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

Good morning, everyone, and welcome to our Strategic Decisions Conference for 2021. I'm Alexia Howard, Bernstein's U.S. food analyst, and it's my great pleasure to be here today with Dirk Van de Put and Luca Zaramella, the CEO and CFO of Mondelez. Now Dirk has been at the helm of the company since -- well, for 3.5 years now. And prior to that, you were CEO of McCain Foods for 7 years. Now at Mondelez, he's successfully accelerated top line growth, and the company has navigated the pandemic with great resilience around the world. With him today, as I mentioned, is Luca Zaramella, the CFO. He's been with the company since 1996 and took over as CFO in 2018. I want to thank everybody that's listening in. Welcome. There is a notice on the side of your screen with a live Q&A link. [Operator Instructions] And we'll see if we can get to all of those.

So with that, we can jump straight into questions here. Dirk, so you're coming up on your 4-year anniversary at the helm of the company. And the business has certainly seeing a marked acceleration in the top line since you took over, which is great. What have been the key milestones for you in the company over the last few years?

Well, first of all, thank you for having us, Alexia. It's a pleasure to be here. It's -- yes, it's almost 4 years now. And I would say, if I think about milestones, the first one and the reason why I was sort of asked to come in was that the company, after a very successful period where it was focused on margin expansion, that there was an understanding that at a certain moment, we needed to shift from what I would call margin-centric to consumer-centric and top line growth-oriented. And so when I arrived, we took about 8 months to really study the business and then come up with a new strategy for the business, which we launched in September 18. And I would say the first milestone was that the strategy that we developed is working for us, which was not a given when I started. It was a bit of a question mark on how we were going to do this because the company had had a tough time doing both at the same time, i.e. being cost-focused, and at the same time consumer-focused. And I would say we now have the right growth strategy, which is working for us. And at its core, I think we changed the paradigm of the way we look at the business. And I found that it's successful. Change the way you look at things, and you might come up with new ways to do things with new results. So we changed the focus of the organization from delivering profit to win with consumers or -- we sort of said that it's not about the top or the bottom line in the first place. It's sort of about, if I can cover it like that, the middle line. Gross profit dollars, not percentage, is very critical in the way we look at our business, which makes then the teams think about volume leverage, about things like RGM. We also said that local should drive the business in the first place. So we changed our organizational structure, and we came up with a good list of growth drivers and growth enablers. So all that together, I think, kind of made it possible for us to make this strategy successful. The second milestone, I would say, is that because we were in this cost phase and sort of focused on increasing our margins, the day-to-day execution, doing well what we should be doing well, have taken a little bit of a backseat to transforming and kind of making big changes in the composition of the company and getting back to consistent execution because we dropped the football a few times if I go 3, 4 years back, And so I would call it in execution, going from transformation to consistency, embracing operational excellence as a driver of growth and margin, and then really working on the sales and marketing execution or our supply chain execution. And getting that really at the next level, that has been a critical part. If I compare when I arrived, the North American supply chain was a weakness for us and we didn't do so well. Last year, during the pandemic, I would say our North American supply chain was a strength for us. And so that is an example of the second milestone that we've had. And then the third one, I think, which is really the most critical one, is making sure that we have the right mindset in the company, that we think about what we are supposed to do as a company in the right way. You could call it culture. We changed a little bit the way people see themselves. I would call it ownership is at the local level. Both are important, both towards local and ownership, trying to make our teams in India, in China, in whatever it is, feel like they're in charge of the business and they need to make sure that the growth happens, which requires accountability and empowerment locally. And we have to make sure that they have that. We changed our incentive system towards what we want to see. So for us, as a company, for instance, in our incentive system, you will find volume growth as being incentivized. Gross profit dollars, I talked about that. We heavily reward market share gains. On top of the typical net revenue, operating income, cash flow, we have the classical ones that everybody else has. But we have a few, I think, that differentiate us, and that's part of the culture. And then I think making sure that there is an understanding and a belief that speed and agility is more important in decision-making than perfection in decision-making. But at the same time, in execution, we do want perfection. And so those are some of the elements of the culture. But those are the 3 that I would mention: getting the strategy right and making sure it works, getting consistency in execution, and then really change our mindset. And obviously, I'm very proud of our teams around the world because they're ones that make this happen. And they've really embraced it and have run with it, and it's been successful.

That's super helpful in terms of just hearing about the journey over the last few years as you joined the company. So investors these days seem very curious about the path to recovery in emerging markets as they work their way through the pandemic. Can you comment on how the company is performing in places like India, China and Brazil?

