Mondelez International, Inc. (NASDAQ:MDLZ) Barclays Global Consumer Staples Conference September 6, 2023 7:30 AM ET

Company Participants

Dirk Van de Put - Chairman and CEO

Luca Zaramella - CFO

Conference Call Participants

Andrew Lazar - Barclays

Andrew Lazar

So welcome back, everyone, to our fireside chat with Mondelez International. I hope everyone had a really, really good productive day yesterday. I know it's a lot to process in a short period of time. We've got another pretty big day ahead of us today. So we're looking forward to it. With me today are Chairman and CEO, Dirk Van de Put; and CFO, Luca Zaramella. Welcome, gentlemen. Truly great to be back with you in person here in Boston, and just a reminder, there will not be a breakout for Mondelez after this session.

So maybe just to kick it off, I think a good place to start, the Company's recent second quarter earnings in July, certainly, at which you sounded very positive about the outlook for the rest of the year. And I think perhaps maybe somewhat surprisingly to a lot of people in the room spoke very encouragingly about the state of the consumer.

We're now a couple of months removed from that earnings call. So I was hoping you can maybe provide sort of an update on the current landscape as it relates to Monday specifically. And maybe any changes 1 way or the other that you're seeing in the consumer that are notable to you.

Question-and-Answer Session

Q - Dirk Van de Put

Yes. We, of course, look at the consumer largely through the lens of far categories in our case, chocolate and biscuits baked snacks. And in those categories, we clearly see strength as it relates to the consumer. We don't really see their consumption slow down.

Volumes in our categories are flat to slightly positive. And we see a few changes as it relates to the buying pattern in the sense that in certain areas and certain classes of consumers, they increase the frequency and reduce the amount that they're buying. So they tend to shop around a little bit more to more of the discount channels.

But overall, we see our category is very resilient. If we then also look at what is the sentiment of the consumer and how do they feel. And we see, in general, there is a preoccupation, but an increasing positive feeling about where things are heading in Europe and in U.S. And in emerging markets, for a long period of time now, we have seen a relatively positive attitude of the consumer.

Maybe something else to note is a promotional pressure increasing? Yes, but not to an incredible degree. Is private labels increasing? Not that much. And in biscuits, over the last 2 years was about 1 point of market share, so private label in biscuit is about 10% of the market.

And then in chocolate, it increased 0.2% of a 5% share that private label has. So we really don't see big changes in the consumer, and overall, a pretty positive attitude. They tell us they want to keep on buying our products. Our brands are still very high on their list. So, I know it's a little bit different, but we can't tell that we see anything major happening with the consumer, right?

Andrew Lazar

Also on the second quarter conference call, Mondelez raised 2023 constant currency EPS guidance to 12% plus year-over-year, implying at least there's likely some flex above sort of the 12% floor. As you think about achieving sustainable long-term EPS growth beyond just this year, maybe talk us through how you think about the balance between sort of maximizing '23 EPS growth, but also reinvesting some of that potential upside in longer-term opportunities, white space distribution and such that can set the Company up for sustained growth further out, as well as what maybe some of those key opportunities might be?

Luca Zaramella

Yes. We are very positive about the year. And fundamentally, there are three things that made us increase guidance. The first and most important, I think was the fact that we ended the first half with a very positive momentum in the business overall. And I was particularly pleased with the operating part of our EPS, which is really an amazing number that the team achieved throughout our businesses.

The second thing is the consumers and our brands. We see resilience, we see pricing sticking, and we see volume momentum. In fact, you, of course, the only one that post the negative volume in Q2 because of the disruption we talked many times about. And the third one is clearly Europe landing in a good place in terms of pricing. And from that pricing being now established, you start seeing margins momentum. We are reinvesting that in the business, and we are going to deliver volume growth in the second part of the year across more like over the region. So, we feel very good.

The 12% is a core. And as I said, that allows us to play some flexibility where we won't invest. The situation in the U.S. and the supply chain is pretty much where it should be at this point in time. So, we have stock availability, and we can push a little bit harder on advertising investments. And so, we want to support our brands. We are not going to invest present volume and promotions. We prefer investing in advertising.

In emerging markets, we are going to invest in distribution initiatives and in advertising again. And the idea is really tying third-year [indiscernible] with great momentum across the board, which I think we had by the end of the year.

