Mondelez International, Inc. (NASDAQ:MDLZ) Q4 2023 Earnings Call Transcript

Mondelez International, Inc. (NASDAQ:MDLZ) Q4 2023 Earnings Call Transcript January 30, 2024

Mondelez International, Inc. beats earnings expectations. Reported EPS is $0.84, expectations were $0.78. Mondelez International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Mondelez International Fourth Quarter 2023 and Year-End 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, 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. I’m pleased to share that we delivered our best year ever in 2023, with robust top-line growth, continued share improvements, record profit dollar growth and strong total shareholder return. Our double-digit top-line performance was driven by strong pricing execution and positive volume mix growth. We also delivered continued share improvements as consumers across the globe remain very engaged with our iconic snacking brands. We set another record for gross profit dollar growth achieving $2.2 billion through ongoing cost discipline and sound pricing to offset cost inflation, as well as volume leverage. We continued our track record of strong free cash flow, generating $3.6 billion.

To accelerate our strategy of global snacking leadership, we continue to invest significantly in our brands and capabilities, driving multi-year growth on both the top and bottom lines. I’m especially proud of our record financial results, as well as returning nearly $4 billion in capital to shareholders. These results deepen our confidence that the strength of our brands, our proven strategy, our continued and increasing investments, and especially our great people, position us well to achieve our long-term financial targets in 2024 and beyond. Turning to slide five, you can see that 2023 was a strong year on both the top and bottom lines with substantial reinvestment to drive continued growth in the year ahead. Organic net revenue grew 14.7% or $4.6 billion versus prior year.

Our continuing solid performance in volume mix demonstrates that consumers continue to prioritize our brands and categories. We also delivered record adjusted gross profit dollar growth of $2.2 billion, up 18.8%, significantly lapping the last several years. We are proud of our team’s continued focus and commitment, which enables us to continue investing in the business to drive further sustained growth. Accordingly, we increased A&C investments by more than 21%, helping to drive consumer and customer loyalty to both our iconic global brands and our local jewels, which represent the taste of the nation in their markets. These results translated into strong OI growth of nearly $1 billion, up more than 19% versus prior years. Adjusted EPS grew 19% on top of strong growth in the past several years.

All told, we remain confident that our virtuous cycle of strong gross profit dollar growth, fueling local first commercial execution, and increasing investments in our strong brands, capabilities and talent will enable us to continue delivering attractive, sustainable growth. I’m especially proud to share that we continue to outperform our peers in total shareholder return. As you can see on slide six, our five-year TSR is nearly double the average of our peer group. Our one-year return is particularly impressive with Mondelez delivering double-digit growth, while our peer average return has fallen into negative territory. We view these results as evidence that we have the right strategy, the right brands, and the right people to continue delivering long-term value for our stakeholders.

Switching to slide seven. Our performance in 2023 gives us confidence that we have not only the right growth strategy, but also the right execution to deliver it. Here are just a few highlights of our strategy in action. Our biggest global brands, Oreo, Milka, and Cadbury achieved more than $10 billion in global net revenues. We continue accelerating our focus on our core categories for chocolate, biscuits and baked snacks, because these categories offer attractive growth and profitability. We remain on track to deliver 90% of our revenue through these core categories. We also continue to make strong progress in executing our growth strategy. Our U.S. supply chain has stabilized and we have added more than 600,000 stores to our emerging market distribution channels.

Additionally, we continue to advance our portfolio reshaping strategy. In 2023, we integrated Clif Bar and Ricolino, now we are harnessing the power of these recent acquisitions to strengthen our presence in the global snack bar and the Mexican chocolate and candy segments. We also completed the sale of our developed market gum business for $1.4 billion, providing another important source of reinvestment to further advance our brands, talents and capabilities. On slide eight, along with our financial performance, I’m pleased to share that we made significant progress toward our sustainability goals and targets in 2023. First, we continue to advance our leadership in more sustainably sourced critical ingredients. About 80% of the cocoa volume used in our chocolate brands is sourced through Cocoa Life, our signature cocoa sourcing program.

There works just to lift up the people and restore landscapes where cocoa grows. We also made continued progress in helping to combat climate change. We achieved an important milestone in 2023 by submitting our roadmap to achieve net zero by 2050 through the Science Based Targets Initiative. Additionally, we continued advancing our light and right packaging strategy. More than 97% of our packaging now is designed to be recycled. We also continue investing in ways to empower consumers to make more mindful snacking choices that fit into their healthy active lifestyles. More than 55% of our snacks revenue comes from Mindful Portion Snacks, that is, snacks that are packaged in individually wrapped Mindful Portion serving sizes or with clear Mindful Portion recommendations unpack.

