Mondelēz raises outlook despite softer sales

by Monica Watrous
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Mondelez reported softer growth in cookies and crackers and declines in candy and gum during the third quarter.

 

DEERFIELD, ILL. — Mondelēz International has raised its fiscal-year guidance, even as consumer demand for cookies and crackers crumbled during the third quarter. The maker of Oreo, Chips Ahoy! and Ritz reported sluggish growth in the U.S. biscuit category and a decline in its candy and gum business, but Mondelēz said it expects to drive earnings growth with cost-reduction and productivity programs. The company increased its adjusted earnings per share target range by 9c for the year.

“In this challenging environment … we have chosen to focus on what we can control, and that is driving productivity and aggressive cost reductions, and that’s what’s fueling our earnings growth in the short term,” said Irene Rosenfeld, chairman and chief executive officer, during a Nov. 5 earnings call with financial analysts. “Over the long term, I feel quite confident that we have got the right elements to be able to deliver top-tier growth on both the top and bottom lines, but in the near term, while we see the macroeconomy in its current condition, we are choosing to focus on what we can control, which is primarily the costs.”

Net earnings attributable to Mondelēz in the third quarter ended Sept. 30 dropped 7% to $899 million, equal to 53c per share on the common stock, from $1,012 million, or 57c per share, in the comparable period.

Net revenues for the quarter eased to $8,337 million, down 1.6% from $8,472 million in the third quarter of the previous year. Pricing actions to offset higher input costs drove revenue but pressured volume mix during the quarter.

“Our pricing actions were broad-based, spanning all categories and regions, though they were most significant in chocolate and coffee, given the steep rise in both cocoa and green coffee costs,” Ms. Rosenfeld said. “As expected, increased pricing and the wider price gaps that resulted pressured overall volume mix, which was down 3.1 percentage points.”

In the short term, Mondelēz said it expects continued headwinds from the pricing implementation until competitors follow suit and consumers adapt. Regarding long-term growth, Mondelēz’s top executive updated analysts on the status of three strategic initiatives.

“As you can imagine, all of this transformation work is quite an undertaking, but big change is something we do very well here,” Ms. Rosenfeld said. “I am quite confident in our ability to successfully implement these initiatives to get this company fit to win regardless of the macroenvironment and to deliver sustainable profitable growth over the long term.”

First, Mondelēz’s planned coffee joint venture with D.E Master Blenders 1753 B.V. is moving ahead and expected to close in 2015. Dave Brearton, who is transitioning out of his role as chief financial officer, will lead the formation and launch of Jacobs Douwe Egberts.

“We’re making progress in securing regulatory approvals, as well as engaging with our works councils,” Ms. Rosenfeld said. “As you can imagine, there is still a lot to do to stage this business for continued success, so I’m very pleased that Dave will be able to focus on this project at this critical juncture.”

Second, Mondelēz is advancing in its goal to reduce costs through supply-chain reinvention and zero-based budgeting. The company is set to open a new biscuit plant in Salinas, Mexico, that will provide 1,000 basis points of margin improvement for products manufactured there compared to the existing network. Mondelēz also recently announced a $90 million investment in a new biscuit plant in Manama, Bahrain, to support growth in the region.

“We’re in the midst of our first annual budget process, leveraging our new (zero-based budgeting) Z.B.B. toolkit and revised cost policies,” Ms. Rosenfeld said. “I can tell you that Z.B.B. is having the desired impact on our culture. We are pushing our teams to make the trade-offs to budget at a very granular level and challenge old ways of thinking. This sets the stage for a best-in-class cost structure and further margin improvement over the next few years.”

And third, Mondelēz has announced organizational changes as part of preparations to adopt a new, category-led operating model in all regions on Jan. 1, 2015.

“This operating model will deliver improvement in both our top and bottom lines by accelerating launches of proven innovations around the world, by clarifying and streamlining decision making, by reducing costs through simplification, standardization, and scale, and by building world-class capabilities and operating discipline,” Ms. Rosenfeld said. “This is a significant change in how we will run the business, especially in our emerging markets.”
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