Mondelēz International Reports Q4 and FY 2020 Results Transcript MDLZ - Summary

Shep Dunlap: Good afternoon, and thanks for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, 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, 10-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. We’re also presenting revenue growth on a two-year CAGR basis to provide better comparability, given the impact of COVID on 2020 results. 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.

 

In today's call, Dirk, will provide a business and strategy update, then Luca will take you through our financial results and outlooks. We will close with Q&A.

 

Before turning it over to Dirk, I would like remind you of two upcoming investor events. First, we will present virtually on February 22^nd at CAGNY, focusing on our AMEA region. And, second, please save the day for a Mondelēz Investor Day on May 10^th.

 

With that, I’ll turn the call over Dirk.

 

Dirk Van de Put: Thank you, Shep. And thank you, everyone, for joining the call today. I'm starting off at slide four.

 

2021 marked another year of strong top and bottom line results. Growth was driven equally by volume and pricing as we leveraged the strength of our brands and execution capabilities. We continued to deliver on our long-term growth algorithm, returning nearly $4 billion in capital to shareholders, while investing in our growth initiatives, positioning us well to deliver strong performance in 2022 and beyond.

 

The COVID-19 pandemic continues to impact both, consumer behavior and the broader operating environments. Against this backdrop, over the past two years, consumers continued to choose our trusted and beloved brands for both, comfort and sustenance at home and on-the-go. We have delivered on this strong underlying demand across our brands and geographies with continued strength in execution, activation and innovation. As a result, our cumulative market share remained higher than pre-COVID levels.

 

At the same time, we are continuing to operate in a dynamic environment characterized by global input cost inflation, alongside supply chain, labor and transportation disruption. We are effectively mitigating these challenges through ongoing cost discipline and strategic pricing actions.

 

We also continue to execute well against our strategic growth priorities, investing in our brands, capabilities and sustainability initiatives, while expanding our portfolio with the addition of several growth-accretive acquisitions. Hu, Gernade, Gourmet Food and Chipita, which closed earlier this month. These additions increase our exposure to broader snacking categories and growing profit pools.

 

Along with our financial performance, we made progress in other areas. We continue to advance our ESG goals, setting ambitious new targets for achieving net zero by 2050, and we continue to accelerate our DEI agenda, and none of this will be possible without our people the best in the CPG industry.

 

We’re proud of the way our teams continue to focus on delivering great products to our consumers as pandemic conditions continue to impact both, our work lives and our personal lives. I’m especially grateful to our frontline teams whose hard work and dedication delights families all over the world. We are confident that the strength of our brands, our proven strategy and our continued investments position as well to achieve our long-term financial targets in 2022 and beyond.

 

Let's take a closer look at the market and macro trends on slide five. With the recent rise of the Omicron variant, the rebounding in mobility that we saw earlier in 2021 has slowed down in both, developed and emerging markets and is expected to remain 10% to 15% below pre-COVID levels in many markets.

 

Time at home and eating at home look likely to remain elevated. In the US, for example, 60% of adults are not expecting to eat out more in 2022 than they did in 2021. These positions our core biscuits and chocolate portfolios well as they are skewed towards in-home consumption.

 

The pandemic continues to fuel the desire for comfort and indulgence, benefiting our categories and trusted brands. And, overall, as we found in our state of snacking survey released last week, the tendency for daily snacking is up for third consecutive year. And although 70% of global consumers’ report concerns about inflation, it has done little to-date to change their grocery shopping behavior. This is consistent with the observed price elasticity, which has been much lower than historical levels as well as a continued share weakness for private label.

 

Let me spend a moment on the current operating environment on slide six. Like other companies, we are experiencing cost inflation globally, particularly on transportation costs, dairy, edible oils and packaging. We have implemented material price increases, ensured we are significantly hedged across key commodities and we are continuing to drive productivity measures.

 

We also continue to manage through significant volatility in the supply chain due to labor shortages at third parties as well as the continuing gap between demand and supply of trucking capacity and containers in places like US and UK. In addition, the US strike in Q3, although resolved, impacted our production output and inventory levels in the quarter.