As I said, the initiatives are the same. They are intended to sustain our brands and give us sustainable competitive hedging in the next year, particularly in light of the fact that we will have to take some additional pricing.

Andrew Lazar

A good segue in the rise in some items like sugar and cocoa have been pretty well documented more recently. Understanding that you have different hedges set in different places that we're not necessarily privy to, I guess how do we think about the potential need and timing of further pricing actions across geographies to offset some of those inflated costs?

And we've been very successful, obviously, in taking pricing that you needed even in markets that are difficult historically for that such as Europe. What's the appetite, right, of the Company to sort of continue to view that if needed, if justified? And what's been learned, I guess, through the recent two ways in Europe specifically that might help inform those decisions as you go forward?

Luca Zaramella

I think as you said, you look at the cocoa price increases, particularly you see material decreases. I mean we are talking about 50% over the last 12, 24 months. We have very good coverage. We are quite favorable to the market and to start with 2023 cost pretty much for across all commodities have been locked. So, I don't think there is going to be any surprise on a constant point of view to 2023.

As far as '24 goals, we are covered for a good part of 2024 already across all commodities. Cocoa, a little bit less, but we have good covered. And importantly, that is favorable to market prices today. The way we look at this is we will try to price at replacement cost. And we are going to do it in a way that eases both retailers and consumers into new pricing particularly in emerging markets, particularly for products that are low unit price, we will protect price point.

In places like India, small unit price products are the way we recruit consumers for the future. And so, we need to protect that. But we are blessed that we have a good portfolio across multiple price peers, and we will be minding the mix across all the portfolio.

On top of that, I think we have made mixed strides as a company, particularly in RGM. And so in places like Brazil, which is one of the best-in-class in terms of RGM, we have learned big lessons, and we will try again to protect critical price points and to optimize our mix.

In terms of timing, I think as we said, we are enormously priced from the margins than going to price again this year, but it is on a case by case. And as I said, we would like to price at replacement cost rather than passing on the favorability we were able to get through the wise covers that we do.

Andrew Lazar

When we think about emerging markets, obviously, it's been an incredible bright spot for Mondelez over the last couple of years. The momentum continues at pace, and it's certainly a major differentiator for Mondelez as well relative to many peers. It's an area that also tends or can be more volatile, of course, over time.

Maybe you could provide a bit more color on what's been driving some of the recent success, particularly in the Latin America region, in some of the countries such as China and India. And maybe why you feel that performance sort of going forward this time can be maybe more sustainable.

There's always going to be some level of volatility, obviously. But it feels like you've hit a point in some of these markets where maybe you've got better visibility into the sustainability of this type of growth or you're at a new sort of level set, right, of growth in emerging markets?

Dirk Van de Put

Yes, I think like you said, that is the way we look at it. I would say we have found a way to really drive our categories in the different countries around the world. We work on those price points that Luca was talking about. So, we are hitting the right price points.

We have a number of brands that are really taking off in the first place, OREO that we now really see taking hold across many markets around the world. We have constantly improved and sophisticated distribution efforts. So not only is the existing distribution been made more sophisticated and giving us better returns. We're also extending our distribution in several key markets like India.

Every year, we keep on adding new stores. We keep placing video coolers. In China, we have a strategy of going into third-tier cities and expanding. The acquisition of Ricolino will triple our distribution points in Mexico. So, I think it's a mixture between really understanding the consumers, the price points, connecting with them well through more sophisticated or more advanced advertising and at the same time, driving our distribution very hard.

Andrew Lazar

On distribution, specifically in China, you've been seeing really strong post-pandemic growth, largely led by biscuits and a recovery in the gum category. I guess what sort of white space distribution opportunity still exists for Mondelez in China? And how do you intend to go about capturing some of those over time?

Dirk Van de Put

I mean if you think about it, we're still working on the third-tier cities. I think we are in sort of 1.5 million, the latest number of stores. China probably offers us the opportunity to at least double the amount of stores there, adding around 100,000 to 120,000 a year. So, we still have years of runway there.

Not only is it adding more stores in the stores that we are present, we're adding SKUs now. So we start off with a limited number of SKUs. We make a selling work from a distribution system. Once that is up and running and profitable, we start adding more SKUs and getting more churn by or turn by store. So, we got those two fronts that we work.

