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

All right. Great. Good morning. Welcome to day 2 of the conference. To kick us off, I am thrilled to welcome back Mondelez. With us from Mondelez today are CEO -- Chairman and CEO, Dirk Van de Put; and Executive Vice President and Chief Financial Officer, Luca Zaramella. Gentlemen, thank you for joining us. Welcome back.

Thank you.

Thank you.

We're going to use the entirety of our time for Q&A. And so we'll just jump right in. And Dirk, I guess we'll start with you and start relatively high level. As we've been talking about at the conference, it's been an eventful start to 2025 for everyone, lots of cross currents on the consumer broadly. If we start there, let me just get your assessment of consumer health, maybe starting in the U.S. and Mexico and branching out to Europe and beyond, just kind of what you're seeing and how that translates into recent trends for your categories and your business?

Yes. Well, clearly, the U.S. consumer confidence is quite low. In May, it didn't go down, but March, it went down quite significantly. In April, the same thing. So we're clearly seeing a consumer that is very conscious about how they want to spend their money. They're very worried about what their financial future looks like. And they reflect that -- particularly the lower social classes, they reflect that in very careful shopping with a budget. And within that budget, they need to fulfill their basic necessities. And since we're coming out of a high inflationary period or still quite in an inflationary period, that budget makes them cut out certain categories. And recently, we've seen that a number of snacking categories are doing less good. I think there's also some other effects like the Hispanic consumer that play a role in why we see the slowdown of the categories. Within that biscuits, which is our main category in the U.S. is doing okay, I would say, better than most other snacking categories. And with that category, we have been gaining market share. So for instance, the category would be down 2% in volume, and we would be 0.5% down to flat in volume. But overall, we also don't see any signs that the consumer think that things will improve. They remain very worried. So I'm not seeing a better second half at this stage versus where we are today. If I go to Mexico, it's kind of a reflection of the same nervousness that we're seeing, all driven by tariffs and the risk that there will be unemployment, the risk that remittances will come down. So there also, we see category slowing down. In that, since we've had in the last 2 years, not our best performance in Mexico, we are doing well, but that's against the last year, which wasn't so great. So we look better because of that. But overall, clearly also a slowdown of the categories. Europe is different in the sense that the consumer there is more positive about the future. They feel financially better off. They didn't feel like the hit of inflation was that big. There's a lot of countries where there's indexation of wages. So they feel that they're keeping up with inflation. And we can see that overall, the categories are doing better, our biscuits. And then, of course, chocolate is a separate discussion, which we will come to, I'm sure. But so the European consumer, we see in a better place, and our business is a reflection of that. We also have a number of effects like we didn't have the same client disruption as we had last year. So lapping that is helping us, too. But overall, our European business is looking good. China, consumer is probably at a low for the last 20 years. That is slowly improving, but despite some serious government measures, it's not the lift that you would hope to see. But in our case, our categories are doing okay compared to other food categories. And within that, we are gaining quite some market share. We're expanding distribution. So our business looks like any other year in China, high single-digit growth. India, the last 3 years, the consumer has seen inflation, has clearly shifted their spending. So we see a slowdown from very high growth in the chocolate category to slower growth right now. And in biscuits, we see a shift from premium where we play to more basic products. So we can see in our business that there is an effect from the consumer. Consumer -- again, government measures, consumers is starting to feel better, and we start to see an acceleration taking place. The last one maybe Brazil to go through the 4 big emerging markets. Brazil, overall, consumer is doing good. Category is doing good. We're gaining market share. So it's probably one of our brightest spots at the moment.

Everything could be Brazil. So as you kind of went around there, even where the market backdrop is tough, overall, the company is persevering and generally gaining share on a global basis. What do you think it is about your strategy in general that helps you weather volatility successfully?

