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

Good morning, everybody. David Palmer here, Evercore ISI's food and restaurant analyst. We're kicking off day 2 of the Evercore ISI Consumer & Retail Summit. I'm pleased and honored to have Mondelez with me here today for this virtual fireside. You should see a disclosure. We wanted to get it out of the way first before we get going. Joining us here today is Glen Walter, Executive Vice President and President of North America; and Shep Dunlap, Vice President of Investor Relations at Mondelez. He's been in that role for 4 years now. In his role, Glen is responsible for leading that $7 billion business that is the U.S. and Canada. It includes power brands such as Oreos and belVita, GOOD THiNS and growth businesses like Perfect Bars and Tate's cookies out of Long Island. Glen joined the company in late 2017 from Coca-Cola, having recently run the China business. And before that, he was COO of Coke North America. So he's certainly seen a thing or 2 before he joined the company. And as I remember it, it was not quite the same business in North America. It was coming off some rough quarters at the time. Glen, why don't we start by giving a little bit of a state of the union of the North American business? When you arrived at Mondelez, what did you see and what's changed?

That's great. First, Dave, good morning, and good morning, everyone. I hope this finds you and your families well. I know this wasn't the original plan, but thanks for the interest and glad to be here with everybody today. Originally, Dave, as you mentioned, I was in China. I was absolutely attracted to a high-growth snacking market. I had the chance to spend quite a bit of time with both Irene and Dirk, as he was entering. He and I started the same week with the organization. And it was -- I'm an individual coming from a career with InBev and Coca-Cola that's passionate about iconic brands. When I see the strength of brands like an Oreo or Ritz or Chips Ahoy!, certainly, I was drawn to the strength of the brands, combined with how we were seeing consumers eat in an on-the-go environment. I also saw the strength of the biscuit portfolio being in nearly 90% of U.S. households with a commanding market share, and having had the chance in my career to work across a wide range of routes-to-market was certainly attracted to the opportunity to leverage DSD in a different way. So all of those were things that were very compelling to be a part of after an organization that has spent quite some time on productivity and a number of the things that Irene and the team were going through. That being said, the brutal facts, and you mentioned this, the North America business, clearly, several years ago, was not operating at its full potential. Having been internally focused on transformation, we were not investing, I would say, in our brands at the fullest potential. You can appreciate, when we've got multiple years of transformation, we had lost quite a bit of our talent and frankly a bit of our swagger and the passion that had been behind these brands in the past. As a consequence, and I shared with many of our investors in a conference several years ago, our service levels were suffering. Our supply chain was not consistent and predictable. And consequently, we had a large drain on costs. So we were in a rough spot. And when I came together with Dirk and the team, we put together what is a very, very compelling road map and vision for the future, grounded in a consumer-centric growth approach, where we thoughtfully reinvested in our brands. We've made significant changes with our talent and our leadership across the business. We focused on our fundamental core processes, whether it's in how we build our brands, how we connect with customers and consumers, how we execute in the marketplace and how we bring our supply chain back to stability and predictability. And I would tell you that the cultural undertone of our team today is one where we're starting to see some progress, but we're constructively discontent. We know that we've got a lot more to do, but we're in a very, very different place today than we were 2.5 years ago, and we'll get into it. Certainly, COVID has amplified that. But the progress started well -- a year or so well before any of this happened.

That's interesting. You touched on supply chain and the inconsistency there for several years. And more recently, it's improved. Could you dig into what are some of the reasons for that? And what were the drivers of maybe the inconsistency and the sustainability of the progress and the opportunities for that ahead?

