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

Good morning, everyone. I'd like to welcome Mondelez back to our global staples conference today. With us this afternoon for our virtual fireside chat are CEO, Dirk Van de Put; and CFO, Luca Zaramella. Thanks very much to you both for spending some time with us here today. I'm sorry we're not doing this in person, of course, but good to be with you nonetheless. And hopefully, a year from now, we can all reconvene in person.

Yes. Thank you for having us. We're happy to be here.

Sure thing.

Thanks, Andrew.

Perhaps, maybe we start off, Dirk, a bit more broadly with sort of the state of play in the industry at this point. For me, having covered the packaged food industry for some 25 years now, and I'm not that old, I started when I was incredibly young, I have been truly impressed by the agility of the industry to pivot where needed to serve consumers while also keeping everybody safe. And I know none of this has been easy or perfect, but the industry's responded really quite effectively. So I'm trying to get a sense from you what stuck out in terms of the Mondelez response so far.

Yes. Well, first of all, Andrew, it's good to hear that we both started very early in this industry. That's why we're still so young. We must have been 14 years or 15 years old or something like that. So I would say from our perspective, what I think we did well, and as you said, I think many companies did -- in our industry did it really well, is we were able to put our priorities quite clearly, quite early. Of course, there was safety first, and we did a number of things around the world that you probably are perfectly aware of, what most companies have done. And then we focused very heavily on supply chain continuity. We knew that, that was going to be the key thing. And for us, we were a decentralized company as it relates to our supply chain. That means an advantage because we are closer to our market. It means a disadvantage in the sense that we're dealing with many plants around the world. And so to keep them all going, that was a particular challenge, and I think we've done that quite well. The other thing we did right at the beginning is we decided that the center was going to be the one that gathers the insight, tracks and shares the experiences, broadcasts the best practices and -- to facilitate fast decision-making in the local market. So we didn't have people in India and in the U.S. and in Brazil all trying to figure out what was going to happen to COVID. We did that all at the center and then informed them what we thought their course of action should be. And then with that, I think the decisions we have taken a few years ago to create our business units and give them a lot of autonomy on how to react, particularly in those days, to the consumer and do what's best for the consumer really helped us also because we were able to really react fast -- they were able to react very fast, listen to their local consumer, see what was going on and go with the markets by specific dynamics. I would say they executed really well. Our teams demonstrated great accountability, great entrepreneurial spirit, everything that we wanted. Our facilities, I would say, stayed open for the most part. Here and there, sometimes it closed for a day or 2, but nothing major. Everybody prioritized on core SKUs so that we limited changeover and we were able to increase output. And so I would say between keeping the supply chain going, having good brand building and we did a lot in adapting the messaging on our brands to the local situation and the specific situation, all that led to a very good customer service and great market share gains. And I think those would be the 2 things out of all this work that came out where we are different, I would say. I think our customer service stayed at a higher level, and we gained market share. We are, of course, now trying to prepare very strongly -- and we did also right at the start to say, "Okay. We have to go through this crisis. We don't know how long it's going to take, but we're going to come out of this stronger." And very creatively, we called the program emerging stronger, but it's very comprehensive in that program. That builds on our previous strategy, but that really reinforces certain areas of that strategy in the middle of all this so that we feel that we will hit the ground running when this all starts to ease and that we will be ahead of the pack. So I would say -- I'm sure that we will talk a little bit about what all that means. But those would be the points that I would say: customer service better, great market share gains and probably in a great position to emerge really strong from this.

Great. Luca, many packaged food companies are beginning to talk about maybe taking some learnings from the pandemic and really making some longer-term structural changes, not just on the sort of the sales side but really on the cost structure side. Some have clearly stated that they are not going back to a pre-pandemic cost structure. And recently, Mondelez too mentioned taking sort of a fresh look at its cost structure. And maybe you could remind us what some of the big buckets are that Mondelez is now targeting. Maybe a sense, if you can, for the potential magnitude of some of these cost savings or how investors can dimensionalize the opportunity and most importantly is how this is different from maybe the big sort of cost-savings initiatives of years ago.

Yes. Thank you, Andrew, and good morning, everyone. As we've just said, as it became apparent that COVID was a global pandemic with a lot of ramifications that would affect our business and customers and our company, we started developing this series of actions that we call emerge stronger and that are, for sure, about simplifying our operation and tightening cost control, something that I think we have done very well over time. But importantly, they are also about doubling down and playing to our advantaged positions with our consumers. As Dirk just said, this is not a new strategy at all. It is an acceleration of our existing strategy with a special attention to growth. On the efficiency side, back to your specific question, the big buckets are around simplification of the portfolio. And there, there are a multi-pronged approach, which is true SKU reduction; better and more incremental innovation, so reducing the net number of initiatives; and simplifying our portfolio of brands and sub-brands. All of these should lead to a more effective and efficient supply chain, and we are seeing the benefits already and as well as the R&D function that is less tied up in a lot of initiatives that are less incremental. And all these simplifications should lead also to lower inventory levels. There is an element of promo efficiency. Given the current consumer context in developed markets, specifically, it doesn't make much sense to promote -- or to overpromote. And I think that level of promotion might be something that we see also going forward. We have been adjusting our capital expenses and accelerating restructuring programs in our plants or for that matter, which is most likely what everyone is doing these days, reconsidering cost packages like travel and consultancy costs. We have been reducing our working media. And so we saw the opening of this crisis as an opportunity for us to be able to implement quickly all these changes. But we would like to stress again the fact that the vast majority of these actions were in our strategic plan. They just have been accelerated. Importantly, the way you have to see these benefits is that they are invested back in the business to drive growth. For me, the outcome of emerge stronger is about potentially 3 outcomes: how much share do we retain going forward, how much of these cost savings are stable and how much more investments are we making in the business, driving that virtuous cycle that we have been talking to you about. And so working media investments, pursuing marketing excellence and expanding into global and local brands, it is something that we want to do. This is not about another enlarged [ CBB ] program or supply chain on steroids as maybe we have done in the past. On the magnitude of this, this is an acceleration. And so I think the way you have to see it is, it is in the context of our long-term algorithm. Again, the ultimate goal for us is to get back, for instance, in emerging markets as soon as possible. For the second part of the year, you will see COVID costs subsiding and the emerge stronger initiatives offsetting incremental investments and what remains of COVID extra costs. So you might see profit growth stabilizing in the second part of the year as opposed to what you saw in Q2 specifically, where we were heavily hit by a bunch of COVID extra costs and some of these initiatives were not in full swing yet.