Well, I think the big strength of the company, and that's something we absolutely want to even improve is our geographical spread. We are big in Europe. Our percentage of our business, that is Europe, is bigger than most European companies. We're strong in the U.S., and we are strong in emerging markets. So that gives a very interesting spread. So when you have a situation like currently in the U.S., we can offset that because 75% of our business is somewhere else. So that's a big strength. The second one, we're driving distribution very hard. We are in categories that you need to find in every single small store, every corner. And that opportunity still exists for us almost everywhere in the world. So we can sort of put the pedal to the metal in distribution drives, which then makes up for a slowdown in the category. I think that's another big benefit that we have. The categories themselves, although slowing down in the U.S. at the moment, overall have been quite good. And if you look over longer periods of time, biscuits, chocolate, cakes and pastries, bars, they're some of the stronger food categories. I have no doubt that, that's going to continue, goes with ups and downs. But overall, these are categories where you can almost count on a 2% volume growth over 3- to 5-year periods and a 3% to 5% net revenue growth or a little bit more and so within the right categories. Our brands are strong. We have found ways through our marketing to increase our market share. And I think we still have huge execution opportunities. We've improved quite a bit, but we're not yet at the level of perfection that you could hope for. So there's an execution lever that we still can do. So I think it's -- on all these aspects is the opportunity combined with the spread that makes our strategy really good for volatile times.

Very good. Okay. Chocolate and cocoa...

You go to Luca...

This is for Luca. Yes. So obviously, in chocolate, cocoa inflation has dominated the conversation for year plus. Maybe just summarize for everybody how your business is performing. This kind of dovetails with what Dirk said about Europe. And what strategy you've taken to balance pricing and revenue growth management with just leaning into innovation and the like. And so how you're weathering through the current innovation -- the current inflation?

I think the business is performing well, certainly in line or slightly ahead of expectations. Two big key wins for us at this point in time. In general, pricing has been implemented as we had in mind, whether it was in Europe or across the markets where we have done both list price increases, but importantly, what we call RGM, which is more than downsizing. It is also the ability now we have to target consumers at various price points and offering entry points to the category in different channels at EUR 1 as well as EUR 5, EUR 6 per tablet, providing both accessibility, but also convenience as you have. When you want to share a tablet of chocolate -- Milka tablet with your family, it is a very compelling value. I think in emerging markets, again, we have protected quite well price points. We are though still in the process of implementing prices. And importantly, when you look at the key event that happens in Q1 or in Q2 in this case, which is Easter. We were very pleased across the 4 main markets, where we had a terrific Easter season. We gained share consistently in the big markets, and the team has done a very good job. And in most of the cases, we were able to grow volume year-on-year, which despite the price tells you how attractive the category is for consumers at these price points. Having said that, I think some elasticities are a little bit a watch out for us in some cases. In general, though, elasticities as we see them today, they are fairly benign. So I would say, in volume terms, we are where we said we would be. But we need to see as we implement, as prices gets reflected in the marketplace, how consumers react, and we will be very vigilant to make sure that we retain consumers within the category. I personally believe without taking a view on 2026 necessarily that in the long run, cocoa will have to come down meaningfully from the levels it is today. And so our role is really to retain consumers, to retain market share. And in relative terms, I think we are doing better than competitors as we are gaining market share, and eventually take advantage of cocoa costs subsiding and having a P&L that really tries.

Okay. So one of the -- assuming those benign elasticities hold, one of the conclusions could be that historically, chocolate was underpriced in Europe and that those -- that these higher prices can hold even if the underlying commodity rolls over. Is that your view? And then how do you just guard against pricing too far? It's hard to know that you -- things look okay on the scorecard and then all of a sudden, they don't. So what's your level of confidence that you're on top of the pulse of the consumer and you won't overprice?

I think the conclusion that chocolate was in general, underpriced is a very fair one. Even before the cocoa spike, I mean, we had to price because of general inflation. And in that context, we were even able to grow volume. So that tells you that maybe there was a little bit of even negative elasticity, as I call it. So I think it is fair to say that chocolate was underpriced. How do we make sure we don't cross the line of going too far and losing consumers? First of all, I would tell you, we are well positioned. Our brands fare to mainstream consumer occasions. And so there is -- there are some competitors that play on the upper part of the spectrum. And there are little private labels, I would say, in size terms that play at the lower end of the spectrum. We don't see a lot of migration from us to private label because in many countries, if not all, where we compete, we mean to consumers that a lot more than our chocolate brands. We are, what we call, the taste of the nation. It is hard for consumers to replace Milka with something else, to replace Côte d'Or with something else, to replace Marabou with something else. And so we don't see necessarily a move from mainstream to lower prices. On the other side, if consumers feel the pressure in terms of price from premium, most likely, they will migrate more towards mainstream. And I think that's a great relief for us, quite frankly. I think also we have to bear in mind that by having multiple price points, we still attract consumers at something that can be affordable from an out-of-pocket standpoint. And on the other side, we provide value on the bigger sizes. We will keep on monitoring how consumers react. And you might imagine that we have a sort of plan B in place, whereas if we see that we start losing penetration, we will start reinvesting in promotions and making sure that, again, we provide the value that is needed for consumers to stay in the category.

