NORTHFIELD Jul 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Mondelez International Inc earnings conference call or presentation Tuesday, July 28, 2020 at 9:00:00pm GMT

Mondelez International, Inc. - Chairman & CEO

Mondelez International, Inc. - Executive VP & CFO

Mondelez International, Inc. - VP of IR

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* Jason M. English

* Kenneth B. Goldman

Good day, and welcome to the Mondelez International Second Quarter 2020 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez management and the question-and-answer session. (Operator Instructions) I'd now like to hand the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Shep Dunlap, Mondelez International, Inc. - VP of IR [2]

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.

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. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of our presentation.

In today's call, Dirk will provide a business update, then Luca will take you through the financials and our outlook. We'll then close with Q&A. With that, I'll now turn the call over to Dirk.

Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [3]

Thank you, Shep. Let me start off by sharing an overview of our Q2 performance on Slide 4. Overall, we are pleased with our results, our business has been resilient, and our execution has been strong. Our first priority remains the safety and well-being of our colleagues and our communities as we navigate COVID-19. Because there still are areas of high risk, we are preparing the reopening or already have opened some of our offices around the world. And it is clear that the situation will remain volatile for at least the remainder of the year.

Our second priority also remains business continuity. I'm very proud of what our colleagues have and are doing to keep our operations running well. Here also, we need to remain vigilant because with the growing number of cases, the risk of business disruption continues to exist around the world.

Our overall results for Q2 are good. Despite the fact that COVID has impacted various markets in quite different ways. Our portfolio of trusted brands as well as excellent execution have helped us to weather the high volatility reassuring us that our business fundamentals are solid. Particularly our execution in supply chain as well as our commercial operations have been superior in a very challenging environment. For instance, today, approximately 90% of our plants are running in line or above historical performance. Although we had already good market share momentum going into the crisis, this combination of the strength of our brands and our superior execution have helped to drive unprecedented gains.

While the business environment globally remains very volatile, our strategy has proven to be a strength in these difficult circumstances, so we don't see a need to make changes, but we do see opportunities to double down and accelerate certain areas. For instance, due to our current momentum, some overall cost savings and our market share momentum, we are increasing investments in our brands in H2. That virtuous cycle of investment in our brand is an anchor stone of our strategy.

Looking at the second half, we expect to see volatility continuing but we are well positioned for several reasons. Overall snacking tends to be a very resilient category, even in times of recession, meaning we are generally in the right categories. Our brands are some of the most preferred brands in our categories, both local and global. Our geographical footprint is diversified, meaning that while COVID might impact one location, others might be doing better. And finally, our people are responding very well with agility and resilience, and our local-first culture is an advantage in this environment where decision-making needs to be fast and made with the local consumers in mind.

Switching to Slide 5. Despite serious challenges caused by COVID effects on trade channels and consumers, we delivered solid results across the board, giving us confidence for sequential improvement in the second half as well as confidence to maintain the course of the strategy we announced almost 2 years ago. Our revenue growth was 0.7% in Q2 and is 3.7% for the first half. I consider this pretty good given that during the quarter, at one stage or another, every country and many trade channels were in lockdown.

There are parts of our business that have slowed down significantly, such as the gum category, world travel retail, away-from-home and the traditional trade channel in some key emerging markets. At the same time, the grocery business in most of the world is well above normal trend. The combination of these 2 extremes give an almost 1% growth as an average, which we feel good about given the circumstances.

Emerging markets were more affected than developed markets and declined in Q2. The good news is that they showed a sequential improvement during the quarter, and they exited the quarter with growth. We are maintaining or gaining share in markets, representing around 85% of our revenues in year-to-date 2020. This is driven by a number of key reasons. We are seeing consumers turning to brands and products they trust. We have many of these trusted brands around the world. Within our category, there is also a shift to segments that are better fit for at-home consumption. So we are stronger in these segments like tablets versus pralines or bars in chocolate. And our supply chain has kept functioning quite well throughout a shortage of labor or lockdowns providing us with a competitive advantage.

Our adjusted EPS grew 16.1% in Q2 or 8% for the first half. Luca will provide the details, but despite the extra COVID-related costs, our operating income fell only marginally. Thanks to some offsetting cost-containment activities. We generated very strong cash flow. In the first half, free cash flow was $1.1 billion, and we raised our quarterly dividend by 11%.

