Mondelez International Inc (MDLZ) — Q1 2019 Earnings Call Transcript

Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. In today's call, Dirk will give you an overview of our results as well as a progress update against our strategic priorities. Then Luca will take you through the financials and our outlook. We will close with Q&A. With that, I'll now turn the call over to Dirk.

Thank you, Shep, and good afternoon, everybody. Six months after the launch of our new strategy, I'm encouraged by our performance and the progress that we're making. Our new strategy leverages our unique differentiators. We are a global leader in snacking. We are not in general food. We have an expansive global presence with nearly 75% of our sales outside of North America. We have large and powerful global brands and well-known local brands that resonate with consumers. And we've built a culture of cost discipline, which provides a strong platform to leverage future growth. Our teams are rallying behind our clear and focused strategy to accelerate growth and create value for our shareholders. Our new strategic plan, built on these fundamental advantages, is focused on executing these three strategies to create a more consumer-centric organization. The first strategy is about accelerating our topline growth; the second, about driving operational excellence; and the third, about creating a winning consumer-focused culture. The combination of these three leaves us well-positioned to create sustainable long-term shareholder value. I am pleased with our latest financial results, which demonstrate clear progress against these strategies. These results reinforce my confidence in what we can achieve with a consumer-centric mindset and with our people empowered to act with speed and agility. We started 2019 with a strong quarter. In the first three months, we delivered against our key financial metrics. Our topline growth accelerated to 3.7%, with a good balance of volume mix and pricing. Our emerging markets grew at 8%, and we continue to build on our momentum created with our strong execution. India, China, Southeast Asia, Russia, Mexico, and Africa all performed really well, and Brazil returned to growth. Our developed markets showed sustained growth at approximately 1%, supported by Europe and a continued improvement in North America. We also expanded gross profit dollar growth of 4.5%, and we achieved operational income increase of more than 4%. This enabled us to deliver double-digit adjusted EPS growth for the quarter. We also continue to improve cash generation with free cash flow of $200 million, while we deployed over $1 billion to shareholders through dividends and share buybacks. Let me share with you some more details and examples. Our first strategy, which is consumer-focused growth, is driven by deep and proprietary insights about snacking behaviors and occasions. One focus area within this strategy is to extend our brands into broader snacking territories. A couple of examples from Q1: we talked about chocobakery, a growing gross category opportunity globally. In India, our team expanded our presence in this space with a new Oreo cookie dipped in our Cadbury Chocolate. The result is a premium offering, which helped us gain biscuit market share in this key market. Another example is from our launch of Cadbury Little Treasures in the UK, a portion-controlled amount of chocolate combined with collectible toys. This launch was strong, exceeding our expectations and helped us to increase overall Cadbury Dairy Milk sales in the UK. The second focus area of our growth strategy is to make the most of our portfolio by investing in our global and local brands. A great example is the Specific biscuits brand in China, loved by local consumers. We expanded this brand into rice wafers, a new segment beyond its core category, and it's performing well. Our local brands contributed solid growth this quarter, reversing a previous trend. Our global brands also grew faster at mid-single digits, with strong growth across brands, notably Oreo, which grew double digits, and Cadbury Dairy Milk, which grew high single digits. The third focus area within our consumer growth strategy is the activation of our new marketing playbook, driven by new consumer insights that allow us to refine our campaigns. A prime example is our new global Oreo campaign, where we used insights to deliver effective local adaptations. In China, we connected Oreo with traditional occasions, resulting in double-digit growth for Oreo sales. Similar success was seen in Brazil with our new campaign for Trident, called Chew2Relax, which drove strong consumption recovery and helped us regain share. The fourth focus area is about agile innovation, testing ideas through small launches to capture learning and then scaling them. An example is our first quarter launch of PataMilka in France, which went from idea to market in six months, expanding the Milka chocolate brand into spreads. Lastly, we are reaching consumers wherever they are, expanding our presence in alternative channels and geographical white spaces. In Indonesia, we expanded distribution in the traditional trade, driving double-digit sales growth. In South Central Europe, we increased presence in impulse channels, leading to solid total business growth in the first quarter. Now, switching to our second strategy, we aim to translate our consumer-centric growth model into incremental sales and margins by focusing on improving execution across all elements of our business. This operational excellence strategy manifests in sales execution, leveraging our customer supply and logistics capabilities. A focus area is North America, where we are making important improvements to our supply chain and direct-to-store distribution, leading to low single-digit consumption growth. We've benefited from our investments in plants and other areas, leading to operational growth. Coming to our culture, we've renewed our team's energy, purpose, and passion, empowering them to uncover growth opportunities. We launched a nimble and more empowered commercial organization with incentives to drive growth. We're accelerating training around growth capabilities and project-based systems across functions. Under these empowered teams, we're seeing benefits such as efficient investment in advertising and improved local and global brand balance. We also aim to create innovation networks to unlock growth opportunities globally. We've made investments in focused on prebiotic snacks and healthy snacking options. Lastly, our purpose is to empower people to snack right, which guides our sourcing initiatives and our Cocoa Life Sustainability Program. We commit that by 2025, 100% of the cocoa we use globally will be sourced through this program, increasing significantly from the previous percentage. I'm confident we have the right strategies in place to capitalize on opportunities in snacking and markets. Our first quarter results demonstrate that we've got momentum as we head into this investment year. Our categories are performing well, and our brands are benefiting from increased investment. This motivates our teams globally. I will now turn to Luca for more detail on our Q1 performance.