 

Additionally, COVID-19 continues to cause disruption in consumer mobility in certain geographies, impacting or gum business and on-the-go products. This currently affects a small portion of emerging markets. Additionally, the rise of the Omicron variant is driving high levels of absenteeism in certain markets, while limiting recovery mobility.

 

We are focused on reactivating part of our COVID playbook from the early pandemic days and also looking to further simplify our operations to offset this pressure. And although challenging, we are managing effectively through each of these dynamics. We implement our revenue growth management levers and continue to invest in our brands, while taking extensive measures to lighten the supply chain disruption. By applying the lessons learned from earlier waves of the pandemic and maintaining our focus on execution, we are confident that we remain well positioned to deliver our growth targets.

 

Turning to slide seven, you can see that our strategy is continuing to drive a virtuous cycle. Strong volume momentum, combined with brand investments and strategic pricing options, [position] us well to consistently deliver profitable top and bottom line growth as well as strong return of capital to our shareholders.

 

We grew revenue by 5.2% in 2021, lapping 3.7% growth in 2020. Volume was once again a big contributor to this growth, which demonstrates the fundamental strength and health of our business.

 

Despite the ongoing impact of cost inflation and supply chain volatility, we delivered gross profit growth of 3.6%. Our working media investments have increased double-digit versus last year on the back of a double-digit increase in 2020. Combined with our advantaged portfolio of brands and our execution activation capabilities, we gained or held share across 75% of our revenue on a two-year cumulative basis.

 

We increased operating income by 5.8% and delivered $3.2 billion in free cash flow. We view these results as a healthy indicator of our ability to continue to deliver on our long-term growth algorithm.

 

As you can see on slide eight, we are now averaging at 4.2% quarterly growth rate since the launch of our strategy in September 2018. We're proud of our strong and consistent track record over this time. By continuing to focus on profit dollar growth, local first commercial execution, high return investments and aligned incentives, we are confident that we can continue to consistently deliver attractive growth.

 

On slide nine, you can see some highlights of our successful execution against our long-term growth drivers. These include delivering our strongest Christmas sales or record in Europe, growing double-digit versus 2020 and 2019, led by Cadbury in UK and Milka in Germany.

 

It also includes continuing to expand distribution in emerging markets, adding 300,000 stores in China, and more than 200,000 stores in India. It includes investing to sustained growth in digital commerce, which grew 29% on a reported basis, lapping 75% growth in 2020.

 

Digital commerce now accounts for approximately 6% of revenue, up from 3% in 2019. And it also includes expanding our presence in high growth segments, where we are underrepresented, including wellbeing, where we launched breakthrough innovations on key brands like Oreo Zero sugar in China, as well as Cadbury plant bar and plant based Philadelphia in the UK.

 

As consumer demand for wellbeing options rises, each of these innovations has a clear potential to expand to additional geographies. We also grew our presence in the premium biscuit space with double-digit growth led by Tate's, which we successfully transitioned to direct store delivery. Additionally, we expanded our presence in close-in adjacencies such as baked snacks with the successful integration of Give & Go. By realizing revenue and cost synergies, we grew that business double-digit in 2021. We also expanded our presence in snack bars with the acquisition of Grenade in the UK.

 

Switching to slide 10, we continue to further enhance and strengthen our portfolio in 2021. Expanding our exposure to the growing profit pools in chocolate and biscuits, as well as adjacent categories and the wellbeing and premium segments.

 

We acquired four high-growth strategic assets, Chipita baked snacks in Europe, which just closed in January, Grenade’s wellbeing snack bars in the UK, Gourmet Food premium crackers in Australia, and Hu premium wellbeing snacks in the US. These acquisitions are worth $800 million in annual revenue and they are well positioned to collectively deliver high-single digit growth for years to come. This takes our total number of acquisitions to seven since 2018, and contributing over $1.5 billion of revenue.

 

We also earned $1.5 billion in net proceeds from selling down on our beverage assets in 2021, enabling further investment in our brands and growth drivers. Additionally, we are in the process of completing a strategic review of our developed market gum business. We expect to complete that review and have more information to share with you at our May 10 Investor Day.