Yes. Obviously, those markets were affected last year, but they came back real fast. And so if I look at the results in the first quarter of the year, we had about 10% growth in our emerging markets, 7% on a 2-year stack, so 7% CAGR, if you look over the last 2 years. It was broad-based. We had double-digit growth in Brazil, India and China and high single digit in Russia. So it's sort of in the key countries. The contribution was from global and from local brands. So sort of a very solid pace across our key emerging markets and also in the other emerging markets. If I look at why is that, I think China stands on its own. China is already operating well, came through COVID relatively fast with the return of mobility of the consumer. And if there's a rise in COVID, they jump on it right away and they move on. The India performance was spectacular in the first quarter for us. I think that was driven by the persistence of our teams, doing a great job keeping our supply chain running, keeping in contact with our clients, I think also a little bit of a shift in the eyes of the consumer where they prefer packaged food versus street food and snacking. Those are the 2 big options that you have in India. But of course, we've all seen recently what's going on in India. And so big rise in cases. Very, very unfortunate and very painful to see. What we're seeing is that there is a lot of restrictions but not in total lockdown. There's only about 10% of the population that's in total knockdown. And so the restrictions are not materially affecting our sales. Of course, we're lapping also next -- or this quarter, Q2, a very weak quarter last year. So we're expecting that India will still look very good in the second quarter of this year compared to last year. And Brazil is a little bit in the same situation. It's very strong daily cases of COVID. We see the chocolate and the biscuit consumption growing, which is in line with stay at home, and while the impulse part and the Gum & Candy part of our business is impacted by the lockdowns. And I would say that the modern trade shares are showing a positive trend in Brazil for us in the first time in about 12 months. So Brazil is getting better for us. So I would say very strong in China, India and Russia with very different circumstances. And then Brazil wasn't so great a year ago, but coming back really, really well for us. I think that these 4, and those are the BRIC countries that, of course, as it relates to emerging markets, the ones that really matter the most. I think they still have a long runway, each of them, to keep on growing. We can add a lot of new outlets in India and China. We've added 500,000 in China, 330,000 in India in the last 2 years. We can keep on doing that. We still have a lot. Online is booming in China, and we're really growing very strongly there. In India, we're the main chocolate player, but we are emerging as a biscuit player and doing quite well. Very nice growth for us. And then in Brazil, we've worked on some fundamental improvements in the last 12 months, which are starting to play out and show off. So I would say that overall, we feel very good about our emerging markets and how fast they rebound and how important they are going to be for the growth of the company.

Have to ask the cost inflation question because it's such a hot topic right now. So what level of cost inflation are you anticipating over the coming year? What's driving that? And how can the company respond to such pressures? And I think you've mentioned that price is likely to play an important role in handling the current input cost and freight situation. What gives you the ability and confidence that you'll be able to take pricing? And how does that vary by region?

Yes. I'll take that one. And hi, everyone. Thank you, Alexia, for hosting us. So as everyone else, we have seen higher cost inflation than what we would call normal for our industry. And it is a cost pressure that we see particularly in some buckets of our commodities, namely meat, at this point; oils, edible oils; and packaging; but also around logistics; and importantly, in the labor market as well. It is particularly acute in the U.S. at this point in time, but it is not limited to the U.S., quite frankly. And in some cases, devaluation adds further pressure to an already pressured inflationary environment. This year, the impact is manageable given the favorable commodity coverage that we have, but the full impact, potentially, next year can be bigger. And we continue to monitor the situation and extended coverage where appropriate. In fact, at this point in time, we have circa 40% of next year's coverage secure, and it is at favorable prices. Obviously, the remaining 60% is causing a little bit of a challenge to us. But reality is at this point in time, we have good line of sight to additional pricing that we have already taken this year. In terms of selected cases, we have decided to price in addition given the pressure that we see. And importantly, we are going to use the full range of what we call revenue growth management of our GM to minimize the elasticity impact and volume. And by the way, since this is common to market, the cross-elasticity should be more benign than it might have been otherwise. And we are also doubling down on certain cost initiatives areas, investing particularly in digital, being able to ensure that for next year and this year, we fast track some initiatives that will deliver benefits to the bottom line. And importantly, one thing that is very relevant for us, bear in mind, is that investments level are not going to be touched. In fact, since the beginning of the year versus the original plan we put together last year for 2021, we have decided to invest even more this year. And we will continue on that investment path next year. So between RGM and doubling down on cost savings, we feel comfortable that we can have another year ahead of us in 2022 being able to deliver volume and price/mix growth, and importantly, continuing the investments that we have done in the last 3 years since [ different in the company ].

That makes sense. Can you give us some more details about how your approach to marketing is being transformed? What about the spending levels required to support the business and sustain or accelerate growth from here?