Thank you, Dirk, and good afternoon. It was a strong first quarter and start to the year, building on the progress we saw in late 2018. We delivered strong organic net revenue growth, solid increases in gross profit dollars, a double-digit earnings increase, and positive free cash flow. We returned more than $1 billion to our shareholders. Growth was broad-based, with positive results in each region and business unit, fueled by balanced volume and pricing. It is important to note that the majority of Easter shipments happened in Q1, eliminating phasing impact. Adjusted gross profit dollars on a constant currency basis grew more than revenue, similar to Q4. We continue to invest in our business to support long-term strategic initiatives across brands, go-to-market, and innovation. Organic net revenue increased 3.7% for Q1. This increase was driven by solid execution and continued momentum in emerging markets, where we posted growth of 8%, balancing volume and pricing. Excluding Argentina, emerging markets grew 6.5%. We delivered strong results across the board in India, China, Southeast Asia, Russia, Mexico, and Africa. In addition, Brazil returned to growth this past quarter. Our developed markets also performed well, supported by Europe and continued improvements in North America. In Europe, revenue growth was 2.7%, supported by solid volume across chocolate, biscuits, and candy. In AMEA, growth was 6.1%. India delivered double-digit growth due to strong execution in both chocolate and biscuits. In China, we saw mid-single-digit growth driven by our global and local brands in biscuits and gum, with good traction from our products. Southeast Asia and Africa also posted strong results in multiple categories. Latin America saw growth of 8.4%, with continued improvement in Mexico and Brazil. Overall, North America grew 0.5% in Q1, driven by our biscuit business, although gum and Halls saw declines. We delivered biscuit share gains in many channels, boosted by strong execution behind our Oreo brand. Improvements surfaced through our investments in service levels. In terms of profitability, Q1 saw adjusted gross profit dollars grow nearly 5% on a constant currency basis due to productivity, volume leverage, and pricing. For OI dollar expansion, we achieved more than 4% on a constant currency basis, translating to an adjusted OI margin of 16.7%, consistent with expectations from last year. In Q1, we invested in A&C, route-to-market, and innovation as planned, contributing positively to our results. On a regional basis, gross margin expansion drove profit dollar improvements in three of our four regions. Europe achieved an 8% gain in adjusted OI dollars, AMEA improved by nearly 17%, while Latin America declined approximately 19%, mostly due to previous year's indirect tax impact. North America increased nearly 9%, driven by pricing and improved service levels. Our three snacking categories saw growth, reinforcing confidence in our attractive market position. Overall, we gained market shares in 60% of our business, with biscuits growing 3.4%, and chocolate at 5.9%. Candy faced challenges but remains a focus. Regarding EPS, Q1 saw approximately 13% growth on a constant currency basis due to strong operating gains and low tax rates. We delivered positive free cash flow of $200 million for the quarter, aligning with our plans, and returned $1 billion to shareholders through repurchases and dividends. For our outlook, we maintain an organic net revenue growth target of 2% to 3%. We’re optimistic about our Q1 performance but want to remain cautious due to uncertainties ahead. As for adjusted EPS growth, we remain guided to 3% to 5%. Now, let's open the line for questions.

Good afternoon, everybody.

Hi, Andrew.

Hi, Andrew.

