Mondelez International Inc (MDLZ) — Q2 2025 Earnings Call Transcript

Thanks very much, and thanks also for putting out the prepared remarks this time around. Very helpful. Dirk, it would be great if maybe you could do a brief walk-through of the key geographies and how you see it all playing out in the second half. And then Luca, given the additional weakness in North America, what incremental actions can the company take, whether they be on the cost side or maybe more importantly, on the demand-driving side to accelerate growth there even in the context of a weaker category?

Thanks, Andrew. Yes, maybe quickly, overall, we think the Q2 results are quite good. We had some good pricing. If you discount for the downsizing, we're flattish as it relates to volume/mix, and our bottom line is slightly better than expected. I think what also is clear is that we have a very good global balance in the sense that we see continued weakness in North America, but we had a strong quarter in the rest of the world. And since our sales are well balanced between the different continents, that really helps us. The other one that's important for us is that chocolate and the significant pricing increases and RGM actions that we've done are playing out in line with expectations. So that's good. Our categories are showing continued strength, and we are maintaining our full-year outlook. So overall, we feel good about the quarter. If I go a little bit around the world, maybe starting in Europe, a good quarter in Europe with good numbers, strong share gains. Clearly, the business is very resilient. The consumer is more confident in Europe, still quite fragile and frugal spending, but snacking continues to outpace food. And overall, I would say we feel pretty good about our European business. Consumers are not exactly bullish, but they're focused on essentials, but they keep on buying our category even despite the significant price increases that we have to do in chocolate. If I go to the U.S., a little bit more of a difficult situation there. There's a lot of consumer anxiety. They look at a quite uncertain outlook as it relates to their personal finances, job expectations, inflation. So they tend to focus more on essential items. The size of the basket is getting very important, absolute price points. There's channel shifting going on. There are more promotions and some pack shifting too. So overall, we see a pretty soft biscuits category, probably performing a little bit better than other snacking categories with holding share, but overall, the volume is declining. Switching to the emerging markets, we feel very good, double-digit growth. We have sustained volume and value growth. We have very good share gains in Brazil, in India, and Mexico. Consumer confidence is softer in these markets. They are worried about their personal finances, job security, inflation. So we see the same channel shifts mainly into bulk and discount in places like China. We also see the pack shift, but emerging markets continue to be an attractive growth engine for us. And if you look at our 4 major markets, we feel good about China, India, Brazil. Mexico has been softer, but overall, I would say clearly a strength this quarter in emerging markets.

Okay. Thank you for your question, Andrew. So as far as North America goes, first of all, there is clearly a consumer sentiment that is impacting consumption across the board. We have not planned for a material rebound of the category in the rest of the year. So I want to reassure you that in the guidance we have given, we have reaffirmed there is no material improvement in the U.S. general sentiment. In terms of plussing the plan up, what we have done is, first of all, we have announced incremental pricing that is going to take effect in a few weeks in North America. I won't elaborate much, but we are clearly at a point in time where we see inflation going up. Our cost base is higher, particularly because of cocoa, but not only, and I think that will boost revenue and top line. We have done quite a bit of work in terms of being very selective. Instead of picking the items, for instance, those that were most impacted by cocoa, we went pretty much across the board with more limited price increases. We had protected certain points where we see consumers going. We also had protected specific formats that consumers favor during their buying habits. We have a plan that aims at boosting productivity in the second part of the year, and the team has done a very good job in terms of ensuring cost control. And I think you're going to see a rebound of the North American profitability, particularly in Q4. The team continues to pursue incremental opportunities, particularly in alternate channels. We mentioned a few times that our share gains in channels like club and dollar and value, they are clearly outstanding. And we have, again, deep opportunity to get to our fair share or closer to our fair share in those alternate channels. So quite a bit of actions that are planned for the second half. But again, we are not putting out wishful thinking in terms of category rebounds, etc. I think it is a fair assumption and a safe one.

Dirk and Luca, I wanted maybe to put a finer point on the previous question, particularly around the lack of change in guidance for the second half. Clearly, you had a strong delivery on the first half. So Dirk, maybe you can just put a bit of a finer point on the puts and takes in the second half. It seems like maybe the U.S. is a bit weaker than you thought, but then there's other pieces that are holding it up. Any other considerations that we should really think about as we contemplate that?

