DEERFIELD, ILL. — Robust quarterly earnings growth and margin expansion at Mondelez International, Inc. were coupled with decreasing revenues during the period. The weakness was compounded by the effects of a malware attack that disrupted business at Mondelez together with many other global corporations.
Net income at Mondelez International in the quarter ended June 30 was $498 million, equal to 33c per share on the common stock, up 7% from $464 million, or 30c per share, in the second quarter of 2016. Net sales were $5,986 million in the second quarter, down 5% from $6,302 million in the second quarter last year.
A June malware attack reduced sales during the quarter by about 2.3% and resulted in about $7.1 million in expenses.
Adjusted earnings per share during the quarter were 48c in the second quarter, up 19%. Adjusted operating margin was 15.8%, up 90 basis points. The adjusted figure excludes numerous factors, including the effects of two restructuring programs over the past decade, malware attack expenses, losses in connection with the company’s Venezuela business, acquisitions gains/losses as well as related integration and acquisition costs and mark-to-market impacts from commodity and currency transactions.
|Irene Rosenfeld, chairman and c.e.o. of Mondelez|
“We delivered strong margin expansion and double-digit E.P.S. (earnings per share) growth in the quarter despite the revenue impact from the malware incident at the end of June,” said Irene Rosenfeld, chairman and chief executive officer. “We’re seeing improved trends in Europe and across many of our emerging markets, and our North America business is on track for a stronger second half. In addition, as a result of our improving free cash flow outlook, we’re increasing our dividend payout.”
The company declared a quarterly dividend payment of 22c per share, up 16% from the previous payout rate.
Looking forward, Mondelez said the company’s organic net revenue growth for the year will be up at least 1% from last year with adjusted operating income margin in a mid-16% range and double-digit adjusted earnings per share growth on a constant-currency basis.
North America remained a weak spot for Mondelez in the second quarter.
Operating income in North America was $214 million, down 27% from $295 million in the same period in 2016. North America sales were $1,573 million, down 9% from $1,720 million in the second quarter last year.
At the start of the year, Roberto Marques, president of the North America business, left the company. Following the first quarter, Ms. Rosenfeld identified parts of the North America business she said were ripe for improvement.
In the Aug. 2 conference call, Ms. Rosenfeld said improvement in North America results was limited in the second quarter and that the business remained “challenged.
“As we discussed last quarter, we’re actively working to improve the trajectory of our U.S. business, and the team is executing with a sense of urgency,” she said. “While the Q2 numbers were soft, we are seeing some green shoots, which give us confidence that we’ll see improvement in the back half. In particular, we’re optimistic about our robust pipeline of well-being innovation and core brand renovation, our white space chocolate expansion and gains in displays and shelf space as we capitalize on our competitor’s transition out of its D.S.D. (direct-store delivery network.”
In the first half of 2017, operating income in North America was $506 million, down 11% from $566 million the year before. Year-to-date sales were $3,221 million, down 5%.
Brian T. Gladden, chief financial officer and executive vice-president, offered detail about why the company is hopeful results will improve in the second half.
|Brian T. Gladden, c.f.o. and executive vice-president of Mondelez|
“We have a strong second half innovation agenda in North America,” he said. “This includes our new Véa snacks and non-G.M.O. Triscuit crackers, both of which launched in July as well as belVita Protein, Ritz Crisp & Thins and Good Thins, which continue to gain share. Our white space Oreo Milka chocolate candy is also gaining momentum with healthy velocity and stronger peak rates as we expand distribution and capacity. In addition, our D.S.D.-driven share gain plans are now beginning to play out as we’d expected. As our competitor began to transition out of its D.S.D. system at the end of Q2 and our major customers reset their shelves, we’re now capitalizing by gaining displays and share of shelf. We expect this to be a key growth driver in the second half and into next year.”
Asked by an analyst about the persistent lack of growth in North America, including the biscuit category, Ms. Rosenfeld was not as forcefully confident as was the case in May.
“I think it starts with the fact that we’re seeing price deflation and erosion in promotion effectiveness in a number of markets but particularly acute in the U.S.,” she said. “And I think you probably have heard that from many of our competitors. In response to that, we are progressing our revenue management activities to continue to find those places that we’re getting the best return to work with our customers to understand the R.O.I. (return on investment) of some of the various promotional practices that are going on. And frankly, I do believe that U.S. food deflation will begin to stabilize later this year. The second one is that we are seeing continued shifts toward health and well-being products. And again, as we’ve talked on a new number of occasions, we’re taking significant steps, both in terms of renovating existing brands with things like organic Triscuits, belVita Protein, Ritz Crisp & Thins as well as totally new products like Véa, which we are in the process of introducing into the marketplace. And we believe that will help to not only improve our share position and is a big part of our back half share recovery, but we also think it will ultimately stimulate category growth. And then lastly, there is a piece that is non-measured channels, again, primarily e-commerce, which in snacks is a fairly small piece of the business, but it’s also natural food stores and other places where the consumer is shopping. And once again, it’s one of the reasons we have chosen to focus our efforts so much as we complete our supply chain reinvention on having the flexibility to introduce different package formats and different package sizes, so that we can be present in whatever channels the consumer is shopping. So net-net, we are seeing continued category declines. And in fact, as Brian said, it got a little bit worse in the second quarter, but we have great confidence as we look to the back half of the year, particularly a number of the actions that we are taking, that we’ll start to see that category recover.”
Mondelez has said it would benefit from a decision by Kellogg Co. to exit direct-sales delivery for snacks, and analysts asked when those benefits would become apparent in financial results.
“We feel every bit as confident and optimistic about the opportunity that our competitor’s exit presents us with,” Ms. Rosenfeld said. “For competitive reasons, we’ve been reticent to get into a lot of the specifics, but I will tell you we are seeing early success. And part of the challenge is we’ve been talking about this for quite some time. They announced six to nine months ago, and we told you what we were going to do, and now we’re actually about doing it. So we have every confidence that we will pick up incremental shelf space, incremental displays, and it will be a key contributor to the trajectory change on our North American business in the back half of the year.”
In the six months ended June 30, Mondelez International net income was $1,128 million, or 74c per share, up 11% from $1,018 million, or 65c. Year-to-date sales were $12,400 million, down 2.8% from $12,757 million in the first half of 2016.
Mr. Gladden said the three regions other than North America in which Mondelez operates achieved good results. In Europe, the operating margin widened by 220 basis points to 19%. Asia Middle East and Africa was strong overall, though Asia Pacific helped carry the segment while the Middle East lagged. Operating margins in Latin America increased 530 basis points, to 14.3%.
Asked about leaving the sales forecast unchanged when the first half of the year has been so difficult, Mr. Gladden acknowledged the challenge facing the company.
He also offered a few reasons Mondelez believes it will achieve its sales target of 1% growth for the full year.
- “Three of our four regions are actually executing well and don’t really need a significant change in trajectory as we look at the second half,” he said.
- “We will ship through the majority of the Q2 malware shipments, and again, July, we did the majority of that and feel good about that.
- “We have good confidence in North America having a much better second half. It’s about the pipeline of health and wellness opportunities that we’re pursuing, and it’s about the execution of the team as we've had leadership in place there”