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

Good morning, and welcome again to the Evercore ISI Consumer and Retail Conference. I'm David Palmer, the food and restaurant analyst. Thank you for joining this special fireside with Mondelez's EVP and CFO, Luca Zaramella. Luca is widely regarded as one of the top CFOs in the consumer space, partly because he has such a strong understanding of the business. He's been with Mondelez for more than 25 years in virtually every division across the company globally. So I'm excited to talk to Luca about the priorities for growth and other key topics. Thank you again for joining, Luca.

Thank you, David, and thank you for the kind words. Thank you so much.

It's our honor to have you. An opening question for you. I think the company has certainly achieved a great deal over the last 6 years under Dirk's and your leadership. We'll get into some discussion about the environment in 2024, but perhaps we can widen the lens a bit. Just talk about what's next, and by that, I mean, what's next broadly over the next few years or so? What are the top priorities today for Mondelez?

The top priority is really to keep on growing the company and keep on delivering volume growth. I think as you kindly said, we have been delivering strong results. But importantly, I believe we have strengthened our overall position as a global snacking leader. We have been investing materially in marketing activities, in distribution activities, in our brands, in our people. And given that snacking continues to grow, it is durable. It has proven to be a category that has been very resilient, particularly in light of the many rounds of pricing we had in the last few years. I think we continue to be well positioned both in emerging markets and developed markets. When you step back and you look across the board, we obviously see penetration opportunities. We see distribution opportunities. We see RGM opportunities. And the other element that I believe has characterized Mondelez over the last few years, it is our ability to reshape the portfolio and get M&A activities underway. So when you combine our categories, our footprint, our brands, our capabilities, we have what it takes to really unlock further the potential of our brands. And that's really the focus of what we call Vision 2030. That is not by any means a departure from the previous strategy, but it is a strategy of acceleration, as we like to say, and focus. Acceleration, because I think the top line and the earnings we have been compounding over the last few years give us the confidence that we can be at the higher end of the algorithm we explained, but also importantly, because the focus that we have on few categories that are chocolate, biscuits, cakes and pastries and snack bars, so 4 categories with clear interactions between our brands, I think it gives us really the confidence that we can accelerate growth and earnings. The unique capabilities we have particularly in emerging markets in some of the categories, I think it is clearly giving us the competitive edge to push this company to the next level.

And so a lot of ways we can slice and dice the opportunities for Mondelez category is one, but maybe we can just try to tackle this by region, starting with the U.S. first. It's 20% of your business. What's your outlook for the U.S.? How do you plan to continue to drive organic sales growth this year?

So this year in the U.S., again, we are going to have a little bit of, I would say, of a challenging year. I mean the start to the year was not necessarily as we wanted it to be. We talked extensively about the softness of the biscuits market in the U.S. We are reassured by the fact that we are not losing penetration. The category is not losing penetration, but we are losing a little bit of frequency as a category, first and foremost, particularly across those cohorts of consumers that are lower income. I think consumer confidence is somewhat impacted among those. And what we are doing specifically to tackle both the market situation and a little bit the share situation that manifests itself through brands like Chips Ahoy! that are more prone to competitive aggressiveness and private labels aggressiveness. We are going to have a great promotion that is coming up, and I can't disclose at this point, in the second part of the year, which is going to be materially incremental, I believe. The second one is we are repositioning slightly some of the price points, given the materiality of pricing that has been taken through the categories but that was led by us. We moved price points, particularly in the bigger sizes above $4, and we have to lower to below $4 to really get access to those consumers that are price-sensitive. And then we're going to hit the market with new packs, particularly at entry-level prices like $3. And so we will allow consumers really to get into a much more stable territory. And I think when you step back for a second, I want to say that the profit and loss of North America is really the strongest it has ever been. I'm very happy with the series of acquisitions that we made in North America. And we gave you some numbers around Tate's, Give & Go, and even Clif while we materially move the needle. So I think it is a temporary slowdown, but I'm really confident that the team has, particularly in the second half, the slate of initiatives that will allow us to reverse most likely some of the softer market trends that you see at this point in time, but importantly, to reverse the share losses that are particularly acute, as I said, around Chips Ahoy!. So the plan is fully loaded. I think the team has proven over the last few years that they can execute much better. We got the supply chain in a much more stable territory. So I don't want to move for a second from the guidance we gave for the overall company because I think we are going to deliver the year in line with what we told you.