Yes. We've done -- we've been doing a lot of work on our overall marketing approach. And that was, of course, critical as we wanted to go from what I would call margin-centric to consumer-centric, understanding the consumer and connecting to the consumer is a key stepping stone of our approach. I would say there's probably 4, 5 big changes that we've driven. The first one is just better core marketing and I would say that getting clear on what our brands stand for, what is their purpose, how do we drive that purpose, how do we explain that to the consumers; an obsession with product, constantly renovating our products, very strong quality focus; and then creative, improving our creative. We've installed a scoring system, and we are clear on what creative excellence looks like. In today's world, we're spending 60% of our investment in digital. So digital creative excellence is very different from TV or print. And digital brings with it -- of that 60% we spend on digital, 35% is personalized. So how to do creative and how to personalize the messaging is very critical in today's way of marketing. So that would be the first thing that I would say. We just improved our core marketing. The second one is this drive towards digital, which means that we are doing investment in our infrastructure, that we need to understand how to personalize messaging, which is very different from what it was like when I was in marketing. And it also is driven by and needs to lead to better insight and analytics and a much better understanding of our consumers, which is what is made possible through digital, and doing that on a massive scale globally. The third one was what you were referring to also was increased A&C investment. Our view is that every year, we need to increase our A&C investment. Why? Because we want to grow faster and faster. Or if the basic math is bigger, to grow the same percentage will become bigger every year in dollars. And so you need to keep on investing in your brands and differentiating them and make sure that the consumer really keeps on loving them. And so we feel that every year, we need to increase our gross profit, and that half of the increase of the gross profit needs to be invested in our business, and the other half should flow down to the bottom line. So that's a little bit the way we look at it. We're not yet there. We still have many brands that are not getting the investment that we would like to give them. But within the limits that we have, I think that's a model that is really working for us. And so that's what we're planning to keep on doing. And then within that A&C investments, we are shifting a lot more into working media. So if we are increasing our A&C every year, we're increasing our working media within A&C even more, very significant increases, which gives us more firepower, if I can call it like that. The fourth one would be execution in marketing. I talked about as one of the big milestones is our step-up in execution. We made ROI a key measure for us as a business. We've done a 14% improvement in the last 5 years per year. And last year was a real balanced year with a 25% improvement of our ROI in marketing. For instance, in creative, 50% of our creative is now in the top tier of creative's scoring. And so that has been a big help in improving our ROI. And we also worked hard on our partner ecosystem, the agencies we work with, and simplified it, made it more efficient and improved it. And then maybe the last one that I would mention in our changed approach to marketing is talent. Today's marketer is a completely different animal from what it was. Again, when I was at -- 30 years ago in marketing, as you can probably imagine, I'm a dinosaur now. And so to build up that capability in the company around the world is really important for us. They need to be really digitally savvy and understand how today's consumer is communicating. We also need very high engagement. It needs to be the core and the driver of the company. And so you need a team of people in marketing around the world that really drives the way the company looks at the consumer and thinks about the brands and the products. So I would mention those 5, Alexia. And I hope I answered the question on how much investment that we think we need to have in marketing.

Just getting a bit more richness around everything that's changing in marketing because we know a lot is changing. That's extremely helpful. I've had a couple of questions that have come in from the audience that are kind of linked to the top line. The first one is, what are the biggest white spaces you're focused on for the next 3 to 5 years, whether by category, geography or product? And kind of a sub-question under that somebody else has asked, where are the biggest opportunities for Oreo because it's such a gigantic brand?

