Mondelez International, Inc. (NASDAQ:MDLZ) Barclays Consumer Staples Conference September 7, 2022 12:45 PM ET
Company Participants
Dirk Van de Put – Chairman & CEO
Luca Zaramella – EVP & CFO
Conference Call Participants
Andrew Lazar – Barclays Bank
Andrew Lazar
Let’s all find our seats. We will commence with our next 5 star chat. So welcome back, everybody, to our fireside chat with Mondelez International. With me today are Chairman and CEO, Dirk Van de Put; and CFO, Luca Zaramella. Welcome, gentlemen, and it’s truly to be great to be back in person with you both.
Let’s all find our seats. We will commence with our next 5 star chat. So welcome back, everybody, to our fireside chat with Mondelez International. With me today are Chairman and CEO, Dirk Van de Put; and CFO, Luca Zaramella. Welcome, gentlemen, and it’s truly to be great to be back in person with you both.
Luca Zaramella, Mondelez International, Inc. – Executive VP & CFO
Thank you.
Question-and-Answer Session
Q – Andrew Lazar
Maybe a good way to start off, Dirk, would be the company’s recent Investor Day in May, in which you raised the long-term organic sales growth target to 3% to 5% from 3% plus. I think over the past 3 years, organic sales growth has been greater than 4. So the company has obviously already been operating in this zone. But a key component moving forward is getting the core chocolate and biscuit categories to represent about 90% of sales from 79% in ’21, and I think just 59% in 2012. Can you talk a bit about how this takes place, both organically and inorganically and maybe a potential time frame for reaching this outcome?
Dirk Van de Put
Yes. Well, maybe I’ll start off with quickly saying why we like those categories so much. Both our categories were brands play a big role. They’re growing quite nicely. Our businesses has been growing around the 6% mark for the last 3 years. private label is very limited in the categories. It’s an expandable consumption, if you want, which makes it interesting. And we still see plenty of opportunities around the world for significant growth in this category. So we like them, and we’ve been doing quite well in them.
So from our perspective, if our business would be only biscuits and chocolate, we would see a much stronger top line and we would see a much stronger bottom line. And we think that’s where we gradually have to move towards — that movement will take place through a balance between acquisition and divestment, I would say. There’s 20% of our business. That’s not in both categories. And that’s really over time, where we will exit and we will try to combine that with a number of acquisitions. We’ve already done 9 in the last 2, 3 years for about $2.8 billion in sales. All of those have been focused on these categories. And so you will see that balance very gradually evolve.
I can’t put an exact time line on there because it’s not like the categories that are not core for us that they are doing particularly bad, and we feel that we need to exit right away. We see it more as a gradual balancing act. Now we’ve not taken by the time line. talking about a time line that’s going to be 10 years, but it’s probably not 2 years. It’s also not 5 years, it’s somewhere in that order between 2 to 5 years. I would say you would see it. And we say will remain in other categories because we always believe that there will be a piece that is not biscuits and chocolate that comes with some of the acquisition or that’s still remaining from our portfolio like we have it today.
Andrew Lazar
And Luca, despite the higher organic growth algorithm, Mondelez is sticking with its high single-digit year-over-year constant currency EPS growth target and $3 billion plus free cash flow generation target. So we often get investor questions around the perceived lack of sort of EPS flow-through or upside given how strong sales have been. So maybe you can talk about this a bit and what investors should know around the mix between the 2 algorithms?
Luca Zaramella
Yes, absolutely. We feel quite confident around that algorithm, particularly on the top line. And as you have to see the EPS and the cash flow commitment, the reality is those are floors in our mind. Dirk just finished talking about the importance of chocolate and biscuit. Quite frankly, if I look at the P&L performance of those 2 categories, our EBIT in the last 4, 5 years has been almost double digit, which if we were concentrated only in those 2 businesses, our EPS will be double digit, for sure. I think it is important to realize that in this context, we will continue investing. And so you heard us talking about double-digit AMC increase in Q2, and that is really the consistent spending that we have been making over the last few years and it will continue.
