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

Good morning, everybody, and welcome back to day 2 of our presentations and fireside chats. With us this morning, we've got a fireside chat with Mondelez International. And joining us today from the company are Chairman and CEO, Dirk Van de Put; and CFO, Luca Zaramella. Welcome, gentlemen, and thanks so much for being with us all today.

Hi, Andrew.

Good morning, Andrew. Thank you for having us.

Thank you.

Our pleasure. Our pleasure. Maybe we can start off with our discussion today with a little bit of a state of the union. Mondelez has seen a steady increase of sales growth over the last few years. And I was hoping you could talk a bit more about consumer behavior trends and more broadly, maybe about some of the opportunities that most excite you and whether you believe the company is in sort of the early, middle or late stages of those opportunities. And sort of what gives you the confidence that you can compound this growth year in and year out? I think some investors do debate whether certain CPG companies sort of temporarily benefited from COVID.

Yes, yes. I hope you can hear me. My screen says I'm muted. Am I okay? Okay. If I look at the last 3 years that we have sort of announced our new strategy and how things have evolved for us, there's a few things that I would mention that are worthwhile keeping in mind. First, there has been the consistency of our results before the pandemic, during the pandemic in this year, which was growth of well above 3%; in fact, 4% for 9 out of the last 10 quarters. The exception was Q2 '20, but that was in the middle of the pandemic. And so while we announced 3% plus, it really has been 4% on an ongoing basis. We're in categories that are growing well. We're in global biscuit and chocolate markets, which during the pandemic had some benefits in certain markets but also some negatives. The net effect for us has been that the year 2020 looked to the sort of on the surface as a normal year from a bottom and a top line, but underneath, there was a lot of different situations around the world. And if you look at '21, we will probably continue on the similar trends. And so I wouldn't say that we have benefited in a particular way from the pandemic. Another thing that I would mention is that the market share performance has been substantial for us in the last 2 years and even started 3 years ago. So we've gained material share, if -- particularly if I look at where we were before the pandemic and where we are now. And the other thing that has been striking for us as a company is that we have had great performance last year in developed markets. But emerging markets, while affected in the middle of the pandemic and those moments were different depending where you were around the world, but they've come back real fast, and we feel very good at this stage about the vast majority of the emerging markets. And then I would also say that we have a very strong virtuous cycle -- financial cycle, where we are able to keep on investing -- increasing our investments every year. We have pricing ability. We have brands that react well to those investments. So we feel pretty good overall. If I look at -- well, can this continue? I would say the opportunities that we have, we're only starting to tap into them. It's not like we've, in the last 3 years, used all the growth opportunities we have, and now it's not going to happen anymore. So I think the main area of our growth has been strengthening our core, and that's where most of our energy has gone in the last 3 years, which was making sure that around the world, the categories we're in, the brands that we have, that we are doing the right thing, innovating, renovating, investing, making sure we show up in the right way in the stores. And that has really been the core of the growth, and that can still continue. For instance, Oreo, we only have 10% of the biscuit market with Oreo in China and the U.S. But we know as we see the Oreo growth around the world that we can get there in many, many more markets. And we see 20%, 30% or more growth in Oreo in key markets like Mexico, for instance, India also, so very substantial growth there. There's about 10 other markets where Oreo is really growing substantially. The second thing that I would say as growth opportunity for us is channel expansion. Before the pandemic started, we would be able to significantly expand in different channels, of course, e-commerce in the first place. We halted that a little bit during the pandemic. And as we hopefully get out of the pandemic, we are going to start that again. We have opportunities. There are certain segments within our categories like well-being or premium where we're underrepresented, so we're working hard on increasing our presence there. And then we've recently started to enter adjacencies like cakes and pastries and bars. So I would say we're still in the very early stages of realizing these opportunities. I believe we have a very long runway of growth. It's not that we're lacking opportunities. And we have great enablers that are going to make it possible for us to capture those growth opportunities like our brands, our pricing. We can do some portfolio reshaping. Cost management has been strong. So it's really in our hands to make this happen. If we don't deliver, it's basically because we're not executing this well. It's not because we are missing opportunities. Maybe quickly before I take too much time, on consumer trends with COVID, as I said, I don't think that we consider ourselves as beneficiaries because of the emerging markets disruption last year in 2020. But consumer trends, in the end, for our product groups have accelerated by COVID. People are spending more time at home and they tend to eat more biscuits and chocolate. When they do that, we can suspect or we can expect that consumers will stay more at home going forward. There is more focus on comfort and well-being, which also helped. So snacking, I think, that's going to be on consumers' mind for a longer period to come. And we have continued to support our categories and increased our investments, which we have seen accelerate the growth in our categories. So we are planning to continue to do that. So I would say we didn't particularly benefit, but in the end, if I look at the consumer, we're in a good place with our categories. I hope that gave you a good picture, Andrew.

