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

Good morning. Welcome back to day 2. I hope everybody is properly hydrated and ready for another long day. We're really excited to have with us Mondelez International back at our conference. So thanks so much for being here. And with us [indiscernible], we have COO, Luca Zaramella, CFO, Amit Banati. Welcome to you both.

Thank you.

Thank you, Andrew.

Maybe we kick it off, Luca, with you. Mondelez has come through a pretty anomalous several years, extreme volatility in cocoa, which also necessitated a few years of sizable consecutive pricing, not to mention a broadly challenging consumer environment, all wrapped up and impacts from Middle East conflicts, although still a very dynamic matter of [indiscernible]. It seems though perhaps you're getting closer to a more, now I won't say normal, but maybe more stable operating environment. And as you think out towards 2027 and beyond, you've continued to express confidence in the 3% to 5% organic sales algorithm and high single-digit constant currency EPS over time. I guess, what gives you the most confidence today that, that algorithm is still intact? And what has changed in the business maybe in the past few dynamic years that you think makes the algorithm more durable.

So yes, it has been a few years that have been quite eventful, I would say. But we learned a lot of things along the way. The first thing we learned is that we compete in categories that are very resilient. I would have never thought that we would have taken post-COVID all the pricing we took and with minimal, I would say, in the big scheme of things, volume implications. So that's really the first learning. We continue to see snacking as a great trend in food particularly in emerging markets, snacking is the place to be. And within snacking, I personally believe chocolate is one of the best categories. It's not the best because I think there is a special bond between our brands and consumers in general. And it is tough to see for consumers to switch from chocolate to something else. Biscuits is another big opportunity for us. It's a great category. And when we step back and we look at both chocolate and biscuits, A, on chocolate, we have tremendous opportunities in terms of growing penetration of our brand. In emerging markets, we have clear examples of what chocolate can be, but we are not consistently developed across all emerging markets. And so when you take a [indiscernible] in Brazil, you see plenty of opportunities in establishing chocolate consumer behaviors. Biscuits on the other side, we are blessed with a brand like Oreo, which is $5 billion globally. The reality is, again, in many places, we have share opportunities that are tremendous. So ample runways. And how we do that is through muscle of distribution in emerging markets. In developed markets, I think in places like Europe, chocolate has shown us with Biscoff that there is a space between where we play in mainstream and in upper mainstream where we have the right to play with our brands call it Milka or Cadbury. And so the premiumization trend is a clear one, awaiting indulgence is a clear trend that we see. And again, Mondelez has the right to play in there. And finally, the U.S., where, yes, there are some challenges, particularly driven by the fact that there is some economic strains in the consumer environment. The reality is, again, brands like Oreo, Ritz, [ Belvita ], et cetera. We have tremendous opportunity. We are starting to play more in channels that are beyond the food and mass. And so when we put all of this together, we couple with the fact that we are investing heavily in our brands in capabilities in new markets in digital. I believe Mondelez has what it takes to really deliver that algorithm and to complete the analysis, I would say, from a profitability standpoint, big initiatives like the supply chain program that we have from the U.S. and part of Europe will deliver incremental earnings and fuel for growth.

Great. Amit, maybe for you. The decision to raise your top line outlook while maintaining your EPS guide struck as an important signal. I think suggest that if the business continues to outperform, your bias maybe towards reinvesting behind momentum rather than harvesting all of the near-term profit. Can you talk about that philosophy a bit? Specifically, what are the opportunities you're seeing today that make reinvestment a more attractive use of the incremental profit dollars rather than simply maximizing earnings in the near term?

Yes. So we've been consistent that we are going to invest the upside back into the business into areas that are working. And we see a lot of opportunities, a number of opportunities where we can fuel more investments. I think it's also important to note that we've absorbed all the incremental costs related to the middle conflict within our guide, and those costs are not insignificant. So we've absorbed that. I think in terms of opportunities, we want to invest back into areas that are working. So emerging markets where we've got momentum, increased distribution, investment behind our big brands, investment in innovation in specific areas like growth channels, Luca was mentioning, we have an opportunity in growth channels in the U.S. So investing there to get the opportunity. Investing in innovation that's working. The Biscoff partnership is working really well, both across chocolate and biscuits, innovation Milka Croissant in Europe, Sour Patch Chews in the U.S., Gum in Latin America. So really fueling the innovation that's working in the marketplace and scaling that up. And then finally, I think investing back in A&C behind our big brands in the big markets. So really, our view is these reinvestments will drive volume-led top line growth across multiple years.