Transitioning to Slide 6, as mentioned, our long-term strategy does not change. But seeing our current momentum, we are accelerating some initiatives which will allow us to emerge even stronger from this crisis. As it relates to growth strategies, we are planning a significant increase in investments behind working media in the second half, capitalizing on the strength and demand for our brands and built on our increased market share. We are also making adjustment to some of our advertising copy and campaigns to make them more relevant in the current context.

Seeing the fact that the consumer is driven more to our core offerings, it is an ideal moment to simplify our portfolio as well as our innovation pipeline to focus on our value-driving core. So we are removing 25% of SKUs which will simplify our supply chain, reduce our cost and inventories and increase our sales in -- and our customer service. With the consumer probably focusing more on value, we are amplifying and accelerating our efforts on revenue growth management, and we believe there is significant potential to capitalize on the increase in e-commerce, particularly with many first timers buying their groceries online.

In execution, we were always very cost conscious, but we're taking a fresh look at cost opportunities, reducing in areas like travel and office costs. Costs also benefits from a smaller number of projects and initiatives as well as the reduction of our inventory levels. Out of an abundance of caution, we've decided to only invest CapEx this year in essential projects. And we are accelerating a number of key supply chain initiatives which are aimed at improving our efficiency.

Finally, all of these changes are enabled and underpinned by the continued evolution of our culture. Our local-first approach is enabling agile decision-making and adaptation in market. We also see we can evolve the way our people work, helping them with a better balance of life-work. For instance, going forward, we see more people working more time from home.

Some of the changes due to COVID will be permanent. So we're redeploying resources to the areas with the highest return opportunities and areas that will be critical post COVID, as an example, e-commerce.

Now moving to Slide 7. Despite the current volatile and unpredictable environment, we believe ESG is as important as ever, if not more so, and we remain committed to making progress in this space. In terms of social impact, we have now made cash and in-kind donations of more than $25 million related to COVID-19, through product donations but also cash support as actions by brands and teams to donate PPE and other essential items. Our responsibility, the communities we operate in has also been highlighted by the recent attention on the racial justice and equality movement. Without question, there is no place for racism in our company or in our society, and it's critically important that we, along with other companies, show measurable action in helping to redress some of the injustices that exist in our society.

My leadership colleagues and I have spent time listening to our employee resource groups and colleagues across the business. We've heard that colleagues want actions that are sustainable, impactful and generally make a difference. We want to build on our historical efforts in this area, and so we've organized ourselves across 3 pillars: colleagues, culture and communities.

In our supply chain, we continue to advance our work on creating a sustainable supply of critical ingredients. One of the biggest challenges in this space is deforestation, and the result impact -- or the resulting impact on CO2. This quarter, we have launched as part of the Consumer Goods Forum, the Forest Positive Coalition with other CPG companies encouraging our suppliers to be more transparent on the land used to grow our ingredients. And finally, we are on track to meet our 2025 goal of 100% recyclable-ready packaging.

I'm proud of the fact that we've been continuing to work on these critical long-term ESG topics throughout this crisis. And with that, I hand it over to Luca.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [4]

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Thank you, Dirk, and good afternoon. Second quarter performance was solid in terms of growth, share gains, earnings and cash flow given the circumstances. We delivered positive revenue growth through a combination of resilient categories and superior execution despite facing significant disruptions and operating restrictions from the crisis.

Our developed market continued to perform well, with strength in North America and Europe mass retail, confirming elevated momentum as seen in Q1. Emerging markets were significantly impacted by broad lockdowns, especially during April and into May. Despite this dynamic, we are doing well on a relative basis compared to peers as we are gaining share.

I would like to unpack our top line cadence to give you some context of how we ended the quarter, as that might be more indicative than the pure Q2 number. Prior to COVID, we were seeing strong momentum in both developed and emerging markets, and that was both due to snacks categories, momentum and share gains. Once we move into late March and for the month of April, we saw significant divergence between developed and emerging.