These are just a few highlights of our continuing progress towards building a more sustainable snacking company. We continue to believe that helping to drive positive change at scale is an integral part of value creation, with positive returns for our stakeholders. We encourage you to watch our annual Snacking Made Right report, which will be published in April to view our full-year sustainability data. Turning to slide nine. You can see that like many companies, we continued to navigate through a dynamic operating environment. We are closely tracking and planning around a number of near-term themes, including continuing inflation, shifting consumer habits, geopolitical challenges, rising cocoa prices, just to name a few. We are well-positioned to address these challenges and we remain confident that we can deliver an on-algorithm year.

Our confidence is rooted in our conviction that we have the right strategy, the right execution, and the right people, as well as very strong widely loved brands. We continue to see momentum in the majority of our key emerging markets. Our categories remained resilient and our solid volume mix performance demonstrates that consumers continue to prioritize our iconic snacking brands. To continue accelerating this momentum, we are continuing to increase our investment significantly in our brands and capabilities. We are pleased that our U.S. supply chain has substantially improved and we continue to focus on expanding distribution opportunities in both developed and emerging markets. We are also making solid progress in our European pricing negotiations.

We expect to deliver robust EPS growth in both constant and real dollars in 2024. And overall, we remain confident that we have the right strategy to effectively navigate today’s volatile environment while continuing to focus on long-term sustainable growth. In conclusion, I’m pleased to reiterate that 2023 was another record year. Our focus and portfolio reshaping strategy is working and we are well-positioned to continue driving attractive growth in 2024 and beyond. By continuing to double down on our attractive core categories of chocolate, biscuits and baked snacks, investing in our widely loved brands, focusing on operational execution and cost discipline and empowering our great people, I am confident that we can deliver strong performance for years to come.

With that. I’ll turn it over to Luca to share additional insights on our financials.

Luca Zaramella: Thank you, Dirk, and good afternoon, everyone. Before I get into our financial results and the 2024 outlook, it is important to provide some context related to the developed market gum divestiture and its impact on our results. On slide 11, you can see that impact of the divestiture on revenue was roundabout $500 million, while our growth, 0.3 percentage points negative. EPS was impacted by minus $0.11. I’ll give you more color as this relates to the outlook later in the call, and how we plan to fully offset impact on income. Moving to slide 12. In 2023, we delivered exceptional results, starting with double-digit revenue growth, with both volume and value contributing. As we keep saying, gross profit dollars is the most important P&L variable as it allows reinvestment protect on our virtual cycle.

Last year, GP dollars grew by $2.2 billion, allowing substantial reinvestments, strong earnings and robust cash flow generation. The strengths of these results can be seen across all regions and categories. Revenue growth was plus 14.7% in the year with 1.3 points of growth coming from volume mix. For the quarter, growth was about 10%, with a slight decline in volume mix. Emerging markets grew by 20.4% for the year and 14.9% for the quarter with strength coming from a substantial number of key countries, including Brazil, China, India, Mexico, and the Western Andean. Developed markets grew plus 11.1% for the year and plus 6.6% for the quarter, including robust growth from both U.S. and Europe. Moving to portfolio performance on slide 13. Our chocolate and biscuit businesses, both delivered double-digit growth for the year.

Also gum and candy continued to perform well with superior growth in emerging markets. Biscuits grew plus 11.9% for the year and plus 5.5% for the quarter. A large number of brands delivered strong growth for 2023, including Oreo, Ritz, Chips Ahoy!, [Indiscernible] Tate’s Bake, Give & Go, 7Days, TUC, and Club Social. Chocolate grew plus 14.5% for the year and plus 11.2% for the quarter with significant growth across both developed and emerging markets. Volume mix was up by 2.5% for the year and 2.4% for the quarter. Global brands like Cadbury Dairy Milk, Milka, and Toblerone all delivered extraordinary growth while we also delivered strong growth with many of our local jewels including Lacta, Ricolino and Kinh Do. Gum and candy grew more than 28% for the year and 20% for the quarter.

Key markets including Brazil, Mexico, China and the Western Andean area, all performed well. Let’s review market-share performance on Slide 14. We held or gained share in 65% of our revenue base with strong results in both chocolate and biscuits. Given the amount of pricing we took in the last couple of years, we see this as a strong accomplishment and our brand investments, both from a quantity and quality standpoint, clearly played the role. Turning to region performance on slide 15. Europe grew plus 14.5% for the year and plus 11.6% for the quarter. Strong execution led to positive volumes mix for the year, despite significant customer disruption in Q2. Profit in ’23 was up plus 12.8% for the year and plus 1.6% for the quarter. Underlying profit in Europe continues to improve, but Q4 was negatively impacted by ForEx fluctuations on some cash deposit held in dollars, that function as a protection against currency volatility.