So, we basically go back to 3 million stores and add SKUs to them. So, I think it's going to be a perpetual motion. And as we get more sales, and we can afford, it will deepen the distribution that will help us.

Andrew Lazar

Baked snacks is a sort of newer area. One of the reason investors, but are still getting up to speed on, if you like, maybe you can help remind everyone why you find that space globally as compelling as you do in terms of size, growth ability of the Company to scale it? And maybe the -- what you look for specifically as you think about further baked at acquisitions? So what works in that context for you? And maybe what sorts of things don't work? There's various assets that could be on the market at this stage. And just trying to get a sense of how you can analyze what types of assets in that space work for you?

Dirk Van de Put

Yes. First of all, we see baked snacks as a natural extension of the biscuits market. Basically, it's softer biscuits, if I can call it like that. It's made on the same equipment. It's usually sold in a shelf close to biscuit. You can make a softer version of your biscuit.

So for instance, we have a pretty burn in Europe, which is a hard biscuit, but you have the soft version or renewed the cakes of Oreo, which is the soft version an Oreo. So first, it's a natural expectant, really normal that we will play in that space. It's a big market. So if you think about the biscuit market is about $110 billion.

This is a $80 billion market, growing at about the same speed, very fragmented. So in biscuits is also fragmented, but we've got big local players around the world. This is even more fragmented. So, there is an opportunity to consolidate. There's also a whole segment of cheaper, not so great products. We believe there's an opportunity to bring more value and more premium approach. That's really where we're focused on.

We're not looking to play into the more economic versions of cakes and pastries. We want to bring added value, more sophisticated products and brands to the space. So you have to think about an Oreo starting to play there or a Milka in Europe or Cadbury is already in there. And then we complement that with acquisitions of products and brands that we don't have and that are not a natural space.

So Chipita in Europe is offering more meal replacement than a snack, present now in more than 20 countries, doing well everywhere, so clearly, a product that has global opportunity. We can do it under the 7Days brand, which is their brand or we sometimes do it under our brand. So we see global expansion and the opportunity to really offer something new to the consumer at different occasion also.

Or Give & Go, which is more in the fresh bakery space, where consumers are drifting a little bit more than to the packaged shelf into the -- what they perceive as pressure. And there, I think there's a whole opportunity for cakes and pastries. That's the space there. So the way we look at it is it needs to add something new to us. It needs to add value.

It needs to be a step-up from what's already available in the market. It needs to be a more sophisticated high-quality product at a higher price point with the right margins. That's sort of the way we judge this space. We don't want to be in cakes and pastries at lower margins versus the rest of our business. So that's how we look at it.

And there are opportunities, but we probably are walking away from more opportunities and jumping on them. And so we have -- I mean the system we taken with our own brands have been very successful. So we have cake on Oreo in China and cakes here on the Oreo in the U.S. Both are doing very well. Those are the two big Oreo countries for us, and that is a typical way of how you will see us attack that space.

Andrew Lazar

Chocolate, obviously, your critical part of the portfolio, number two global player close to number one. Maybe something here in the U.S., we can sometimes lose sight of, like given your presence in the category is much more concentrated in other areas of the world, particularly Europe.

Maybe you can talk about some of the key drivers of growth and progress, especially when it comes to gifting seasonal or areas like premium, which I know are areas where you feel like there's still a lot more opportunity, maybe Mondelez hasn't been as active maybe in the past couple of years as you'd like to be.

Dirk Van de Put

Yes. Well, chocolate, first of all, is very interesting category. It's a $120 billion category, growing about 7% over the last four years. I think in the whole world of indulgence, it takes a unique space. It is an indulgent that most consumers do not have a major problem with. They eat it in relatively smaller quantities, and it's sort of a daily indulgence that they are fine with.

So if you look at snacking and you think about health and wellness, I think chocolate is quite unique in that space, a very interesting category to be in. It's also an elastic category, if I can say, in the sense that through gifting, through prelims, through seasonals, you can drive up the consumption of chocolate and there is opportunities to extend not only the base of consumers, but also increase the amount of product they have in the shelf and in their homes.