In developed markets, we saw a spike in consumption. And despite some challenges, our ability to operate was still okay. On the flip side, we enforced lockdowns and curfews in emerging markets. We encountered significant operating restrictions. These markets were most impacted in April with double-digit top line declines as high percentage of outlets were inaccessible to consumers and to us. As a result, total revenue declined low single digits in April. As we moved into May, things began to improve. And in June, our emerging market turned positive and posted low single-digit growth. We expect this trend of improving growth to continue into July as the majority of these markets are on better footing. We also expect strong demand in North America and Europe mass retail, albeit not as elevated as in H1, but total company is trending better in July than in Q2.

Turning to Slide 11. You can see that Q2 revenue growth was driven by positive volume and pricing. This comes despite some significant mix headwinds presented by lower revenue from world travel retail and gum. Biscuits is seeing elevated demand and led growth at more than 9%. Chocolate declined slightly, but this includes 3 points of headwinds from world travel retail. In addition, chocolate was also impacted by lockdowns in emerging markets, mostly India. It is worth noting that India was nearly flat in May and posted positive growth in June. Gum and candy declined double digit, primarily driven by gum as it skews towards away-from-home consumption and convenience. This channel has seen significantly reduced traffic during the crisis.

Turning to category and share highlights on Page 12. Consistent execution, preferred brands and our investments in brands and capabilities continue to drive strong share results. Year-to-date, we have held or gained share in 85% of our revenue base, and our overall share is as high as it has ever been. Biscuits and chocolate drove the overall outcome. More specifically, we gained share in the latest 3-month period across a number of our biggest markets including U.S. biscuits, Europe, with U.K. and Russia and France standing out; in EMEA, China and Vietnam biscuits, but also Australia, New Zealand and India chocolate; in Latin America, we saw some improvement in Brazil chocolate and powder beverage share, along with Mexico.

Our categories held up relatively well with the exception of gum. However, it is important to note that year-to-date category growth of 4.5% doesn't reflect unmeasured channels, such as convenience and world travel retail or the lag effect of some emerging market readings.

Now let's review our profitability performance on Slide 13. As expected, our estimated COVID-related costs during the second quarter were more than $100 million, including over time, protective equipment, frontline bonuses, incremental logistics costs and lower cost absorption in emerging markets. Ex this cost, gross profit would have shown solid growth in line with last year's growth rate. In fact, volume leverage in both North America and Europe as well as cost containment efforts across the business enabled us to offset much of this on a gross profit basis as it declined less than $10 million versus previous year.

Operating income declined 3.8% for Q2 due to the decline in gross margin, which was partially offset by lower A&C and higher overhead due to COVID as well as the other line impacted by some legal accruals. We continue to expect COVID-related costs in the second half, however, we believe improved leverage and cost mitigation efforts will more than offset these dynamics as we progress through the second half. Especially in Q4, with Q3 still somewhat impacted.

Moving to regional performance on Slide 14. North America grew 11% driven by strong share gains and elevated biscuit consumption. Our DSD network continued to demonstrate its value in keeping shelf stock and enabling significant share gains. Gum was down double digits. North America operating income increased by more than 20%. North America will continue to grow above the historical rates, but we expect lower growth than Q2 as we move throughout the year.

Europe revenue declined 1.2% in the quarter. Headwinds from world travel retail, which was a drag of 2.5 percentage points as well as gum and the instant consumption channels drove this dynamic. We saw strength and good execution in several key markets, including mass retail which grew high single digits, and in chocolate, where we posted significant share gains in the U.K., in France, in Russia and Benelux. Although we expect continued challenges in world travel retail, we are more constructive on the state of convenience and traditional trade, which are expected to be much less of a headwind in the second half. We saw improved exit rate in June and good growth into July. Overall, we expect EU to return to growth in Q3, unless there is a material COVID relapse.

Adjusted OI dollars declined as a result of significant COVID costs and unfavorable mix. These results should improve as we progress through the second half of the year.

EMEA declined 3.1% with conditions that vary greatly by market. China continued to recover, growing double digits. Southeast Asia grew mid-single digits. India declined double digit due to significant lockdowns and store closures in April and May before it turning to mid single-digit growth in June. As we move into the second half, and based on the dynamics we see today, we are expecting this improvement to continue, unless there are additional shutdowns in key markets.

AMEA operating income dollars declined by approximately 5%, due primarily to lower-than-typical volume leverage and additional coverage-related expenses. AMEA executed well on cost containment actions.

