certainly geographical portfolio, is still intact in the medium to the long term. And it is our job to make sure that we continue along those strategic lines that we outlined at the Investor Day a long time ago, but even at CAGNY, that we continue along those lines to really propel our business. When you think about, again, our categories, they are, in general, durable. We saw before the crisis a situation where those categories were growing 3% or so. In that context, we were gaining share. I think what has happened in the meantime is that some of our category geographies have increased. The U.S. is one example. Some categories have been hit. And particularly in developing markets where there was a full lockdown, take India as one example, there has been a category slowdown. But in general terms, everywhere across the board, we have been gaining share in biscuits and chocolate. And I think as you look ahead, there might be a situation where categories slow down, but the ability that we have to gain share to invest in our franchises, to execute according to the strategy we outlined at CAGNY most recently, gives us the conscience and the confidence that we will be able to grow in line with the algorithm that we said we would pursue. On top of all of these, I think what we have done as a company is making sure that we double down on certain initiatives. And we create even more space within the P&L to be able to invest and to protect medium to long-term profitability. So we have talked quite explicitly about initiatives in the cost area, cost packages. We have talked quite explicitly about simplifying the portfolio and pursuing additional productivities in our factories. And we will have a step-up in efficiencies, particularly in the second part of the year, a, to face some incremental costs that will be there because of COVID, but also to enable us to invest. Again, we are quite encouraged by the material and broad-based share gains that we're seeing. We are quite encouraged by the fact that when you look at the market like China that was materially impacted in Q1, it came back quite well. And it's early to tell you what Q2 will be for China, but I expect a growth rate that is in the ballpark of what we saw last year. And again, if it is of any indication to what can happen in all the other places, I would like to tell you that in a context where our share in biscuit is a little bit north of 20%, it was 24% last year, I believe. Gaining 5 percentage points of share is an indication of, during crisis time, what consumers might revert to in terms of brands, in terms of safe brands they can relate to. And it is our job to make sure that even in a context that might be challenging, we create graph and continue gaining share and invest in our franchises. And on top of that, all the initiatives we were talking to you in China, again, just to give you an example, in terms of distribution gains, in terms of expansion into adjacencies, are still there as opportunities for us to pursue going forward.

Excellent. Just Luca, real quick, and then I have one more question before we wrap up here. Just in terms of price pack architecture, I mean, right now, what's been happening, and Dirk even talked about with online, big pack sizes, right, are not only becoming popular in brick-and-mortar, but online as well. When you think about recession and price point and affordability, how do you reconcile that? How do you manage that as we move into the back half of the year?

This is a big opportunity for us across the board. And in a nutshell, it is really tried to have the best forms by channel and by occasion. And as we look at our current portfolio and certain price points, we feel good about what we have. But we clearly see tremendous opportunities. If you look at what we have done in the U.S. in the last 6 to 12 months, that is an indication of the size of the opportunity we might have in all our developed markets and in our developing market. I see pretty much a couple of trends: one, it is larger packs and multi-buys, i.e., higher value for consumers. And that's an opportunity for us to increase consumption in our categories that are scalable and expandable. And that play is still largely untapped as an opportunity. So providing more value and more quantities to our consumers. And the other one is a play that we are very good at, in general, which is protecting price points in developing markets. And again, when I look at the portfolio and what we have done, I think refining our techniques and tactics going forward is, again, an opportunity. Remember, if you take a place like India and you look at what we sell in chocolate, we operate for the majority of the portfolio at very low price points, and giving the opportunity to our consumers to have a little of -- out-of-pocket to buy a piece of chocolate is so important. And this is what we call price pack architecture. And I would say both on the developed market size and developing market size is an opportunity going forward for us.

Excellent. And we'll cap it off with you, Dirk, in terms of kind of strategy and thinking about the current environment. And just given the current state if there's. How you think about bolt-on M&A? Will Mondelez be more or less aggressive in this kind of environment? Do you see opportunities? And just if you can tag on to that salty snacks? And can you get more aggressive there?

Yes. Well, I think, first of all, I want to mention or point out that we feel good about our core categories. They're growing well, as Luca was also discussing. We are the market leader, but we have a lot of room to grow share as is happening right now. Our geographical footprint still represents significant opportunities to grow our presence and our distribution. And on top, our brands can expand in what we call the close-in adjacencies, like soft cakes or bars. So we feel that the playground of our categories and adjacencies and geographies around the world is still very, very big for us. So at first sight, our interest in entering into new categories where we do not have a lot of experience is limited. So related to that, obviously, bolt-on acquisitions make for us a lot of sense because it helps us or it offers us a very good strategic fit, a financial fit and potentially a cultural fit. And so we would like to continue to pursue that opportunities. Obviously, there's a number of other areas that just are categories or adjacencies or geographies. We want to do more in health and wellness. We want to do more in digital business models. We want to do more in premium. So I would say that, that's another area where bolt-ons make a lot of sense for us. And so what we've done so far, Tate's, Perfect Snacks, Give & Go recently, that all fits into that strategy. This might be a particularly opportune moment to pay attention to all M&A opportunities. I would say valuation might come down, particularly in emerging markets, often even helped by a devaluation of the currency that -- but might get more appealing in U.S. dollars. Second, crises usually make things possible that were not possible before. And I think conversations can happen and are happening that before were not being able to take place, because the circumstances might help us to partner up with certain companies. And the third reflection on it, I would say, is we will remain very disciplined. While there's a lot of opportunities in these circumstances, if there's one thing we need to be very careful with is financial discipline in a situation like this one. So that's the way we look at it. And I would say, overall, the message here is we are not planning to slow down our M&A approach. If anything, we are even more keen on seeing what are the possibilities.

Excellent. Well, we're out of time. Dirk, Luca, thank you so much for being part of RBC Consumer Conference. Best of luck for the rest of the day, and please stay safe and healthy. And thank you, everyone, for tuning in.

Thank you, Nik, thank you for having us.

Thank you, Nik. Thank you.

Thank you, guys.

Bye.