Mondelez International Inc (MDLZ) — Q1 2020 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 in our recent filings. In today’s call, Dirk will provide a business update. Then Luca will take you through the financials and our outlook. We’ll close with Q&A. With that, I’ll now turn the call over to Dirk.

Thanks, Shep, and hello, everybody. Let me begin by saying thank you to our colleagues for all that they are doing during this unprecedented human crisis in our factories, our facilities, distribution network and our sales force. Our teams are working night and day to keep the food supply chain going. Our greatest asset is our people. They’re determined, dedicated, and they love our consumers. Because of them, we have delivered outstanding results in exceptional circumstances. I’d also like to take the opportunity to wish everybody all the best during this difficult time, our investors, business partners, clients, and of course, our consumers. The challenges we face are unlike anything we’ve seen before, but we firmly believe we will emerge stronger from this. In turning to Slide 5, we have clear priorities for managing the volatile environment caused by this pandemic. First, we are supporting our colleagues. Their well-being is our highest concern. We’ve put in place strict health protocols including temperature screening, social distancing, and mandatory work from home policies for those who can, alongside enhanced benefits for frontline employees. We extended sick pay for anyone who contracts the virus. In markets like the U.S., we announced increased hourly pay and bonuses for frontline workers. We’re also supporting our communities. In March, we announced a program to donate $15 million in cash and products for COVID relief. We’ve already exceeded our original plan by $5 million. The recipients included the Red Cross organizations in the United States, Italy, Switzerland, and the Philippines, the National Health Service trust in the UK, and food banks across Latin America, to name a few. Our teams have responded to local needs with creative solutions, such as redeploying our 3D printers in the UK and Slovakia to create parts for face masks for frontline care workers, and making hand sanitizers in several markets. I’m very proud of our response and believe that we are doing the right thing. Our next priority is business continuity. Our supply chain has been resilient with consistent service to our customers. Case fill rates are at better-than-average levels. We’ve seen an increase in demand in developed markets, and we’ve met it by focusing on the most important SKUs. Our strong relationships with suppliers have helped us maintain critical raw materials and packaging supplies. We have worked with local governments to keep our factories open during lockdowns, while maintaining cost discipline and managing cash appropriately. We’ve adjusted spending, focusing on working media promotions, and reducing non-critical capital expenditures. We are also closely monitoring foreign exchange markets and adjusting as necessary. Under these circumstances, we are preserving capital and liquidity. We’ve taken opportunities to increase liquidity through extensions to our credit facilities, and we’ve also stopped our share buybacks in March. We refinanced short-term debt at attractive levels. Overall, our priority is clearly to emerge stronger from this. We are confident we can do that because, before the epidemic took hold, our strategy was working well. We are better positioned than ever to handle a situation like this. We are now accelerating numerous strategic initiatives and continuing to invest in our brands and capabilities to remain the preferred choice for our customers and consumers. In turning to Slide 6, we executed well in the first quarter despite the virus spreading. Organic net revenue growth was 6.4%, driven by strong performance in developed markets for March. The first two months of the quarter aligned with last year’s results, showing strong top and bottom-line growth. The exception was China, which showed a significant slowdown in February, but started to recover quickly in March, thanks to our local-first approach. North America and Europe became strong drivers of growth. Consumers not only stocked up but also consumed more of their trusted brands, including new consumers entering our brands. Execution was strong for our Easter business, and our teams were agile in meeting increased demand. Our supply chain remained strong. Emerging markets started to experience disruptions, sometimes with abrupt lockdowns that made sales and distribution more difficult. The long-term prospects of these markets remain attractive. We will continue to face headwinds, but we will focus on emerging stronger, better positioned than ever to recover. Now, despite this challenging environment, we can be proud of what we have achieved. Since September 2018, we have increased investment in our brands, both in quantity and quality, leading to record share levels in Q1. We held or gained share in 80% of our markets. Biscuits, accounting for around 45% of revenue, have seen the biggest spike in demand due to COVID-19, and that category has also seen the largest share increase. Overall, our Biscuit brands in the U.S. reported mid-teens growth or more in Q1, driving share gains. Although conditions differ, global snacking categories remained strong. We expect headwinds in the second quarter but remain positive about our long-term prospects. We are convinced that we will emerge stronger because we are market leaders in resilient categories and have an unrivaled portfolio of global and local brands. Consumers are snacking more, looking for comfort in today's stressful circumstances. Our trusted brands and local offerings can provide that comfort and normalcy. We are focused on operational excellence, ensuring our products remain available for consumers while managing costs effectively. We will invest to win and continue supporting our brands while driving efficiency. On Slide 9, we will focus on our three strategic priorities and our long-term financial guidance. We will make tactical shifts as necessary. Our strategy is proving effective in the current situation. Our local-first approach allows us to empower local business units and maintain a reliable supply chain. Our local brands are gaining consumer trust, and we see significant growth opportunities in both our revenue management and e-commerce initiatives. Turning to Slide 10, our commitment to sustainability is unchanged. We believe it is important to do the right thing during this time. We have supported our communities and suppliers, and we remain on track to deliver on our environmental and social goals, as highlighted in our upcoming investor session on May 8 regarding our ESG targets. With that, I will hand it over to Luca.