Yes, we are focused on executing our strategy while being mindful of certain challenges. We have taken into account the more difficult areas in our outlook, particularly regarding chocolate. In Europe, we had a successful Easter, and our pricing strategy performed well. However, during June and July, a significant heat wave led to lower volumes. Fortunately, temperatures have recently dropped, and we are starting to see a recovery in volumes. We remain cautious about the elasticity of chocolate demand for the second half of the year, but it's challenging to predict given the extreme weather. In the U.S., we don't anticipate immediate changes; instead, we expect consumers to feel the full impact of tariffs in the latter half. We need to carefully monitor consumer confidence and spending. These are the two main factors influencing our current outlook. As Luca mentioned, we've adopted a realistic perspective on these elements, which seems to be the best approach for now.

Okay. And Luca, maybe just as a follow-up, there's obviously been a lot of discussion around the move in cocoa and cocoa butter in particular, which I think has moved in a pretty favorable direction. So maybe you could just talk about how we should extrapolate that, how you're thinking about it as you begin to contemplate hedging for '26.

I think when you look at the cocoa market fundamentals, they are going in the right direction. There has been clearly a pressure point in terms of demand. I think you saw the grinding numbers being down 7%, 8%, and that drove a couple of weeks ago a low level of cocoa price below the GBP 5,000 per tonne mark. Clearly, we took advantage of that. And it is what we said to you many times, which is many adjacent categories are reformulating out of real chocolate and moving into what we call compound. The pod count in West Africa is very promising. The weather has been cooperating. And look, notwithstanding the fact that there is still a long way to go, today, with the 50% confidence level, we can say that the season is going to be good in terms of the crop. And so potentially, there is a material and meaningful upside between supply and demand into the 2026 season. The level of the industry stock is still low. So many are on the watch out still. And so I believe the sentiment, the overall sentiment is that sooner or later, cocoa prices will have to come down. On the cocoa butter, which is the most noble part of cocoa and it is the one we use the most around the world, and that is what allows you to call chocolate chocolate, for instance, in places like Europe, it has come down dramatically, I would say, versus last year. It is usually traded as a ratio to the overall cocoa prices. Last year, it was most likely at a certain point in time, even higher than 3, and it went almost to 4. And today, I think we can strike a contract with the supplier for most likely half of that price and ratio. And so there is a material benefit coming, which obviously is offsetting the cost we have seen as of late. But in general, we feel like cocoa prices will have to come down.

Maybe another follow-up on the second half outlook. There was a comment in the prepared remarks just about some of these headwinds reducing your flexibility. And I guess if I were to look at what's implied in the second half in terms of organic sales growth, it's roughly similar to what you reported in the second quarter. And just wondered if we could talk a little bit more about the regions and how to bridge from the second quarter to the second half. It does seem like you have good momentum in emerging markets. You'll have more pricing coming through in Europe, understand maybe elasticity is a bit higher. North America is weak, but Luca, if I understood you correctly, maybe North America could get a little bit better. So what are kind of the offsets that I'm missing that reduce the flexibility in your minds as it relates to the second half?

Thank you, Megan. Regarding our outlook, we mentioned a bit less flexibility in our prepared remarks. This refers to the unexpected heat wave that affected chocolate production in Europe, which we couldn't foresee, and the impact of trade destocking, especially in the U.S. This has led to our current situation of reduced flexibility. Typically, we maintain a buffer since unforeseen events can arise. However, recent weather patterns in Europe have improved, leading to an increase in chocolate consumption. It's challenging to differentiate between the effects of elasticity and weather impact, but the latest data indicates that the volume decline in chocolate is less severe than previously observed over the past couple of months. This will influence shipments in Europe for Q3, so we are being cautious in our projections for that region. In North America, the market is currently experiencing a volume decline of 3%. This downward trend began in Q3 and Q4 of last year, so we are still projecting a 3% volume drop moving forward. We do anticipate an increase in revenue due to pricing adjustments, as evidenced by the positive numbers from this quarter. Additionally, we expect improvements in our bottom line based on this quarter's performance. In emerging markets, we have introduced several pricing changes, particularly in our key markets of India and Brazil, and will monitor their effects on elasticity. We don’t foresee a worse elasticity scenario than we had anticipated. Our biscuits segment remains strong, with revenue growth exceeding 7% year-to-date, excluding North America, and we expect this trend to continue. However, we want to maintain a cautious approach. It’s important to note that guidance isn't guaranteed at this moment, especially with the potential wave of inflation in the U.S. We need to stay alert and execute our strategies effectively, as we have largely done in the first half.

