Mondelez International Inc (MDLZ) — Q3 2025 Earnings Call Transcript

Dirk, maybe to start off, I was hoping you could talk a bit more in depth about Europe, how you're seeing things as you sort of close the year and into next, particularly when it comes to pricing that's been landed and movements sort of that you deem that you need to make, as you mentioned, price gap management in certain European markets.

Yes, Andrew. Starting with the consumer in Europe, I would say consumer confidence is generally stable and unchanged from the last quarter. In our biscuits, cakes, pastries, and meals business, we are experiencing share growth and volume/mix growth. Overall, in the euro market, the category is performing in line with expectations, particularly in the chocolate categories. We have faced significant cocoa price increases, around 30%. While the chocolate business is generally doing well, we are encountering some pressures that need addressing, often due to competitive dynamics where competitors have not raised prices as much, largely because they are private companies. Additionally, in some markets, retailers have taken more margin than in the past. We're addressing these issues, which are not structural but do affect our quarter expectations in Europe. It’s worth noting that a heatwave in July impacted our volumes, along with some significant downsizing that also affected volumes, particularly in the U.K. and Germany. We are beginning to see positive reactions to the adjustments we've made to pricing in certain areas of our portfolio, which is improving volume and share. Competition has also started to adjust their pricing recently, which should help going forward. Overall, the pricing elasticity in Europe is around 0.7 to 0.8, which is higher than our initial expectations of 0.4 to 0.5. In addition to what I've mentioned, we are taking further actions, such as innovating with new flavors and formats, increasing investments in advertising and promotions, and striving for better promotional effectiveness, as this hasn’t always played out as expected. Our main focus is on achieving the right price points; in some instances, we have crossed key price thresholds in our 300-gram chocolate range that may be too much for consumers at this time. We're also pursuing productivity and cost savings measures. I believe that since we've experienced the highest cocoa costs this year, we anticipate significant improvement moving forward in Europe.

Yes, really thorough. Really appreciate that. And I guess, lastly, with respect to guidance, maybe you could talk briefly about the implied Q4 guidance change, just as I would assume, cocoa is largely been locked in at this point. And then what's the key reason behind, I guess, the cut? And then as it relates really to '26, you make reference to being an algorithm and EPS. I was hoping you could add a bit more color on your confidence around this. And I guess, more importantly, the sort of the key puts and takes that we should think about when thinking about organic sales growth next year in light of the planned investments that you're making and some of the elasticity concerns?

Thank you, Andrew. I will start by saying that on the '25 guidance, we had a series of impacts that clearly we weren't anticipating at the time of us giving guidance for 2025. The three main ones are the tariffs and related uncertainty affecting the overall consumer confidence. The second one is the material destocking that happened in the U.S. due to retailers lowering their working capital. And the third one clearly was the unprecedented heatwave in Europe. Those elements lowered already, when we talked to you for Q2, our flexibility for the year. With incremental softening of the U.S. biscuit market at the end of Q3, and we saw the market declining in volume terms a little bit more than the previous quarters, and the higher chocolate elasticities in Europe. Clearly, that caused a volume/mix impact that at this point in time, we don't want to offset by cutting costs and potential growth into next year. I think importantly, in the prepared remarks, we give you a sense of all the actions we are taking to improve the volume trend that we see specifically in the U.S. and in Europe. And importantly, we have taken additional pricing in the U.S. We have confidence in all the plans that we are putting in place around seasonals. I think we call out clear elements of growth in the U.S. like Tate's, the Ventures and Give & Go. And I think when you really look at what the new guidance means in terms of implied Q4, you see a step-up in the top line. 4% is year-to-date organic net revenue growth, we are guiding you at more than 4%. And importantly, last year, below the line, we had a $0.08 impact in the tax line that is nonrecurring this year. And so the implied EPS growth will translate in an over delivery compared to last year of the EBIT that will be quite good in terms of growth. Obviously, as far as '26 goes, it is a little bit premature to put all the pieces together for you at this point in time. We are literally going through the plans. And you might imagine that the big question we are asking ourselves is, what cocoa level are we going to have into next year? As I mentioned a few times, we are well protected and covered. But reality is we have put in place a series of coverage strategies that would allow us to participate to cocoa further potential declines. And so we need to understand a little bit better, and we will have a better sense of what the real cocoa impact is going to be for next year. It's certainly going to be positive even if cocoa is trading at a level that is quite higher compared to historical norms. We feel quite good about the plans we have been reviewing with all the business units in terms of chocolate. We are clearly optimizing GP dollars into next year, in line with our guidelines and how we want to manage the business. The commercial approach to chocolate is quite good. We are doubling down on things that are working really well for us. And obviously, we want to build share, drive consumer value and protect penetration. And I don't have to tell you again that we have big opportunities in all emerging markets. I mean, adjacencies like cakes and pastries, snack bar, and premium. So cocoa will be deflationary in '26, and we wanted you to hear that our goal is clear in terms of EPS growth for next year. And so we are really targeting a high single-digit EPS growth for 2026, even after the material investments that we're going to put into the business to really protect the long-term growth of our categories.