For us, there's kind of three ways to develop our presence there. The first one is where we are the biggest players. That's typically your tablet, chocolates. That's our home ground. There's still a lot of opportunity there through sizing, through RGM, also through developing new types of products with, for instance, different fillings and so on, using also different brands.

And in general, I would say there is an opportunity to increase the per capita consumption of chocolate all around the world. The second big space, that first space is 25% of the chocolate market. The second big space is what we call seasonal gifting. So think Easter, think Christmas, think you're going to visit somebody, you want to bring them a box of chocolate. That's 1/3 of the market.

We were underdeveloped about 10 years ago. We started to work very hard from this space. We're still catching up, but it's a huge area of growth for us. And every year, we get more sophisticated and take more market share. So that's a big growth toll for us.

And then the third space, which is about 20% of the market, is the premium space, the premium, as you see it in the grocery store. We have a number of brands that play there, Toblerone, Hu, Green & Black's. But I would say, overall, it's an underdeveloped segment for us. So, we are re-launching Toblerone with significant increase in advertising. We're launching Toblerone prelims doing a major online effort. And so, we are going to push those brands that we have.

We are working also quite strongly on new here in U.S., but we remain open for acquisitions there and to reinforce our presence in the premium space. But the combination of the three we think will give us the momentum to become the leader in chocolate and on top of that, drive the growth of the category.

Andrew Lazar

Oreo, obviously, an iconic brand, one with a lot of emotional attachment for consumers. And when you have some pretty hefty goals for even going forward. And I think, particularly as it relates to expansion in emerging markets. Maybe you can walk us through a bit about what you think the opportunity is for Oreo globally? And so what makes it such a unique product?

Dirk Van de Put

The opportunity for Oreo is very large, from my opinion. In our key markets, the U.S. and China, Oreo has reached 10% of the market. And we believe that once Oreo gets established, once we get the whole machinery of activation, innovation, communication, distribution, once we get that going, Oreo should have a potential to reach 10% of the market everywhere.

So if you think about it, there's so many more countries left for us. The way we look at it is we count $100 million markets for Oreo. About six years ago, we had none. So today, we have six. And we have another four, five that are going to get there.

Three years ago, we were talking about Oreo reaching $100 million in China. Now we're looking at Oreo going for $300 million in -- sorry, in India, $300 million in India. And so we seem to have found the key to develop Oreo around the world.

The key is quite simple. It's a brand that has a unique positioning about staying playful. It is in the space where kids and their parents touch. It has a unique moment, which is when the kid comes from home, there's a whole ritual related to it with the milk. We found a way to really connect Oreo to the things that are happening that consumers are interested in.

So we found a way to connect the brand to those areas or moments that consumers really like, and that's working for it. We have done a lot of innovations. We do licensing. It's an ice cream. We have partners that work with that develop the Oreo merchandise and so on. So I think we found a way to really create a strong global brand.

It's $4 billion last year in '22. It's going to be $5 billion next year. And I mean, to my opinion, it is already the world's favorite cookie. But I would compare it to brands that have a much bigger $10 billion, $15 billion global presence. Oreo has that potentially. It's just up to us to work it the right way.

Andrew Lazar

M&A has been pretty active over the last several years, notable acquisitions, Clif, Ricolino, Chipita, along with the divestiture of developed market brand that's coming. So, on the acquisition side, I guess, how is the integration of the acquired business is progressing? What excites you most about the opportunities they present? And on the gum divestiture, when do we expect the close of that transaction?

Luca Zaramella

So maybe starting with gum. We are absolutely on track, and I would expect October, November as a closing date. The carve-out of the business is progressing well and on the other side, perfect is ready to take the business. So, we are going to close it in Q4 as expected.

The integration is doing okay across the board, I would say. Chipita was really seamlessly integrated into our European business model. It is part of the business. We have a dedicated organization on the marketing and sales side to make sure that we continue to progress in the expansion of the brand.

If I think I quoted a few times the numbers that we are seeing for Clif going double-digit EBIT margin that is close to the average of the North American segment. We are about to put them into the SAT model, which will unlock cost synergies even further as further way for us to get more synergies.

Ricolino is a complex carve-out from Bimbo, and then it is a complex integration into our systems. But importantly, we will have to set up our own DSD system in terms of warehousing, distribution centers, et cetera. That integration is again progressing very well.

