Mondelez gaining momentum

by Josh Sosland
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The company's portfolio has a clear focus on snacks.

"I stand here today more confident than ever that Mondelez International is well positioned to deliver strong shareholder returns now and over the long term.”

With profit margins and adjusted earnings per share on the rise, Irene Rosenfeld, chairman and chief executive officer of Mondelez International, Inc., Deerfield, Ill., believes such optimistic forecasts are solidly grounded. While the company’s share price has endured wide swings, Mondelez stock is considerably higher than when the business was created with a 2012 spin-off of Kraft Foods Group. Ms. Rosenfeld made the case for the future of Mondelez and the snack foods business during a February presentation at the 2015 Consumer Analyst Group of New York, held in Boca Raton, Fla.

“We have a unique set of assets, a clear portfolio focus on snacks and some of the fastest-growing categories within snacks, leading brands across those categories, strong share positions in our major markets, an advantaged geographic footprint with almost 40% of our revenues in emerging markets, and a strong global team that’s executing well,” Ms. Rosenfeld said.

Still, by a number of measures, a murkier picture emerges for Mondelez. While in a fast growing category, top-line growth has been completely missing on an as reported basis from continuing operations. As the company has focused on boosting margins through pricing and cost reduction, it has lost market share. Investment analysts, while generally positive about the company, have expressed concern.

Even with their questions, analysts share Ms. Rosenfeld’s belief that the company’s strong presence in snacks gives it great advantages within the food business. Currently, 75% of Mondelez revenues are derived from snacks, a figure that will grow to 84% when the company spins off its coffee business (though Mondelez will continue to hold an equity stake in the business created together with D.E Master Blenders).

“We have leadership positions in some of the fastest-growing categories within snacks: biscuits, chocolate, candy and gum,” Ms. Rosenfeld said. “We have an unrivaled portfolio of leading brands in each of our snacks categories: Oreo in biscuits, Milka and Cadbury in chocolates, Trident in gum, and Halls in candy. We have an advantaged global footprint, with nearly 40% of our revenues in the emerging markets. And although emerging markets have slowed somewhat recently, they still grew 7% last year. We expect emerging markets will continue to be our primary source of growth over the long term.”

The runway for growth at Mondelez is not necessarily limited by annual growth rates, Ms. Rosenfeld said. In most emerging markets where the company operates, Mondelez has a large presence in only one category or two.

“For example, China is a biscuit and gum market; India is predominantly chocolate; and Russia is largely a chocolate market, although we have a significant coffee business there as well,” she said. “The only exception is our $2 billion business in Brazil, where we have a meaningful presence in each of our snacks categories. Ultimately, our goal is to compete in all of our snacks categories in each of our key markets.”

Pegged by Ms. Rosenfeld as a $1.2 trillion market globally historically growing about 6% a year, she said snacks are “aligned with many significant consumer trends” — including serving as a bridge between meals. The category tends to generate higher profit margins than other food categories.

“Consumers prefer branded snacks, and so private label usually has lower penetration than in other packaged good categories,” she said. “In addition, a greater percentage of sales come from higher-margin immediate consumption channels and from the hot zone near the cash register, where there are significant barriers to entry.”

She also described snacks as “highly responsive to advertising and in-store merchandising” and also positively responsive to gross domestic product growth in emerging countries.

Despite the many positives, the snacks business in 2014 did not live up to historical averages, either for the category or Mondelez. Blaming “macroeconomic headwinds,” Ms. Rosenfeld said the industry is “still growing faster than most food categories.

“In 2014, snacks grew just under 4% while all of our categories in aggregate grew about 3.5%,” she said. “Importantly, these growth rates softened somewhat in the back half of the year, and we expect that this trend will continue in 2015. Despite the temporary slowdown in our categories, our long-term strategies and financial targets are unchanged.”

Central to the approach Mondelez will be taking will be steps to gear the company’s portfolio in a way that will “leverage global trends,” reducing supply chain and overhead costs and making necessary foundational investments in advantaged brands, innovation platforms, and route-to-market capabilities so that the company may accelerate growth as consumer demand improves (see related story Food Business News of Feb. 24, Page 13).