Yes. Yes, yes. The 2 are very linked. So the way we look at our white spaces, if you can, is that we see there's 4. The first one, it's not really a white space, but we think we can still grow our business in the first place by growing the core of our business, meaning the products that we currently have in the channels where we currently are, in the stores where we currently are and in the geographies where we currently are. The biggest opportunity that I would mention there is, in fact, Oreo. We think Oreo can grow $1 billion in the next 2 to 3 years. At the moment, 60% of Oreo sales are coming from the U.S. and China. And we've built really a very strong brand in each country. We know how to do it. India is the next one, where Oreo will surpass $100 million. So still a long way to go to $1 billion like we have in India -- sorry, in China and the U.S. But we're on our way. And so there's a group of 10 countries. Mexico would be another one. There's a few European countries in there where Oreo has a huge opportunity, and we see the wheels are turning. It's coming. The second big white space -- or really the first real white space is channels. We are -- at our core, we're really a grocery player. And so where consumers buy around the world have been shifting a lot. It shifted one way before COVID. It shifted another way after -- during COVID. We'll see where we end up after COVID. But shifting our presence and our focus from channel to channel and getting our fair share in every channel, that's still not the case yet. And so that's something we see as a big open opportunity for us. E-commerce, of course, is a big part there. The biggest opportunity for us there is e-commerce, special e-packs, and really selling largely more volume per consumers through e-commerce. That's the big opportunity that we have. But then there's other channels like discounters in Europe, traditional trade in emerging markets, club and C stores in the U.S. We have -- in every country of the world or every region of the world, we have this channel that -- or several channels sometimes that are underdeveloped for us and really working those channels and getting our fair share. That's another big opportunity for us. The third one that I would mention is there are segments within our current categories where we do not have the presence or the share that we should have. I would mention premium, as an example, in the chocolate market. I would mention the low unit pricing chocolate in emerging markets. And so we're working hard on each one to develop our presence. We're doing a lot, for instance, on low unit pricing around the world. Every country is trying to launch their chocolate at the ideal price point. India, of course, is setting the example where they've really cracked that, and they know how to do it. And so they're kind of the example we have for the world. But I would say Indonesia, Latin America, Africa, we have huge opportunities there. And then the other one is in premium. We have an opportunity with Toblerone to really develop it into our premium brand around the world. And I think that's one of the big areas that we also want to work in the coming years. The last white space that I would mention is adjacencies. If you think about it and you think about chocolate and biscuits as sort of our home turf right next to it, on one hand, you have what I would call bars, candy bars or health bars, which are very closely linked to the chocolate market; or on the other side, the bakery products, so largely cakes and pastries. I'm talking about the more premium-oriented part of bakery. That's very close to biscuits. Similar technology. Consumer often cannot really make a distinction sometimes between them. And so those are huge opportunities for us, because our brands -- our chocolate and our biscuit brands can naturally play a role in those adjacencies. Again, for instance, the recent acquisition of Chipita falls in those adjacencies. And we think that is a big opportunity for us. It's a $65 billion segment, cakes and pastries. We have started to enter this through what we call Shuffle Bakery. We've made a Give & Go acquisition. We now have made the Chipita acquisition. And so that's a very big white space for us that we are going to start to develop. So I hope that gives you an idea of what are the white spaces and what are the biggest opportunities within those white spaces. And Oreo, I think I said $1 billion in the next 3 years, 10 countries. We know the recipe on what to do. It's -- the execution is really the key for us.

Makes sense. So you touched on distribution in the discussion that we just had, but you have talked about distribution as a key opportunity that the company is working on in certain regions. Can you elaborate on that a little bit more and tell us how that's playing out?

Yes. It's largely -- distribution is always a question in every country of the world for us. We're in snacking, which means you have to have very wide availability of your products. We need to be very available online, for sure. But wherever you go and you feel like a snack, we need to be there. And so it's a constant obsession around the world. But where particularly it's important is in emerging markets. And the reason being, if you look at the universe of stores and where most of the products are bought, if you developed market that's largely in the modern trade in the grocery trade. In developing markets, we're starting millions of small traditional trade stores. And they can sometimes represent 90% of the -- of where our -- of the volume of our products that are being sold in a country. So for us to constantly expand our distribution and being in more store in emerging markets is absolutely critical. And so to give you an example, we started to work this really hard in China and India. So we've added 530,000 stores in China since the beginning of 2019. But we still have a lot of opportunity in biscuits. We're -- if we consider the universe for us available in China, about 6 million stores. We are now in 3 million stores. And that 6 million is growing. But in gum, we're in only 1.9 million of those 6 million stores, and our leading competitor would be in 4.2 million of those stores. So you can see the opportunity that we still have. If I switch to India, we've added about 330,000 stores since the start of 2019. In India, since it's a hot climate, we also need to -- for part of our chocolate range, we need to put what we call visi coolers, which keep the chocolate refrigerated. So we've also placed 135,000 extra visi coolers versus the park that we already had and that constantly needs to be renewed. So this is additional visi coolers. In India, there's about 9 million food retail stores. We, at this stage, cover 1.7 million directly and 3.2 million through -- indirectly through wholesalers and distributors. So still a lot of headroom for us. The consequence of this has been, around the world, that we've added about 150 million households penetration in the last 12 months. Those are just 2 examples, but I could go through -- well, imagine Africa, imagine Indonesia, Vietnam and all of Southeast Asia, Eastern Europe, Russia. So the opportunities exist everywhere. So it's not a question of the opportunity not existing. It's about doing it in the most cost-efficient way, making sure you get the right velocity of your brand, so doing all the necessary brand support so that the retailer wants you to come back to selling more. And so it's a question of execution and efficiency and the right cost-benefit relationship. But the opportunity, for sure, exists for us.

It certainly sounds as though there's a huge number of outlets as potential carriers of Mondelez products out there. Can we turn our attention to portfolio changes and M&A? And I've got a couple of questions that have come in here. Luca, could you provide us any insights regarding acquisition activity? Does this inflation cycle offer you any opportunities, thanks to your sourcing strengths? And then just more broadly, is there any update on the possible strategic review of the gum business in developed markets? Would love to know what percentage of sales and profits that represents. I imagine it's a higher-margin business. So yes, anything on the M&A side of things and perhaps a little bit of a dive into the Chipita acquisition as well because people are curious about that.