Sure. I would say, first, Dave, was about leadership. We needed to bring fresh thinking, not only in leadership across the overall supply chain but within our disciplines, whether it was procurement, safety, quality, manufacturing, logistics. So I would say the most impactful chain is bringing a fresh leadership mindset that has got a very strong orientation around safety, a strong orientation around quality, a strong orientation around efficiency and cost and creating this virtuous cycle that being able to fuel growth and operate safely and produce and bake the highest-quality snacks available and drive cost are not mutually exclusive. So we started with that talent. We then pivoted into really embedding integrated Lean Six Sigma across the supply chain. So what are those key KPIs, both leading and lagging, when we measure safety, quality, efficiency and cost? We've started to rebuild. Again, we're in the early stages of a mindset that our supply chain is actually an advantaged part of our growth algorithm. Whether it's on diversity of pack sizes, ability to take waste out of the system. I think we've shared, and you've heard from Dirk and Luca, last year alone, we eliminated nearly $80 million of waste from the supply chain that's allowed us to reinvest back into the business. So all of those elements have put us on a much more stable footing. Again, I'd couch it by saying we still have got quite a bit of work to do. I mentioned earlier what we feel is our advantaged DSD system. Another key component of the step change we've made in the supply chain is better connecting our selling organization with DSD in with our logistics arm of the supply chain, so how can we improve service at the same time improve efficiency, reduce costs to be able to invest back in our customers and our brands. And I'm very pleased with that progress we're seeing.

Very good. I want to ask a little bit about the top line. You guys have been gaining share in the last 4 weeks and year-to-date, what are the drivers of these share gains? And is that sustainable?

Yes. Dave, we started to see share -- a bit of the share turnaround. And that's something we're maniacally focused on as we exited 2019. And that is a consequence of us rebuilding our consumer brand marketing capability. So we're obsessed with studying the consumer and the shopper, what are the snacking occasions across different cohorts to make sure we've got the right snack in the right place at the right time. We've started investing into that strategy at the end of 2018. It started to bear fruit in 2019. And as you just mentioned, we've seen that not only in the first quarter but even as we've kind of moved through COVID, at whatever stage we're in now, well beyond pantry loading, what we're seeing, that even accelerate, so investing in brands, better understanding of the consumer and the shopper and the snacking occasion. And then I get back to the strength of DSD. So really leveraging our execution in the market. I could not be more proud of the men and women who are part of our frontline. We moved very, very quickly to make sure that they were safe, that we were focusing on business continuity. They've been an integral part in making sure we can remain in-stock, which has had a direct correlation to what we're seeing in share growth. And then finally, part of our growth strategy was to, while we continue to focus on food and mass, to start to pivot and look at some of the other channels, whether it's been e-commerce, club, value, where we were underrepresented. So all of those things, brands consumers are passionate with, being at home, eating more, more do-it-yourself, our brands pivoting very, very quickly to be able to have relevant campaigns, combined with very strong, consistent execution.

And your execution during COVID, during this period for supply chain has been impressive. I know Dirk has been bragging about the U.S. being maybe even having its execution on case fill rate being better than average during this period. Very impressive.

Yes. That's been very strong.

One of the benefits that we wonder about is household trial. This has been a time when you're a snacking business, but you're a snacking business that people have at home. So there's been an opportunity for you to gain new users. Can you talk about those new users, what you're seeing in the data? How many of these do you think will be returning consumers in terms of attitudes and repeat levels? Do you think this is really sticky?

Yes. Well, look, we've been fortunate long before COVID to have incredibly strong household penetration. So I think as I mentioned, we find ourselves in nearly 90% -- if you looked at our cookie and cracker business, in nearly 90% of U.S. households. And if you looked at what's happened through the COVID period, we are leading by a long shot the increase in household penetration, so again, more consumers at home, trusted brands they love. We moved with lightning speed to be relevant with our messaging. So that data-centric focus on consumers and shoppers and what drives snacking behavior, our teams were able to very quickly pivot and have stay-at-home messaging, do-it-yourself programming with kids and families across Oreo and Ritz and belVita and Tate's. So we've not only had strong household penetration, we've led the increase and we're seeing what's very important to us, increased frequency. And the frequency is not only a consequence of continuing to invest in the right way on our brands. But Dave, it's also reflective of how we've been evolving, what you hear us talk about: our PPA, our price pack architecture. So not only are we providing value in larger pack sizes like our family size, but we're also investing in multipacks. So if you're a caregiver or a mom or a dad and you've got kids at home who are going to school, buying a large-sized multipack for either single serving at home or for an on-the-go in a world post COVID is important. So we're also seeing that penetration, the trial and repeat, on the investment we're making in the types and sizes that again is grounded in really understanding the consumer and the shopper and what drives snacking behavior.