Thank you, Dirk, and good afternoon. Before getting into our financial results, I would like to echo Dirk’s comment thanking our people and teams across the company. I’m really proud of how everyone has come together in this situation, showing resolve, energy and creativity to help us navigate challenges and find solutions. In terms of results, we had a strong performance in the first quarter on both the top and bottom lines. Our revenue grew by 6.4%, supported by expansion in each one of our four regions, particularly in North America and Europe. We delivered record share growth due to a combination of supply chain execution and recognition of the quality of our global and local brands. This allowed us to grow share by 50 basis points on a year-to-date basis. Our revenue growth driven by volume and pricing dynamics led to solid profit dollars and EPS growth despite substantial COVID-related costs. We seized the opportunity to strengthen our balance sheet and liquidity position. On Slide 13, you can see we performed well across all key metrics. Importantly, we generated significant profit dollar growth with volume leverage that offset costs related to COVID. This allowed us to invest more in A&C during the quarter. Moving to Slide 14, we observed strong growth in developed markets, which grew over 7%, driven by COVID-related consumption. This trend has extended into April, mainly in North America, as Europe is impacted by declines in the travel retail business. Emerging markets grew 4.5%, but faced challenges due to lockdowns impacting traditional trade. China displayed resilience, demonstrating the potential for recovery in emerging markets. Overall, our strategy remains intact, and we will continue to invest appropriately in long-term growth opportunities within these markets. Our focus will remain on maintaining gross profit and operational excellence. Despite challenges, we believe we are positioned well to capitalize on opportunities ahead. We will keep manufacturing, shipping, and delivering products in these circumstances, relying on our robust distribution systems. As we navigate through Q2, we expect some headwinds and costs to persist. However, we remain steadfast in our commitment to our people and communities and will continue to invest in our brands for long-term growth. Thank you.

Thank you, Luca. As we look to the next weeks and months, we have clear priorities: taking care of our people, ensuring they are protected, and providing support to our customers and suppliers. While short-term challenges remain, our long-term emerging market opportunities continue to be significant, and we will remain committed to ensuring our routes to market remain intact. We are prepared to meet the increasing demand in developed markets and will focus on maintaining a strong supply chain. The current environment is dynamic, and each day presents new challenges, so we will remain agile and respond with speed. We are confident in our abilities to emerge from this situation stronger and faster, and we will continue our investments in brands, customers, and staff. With that, I will turn to Shep to open the Q&A.

Great. Thanks very much, everybody. Dirk, to start off, you talked a number of times about looking to emerge from all of this in a stronger position. I was hoping you could expand a bit on that. It’s clear market shares took a big step forward. And it seems like scale, brand strength, and supply chain have all been pretty clear advantages at this stage. But should we anticipate some additional investment as the year progresses, if there are opportunities to do so? What form might those take, whether it’s advertising, go-to-market investments, etc.?

Okay. Thank you, Andrew. First, I would say we enter this crisis from a position of strength. Our strategy was producing results, and we want to return to that as soon as possible. You mentioned categories like Biscuits and Chocolate, which tend to perform well during crises. We still have significant growth opportunities, especially as smaller competition might struggle more than we do. We are confident that our local-first structure promotes agility and efficiency in decision-making. Our strong results in China reflect the success of that approach. We believe we can gain market share in the second half of the year through increased investments and an agile marketing strategy. While we will reassess our spending in Q2, we aim to stabilize it and possibly increase it significantly later.

Okay. Thank you for that. And just a quick one, can you give a quick walk-around on some of the key emerging markets? They are not all created equal, and how long you might see it taking in these key markets to get back to a more normalized consumption pattern, based on the best information you have today? Thank you.

Sure. First, I should clarify that in Q1, our emerging markets accounted for about 37% of our revenue. For China, over 10% of that. The market saw low single-digit growth in Q1 and a strong bounce back post-lockdown, aided by our team's strategic decisions. India, which also contributes 10%, faced significant closures, given that traditional trade represents a large part of our revenue there. However, expectations indicate that as restrictions ease, we will see growth recover quickly alongside our strong distribution. Southeast Asia mirrors India's situation. Eastern and Central Europe have been less affected due to the lower reliance on traditional trade. Latin America presents challenges concerning traditional retail but we are optimistic about recovery. In summary, while parts of our emerging markets are progressing, overall, growth will face some delays but there is reason for optimism, especially given our strong local positions and consumer trust in our brands. Yes, of course, it’s important to differentiate these markets. For China, we noted strong recovery indicators; India is paving the way to recovery with potential high returns owing to our significant consumer base and market presence. Emerging markets offer challenges, yet they are also crucial for long-term strategy and growth opportunities, through speed in our adaptation and leveraging budget for necessary marketing adjustments. As we maintain awareness of consumer sentiment and needs, we will navigate and grow in this challenging landscape.

Hey, guys. Hope everyone is doing well in this environment.

