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

Welcome to our virtual CAGNY 2021 presentation. I am Dirk Van de Put, Chairman and Chief Executive Officer of Mondelez International. And today, I want to talk about how, in the third year of our strategic plan, we're better positioned than ever. I will show you how we are delivering on our strategy, where we see potential to sustain momentum in our core, in high-growth segments and channels and through adjacencies. Then Luca Zaramella, our Chief Financial Officer, will talk about how we aim to continue creating value for shareholders through our plan for sustainable growth. For more details, please download a copy of today's presentation from the Investor Relations page of our website. With that, let's discuss our strategy and the significant progress we've made since we presented at our 2018 Investor Day. We launched our strategy in late 2018, and it focuses on 3 pillars: growth, execution and culture. It is fair to say it marked a turning point in our company's journey. We have become more consumer-centric by step changing our investment in our capabilities and communications. We are resolutely focused on executing with excellence and winning in the market. And we have empowered our people with a simpler organization. Alongside our strategy, we laid out long-term financial targets. These included 3% plus volume-driven top line growth, growing profit faster than revenue, double-digit shareholder returns and strong free cash flow generation. I am pleased to say we have delivered strongly against them. As we enter 2021, our strategy remains the same. But we've accelerated certain initiatives to steer the best course through COVID-19 and to position ourselves to emerge stronger after this crisis. We did not miss a beat during the pandemic. From the start, we set clear priorities that guided us. Number one was to protect our colleagues all over the world. Next, was supporting communities with almost $30 million of donations to local causes. And in service of our customers and our consumers, we worked hard to maintain supply chain continuity. Based on these priorities, we took decisive action to enter 2021 in a very strong position, both financially and in the marketplace. We increased liquidity. We focused on highest priority CapEx. We reduced our overheads, and we simplified our portfolio. As a result, we had sufficient fuel to continue our step-up in brand investments. Our actions leading up to the crisis and throughout 2020 position us to sustain 3% plus revenue growth in 2021 and beyond. Looking back over the past 3 years, we've seen a step change in performance. Revenue growth has accelerated from 1.3% to 3.4%. We have delivered gross profit growth in excess of revenue growth. This has funded a significant step-up in investments in our brands and capabilities, and we have delivered double-digit EPS growth through a high-quality growth equation. Finally, we have transformed free cash flow and we are now at 99% conversion, adjusting for our coffee holdings. This track record points to our ability to deliver sustainable growth long term. I am particularly proud of how Mondelez is winning in the market. Our strategy has led to a clear improvement in market share. Now 80% of our revenue base is gaining or holding share, up from only 50% historically. Thanks to the strength of our global and our local brands, we have emerged as clear winners in the vast majority of markets where we compete. In 2020, we achieved record share gains as a company. Highlights included gains of over 1 point of share in key markets like China biscuits, U.K. chocolate and U.S. biscuits. And we are investing to sustain growth. Our marketing transformation has been a critical enabler of the acceleration of our top line growth and share gains. Since 2018, we have step changed brand investments and developed sharp growth strategies for our focus brands. We've brought brand purpose to the fore. For instance, the spirit of generosity for Cadbury or the playfulness of Oreo. We were pioneers in using personalization at scale to better target digital audiences. Last year, despite the crisis, we increased our working media spend by 17%, and we are channeling those dollars to digital, where the return on investment is higher than traditional channels. As a result, we have more brands on air in more markets. And we've transformed our media ROI, which is now top tier, increasing by 70% since 2017. At the same time, we've refocused our innovation agenda. We're now delivering fewer, more impactful and more incremental innovations. We've increased our focus on core brand renovation. We are working with more agility and getting to market quicker. And we're leveraging our SnackFutures hub to nurture on trend emerging brands. Alongside marketing, improvements to our supply chain are also driving sustained top and bottom line growth. We've made a lot of progress since 2018, particularly in stabilizing and improving our North American and Latin American networks. The resilience of our global network protected service levels and help maintain top line momentum during COVID. We have delivered