Mondelez International, Inc. (NASDAQ:MDLZ) Q3 2023 Earnings Call Transcript

Mondelez International, Inc. (NASDAQ:MDLZ) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day and welcome to the Mondelez International Third Quarter 2023 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Mr. Shep Dunlap, Senior Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap: Good afternoon, and thank you for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we’ll make forward-looking statements about the company’s performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we’ll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results.

In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update followed by a review of our financial results and outlook by Luca. We will close with Q&A. I’ll now turn the call over to Dirk.

Dirk Van de Put: Thanks, Shep, and thanks to everyone for joining the call today. I will start on slide four. Our strong third quarter results and our prospects for the future confirm that we are positioned for high-quality, sustainable growth. We remain confident in the durability of our categories, the strength of our iconic brands and the consistency of our execution. We delivered strong profitable volume growth with a healthy share performance. All our geographic regions grew double-digits in both revenue and profitability. To manage cost inflation and enable robust reinvestments, we continue to leverage our RGM capabilities. RGM is an area where we believe there is significant room to do more over the next several years.

We continue to reshape our portfolio to focus on our core categories of chocolate, biscuits and baked snacks with the successful divestiture of our developed market gum business, generating additional reinvestment opportunities. Our strong year-to-date performance, the continued strength of our categories and our ongoing focus on strong commercial plans and execution provide the confidence to again raise both our organic net revenue outlook to 14% to 15% and adjusted EPS growth outlook to approximately 16%. Turning to slide five. You can see that in the third quarter, we delivered both top and bottom line strength, enabling us to continue substantial reinvestment in our brands. We delivered organic net revenue growth of 15.7% for the quarter.

Year-to-date revenue is up 17%, nearly $4 billion ahead of last year. We also delivered adjusted gross profit dollar growth of 22.3% for the quarter. Again, we are ahead of last year’s pace with 20% growth year-to-date, up $1.7 billion. The strong performance enables us to reinvest in our brands and capabilities to drive attractive growth in future periods. Our A&C investment is up 28.5% for the quarter and 21.5% for the year, which demonstrates our commitment to continue to build the strength of our brands. These results translated into strong adjusted OI growth, up 24.5% for the quarter and close to $900 million for the year. As you can see on slide six, our third quarter growth was driven by strong volume/mix, up nearly four points. We are especially pleased that our European pricing actions, which were implemented earlier this year are successfully behind us.

We view this quarter strong volume/mix performance as evidence that we are taking the right actions to continue delivering sustainable growth and share gains. Consumers continue to choose our trusted and beloved brands, despite significant pricing due to ongoing inflation. More broadly, we view our strong performance in the third quarter as evidence that our long-term strategy continues to pay off. Since the launch of our growth plan in 2018, we have consistently delivered gross profit dollar growth, which allowed for a virtuous cycle of yearly increasing high-return investments. We remain confident that this strategy will continue to consistently deliver attractive growth. Turning to slide seven. We continue to see evidence that consumer demand for our snacking categories remains resilient and that consumers continue to prefer our widely loved brands over private label alternatives.

In North America, the biscuit category is experiencing some softness in scanner data, most notably among lower-income families. However, I would note that these families are increasing their purchases in the non-measured club store channel. Our total US biscuits volume was up more than 3% in Q3, showcasing the continued strength of our brands and investments in both measured and non-measured channels. We are seeing particularly strong growth in unmeasured channels like club stores, e-commerce and food service. Meanwhile, in Europe, consumer confidence is improving with a significant step-up versus 2022 and remains broadly stable throughout Q3. We’re seeing positive volume growth in biscuits and chocolates, which has accelerated over the last three months and is outpacing broader food driven by solid elasticities and lapping of 2022 disruptions.

In Q3, our European chocolate and biscuit business delivered solid volume growth of 2.6%, which again shows the resilience of our categories and the strength of our brands. In emerging markets, consumer confidence remains strong. We continue to see resilient underlying demand and lower price sensitivity than in developed markets. During Q3, we delivered strong growth in terms of both volume and value at 4% and 24%, respectively. And we are confident that we have strong opportunities to continue to drive expanded distribution and creating new snacking occasions. On slide eight, you can see a few examples of our growth acceleration strategy in action. We continue to invest in our brands and connect closely with consumers to stay in line with changing consumer tastes and snacking occasions.

