Yahoo Finance Mondelez International, Inc. (NASDAQ:MDLZ) Q1 2024 Earnings Call Transcript
Mondelez International, Inc. (NASDAQ:MDLZ) Q1 2024 Earnings Call Transcript April 30, 2024
Mondelez International, Inc. misses on earnings expectations. Reported EPS is $0.84 EPS, expectations were $0.88. Mondelez International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Shep Dunlap: Good afternoon, and thank you 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. 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, Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results.
In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, followed by a review of our financial results and outlook by Luca. We will close with Q&A. I'll now turn the call over to Dirk.
Dirk Van De Put: Thank you, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I'm pleased to share that 2024 is off to a solid start with strong profit delivery. We posted solid top-line results in the first quarter, coupled with strong earnings and free cash flow generation. We continue to see momentum in emerging markets where consumer confidence remains strong and our categories remain resilient. There were a number of one-off factors that affect our sales in the quarter, such as the disruption with some of our European clients and the boycott of Western products in the Middle East and Southeast Asia. We delivered another quarter of strong gross profit dollar growth through ongoing cost discipline and sound pricing.
And we also continued our track record of strong free cash flow generation of more than $1 billion this quarter. To accelerate our strategy of global snacking leadership and drive sustainable long-term growth, we are continuing to invest significantly in our brands and capabilities, driving distribution gains, and harnessing synergies from our recently acquired assets. While our operating environment remains challenging and dynamic, our teams are focused and agile in dealing with the short term as well as executing against our long-term growth strategy. While surprising but temporary, the cocoa inflation does not affect the fact that our categories remain durable and our growth opportunities remain sizable. Turning to Slide 5, you can see that organic net revenue grew 4.2% this quarter with adjusted gross profit dollar growth of 11.6%, enabling us to continue investing in the business.
We continue to increase our A&C spending year-over-year in the high single-digits, which is driving consumer and customer loyalty for our iconic global brands as well as our local jewels. Adjusted EPS grew 16.3% and we generated $1 billion in free cash flow. While many food and beverage segments are showing softness so far this year, and I'm now on Slide 6, our core categories of Chocolate, Biscuit, and Baked Snacks are still demonstrating relatively more resilience and lower elasticity than the broader food universe. Consumer confidence varies by region with North America, and Australia, New Zealand mixed, while Europe is improving and emerging markets remain strong. Shoppers in many markets are becoming increasingly sensitive to the absolute price point, driving them to choose smaller pack sizes in both Biscuits and Chocolates.
And at the same time, consumers in our snacking categories remain very loyal to the brands they know and love. In North America, we're seeing increased promotional intensity combined with a significant shift in sales to non-tracked channels, including club stores, dollar stores, and emerging e-commerce platforms. Lower-income consumers feel pressured and we see that pressure weighing on their frequency in the category, especially among brands that skew more to that group. In your -- sorry, in Europe, consumer confidence is stable. While volume growth has slowed, the Chocolate and Biscuit categories are holding better than the broader FMCG landscape and we're hearing increased optimism about the go-forward economic outlook. Emerging markets remain a strong growth driver, with consumer confidence driving resilient demand and low elasticity.
Consumers in emerging markets are particularly interested in premium offers, enabling us to expand our range with new on-trend formats and pack sizes. Turning to Slide 7, it is important to underscore that despite short-term marketplace volatility, we remain focused on advancing our long-term growth strategy by reinvesting in our brands and people, driving strong execution, reshaping our portfolio, and scaling sustainable snacking. We continue to increase our focus on our attractive and resilient core categories of Chocolate, Biscuits, and Baked Snacks, and we remain on track to deliver 90% of revenue through these core categories by 2030. For example, we're investing significantly to support our Cadbury brand's 200th anniversary in the United Kingdom this year with a multichannel consumer activation promoting the brand promise of generosity.
At the same time, we are strengthening store availability, visibility, and execution around the world. During the first quarter alone, we added around 100,000 directly served stores in emerging markets. We are also harnessing the power of recent acquisitions by capturing synergies and driving growth. For example, we successfully completed a significant system integration in our Ricolino business this quarter, which boost our ability to fully leverage the expanded routes-to-market in Mexico, particularly in the traditional trade. The combined Mondelez and Ricolino system paves the way for significantly expanded distribution in key categories, including Chocolate. Additionally, we are making continued progress on our environmental and social sustainability agenda.
Just a few weeks ago, we earned validation for our net zero by 2050 roadmap from the Science-Based Targets initiative, demonstrating that we are on the right path towards combating climate change. We also delivered significant improvements in advancing our mindful snacking priorities, including enhancing nutrients and ingredient profiles, promoting active lifestyles, and empowering consumers to make more mindful eating choices. I do encourage you to read our Annual Snacking Made Right report now available on our website to learn more about our sustainability strategy and to review our full year sustainability performance data. Before I turn the microphone over to Luca, on Slide 8, I'd like to spend a few minutes putting the recent headlines about cocoa prices and chocolate into perspective.