Yes. Very helpful, very helpful. Maybe next off, Mondelez, like many companies, has flagged a step-up in inflation, headwinds and input costs for the year. I guess, what should investors know and think about the second half and the setup for '22 at this stage? And can you talk about where you stand in terms of sort of pricing and sort of the broader revenue growth management initiatives?

Yes. And I would start by saying that we are very happy with the level of profitability that we have achieved in the first half. In fact, our gross profit was up 6%, and our EBIT was up more than 10% despite Working Media being growing 45% versus last year. Having said that, as you rightly say, we called out in the Q2 earnings calls that we are seeing more inflationary pressure going forward. And that is particularly true for the U.S. business, where some areas like logistics costs are at levels that we could not have predicted a few months back. It is a fact that we have a captive system like DSD that insulates us from certain headwinds. But it is also fair to say that part of our network, specifically some distribution centers, are third party operated. And those are facing material labor shortages and capacity constraints and creating some issues between costs and service levels. I do not expect, quite frankly, this cost inflation pressure to go away in 2022. And so we are taking the necessary measures to offset those headwinds. And it will be a combination of pricing and cost containment measures. And the clear goal is to enter 2022 from a position that is improved. But as you rightly say, Q3 will be impacted, and so will be Q4, even if to a lesser extent. One word on pricing. We feel confident, as Dirk just said, in our ability to price. And you should expect more pricing going forward, especially as we ramp up several growth -- revenue growth management initiatives. In the end, we know that our algorithm is predicated on growing GP dollars, and that is essential for us to continue to invest in the business. And I continue to believe that in the U.S. and outside of the U.S., we are well positioned for 2022. A couple of other points. There is a global inflation overall that is higher than we expected, whether it is commodities or transportation costs. But the situation in all the business units is, quite frankly, not as severe as it is in the U.S. And despite these challenges that we are seeing in the U.S., which, as I said, will be most acute in Q3, we still have line of sight to the guidance we gave you at the end of Q2 with our Q2 earnings, which is 4-plus percent growth for the year, high single-digit EPS and a free cash flow that is $3-plus billion. And this $3-plus billion includes $0.5 billion pretty much of coffee-related tax that we had to pay as we decided to go public last year with JDE Peet's. So quite good numbers for the year still in sight for us.

Great. It's a good segue into the next question around free cash flow and capital allocation. Your free cash flow target is $3 billion plus, which you've achieved the last couple of years. Can you expand on additional opportunities and drivers going forward? And maybe talk about whether your preferences for capital deployment, your preferences on that and really whether anything has fundamentally changed.