We are also driving growth in a broader range of channels while accelerating our focus on premium segments and harnessing the power of recent acquisitions to advance geographic expansion. For example, Oreo continues to grow its strong position as the world’s favourite cookie, and its share performance here in North America has grown nicely. Our recent partnership with Super Mario Brothers executed both online and in-store is just one example of the many creative campaigns that leverage personalization and local relevance to reinforce the brand’s playful persona. Along with continuous reinvestment in our brands, we are also investing in growth channels. For example, our belVita business is up nearly a full share point in the US club channel, driven by growing shopper interest in convenience, tasty and better-for-you options for morning snacking on-the-go.

Sold in individual portion packs and delivering more than 14 grams of whole grains per serving. belVita offers a great solution for consumers who are too busy to eat a traditional breakfast. We’re continuing to grow this business with a new customized and digitally targeted social and digital media campaign celebrating the ritual of belVita and coffee in the morning. Another important element of our growth strategy is investing in the fast-growing premium chocolate space. We have re-launched Toblerone with a robust campaign inspired by luxury fashion brand, positioning it as a jewel. We’re supporting this launch with a strengthened brand persona, Never Square and substantial investments in A&C. Bringing this dual concept to life, our new pralines called Toblerone Truffles recently debuted in the United Kingdom, Switzerland and Australia as well as airport duty-free stores in key markets.

They will expand to additional markets next year. Finally, we continue driving geographic expansion of our recently acquired brands. For example, Ricolino headquartered in Mexico is now the number one hispanic confectionery brand in the United States, growing well and in line with our expectations. Turning to slide nine. Let’s zoom in closer on the snack bar business to highlight the strong progress. We’re excited about the opportunities in this space, and we believe there is significant runway ahead led by the strong and growing brands of Clif Bar, Grenade and Perfect Snacks. We expect our snack bar business to exceed $1.2 billion net revenue this year. Let’s start with Clif, where we are excited about our current results and the long-term opportunity to broaden distribution, expand into new formats and increase our geographical reach.

Year-to-date, Clif is up double-digit in top line growth. And within that, the Clif Kid Zbar has been a particular standout. Zbar is a delicious organic non-GMO soft-baked, whole grain energy snack for kids with zero transfat or artificial flavors. Zbar is growing at twice the rate of the total bars category with consumption dollar growth up 19% versus last year. Grenade also continues to exceed our expectations. Grenade is performing very well in the sports nutrition space with signature bars that are high in protein and low in sugar. Since our acquisition a bit more than two years ago, we have doubled the business, thanks to strong core growth in the UK and distribution expansion in Ireland, Nordics and the Benelux. Perfect Snacks also is experiencing continued double-digit value growth, strengthening its position as the number one refrigerated protein bar in the United States.

We have a great portfolio and strong conviction in the growth potential of our snack bar business and we will continue investing to drive leadership in the segment. Turning to slide 10. I’d like to take a moment to share progress on an important element of our sustainability strategy. Just two years after joining the science-based target initiative, net zero carbon emission, we have submitted a time-bound plan laying out how we aim to achieve our target of net zero greenhouse gas emissions across our full value chain by 2050. To reach this critical milestone, we have completed a detailed process of re-baselining providing documentation of our carbon accounting and aligning to new standards. Putting this plan into action in the near term, we are making solid progress towards our 2025 goal of reducing end-to-end carbon emissions by 10%.

We are working hard to transform our business operations and supply chains. Over the past two years, we have scaled regenerative agriculture practices across our signature sourcing programs for coco and wheat, achieved renewable energy at manufacturing sites across every region and reduced CO2 emissions through plant and logistical efficiencies. We continue to believe that helping to drive positive change at scale, including through reducing our climate impact, is an integral part of value creation with positive returns for our stakeholders. We encourage you to read our Snacking Made Right report for additional details and context on our broader sustainability goals and progress. With that, I’ll turn it over to Luca to share additional insights on our financials.