consistent supply chain productivity since the launch of our new strategy. Cash management has improved with lower inventories and best-in-class payables management. In terms of our fundamentals, quality has improved, and our safety is significantly better with much reduced incident rates. And finally, alongside our financial commitments, we remain focused on our ESG agenda, in particular, sustainability. This commitment has not wavered despite the challenges posed by COVID. We know this is an area that matters to consumers, customers and colleagues. Our approach to sustainability at Mondelez is deliberate and intentional. We prioritize where we can have the greatest impact. We focus on driving outcomes that are measurable, and we actively seek partnerships and collaborations to help us scale up solutions. We've made significant progress in areas like reducing our impact on the environment and the sustainable sourcing of our ingredients. We've also set ourselves challenging targets for 2025 in these areas. You can find more information about our strategies and plans in the presentation on our website. Let me mention 2 key developments. To help us scale up our impact, we are developing sustainable futures, an investment fund that will help us partner with others on climate projects around the world. And in the area of social impact, we've launched a multiyear commitment to diversity and inclusion. This includes the appointment of a Chief D&I Officer, a step change in black management representation here in the U.S. and commitment to spend $1 billion annually with women and minority-owned businesses. In summary, our strategy is delivering well, and we are investing to sustain growth. Building on our strong foundations, we see a long runway of growth opportunities ahead of us. Let's talk about snacking. This market remains very attractive. It proved exceptionally resilient during the pandemic, and our annual state of snacking survey shows that it continues to grow in importance with consumers. A majority of people, particularly Generation Z and millennials, prefer to eat multiple small meals than a few larger ones. While COVID changed consumer behavior in many ways, it did not reduce the desire to snack. Nearly half of people we surveyed snacked more during COVID as they sought ways to take a break, get a boost or a reward during tough times. And nearly 70% of our consumers said they favored trusted brands during COVID, which has been positive for our portfolio. Within snacking, we're well-positioned. 80% of our revenues are in the advantaged categories of biscuits and chocolate, and 90% of our revenue base is growing very strongly. Over the last 3 years, biscuits have averaged growth of over 5% a year. Chocolate is growing over 4%, and more if we discount the travel retail disruption in 2020. Other categories, cheese, grocery, powdered beverages also show robust growth. The gum and candy category, however, declined as COVID restricted consumer mobility. In addition to the strength of our core categories, our global footprint means we have unique access to high-growth markets. Over 30% of our revenues come from emerging markets with combined average growth rates of over 5% over the past 3 years. Not only are we in the right categories and present in developed and emerging markets, we also have an enviable portfolio of brands. These are strong foundation for us to build off. And we have a very clear and actionable set of opportunities, which we are pursuing to sustain the 3% plus we have delivered in each of the last 3 years. First, we can continue to strengthen and grow our core portfolio; second, we can expand our presence in high-growth channels like e-commerce and discounters, where we are underrepresented; and third, we can drive penetration in newer and incremental segments like well-being, premium and low price; and fourth, we can continue to expand in close-in adjacencies through both brand expansion and strategic acquisitions. Let's start with the core and Oreo. In biscuits, we have a $3.6 billion Oreo business, which grew double-digit in both 2019 and 2020 with a clear path to add $1 billion over the next several years. This is the world's favorite cookie and Generation Z's favorite food brand. We have a great track record of emphasizing the playful nature of this brand and keeping it relevant with activations like our #ProudParent campaign in 2020, and most recently, kicking off 2021 with a unique Lady Gaga Oreo. Oreo still has huge headroom to grow. We are leaders in the U.S. and China, but in other markets, we're underindexed with significant opportunities. We have identified 10 focus markets and defined clear strategies for the brand in each market based on maturity. A share gain of just 1.2 points globally would make Oreo into a $4.5 billion global brand by the end of 2023, and we are focused on achieving that target. While Oreo is our largest single biscuit brand, our portfolio of local biscuit brands is even bigger when combined. These are strategically relevant brands that are distributed in a limited number of countries but resonate strongly with local consumers. Average annual growth rates