So free cash flow is a top priority for all of us. And specifically, in finance, we have established operating rhythms that go into the details of how we generate cash, where we spend CapEx, how we can obtain opportunities in the areas of payables, receivables and inventory. And obviously, I think you see the numbers. We have a goal, that is to get closer to the 100% conversion to net income, excluding, obviously, the JVs that don't pay dividends as high as their net income. There is still quite a bit of headroom for us to improve. First and foremost, I would say that we had good levels of DPOs and receivables. We run the company at 2%, 3% overdue on receivables, which is pretty much technical overdue rather than real late payments. And then in the area of DPOs, we know that we have still opportunities around the world with some suppliers to expand our payment terms. The biggest opportunity we have at this point in time, though, is reducing inventory. And particularly in the area of forecast accuracy, in the area of optimizing demand and supply planning, there is a big project underway that will result in the digitization of the company in those areas and will provide more opportunities going forward. In terms of capital allocation, the #1 priority is clearly investing in the business. We have done a tremendous amount of work in the area of sales and marketing, but there are still opportunities for us to make strides into more marketing investments, particularly in some of the local brands renovation. And we know that, particularly in emerging markets but also in developing certain channels, investing is a great return on our capital. The other one is M&A. And the M&A, particularly as you think about Give & Go and Chipita, those are the sweet spot opportunities for us, $600 million platforms each, high single-digit growth, material synergies, both in terms of revenue and cost, and EPS accretion as of pretty much year 1. So that's the other one. We are fully committed to continuing to grow dividends over time. And share repurchases is integral part of what we do, but obviously, can be turned on and off depending on specific circumstances. And finally, debt repayment. So we have a good level of debt at this point. We feel comfortable. Every time we go in the market and launch a bond, we get overwhelming response from the investors. And so that is the fourth priority in terms of capital allocation.

Great. And maybe it makes sense here to dig into some of the recent M&A a little bit further. Two of your largest acquisitions, Give & Go and Chipita, which will close later this year, are in sort of cakes and pastries. I'm trying to get a better sense of why you see this as such a compelling area. And what do you believe may be underappreciated about the category and sort of the go-forward opportunities?

Yes. First of all, I would like to refer to our acquisition strategy that the cakes and pastries area is in line with what we have said for a while now that we would be doing. If you think about it, we -- wherever we can, we want to fill geographic white spaces around the world. Cakes and pastries is not part of that -- part of our acquisition strategy, but we've done Gourmet Food, for instance, in Australia and New Zealand to get going on our biscuits presence there. The second part of our acquisition strategy, that's where cakes and pastries falls in, is building a meaningful foothold in adjacent categories, and there's 2 of them, cakes and pastries and snack bars. So we've done, as you mentioned, Chipita, Give & Go, but we've also done Grenade and Perfect Snacks in the bar space. And then the third part is to increase our exposure to incremental, fast-growing snacking segments like well-being or premium, and they're also Gourmet Food, Grenade, Hu, Perfect Snacks fall in the well-being or Tate's in the premium segment. So it fits into the acquisition strategy that we have announced. I think the name cakes and pastries, maybe it brings up this view of big birthday cake. But the reality is that if you look at the biscuits category, there's a natural extension into what I would call softer types of products. If you think about crackers or some of the harder biscuits, that flows naturally into the more cake or pastry consistency. And we already had -- under many of our brands, we had an extension into this space. So it's almost an artificial separation for us. And you can easily see our brands flow. The best example I always give is that you have a Lu Petit Beurre, which I think most of you will know, it's a hard cookie and very emblematic in Europe. That now exists in a soft cake. It looks exactly the same, it's just a softer version of that. And that's where the opportunity lies for us. So that part of the market -- if you go into a European supermarket, you will have the typical biscuit aisle, and right next to it, you have the cakes and pastries aisle. And there's a lot of synergies between the 2. So it's sizable, it's clearly incremental and it's growing at a good pace, slightly better than the biscuits market, $65 billion market. The revenue per kilogram is higher than in cookies, although it is very similar in the consumer's mind. And I think the other thing that this category or this segment has is that it's very fragmented and there is a real opportunity for clear leadership and premiumization and to even drive that revenue per kilogram higher and as a consequence, the margins. And so there's big synergies. Our brands can naturally play there, although in some of the acquisitions like Chipita, we're also getting very strong brands that come with the acquisition. So you could start to think about things like Milka croissants or Oreo cupcakes and things like that. So with everything we've done, we are now already well above $1 billion in sales that makes it -- when Chipita closes, that makes us the #3 player in the market. And both companies, Give & Go and Chipita, are, like Luca said, $600 million annual revenues growing at high single digit. And if you add on top of that our existing extensions that we already had naturally from our own plants into this segment, that adds up to over $1 billion, as I was saying. We believe that, that will continue, that we have an opportunity around the world and that this will be a great area of growth going forward for us.