 

2021 was a strong year and we are well positioned for another year of strong shareholder returns in 2022 and beyond. By staying close to our consumers, executing our proven strategy and taking the appropriate actions to navigate input cost inflation and supply chain volatility, I'm confident that we can deliver strong performance for years to come.

 

With that, I will hand over to, Luca, for more details on our financials.

 

Luca Zaramella: Thank you, Dirk, and good afternoon. Our full year and [fourth] quarter performance was strong in terms of value growth, volume, earnings and free cash flow. We delivered revenue growth for the year and quarter of 5.2% and 5.4%, respectively. Importantly, half of this performance was underpinned by volume.

 

Emerging markets increased 12% for the year and 11% for the quarter with strong performance across significant majority of countries, especially the BRICS. Despite a small group of countries, specifically in Southeast Asia, continuing to face COVID-related challenges, overall we are encouraged about the outlook for our EMs in the near and long-term.

 

Developed markets grew 1.6% for the year coming off an exceptional 2020, and 2.5% for the quarter off a strong comparison. As with our emerging markets, we are encouraged by the sustained performance, particularly in our key core snacks categories.

 

On slide 13, you can see our portfolio performance. Chocolate and biscuits remain attractive and durable categories with very strong results, both pre-pandemic, during the pandemic and importantly as we enter 2022. In addition, improved mobility has yielded growth in gum and candy versus 2020, approaching the return to pre-pandemic levels in many markets and back to growth versus 2019 in China.

 

Biscuits grew 3% for the year and 3.2% for the quarter. EMs were the big driver of performance with majority of our AMEA and LA business, delivering double-digit or high-single digit growth. These underscores the large long-term opportunity for our EM biscuit businesses as we continue to make investments in A&C portfolio growth and distribution expansion.

 

Both global and local [jewels] brand including Oreo, Chips Ahoy!, Barni and Club Social delivered strong growth.

 

Chocolate grew more than 10% for the year and 8% for the quarter with significant growth across both, developed and emerging markets through both, our global and local brands. Chocolates is a great category to be. And as in biscuits, we continue to make investments in our brands and capabilities to continue to drive its performance for the years to come.

 

Gum and candy posted 7% growth for the year and more than 11% growth for the quarter. As increased mobility resulted in a return to growth in several key markets, especially within Latin America.

 

Now, let's review our market share performance on slide 14. We continue to see good share performance on a two-year cumulative basis as we prioritize A&C investments and execute while in most market. We held or gained share in approximately 75% of our revenue base on a two-year stock.

 

Our biscuits and chocolate categories continued to do well with 80% of our revenue base [holding or gaining]. Overall, share gains versus 2019 were broad based, with all regions growing share over two-year period.

 

A few of the more notable areas of share gains over this time, include China, Russia, India, Brazil and Mexico biscuits. UK, Russia and Australian chocolate and China gum. As we move into Q1, we expect softer share performance driven by our North American segment as the combination of supply chain constraints from third parties and labor shortages will pressure stocks and service levels.

 

While the immediate effect of the strike is behind us, we have entered 2022 with low stocks, and we're working to rebuilding inventory levels, which takes time in this environment, particularly as demand continues to be strong. We expect a gradual improvement of this situation as the year progresses.

 

Now, turning to page 15. For the year, we delivered strong OI dollar growth of almost 6%, driven by solid gross profit dollar increases and reduced overheads. For the quarter, profitability was pressured, primarily due to the lag between commodities and ForEx related inflation and implementation of pricing actions, specifically North America, where price increases became effective at the beginning of January.

 

Turning to regional performance on slide 16. Europe grew 5% for the year and 6.5% for the quarter, supported by strong execution and activation and continued recovery in the convenience, away from home and travel retail channels.

 

Our Q4 results were driven by strong growth across major markets, including the UK, Germany and Russia, underpinned by solid share gains.

 

In chocolate, we delivered record results for the Christmas season growing double-digit against both, 2020 and 2019. Biscuits and meals categories also delivered good results.

 

OI dollar growth for the year was high-single digits, driven by continued volume leverage, cost control and strong overhead management. Looking ahead in this region, we expect muted profitability in Q1, with improvement beginning in the second quarter as price increases in a number of countries take effect.

