Mondelez International, Inc. (NASDAQ:MDLZ) Barclays Global Consumer Staples Conference September 4, 2024 9:00 AM ET

Company Participants

Dirk Van de Put - Chairman and CEO
Luca Zaramella - CFO

Conference Call Participants

Andrew Lazar - Barclays

Andrew Lazar

Perfect, all right. If we could all find our seats, we'll kick off our next fireside chat with Mondelez. Good morning. Welcome back everybody. I'm thrilled to welcome Mondelez International back to our conference, and with us this morning our Chairman and CEO, Dirk Van de Put; and CFO, Luca Zaramella. Welcome gentlemen.

Dirk Van de Put

Hi. Thank you.

Andrew Lazar

Mondelez was actually the most requested company of all the companies here at this conference in terms of meeting. There's a high level of interest. We'll jump right in. Maybe Dirk, we'll start with you.

A lot of topics to cover, right, including Cocoa, U.S. biscuit trends, health of the consumer. But I want to start bigger picture. I think, if we take a step back and you think back to the company's sort of strategic launch back in 2018, you've managed to deliver through lots of volatility, very consistent results, in line at least if not better at times with your long-term algorithm. Do the shifts the past year or so in consumer behavior and input cost volatility require sort of a different strategic approach now or just more tactical moves as you work through it?

Dirk Van de Put

The answer to that is, it's both. If you look at the premise of the company, the premise of the company is that, we want to be the global leader in chocolates, biscuits and baked snacks. If you look at those categories, those are appealing categories that have good growth, good value creation, particularly in emerging markets the per capita is quite low.

For us as a company, we have some of the most iconic brands in those categories. We are getting better and better at growing those brands establishing them around the world. We have geographical opportunities, because we are not the number one in every category in every country. We have big geographical growth. Within the categories there are segments like premium that are growing. And when things turn like today, these categories are quite resilient.

So the premise of that, we want to be the leader in those categories is still the same. The strategy of how we're going to do that is still the same. The runway of growth I think for the next 5 to 10 years is very good. We don't see a reason to change our long-term strategy. We'll keep on doing what we're doing.

If you look at the short-term there are some shifts, which if you look at what the consumer has gone through with COVID and the inflationary period is expected that there will be some reaction from the consumer. So we have to deal with it tactically. And I can explain a little bit what that means for us. But that doesn't mean for us that we are not already looking at ‘26 and where do we as a company want to be in ‘26.

I would say we are confronted with two big things for next year. One is the consumer and how long is this suppressed consumption pattern going to continue and what do we do with it? And second we have the cocoa inflation that is a temporary offset but it's there.

So from our perspective the tactical things we need to do is probably adjust some of our promotional techniques our RGM where we think the consumer enters and stays into the category, play around with that make sure that we only invest where it matters and try to keep all our other costs under control and probably reduce them. So it's going to be a frugal year if I can call it like that.

We'll keep on investing. And for us winning at the end of ‘25 means that our categories are growing and healthy and we are basically the stewards of those categories that our market share is the same or has increased and that we deliver a reasonable financial year and we are positioned for significant growth in 2026.

Question-and-Answer Session

Q - Andrew Lazar

Thank you for that. Luca, I think it makes sense to dig into the company's recent second quarter earnings from late July a bit more, right, where you reaffirm the upper end of your 3% to 5% year-over-year organic net sales growth guidance. It implies organic revenue growth in the back half of the year will accelerate to more than double what you reported in the second quarter and that improvement will need to be volume based, given you expect the same year-over-year benefit from pricing in both halves. Maybe you can remind investors why you're still confident in being able to hit that target as I know there are some clearly discrete dynamics involved?

Luca Zaramella

Yes. So I think when you look at the first half, the total top line growth was around about 3.5% with volume down around about 2%. Two key items in there that drove the volume decline year-on-year and it is the European disruption and the EMEA boycott. And I think we are in a good place in terms of having implemented pricing now particularly in Europe. Disruption is behind us.

And so as you look at the second half, there are pretty much three key drivers that will drive the improved performance. The disruption in Europe being behind us and happy to report after having seen now July and August that numbers are quite good in Europe to testify the great job done by the European team getting back on track and loading up promotions for back to school. Consumption is coming. And so I think Europe is really setting the stage for an improved and accelerated top line growth in the second half.