We are playing for the long term in chocolate because it is fundamentally a great category with very high brand loyalty and low private-label penetration. And within this great category, our business is strong and agile. Record costs for cocoa ingredients and the resulting current and future price increases for customers and consumers, obviously, are generating substantial discussion. Despite this near-term headwind, Chocolate volume continues to grow. And within this growing category, we remain structurally advantaged with large opportunities still ahead. We are confident in our Chocolate business for four main reasons: our cocoa coverage strategies, our approach to pricing, our supply chain, and our iconic brands. First, it is important to underscore that our coverage strategies have proven advantage versus market dynamics in the last few months.
We are fully covered for 2024 and well-protected heading into 2025. Our teams continue to monitor the market very closely to put ourselves in the best position possible. While poor weather and other factors on the supply and demand side have driven prices to unprecedented levels, we believe there will eventually be a market adjustment. We are confident that our teams are putting in place the right strategies to provide future flexibility. Luca will provide some additional details in a few minutes. Second, we continue to implement sound pricing strategies, including both headline pricing and revenue growth management. We remain agile in balancing the need to offset inflation with the need to maintain solid volume dynamics. We are especially focused on protecting critical price points, including low unit price, and other key threshold prices.
Third, we remain confident in our supply chain. Continuity remains our top priority and we are confident in both our own team and our partners with robust work streams to minimize the risk. Finally and perhaps most importantly, we have some of the strongest, most iconic chocolate brands in the world, including Cadbury Dairy Milk, Milka, Cote d'Or, Marabou, Freia, and Lacta to name a few. These brands already are the leaders in numerous key markets and we are well-positioned to accelerate growth in emerging markets. Our research shows that consumers remain extremely loyal to our great brands because chocolate plays an important role in their lives, helping to bring families together, celebrate key milestones, and to enjoy some quiet me time.
In our annual State of Snacking survey conducted in partnership with the Harris Poll, 72% of consumers across 12 countries said that a world without chocolate would be a world without joy. Nearly 60% said that they would rather give up social media for a month than give up chocolate. Our economic portfolio, our -- sorry, our iconic portfolio, strong brand loyalty, and advantaged geographic footprint, make us particularly well-positioned to take advantage of these consumer trends. In summary, we are confident that we are well equipped to navigate a relatively short-term headwind and that we are structurally advantaged to accelerate long-term growth in this category. With that, I'll turn it over to Luca to share additional insights on our financials.
Luca Zaramella: Thank you, Dirk, and good afternoon. Q1 marked a solid quarter for our business with organic net revenue growth across each region, [indiscernible] profit dollar growth, substantial reinvestment into AFC, and great free cash flow generation. Revenue grew 4.2% with strong pricing execution. Volume/mix was varied for the quarter with emerging market flat despite being impacted by some political unrest in the Middle East and some production slowdowns in Mexico related to Ricolino being integrated into SAP. We expect both issues to subside throughout the year and specifically, the Ricolino is almost back on track. On the other side, developed market volume mix was down 3.6% for the quarter, being impacted mostly by Europe customer disruption and the US Biscuit market softness.
On the customer front in Europe, we are happy to report that about 90% of the price is now implemented. One relevant customer alliance is still pending. Total revenue for emerging markets grew plus 8.3%, underpinned by strength across a number of key markets, while developed markets grew 1.4% with solid results from Europe, despite customer disruption and strength from our North America growth channels and Canada. Moving to portfolio performance on Slide 11. Biscuits and Baked Snacks grew 0.6% for the quarter. A number of brands delivered solid growth, including Oreo, Ritz, Tate, and Sundaes. On the flip side, we have seen ongoing softness in US Biscuit, driven primarily by brands that had higher penetration among lower-income households such as Chips Ahoy! This dynamic has impacted frequency and contributed to the decline in volume/mix.
Chocolate grew 5.8% with significant growth across both developed and emerging markets, though mix was down 1.6%, driven by customer disruption in Europe. Cadbury Dairy Milk posted strong growth while we saw solid increases from Milka despite customer disruption. There is an element of Easter timing in these results, but we believe it to be immaterial. We also delivered solid growth with several of our local jewels, including Lacta in Brazil, Freia in Norway, Marabou in Sweden, and Hu in the US. Gum and Candy grew 12.9%, driven by continued momentum and strength in key markets, including China, Mexico, and Western India. Let's review market share performance on Slide 12. We had or gained share in 40% of our revenue base with strength in Chocolate as well as in Gum and Candy.
This trend was offset by softer results in our US Biscuits business. Turning to regional performance on Slide 13. Europe grew 4.4% in Q1. Execution was strong in the quarter with a number of key countries delivering strong growth through solid pricing and excellent Easter execution, which led to share gains. This trend was partially offset by volume declines associated with expected customer disruption, while dollars were up more than 20% and including significant ESG investment. We have now landed the last -- the vast majority of pricing in Europe. One customer alliance is still ongoing, which will cause some additional disruption in Q2, but the business remains in line with our expectations. North America grew 1.3% against an exceptionally strong compare of more than 16% in Q1 last year.