I think what is nice about all this integration and I didn't mention even more. I didn't mention dates. As one example, we date back to 2018, I think. What is nice about this business is that they have contributed not only in terms of cost synergies, but they are now becoming if in terms of growth and in terms of value synergies. So we are quite pleased.

We have a clear playbook in terms of how we want to play across these businesses that are, in general, what we call hybrid models. We integrate them partially into our systems to protect the essence of the brands. And then we clearly try to get the benefit of purchasing power that Mondelez provides. So cost synergies in general are important.

And I think, we were well on track. And I think you're going to see the benefit of Clif go even faster into next year, and Ricolino that will give us material cost synergies for 2024.

Andrew Lazar

The balance sheet is in a very healthy state. Leverage is low. It will be even lower after the close of the gum transaction. How are you thinking about prospective M&A moving forward, there are certain categories or geographies that appealed to you more than others? And are there certain areas or geographies where perhaps the ability of the team to handle more, at least M&A at this time or more time the season what you've already done?

Luca Zaramella

Yes. So look, we're happy with the balance sheet, where it is. We have that prove is costing us a little bit north of 2% at this point, whose average maturity is more than 8.5 years. So, we are in a good place in terms of that. We are not going to touch that. We are not going to lower that even further. It doesn't make any sense given the context of interest cost these days. We also have flexibility on other parts, which is the JV and state glass part of the portfolio that in Mondelez are not necessarily core to us and there are still a few.

And so, we have like the flexibility, and we believe both our acquisitions is really the way to go for Mondelez. So, we see in a context where our capital is being grown and where we have rented opportunity that has the number one opportunity we had. So we will stay on par to the course on that. We will continue to invest in the business.

If an acquisition comes along, we will have most likely to take home temporarily more debt. But then as I said, we have different avenues to optimize our balance sheet. We are not necessarily going to pile on, on countries and geographies that have acquisitions underway. So you might imagine Mexico have their hands full in terms of an acquisition.

I would argue, even in the U.S., there is more to be done in terms of Clif and the integration and what we call the ventures that are giving broadcasters tremendous opportunities. So, we will explain. We are looking at a list of 30 to 40 around the world that we call obsession that we are paying very close and see that those will materialize. And if they come along, we will play.

Andrew Lazar

And Dirk, in your time at the helm, you've been much more balanced in your approach and you've talked a lot about this between margin percentage and profit dollars, margin dollars. And that's worked out really, really well. I get the sense there's still maybe not confusion, but I think investors are still trying to get comfortable, right, with that and this concept of moving away from just purely sort of margin rate. Can you talk a little bit about what led you to that sort of conclusion as you started and how that's played out over time and why that's so important in your mind?

Dirk Van de Put

Yes. Well, for me, in the first place, I tend to believe that what drives our business is the dollars we can invest. So I'm focused if I need to develop Oreo or any other brand, I need to be able to invest a certain amount of dollars.

So through the need of the fact that we need to invest dollars, not percentages, there is a need to generate x amount of dollars every day, every year of gross profit dollars. We also want to make sure that we flow sufficient of those dollars to the bottom line because EPS is measured in dollars, not in percentages.

So for me, it was never clear if everything that drives our decision-making is driven by the absolute dollars, why are we so obsessed with the percentages? The other thing that I noticed is that because we had sort of a thinking that we needed to hit a certain percentage we would walk away from certain opportunities because we didn't hit the right percentage.

And so when I arrived, the Company was not growing a lot. And it was clear that this obsession with percentages led us to heavy cost-cutting and so on. And so, if I want to liberate the teams to think differently and to start developing new opportunities, we need to shift the way they look at things. And so we started to say, try to add dollars and think about gross profit dollars in the first place.

I think we are the only company that incentivizes on gross profit dollars in our peer group, and it's the biggest part of our incentive. So the whole company is focused on how do we drive gross profit dollars. The idea originally was that we should add $400 million gross profit dollars every year to that line. The $200 million would go to the bottom line and the $200 million would be reinvested in the business, which would give us a high single-digit to double-digit increase of our advertising dollars.