Luca, the North America segment has gone from one of -- one of the larger debates around the stock to arguably one of the more encouraging parts of the store. What's changed most meaningfully over the past 12 months, whether it be promotional strategy, innovation, channels or price pack architecture. And I guess, why should investors believe the improvement in North America is sustainable, maybe rather than a function of easier comps or just elevated spending in the near term?

There are fundamentally four things that have changed significantly over the last, I would say, 12 months or so. The first one is we fixed our promotional strategy. We came to terms last year that investing more in promotions was not necessarily resulting in incrementality, and it was depleting the value of the category. So we decided to restate our promotional activities, both in terms of depth and frequency and being more attentional on what we do to drive incrementality and the strategy is paying off. I think the sales team in the U.S. has done an amazing job in making sure that, that promotional strategy is executed with excellence. The second element is we have accelerated channels growth where we have opportunities. We under share significantly in some of the channels like value clubs and I would say, in general, away-from-home and convenience. And those are opportunities for us and the team has been very intentional in going after these opportunities, particularly with new formats, any price point. The third thing is, quite frankly, we have reinvested much more this year than last year. Last year, we all know we were impacted in terms of earnings because of cocoa and we were on a much tighter rope in terms of opportunities to invest. [indiscernible] is a consistent investment with excellent media around all our core brands. And the fourth element it is innovation. I think the team stepping back has really seized the opportunities in places like Ritz or a brand like Ritz, whereby Ritz has been moved more towards munching and for me, consumption occasions. And the fact that we have great opportunities in that area that is quite incremental is resulting in incremental growth, incremental share. If you look closely at the share gains we had with Ritz and you realize what is really working on the core and on this incremental innovation, you really see a model that is working, and we have just started. And so I think there are plenty of opportunities to really push all this innovation order. And it's not only Ritz, it is Oreo where Minis, again, in the area of munching is an important platform or Zero in the case of Oreo, but also in cases like Sour Kids. And there is more to come. We have a full relaunch plan on some of our core brands that is coming into 2027. And so all those four things coming together have resulted in better results for North America. And I think those are sustainable things.

Maybe, Amit, despite the improved results in North America, the category tailwinds still remain somewhat muted. How do you think about winning within a more sluggish category environment? That is if U.S. snacking demand remains subdued, can Mondelez still grow consistently and sustainably in North America through share gains, channel exposure and innovation? Or does the category ultimately need to improve for that to be more sustainable?

No, I think we are confident that we can continue to grow even if the category remains subdued. I think a lot of the drivers of that growth will be what Luca mentioned, because a number of them are multiyear plays. So when you think about the opportunity to expand in channels that are growing, right, that's a multiyear play. When you look at out-of-home consumption, when you look at the opportunity that we have in scaling up offerings in Better For You, Oreo Zero Sugar, Oreo Gluten-free, premium indulgence with Tate's with Oreo Thin's, the whole protein offerings, the snack bars. So I think we're executing well this year, but a lot of those drivers, right, are multiyear drivers, and we have plenty of opportunity to really maximize that opportunity. A big part of our modernization of the supply chain is to create the flexibility to allow us to access those opportunities across channels and occasions. So I think that will be an important driver across -- for growth across multiple years. Obviously, innovation is always going to be important. Consumers want bold differentiated innovation. And I think when you think about brands like Oreo, or Sour Patch Kids, right? They absolutely have the right to win there. I think we've learned a lot with some of the activations that we've done. I think we've got an opportunity to continue to excite consumers, surprise them. with partnerships, with cultural icons or different brands. And I think we've learned that consumers love that. They love these different combinations. And I think we have the brands that can really activate against those. And then finally, as Luca was mentioning, right? We are back in terms of investing behind our big brands. So continuing to scale awareness that, along with big differentiated in-store activations I think will allow us to win a bigger share of the basket. So we feel that we have a number of growth drivers that will allow us to continue to drive growth despite the category being subdued.

Luca, maybe shifting to Europe. You've pointed to improved volume trends, improving share trends and better execution across the region. [indiscernible] simply lapping some of the pricing actions. I guess what are the structural drivers that give you confidence Europe can become a more balanced volume and profit growth story again?