Yes. As Dirk mentioned, retailer implementation of pricing this year went very smoothly after really a couple of years of disruption in past cycles. I guess that's sort of an endorsement that they're on board with your strategy and your thinking and to the extent that trends play out, I don't -- it doesn't sound like you're expecting any kind of -- it sounds like retailers are on board with Europe.

Yes, retailers are on board, yes.

Okay. Great. Dirk, you touched upon this, trends in the U.S. have been more challenging for a while and are progressively so. Can you go a little bit deeper in what you're doing to try to kickstart growth because I think you've got some pretty discrete strategies and tactics ongoing right now, both in core biscuits but across the portfolio. Just maybe a little bit more about what you're doing specifically in the U.S. to try to kickstart growth and overcome some of the category headwinds.

Yes. Well, I think it starts with understanding with what is going on with the consumer. And if you look a little bit going all the way to COVID, in the COVID period, people were at home and they were snacking at home. So instead of buying it on the go, they would buy it in the supermarket and consume it at home. So they were migrating to bigger packs. So if you would look at typical shelf, let's say, OREO, we went from more regular packs to family packs during COVID, and that remained during the beginning of inflation. But as the pressure mounted on the consumer, they suddenly started to realize, well, I used to buy my OREO at $2.99, now suddenly, I'm buying a family pack at $4.99. And they start to have a problem with that. And so in the shelf, 70% of the shelf was bigger packs. So we had to make a move towards smaller packs, which we couldn't get there with promotions. What we did is we launched a number of packs that are being sold at $2.99 and $3.99. And that clearly is working. So we've learned that we need to stay under $4 with our price range at this stage. That's where -- that's sort of the magical barrier. So understanding where the price barrier lies and which packs you need to offer at which price permanently, not just through promotion, that has been a key learning for us. The other big learning that we've had is that if you're on a budget as a consumer and you have decided that on this shopping trip, you're not going to buy any biscuits, even if those biscuits are promoted 30%, 40% off, it's not going to bring you back to the category. While in the past, the budget was a bit more elastic, as they went through their shopping trip. And so promoting heavily on price is not having the same effect as it used to have before. So we have to walk that back and reinvest that money in a different way. And the way that we're seeing is working well is activations in store, big displays, having news around the brand. So at the moment, we're doing Selena on OREO, that will be quite big. We did Post Malone. We did the Coke thing. Activating the brands around new things, having special varieties of your product, which is interesting for the consumer to try it again, that is working really well for us. So those are the things. And then the third one, I think that everybody is aware of, to deal with their budget consumers are shifting channels. And in one way, it's a good thing. In other way, it's not a great thing in the sense that we still have an opportunity in those channels where they're shifting to. We are underrepresented. Our market share is lower. So we can play catch-up, and that is giving us an extra lift in growth. I would say those were the 3 big things that we're doing to adapt to the current situation.

Okay. And you went through the various emerging markets and -- but the big 4 are all different. Is there a way to summarize kind of what you're prioritizing when you think about -- maybe not just in the here and now, but as you think about the medium term, what you're prioritizing, what the opportunity set is in emerging markets for your business?