If we operate those portfolio changes that Dirk alluded to, if we get more skewed towards chocolate and biscuits, if we make acquisitions, which, by the way, have great return on capital, I always give the example of [indiscernible] acquisition. We took on that at 0 cost. We have material synergies that are already materializing into the P&L. Those would create additional space within DPS. So I don’t want to give the impression that volume leverage going forward is less relevant. It is by relevant. We still have to deal with this 20% of the portfolio, which is not growing as fast as chocolate and biscuits. And look, I think you know us. We want to commit to something that we can, in general, over deliver.
Andrew Lazar
Great. Dirk, chocolate is a big part of the portfolio as the #2 global player and pretty close to #1 at this point. Can you talk about the key drivers of growth and progress, whether that’s in sort of gifting seasonals or in areas like premium that you’ve increasingly focused on?
Dirk Van de Put
Yes. So for us, there’s 3 parts in the chocolate market that we are particularly interested in. First of all, there is the tablet market, which is about 25% of the market. That’s really our home turf. That’s where we are big players. You can imagine Cadbury, Milka and some of the other brands we have around the world. There is still — while the growth is very, very good. We still believe that there is more growth to be have. We see a shift in consumer behavior during the pandemic where chocolate has taken up a much more important place in the day-to-day life. For instance, 72% of consumers in our recent state of snacking survey that they cannot imagine a world without chocolate. And so — which we totally agree with, of course. So chocolate is taking this more important place. And I think there’s very specific needs like a long time or adult time at night when the kids come home and so on that we still can play out.
The dark chocolate parts of the tablet market is an important part that is growing fast, where we are underrepresented. So we are going to also do an effort in becoming bigger in dark chocolate. The second part of the market is what we would call seasonal gifting, those 2 combined. And that’s a really expandable part of the market. It’s 1/3 of the chocolate market and growing. You have to think about the Halloween or Christmas or Easter, Mother’s Day. And there clearly, for us, there is an opportunity to link chocolate to the different holidays or celebrations around the world can be different from country to country. There’s certainly an opportunity. It’s a perfect time for people to buy chocolate and consume it with the whole family or share it with friends. And it’s our objective to continuously develop a bigger range and a more sophisticated range of seasonal and gifting items, think about pralines, wafer, for instance, we think personalization is going to start to play a big role. This also offers quite a big opportunity for e-commerce.
Then the last part where we see big growth possibilities for us is in premium where we are underrepresented. We have 3 brands, Toblerone, Green and Black and new. And we are expecting with those 3 brands who all play very specific individual roles to take a bigger piece of that premium segment. Particularly, we will be relaunching Toblerone in the second half of this year. We’ll be launching a range of prolines on the cover. We’re increasing the communication on the brand — so we — and Toblerone is already the leader in world travel retail in duty-free stores and so on. So that’s going to be a big push for us. So those 3 combined lead us to believe that we can see good high single-digit growth in the chocolate category for us.
Andrew Lazar
Got it. Luca, in terms of investments surrounding the portfolio shifts, big snacks, support of local brands and such. Can you tell us a little bit about the return on investments of these activities and if they’re comparable to the main portfolio?
Luca Zaramella
Absolutely, they are comparable. There are a lot of synergies between this part of the portfolio, not only in terms of branding, so extending our brands into adjacencies but also from a manufacturing standpoint, certainly from a route-to-market standpoint and certainly from an advertising standpoint. So as you think about return on investment, those are pretty much activities that entail low level of risk, high incrementality and a good return on capital. We are selectively investing in those as well. It’s not that we go abroad everywhere. So for instance, through the Chipita acquisition, which is highly accretive. In terms of revenue synergies, we are testing how 7 days can play in certain countries. We are seeing if we can apply our chocolate brands.