Dirk, I was hoping maybe you could give us a similar walk around the U.S. in terms of the path forward maybe to getting back to growth. I know you gave kind of a very detailed answer around Europe, but would appreciate kind of a similar level of detail on the U.S., please.

Yes, we noticed a slowdown in the category during the last quarter compared to the first half, which is concerning. The volume decreased by 4% compared to an average of 2.8% year-to-date, reflecting consumers' worries about the economy and their frustration with pricing. Consumers are increasingly value-driven, with lower-income individuals opting for smaller packs at more affordable prices, while higher-income consumers are leaning towards larger packs and taking advantage of promotions. The average basket size has remained stagnant over the past three years, and with rising prices, consumers are more selective, focusing on essentials. Consequently, snacking categories are less of a priority, impacting our volumes. Promotions are also not yielding the expected return on investment. Additionally, we are seeing a significant shift in shopping habits from food and mass retailers to value, club, and online channels, along with an increase in sales of multipacks. On a positive note, some premium segments are performing well, particularly specific products in our range like cakes, protein bars such as Builder's Bar and Perfect Bar, as well as Hu, our vegan chocolate. Give & Go is also seeing good performance. However, the U.S. biscuits category remains a concern, compounded by upcoming government shutdowns that could further impact consumer confidence. In terms of operating income, the negative figures in North America are significantly influenced by cocoa costs, affecting products with chocolate, such as Oreo, Chips, and Tate’s. Pricing in the U.S. is challenging at the moment. To address these issues, we are focused on improving our market presence in the growing channels of Club, Value, and E-commerce. We’ve been working diligently over the past year to enhance our market share in these areas, and our efforts have led to quarterly increases in market share. This requires adjusting our promotional and pricing strategies and boosting the visibility of our products in these channels. We are also emphasizing on-the-go products, particularly multipacks, which are appealing for parents packing snacks for lunches, as they provide multiple servings. Convenience stores are another critical area for our on-the-go strategy. Correct pricing is essential, so we are conducting extensive revenue growth management work to ensure competitive price points, including achieving a $3 target for some packs and maintaining larger pack offerings. Additionally, our better-for-you protein options are experiencing significant growth, with over 20% increases for Perfect Bar and Builder’s Bar. We plan to continue investing in protein products as well as premium brands like Tate’s, belVita, and Hu. In terms of health and wellness, we are expanding our Zero Oreo and gluten-free Oreo and Tate’s offerings. Lastly, we are carefully analyzing the effectiveness of our promotions and recognize the need for more engaging activation beyond simple price reductions. By implementing these strategies, we believe we can work towards positive growth next year in the U.S.

Great. And Luca, maybe just on the prior question, maybe a bit more directly, you seem to have the visibility on, on-algorithm EPS growth for next year. I mean, should we be expecting that on top line, you'd have some visibility to algorithm top line, even if it's at the low end, just I know it's a bit more of a direct question, but would be helpful just from a modeling standpoint.