Okay. Great. Super thorough and helpful. And then maybe just a follow-up on cocoa. When we came into the year, you said there's essentially 2 scenarios in terms of '26: one is cocoa comes down and you have higher earnings upside potential; two is it stays elevated, and you have to take a bit more pricing. And you mentioned you took advantage of the recent drop in cocoa prices. But how are you thinking about whether or not you might have to do a little bit more pricing, some more RGM? And I guess how are you thinking about that into the back half of this year?

So I think, look, this is one of the unknowns of the plan. I think, but I might be proven wrong, I believe that with the new crop data, we will know which direction cocoa is going to take particularly for 2026. And I think there are possibly 2 scenarios: one is this stays elevated; but the other one is it might go down quite rapidly because if there is a surplus between supply and demand, I think there will be material cocoa availability that will drive prices down. In the first case, I think we might need or not additional pricing based on where cocoa is. If it stays where it is, I think all the actions that we are about to take from now to the end of the year in some of the markets, I think, will put us in a good spot. I said many times that when I look at the underlying per kilo of cocoa or the chocolate business gross profit dollars, I see a number that I like as we exit the year. Remember that pricing has a carryover as well into next year. And so if cocoa stays elevated, there might be additional pricing. But I think all in all, we should be in a good spot at the end of the year. If cocoa comes down, the question becomes what do we do to protect demand, what do we do to face potentially some competitive actions, etc. But in the end, I think the P&L will thrive because if I apply the elasticity we have seen on the way up to the way down, there is either material price upside or there is a potential volume rebound. Also remember one critical thing, which we said many times, the virtuous model of this company has been in the last few years to protect gross profit dollar growth as opposed to percentages, but it has also been investing, particularly in working media and in route to market, and we will continue to do so. And potentially in 2026, we'll step it up depending on the level of cocoa to the point where we really reestablish a virtual cycle, which is volume growth, share growth, generation of GP dollars, and again, good cash for the company.

And maybe just a couple of things to clarify, Luca. The comment that you need to invest in working media in 2026, a lot of other companies do that when they reduced media in a given year. So it doesn't sound like that's what you're doing. So maybe you could explain whether that's like a catch-up in '26 or not. And then I'll ask a quick follow-up.

Yes, Rob, I'll address that. I would say that the chocolate category has seen a price increase of 30% to 50% over the past two years. We observe that consumers are still purchasing chocolate, but they are buying it less frequently and in smaller quantities. Even if cocoa prices decrease, I don't expect that we will see significant reductions in chocolate prices. We need to support our brands to maintain or restore historical volume levels. While I'm not certain where we will end the year, it's likely that global chocolate volumes will decline, and so far, we have seen a decrease of around 6% to 7%. This trend is the primary reason we believe reinvestment is necessary. Additionally, in the U.S. biscuit market, we are facing a challenging consumer environment, and I don't anticipate improvements next year. Therefore, we will likely need to boost our investment in our brands in North America next year as well. These are the main reasons we find it appropriate to increase our media investment next year.

And you're right, we have protected working media. This year, what we have cut is the nonworking part. And so I wouldn't say the baseline is terrible. But this year, unlike other years, we haven't increased working media much.

Okay. And my follow-up is, I noticed Luca, that you said category volume down about 3% in biscuits in the first half. You expect it to be similar in the second half. But then you're also raising prices in the U.S., and you've mentioned that the consumer is under a lot of pressure. Is this one of the flex points that might go the wrong way? And how much pricing do you think you'll raise in the U.S.?