It sounds like you've done some things to sort of feed the beast there. Maybe that ties into your digital strategy, if you want to touch on that from a marketing angle, but what have you also seen from the e-commerce mix during this COVID period? And whether that be through certain channels like click and collect, delivery, how are you seeing that behavior shift? And how are you marketing to that?

Sure. Yes. We -- long before COVID, I mean, obviously especially coming out of China, that was one of the benefits I had. I kind of almost went in a time capsule to a different environment, where you could take experience in a developed country, get a glimpse of consumers who are leapfrogging how they shop and the opportunity to come back was very helpful. So investing in e-commerce, not only as an additional class of trade, also a way in which -- you talked about marketing, you can engage with consumers, whether it's a recruitment tool, a convenience tool, it's been very helpful. So we've started investing in e-commerce years ago. We've continued that effort. We had a very strong year in 2019. And there's no question as COVID hit with more U.S. shoppers using -- whether it's pure play or click and collect for the first time, we've seen over 100% growth this year. And we're investing in search, we're investing in digital, we're investing in service and we're investing in the types of differentiated packages that consumers are looking for in e-commerce. So we've added over -- nearly doubled the number of unique pure-play e-commerce packs to the portfolio in lightning speed. So all of those things are going to -- will stick with the business. We're anticipating that a lot of those shoppers will remain. What's interesting, I would tell you also is, as in our omnichannel, we're also seeing that the strength of our DSD not only helps in-stock condition for normal shoppers that we would all have been doing before COVID, but it's really helped us with in-stock condition to help those players as they're picking orders in stores for their omnichannel business. So as a consequence, we're seeing strong growth, we're seeing market share growth. We picked up nearly 3 share points of growth overall in the portfolio. And I feel like we've got strength-on-strength and a lot of momentum as we collaborate with our customers as we go forward with this.

I mean sort of similar to that question about the trial and repeat, do you think that some of these digital occasions will be sticky and therefore your share gains there will be sticky as well?

Yes, absolutely. I mean look, time -- for all of us, time is the most precious commodity. I think -- so even without COVID, if you subscribe to the phrase of never waste a crisis, this has provided a proof point for people that I can have a good shopping experience. I can get the brands I like. They show up to my home in a safe way and intact. And I can save myself a trip or even looking at subscription. There's no question we're seeing that. And that's across cookie, that's across cracker. We're actually growing share in pure play, in our gum business. So whether it's the #1 cookie, gum, Hall's cough drop, we're fortunate to have the leading brands across all those categories. And we do think that, that will be sticky.

Let's just shift gears to a topic of revenue growth management. That's a broad topic. It includes a lot of stuff, price pack, promotion. It's always been -- it seemed to be the case, the legacy, that beverage guys are better than the food guys. So I would imagine you have some great perspectives coming and seeing the way things are done. Could you talk about some of the efforts and initiatives that you have been going through here?

Sure, I mean, well, I look at, Dave, revenue growth management as this virtuous cycle across volume, price and mix and how do you bring all of those elements together to create an environment where we can still have the right snack for the right snacking occasion, the right consumer. We can offer value, we can offset any pressures we're seeing from inflation or commodities or ForEx through headline pricing and invest in our brands. We can continue to diversify the types of packages we've got to meet those different snacking occasions, which oftentimes allows our customers also to see strong margin expansion. And we can make sure that the investments we're making across trade are being optimized versus trying to use a one-sized trade investment across every customer or every outlet. So it's a virtuous cycle. We're in the early stages. We've demonstrated over the last 18 months, we've been able to take headline pricing across our biscuit and our confections portfolio. I mentioned before, we're broadening the reach across our price pack architecture to have more diversity of packages there. And we're engaging in, I would say, the triple bottom win, the consumer, the customer and the brand owner, in delivering value, being able to continue to grow margin but also to generate that fuel for growth. And so I'm pleased with our early progress. We see a lot of runway there. But it's -- it's a key element of our growth algorithm as we go forward.