And I always give the example of the importance, for instance, of these days, I believe, last year was the biggest share gainer in the U.S. And so these acquisitions or these adjacencies can play a key role. Very excited about the Ricolino acquisition. Ricolino will double the scale of us in Mexico. And importantly, it will give us access to a route to market that is of a superior quality. And in there, we can plug in and grow even faster our area, which is an overwhelming success in Mexico. So I think all these categories allow us to expand, allow us to add earnings growth, but importantly, from a branding and revenue standpoint, they are very synergistic.
Andrew Lazar
And Dirk, big snacks is a newer area that investors are still getting up to speed on. Can you help remind everyone why you find this space so compelling, in terms of size, growth, ability for Mondelez to sort of scale it consolidated globally and things of that nature?
Dirk Van de Put
Yes. So first, to situate it, the chocolate market is about $110 billion market in the world. The biscuit market is about $100 billion. Cakes and pastries, which is part of the base snacks is about $76 billion. And so almost the size of the biscuit market. And then health snacks or health bar, sorry, are smaller, they are only $16 billion. Maybe I’ll start with those. I think if a consumer is looking for health and wellness in snacking, there’s only a few areas where they go. You over kind of play that role, but is your part of the consideration set for snacking a little bit less. They’re going to not send dry fruits and they think about the health bar category. That’s really where health and wellness plays out.
The phenomenon has been largely focused on the U.S. So far, 50% of that $16 billion is in the U.S. The rest of the world is only now catching up, but you see the segment evolving everywhere. And so we believe that is a category that in the coming years, which slowed down because of the pandemic is going to accelerate again. We see Perfect Bar, Cliff all growing very strong double digit at the moment. And so we believe that there is international expansion. There’s sophistication of the range. There’s optimization of the businesses. And so we see above-average growth possibilities there.
The other part of break snacks is cakes and pastries for us, which is a very highly fragmented market, which is largely produced on the same lines as biscuits are produced, some modifications necessary but the same process. There’s very little branding together with that fragmentation, and the overall sophistication of the product is not very high. So we see a big opportunity for consolidation, bringing branding through Oreo or through Milka or through Cadbury, upgrade the level and the quality of the products, and to really create an extension of the biscuit shelf, which for most consumers is kind of a continuation in their mind and extent of brands into that area. There is also — in that part, there is also what I would call a more affordable segment, which we are trying to tap into with Chipita, which is a brand that is doing very well in developing markets. We see opportunities for the brand around the world. It’s basically a filled croissant, packaged filled croissant, which is a universal product. And so this category will also help us get wider distribution into the lower social classes.
Andrew Lazar
And if I’m not mistaken, there’s no global dominant leader.
Dirk Van de Put
No. Not at all.
Andrew Lazar
So Luca, maybe shifting a bit more to the current environment and pricing. On the Q2 conference call, I think you mentioned there was still about 35% of the price increases in Europe that still needed to be finalized with some customers. So I’m trying to get a sense if those have gone generally as expected. And for the other 65% that we already negotiated was Mondelez able to put through what it initially anticipated, kind of a couple of…
Luca Zaramella
I’m happy to give you an update, and it is a good update. Virtually all pricing that we had planned in Europe at this point has gone through successfully. We have been able to meet the level that we expected. Importantly, we had planned, as you remember, for the second part of the year, some slowdown in revenue, given potential conflicts with customers and the volume disruption related to us putting on hold shipment or putting on wholesome promotions has been a little bit lower than we anticipated.
So particularly, in Europe, pricing, I think, will go through — will kick in in Q4. So you will be seeing a margin recovery in the European segment as of Q4. And I think it is important to realize that timing was of essence here because we wanted to enter back to school, and importantly, all the Christmas activities that are so relevant for the chocolate category, specifically in Europe, and also for the biscuit category. We wanted to enter this high consumption peak season in a good place, and everything is going as expected.
So we had proven this year that we had been pricing very vigilantly. We had multiple pricing waves in the U.S. in emerging markets. And I think as you look forward, there is at these levels of cost, more pricing needed into 2023 pretty much across the board, but importantly, with the pricing we have already taken 50% to 60% of what is needed into 2023 is already secured by all the pricing that we have been putting in place in 2022.