And at the same time, would also give us that high single-digit EPS that we're looking for. The last two years, instead of $400 million, we've added over $1.2 billion to our gross profit line. So that is driven through the performance in EPS and also has increased significantly our investment in the business. So that's the way we think about it. And I think it really has opened up the thinking of the Company.

Now to be clear, we do believe if I think it's true a little bit that anything below 35% gross profit, especially if you start approaching 30% gross profit, we monitor our business units around the world, where you need to start talking about percentage a little bit. So there is a framework within which you need to remain. And I would say around 35 is not to pay attention. If you're approaching 30%, you really need to do something about the percentage perhaps the way we think about it.

Andrew Lazar

The men in your business clearly is among the best in this stable space, has been and continues to be. So what is it that sort of keeps you up at night at this point? I mean, obviously, it's a long list, I'm sure. But top one or two, just things that you're sort of keeping your eye on, keeping your finger on the pulse a little bit more closely just to sort of assessment, whatever, could change.

Dirk Van de Put

I can give my one or two and maybe Luca, his one or two. But for me, it's a whole cycle of inflation. There's a lot of talk that inflation is coming down. We don't quite see that yet in the sense that the cost increases that we are expecting for next year are less about half they were this year and the year before, but it's still an increase of our cost. And so we will have to price again, much less than we had to do this year, but we have to price.

And so, so far, elasticity is good. Volumes are good. But there's going to be a moment that it starts to affect. So That keeps me up at night. How we're going to pass those price increases? Are we going to make sure that the volumes don't suffer? So far, I think we've done really well. We know that our categories help us, but that is the number one.

The second one, I think, is we don't run a global supply chain. We produce largely in the different countries. But after the effect of Russia, now the whole discussions around China, we are heading towards a world where for a company like ours, how to manage our business in different parts of the world is becoming way more complex and how to deal if a conflict arises how to deal with that. Those are big chunks of our business and how to manage that and take the right position that has become much more difficult. Now Luca?

Luca Zaramella

I mean roughly in addition to what Dirk said, I think for us, what is paramount is that we keep the business focused on the right things. And what has driven results for us is consistency of execution and investments in the brand describing the organization of what good looks like, both in terms of financial delivery, but also quality of the results.

And there is one thing that I'm a little bit obsessed about which is continued progress in our strategic team because the avenue of growth that we can open up in the next 5 to 10 years require some more today for which work and results are not going to be visible to the outside world, but it is absolutely critical, but we come to terms on what we want to do, how do we want to pursue, for instance, emerging markets or emerging market biscuit.

Those are huge opportunities that if we don't plan the seeds today, we are not going to get the benefits in the future.

Andrew Lazar

Maybe in the last minute or two, just sustainability. Obviously, an increasingly important topic for many fundamental investors. You recently added sustainability as one of your four core pillars. Maybe just provide a quick summary on the strategy and where the Company has been taking the most progress.

Dirk Van de Put

Yes. So, we haven't seen it as a pillar because we want our teams look through a sustainability focus in everything we do. At the same time, we feel that as a company, we need to focus on those areas where we are important and where we can make a difference. And so we've divided that up in three key focus areas for the Company.

First of all, there is the carbon neutral approach. We are working towards that by 2050. That requires a number of changes in the Company, need to change all our offers to electric offers, more to electric ovens assuming all the electric energy is green energy and so on electric vehicles. But it's -- yes, I would say, it's a program that requires investment, that's manageable.

The second one is our supply chain, largely the front part of the supply chain, our ingredients. Cocoa and wheat, which are two important streams, which have attached to them significant environmental impact, and so driving changes in those two supply chains for us since we are a big player is quite critical.

And then the third one is packaging since most of our packaging is flexible packaging. It's not the hard PAT. The whole way of recycling, reusing not as well developed. So, we feel that we have a role to play there in making sure that the right infrastructure through the communities for collection or to recycling, so the reworking effort, that we are a key player in that. So we will hit a little bit in some of the facilities there.

But we try to be very constant to EBIT on these three areas and make sure that we make progress there.

Andrew Lazar

Good. So, we'll end it there. Thank you very much, Dirk and Luca, for being with us here today. We appreciate it. Thank you.

Dirk Van de Put

Thank you.

Luca Zaramella

Thank you.

Andrew Lazar

Thank you.