 

North America declined by 0.6% for the year and 0.3% for Q4, lapping very strong high-single digit growth in the previous year. This performance includes healthy growth from our ventures portfolio. Softening in the quarter and second half were also driven by supply chain constraints and low inventory levels due to the strike and third-party labor constraints.

 

North America OI declined minus 10.4% for the year and minus 20% for the quarter due to inflationary pressure and supply chain constraints. As mentioned earlier, we expect sequential improvement as pricing actions go into effect in Q1.

 

AMEA grew 7.3% for the year and 5.8% for the quarter showing continuous trends across most of the region. India grew double digits for the year and continues to execute well and we invest for the future. We continue to extend our leadership position in chocolate while the growth of our biscuit business continues to outpace larger competitors in the region.

 

China grew low-double digit for the year and high-single digits for the quarter, driven by continued share gains in both, biscuits and gum. Australia, New Zealand also did well, with solid performances in the year and in the quarter in chocolate and biscuits.

 

AMEA increased OI dollars by more than 13% for the year, due to strong volume leverage, productivity and overhead management, while also increasing working media by double-digits. Q4 growth was more muted due to commodity inflation. As in other regions, pricing actions through RGM are being implemented as of Q1.

 

Latin America turned in strong growth for the year of 20.4% and 19.7% for the quarter with overall share gains for 2021. Brazil delivered strong double-digit growth for the year and quarter. Mexico grew high-single digits for both, the year and the quarter. And now Western Andean business grew high-single digits for the year and mid-teens for the quarter.

 

Adjusted OI dollars in Latin America increased high-double digits for the year and more than 40% for the quarter. These increases were driven by broad based growth across core snacking categories, effective pricing and the volume and mix impact of higher gum and candy. Inflationary pressure remains challenging, but we believe both RGM and volume growth will enable us to largely offset this dynamic in 2022.

 

Moving to EPS. Full year EPS grew 9% at constant currency. This growth was primarily driven by top line-driven operating gains.

 

Turning to free cash flow and capital return on slide 18. We delivered full year free cash flow of $3.2 billion, which included $300 million higher tax payments year-over-year. Some related to our coffee, JVs, IPOs and sell-downs.

 

We continue to feel confident about our free cash flow trajectory as we move forward. And for the year, we returned $3.9 billion to shareholders in the form of dividends and share repurchases.

 

Now, let me provide some color on our 2022 outlook, on slide 20. We expect to deliver against our long-term growth algorithm that we see as a performance floor, particularly as revenue [grows].

 

As you are hearing across all sectors, we anticipate another year of material cost inflation, which in percentage terms is expected to increase high-single digits versus 2021. As such, pricing will be a larger top line contributor than in the previous years, but we do expect volume to also be a positive factor.

 

In this regard, a few more points. Our superior portfolio brands and the consistent investments we have made and will continue to make in working media, marketing and sales, route-to-market and RGM capabilities, position us well for sustained growth and profitability in this higher inflation environment.

 

We believe, we can continue being an effective driver of category, value and volume growth, specifically in biscuits and chocolate. Our focus is now changing as we aim at growing profit dollars and dollar growth underpins our sustainable algorithm, cash flow and capital return.

 

We have a history of cost excellence, which we expect to remain the case for 2022 and going forward. Our algorithm, continues to be predicated on brand building and capabilities in sales and marketing also in 2022. All included, for the year, we expect mid-single digit OI dollar growth and high single digit EPS growth.

 

Earnings phasings will [affect] the current inflationary environment and the sequential introduction of pricing. We expect improved year-over-year gross profit dollar growth as pricing is fully realized and as we implement additional RGM strategies, but we do still expect some pressure in Q1 and partially in Q2.

 

For Q1 specifically, we still expect to face larger supply chain headwinds in North America, related to third-party partners and low inventory from last year’s strike. That should improve as the year progresses.

 

With respect to free cash flow, we expect another year of $3 billion-plus. In this outlook, we also expect an ETR in the low to mid-20s based on what we know today. Interest expense of approximately $325 million and share repurchases of approximately $2 billion.

 

With that, let's open the line for questions.

 

Q&A

 

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