Luca Zaramella: Thank you, Dirk, and good afternoon. Q3 was strong all across our business, with high-quality top and bottom line growth, healthy volume mix, record profit dollar increases and substantial brand reinvestment. We delivered double-digit organic net revenue of 15.7% with growth across each region, underpinned by volume mix of almost 4% as well as by some pricing of around 12%. Our business is proving to be resilient, both in emerging markets, which grew 19%, with strong performance virtually everywhere, and in developed markets, which grew more than 13% with balanced trends from both North America and in Europe. Turning to portfolio performance on slide 13. Our chocolate, biscuits, gum and candy businesses, all posted double-digit increases in Q3.

Biscuit increased plus 12.4%. Oreo, LU, Biscuit, TUC, 7Days and Clif delivered double-digit growth and robust volumes. Chocolate grew plus 14.9%, with double-digit growth in both developed and emerging markets. Cadbury Dairy Milk, Milka, Toblerone and Lacta all posted double-digit increases. Gum and candy grew more than 30%, with particular strength coming from emerging markets. Now let’s review market and share performance on slide 14. We held or gained share in 65% of our revenue base, driven by brand building investments as well as solid North America supply chain performance and strong sales execution, particularly in emerging markets. Moving to regional performance on slide 15. As far as Q3 goals, we delivered double-digit revenue growth in every single region, with a significant contribution from healthy volume/mix growth, including Europe, which has rebounded after lending pricing this summer and is now in a much stronger position.

This robust growth and volume performance translated into operating leverage across the business. Notwithstanding material marketing investment, profit growth delivery has been very strong in all regions. Europe grew plus 15.4%, with nearly 30% OI growth that was driven by pricing and volume/mix. Top line strength was broad-based with the UK, Germany and France, among those posted strong results. Cadbury Dairy Milk, Milka, Oreo, 7Days and Grenade were among brands with double-digit growth. European elasticities remained stable in both chocolate and biscuits. North America grew plus 11.4%, with OI dollar growth of more than 24%, driven by higher pricing and volume/mix growth of 4.6%. Oreo, Clif, Tate’s and Sour Patch, all grew double-digits, while Ritz and belVita posted high single-digit increases in the quarter.

Profitability in the base business remained strong, while acquired businesses, such as Clif and Tate’s, posted strong double-digit profit dollar growth. This is an important proof point showing how accretive our M&A agenda can be. Clif profitability continues to improve. And as I said last quarter, we still have some synergies opportunities as we have now integrated the platform into SAP. AMEA grew plus 11.9%, with volume/mix growth of more than 3%. OI dollars increased plus 18.1%. India and Australia grew double-digits, while China increased high single-digits in the quarter. Latin America grew more than 35% with OI dollar growth of nearly plus 37%. LA top line grew more than 16%, ex Argentina. Mexico to Western Andean countries and Brazil, once again delivered great results.

Ricolino grew high single-digits and remains on track in terms of integration work. Moving to page 16. We delivered nearly $650 million in gross profit dollar growth or more than 22%, driven by top line growth, volume leverage and productivity. Year-to-date, GP dollar growth is now more than $1.7 billion. This provides ample funding to reinvest for future growth and flow to the net earnings line. OI dollar growth was more than $300 million for the quarter or up more than 24% versus last year, driven by solid cost discipline, effective pricing and volume leverage. Year-to-date, OI dollars have grown $880 million or almost 24%. EPS on slide 17. Year-to-date, EPS grew more than 18% in constant currency or more than 13% reported dollars, driven primarily by strong operating gains.

Turning to slide 18. Free cash flow is $2.4 billion year-to-date, which represents an increase of $0.5 billion year-over-year. Year-to-date, capital return is $2.2 billion. Moving to our outlook on page 20. Given the strength of our Q3 and year-to-date performance, strong volume/mix momentum across our brands and overall demand resilience, we are now raising our full year outlook for both revenue and EPS. We now expect top line growth of 14% to 15% versus our original outlook of 5% to 7% and most recent outlook of 12% plus. EPS growth is also expected to be approximately 16% versus our prior outlook of 12% plus and original outlook of high single-digit. In terms of the assumptions, no change to our double-digit inflation. We also expect interest expenses of approximately $325 million for the year.