Andrew Lazar
Got it. And that’s sort of a global comment.
Luca Zaramella
That’s a global.
Andrew Lazar
60% of what you think you may need into ’23 is sort of in place, and then there’s said, more to come.
Luca Zaramella
Okay.
Andrew Lazar
Got it. That’s helpful. Yes, because you had mentioned, I think, previously that you made some further pricing towards the end of the year, maybe in North America to be sort of situated properly, right, to handle some of the inflation that’s coming your way in ’23 and — so that makes sense. With the additional pricing would — some companies have talked about additional pricing that’s needed to be maybe a little bit more tactical or strategic, not necessarily across the board as maybe some of what we’ve seen in the last year has been. I don’t know if that’s how you’re thinking about it or if there’s still a need for something more broad based?
Luca Zaramella
I think it’s going to be more surgical, particularly in the U.S. As you remember, we have talked consistently about RGM and we have been investing in digital capabilities, particularly in the U.S. And so it will be a little bit differentiated product by product. There are going to be products where our product lines and brands where we’re going to take line pricing up, others where we will fine-tune promotions, other where we will operate some price pack architecture to still keep certain price points and continue retaining consumers at a center price point. So all that plan is well underway, and let’s see how it plays out.
Andrew Lazar
And are there certain areas that have been more thorny from an inflation perspective that’s requiring some of the additional pricing? Is it — is it energy in Europe? Or is it ingredients across the board? Where are you seeing it? Because there’s this belief that we’re starting to see some, right, exchange traded commodities start to moderate or stabilize a bit. But I think we are hearing here a little bit more that inflation is still going to be an issue broadly speaking going forward for a lot of companies. So I probably got a sense of where you’re seeing it a little bit more?
Luca Zaramella
In general terms, as we commented at the Q2 earnings cycle, the level of inflation in absolute dollars, even these days is pretty much unchanged into 2023 compared to 2022. So there is going to be the same amount of dollar inflation going into 2023. The simple way to think about that is, yes, there are some commodities that have become more benign in terms of cost. But on the flip side, you have to bear in mind that we are favored by positive coverage from 2022. And on the other side, materials like natural gas in Europe, fresh milk, the euro dollar, most of the commodities that are procured in Europe are globally traded in U.S. dollars, those are putting pressure into 2023.
I want to reassure you that in terms of continuity of supply these days in terms of natural gas situation in Europe, I think the situation is a little bit better than as it sounds by reading the news every day. So I’m not necessarily at this point, particularly worried about continuity of supply. I’m more worried about the implications that natural gas and the cost of natural gas can have on the overall because besides the exposure we have, there are materials like packaging and others that are strictly linked to energy cost, and so there might be ramifications due to that.
So I think the simple way you have to think about 2023 is going to be, at this point in time, based on what we see, the same amount of dollar pressure into the P&L. Now we are very flexible in the way we cover commodity into 2023, unlike in the past where we would go with straightforward in some materials, we are keeping our optionality. And so we are putting in place structures whereby we limit the exposure, but on the other side, should commodity and cost subsides, we will take advantage of those and that will give us flexibility within the P&L.
Andrew Lazar
Got it. Got it. And that’s a good segue, I think, Dirk, and more broadly, I’m talking about the consumer and consumer behavior. When you think about the risks to more significant changes, right, in consumer behavior across the U.S., Europe and emerging markets, I guess, how would you rank order sort of your relative concerns?
Dirk Van de Put
Well, first of all, we’ve put in place a number of monitoring mechanisms that allow us to understand what’s going on in the mind of the consumer and in the behavior of the consumer. And what I would say is that there’s a clear difference as you talk about the sentiment of the consumer between the different regions around the world. Consumer is particularly nervous and negative about how they see the next months playing out for them from a standard of living perspective. The worst assets we’ve gotten or the highest percentage of people that declare serious nervousness for the U.K. and U.S. But in general, I would say all European countries were quite low, and we saw more positive sentiment in Asia and in Latin America.