Great. Oreo cupcakes, so I won't hold you to it, but I'm going to kind of hold you to it, just so you know. Maybe we shift over a little bit to talking about the algorithm a bit. As the rate of growth for Mondelez has steadily improved, and as you talked about, it's averaged really 4% since the fourth quarter of 2018, there's been some conjecture among investors that Mondelez might look to revisit its long-term algorithm. And just trying to get a sense of sort of where your updated thinking is on that topic.

Yes. I got this question a few times yesterday already, so I think I'm well prepared here. But we view the current long-term algorithm as a baseline. And as I always say, actuals matter much more than that. We feel comfortable about the consistency and trajectory of our top line results. And in fact, since the launch of the strategy today, our top line has averaged 4%. We have delivered high-quality EPS growth, both at constant and in reported dollar terms. And our free cash flow, as we have just finished talking about, has exceeded more than $3 billion. We have clearly increased confidence in delivering our algorithm, but we are not raising it yet. Even if it is fair to say that we compete in categories that overall, including Biscuit, Chocolate, Gum & Candy, they are averaging 3% growth. And that, by gaining share, can be compound in terms of growth. In the end, as Dirk said at the beginning of the conference, we still have a lot of opportunities building multi-category strengths in high-growth geography. We talked to you many times about Oreo achieving the $100 million mark in India, for instance, with growth at least 20%, 30%. Mexico is the other one, where we're getting close to 5% share of market for Oreo. And so establishing our presence in multi-categories in high-growth geography is clearly an accelerator of growth as well as it is competing in channels where we're under-indexed. In addition, going beyond our core into high-growth adjacencies, cakes and pastries, for instance, both organically and inorganically, and addressing Gum in developed markets can put us on a higher long-term growth trajectory. So I'm confident that the 3% is a baseline. And what we have created in the last 3 years that goes above and beyond investing in our brands and creating an ecosystem of growth, starting from a growth culture in the company, moving on into incentives and developing the right executional skills, will give us additional opportunities. I believe, quite frankly, some portfolio changes could be the trigger for us to raise our long-term algorithm. But at this point, as I said, I think it's better if we deliver more than 3% and our long-term algorithm history.

Perfect. Maybe you can give us an update in terms of where you stand with the strike that we've read about in some of your U.S. manufacturing facilities.

Hey, Dirk, you are on mute, I believe.