That's great. On investments, it seems like Mondelez has been more aggressive or at least talking about being more aggressive in advertising and consumer promotion than the average company out there. Is that a fair characterization? And why is that the right course of action? What results have you seen?

Yes. First, I'd say we do want to continue to invest in our brands. We do look at some of these headwinds as an opportunity to build on the strength. I would tell you also though, Dave, this has been met with -- one of the things I was very pleased to see when I came, I talked about the opportunities. But through all of the focus and years of transformation, our teams have been obsessed and maniacally focused on ROIs. So we tapped into that capability. And we said, "Look, here's where we're going to invest." We've got a very, very strong ROI orientation. With the investments that we're making into this, we're seeing even stronger ROIs. We evaluate things very, very carefully. We've -- as I mentioned, we've augmented the message. So we're relevant with consumers for the times that we're in. We've amplified our messaging in different channels like e-commerce. And we're being very, very thoughtful in making sure we're shifting, which we've already made good progress on, but nonworking media into working media. Clearly, we made some adjustments in Q2 where we felt that it was not the right time. And certainly, if you think about where we all were in March and April where consumers were not interacting in that way and we've thoughtfully delayed those and we've pushed that into the back half. But I would say that we'll continue to thoughtfully lean in and invest with a very strong orientation around who's the consumer shopper and the snacking occasion and an obsession with strong ROIs. And I'm very pleased with what I've seen thus far.

Let's talk about the portfolio in North America. Gum has always been a problem area for the company in North America, particularly. Could you talk about that category initiatives there? And then on M&A, how are the acquisitions that you've made, those growth ones, Perfect and Tate's, performing versus your expectations?