As I said, Peter, we need to put together our thinking at this point in time on what type of cocoa levels we are going to have into 2026. As I mentioned, we are well protected, but should cocoa go even lower, we will take advantage of that. I think the way you have to think about the top line is in three key components. One, it is Europe, where clearly, chocolate pricing might be deflationary. But as a consequence, the elasticity that we saw on the way up, should happen on the way down as well. And importantly, I think we will be seeing volume growth in the chocolate business for 2026 in Europe. The other component is developing markets where I think you're going to see continuous growth, volume and price-driven at this point in time. And the third component is really the U.S. where we are not projecting an improvement of the market situation, but where we will have material benefits coming out of channel expansion, us investing more in our brands and importantly, going after things that are really working well for us and doubling down on those. I think in the prepared remarks, for instance, we mentioned Oreo with Reese's. So it's really impossible for us at this point in time to give you exactly the range of top line growth of 2026. But rest assured that we are driving for volume growth in chocolate in Europe, we are going to restore top line and bottom line in the U.S. And third, emerging markets will continue growing for us.

I just want to circle back to Europe. You mentioned the price elasticity up to 0.7 or so. And you also talked about there's some price gap issues and some competitors that have lagged on pricing. I'm curious how you're thinking about the outlook for price elasticity going forward, maybe some of the gives and takes since we don't deal with that market quite as much. One scenario would be that you're making adjustments right now. And that price elasticity could come back down. And then you mentioned the historically high prices, and we've seen categories where there's a little bit of fatigue after a series of prices and that price elasticity can continue to be stubborn and rising. So I wanted to get your sense on that. And I have a quick follow-up.

Yes. Well, the type of price increases we had to implement are kind of unprecedented if you think about it. We are players that are largely in the tablet market. We are also in the other segments of chocolate, which is gifting or count lines. But largely tablet players, which has the biggest content of cocoa. So as a consequence, we had to do, as I said before, about a 30% price increase. And historically, the elasticity has been around 0.4, 0.5. It is higher, as I said, 0.7, 0.8, but that's not yet dramatic in the scheme of things, I would say, that's pretty good as long as you're below 1, I don't think there's many categories that would have such a limited price elasticity. But the main thing is, if you think about a 30% price increase on a 300-gram chocolate bar, for instance, you start to really get into quite high euros per bar. And I think as an example, that one, that's the one where we believe that we need to do something going forward. That doesn't necessarily mean elasticity needs to improve. What we need to do is get that bar to a price point, which is much more acceptable for the consumer. Short term, we can do that by reducing the price. Long term, we have to see if we reduce it to for instance, a 250-gram bar or something like that. So it is really adapting to very specific circumstances where we knew that we were taking a risk by passing certain price points, and in some cases, that worked quite well. In other cases, it didn't turn out so well. So these two movements, we believe, will solve some of the issues that we're seeing. And again, I want to emphasize that, yes, things are different than we expected, but it's not that they're often a major way of what we would have expected to happen in Europe, but we do need to make a number of adjustments of which I just gave you two.

And when you look at your emerging markets, I don't want to make a big deal of the type of price elasticities that it looked like in the third quarter, they were still not bad. Your volume was down, the price elasticity would be sub-0.5, even if you take that quarter in isolation. But are you seeing certain markets where you're seeing a little bit of fatigue or maybe price gap issues? Or is that playing out just as you would think there, and I'll pass it on.

In the emerging markets, things are unfolding largely as we expected. We've noticed more downsizing, which has impacted our volume—specifically, our volume was down 4.7%. Argentina has been significantly affected due to hyperinflation and negative macroeconomic factors; we expect improvements following the recent elections. In India, instead of raising prices significantly, we opted for downsizing, which means that if we exclude Argentina and India, the volume decline adjusts to 3%. We're experiencing some challenges in China, where we reported low single-digit negative growth in Q3, which is new for us. However, year-to-date, we still have positive growth. Consumer confidence in China remains low, but we believe it will gradually recover. On a positive note, India is performing better than anticipated, with mid-single-digit growth in Q3 and low single-digit growth year-to-date. Brazil is showing double-digit growth in Q3 due to strong performance in biscuits, chocolate, and gum and candy. Mexico is showing improvement; while consumer sentiment remains cautious, our business has bounced back from prior challenges with good mid-single-digit growth in Q3. Overall, we have a positive outlook, and while the volume numbers might suggest a significant elasticity effect, we don't see it that way in our major markets.