Yes. I mean there's a number of general opportunities and priorities, and then there are specifics by country that we need to pay attention to. In general, I would say we're very focused on building the equity of our brands. So we try to communicate quite heavily on our key brands. The second big one for us is distribution. We can really drive extra distribution. So every year, we are adding a few hundred thousand stores where our product is being available, be it China, India, Brazil, but almost in every -- even in the U.S., those channels that I was talking about. So it's not only adding a new store, but it's new items per store. So the distribution opportunity is very big for us. And then we are -- the third big focus for us is to offer our product at the right price point. And in emerging markets, it's quite critical. And you can imagine with a situation like chocolate, for instance, where your input costs go up quite a bit. To keep that price point in a country like India, that requires quite a bit of work on the size of the bar and how you play with your mix and so on and how you offset the cost of that. So those are across the board. I would say, in China, it's now -- since we recently bought Evirth, we're really getting going in cakes and pastries. We already have OREO cakes, is really push our cakes and pastries presence on top of that. In India, it is finding ways of bringing consumers back to the premium segment of biscuits because, as I was saying before, they were abandoning that. And at the same time, dealing with the chocolate situation that I was talking about. In Brazil, I think it is the chocolate situation and how do we adapt the price points, the mix of what we sell and how do we keep consumers in the category even if there's big price increases. We're doing that through very slow-moving price increase over several steps. And then in Mexico, it's the same thing. It's keeping consumers in the category, right price points, heavy communication, driving distribution, but making sure that the category remains healthy, that gives you.

Yes, that's good. You referenced cakes and pastries in respect to China there. This is a question you get a lot, I know, but it's probably worth digging into because it is discussed a lot amongst investors still in terms of just the basic question of why cakes and pastries is attractive to you and what capabilities Mondelez currently has to exploit the opportunity you see?

Yes. Well, I think since most of our investors are from the U.S., they think about cakes and pastries as if it's the U.S. market. And since we're in France, I think it would be worth to, for instance, go to a French supermarket and stand in front of the biscuit aisle and turn around, and you will see a cakes and pastries aisles right next to it. And you will realize that for the consumer, those 2 are very connected. One is the crackers and sweet biscuits, the other one is softer cakes basically. And there is a natural extension. And in the eyes of the consumer, it's kind of a universe. So the main reason for us is because in the consumers' eyes, it's a natural extension. They can easily flow. It's not like going into yogurt or going into salted snacks. This is very close. So our brands can play there. So we can do it with the same brands. We can bring in our chocolate because those products often have chocolate, so we can have a whole choco pastry next to a choco bakery strategy. We see it's a category that's very undermarketed, underrepresented, very fragmented. So we see consolidation opportunities. We see premiumization opportunities, branding opportunities. So it's sort of an opportunity that's lying right in front of us. At the same time, the products are quite sophisticated. So the net revenue per kilo is better than it is in biscuits and as a consequence, the gross profit dollars per kilo get better. And then on top of that, there's a whole evolution happening whereby the consumer when they think fresh, they think largely cakes and pastries as it relates to bakery. So if you go into a U.S. supermarket and you go to the bakery section -- the fresh bakery section, you find a whole bunch of cakes and pastries there. So we're starting to play in that segment, and we think that is going to evolve to the rest of the world. So for all those reasons, we think it's a very interesting space. And we do believe that we are the rightful player to be the leader of this space. So that's -- for us, it's kind of a natural one to extend in there.

Great. Luca, maybe this -- you touched upon some of the -- some of what I think is the answer to this question, but maybe this is where we talk a little bit more about what you're seeing in cocoa dynamics. But just what do you think the building blocks are to Mondelez getting back to more of a consistent long-term algorithmic performance or recovery towards an algorithmic trend? What needs to be done? And how dependent are you on cocoa cooperating?