Excluding these headwinds, EBIT in Q4 was up nicely, despite a significant increase in A&C. North America grew plus 9.5% for the full-year, while Q4 grew plus 1.9% against an exceptionally strong compare of almost 20% in 2022. Full year growth was driven by higher pricing, broad-based strength across brands and channels and solid volume mix. In Q4, volumes declined as a result of softening US biscuit category, tight inventory management in advance of Q1 pricing and declines in Give & Go and Clif. Give & Go was impacted by our decision to release some of the holidays gingerbread kit given low profit. We continue to be very happy with Give & Go overall. Clif results were driven by lower bar consumption and inventory depletion connected to retailers building inventory in Q3 to minimize potential disruption ahead of a system transition in early October.

As a result, we made adjustments to inventory driving a year-over-year shipment decline. We feel comfortable with current inventory levels along with our programming and investments to drive ’24 growth. Overall we are confident regarding our prospects in ’24 for North America, given our strong activation plans, TDPs expansion, growth channels and substantial investments in A&C. We are going to give you a better sense of these opportunities at CAGNY. North America OI increased plus 22.7% for the year due to strong pricing and solid volume. For the quarter, OI increased by 9.5%. AMEA grew 11.7% for the year and 7.9% for the quarter. India grew strong double digits for the year and quarter, driven by both chocolate and biscuits. China grew high single digits for the year and quarter as well.

Southeast Asia grew mid-single-digits for the year and Australia delivered strong results for both the year and the quarter. As it relates to volume mix performance in the region for Q4, there has been some pressure on Western consumer brands in the Middle East since the war began and we have not been immune from that, with an impact of sales in the Middle East and part of Southeast Asia. We are supporting colleagues who have been impacted in different ways around the world as well as working with NGOs partners to aid in humanitarian efforts in the regions. While volatile and difficult to predict on a go forward basis, we are tracking the situation and working with stakeholders and planning for these dynamics in our 2024 outlook. AMEA increased OI by 14.5% for the year and 18.5% for the quarter, continuing a strong track record of annual top and bottom line growth.

Latin America grew 34.8% for the year and 28.6% for the quarter, with strong volume mix growth and strong price execution. Ex-Argentina, growth for LA was plus 18.1% for the year and 9.2% for the quarter, justifying the good work done by our teams beyond price management in Argentina, Latin America delivered another strong year of profitability. OI grew plus 48.5% for the year and more than 49% for the quarter. Strong volume mix pricing and continuation of gum and candy momentum drove these results. Turning to page 16. For the year, we delivered strong double digit OI dollar growth, driven by a record high increase in gross profit of nearly $2.2 billion. This growth has enabled strong levels of reinvestment behind brands and capabilities for 2024 and beyond.

In Q4, we also saw strong double digit OI and gross profit dollar growth of more than $500 million, driven by top line strength and ongoing cost discipline. Other was impacted by the Forex dynamics and fund protection in US dollar that I discussed about Europe. Next to EPS on slide 17. Full-year EPS grew plus 19% in constant currency. The vast majority of this growth was driven by operating gains and despite currency headwind, we grew adjusted EPS at reported Forex by 14.3%. Adjusted EPS would be $3.30 per share, including $0.11 of contribution from DM Gum. I’ll talk more about our plans for ’24, but we will aim at removing as much standard cost as possible. Turning to slide 18. We delivered $3.6 billion of free cash flow for the full year, including the impact of more than $380 million related to cash taxes from the liquidation of our KDP stake.

Our balance sheet remains quite strong as full year leverage ended at 2.6 times. Let me take a moment to discuss our outlook and some of our key planning assumptions on Slide 20. For the current year, we expect to deliver on our long term algorithm for revenue, earnings and cash flow. We expect to be at the upper end of our 3% to 5% algo range for organic net revenue growth as pricing in certain markets with significant chocolate portfolios such as Europe is expected to be higher than historical levels. We expect free cash flow of $3.5 billion-plus. In terms of the assumptions, for inflation, we expect a high single digit increase for ’24. This inflation is driven by significant increases in both cocoa and sugar, as well as another update in labor costs.

As Europe faces more inflation than any other market, we expect customer disruption during Q1 and potentially into Q2, associated with our annual price negotiation process. This process is happening earlier in some cases than last year, so intact might be more pronounced in Q1 for top and margin lines. We also remain committed to substantial brand support in this region and all the others, similar to our stance over the last past several years. In terms of interest expenses, we expect approximately $325 million. We are expecting $0.03 of EPS of headwinds related to forex impact for the year. In terms of taxes, we expect an ETR in the mid-20s. Share repurchase expectations are around $2 billion. Turning to our EPS outlook on page 21. With respect to adjusted EPS, we expect high single digit growth of our reported base ’23 of $3.30 per share, which includes the $0.11 of contribution from our divested developed gum business.