Okay. Great. Look, I mean, I've -- growing up, I've been a big fan of gum. I mean to just put it into context, gum for North America is about 5% of our business. It's about 7% of our business globally. So that doesn't mean that it's not a focus in the U.S. We know that gum has been a challenging category overall. COVID certainly has amplified that with this category being more on-the-go, indexing more towards C-stores, all that you know. But we do think that gum plays a role in snacking, whether it's functional benefits around refreshment, the ability to deliver other functional benefits, could be energy, could be other supplements. There's a lot of research we've seen on the enhancement around focus and for some people around appetite suppression. So we feel that there is a role for gum to play in snacking. It's a profitable category for us. We have admittedly struggled with share declines. And so our team has done some good work on, I would say, more of a tactical plan to strike the right balance of seeing a more stable gum outcome with a handful of clear initiatives we'll be able to share more with you later. But we're going to be watching this and working with our customers very carefully as C-store regains traction, which is going to be very, very important, front of store, whether it's in traditional grocery and mass or self-checkout. So we're working collaboratively there. We've got incredible brands in Trident and Dentyne. We had a strong launch last year with Trident Vibes, highly recommended, which is a great soft chew tablet in a bottle. So this is an area that I would say is a small part of the portfolio. But we take it very seriously with the size of our profit contribution and the role we feel it plays in overall snacking. So more to come as we work to stabilize gum. And that's certainly a focus of ours. You asked about M&A. First of all, I think it's important, just overall, we've mentioned that we'll continue to have a very broad view of overall snacking. We want to have a balanced approach. So we have our antenna up to take a look at what's in the marketplace. There is again, I would say, this obsession of focusing on where we can get growth in our core, I mentioned when I first arrived, under-investing in core brands, opportunity to better leverage DSD; opportunity to expand in channels. We see a long runway of predictable profitable growth just in the core. With that being said, we do think that M&A can be a great capability, whether it's on bolt-on acquisitions where we can leverage the strength of our DSD or an acquisition, you mentioned Perfect Bar, that allows us to enter into a new consumer demand space, like well-being or premium refrigerated snacking. So we'll continue to evaluate things thoughtfully from an M&A perspective. But really, what we're predominantly focused on, grow the core and where we've got an opportunity, how do we build on an advantaged capability like DSD or expand into channels, particularly around premium and well-being. That being said, look, we've got 3 new members of our family, 3 new cousins, if you will, in Tate's Bake Shop, which is doing very, very well. Tate's has continued to perform exceptionally well throughout the COVID crisis. So I'm very pleased with what we're seeing across the Tate's business. Perfect Bar is also a fantastic brand you can appreciate. Perfect Bar has seen some slowdown in April with some of their channels being impacted. But they are the leader by a long shot and still have got a huge runway in just basic penetration, trial, ACV. And I'm very, very pleased with what we're seeing there. And then most recently, our new member of the family in Give & Go, which is very exciting to us to access fresh in-store bakery. It allows us to access a part of the store that's different than anything in our portfolio. It's growing 2 to 3x the rate pre COVID of our core snacking business. It's typically a higher-margin area of the store for that category. And it provides our retailers a very strong solution of wanting to offer fresh in-store bakery. And we're able to own all the complexity through the supply chain. And what's really differentiated in this model, I thought we were obsessed around innovation and quality, the Give & Go team, that's their secret recipe. They continue to have a highly innovative capability that allows them to deliver fresh in-store snacks, highest quality, great-tasting and work very, very collaboratively with customers. So I would say all of those are performing very, very well. My last comment on this, Dave, would be we also are pleased in trying to strike this right balance of how does a big CPG company bring in these smaller, nimble entrepreneurial businesses and avoid the extremes. You either leave them alone and you've got no synergy whatsoever or you try to bring them in and you suffocate the magic that actually created them. We're trying to strike that right balance. We've tied all of the founders and CEOs and their management teams and had them roll their equity into our investment thesis. So we've got all of our interest directly aligned. We've got a clear path with whether it's route-to-market or customer management or marketing synergies or supply chain synergies. So it's early stage, but these are great bolt-ons that allow us to access new snacking occasions and new consumers, and we're very pleased with where things are.

And just 2 follow-ups, just because I'm curious. On the Give & Go, I saw another smaller food company really struggle with in-store baking business. They didn't really leverage it. I'm wondering about how you intend to leverage that. How many points of distribution is it? And do we expect to see Oreo and your other brands leverage into those perimeter occasions? And then on Tate's, as somebody who lives outside New York whose had the product, I often wonder why you haven't been even more pedal to metal there and having the distribution broader and bigger even more than it is today.

Sure. So Give & Go, there's no question that when we think about their growth algorithm, are there some cross-category opportunities? We actually already partner with them on some ingredients, like you mentioned, within Oreo. The biggest opportunity we see with Give & Go right now is just to continue to allow them to expand. They've done a great job of being able to identify by customer and by category where they've got opportunities from the 2-bite brownie to mini muffins to decorated cookies to decorated kits, which you can appreciate now is taking an even greater level of interest with a lot of do-it-yourself, at-home activities with kids. So they've got a long runway. And we can help them with kind of customer connections. We could help them as they look at expanding into different channels. And certainly, as we've aligned our investment thesis, we can help them with the right level of capital as they think about increasing capacity or capability into those areas. So I feel very, very good about that what they've got. And Joel Flatt, their CEO, is just a really talented entrepreneur and executive and is going to do great things and continue that growth there. Look, Tate's is a great business. And one of our -- what we've told the team is that the first, second and third thing that are the holy grails of Tate's is do absolutely nothing to take away from that delicious, crispy, special cookie. So from Kathleen's recipe to the baking process, absolutely nothing has changed and will change. We're thoughtfully increasing our capacity and investing in more capacity there in the right way. That's all part of our investment thesis. We're leveraging our customer connects and our DSD system to be able to expand the reach. And as you know, and you mentioned this living outside the New York City area, we want to make sure that consumers can fall in love with their first Tate's experience the same way a New Yorker might have been or somebody in the Tri-State Area that has had the chance to go to the bakeshop. And so the team is doing a great job of how do you replicate that bakeshop experience so that we can still continue to offer Tate's as a premium product that's special and delicious. So very, very happy with what we're seeing there.