Look, I'm not going to comment specifically on the amount of pricing yet. But as I said, the price increase that we are about to take has been quite surgical. We mentioned to you a few times that between $3 and $4 per pack, it is the magic of being there and attracting consumers. And that's what really we are about to not to touch. We will protect those price points. We mentioned to you that there are specific pack sizes that are very relevant to consumers like the multipacks. We are keeping those price points. There are brands that are not our top brands necessarily where we're going to go with higher prices. And that over time has proven to us that elasticity is not material. And then there is a whole host of ideas as to what we have to do to boost consumption in the second half, particularly as it boils down to RGM and promotions. I think the team has a slate of actions that hopefully will lead to much better revenue results. So you're right in saying how do you reconcile the fact that consumers are price sensitive to a price increase. But we have done our homework, and we believe there is not going to be a material volume repercussion on consumption in our case.

Can I start with a question on uses of cash? It seems as though you are taking on a bit more debt in order to repurchase shares. I think you put a $9 billion share repurchase approval over the next 3 years out at the end of last year. Should we expect that dynamic to continue? How are you thinking about the trade-off between taking on debt and continuing to repurchase shares at this point?

The primary consideration between managing cash flow, share repurchase, and dividends is the impact of foreign exchange on our debt. Our debt comprises mainly U.S. dollars, but also includes euros and pounds. We have strategically diversified the currency mix of our debt, which we believe is the correct approach. Additionally, we have significant net investment hedges that protect the composition of our balance sheet against various global currencies. Therefore, while forex affects our debt and the overall balance sheet, the gains we are seeing from these net investment hedges may be somewhat misleading. Regarding share buybacks, I reiterate what I stated in the Q1 call. We have been repurchasing a substantial number of shares at an attractive average price below $60. We will remain practical if the stock price fluctuates. Considering the drop in cocoa prices and the competitive landscape where many companies struggle to report strong top-line numbers, I believe we are positioning ourselves well for a solid 2026. I do not anticipate that the stock price will decrease significantly from here, but if it does, we will continue to buy back more shares. Looking back, as cocoa prices stabilize and we assess our normalized earnings, this could prove to be one of the best capital allocation decisions we've made.

Great. As a follow-up, regarding the decline in North American volumes, I understand you’ve linked it to value-seeking behavior among consumers. How do you view the impact of GLP-1 on indulgent snacking categories? Especially with pill versions expected to launch next year, do you think North America might continue to face pressure? Your other regions are performing well, which is positive, but I'm curious about your preparations for that possibility next year.

From our perspective, there is currently no significant impact on our volumes due to GLP-1. We conducted a thorough analysis in North America, and the decline in volume we’re experiencing and the shift in consumer purchasing behavior are largely driven by economic factors, such as anxiety about the future and frustration with inflation. Presently, the penetration of the drug in the adult population is around 4%, with a reduction in calorie intake averaging 11%, and consumers typically stay on the drug for about 9 months. The penetration has not increased at this time. Therefore, when considering that 4% of the population is reducing their calorie intake by 11%, the overall effect is nearly negligible for us. Even when we project this out to 2026, we do not anticipate a significant rise in the penetration of GLP-1s. Thus, we believe that the current softness in the snacking category is not a result of GLP-1s, and this will likely remain the case in 2026.

Just sticking on North America. I wanted to get a better sense for the retailer destocking that you saw. I'm hoping to get more color on what drove it and how you think it plays out or recovers from here.

Yes. I mean it's sometimes difficult for us to put ourselves in the place of the retailers. But we believe that this is driven by a number of things. But in the first place, probably the retailers wanting to manage their cash flow. If you think about it, there's an overall slowdown in consumption. Tariffs were coming. They probably wanted to import more from the countries that were going to be affected. So they increased the imports and increased their inventories in certain items and wanted to offset that by reducing other items. The second reason, I think, is there's an overall slowdown in food consumption and also in snacking. So there's a need for them to have less inventory at this stage. For me, those are the 2 main reasons. As we said, we still have significant opportunity in other channels. So one of our strategies is to shift more of our pressure into channels like the value channels or e-commerce or the discounters. And that is giving us an opportunity to offset some of that destocking that we've seen in the retailers. But overall, I think those were the factors that drove it. We were a bit surprised to still see some of that in Q2, but I think we now have that behind us, and Q3 should be clean as it relates to retailer inventory.

Well, I want to thank everybody for their interest, for their attendance to the call. You can always follow up on more questions with our IR group. And I'll see you for the call a quarter from now. Thank you.

Thank you, everyone.