Luca, maybe just a quick follow-up. I think in one of your answers you said the guide does imply a step-up in the fourth quarter from an organic sales perspective. It sounds like that's mostly driven by Europe. I guess, is that fair? And then just the second part of the question. I think you had anticipated some rebound in North America just as the pricing flowed through. So can you just help us understand a little bit more about what you're expecting for North America in the fourth quarter, just given scanner data has been a little bit softer recently?

Thank you, Megan. Yes, we expect a bit of a rebound in Europe. There will definitely be a significant boost around Christmas, and our team is working diligently to prepare for the season. Therefore, you can expect a slight increase in volume in Europe, which is one of the factors contributing to our outlook. Emerging markets may show volumes and mix that are somewhat lower than anticipated, as mentioned by Dirk, particularly due to the impact of Argentina. However, chocolate elasticity in these markets remains at just 0.3x as of the third quarter, and we do not expect that to change for the fourth quarter. Importantly, we believe that countries like Mexico, China, India, and Brazil will continue to perform well, so we look forward to a stronger top line entering the fourth quarter. In the U.S., we project a market decline of about 4% in terms of volume. However, we are adjusting our pricing strategies and promotions, which should lead to some additional pricing impacts that will positively affect both our top and bottom lines. That is our current position.

Okay, great. And then maybe just as a follow-up. You talked about in the prepared remarks the new multiyear North America supply chain program. Maybe you can just spend a little bit of time helping us understand what's different about this from prior productivity programs and any early targets you can share today?

Yes, we have been reviewing this plan with the team for the past six to nine months. It takes advantage of our existing strengths in supply chain. When we compare our profitability in the U.S. biscuit market to our competitors, it's clear that we have several strengths that contribute to our strong business profitability. The new program will primarily focus on reducing costs in some U.S. bakeries. We still see opportunities for more automation and addressing capacity limitations, but overall, we believe it will significantly impact our cost structure, with noticeable results likely starting in 2027. Another major area we are currently working on is our Direct Store Delivery system, which we consider a competitive advantage. We are focusing on the logistics aspect, rather than the front-end delivery of our brands to retailers. By potentially reducing the number of distribution centers and branches and automating processes, we expect to achieve better logistical costs and improved service levels and inventory for retailers. Stay tuned for more updates in the coming months, and this will all be aligned with our cash flow goals.

You noted the planned reinvestment for 2026 just when kind of talking about earnings. SG&A has been running down quite a bit this year. I guess any framing of how much of the reduction we've seen this year is more persistent cost reductions versus items that kind of come back next year?

So in terms of SG&A, I would say there are three key components of it. The #1 is clearly the working media, and working media is a little bit in decline compared to last year, but we didn't touch structurally the amount of spending investments we have been making in that P&L line in 2025. Going forward, you will see a big step-up of that line into 2026, and we firmly believe that the virtuous cycle that has delivered great results for us will have to be put back in place in 2026, particularly as there is cocoa coming down and there is a cost favorability due to that. The second element is non-working media that has been managed in a declining mode for 2025 and that will continue into 2026. Obviously, we'll have to make some specific investments, but we expect the non-working media line to be kept in control. And the third element is the overhead. This year, specifically, there is a positive impact due to our incentive plan that is not as high as we had it last year. But importantly, as we go forward, I think the team is working on initiatives that will deliver further SG&A savings. And so we expect that line to be in level to 2025 in 2026, with the exception, obviously, of the incentive that will be planned at 100% for 2026.

Okay. And I apologize for asking again on Europe. But I do just want to clarify on elasticity because I think there's kind of two pieces you discussed. This 0.7 to 0.8, that's effectively like non-seasonal products where you're seeing that elasticity and the belief is that will not change for the quarter. But as you shift more to seasonal, you'll effectively see better volume trends because those items will have less elasticity?

Yes. That's basically the correct assumption in the sense that the 0.7, 0.8, unless we start to do major movements, and what I said is we are adapting in certain areas, that means it's not an across the board sort of adjustment of our pricing. It's only in those specific cases where we think we need to bring it back to the right price point. And so the 0.7, 0.8 roughly will be maintained on the normal range. And just historically, we noticed that the seasonal range, the consumer is not that clear on what the right price point is and also is inclined to pay a little bit more. So the seasonal range will have less elasticity.