That's great. So when it comes to the pricing comment that you made before, is that fairly local to Chips Ahoy! and the issues that may have and the interaction index it may have with private label? Or is that something that you think is needed for the category overall?

No. I think it is particularly relevant for Chips Ahoy!. But having said that, if you step back for a second, a few years back before the multiple rounds of pricing, the majority of Oreo, Chips Ahoy! and any other cookies and crackers that we sell in the U.S. was evolving around the $3 price point. We have implemented a series of strategies around pricing and price pack architecture. We have priced, but we have also given more value to consumers, particularly through upsizing. And so we have moved the majority of the portfolio 2 bigger sizes, namely family sizes and party sizes. And in doing that, given all the issues that we had in the supply chain, we didn't have or we don't have at the moment, something that revolves more around the $3 price point. And if you look at the most successful cases of price pack architecture in Mondelez and we have many, it is where we provide multiple price points to consumers and where our promotional activities are balanced towards multiple price points, giving consumers the option to go for value and get a great deal on bigger sizes or go for potentially price point which are very important in the context where consumers feel constrained in terms of the amount of money they have to spend on their grocery to really opt for our brands and our categories. And I think you're going to see going forward a much more balanced strategy in terms of what price point we are going to cover, particularly in the U.S. And again, given the much better supply chain we have these days, we're going to hit the market with these new packs and price point [ fairly soon ]. So it will be mostly towards Q4, but we will be available in new shapes and price points forms for our key flagship brands.

I wanted to ask you about the supply chain journey. Going back a ways, this was perceived to be the perhaps your oldest manufacturing network, many plants, many not up to the modern standards in terms of flexibility. I think you've closed 4 manufacturing plants over the last few years. What's that done to the production capacity, productivity metrics, gross margin? Where -- what more is possible here from a supply chain streamlining perspective?

Look, I think we have done a lot of heavy lifting and Gustavo, who is the leader for North America, gave quite a few indications as to what has been done over the last few years in the network overall. I think today, quite frankly, I believe we are in a good place in terms of number of facilities. We will have to invest a little bit more on our DSD distribution system, but nothing I would say that it is out of the ordinary. We have increased substantially our flexibility and our capacity, particularly around key brands like Oreo. And we believe that the supply chain on the manufacturing side, particularly with the mix of plants that we have and state-of-the-art facilities like what we have in Salinas, we are well positioned really to create growth for the years to come. I think what you have seen is a material step-up in case fill rate and on time for the first time in -- with our customers. And so customer service levels have been dramatically improved. We have streamlined the number of SKUs that we have in our supply chain. And I think overall, from a manufacturing standpoint, while obviously, there is more optimization to be gotten, we are in a good place. We will continue to invest in our facilities. We will continue to invest in automation, particularly in a context where we still have quite a bit of overtime, and we had still quite a bit of high labor costs in some of the facilities. We will continue to invest in our distribution system, which is equally as important, given that we have a DSD system. So productivities are improving. We have been investing a little bit more in capacity. And now I think we will invest a little bit more in cost saving initiatives. So we are going to see most likely that virtuous cycle that allows us to grow our volume, create -- fuel the gross profit dollar line and reinvest in A&C. If you -- I never quoted gross margin for the North American business, but it is the highest gross margin business that we have, and it has clearly created quite a bit of gross profit dollars, which is our key metric, particularly through the biscuits business and the acquisitions we have made. And so I think we are not done yet. And we will continue to generate volume and invest back in the business to continue to have that virtuous cycle that has given us great results in the last few years.

Well, let's pivot to emerging markets. They've been a strong driver of growth for the company. It's 39% of sales as of the first quarter, 8% organic sales growth in that quarter. Can you provide a state of the union on some of your larger emerging markets like China, India, Brazil and Mexico?