have improved dramatically to mid single digits after we increased our focus and our investment. We're driving growth in multiple ways. We're renovating brands, identifying their purpose and defining their growth strategy as we did with Chips Ahoy! in China. As another example, we are the leading branded manufacturer of savory crackers in the world, but we have an opportunity to extend our leadership position in savory as a whole, for example, in the RITZ portfolio. Turning to chocolate. Our iconic brands, Cadbury and Milka, have strong momentum, each with mid-single-digit revenue growth over the past 3 years. We see 4 clear opportunities for acceleration. First, leaning into purpose and sustainability by amplifying the sustainable or local sourcing credentials as a point of difference to consumers. Second, dialing up our activations such as our seasonals or our sports partnerships like with the Premier League in England. Third, to extend these brands' leadership beyond traditional tablets into other chocolate segments and occasions like pralines and gifting. And finally, to extend outside chocolate into spreads and chocobakery. Moving on to gum. While it is a small category for us, we're focused on improving performance. Before COVID, emerging markets were performing well, but our performance in developed markets was mixed. During COVID, consumption declined significantly as consumer behavior changed and on-the-go consumption occasions were heavily reduced. What hasn't changed is the consumer need state for gum, namely refreshment. Our focus right now is on improving share. We're sharpening our marketing investment strategies. So we have the right innovations and pack formats to set us up for recovery as well as strong activations. We're also strengthening in-store execution to help get gum back on track. And as you can imagine, we are taking a thorough look at all our options in developed markets. With that, let's shift from portfolio opportunities to channel opportunities. We'll start with the big winner of 2020, e-commerce. First, we are focused on having the right products for the right channel. For instance, larger format packs, so the consumer always has their favorites in stock at home. Second, just as we do off-line, we are executing with excellence. We've invested in search optimization, better digital content and in recreating the impulse experience online. Finally, we are advancing our capabilities. This includes configuring our supply chain to be able to ship directly to consumers as well as relaunching our direct-to-consumer sites. Thanks to these changes and the COVID boost, e-commerce revenue grew 75% last year. It now represents 5% of our total Mondelez revenue, up from 3% in 2019. We also gained share in our 3 top e-commerce markets in 2020; U.S. biscuits, U.K. chocolate and China biscuits. While online channels are important and growing fast, brick-and-mortar stores still represent 95% of our sales. In Europe, we are underindexed in discounters, and we're seeking to sustainably and profitably grow that business with channel-specific offers and activations. Next, we have traditional trade in Asia, Africa and the Middle East. In places like China and India, we can deepen our distribution into the next tier of cities and villages, enabled by digital ordering tools and an efficient sales force setup with direct and indirect coverage. And finally, in the U.S., we are working to improve our share in club, value and convenience stores through portfolio evolution, new partnerships and capability. Our third opportunity is in high-growth segments like well-being, premium and affordability. In well-being, our priorities are clear. While dollar growth is more significant in the indulgence areas, percentage growth is higher in well-being segments, and we want to tap into that. We have a clear framework for how we can meet the well-being snacking needs of our consumers, and we have made good progress in expanding our core brand offerings in these areas. We're doing more with portion control, such as with Cadbury in the U.K. We've launched new better-for-you options like reduced sugar options in our candy brands and gluten-free Oreo. And more natural and authentic products like our European LU range now made with all-French ingredients, a clear point of difference versus competition. And we are accelerating our presence in well-being segments through fast-growing strategic acquisitions, most recently with Hu and before that, Perfect Snacks. Next, we see potential for our chocolate brands to play outside of the mainstream in both the higher margin premium segment as well as the lower priced segment. Together, these segments are worth around $40 billion. For low price, we will extend our penetration in populous and high-growth emerging markets by using a low unit price range, leveraging the strength of Cadbury in these markets and taking the learnings from our success in India. In premium, we will innovate as well as scale existing offerings in new channels and geographies. And we have unexploited potential in brands with premium credentials like Toblerone, Hu and Green & Black's. That brings us to