So when we look at the European performance over a prolonged period of time, particularly before the material price increases we took last year. Europe was a good business in terms of both growth in terms of top line and bottom line and fundamentally, despite the fact that there has been any stage of chocolate volume because of the material pricing we took. Those fundamentals are still intact. Again, we are very proud of the business that we have -- in the U.K., we are very proud of the business we have in the emerging part, emerging market parts of Europe, the likes of Poland, we are very proud of all the other businesses we have. And yes, there are some challenges, particularly with some of the retailers that we all know. But when you step back and you look at the fundamentals of chocolate, doors are still intact. What Biscoff with our chocolate brands of Cadbury and Milka showing us is that we have the right to win in a space that is more elevated than the regular milk and Cadbury propositions that we have, which are great. We still have ample opportunities in seasonals. We don't play consistently across all the countries in seasonal. We have opportunities in terms of Chaco Bakery, for instance, mixing our chocolate brands with our biscuits brand. I mean, we created massive businesses in places like Germany, by being deliberate on what we wanted to do with Milka Chaco Bakery. And that's a model that we haven't replicated yet in places like the U.K. Biscuits is another big opportunity. In terms of share, we have some struggle, the likes of France, the like of Belgium. The reality is in most of the places in Europe in biscuit we don't share that crosses the 10% or 15% threshold -- and so being more deliberate as to what we do with Oreo some of our other brands that we have, I think, still is a great opportunity. And then the adjacencies the Chipita acquisition is something that has shown us that we had the right to play in cakes and pastries, and Milka Croissant is one example. It is a meaningful business. It is growing, and we are about to roll it out in more places in Europe. And bars is the other one. Grenade, it was a great acquisition. But again, we kept it for the time being only to the U.K. so when you look at the opportunities we have and the muscle we have in sales and marketing specifically to really develop further our categories and our brands. Europe is clearly a place that can deliver growth. I mentioned briefly before that the supply chain is in [indiscernible]. And we're about to take a look at some of our big plants and big lines to modernize them and provide better costs and better profitability to some of our brands to be able to reinvest.

Great. Luca, staying with you, what have you seen more recently in terms of competitive behavior in Europe, chocolate specifically? That was one of the initial watchouts right heading into this year, given how precipitously cocoa costs dropped following all the pricing that was taken in the past sort of year plus. And how should we think about the cocoa dynamic now versus where we were just a couple of years back?

So in terms of pricing, there is nothing really unexpected. And one of the things that we called out as a potential risk, which was private label lowering prices in some of the markets like Germany, we haven't seen that. And I think that is a clear outcome of the volatility we have seen as of late in the cocoa market. And so we have seen from private labels, a promotional strategy or pricing that is very much in line with what has been, I would say, in the last 6 months to 12 months. Likewise, for branded competitors, behaviors have been rational, and I would say we made some adjustments that were minor all in all, last year to some of our pricing and so did competitors. But in the big scheme of things, I would say, pricing is holding up well. It is in line with what we expected. And certainly, with cocoa where it is these days, I think the level of pricing that we see is adequate in line with the pricing that we see. As far as it goes in terms of the cocoa market, look, the cocoa market is fairly nervous. I think there is an overreaction based on what happened a couple of years back, but fundamentally, there are a few things that are very clear. The first and the most important thing is that there is excess supply for the last couple of years. And it is not inconsequential in terms of the amount of it. So the market is oversupplied. And if you look at the last 5 years, what got made in the last couple of years is more than sufficient to cover the deficit that caused a stock depletion in the years before. Chocolate again, is a great category and before the pricing spikes, it was a category that used to grow volume 2%, 3% at least. So fundamentally, the market is in a different place. I think there is obviously a concern about El Nino that is factored into the pricing of cocoa at this point in time. But again, if we look at what happened with the mid crop that was fairly late last year or this year and the impact that it has on the main crop again, the evolution of the main crop for the new season is pretty much in line with what we would have expected. I think the -- all competitors are covered for at least 10 months of plus, which is something that we haven't seen in a while. So branded competitors have taken opportunity to cover themselves up as we did in line with more historical norm. And so the market is in a very different place in terms of cocoa. Fundamentally, when you look at supply and demand, and you also consider the fact that outside of Africa, many countries are growing double digit their supply I think cocoa in terms of supply/demand for the years to come is in a much different situation and a much better one.