Growth channels, including club and e-commerce, and Canada delivered strong results. However, overall volume mix declined as a result of ongoing softness in Food and Mass. This softness has been consistent with the overall market and driven primarily by less frequency from lower-income households. We are working to ensure our offers and activations continue to provide value to this consumer's cohort and we continue to build that into our plans moving forward. We remain encouraged by our activation plans in key products such as Oreo, TDP expansion, and growth channels as we move through the year. North America increased by 2.1%. AMEA grew 5.9% for the quarter. China delivered another strong quarter with low double-digit growth, fueled by initiatives to enhance brand equity in our Chips Ahoy! trial.
India grew high single-digits, driven by continued strength in Chocolate and distribution gains, while Australia, New Zealand, and Japan also delivered a robust quarter four growth, coupled with strong share gains. Like last quarter, Cold Coffee in the Middle East and Southeast Asia impacted results. We believe this dynamic would begin to moderate in the second quarter and remainder of the year. And AMEA increased OI dollars by 20.2%, continuing a strong track record of top and bottom-line growth. Latin America grew 7.1% with strong price execution and a slight volume/mix decline of minus 1.2%. It's important to note that Argentina is now capped at 26% and this is not reflected in the base year comparison for Latin America. Argentina contributed more than 11 points to Latin America growth in Q1 2023, but only 1.8 points in Q1 2024.
So, we expect the underlying growth rate in LatAm to appear understated for this year. Having said that, reported dollars growth continued to be strong for this segment. Volume/mix was softer in the quarter, primarily due to some product availability in Mexico associated with the Ricolino SAP go-live, that resulted in some production temporary slowdowns. These issues are mostly behind us, but we are still working to rebuild inventory. Consumer confidence and demand in Mexico remain quite robust and we expect to see improved volumes as supply chain catches up as Q2 progresses. Brazil LatAm continued to be strong, both in terms of volume/mix and revenue, while Argentina is impacted by unprecedented inflation and subsequent pricing and volume softness.
Latin America delivered organic -- OI growth of more than 33%. Strong pricing, and the combination of Gum and Candy momentum drove these results. Turning to Page 14. In Q1, we saw strong double-digit OI and gross profit dollar growth of more than EUR300 million EBIT, driven by top-line strength and ongoing cost efficiency. It is important to note that the impact of cost inflation will be a more significant headwind in the remaining quarters than what we saw in Q1 as a result of our favorable cocoa pipeline compared to the current market prices. Next to EPS on Slide 15. Q1 EPS grew more than 60% in constant currency. Most of this growth was driven by operating gains and despite some currency headwinds, we grew adjusted EPS at reported ForEx by 10.5%.
Turning to Slide 16 and cash flow. We delivered EUR1 billion of free cash flow for the quarter. We also repurchased $600 million in stock during the quarter. We will continue to remain opportunistic for the remainder of the year as it relates to share buybacks. Our balance sheet also remains strong as leverage ended at about 2.5 times. Before moving to our outlook, let me take a moment to discuss cocoa on Slide 18. First, our corporate strategies have proven advantageous versus market dynamics in the last few months. We are fully covered for 2024 and also for a portion on F1 2025. Typically, we are covered for 12 months-plus, but given recent volatility, we have remained slightly shorter in duration. Our teams continue to monitor the market very closely to put ourselves in the best position possible.
It is obvious that the series of conditions on both supply and demand sides have driven costs up at unprecedented levels. We believe there will eventually be a market adjustment, and while we want to protect ourselves, we are putting in place flexible structures that will allow us to participate to potential upside versus current historically high prices. On the other side, we continue to execute against our pricing strategies to offset input cost inflation, using both headline price and revenue growth management. Chocolate has shown strong growth over the past several years with very durable volume and elasticity, despite significant pricing, particularly as we have some of the strongest brands in the category. However, we will remain agile in our approach to pricing in order to balance the need to offset inflation with the need to maintain solid volume dynamics.
This means we will protect critical price points such as low unit price and key thresholds across our footprint. We also remain confident in our supply chain. Supply chain remains priority one, and we are confident in our supply chain and that of our partners with ongoing work streams to minimize risks. Turning to our outlook on Slide 19, our outlook for 2024 remains unchanged. We continue to expect on-algo delivery for revenue, earnings per share, and cash flow. This improves the upper end of our 3% to 5% range for organic net revenue growth, which continues to factor in ongoing customer disruption in Europe and softer growth in parts of the US. Most of our key assumptions remain consistent with what we shared with you in our last call. We continue to expect a high single-digit inflation in 2024.
Although the vast majority of pricing has been landed in Europe, we continue to expect some level of customer disruption sue to -- associated with our annual price negotiation process. Interest expense is now expected to be approximately $300 million for the year. We are expecting $0.10 of EPS headwinds related to ForEx impact. In terms of tax rate, we continue to expect an adjusted effective tax rate in the mid-20%s. Share repurchase is expected to be $2 billion with an opportunistic approach. With that, let's open the line for questions.
Operator: [Operator Instructions] We'll take our first question from Ken Goldman with J.P. Morgan. Please go ahead. Your line is open.
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