Yes, I put myself on mute. First -- thanks, Luca. We are obviously disappointed that we find ourselves with striking 3 of our plants in the U.S. It's a decision of the BCTGM unions. Our goal has been and always has been and continues to be to bargain in good faith to reach a new contract. Having said that, we were requesting a number of changes to their current contract. And we foresaw that it would not be an easy conversation. And so we planned for potential strike and be prepared and then activated a robust business continuity plan with the purpose of continuing to serve our customers and our consumers. That plan has 3 layers to it. One is we increased inventories before the negotiation started. Second, we made sure that as soon as the strike started, we were in a position to run our factories, not to the same level as before, of course. Gradually, we will get there, but make sure that we immediately had the key lines running, which happened. And in fact, we are above expectations in that sense. And then three, we simplified and continue to simplify our commercial agenda so that we minimize the potential stress we would have in our production and distribution system. So that continuity plan is working well. The discussion basically is about the fact that we would like to modernize our contracts that we have in the plans. And it's -- with the intent of sustaining the long-term growth that we see coming for our business and also make sure that these plans are competitive and a stronghold for us as a company. In return for more flexibility, we've made an offer which basically increases wages in a good way for the coming years, and it also increases our benefits, for instance, a higher contribution to the 401(k), and it continues to -- with the current health care plan that we have in place. So we believe that it's a win-win, more flexibility, but at the same time, more benefits for our people. On top of all that, I would say that we are really committed to U.S. manufacturing. We have now concentrated our footprint, be close to plants in the first half of the year. We now have concentrated our footprints on the plant in the East Coast, the Midwest and the West Coast. And we -- as we look ahead and we see the volume growth that we see coming, we hope that we can increase capacity through potential capital investment in these 3 plants. But to do so, we need to remain competitive. And so this discussion is basically about making sure that these plants remain competitive for the future, and so that we and our employees will have a long-term success story to tell. The key part of that being competitive is flexibility to schedule in a different way so that we get more output from the plants and basically also improve the execution on a day-to-day basis in the plant. So that's the key area of discussion. Next week, there will be another meeting with the union. So hopefully, we will come to a positive outcome there.

Perfect. And we've got just a couple of minutes left. So maybe as a final question, we can talk a little bit about sort of well-being. Some investors might look at your portfolio and concluded it's still significantly tied to more indulgent products. And want to get a sense of what your latest thinking on well-being is and how the portfolio is expected to evolve in that regard over the next several years.

Yes. Maybe 3 key observations at the start. First of all, if you look at the snacking market, as I said, the snacking market that we're in has been accelerating. And so while there is a big chunk of the market is indulgent at the moment, that clearly has not yet affected the vibrancy of the market, I would say. The second observation is that the consumer interpretation of what is healthy has evolved quite a bit. And I don't know if you've ever had a conversation with a 20-year-old about what is healthy versus me. There's a big difference in age, but there's also a difference in interpretation of what health really is. And so we spend a lot of time studying what is exactly that the consumer sees as healthy, and it's a more holistic view. Consumer understand that they can consume multiple types of snacks across the day and that there is a variety of functional and emotional needs that they want to fulfill. And maybe a last observation is that if you take this new sort of definition of what healthy is, about 30% of our range is in what we would call healthy or healthier products. Half of that 30% is with real well-being credentials like organic, gluten-free, baked not fried, dark chocolate, reduced sugar, which is in line with the global snacking market, where about 15% of the global snacking market is also in these type of products. The other half, in our case, is coming from portion control, and that means individually wrapped portions under 200 calories. So we have a clear plan going forward to keep on increasing that part that you would call healthy. So we are going to sustain our fair share position by continuing to develop new well-being offerings. For instance, this week, we launched Oreo zero sugar in China. We'll see how it goes. But if that's a success, we'll obviously -- we'll expand that around the world. We continue to improve our nutritional and ingredient profile on our course to lowering sugar, lowering sodium, using simpler ingredients. We are doing acquisitions in the space, Perfect, Hu, Grenade, Gourmet Food, all examples of how in our acquisition strategy we're bringing in more healthier products. And then we have a big drive on that portion control to bring it to 20% of our revenue by 2025. So that's a little bit the situation, and those are the things we're doing. And overall, I would say, the indulgent part is the bigger part of the market and our portfolio, in dollars, clearly growing much faster, while the healthy part is the smaller part, in dollars growing a lot less, but in percentage, growing more. And so we have to play on both sides of the equation.

Perfect. Well, I think that's a great place to leave it. And I want to thank you both, Dirk and Luca, for your time today and looking forward to tracking the progress as we go forward. Have a good day.

Thank you, Andrew.

Thank you, Andrew. Thank you.

Bye-bye.