Great. Thank you for that. Dirk, I'd like to pivot a bit to recent consumer behavior and consumption patterns. First of all, many have described this crisis as the greatest CPG trial experiment of our lifetime. And Mondelez too has discussed on the last call a jump in household penetration, which we all know is generally a key precursor to brand development. I guess what can you tell us thus far about how this is playing out for Mondelez in terms of repeat purchase, what this might mean for how sticky some of this recent trial by new or lapsed users could be and what if -- actions, if any, the company is maybe doing differently than in the past to accomplish this sort of repeat buying given that household penetration has improved so dramatically?

Dirk, you're on mute, I believe.

Sorry about that. I was saying that was an interesting question, Andrew, because you're right, this is probably the biggest trial ever in the consumer goods industry. And the big question is what is going to happen after the special circumstances the consumer is living in today is going to -- fading or back to normal. We're certainly very, very happy with what we have seen so far. We are a global company so the situation is different from market to market, I would say. But in general, I would say, in our 2 biggest markets, North America and Europe, we are seeing big increases in penetration and in repeat buying of our products. The most notable is U.S. biscuits. So maybe I'll give you a few numbers related to that so that you get an idea. So we have 2.5 points, full points, increase in penetration across our U.S. biscuit business versus the last year. We already were the leaders in penetration, and this has extended our leading position. Our penetration increase is double that of the nearest competitor. And so we're in a situation now that since the end of February, 80% of U.S. households bought at least once, most of them, more Mondelez biscuits. So the other thing to observe in the middle of all that is how many of those buyers, if the penetration is going up, are new. So we have a 6% increase in new buyers during the last 52 weeks in biscuits in the U.S. And on top, we have a big increase in repeat rate. 90% of the people that have bought since the end of February have bought 2 times plus. So that's very strong, and it does confirm that original buy that we have is certainly being extended. And there's high percentages of 3, 4 times and so on. What's also interesting is that more than 50% or -- in our -- how will I explain this? In our less known brands like Honey Maid, Graham crackers, Newtons, Nilla, Teddy Grahams, those brands, we see that the current buyers since the end of February, 50% of them are new buyers, which is very significant. So it's an increase in new buyers in our big brands, but it's also the local brands that are getting a big benefit from it. So certainly, the effects are there. We're happy with the repeat. It seems to be pretty strong. And so the question is what are we doing -- the second part of your question, "What are you doing to hold on to that?" The first thing is part of that emerging stronger program that Luca was talking about. It's about making sure that in the second half of the year -- we pulled back a little bit in the second -- sorry, in the second quarter in our media investment, and we're re-shifting that into the second half. So the second half compared to last year or to any year is going to show a very big increase in our working media. Also within our A&C budget, we are shifting more of the investment into working media. So you see, for instance, a few examples. U.S. biscuits would see a 60% increase of their A&C in the second half versus last year. Some of those local jewels, Honey Maid, that I was talking about, will see 4x the level of investment they had last year. We're spending 3x more in e-commerce than last year. In Europe, our working media are going up by 30% versus last year, so a big increase. And we believe that, that will create a big buzz around our brands. We are also boosting significantly our in-store visibility because we live also around big events, back-to-school, the Premier League promotion in the U.K., Christmas. And so we are making sure that those are big, starts early in the store and well executed, and that will happen. Then as there's a recession taking hold, we will need to keep an eye on value. So in the U.S., that takes the form of multi-buys, where we are trying to link brands with each other. So for instance, buy Oreo and Ritz together or more multipacks and family packs as part of our assortment. In Europe, that means we're shifting our portfolio more to the in-home consumption because that's going to help the value drive and then also pushing more as well as our global brands, our local brands in Europe because they usually come at a lower price point. For instance, in Russia, we have Milka and Oreo, but we also have Alpen Gold and Jubilee, which are the lower value brands. And then we have a number of strategic launches, which are new. The launch of LU in Germany, we did in the middle of this crisis. LU organic launch in France is new. The extension of Milka spread across Europe is new. So we're accompanying that with big news. So we believe that -- these examples I was giving you, those are additional and new versus previous years, much stronger program. So as the original first entry into a brand, we're trying to reinforce that with a heavier activity calendar in the second half. And we feel pretty good that, that will work for us.

I guess how does Mondelez view the long-term sustainability of the accelerated market share gains with big brands seemingly being the largest beneficiaries? I mean how much of that, I guess, you believe, is driven by consumer behavior, i.e., loyalty to the brands they know and trust versus, let's say, better execution or supply chain from more scaled or branded players; in other words, availability? At some point, we would think some others will eventually get their supply chains in better order. And I know on the last call, you mentioned how this process is not necessarily simple and could take time, but I wanted to get your sense on that, if we could.