Hey, Dara.

Yes, I hope the same.

First, in developed markets where you’ve seen the demand strength, can you discuss how much of the increased demand may be more consumer pantry loading versus actual increased consumption, and based on the research you mentioned, how sticky higher consumption levels might be going forward when social distancing ends? And in terms of emerging markets, could you provide clarity on whether Q2 would look like the March sales decline outlined earlier? There are various puts and takes by region but trying to understand expectations specifically for Q2 relative to what we saw in March in the emerging markets region? Thanks.

Certainly. Let me address the first inquiry. Yes, there was some initial pantry loading throughout the U.S., particularly in Biscuits, which saw growth near 30%. However, that rate has normalized to high single-digit demand. Consumer research indicates increased snacking across multiple categories, with respondents noting out-of-home consumption has shifted inward. That shift seems sustainable, considering home-bound periods encourage grazing and snacking behavior and we expect ongoing engagement along these lines. For emerging markets, we experienced a sort of initial volume shock in March due to restrictions. However, April has shown improvement trending back toward normal as significant trade coverage is established for our brands. So, it’s still tough to forecast, but we are proceeding positively as conditions improve.

Great. That’s very helpful. Thanks.

Hey. Good afternoon, everyone.

Hi, Bryan.

Hi, Bryan.

I just – I had one question. In the conversation so far, there has been a lot of focus on how the lockdowns are affecting your business in emerging markets right now, and maybe how it affected in developed markets, almost positively? As we get through this, could you talk about how the recession and elevated unemployment might factor into the recovery back to normalcy? Do you have the flexibility to adjust price points to affect affordability? Just trying to understand how a recession potentially affects the ability to get back to normal.

Yes, the recession's unique character is challenging to predict. Historically, our categories, particularly Biscuit and Chocolate, remain resilient during downturns. Our products are positioned as affordable solutions, skewed toward home consumption. Although we predict some slowdown from a previous growth rate of 3% in non-COVID times, we believe that through incremental share gains and managing costs, we can potentially maintain stability during this time. We're adjusting our approach to focus on specific products with necessary adaptations to meet broader consumer needs while implementing efficiency measures across our operations to uphold our bottom line. We’ve seen share gains, and that trend will continue to drive demand as we provide the needed value to our consumers.

All right, thank you.

Hi. Thank you for the question.

Hi, Robert.

Hi, Robert.

I want to know about your developed markets sales in Q2. It looks like the sales trends are going to remain very strong because of at-home consumption. Have you done any math to figure out how much the first quarter benefited from one-time pantry loading? How should we think about North America sales growth in Q2, and maybe even Europe?

Look, again, it’s quite tough for us to give you a number, but I can tell you that we see stronger volumes in North America and some parts of Europe continuing into July. The Q1 dynamics had a positive effect on the results projected for Q2. The ongoing COVID costs primarily impacted Q2. In Q1, we noted around $40 million to $50 million in COVID-related costs, with that likely to increase due to lockdown conditions, which will require additional investment in workforce and compensation adjustments. Our job remains to identify cost-saving opportunities while navigating through the challenges, and thus our guidance will remain judicious. Probably we will not have the same guidelines for Q-Baked but we will aim to stick closely to our original investment plans into the latter half.

Yes. Hey, thanks.

Hi, Steve.

Hi, Steve.

Awesome. Hey, good evening, guys.

Hi, Jason.

Hi, Jason.

You mentioned EMs down low-single digits throughout March, but I think you also indicated it decelerated and remains at a weaker level through April. What is that weaker level?

The decline varies by market. For instance, India faced severe lockdowns, causing sales efficiencies to drop dramatically. Still, as restrictions ease and distributor partnerships strengthen, we see promising signs for recovery. It’s a mixed bag overall; forecasts remain fluctuating by region.

Good evening, everyone.

Hi, Alexia.

Hi, Alexia.

Firstly, should we be concerned about European Chocolates in the upcoming quarters? Are you able to give us a rough idea of how much of that business is tied to on-the-go impulse type purchases that might be at risk? And then regarding China, you discussed share gains; were competitors somehow compromised? Were you able to outspend them effectively in that environment?

Chocolate is performing well overall. We experienced solid growth in the majority of markets participating in the retail segment. Our Easter season performed better than expected, with consumers responding positively to our campaigns despite the shorter promotional window. The resilience of our tablets and home-focused consumption has counterbalanced impulse purchase declines well. In China, our ability to adapt prompted recovery owing to proactive strategies; competitors struggled with logistical issues during the lockdown periods, allowing us to solidify market share effectively. Clearly, consumer sentiment continues to favor trusted brands. Thank you, everyone. We are grateful for your attention on today’s call. We appreciate the time spent and the detailed discussions. We will continue to navigate through these complex dynamics while ensuring our strategy focuses on long-term growth. We will retain our commitment to the well-being of our employees and community while fulfilling consumer needs as economic landscapes evolve. We will be mindful of changing consumption patterns, leveraging strategic opportunities while refining our approach to price and promotions. Thank you again, and we look forward to reconnecting in the future.