Leverage is expected to be in the mid to upper 2s range by year-end. With respect to currency, we now expect $0.15 of EPS headwinds related to ForEx impact for the year versus $0.11 in our prior outlook, of which $0.12 have been materialized already in the year-to-date. On the gum divestiture that became effective as of the beginning of October, this current outlook reflects the loss of the business for the entirety of Q4. We are not providing yet restated financials as teams are working through the definition of the impact and importantly, the removal of stranded costs. While we will provide a full update in the next earnings cycle, we do not expect any material EPS dilution as we will remove majority of stranded costs in ’24. The outlook revision reflects our increased confidence in the year, ongoing resilience of consumer consumption in our categories, relatively benign elasticities, continued brand reinvestments and completion of pricing in Europe and the health of our emerging markets.

There is a lot of volatility around the world, and it is important to note that this current outlook does not reflect a material deterioration of the geopolitical environment and ForEx rounding some areas of the business. Finally, a word on share repurchases. Now that we have received the proceeds of our sales outcome, our balance sheet is the strongest it has ever been, with long tenure debt at very compelling interest rates relative to the current cost environment. We decided to post buybacks in Q3 and were in our traditional blackout periods late in the quarter and the month leading up to earnings. However, we expect to consider buybacks for the remainder of the year and into next, given the current stock price versus our view of intrinsic value and long-term potential of our company.

We realize we have underspent versus our original outlook of $2 billion for the year and that provides the opportunity to take advantage of current low stock price levels. Additionally, we could pull forward from our ’24 share repurchases if an appropriate opportunity presented itself. We will be flexible and opportunistic in our timing, depending on the various useful factors. We believe this is the right thing to do, given the current context. Importantly, this does not represent a change in our ability to pursue our well-defined capital allocation strategies as our priorities remain the same in terms of reinvesting in the business and in selected strategically and financially attractive bolt-on M&As as well as strong dividend growth. With that, let’s open the line for questions.

Operator: [Operator Instructions] Our first question comes from Andrew Lazar of Barclays.

Andrew Lazar: Thanks so much. Good afternoon. Dirk, clearly, pricing, as you went through was very strong in the quarter. But despite this volume came in better than our forecast in every region as well. And we know price sort of comes and goes. So I’d really like your thoughts more on how you feel about the sustainability of volume growth going forward, particularly in the context of sort of the state of the consumer as you see it?

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Q&A Session

Dirk Van de Put: Yes. Thank you, Andrew, and hello. First of all, yes, maybe restating quickly what is driving the volume growth in the different regions to give a clarification around that. And yes, we are constructive as it relates to volume for the remainder of this year and next year and then talk a little bit about the consumer. So we have a strong volume/mix across all our regions. And overall, we’re up almost 4%. If I start with North America, there we are up 4.6% in year-to-date, 3% in volume/mix. The categories are experiencing a little bit of softness there. But our biscuit business is performing significantly better and delivering some significant volume share gains, about 1.2 points in the last 3 months. We also have that from unmeasured channels, which are performing well, the club channels, online because consumers are shifting there because that gives them better pricing opportunities.

Switching to Europe. There, we see a 3.3% volume/mix increase. Year-to-date, that is flat seen the disruption that we had in the beginning of the year. We see biscuits and chocolate volumes being quite resilient. And in Q3, we saw the volume/mix growth accelerating, outpacing the rest of food. The reason there is that the elasticities are quite solid. And we also take into account that we are lapping 2022 disruptions in Europe. And then emerging markets is up 3.4% in volume/mix. Year-to-date, also 3.4%, but we have certain markets like India and Mexico, where we have double-digit volume growth. It’s quite remarkable because these markets have quite significant pricing, all the emerging markets. And the reason being is that the consumer confidence is quite good.

The demand is resilient. We see the consumer in places like India, China, Mexico are in a four-year high, and that is clearly having an effect on demand. We also are gaining in these markets by expanding our distribution. That’s always an extra benefit that we have. And we’ve been doing smart downsizing. One of the things we do in these markets is our LUPs or lower unit price. We try to keep that price constant that we have the entry into the category not being affected. Going forward, we expect the recovery in Europe to continue because pricing has landed and we are back on the shelf, and we are running full force in our commercial activities. Our inventory levels around the world are very healthy, including in North America, so we don’t see any effect there.