At the same time, we also look at what is their behavior at the moment because on one hand, we get a clear signal from the consumer, particularly in Europe, that they’re nervous that they understand what’s going on. They see their energy bill and so on, and they declared that they will need to make choices as it relates to how to spend their disposable net income. And they say that they’re going to spend more on groceries as a percentage of the net income and that they’re going to save in areas like food, durables, eating in, ordering in, vacations, entertainment and personal care. Those are the ones they mentioned. We do expect, seeing the fact that there is more pricing to come, that also in food we will see a shift. But at this stage, looking at shifting to private label, shifting to lower cost brand, stepping out of the category and so on, we really see no signals that would indicate there is a big change in the buying behavior of the consumer.
But all logic will say at a certain stage, we’ll start to see a shift. I think we’re a little bit protected because of the categories we’re in, biscuits and chocolate are usually not the categories where big shifts happen. We know that from past recessions and in particular situations where the consumers feel particularly pressured for stress, they tend to be go-to categories so to feel better as we saw in the pandemic, but we do expect a little bit of shift to happen. But if I would rank it, I would say, at this stage, very happy about our situation in EMEA and in Latin America. U.S. consumer nervous, but not necessarily. I think, stepping into a big way into the consumption and the European consumer clearly more nervous and starting the only behavior we see shifting there is that they’re starting to buy in different channels. So they’re looking for cheaper options, they are going more towards the discounters. That’s the way I would position it.
Andrew Lazar
Luca, turning to the capital return side of capital deployment. I guess the company continues to buy back somewhere in the range of $2 billion a year. We recently raised our dividend again by more than 10%. How do we think about your priorities going forward in terms of both of those items?
Luca Zaramella
I mean the first priority, which is very important for us is to continue to invest in the business. As you think about the investment, obviously, it is A&C. It is particular capabilities like digital, and importantly, it is route to market opportunities. We are not short of growth opportunities within the company. And particularly within the core, we still have ample margin to grow. I mean, it is amazing to see these days how developing markets are evolving, how production keeps on being up and up in places like India, China, et cetera, at least for us. And so the #1 priority is to continue to invest in our brands, in our capabilities, including digital.
In terms of capital expenses, we’re going to be very selective. And if you think about how we’re going to deploy capital expenses, it is behind 3 fronts. The first one is behind growth. And we are not talking about necessarily new products. I mean what is really working well for us is a platform like oil we have been putting down new lines for oil pretty much across the board, across all the countries in the world or where we have facilities that make biscuits. It is chocolate, we could be selling much more in India if we had the capacity. So we are putting down new lines, and potentially, we have been thinking about a new facility in India. It’s in places like China, again, oil lines, et cetera. And then it is particularly around productivities where we will have to invest — and then it is the third chapter, which is to get some of the synergies on the acquisitions, we will have to spend some capital.
In terms of M&A, I think what you have seen, talks about the strategy we have. It is a clear strategy. It is about incrementality. It is about a certain sweet spot in terms of size. We like $600 million, $700 acquisitions. It was the case in the [indiscernible] the case in Chipita, $800 million in revenue terms for Cliff, where we can integrate the business, get the and eventually take those brands and those propositions and extend them internationally, like in the case of Chipita increase. The confidence we have in terms of free cash flow generation, we continue to do well in working capital. There are still opportunities we have around DPOs and around inventories, gives us the confidence to be able to raise and to continue to raise dividends in the foreseeable future. And obviously, the $2 billion of share buybacks are really something that we can turn on and off depending on the situation. Not to forget that, obviously, we have some coffee stake sitting on our balance sheet, which are sometimes overlooked by investors. And as Dirk said, 20% of the portfolio not being in the core categories of biscuits and chocolate or big snacks and bars. So you have a sense that we have also the flexibility within our balance sheet to do what we want to do in terms of going forward investment.