Ms. Rosenfeld highlighted financial progress made already. She estimated organic revenue growth of 2.4% in 2014.

“We increased adjusted operating income margin by 80 basis points to 12.9%, by implementing $1.6 billion of pricing to recover higher input costs and protect profitability, delivering record high net productivity, aggressively reducing overheads,” she said. “We grew adjusted e.p.s. 23% on a constant currency basis, the third year in a row of double-digit e.p.s. growth. We delivered free cash flow, excluding items, that was 30% above our combined two-year guidance.”

Net revenues as reported were $34,244 million in 2014, down 3%. Adjusted for foreign currency swings, the company’s sales were up the 2.4% indicated by Ms. Rosenfeld. Just as the most recent five-year review of financial data shows no top-line growth since 2011, earnings per share as reported show erratic growth since 2009. The earnings figures, though, include an eye-crossing array of major, non-ongoing items, including restructuring charges. In 2014 alone these included $840 million in restructuring/implementation charges and a $495 million loss from debt extinguishment. The charges were partly offset by a $628 million unrealized gain from a currency hedge. The year before featured $340 million in restructuring charges, a $612 million loss from debt extinguishment and a $385 million gain from a Cadbury indemnification resolution.

Analysts seemed more concerned with revenue trends than profitability issues. Eric Katzman of Deutsche Bank Securities Inc. said the company possesses “long-term top-line potential” and chided the company for what he said was too much focus on margin expansion at the expense of sales growth.

“The industry has proven on a global basis that trimming excess cost via increased efficiency can yield better profitability,” Mr. Katzman, who rates Mondelez a “hold,” said in a Feb. 11 report. “But from our perspective, it is more a question of balance in terms of financial goals and what is the best way forward to increase shareholder value.

“In summary, we believe there needs to be more emphasis on top line growth vis-à-vis category leadership, market share gains and volume/mix improvement. While Mondelez may be successful at pulling cost out of the business and boosting margins, at some point better top line growth in increasingly competitive snacks and confection will require brand support.”

Robert Moskow of Credit Suisse, who rates Mondelez an “outperform,” also had concerns in this area.

“It was a little disconcerting to see management call out market share gains in only 40% of the total snack portfolio and 25% in chocolate,” he said in a Feb. 10 report. “The company gained share in 75% of its coffee business, but this is the business they are selling to a joint venture and therefore less important to the operations. But with the company putting the majority of its focus on overhead cost reductions, advertising efficiency, and cash flow generation, we think it makes sense to accept some short term market share losses especially when competition is failing to raise prices in step with commodities.”

While the CAGNY presentations by Mondelez executives were devoted principally to new product development and major capital investment projects aimed at reducing costs, Ms. Rosenfeld did discuss the company’s thinking about investing in the promotion of certain brands rather than others.

“We’re working to improve our revenue mix by discontinuing some low-margin revenue,” she said. “Specifically we made some deliberate decisions to exit nonstrategic revenue which will temper our organic revenue growth in 2015 by about 100 basis points. In addition to a modest margin boost, these actions provide long-term benefit by enabling us to further allocate resources toward our power brands and innovation platforms.

“As you’ve heard me say in the past, we rely on our power brands and innovation platforms to drive growth. Today our power brands, which are our largest, fastest-growing, and highest-margin global and regional trademarks, account for more than 60% of our revenue. Over the past few years, they’ve grown on average about twice as fast as the overall company. Power brands also improve our revenue mix as they tend to carry higher operating margins that are at least 100 to 200 basis points above non-power brands. For these reasons, we put most of our marketing support behind them.”

Even with this focused approach, Mr. Katzman estimated Mondelez sustained volume declines of 3% to 5% in the fourth quarter of 2014.

“We don’t want to harp too much on one quarter but even using full year 2014 figures, volume/mix dropped in 3 of 5 segments,” he said. “Using the company’s own data, Mondelez lost share in a majority of its snack and confection operations (3.9% category growth vs. 1.6% for the company). While the company can point to more efficient advertising and promotion spending, it is an axiom in consumer products that the most expensive endeavor is to regain lost market share!”

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