The elasticities remain relatively benign. But here and there, some modest upticks, but all the dynamics are included in our outlook. We think that the expansion of volume in emerging markets is going to continue. And in fact, it’s a good problem to have. But in India and Mexico, the key challenge is to how to keep up with the heavy volume increase that we’re seeing. And then we believe that everything we’re doing for our long-term strategy is the things we are focused on and different activities that we have planned confirmation that is working for us, particularly also, for instance, the reinvestments we’re doing. Maybe quickly on the consumer because that is probably the biggest factors to keep in mind as you think about volumes going forward.

We find that consumer demand remains very resilient in our key markets. Consumers continue to prioritize spending on grocery and branded products. And we see the consumer confidence outlook for ’24 stable for developed markets in North America and Europe, but very positive for emerging markets. So if I quickly think this through, modest improvement probably in consumer confidence in Europe and Australia. Why? Because the inflation is clearly easing there. They see the real disposable income go up. There is some shifting to smaller packs in places like France and the UK and to discounters because they’re looking still for value for money. But overall, we feel pretty good about the consumer in Europe and Australia. In the US and Canada, we think the consumer confidence will be holding, but we have to monitor the trends quite closely because we see shifts to non-measured channels, as I said, such as e-commerce and club, we see buying of more multipacks.

We see lower income families pull back on the amount of the frequency of their trips to the store. And we also have the delayed unwinding of the pantry loading from — due to the phasing out of the SNAP benefits. And then emerging markets, we continue to see steady improvements with those four-year highs that I was talking about. Consumer is very optimistic about the future. Even in China, consumer confidence is improving, but slower, but we still have like 60% of our Chinese families expect their income to improve. Private label, maybe private label is losing share in the US and Canada. There is a bit of a watch out in Europe because brands have been taking pricing. But overall, I would say, we feel very good about the outlook for the rest of the year and for next year.

Andrew Lazar: Great. Thank you for all the color. Really helpful. And a very quick follow-up just for Luca, I think. Just regarding what the implications are for 4Q based on your updated full year guidance? And maybe more importantly, any high-level thoughts to consider for ’24 at this point? Thanks again.

Luca Zaramella: Thank you, Andrew. So our revised top line estimate of 14% to 15% implies a revenue growth for Q4, which is around about 7% to 10% which, considering we are lapping a 15.5% top line growth last year, makes really the two-year stack comparable to year-to-date numbers. And so I think that should give you a sense of where we’re going to land the Q4. Keep in mind that we also want to keep a tight control on retailer inventory as we enter next year because, obviously, there is potentially some pricing, and we won’t really to enter with a strong momentum into Q1. On EPS, the expected growth of around about 16% for the year implies a moderate increase in constant currency in Q4. Reason for that is, again, the heightened investment in A&C.

And in addition, as I said in the prepared remarks, there is some ForEx volatility, particularly around certain markets like Argentina, Nigeria, Pakistan and Egypt. And it is quite difficult to predict what exchange rates will be in the course of the quarter. So quite, frankly, I have been a little bit cautious with our assumption. And as I don’t want to surprise anyone. Also remember, gum is completely removed from this number. So this is not really a like-for-like. And I think you’re going to like you realize the EPS and continued profit expansion in Q4. I also want to reassure you that the emerging markets are doing very, very, very well. And we don’t necessarily disclose numbers, but EBIT is up more than 20% in emerging markets on a year-to-date basis in real dollar terms.

So these are, again, a market that can be volatile. But in the end, they deliver a good profit for us. On ’24, we are clearly in the process of finalizing our plan, but I can give you a little bit of the soundbites around ’24. First of all, I think it is undeniable that the business is having good momentum, and that momentum from where we sit today will continue as we enter into — as we go into ’24, both in terms of top and bottom line. Pricing contribution will be clearly less important than this year, but we still see pricing contributing more than an average year, particularly as we need to price for cocoa, sugar and other commodities. A good portion as we went through the plans with the majority of the business units, a good portion of growth in both in developed and emerging markets will be coming through distribution expansion.