Latin America decreased 11% due to traditional trade disruptions in most of the key markets, while Argentina posted growth due to inflation-driven pricing. Ex Argentina, Latin America declined by 15%. Mexico declined low double digits due to a significant decline in gum and candy. In Brazil, we declined high single digits due to significant disruptions in traditional trade. Our Western Andean countries, which were among the most impacted by COVID, also declined. We did see improving share trends in several notable markets.

Adjusted OI dollars in Latin America declined by 78%, primarily due to headwinds associated with negative mix, under absorption and an accrual for a legal-related matter that accounted for 1/3 of the decline versus previous year. We expect the environment in Latin America to remain challenging in the second half given the restrictions in place in most markets and the impact that those restrictions are having on economic growth. We remain focused on what we can control, which is executing our plans and driving better share performance.

Now turning to earnings per share on Slide 18. Q2 EPS grew 16%. Operating gains in the quarter were impacted by COVID costs, which were north of $100 million which means more than $0.07 impact.

I'll now move on to our free cash flow on Slide 19. We delivered free cash flow of $1.1 billion in the first half. Strong working capital discipline was a big driver as we improved our cash conversion cycle by eight days. We also had deferred tax payment for more than $200 million, which will mostly reverse in the second half as well as lower CapEx and cash restructuring. Our priorities for the remainder of the year stay clear, and we will continue to be disciplined.

I wanted to provide some thoughts on our joint ventures, specifically our participation in the successful IPO of JDE Peet's. Prior to transaction, we exchanged our JV investments for an investment in JDE Peet's. JDE Peet's then went public for EUR 31.50 per share at the end of May. The stock now trades at around EUR 38 per share, which places the value of our stake at approximately $5 billion. This was a great result as it provides more flexibility and a public bar for this financial investment.

Moving to Slide 22. As previously disclosed, due to the COVID pandemic, visibility remains limited at this time in a number of key markets. As a result, we are not providing a full year financial outlook. However, we continue to expect the following for 2020: an effective tax rate in the low to mid-20s; adjusted interest expense of approximately $380 million; and we now expect exchange translation to negatively impact our reported revenue by 3% and EPS by $0.05 based on current market rate. Although we're not providing full year guidance at this time, I wanted to share some thoughts regarding how the second half will play out.

We expect improving conditions in many markets that experienced significant store closures in late Q1 and Q2. In-home consumption is expected to be at elevated levels, which is helpful in developed markets such as North America. And we expect to make critical investments behind our brands to continue to drive momentum on a relative basis. On the flip side, we expect the negative impact to continue in some emerging markets, mostly in Latin America. World travel retail is expected to continue its negative trend. And although there is no way to know exactly how the pandemic will evolve, there will always be a potential for a second wave of shutdowns. In aggregate, we expect positive revenue and the sequential improvement in the third quarter based on what we see through month 1 of Q3.

With that, let's open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of Ken Goldman with JPMorgan.

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Kenneth B. Goldman, JPMorgan Chase & Co, Research Division - Senior Analyst [2]

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Two for me, if I can. I wanted to first touch on your share gains. Some of these gains, I think, are due to your North America supply chain, which obviously is quite advantaged and some perhaps due to your competitor struggles globally. But you did highlight some brand strength, other positive factors in your prepared remarks. So just as you think about your expectations for market share in the back half of the year, can you walk us through what you think some of the more sustainable drivers are. I'm guessing higher marketing spend is one of them. And maybe what drivers could back off a little bit versus the first half.

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [3]

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Ken. Yes, sure, with pleasure. If I maybe explain where are the share gains happening and then go a little bit into the drivers and then in what we think will happen. First of all, as we said in the presentation, we've gained share in 85% of our revenue base, so it's very broad-based. It is in biscuits. It's in chocolate. It's across the geographies, I would say, almost in every single market around the world and certainly not important markets. We see significant market share increase. For instance, biscuits China, biscuits U.S., biscuits in France, but also chocolate in the U.K., chocolate Australia, chocolate India. And we also see it across smaller categories. So it's very widespread. And on top of it, we see that it's our global and our local brands. It's not just one brand. It's across our brand. And one of the interesting factors that our penetration of our brand is increasing overall, and also that we see some very good repeat of those new users.