I wanted to inquire about your strategy in North America. Some of your competitors have chosen to invest in value and pricing to create a foundation for long-term volume growth, accepting the short-term consequences. I believe you experimented with this approach in the first half of the year, which affected your profitability, and there seems to be a shift towards safeguarding profit margins. Can you share your confidence in adopting a strategy that emphasizes value and profit protection as we move out of this cycle in the next 6 to 12 months? Additionally, could you elaborate on whether you view value protection and pricing as mutually exclusive, given that it’s possible to maintain profit margins while also delivering value through innovations and packaging changes? Please provide some details on the evolution of your North American strategy concerning pricing and volume.

Yes. Well, I would start with saying it's a particular year for us in the sense that you have on one hand, the whole chocolate, cocoa movement that we have to deal with. And on top of that, you've got North America, particularly U.S. market that is slower than we've seen in quite a while. And so at a certain stage, we need to, yes, protect our overall profit pool, and we cannot try to solve for all problems at the same time. And so that would be one reflection that we had. The other one, I would say, as we started off the year, and we had a certain promotional strategy, what we noticed in North America is that, that promotional strategy was not giving us the volume effect that we were hoping for. And as a consequence, that started to affect our margins more than what we have thought or our profit pool, if you want. And so the shift that you've seen with now some price increases and some changes in the way we promote are really not driven necessarily by protecting the profit pool but are really driven by seeing how can we optimize our situation. And so going forward, as you look into next year, on one hand, as we explained, we think that the chocolate situation will significantly improve and that will allow us also to invest more into North America. If we would use that extra investment for a value play at the moment, I'm not convinced that that is the best solution. As I said before, consumers don't seem to necessarily just react to value. They seem to be much more in a situation where they say, 'Well, I can buy in my basket today what I can afford. I'm not planning to increase my spending. Within that, I need to cover my essentials. And yes, sometimes I will buy my biscuits, sometimes I won't.' But even if the biscuits are a very cheap price, it doesn't necessarily mean that they will buy them. So our experience with the value strategy hasn't been that great. What we do is in our PPA strategy, we have launched a range of products that are at lower price points; you get less product for it, but at least it's available at the $3 or the $4 price point where about 1.5 years ago, 70% of our range or so was above the $4 price point. And we've significantly moved that in a way that is a value strategy, but those products come still at very good margins. So that's the way I see the movements that we are going to do. And I hope this clarifies it a little bit.

Yes. Helpful. One quick follow-up on the investment a little bit around this SG&A buckets. Is there any pull forward of investment that you had planned for 2026 coming into Q4 as you see some opportunities to lean in to achieve some of those outcomes that you're looking for? And then just as it pertains to this 2026 earnings outlook, does that embed a full spending, a replenishment of spending that you would expect to be sufficient so as not to need to do that again going into 2027?

I believe that our Q4 plans for advertising and consumer investments are finalized. The guidance we provided aligns with our spending levels, and we have allocated funds where we identified opportunities. We've scaled back particularly on nonworking media. Overall, we focus on pricing, which is factored into our guidance. Our company's successful model relies on ongoing investments in our brands and effective execution at the point of sale. Looking ahead to next year, we have significant plans, especially for our chocolate with Biscoff and the launch of Biscoff in India. This will incur meaningful spending and additional costs for point of sale activation. It's unrealistic to assume that we will achieve our goals for 2026 without investment. Over the past few years, we've made substantial investments in working media, which is a key reason our categories are performing well. Our company has delivered strong top-line growth driven by both volume and pricing, and we aim to maintain that balance. In the future, you'll see us strategically pursue additional opportunities in areas like snack bars, cakes, and pastries. We recently launched 7 Days in Brazil and are committed to ensuring that our spending on these new initiatives is efficient. Our approach is to fully commit to execution at the point of sale and support for our brands, rather than testing a concept and adjusting funding later.

Well, thank you for attending our Q3 earnings call. Obviously, if you have any further questions, our IR team, Shep and Ron, are available to answer anything else that you would like to discuss. Thank you.

Thank you, everybody.