our final opportunities to sustain our growth momentum. Expanding into categories adjacent to our current snacking categories. First, packaged cakes and pastries, a $65 billion global market, where we see opportunities to gain significant share both through brand extensions and through acquisitions. Our recent acquisition of the North American in-store bakery specialist, Give & Go, is a clear milestone, and we see more opportunities for growth. Second, our core chocolate and biscuit brands have made inroads into soft cakes and bars. We've built on success in Europe by expanding into Asia in the last couple of years. And we are continuing to extend the portfolio and gain distribution in Europe. Finally, we are gaining a foothold in snack bars, which is a $15 billion market today. We've already made an important move by buying Perfect Snacks, the #1 player in chilled bars in North America. And our biscuit brands like belVita and chocolate brands like Cadbury each have plans to grow in snack bars in Europe and Asia with new offerings to meet functional and better-for-you needs. To sum up, we believe the opportunities for sustained growth are sizable and clear. Our unique portfolio of brands and broad geographic footprint create a strong foundation. The strategic repositioning of our company in 2018 has generated growth momentum and turned us into winners in the market. We took decisive action in 2020 to both simplify our operations, but also invest in future growth. This has set us up to continue delivering on our targets in 2021 and beyond. With that, I will hand over to Luca.

Thank you, Dirk, and good afternoon. Today, I'll cover the delivery of our 2020 financial results and our Emerge Stronger initiatives as well as cash flow and capital deployment, and I'll give you a brief review of our outlook for 2021. Let's start with our results and Emerging Stronger. 2020 was another successful year for Mondelez, with strong performance across all of our key financial metrics in a challenging environment. It starts with a volume-led model, which enables us to scale up and drive leverage across our business. This leverage, combined with the history of cost excellence, leads to GP dollar growth, which we reinvested back into the business, including a 17% increase in our working media spend. These investments and strong execution leads to improved growth and share with 80% of our revenue base holding or gaining share this past year. While half of the GP growth was reinvested in working media, the other half, together with our Emerge Stronger savings, translated into strong mid-single-digit operating income dollar growth. Overall, this virtuous cycle underpins our financial algorithm of 3% plus top line growth, high single digit earnings growth and $3 billion-plus of free cash flow. And we have positioned ourselves to achieve that again in 2021. This virtuous cycle has created value since it was put in play in the last 3 years. And our total shareholder return has exceeded over 1.5x that of the Staples index and more than 2x that of our proxy peer group. The objective behind our strategy is to drive consistent, sustainable and profitable growth through high ROI investments in our business and share gains. We have put together a strong track record over the past 3 years in terms of revenue, profit, free cash flow and capital return as well as share gains and stock performance. But we believe there is more as our multiple lags those of many global peers. On the other side, we have a portfolio of superior brands with leadership position in key markets. We have an advantaged geographic footprint with scale in manufacturing, distribution and sales that is unmatched, both in emerging and developed markets. We are taking share and winning in the marketplace consistently in our core categories of chocolate and biscuit. And we have a clear opportunity to further reshape our portfolio with recent growth platforms and significant M&A firepower. All of these should put Mondelez as a unique platform that can deliver sustainable TSR for the years to come. While COVID challenged our business, particularly in emerging markets, it did not derail our strategy. Quite the contrary, we wanted to take the opportunity and strengthen ourselves even further as a few unique opportunities presented themselves. We took, in fact, several swift actions to accelerate planned initiatives and strengthen our position for the long term. These initiatives fall under growth, execution and culture, in line with our strategy. Under growth, we are working to simplify and strengthen our portfolio in order to improve revenue, reduce downtime and lower inventory levels. This simplification includes removing the bottom 25% of SKUs and focusing on the highest value, most disruptive innovation. We also plan to better utilize revenue growth management in terms of mix, price pack architecture, promotions and smart pricing to grow both top and bottom lines. In E&C, there is more opportunity to drive our categories and share gains by optimizing spend by business unit and brand while shifting more funds to working media and higher return media channels such as