So what is the reason? I think fundamentally, during the COVID crisis there, there are 3. First of all, as you alluded to, we have had a very good performing supply chain around to market. You could sort of say that not only in the U.S., but in other markets, we increased our share of the distribution points. Not so much because we increased our distribution, but customer service level and our on-shelf availability was better than our competition. And so for instance, in the U.S. or in other markets around the world, DSD is a key advantage.

The other one is that we usually have sort of the strongest brands in our categories around the world. And consumers have been going back to the brands they know and trust. And so an Oreo, as an example, or a Milka or some of the other local brands that we have, have clear consumer trust. And we see -- that's why we see all of them increasing their share also.

And then within snacking, if you look at it sort of category by category, we are in those segments within the categories that are benefiting from at-home consumption. For instance, tablets in chocolate do better than bars or better than pralines. And in biscuits, it's your more traditional biscuits that is a segment where the consumer is going to.

I would say these are the 3 big drivers. When will they go away? Well, it's difficult to say. Supply chain, I assume that everybody is catching up on their supply chain. Although with what we are seeing in the U.S. and some other places around the world, having your supply chain perform is not as simple as it might sound. I do think that this trend to go to bigger brands and more known brands is here to stay for a while. And then the mix with the in-home consumption, I think that's going to last for a while, too. We are now clearly talking about this change to our lives continuing well into 2021.

I would also like to point out that we have momentum before the crisis. We were already increasing our market share before this started. And so underlying, there is a fundamental share increase that was taking place. I also think the repeat rates of our brands of the new users, that's important to notice. And then I talked about that increase in working media with significant increases in the second half of the year, which should also give a good pull on our brand.

And then I think what we're doing with our business, simplifying everything, eliminating SKUs, going to fewer innovations, all that will give us even more strength in execution. So overall, I'm pretty optimistic. I think that a big part of this market share will stick.

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Kenneth B. Goldman, JPMorgan Chase & Co, Research Division - Senior Analyst [4]

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That's helpful. And then quickly on my follow-up, speaking of the higher marketing spending, you talked about in the third quarter -- I know you're not giving guidance today, but I wanted to poke it a little bit into what you were talking about to make sure I understood. You talked about better revenue into the third quarter, and you've talked about some simplification of the business. But you've also talked about ramping up your marketing spending, like I said. So just trying to get a sense among all these factors and maybe some that I'm missing. Is it reasonable to expect improved operating income in the third quarter as well in addition to better revenue. And the reason I'm asking is The Street's modeling an increase year-on-year in your third quarter EBIT. Is this reasonable given what you know right now? Or is it really just too early to say?

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [5]

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I can maybe -- I'll...

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Dirk Van de Put, Mondelez International, Inc. - Chairman & CEO [6]

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Maybe, Luca, you want to take this one? Yes.

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Luca Zaramella, Mondelez International, Inc. - Executive VP & CFO [7]

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Yes. I'll -- welcome back, Ken. Nice to have you again on the line. Yes. Look, I believe it is a little bit premature to give you a precise number here, but we gave you a few indications in the prepared remarks for Q3 enough to -- simply said, we expect North America to continue with increased momentum. Certainly, we are not going to see as high of a number as we saw in Q2. Having 11% top line was fairly exceptional and 20-plus percent OI. Europe is expected to return to growth overall despite world travel retail. And I would expect, for sure, better profitability and better leverage. Some of the COVID costs will subside. AMEA as well is expected to return to growth in Q2 -- in Q3. And there should be, again, lower COVID cost and better volume outcomes.

Latin America is, quite frankly, expected to meaningfully improve, particularly on the OI line into Q3, but we are not going to see necessarily a positive year-on-year profit. So I would say that overall top line for Mondelez in Q3 is expected to be better than Q2. As we look at July, we see good numbers coming in at this point in time. But obviously, I have to make a disclosure here, which is -- that is absent a material relapse or issue in one of the biggest market or in more than one.

As far as bottom line is concerned, I think there will be a sequential improvement in Q3 from where we see today. Whether it will be all the way to bright, I am not sure as there will still be some COVID-related cost and all the actions we are putting in place actually will come into full fruition in Q4. So you will see some improvements in Q3, but you will see even more in Q4 from what we see today.

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Operator [8]

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And your next question is from the line of Andrew Lazar with Barclays.

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Edited Transcript of MDLZ.OQ earnings conference call or presentation 28-Jul-20 9:00pm GMT - Yahoo Finance