The second one is a recovery from the U. S. Market softness that we saw in the first half both in terms of market, but also in terms of share. We talked extensively about all the actions we are taking. The most recent numbers in terms of category and share performance are quite good, I would say and encouraging. I think you all saw maybe the Oreo coke promotion that is not in market yet. It will come in its full effect in September. And so we are fairly positive about the U. S. too.

And the second thing -- the third thing that I mentioned before in the earnings is the fact that, Q4 last year specifically we had some one-time impact, particularly around the Give & Go business where we sell these kits that are quite heavy gingerbread type of kits that people use to make houses, et cetera, small houses. Those kits we had to restage the business for profitability reasons. And so, we discontinued some of the product lines and obviously that is in the base. So we feel quite good about the second half.

As I said, both July and August were solid numbers and I think you will be pleased with the numbers you're going to see in Q3. We feel quite good. In terms of profitability, I think you saw the material profit increases that we had year-on-year. Now part of it is clearly driven by the favorability related to how we procure cocoa in the first part of the year. But on the other side that gives us a little bit of more flexibility to activate promotions, where we see some consumer softness.

Andrew Lazar

If you haven't seen the Oreo Coca-Cola sort of collab or activation, the samples are in the back room there where all the products are, not in the market yet. Give it a shot.

Dirk, let's return to Europe here. After having successfully completed another round of pricing, you noted in late July that, you were seeing elasticities moving really only slightly higher, but remaining pretty modest overall. How are things progressing in Europe since then? And I ask more because as you've mentioned, there will likely be the need for further pricing in the region in '25 to help defray some of the cocoa cost inflation?

Dirk Van de Put

Yes. Yes, the pricing discussions in Europe are behind it. They came to a good end. We're now fully at filling the pipeline and acting normally in the market. I would say, the consumer around the world, the way I phrase it is, they're frustrated with the inflation, but they're optimistic about the future.

In the U.S. I would say, the frustration is much bigger than it is in Europe. I think the European consumer sees a little bit less inflation than the U.S. consumer, and the U.S. consumer tends to react more violently to these things. We see less elasticity. We see a more optimistic view. Unemployment is low in Europe. They see good wage increases. Inflation is easing, and starting to go down in some items. Overall the consumer feeling is good.

Second, as we look at our categories in U.S. We see some consumers getting in and out, or out of the category. That's not the case in Europe. And so, so far so good. As Luca was explaining, we were expecting a good second half. The new pricing is in the market about a month or two, I would say and so far so good.

Now going forward, we will have to do more pricing so we put in chocolates. So we are putting in place a number of mechanisms. First of all we won't line price everything. We will launch some new items at different price points. We will do what's called RGM. On top of that, when we do line pricing we won't do it in one big shot. We will do in steps so that we can see how the consumer reaction is.

We're putting in place very close follow-up mechanisms that allow us to read right away, what the reaction is going to be to those note prices. And probably the most important part is that, in chocolates historically we've seen low elasticity. It's an affordable indulgence getting more expensive, but still most consumers don't want to give up chocolates on a regular basis, particularly if it's an item that you used to pay EUR2 now you're going to pay EUR3 let's say that's still something they see us as doable.

And so, we have pretty optimistic on what we will see as it relates to those price increases in chocolates, but we're putting any everything in place to make sure that we don't get surprised.

Andrew Lazar

Right. Luca, moving on to maybe one of the bigger areas of focus for investors, you've been pretty open and consistent around your expectation for a market correction in cocoa costs with the catalyst being the main crop data which we should be getting I believe in pretty short order a couple of weeks.

As we sit here today, maybe you can share an update of your views on the topic as well as some insight to the extent that you're able to provide around how the company may have gone about sort of hedging for cocoa differently this year than it has in the past. I think regardless of where cocoa ends up, it's fair to assume you'll be facing a pretty material cocoa inflation headwind in '25.

What will your approach be to pricing? Dirk talked about this a little bit, such that you can best balance the need right to offset inflation, protect margins with the need to maintain solid volume and share dynamics?

Luca Zaramella

So the good news is that cocoa came down quite a bit from the most recent historical highs it held pretty much or even more. And so there is the market discounting the fact that the crop particularly in Africa is going to be quite good.