I think in the end, we have put in place a few measures this year that will allow us to get into 2026 on a very strong position. We have, as we said, touched materially our portfolio in terms of RGM. And just as a point of reference, I mean, we have touched around about 50% of our total chocolate revenue. We have implemented some cost measures. This year alone, we are delivering around about $250 million of SG&A pure overhead savings before inflation. You know that as we talk to consistently to our investors, we have put in place some measures in the area of nonworking media, capping the expenses in that area. You know that we have been delivering productivities ahead of schedule in Q1. And I said that in terms of productivity this year is going to be a great year. All those measures have not been put in place to be reversed in the years to come. Those are measures that will stick and will allow us to get into 2026 from a position of strength. I think the question for us is at what level are we going to be priced at the end of the year. And at the level we are going to be priced to at the end of the year will allow us with cocoa as it is today, not only on a forward basis but as it is today, to grow earnings into 2026. I think it's also plausible to say that given the elasticities of 0.4%, 0.5% on the category, eventually over time, those will temper out. And I hope we can see volume growth or modest volume growth in the chocolate category into 2026. We are not going to stay still, particularly in areas where we have opportunities. Dirk mentioned the ability we have in the U.S. to go after white spaces and new channels. One of the white spaces in some of the markets we have in chocolate is seasonal. It is our ability to have our fair share, not in all the countries, we are very strong in the U.K., for instance. But in other countries, we don't have as big of a presence as we have in relative terms in the U.K. And that has proven to be a profit pool that is material, that is incremental. And so the team is putting together plans to really go after other incrementality initiatives into 2026. So the simple answer is we don't have to have cocoa coming down for us to be able to tell you we're going to have earnings growth into 2026. And if cocoa stays elevated or even higher than it is today, I think we have the ability to still price or to do more RGM. And so it's either one. If cocoa comes down, I think our earnings will thrive. If it doesn't and stays where it is, I think we are in a good position. And we still have the ability to price a little bit more into 2026.

Great. Okay. Maybe this is a question you can tag team on because I think, I love both your perspectives, actually, the company was very active for the 5-year period between 2018 and 2023 from an M&A perspective. A lot of the -- some of the brands that you mentioned earlier were acquired in that period, I mean Tate's, Perfect Snacks, Give & Go, Chipita, CLIF, Ricolino, Grenade and so on, plus some divestitures. Since then, it's been relatively kind of quiet and steady state. Do you have appetite to reengage? How hungry are you on that front? And if so, what aspects of the portfolio are you most focused on rounding out or complementing?

Yes, we can tag team on it. Well, yes, we -- the short answer is yes, we have appetite. The way we work M&A is we look around the world, we look at the different markets. We look at the segments where we want to be big. You know that our preferred M&A strategy is bolt-ons in the 4 categories where we currently are in. And so we have a list of about 40 companies around the world that we think would be great additions. Now those 40 companies are not necessarily for sale. So we stay quite disciplined on what the universe is. So that's one. We try not to go after everything that becomes available. We always take a look, but most of the time, we decide not to pursue. Then second, I would say, the availability of some of those 40 companies. It has been more active in the years you're mentioning. At the moment, it's less active. To the contrary, you would expect -- well, times are more difficult. You would expect that these companies are more inclined. And my experience is, no, that's not the case. I think they're all thinking it's better to wait through this period, and that might be a better moment. The third thing we've seen in a few that were not necessarily on that list, but could have been something we considered the level, that was offered was just we make a clear business plan. We stick to it. If it works, it works in our bid. If it doesn't, we're not going to do crazy things. We've been, to be honest, totally surprised by the prices that have been paid. Those are for me the 3 bigger reasons, but...

Obviously, the team is still engaged. I think our Head of M&A is as busy as it has ever been. So we keep on looking. My personal position on M&A at this point is, a, I believe as we look around the world, we still have tremendous opportunities, particularly in terms of route to market or even expanding some of the assets we have recently acquired. And so we are not necessarily desperate to go into M&A at this point in time, as we have never been. I think the other thing that you might have noticed is our capital deployment has been fairly disciplined. And as of late, we believe that buying back stock is the best thing we can do. If the right opportunity comes to fruition, obviously, we will be in. We still have the balance sheet flexibility that we have. We liquidated all the coffee stakes that we had. The balance sheet is very strong. And if something comes and we deem that we have the right return and it makes strategic sense, I think we will do it, but we have to be strategically and financially very disciplined as we have always been.

Yes. And the cash -- we didn't talk about cash flow in terms of the Algo, but that has remained strong and healthy despite of...

Yes, absolutely. I mean $4 billion underlying after the -- we paid a fine in -- to the European Commission last year, I think, is a great accomplishment.

Yes. Great. Dirk, I'm sure you've gotten the question here, but in general, health and wellness conversations and discussion of incremental food regulation, particularly in the U.S., whether it's dies and artificial flavors or potential changes in SNAP are top of mind for many of investors. How do you feel your portfolio is positioned against those variables? And do you see any of those changes impacting how consumers engage with the snacking categories in general?