Hi. Maybe we'll just pick up on the organic growth piece. Obviously, as you mentioned, it's just the first quarter, but I guess with the strong start to the year on the organic topline, maybe why is 2% to 3% still the right number for the full-year, particularly as pricing seems to be coming through nicely? Were there any discrete benefits that you can help quantify to organic growth in the first quarter, like Easter shipments or Brexit inventory builds?

Yes. So I'll start by saying that we are clearly very pleased with the way Q1 played out, building off the momentum from late 2018. I think it is also important to recognize that these were really strong quality results. The teams around the world did a great job. This clearly adds to the conviction in the long-term potential of Mondelez. We’ve been clear that in 2019, we want to solidify last year's progress and we need to see these growth rates above guidance for at least another quarter before we revise our outlook. This is an investment year, so some investments may take time to positively affect our revenue. We remain optimistic about the outlook, yet we want to be thoughtful of uncertainties such as Brexit. Regarding your specific question, we expected a 50 basis points positive impact from Easter in Q2. However, due to trade discussions in the UK prior to the Brexit exit, Easter stock was put into the Q1 system during that time. So no year-over-year shipment impact was derived from Easter.

That's really helpful. Thank you for that color. I had a follow-up on Dirk, regarding the better overall volume result even in light of the pricing. How close are we to shifting from a cost focus to a growth focus? How responsible has the new compensation scheme that rewards volume growth been in this process?

Thanks, Andrew. Yes, one key element of our strategy is creating volume growth, which we haven't had for a while. You can only grow as a company if your volume is increasing, and it gives us leverage on our overheads. We have changed our incentive plan to reward teams for volume growth. Now, there’s a better balance between topline and bottom-line growth in incentives. We’ve also pushed down incentives, so now people are rewarded at the business unit level, leading to a direct impact. Previously, results were largely based on regional performance. We’ve increased the weightage on financial results in incentives from 60% to 80%. This more direct relationship has played a significant role in these results. We are also focusing on gross profit growth, prompting teams to think differently. Our volume growth in Q1 was around 1.7%, which we want to maintain moving forward, as we see the benefits it brings.

Thanks, everyone.

Thank you.

Thank you, Andrew.

Hi. Good afternoon.

Hi.

Hi.

I had a question for you regarding your pricing that was strong in Latin America. You discussed the benefit from Argentina. Does this boost to your price realization continue across the year?

Yes. We are pleased with pricing as it balances with volume mix. Pricing in Argentina was notably higher than we saw on average last year. The situation in Argentina will continue to grow, but not at the same rate as Q1 due to market conditions expected for the rest of the year. Overall, emerging markets grew 8.5% in Q1, excluding Argentina at 6.5%. We observed solid performance across our business in the region, significantly contributing to the overall results. The U.S. market had positive pricing, especially in biscuits where consumption numbers are strong.

Thank you. Regarding the local brands implementation, what does success look like? How do we see that reflected in the performance now and over the next quarters?

Yes. We're increasing our investments by $150 million this year, with a notable portion directed toward A&C and local brands. We're also investing in route-to-market focused on areas where we need more sales capabilities and resources. High levels of return should materialize as a result of increasing local brand investments. Our strategy positions us for growth beyond this year as well.

Thanks.

Thank you, Chris.

Hi. Good afternoon, everyone.

Hi, Bryan.

I had a couple of questions related to the balance sheet. Luca, it looks like total debt in the quarter was up sequentially by about $1 billion. Any timing-related reasons for the increase?

Indeed, the debt increased. We experienced some seasonality due to Easter and higher receivables this quarter, leading to increased liquidity. Some debt was also refinanced, and we returned over $1 billion to shareholders, resulting in an uptick in debt. However, leverage remains stable as of last year.

As we think about the debt for the full-year, absent unforeseen circumstances like an acquisition, are you expecting net debt to remain stable?

Yes, the expectation is net debt remains stable or may increase slightly in line with EBITDA. We are committed to maintaining our credit rating and have reaffirmed our outlook with agencies.

Lastly, about potential M&A discussions, like Arnott's, could you remind us how you are thinking about size and type of acquisitions?

We prefer bolt-on acquisitions, focusing on filling white spaces in our portfolio. While Arnott's fits into our strategy, it's larger than our typical focus. We remain disciplined buyers and will only proceed if terms align with our strategic plan.

Thanks, everyone.

Thank you, Bryan.