We monitor consistently and very closely the crop evolution. We told you that the mid-crop was about to be good when there were a few weeks to still to count for the crop to become available and the crop had been good. The main crop is evolving quite well. Soil moisture and all indicators that we look at quite precisely including obviously counting the pot on the trees indicate that this is going to be a good crop up around about 20%, 25% from what happened last year. So the supply side seems to be good. Still as you say a few weeks to go, so we can't declare that the crop is going to be good yet for sure, but all indicators are there.

Market is seeing that. In fact, today if you want to get a physical cocoa position in Q4, it is at prices that we have low prices that we haven't seen in a while. And most likely there is a further adjustment still to come when the crop really becomes available. In that context, clearly we want some protection, because we are already towards the end of 2024.

And so we have some coverage into 2025 in terms of cocoa. But anticipating a material reduction in cocoa prices, our approach to coverage has been really to get flexible structures that would allow us to participate in a material correction of the cocoa price if it had to happen. And so that is on the cost side. As I said many times, we will have visibility on the crop. I think that will shed some light into really what the cost of cocoa will be for 2025. And we'll tell you more about our earnings in ‘25 and how cocoa cost will evolve into ‘25 in the Q3 earnings cycle.

It is clear that we are not going to price regardless of our coverage, regardless of where cocoa will end up being blindly left and right. We love the chocolate category. The chocolate category is one of the most loyal and resilient brand driven categories. It is most likely the best snacking category you can think of.

And our role is to make sure that we don't lose penetration and frequency. We will be very careful with pricing. We will protect key price points particularly in emerging markets. The likes of India and Brazil, we still want to make our products available to consumers that have specific coinage availability.

And on the other side, we will go most likely with the most extensive RGM programs this company has ever seen, which means, not necessarily slower grammage on some of the propositions, but proposing to consumers a full array of price points. And so, you will be able to find your Milka, your Cadbury and you name all the brands that we have at multiple price points, allowing people to really have something that is affordable on the go, but on the other side something that might appeal to families in a sharing occasion.

I think, it's also important to say that, there is, what we call seasonal that is much less elastic. And so, big events like Easter or Christmas or other events around the world are really conducive to us to really double down and making and protecting our share. So the goal is really to protect volume, to protect our share. And pricing is a little bit the degree of freedom. We will play with line pricing in a way that will allow us to optimize our top line first and foremost, because we believe cocoa eventually will come down regardless of our cost into 2025.

Andrew Lazar

Great. Thank you. Luca, maybe staying with you. Separate from pricing, you also discussed additional productivity initiatives to help deal with the higher likely inflation in '25. Can you talk a bit about what incremental moves you've made and how you keep from cutting into areas such as marketing and innovation?

Luca Zaramella

Yes. So we want to protect investments as we have always done. If you look at the quality of our P&L, consistently over the last few years, we have been increasing working media. But there are still parts of the P&L that we can optimize the clearly non-working media. We have circa 40% of our total marketing budget that is non-working. And we are putting a tight lead on that and optimizing and so getting productivities out of it.

We are clearly looking at procurement initiatives. And so, whether it is direct or indirect, we are tasking the organization with additional productivities. In supply chain, if we optimize the portfolio, we expect line efficiencies to stay the same. And so, hopefully, we will deliver more productivity. Importantly, we will go for negative overhead growth into next year.

Areas like advertising and support to our brands or for that matter digital investments, or route to market like India and China are fully protected into business. So this is not going to be ZBB it's going to be a year where we will calibrate expenses in areas that are not as impactful in terms of driving top-line growth as we have never done in the last few years. Maybe we did it out of COVID. But we feel confident that, that will provide also on an ongoing basis a much better P&L, as cocoa comes down and as we reap the benefits of all these actions that we're taking. These are non-regrettable actions.

We're not going to touch the formulation of our products. And so you can still enjoy Milka and Cadbury and all the beloved brands that we have as they are today. We're not going to change cocoa content or anything because of this. Again, our goal is to keep chocolate intact as a category as we move forward.

Andrew Lazar

Okay. Dirk, moving to North America. Mondelez is stepping up some promotional price points on more value-oriented brands such as Chips Ahoy! But more importantly, with the consumer's definition of value having shifted, Mondelez is now also rolling out new package configurations, which should enable the company to hit sort of key absolute price points more in that $3 to $4 range.