Andrew Lazar
Time for maybe 1 or 2 more. Just maybe just we hear a lot from companies, obviously, the last 2 days on supply chain. And I think the general take that I’ve seen is making progress, but it’s slow. It’s gradual. Maybe just a quick little update on sort of where you’re at around supply chain as well. Obviously, you’ve gone through a couple of ways of sort of supply chain dynamics, I guess the best way to put it.
Dirk Van de Put
Yes, yes. Well, I would say that in our case, the worst situation is clearly in North America as it relates to the supply chain. I would say in the rest of the world, our customer service is lower than it used to be before the pandemic but it is not dramatic. It is an acceptable degree and I think our clients, in general, are pretty happy with us. It’s particularly in the U.S., where I think for most of the companies the problems are situated. I would sort of bucket them in 3 areas. First of all, reliability of what’s external to us, evolved us about transportation cost and reliability, about raw materials, cost and reliability and labor. And so that is improving. But I personally think that it still will take well into ’23 before we are into situations that are more acceptable. And as we look at stocking, we still see some significant inflation hitting us as it relates to commodities.
The second part for us has been the overall capacity. During the pandemic, we saw an increase in our demand. And that has led to pressure on certain of our brands. That was combined with the third point that I would like to make is that the overall functioning of our lines has been affected by the pandemic. We also had a strike that interfered with it, which depleted our inventories. But the lines are not having the same level of production that we used to have. That’s a consequence of variations in labor, that’s a consequence of the need to produce at a high level and so on. The last part, I think we will solve in the coming months. The building of the capacity will also take us well in 2023. Long story short to say, we will make significant progress from our perspective as a company by the end of this year, beginning of next year. But to get ourselves back into the level of customer fill rate, which used to be in the 97, 98 percentage in the U.S., that’s going to take us the better part of ’23. And from what I hear, that is similar to all other companies. Yes, that’s true.
Andrew Lazar
So maybe as a last one, sustainability is certainly a topic that’s increasingly relevant for many fundamental investors. At your recent Investor Day, I think you added sustainability as 1 of the 4 core pillars. Maybe you could provide a quick summary of your strategy and where the company is making the most progress?
Dirk Van de Put
Yes. Well, we try to not do everything. So we try to focus on 3 particular areas. The first one, of course, is the environment. The second one is health and wellness. And the third one is diversity, equity and inclusion. So if I talk about the environment, we are trying to become a net carbon 0 by 2050. For us, that means that the bulk of our footprint is coming from our ingredients. And so we need to work particularly on supply chains like cocoa and palm oil to bring that footprint down.
The second part is, of course, our own operations. You have to imagine electric vehicles, electric ovens and changing our operations to a more sustainable energy, basically. So that’s the bulk of what we’re trying to do, but we are trying to be very specific as it relates to where are the areas we can make the biggest impact. Related to that is also the packaging question, of course, and we’re trying to have a closed-loop system for our packaging also by 2030 — sorry, the other one is 2050, this is 2030. And so we’re doing well on the recyclability of our packaging, where it’s much more difficult for us is the recycling and the re-usage of our packaging materials, which in flexible is a particular problem.
As it relates to diversity, and inclusion, we have programs around the world because it’s not just a North American issue. We have particular targets that we are trying to achieve as it relates to management or what we see in our engagement surveys, and we are trying to take a very proactive approach in that area. And then as it relates to health and wellness, our position is that we want to make sure that we offer a balanced portfolio to the consumer and that they have a choice of what they — so that’s in a nutshell. I would say the difference for us is that we’re only trying to focus on areas where we are important and where we can make a difference. We’re not trying to do everything. We think this needs to happen in collaboration with others. So we’re very open to do this together with our peers or with any stakeholders that are interested. We believe that it needs to be measurable and that you need to be very close and being able to show what progress you are making. So that summarizing is a little bit harder. Great summary. Great summary.
Andrew Lazar
Okay. So we’re coming right up against time. So one note, Mondelez won’t be — will not be hosting a breakout, so just keep that in mind. And please join me in thanking Dirk and Luca for being here today with us.
Dirk Van de Put
Thank you.
Luca Zaramella
Thank you.
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