We expect to eliminate nearly all of these $0.11 impact by removing stranded costs. In fact, we made good progress by already realizing this sense of stranded cost savings in late 2023. With that, let’s open the line for questions.

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Q&A Session

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

Andrew Lazar: Hey, everybody. Dirk, I was hoping we could get a bit of a state of the union on how you see the performance in key markets at this stage, as we saw a bit more volume weakness in North America in the fourth quarter. And conversely, it still seems like there’s strength in many of the other key markets. Trying to get a sense of how you see this playing out in ’24 and whether similar cadence across your markets might be the same or where it might be a bit different. And then I’ve just got a follow-up.

Dirk Van De Put: Okay, thank you, Andrew. Yes, I mean, we see there’s a very strong full year performance. We feel that there is portfolio strength, which is broad-based across our regions, across the categories, across the brands. The volume mix growth is solid for the year. We expect that to continue into next year. Our price execution has been very good this year across the business. Share performance is good. North America, we recovered. AMEA, we’ve been gaining share. Europe, we had some disruption effect during the year, but we started to recuperate strongly at the end of the year. The strength in emerging markets continues broadly and can comment a little bit on where there are some short term issues. And then we’ve very got — got some very strong gross profit growth and $2.2 billion for the year, which has allowed us to reinvest quite significantly in the business.

And so the acquisitions are doing well. EPS growth adjusted 19%, real 14%, strong cash flow. So we feel good as we enter 2024. We have some more pricing coming in, but in North America, that’s already agreed. In Europe, we’re in line with where we were last year and the majority is already agreed. We are planning to continue with strong investments in our brands, with strong activations. The acquisitions, we expect to continue to play a big role for us. And so overall — and maybe another point to mention is that we have this distribution runway of adding distribution for our brands around the world. So we feel it was a very strong ’23 and we feel good entering ’24. Now, that doesn’t mean that there are no particular issues that are on our mind.

So the first one would certainly be the cocoa prices and our need to price as needed. We are well covered for the year, but we need to, mainly in Europe, get those prices agreed. Consumer, while the consumer is feeling better and more positive short term, we see that elasticity is still at or below historical norms, but there is some uptick in consumer elasticity in some spots around the world. It is to be expected that we will have customer disruption in the beginning of the year in Europe. The annual negotiations are in progress. Like I said, we are in line where we were last year and majority is agreed, but we still have some to go. And then maybe a few words on some of the effects on the volume in Q4, which we don’t think will continue in Q1 in certain instances.

So there is some tensions in the Middle East, and that has some effect on Western brands and we have some of those Western brands. We expect that to continue in Q1 and Q2, but gradually over the year, that will fade away. And that is the main reason why our AMEA is not as strong in volume mix as you would expect. And then North America. Luca said it in the comments, in particular in the US, because of very one-off — specific one-off reasons, stopping part of the range of Give & Go, the systems change in Clif, we expect to return to good volume mix growth in North America in the beginning of next year. All these items that I’m talking about are included in our full year outlook. And so we believe at this stage, particularly since we have to see how the negotiations go in Europe, that we should guide towards our own algo result for ’24, probably more towards the higher side, but we are going to continue with all the things I said and we’ll see how the negotiations go in Europe.

That’s probably the main question mark that we have at this stage.

Andrew Lazar: Okay. Great, thank you. And a quick follow-up for Luca and some of this you covered a little bit, Dirk, but I think there was a street expectation for organic sales growth for ’24 to maybe be a little bit above the 3% to 5% long term algorithm, just given the pricing that you’re taking. So maybe, Luca, you could walk us briefly through some of the just key puts and takes to keep in mind as we think about the sales growth guidance for the year and maybe the phasing aspect of it. Thanks so much.

Luca Zaramella: Thank you, Andrew. I would start by saying that guidance for ’24 in our mind, is solid, particularly as we look at what drove ’23 and the continuation of that momentum into ’24. And so we can, I believe, count on resiliencies of our categories. We’re happy, as I said, in the prepared remarks on our share performance. I think you will see momentum in our share, particularly in the first half, and that is related to the unprecedented A&C investment we put forward. There are still material distribution opportunities that will help us model through some of the challenges that we discussed in the prepared remarks. And finally, the acquisitions, I think will continue to be accretive for us both in terms of top line and bottom line.