For sure. We're very happy with China. We continue to have share gains, particularly in biscuits. We are creating continuous opportunities in terms of distribution. And the way we like to think about China is we have reached, over the last few years, many more points of sales, but we still have an opportunity to expand our portfolio presence in the existing points of sales that we serve. And the team is absolutely very, very focused in delivering distribution gains. And in fact, you don't hear us talking about challenges in China, unlike many other players because we are pursuing heavily, in a very disciplined way, these distribution opportunities. And the team is doing a great amount of work not only about expanding the universal point of sales we serve, but as I said, by creating further legs of growth of the likes of Chips Ahoy!, which is doing very well on top of Oreo, which continues to grow healthily in the country, but also through other categories like gum. So very happy with China. The other one we are quite happy, it is Brazil. It has been going through some challenges in terms of volume/mix, particularly as we didn't have enough capacity. But Brazil in the last few years have performed very, very well. We saw volume/mix growth and we are planning to grow volume/mix for the remainder of the year. The blueprint is exactly the same. We are now more disciplined than ever in terms of distribution opportunities. But clearly, we have a country that is, in terms of our business, mostly concentrated in the south. And there is a huge opportunity in the north part of the country, and the team is going after price pack architecture and distribution opportunities. So whether it is chocolate or biscuits or gum, which has been a tremendously successful business in Brazil, we are very, very happy. India, I don't have to talk much about India. India has been the growth engine for Mondelez in the last few years. And I think what I'm particularly happy about is the depth of the portfolio that we have in India. In chocolate, we compete from entry price point, INR 5 to INR 10 to 5x, 6x the price realization through premium brands like Cadbury Silk for instance. So we play across the whole chocolate portfolio. We hold a share that is north of 60%. And through what we call visi-coolers, which are temperature-controlled displays that we put particularly moms-and-pops in small store, we can have growth for the years to come. The other successful story in India has been clearly Oreo. That is a business that grew tremendously. And you might have seen today's announcement about Lotus and Biscoff and our ability now to sell and market that brand in India as well. So quite happy there as well. The other emerging market that is doing very well and that obviously got step changed in terms of size, it is Mexico. We had some challenges in Q1, particularly after the integration of the 2 systems. And just to give you a few indications of what we are talking about, we are talking about more than 0.5 million customers who are going to invoice or we are invoicing directly. We are talking about 120 sales sectors that service around about 2,200 routes in the country, so massive numbers. I think the business is recovering, but importantly, while there was a little bit of a dislocation in terms of volume in Q1, sellout is growing very, very strongly. And then we have the next-level opportunities, the likes of Southeast Asia. We still have a relatively low presence in some of these markets despite the fact that Oreo or Cadbury are well-established brands. But reality is, particularly in chocolate, I see tremendous opportunities as those categories are under-penetrated, as our role is really to establish a brand and a category as first-comers and great brand owners in many of these countries. So we are very happy with businesses we have in South Africa, we have in Southeast Asia. But reality is we still have huge opportunities, particularly in driving penetration and distribution of our brands. If you look at our emerging market P&Ls over the last few years, you see continuous volume growth, you see revenue growth, you see continuous investments in route-to-markets and marketing activities. And importantly, you see real dollar earnings growth. And so we are very happy and we believe that continuous investments will bear fruit for the years to come in those markets.

I wanted to double-click on your comments about Ricolino in Mexico. It seems that you're excited about the opportunity in terms of distribution gains and the unlocks from that. But is there any way that you can bring that to life for us in terms of how meaningful that could be? It's a pretty large market. It's not always a growthy market for many of our companies, but for you, it feels like it might be the beginning of a ramp in growth. So any thoughts on that?

Yes, absolutely. Look, the way I look at this is to start with, the Ricolino business has the right to win in the market. It has been a growth driver for us. Since we acquired the business, it has been compounding earnings, so we are very happy. And reality is when we look at Mexico at this point in time, it is a $1.5 billion operation. So it is materially bigger than it used to be. We doubled our size, I would say. But importantly, it is a category that has tremendous opportunities, both in terms of growth, but importantly, in terms of complementarity of the Ricolino business and ours. We are, as Mondelez, a company that in Mexico had superior execution in modern trade but limited scale in traditional trade. And the opposite is valid for Ricolino. So we are complementing each other very, very well. The simple facts are that particularly in biscuits, our share of market on our best day in Mexico is around about 5%. And one of the key limiting factors, it is the ability we had to distribute brands like Oreo and others in traditional trading. And the fact that now we get access to 2,200 DSD routes to 0.5 million moms-and-pops throughout the country is clearly opening up avenues of growth for us that before simply because of scale, we didn't have. If you complement all of this with the fact that we are very strong in gum, now we are very strong in candy and in chocolate, plus now we have clearly the opportunities to grow Oreo and biscuits, I mean, the opportunities is obviously right there. The other one I will tell you is there is an opportunity to go into chocolate as well with some of our core brands. And that is not in the plan yet in the near future, I would say, but that's another [ major opportunity ] that cannot be dismissed, I believe, in a country like Mexico, given the size we have and the capabilities we have through legacy Mondelez and the Ricolino acquisition.