Even consumers that are shopping with a fixed overall food budget, should be able to include biscuits in their basket more frequently. On your recent earnings call, you mentioned while still early, we're seeing some green shoots. We've seen some of that in the most recent data. How have things progressed since and how much improvement is needed here to reach your annual overall corporate growth target for the year?

Dirk Van de Put

Yeah. So you phrased it well Andrew. So the consumer particularly the lower socio-economical class consumer, let's say family income above -- sorry below $75,000 has shifted their way of shopping and they're now shopping towards an overall price for the basket. While in the past they were really looking about the best price for that item the overall price of the basket was not that important.

So we have adapted. This consumer is also shifting channels where they buy. And so we are adapting to those changes with the things that you mentioned. What are we expecting to see? The first thing is that the biscuit category which is our main category is stabilizing and that is the case. We're seeing slight volume growth at the moment. Nothing to get too excited about, but from negative volume growth now it's flat to slightly positive.

The second thing that we are looking for is what is happening to our market share. Our market share is improving. And then third, does that translate into positive volume growth for us in the second half of the year? And so far after two months that it is the case. So as we have targets where North America needs to come to the U. S. needs to come to in the second half, we are totally in line with those targets right now. So after two months we feel pretty good of where we are.

Andrew Lazar

And Dirk a big activation in the U. S. and beyond right is the partnership with Coca-Cola. Can you talk a bit about why you're excited about this activation and what's important for investors to know about it?

Dirk Van de Put

Yes. Well, we're excited because it's the biggest activation we've ever done on Oreo. So and we already see it in the volume. It's going to be double the volume of any other activation we've done so far. But the reason why we do it on Oreo is that Oreo is a bit of a becoming or is a bit of a cultural icon of today's world. It's a playful brand that does quirky things always reflected into a unique cookie that goes with that activation.

So we for instance done the Space Wars Oreo or Space Dunk Oreo. We've done Star Wars Oreo, sorry, and Space Dunk Oreo. Now there's a Coca-Cola Oreo and Oreo flavored Coke Zero. So it creates a buzz these things. I mean if you haven't had either item I would certainly strongly recommend. But when consumers can be part of that they start to post it on social media. Clients get excited.

They give us more space, bigger space with our normal items. It doesn't only have to be the activated item. We got a lot of press around it. So the loyalty of our consumers the interest of the brand goes up. We get new people into the brand that want to taste this coke flavored Oreo. It makes sure that we keep on having this ongoing series of activation. So we have to come back with these things. But our team has been quite good in coming up with the new things.

And overall it builds up the overall statue of Oreo. What's also important this time is that we've done a lot of these in the U.S. This is the first time we're doing a global activation. So it's in many countries around the world where we see these two products.

Andrew Lazar

Shifting to emerging markets you've set a target I think to add about 3 million new stores by 2030, which is about a 25% increase over 2023 levels. I think I have that right, but correct me if I'm wrong. And I guess what will take to make good on those gains, both in terms of time and incremental investment and how do you think about prioritizing individual markets and what markets are likely to be prioritized?

Dirk Van de Put

I don't know exactly what the number is that we said. But if I take 23 years as an example we've added 600,000 stores to our distribution. The countries that are getting prioritized are the emerging, the big emerging markets. So we talk about India, China, Brazil and Mexico. If I go through it and to give you an idea of what's still possible for us, in China we're now in 3 million stores. We've added last year about 120,000 new stores. That is a rhythm that we will continue.

China really for us is a universe of 6 million stores. In half of the universe adding let's call it 100,000 to 150,000 new stores every year. India is a universe of 9 million stores. We are now direct or indirect in about 3 million stores. We've added last year 180,000 new stores. We've added 120,000 already in the first half of this year. India even a bigger opportunity for us to keep on growing. It is profitable, so we sell well in those stores.

In India also, apart from getting into new stores, since we are mainly a chocolate player, we have to put what's called Vizzy coolers, which keep the chocolate refrigerated. Since 2019, we've placed about 700,000 of these Vizzy coolers that go on the counter in the convenience stores or in the traditional stores. The other one last year, which started to really more is Brazil. We've added 120,000 stores and then the rest is in different emerging markets. That rhythm we are continuing to keep up. We will add 3 million or more by 2030.