Yes. This has been a discussion since the day I arrived. So it's been a while. But if you think about it, we -- in the 4 categories we play -- and even all the other categories, we monitor constantly and we extrapolate for the next 10 years, where is everything going to go to our opinion. And then we map out our strategy against that and see what is the best configuration of the portfolio geographically by category to get the best growth for the company. And so there is movement in health and wellness, there's movement in indulgence. The best opportunity at the moment, since most of snacking is indulgence, is to weigh our portfolio in line with what the weight is in the market. Now that can change over time, but it's going to be a slow movement. And so we have plenty of time to adapt to that. And we try to follow with our portfolio what the trends are in the market. Now it happens to be that starting with COVID and until recently, the indulgent part of snacking was growing as fast or faster than the health and wellness part, which was not the case before COVID. Recently, we are seeing another move, but it's very specific. It's much more towards proteins. And everybody notices the growth in protein because the categories where it happened are small categories. But if you look at the overall, if you would look at the dollar spent on snacking and the growth that even as a smaller percentage is happening in indulgence, it's still much bigger than in the health and wellness part. So that's one. That's the way we look at it. As it relates to GLP-1s and regulations, I think GLP-1s -- and happy to go into detail, but I mean, with the data that we have and the way we look at it, today, there is no effect. And it's really difficult to get into a case 10 years down the road where GLP-1 would have a significant effect on what's going on with food. It's just -- with all the data we have today, it's just not going to be significant. It's going to have an effect, but it's going to be small, maybe 0.5% of calorie intake reduction, maybe 1% on the total population of a country like the U.S. Now regulation, I think what's happening at the moment in the U.S., like no artificial tolerance. We already have that in Europe. We can easily adapt to that. It's work, and it's probably going to give us a bit of extra cost, nothing earth shattering. But some of the discussions are, a, I don't think solid science. and b, just not feasible for most food companies to make some of those adaptations, like the whole discussion around artificial emulsifiers, that is a much more sensitive discussion. So I assume that in the end, logic will prevail. But so far, it is within reason and it's something we can adapt to. But I do think that there needs to be a much more profound dialogue with real scientific data around what is acceptable in food and what's not acceptable in food.

Okay. I won't make you talk more about GLP-1s. It sounds like you're on top of it. We have a couple of minutes left. I want to end on a question almost around culture. I think since the launch of your strategy, your current strategy back in 2018, the culture model seems to have become a lot more locally oriented, a lot more accountable, a lot more consumer focused. I think the results have been strong in terms of steady volume-driven profit growth. How much room do you see to take that to a higher level and higher level of execution delivery going -- looking forward? And what are the key requirements to get there?

Yes. Yes, the move has been very, very good for us. We are in food and food, to my opinion, is in the first place, very localized. Even if you make a biscuit, the flavors or the type of biscuits, the size, the consumer content is different for different consumers around the world. So we want our local teams to really adapt to the local consumer. That's the ingoing principle. Internally, we call that strategy local first, but not local only. And it's really, to my opinion, at this stage on the -- but not local-only part that we can make improvements. If I look at innovation, we've done a lot of innovations, small innovations, but we have not yet really tapped into the power of the company to come with much bigger innovation. So we're trying to get ourselves. We made a list of what we think can be our top innovations around the world, and we're putting more emphasis on that. And then you cannot do on a local basis. You need to do that centralized. I think as it relates to data and systems, that started off locally, but we're bringing that more back to the center. So I would say, if we want to go to the next level of sophistication and progress, it is tweaking the local first model. And in those areas, I'm using innovation and data as an example, to be clever and to start doing that more at the center, and we're making that movement right now. And then as it relates to local itself, our teams are very good at managing the current situation. I have no doubt that they will deliver this year, but they need to deliver. It's very rare they miss on that. What we need to get better at is, at the same time, making moves for the long-term strategy. It's happening, but we need to do that with more conviction. That would be the second big area for us.

Great. And with that, we are literally at zero. So thank you. Thank you, Dirk. Thank you, Luca. Thank you, Mondelez. Thank you all for joining us.

Thank you, Steve.

Thank you.