And before we move off of emerging markets, I don't know if you ever look at it this way but in the framing of your high single-digit organic sales growth target for emerging markets, as we look into '24 and '25, if you're going to get there, like how much of that is going to be coming from distribution gains just alone? And how much do you think is going to come from other drivers, whether it's the white space opportunities of categories moving into new markets or just marketing reinvestment in your core? Any way you could sort of frame where that growth is going to come from?

Yes, absolutely. If you look at the data over the last few years, I would say half of the growth is distribution but the other half is same-store sales growth. And so I don't think we can be satisfied if the only avenue of growth is distribution. Reality is if you take a place like India, on the existing stores, what we are doing is we are creating more volume through innovation, through upgrading, in some cases, some of the visi-coolers, we have different size visi-coolers. And so we are able to trade up as neighborhood become more -- they have more disposable income. And so same-store sales growth is something that, in general, delivers half of the growth in emerging markets, both through pricing and volume. And then there is the other element, which is distribution gains, where we are fairly aggressive. And as I said, there are still many other places. And while I believe in the past, particularly in some emerging markets, we have been more focused in creating avenues of opportunity through new points of sales, what we know is that the opportunity in terms of expanding our portfolio in existing points of sales is absolutely a tremendous opportunity. In some of the places that we are in Brazil, particularly in the northeast of the country, we sell on average 3 SKUs. And when I say 3 SKUs, I mean, we have brands like Trident, Lacta, Bis, Club Social, and I could go on and on. Those are massive brands with tremendous potential. And so we have all the right to wins. We just need to have the right price point and to push on distribution and continue to invest in brand awareness. And I think that recipe for success is there. The team has been much more deliberate, I would say, under Dirk's leadership. One of the things that I believe he has done very well is what we call the [indiscernible] of growth. And this obsession with distribution gains, particularly in the emerging markets has been one of the key hallmarks of Dirk's leadership.

Yes. Let's go over to Europe. Europe is obviously important, 36% of sales. Sales growth was 4.5% or so in the first quarter. Similar to last year, you've been going through another round or you went through, I guess, at this point, another round of price increase with retailers to cover the higher commodity costs, namely cocoa. How are you feeling about the execution of how this went, how is the consumer, how is the retailer and competitive environment reacting?

So from a market standpoint, I have to say Europe has proven to be more resilient than many other places, I think, again, particularly in chocolate. We haven't seen, in spite of the pricing that we have taken in the last few years, any volume repercussion, quite frankly. I broke to the news last week in Paris that we have landed the last customer that we had opened in terms of price negotiation. So now we are fully done in terms of pricing. And now the team can really be focused together with all our retail partners in terms of pushing consumption. And so I feel quite positive in terms of the consumer sentiment in Europe. Having said that, clearly, we are pricing chocolate quite a bit, given the current cocoa situation. And we have to stay involved and measure our elasticity and market elasticity very, very closely and importantly, being able to push the right level of promotion in the right places at the right time to ensure that we retain consumers. But I think the team masters that quite well. And I look at what the team has done for seasonal and Easter, and it is really remarkable. So they know the category very well. They know what to activate, how to activate and I'm confident they will go through the challenges that cocoa prices make to us. They are going to go through quite well. That's my prediction.

Clearly, we always talk about pricing and input costs in Europe, and it's obviously a chocolate-centric market. But maybe if you just give us a sense of what you're doing there to drive sales growth. What are you most excited about that's going to hopefully drive organic sales growth in '24 and '25?