The other thing I would say, those investments are into our algorithm. It's not like, we had to do special investment last year which we cannot repeat this year. We are building into our algorithm and we are also building in for '25 the investment in that expansion of distribution, plus the renewal of what could be necessary for instance in Vizzy coolers and so on.

Andrew Lazar

You've also made some investments recently in Mexico with Ricolino with adding some significant distribution capability. Maybe you can talk a little bit about the rationale behind that acquisition. How that integration has gone and what you see in Mexico at the moment?

Dirk Van de Put

Yes. In Mexico we have a full spectrum. So we are a player in chocolate, we are a player in biscuit, we are in gum and candy. But historically, our business was largely gum and candy. And so, with the acquisition of Ricolino that put us in the chocolate and we had started to launch our biscuit range into Mexico.

Ricolino the other big benefit of Ricolino is that they cover about 400,000 stores which is a lot more than we were covering traditionally. So suddenly we have a universe of stores that is opening up for us. And we are actively rolling out now particularly our biscuit range Oreo in the first place, but also Chips Ahoy! into those stores. So the overall strategy of why we did it and what it's supposed to do for us is working.

The integration went well. There's many integrations that need to take place. The biggest one was opening, because it was a carve out, out of Bimbo, Ricolino was opening over 100 new distribution centers brand new and activating those that has gone well. Then we're integrating the routes, which we're doing at this stage. They had routes, we had routes, we have to integrate it. It was a system integration. The system integration was a little bit more difficult than we anticipated. We had some hiccups in Q1.

In Q2, because of the Mexican election, consumer in Mexico feels great because about 80% of the consumers are affected in one way or another by government subsidies. The minimum wage has doubled in recent years. So consumer feels really good. But during that election period, they stopped those subsidies. So the consumer was really affected by that. So offtake to went down a little bit.

And we are now also starting to see a little bit of a reaction to pricing. So we have to adapt our pricing. So I would say '24 is a so and so year as it relates to our performance. We have issues that we are dealing with. But overall, the premise of why we did it and what it's going to deliver for us is still very intact.

Andrew Lazar

Got it. And Luca, maybe turning to capital allocation and M&A and in light of the recent sort of Mars announcement, can you remind us and investors how to think about your M&A strategy, has anything changed in this current environment or similar?

Luca Zaramella

It's very similar. We like for mostly bolt-on acquisitions of the like we have done in the last few years. If you think about Clif if you think about Ricolino you think about Give & Go. The way we look at this is in markets where we don't have enough scale we are not necessarily obsessed by acquiring biscuits, chocolate or baked snacks.

In the case of Ricolino for instance, there was a present in candy sector. But again, that would allow us to go and distribute Oreo and to make Oreo much bigger in Mexico. So in these markets where we don't have enough scale, we are looking obviously at our core categories, but not necessarily. We are looking at adding scale and making sure that, again, we can get revenue synergies through our core categories.

In markets where we are at scale, we are looking for assets that are chocolate, biscuit and importantly, in cakes and pastry. We keep on being very excited about cakes and pastry. It is a massive category. It is a category that grows very fast. It is a category that allows branded products that we have in our portfolio to really thrive. And so that's really the focus.

In terms of targets, I would say, most of the targets we are looking at are privately owned and so there is no perfect timing. We don't control timing. We have good relationships with the owners. I think you saw that we come up with structures where there are earn-out and where we keep management and ownership in place just to guarantee continuity.

I didn't mention as a category, we are looking at snack bars. At this point in time, between what we acquired through Clif and what we have with other brands like Grenade and Perfect Snacks, I think we have in our set of brands, enough platforms that we could roll out geographically and expand given that, that category is nascent in many places, but it is still quite a big opportunity in our eyes.

So nothing has really changed. I think the balance sheet is very strong. I remind that we still have our coffee stake and then there are some categories that are non-snacks that we could potentially divest, should an acquisition come to fruition.

Andrew Lazar

And Dirk, Luca brought up cakes and pastries, I know that's an area that you are excited about globally. Can you talk a bit more about the assets that you currently have in that space and what makes us such an attractive space as you see it?