This has been great. We're coming up on our last 5 minutes, so maybe time for 1 or 2 more. Maybe as somebody who sits in the executive team and sees the U.S. as it pertains to the world, and you see the challenges of the U.S. and you compare that to what your peers see in other parts of the Mondelez empire, how do you see the COVID-related challenges and opportunities differing for you versus Mondelez around the world?

Yes. I mean I'm sure you're seeing this across all consumer goods. There's no question that the modern trade, while it has challenges, has been able to operate a bit more sustainably than traditional trade. So whether it's smaller mom-and-pops or distributors, that's put quite a bit of strain. I think that the teams -- my teammates around the world have got fantastic focus against that. You're seeing, and you've heard from Dirk and Luca, in a country like China, where our teams and local decision-making, those groups are empowered. They've anticipated what needs to happen, so they can bounce back very quickly, and you're seeing that in the early results in China. But there's no doubt that in its first point, modern trade versus traditional trade has proven to be less challenging as we navigate through this. And then I would say just the second element will be what we think of the socioeconomics and what is the impact of what will be some level of recession take on with those consumers. I think, fortunately, for our portfolio, whether you're in developed countries or developing, again I go back to this consumer-centric growth model of making sure that we've got the right pack in the right place and at the right price as well so that we've got affordable snacks, whether they're well-being or indulgent. And I think as we start to get our supply chains and our routes-to-market back up and running, and again I use China as an example, you'll see us with not only the brands that consumers love, but even as we think about some downward pressure potentially as a recession, we've got categories that index well and we've got strength and leadership in our portfolio that should endure well.

And maybe that ties into a comment about innovation. You seemingly have gotten better at that. It seems like you tried to play in terms of the extensions in some of your power brands and then as well as playing to some of your smaller brands as well. Could you talk about pipeline today, innovation and marketing, how you see it being different today versus a couple of years ago and how it's evolving?

Yes. I think as we've studied the consumer and we've had regained the passion for really building iconic brands that are craveable that consumers love, we have put more focus against our core, number one, versus frenetically creating innovation to cycle things from the prior year that potentially aren't linked very clearly to consumers and shoppers and snacking behavior. So I would say we have fewer innovations, but they're more meaningful and they're absolutely grounded in data and analytics very, very differently. That would be number one. But the second is we've really -- part of what you've seen in the progress we've been making in our supply chain is we've simplified. So I think good hygiene in any CPG business is really evaluating the portfolio where is that tail and working with our customers to make sure that while we can still offer consumers the right packs in the right place at the right price for the right snacking occasion, we're dealing with the bottom bit of the tail and simplifying that portfolio. And that allows our supply chain to operate more efficiently. It allows in-stock and sort of the optimization of the shelf to work better. But innovation overall as it fits into that, I would say, less is more, much stronger insights around the consumer and fewer but better things. And it doesn't -- hopefully, you've seen this with brands like Oreo or Ritz or Sour Patch Kids, it doesn't take away from our ability to continue to offer exciting new news in the business. We continue to do that, but it's been reduced significantly from where we've been. And we're seeing strong growth from the core as a consequence of that.

Well, Glen, this has been great. Shep, thank you to you as well for this. Really appreciate your time today, and good luck with the business.

Thanks. Stay well, everybody. Appreciate, Dave.

Thank you.

Thanks, Dave.

Yes.