Look, I believe, and it is valid for all the chocolate markets, clearly, we have been on the cocoa case for quite a while now. And I have to say, we spent quite a bit of time thinking through what cocoa means and what are the implication and repercussions for the company. As I said during our Q1 earnings, I truly believe the current cocoa prices are a result of accidental circumstances. It has been sort of the perfect storm between Africa being exposed to excessive rainfalls that has hampered production, particularly in Ivory Coast and Ghana and the fact that many of the chocolate players went quite short on their coverage. And as they entered the market, they provided quite a bit of support to prices in a context where demand hasn't come down because of low elasticity and in a context where supply chain has been materially impacted. The plan that we have is really to minimize elasticities as much as we can. And how do we do that? We do that through price pack architecture. And the way the team is reacting is putting in place a series of activities around price pack architecture, where we will need a series of price points. You're going to see our chocolate range in all countries being available at EUR 1, EUR 2, EUR 3, EUR 4, EUR 5. And so giving consumer options to either pick up a piece of chocolate on the go and still have it at an affordable price point. But on the other side, having value as maybe they want to share a big block of chocolate with their families. And so we're going to play much more across. We are going to have a clear shelving strategy around how we want to display our chocolate and promotional activities that won't be concentrated toward one spectrum or the other, but giving, again, consumer deal options to get good deals to how the full spectrum. So we are really confident that we can protect, as much as we can, the volume. We will have clearly to price as I believe we have quite a good cost pipeline for 2024, but we will be very sensitive to the amount of potential volume losses we are willing to take. And so the name of the game for us is particularly in the context where we believe chocolate cost will come down, it is really to go through a potential temporary dislocation and protect volume and share as much as possible. As I said, the team has been working quite a lot in determining across multiple aspects of the value chain what are the best actions that we can take. But reality is what has to happen for us to be able to give you an indication of 2025, it is, a, we need to know at what level cocoa will land and buying well is clearly critical to next year. And so we want to participate to a potential correction of cocoa to lower levels. And the second thing is the level of elasticity. And so on both sides, we will play very nimbly to make sure that we participate as much as possible to a potential correction, which I see as likely. And also on the other side to making sure that consumers don't abandon the category in the first place and importantly, our brands in the second place.

I guess one thing I gather from your comments is that if prices do magically stay high, the amount of pricing that would be necessary, I mean, we've gotten accustomed to you taking the pricing necessary for the commodity inflation you've been getting in every year. But that would be a recipe for not having the will to take the necessary pricing for that type of commodity inflation, and that would be somewhat of a temporary dislocation in the algo for '25, I suppose.

Look, I'm not really in a position to comment about the algorithm in '25 because as I said, we are looking at all angles of the equation at this point in time, including are there costs that we can fine-tune. The last thing we want to do, for instance, is lower the investments we have on visi-cooler placements in India for next year. That's clearly a no-go. We are going to protect key investments around distribution and support to our brands. But even within the A&C budget, we still have material costs, particularly in production of new campaigns, that may be for next year, we're going to put on hold. We're going to look more thoroughly into our overhead cost base. So we are looking from every angle. Even today, the cocoa forward costs is lower than what the spot price suggests at this point in time. So I believe the market is anticipating already a correction. It can't stay at this level because if it stays at this level, I think everybody will have to price a massive amount. And I think the category eventually is going to get impacted, and there will be some correction that will take place on the demand side. I don't expect that necessarily to happen because my most probable scenario into next year is that costs will come down. There might still be a temporary dislocation. But reality is we will be priced at a level that is materially higher than the precrisis cocoa price, which used to be GBP 1,600, GBP 1,800 per ton versus the more than GBP 8,000 you see today. But again, time will tell. But that's how I personally see it.

We're really at time, but I wanted to squeeze in one more just about M&A, both acquisitions and potential divestitures. You've been so successful at finding synergistic acquisitions, Clif, Ricolino, Chipita, and you divested U.S. gum. What are the priorities going forward on either side of things as you're looking forward?

We have clearly a well-established playbook. We have anticipated, I quoted a couple of numbers last week, I mean, for instance, around Clif where we took the company at $20 million of EBIT. Today, the run rate of Clif is between $250 million and $300 million. So we are doing a massive amount of work to be able to improve the profitability and we get synergies. We have integrated these companies into SAP. So the appetite is high because, a, we have the flexibility within the balance sheet. But at those top price level, one of the key priorities is to continue to pay dividends but also potentially to buy back more stock because I think the stock is undervalued. But definitely one of the best ways for us to create value, it is to continue to reshape our portfolio. We are strong believers in the categories of chocolate and biscuits, which are the core focus of potential acquisitions, but importantly, cakes and pastries are really a unique opportunity. It is an $80 billion category globally. We are #3 despite the fact that we play at small scale. It is high growth and our brands lend themselves in the category very well. I think through the acquisition of Clif, Grenade, Perfect Bar, et cetera, we are in a good position in terms of brands that we own for these snack bar categories. So I would say, most likely, our focus will keep on being in chocolate, biscuits and cakes and pastries. And cake and pastries might take the stage in terms of what we're looking at for the years to come because it is really a great opportunity.

Great conversation, Luca. Thank you very much, and thanks, everybody, for listening in.

Thank you.