Dirk Van de Put

Yes. Yes, I'll start with the space and then the asset. So cakes and pastries, the way I try to explain it is, if you imagine the biscuit aisle, which is probably crackers and sweet biscuits. In Europe, particularly a little bit less in the U.S. across from that aisle, you will find a whole space with softer offerings, cakes and pastries offerings, basically. So it's a natural extension of the biscuits space.

It's a space that's very fragmented. It's about an $80 billion market globally. Slightly smaller, but not a lot than chocolate and biscuits. But in certain markets like China, where chocolate is $4 billion, biscuits is $8 billion, cakes and pastries is a $30 billion market.

The other reason why it's interesting for us is that the brands we have in chocolate or biscuits have a natural right to play in that space. So it is a natural extension for us. Another reason is very fragmented. Sometimes quite basic products. So for us to come in with high-value brands with innovations that premiumize that category, gives us the right to play. So we're quite excited. It's a category that's growing well in line with the biscuit category globally, a higher net revenue per kilo than biscuits.

So these are all the reasons why we like this space. It's sort of a natural extension for us. How we want to play is what I explained with big brands premiumized going into what's most excited in this category. So the items that we have, one is called Chipita. It's a company that was based out of Greece, but it's largely sold at this stage in most Eastern European countries, but it has started to have presence in the Middle East, in Mexico and so on.

It's largely a packaged croissant. It's more of a meal replacement snack mid-morning snack with a coffee at an acceptable price point, very high penetration in middle class and lower social class consumers. The opportunity there is to innovate with some of our chocolate brands, have a higher distribution in the existing countries and then extend worldwide. We're testing several countries around the world. But as I was saying, even before we bought the company, they were already having success in Mexico, in Malaysia, in Saudi Arabia, they're doing well in India. So we see this as an item that could go worldwide.

The second interesting evolution in this space is if you think about the in-store bakery in the U.S. or the bakeries in Europe, they are switching more and more to a freeze and thaw model but they receive their cakes and pastries, from factory frozen and they thaw on the way over there and then are presented as fresh to the consumer. That is very interesting for the retailer because if they have to make it in store that has a lot of labor related to a lot of waste.

And so we will see a shift gradually over time towards that freeze and thaw approach. Give & Go, the company that we bought was about a $400 million company 4 years ago. It's already a $700 million company now. It's the biggest player in this space in North America. We're the same thing in cross-sells, brownies, biscuits and so on. It's what you find into the bakery space. That is a high value-added, high net revenue per kilo segment that spikes the interest of the retailers. We've started to bring in our brands, Oreo and so on. And so we think that's going to be a development space globally in cakes and pastries.

Andrew Lazar

Maybe in the last minute, you've talked about -- it's obviously too early to talk about specific '25 guidance. It's clearly too early to talk about '26 guidance. But is the thinking that the goal is to sort of end up in '26, sort of where you would have under what a normal cocoa environment, but the path there just may be a little different than typical because next year, you've got greater inflationary pressure, but in theory of cocoa somewhat normalizes potential for outsized growth in '26. Am I thinking about that generally the right way?

Luca Zaramella

Yes, you are. The '25 P&L for the non-chocolate part of the portfolio is going to be on algorithm or slightly ahead of our declared algorithm. I would say chocolate, as I said, will be managed for the long term. So retaining volume and share as much as possible and importantly, making sure that that P&L is sustainable at the cocoa levels that we're going to see going forward.

And so if we retain volume, if we play wisely and retain or gain share, I think a normalized level of cocoa will allow us to really have a very good 2026. And importantly, as I said, we are implementing cost measures, which eventually with cocoa stabilizing and going down will allow us to have more headroom within the P&L and either do selective investments or drop it -- the benefit to the bottom line, but reality is if cocoa adjust and we manage cocoa and chocolate as a P&L right in 2025, 2026 should be a very good year. And so you have to see like '26 as us being where we would have been absent the cocoa inflationary pressure.

Unidentified Analyst

Great. Can you just update on splits big acquisition a few years ago right?

Andrew Lazar

Why don't we do this because we're right up against time. But Mondelez is going to do a breakout. So why don't we roll into the breakout right next door, and we can take that question in there, if that's okay. Please join me in thanking Dirk and Luca for being here today.

Dirk Van de Put

Thank you, Andrew.

Luca Zaramella

Thank you, Andrew.