digital. Channel focus, including e-commerce, is an area where we are also stepping up to optimize assortment, availability, search and analytics. Our objectives around improving our network are focused on CapEx optimization and more holistic sourcing to ensure our network works harder and smarter. We are driving more rigor around our CapEx process, which included a reduction in spending last year. We are also looking to better utilize our partnership to manage peaks and volatility in demand. End-to-end planning is about more real-time demand tools and statistical forecasting. This tool should help improve service levels, cost and lower inventory and waste. We are focused on plant and overhead cost of excellence, which includes driving more efficient runs and optimizing our labor mix. And on our inventory, we are reducing SKU levels by 25%, implementing more data-driven decisions and tightening governance in order to eliminate inefficiencies and accelerate reductions. Turning to our focus areas around building a growth organization. We are focused on simplifying processes, improving speed of decision-making, removing barriers and accelerating key capabilities. We are also looking at new ways of working to stay on top of behavioral shifts and utilize technology, which should help collaboration and reduce office space. Next, I'll cover cash flow generation and capital deployment. Our focus on cash flow is paying off with $3.1 billion generated this past year. It starts with an improving earning base that is the result of the virtuous cycle I mentioned. It's also a result of intense working capital management. Our current cash conversion cycle is among best-in-class within staples, improving by 15 days over the past 3 years. But we have more opportunities to further streamline payables and to drive more inventory out of our system with better planning and fewer SKUs. And last, restructuring has continued to decline over the past couple of years. All of this has led to free cash flow conversion at 99% when excluding JVs. Turning to capital return, where we have created value with more than $27 billion return since company inception. Dividend growth has been a big part of our program with a 46% increase in just the past 3 years, and we are confident there is runway for continued growth given our payout ratio and free cash flow trajectory. Share repurchase is also an important part of our program as we have returned more than $7 billion since 2017. We will continue to maintain a programmatic and opportunistic approach to repurchase while retaining M&A optionality. Overall, our past actions and future plans reflect our confidence in our ability to generate attractive free cash flow. In terms of capital allocation priorities, we strategically deploy capital to drive returns and to position our business for future growth. Our first priority is reinvesting in the core business. Our results over the past 2 years validate this. Our second priority is to add growth platforms to our business, to continue to improve our portfolio through acquisitions, which I'll cover shortly. Our third priority is returning cash to shareholders through share buybacks and dividends. And we will continue to ensure debt repayment is a priority in order to maintain our investment-grade rating and flexibility. M&A continues to be an important part of our portfolio management program. We are continuously evaluating our portfolio with a focus on growth and margin opportunities that can enhance the current business. We maintain a disciplined approach to deliver returns in excess of our benchmarks and find platforms with the right strategic, financial and cultural fit. With that in mind, let's review our recent acquisition. Tate's provides an expansion into the fast-growing premium cookie segment with a strong story and double-digit growth. It's just the beginning to reap early benefits from integration into our DSD platform. Perfect Snacks extend our well-being portfolio with organic, non-GMO and protein credentials. It is a clear leader in the chilled snack bars and has been on a strong trajectory. Give & Go, a great example of a close-in adjacency in cakes and pastries. They are a market leader within in-store bakery, a large and attractive category, bringing growth opportunities, strong execution and continuous innovation. And last Hu, which closed last month. This well-being platform is delivering rapid growth in whole foods and natural channels with significant runway to expand distribution. Next, I'll close with an overview of our 2021 outlook. Moving there. There is no change from what we discussed with you on our Q4 and year-end earnings call. We expect that 2021 that is an algorithm for top line, EPS and free cash flow. Currency remains favorable, which is a contrast with the past several years. Overall, we feel good about our ability to sustain growth and execution and to deliver on our commitments and goals. In closing, we are confident that we have the right combination of execution, investments, attractive growth opportunities, talents and ability to refine our portfolio to drive value today and for the years to come. Thank you.