Hi. Good afternoon.

Hi.

Hi, Steve.

Two-part question for Luca; for first quarter, on an apples-to-apples basis, if we consider Easter, Brexit, and Argentina, was the underlying organic sales closer to a 3 percentage point growth?

While Easter affected shipment timing, we avoided impacts on year-over-year volumes. When comparing Q1 2018 to 2019 without material changes, we saw strong category performance despite some challenges in chocolate.

And for Dirk, regarding the global brand versus home-grown brand opportunities you mentioned, could you clarify what you meant about the growth potential for each?

I believe the dynamics of global brands are changing. Home-grown brands are becoming more relevant. The success of insurgent brands shows this shift, but we remain committed to growing our global brands.

Thank you. I'll pass the line.

Okay.

Hi. Thank you.

Hi.

Hi Ken.

There was a gap between your takeaway results reported by Nielsen and your actual North American sales. What were the key reasons for the reported numbers coming in lower?

The takeaway for our sales was around 2%, while our net revenue was at 0.5%. Biscuits performed well; gum and candy were underperforming, mainly driven by Easter timing. Retailers are also adjusting their stocks. These elements likely impacted the gaps you mentioned.

Got it. Any indications on when we can expect a slowdown in destocking?

Yes, we anticipate the destocking effects will diminish over the coming months, aligning our net revenue with consumption as sales begin to rebound.

Thanks.

Hey, good evening, folks. I have two questions. First, is your business affected by the price controls in Argentina? If so, what are the implications?

The new government has removed price controls, and the current environment is favorable for operations. Thus, we are not currently impacted by price controls in Argentina.

Thank you. My second question is about your marginal strength. Could you explain the dynamics at play so that we can understand better the continuation of the gross profit margins?

Our gross profit line grew 4.5%, ahead of revenue growth. While we did see certain pressures, particularly in Latin America, we observed solid results in other regions. Lower one-time gains, such as VAT impacts, will affect year-over-year comparisons.

Thank you, and congrats on the strong start.

Thank you, Jason.

Hey, guys. I wanted to get more detail on the pricing environment in Latin America, especially in markets ex-Argentina. Did Brazil and Mexico see sequential improvements in Q1 versus Q4?

Indeed, we have seen positive pricing dynamics. Brazil is notably improving as we see growth driven through our brands in both the chocolate and gum markets. Overall, though there is still a volume pressure, sequential improvements are anticipated in the coming quarters.

That's great to hear. Thank you.

Okay. Thank you.

Good evening, everyone. I wanted to know how your A&C spend was this quarter and how much you expect it to be up for the full-year?

A&C spend was up significantly in Q1, and we anticipate further increases in subsequent quarters as this is part of our planned strategy, consistently in line with our revenue expectations.

Thank you. Are there other uncertainties aside from Brexit that you're watching?

Brexit is the main risk, but we are also cautious of potential outcomes from global elections that could lead to unforeseen uncertainties. However, we remain optimistic based on our solid results.

Thank you, I'll pass it on.

Thank you, Alexia.

Great. Thank you and good evening. Quick question on your interest expense guidance. How much of your euro debt has a negative interest rate, and how do we reconcile the $80 million interest expense with the $450 million guidance for the year?

Overall, our net debt at year-end was approximately $17.3 billion and included $4.5 billion of euro-denominated debt at negative rates. However, as we renew that with longer tenure this will incur additional costs. While $80 million in Q1 came favorable, our total interest projection remains conservative, considering all components of interest expenses throughout the year.

And can we expect that $150 million A&C investment this year will see full proportional contributions in Q1?

Not fully in Q1, but we expect an increase in spending throughout the quarters to come, aligning with our strategic initiatives.

On cookie growth in the U.S., what are the sustainability factors for that growth?

The growth we saw is largely due to our successful promotions and product launches, notably with Oreo's latest campaigns. However, we expect a return to more normalized growth rates as we pass through these promotional impacts.

Thank you.

Thank you, David.

Thank you.

Thank you. I feel good about our performance in this first quarter and the progress we are making as part of our strategic plan. We are encouraged by this strong start and are well-positioned to deliver on our financial commitments and support future growth. We want to continue investing long-term in our brands, sales, innovation, and quality. This strategy is entering into a virtuous circle to build sustainable momentum and value for our shareholders. Thank you for the time and interest in the company. Talk to you in about a quarter.

Thank you.