Mondelez shares tumbled after FY results and guidance announced

Mondelez shares tumbled after FY results and guidance announced

Mondelez International's shares took a tumble yesterday (3 February) on the back of its 2015 numbers and its forecasts for 2016 - and were down again today. Chairman and CEO Irene Rosenfeld called the last 12 months "a year of very strong results" and, although conceding volumes would again be under pressure, forecast further improvement in profitability. What should we take away from the figures and from its outlook for the months ahead? Dean Best investigates.

Sales growth but boosted by pricing

The Cadbury owner yesterday booked a fourth quarter of 2015 that saw a continuation of trends in the previous three months - underlying profitability up but sales boosted only by price increases. Only in North America did Mondelez see volumes increase in the last three months of the year or, for that matter, for 2015 as a whole.

Mondelez's top-line performance sits somewhat uneasily against the thesis for the company's formation back in 2012 - that it would enjoy solid top-line growth due to the robust fundamentals behind snacking and emerging markets. Of course, many a consumer packaged goods firm has seen pressure on their operations in emerging markets over the last 12 months (Nestle and Hershey to name two close competitors to Mondelez) but the Oreo maker's numbers will cause furrowed brows among some investors.

"Bears continue to focus on volume/mix at -3.1%, which was only a mild improvement from -3.7% in 3Q:15, which represents a sequential deceleration from -2.5% in 1H:15," Sanford Bernstein analyst Alexia Howard wrote in a note to clients.

Much of the pressure on volumes came from what Mondelez called "strategic" moves to cut SKUs, while there was some elasticity from moves earlier in the year to put up prices. Volumes, for instance, were down 13% in Latin America in the fourth quarter as Mondelez upped prices in response to currency-driven inflation, notably in Venezuela. However, 2015 was another year of declining volumes for the snacks maker.

Mondelez continuing to drive margins

Margins have been closely watched at Mondelez. Last year, activist investor Bill Ackman bought shares in the business and there was speculation Mondelez could face pressure to grow sales faster or cut costs - or sell itself.

Mondelez has been feeling the benefit from pricing and productivity measures, including moves to revamp its supply chain and upgrade its manufacturing network. The company also used zero-based budgeting to reduce its overheads, a process more FMCG companies are adopting either inspired by 3G Capital or encouraged by investors - or a bit of both - and a programme the group plans to continue in 2016. "We're beginning to institutionalise our approach to cost management," chairman and CEO Irene Rosenfeld said.

The company did get a boost from a mark-to-market adjustment but its margin performance was praised by analysts. "Management is achieving dramatic margin expansion," Athlos Research principal Jonathan Feeney said.

Venezuela stripped from the numbers

The volatile South American market is proving problematic for a number of international FMCG groups. Mondelez has decided to take Venezuela out of its results. That meant its fourth-quarter reported numbers including a $778m charge from removing all the company's Venezuelan assets and liabilities from its balance sheet. 

The move had an impact on sales worth US$1.22bn and on adjusted EBIT of $281m. For 2016, not having its higher-margin Venezuela business in its numbers will lead to a "50 basis point headwind" against the company's target for adjusted operating margin of 15-16%, CFO Brian Gladden said, although the group still expects to hit that forecast.

Mondelez scrutinised over emerging markets

Emerging markets were touted as one of the key drivers of growth at Mondelez at its inception but the company - like many of its peers - found the going tough in 2015. Fourth-quarter sales from what Mondelez calls "developing markets" were up over 12% in the fourth quarter but that was boosted by a near 15-point gain in pricing in Latin America, indicating, as Stifel Nicolaus' Growe noted, volumes were down.

Mondelez finance chief Gladden said the company expects macro conditions "to remain difficult and potentially worsen" in 2016, especially, he added, in emerging markets. "We're seeing even more volatility in markets like Brazil, China, and Russia, even as we start our first quarter.

Mondelez's management faced questions about its volume performance in emerging markets but Gladden pointed to what he saw as the longer-term opportunity for the business in those markets. "We believe there is a long-term volume growth dynamic clearly in these emerging markets, and we're making the investments ... to ensure that we're positioned for that."

Europe in the spotlight

Mondelez's volumes were down in Europe for the fourth quarter and the full year, despite price increases being more limited than in some of the inflation-hit emerging markets.

The company pointed to its "strategic actions" to improve its revenue mix and its volumes improved throughout 2015. Margins, however, rose by 190 basis points.

Mondelez faced questions on its performance in Europe but Rosenfeld insisted underlying sales growth in the fourth quarter was "modestly higher".

She added: "The aggregate revenue in the fourth quarter for Europe was down about 1.1%; it was almost entirely fueled by these strategic actions. We're very pleased to see our share trends improving, particularly in chocolate, which was the hardest hit because of pricing actions, especially in the UK and Germany, as well as we saw improvement in biscuits in France. At the same time, we were driving significant margin expansion, up over 200 basis points for the year. So, we're very pleased with the exiting position of Europe. I think they are well positioned from a margin and a profitability perspective now to grow off of that base."

2016 sales forecast - how should it be seen?

Mondelez predicted a 2% rise in organic net revenue for 2016, which include an impact worth just over 1% from cutting SKUs. The company therefore expects to grow in-line with its categories. The Trident and Halls owner did not provide estimates for how it sees volume/mix and pricing panning out but, given inflation in some emerging markets (for example, Brazil), one could have concluded volumes are expected to be down again this year. In fact, Rosenfeld confirmed as much on a conference call with analysts.

Mondelez's top-line forecast for 2016 was below analysts' consensus and was, in all likelihood,  a key factor in the slump in its stock price yesterday, which was down over 6%.

Speaking to analysts yesterday on a conference call, Rosenfeld sought to underline how Mondelez's sales target had been set with its margin goal - and what she called "a challenging macro environment" in mind.

"Don't forget that we are growing essentially in line with our categories in 2016, while we're expanding margins by about 200 basis points. And I think it's our ability to drive top and bottom line as one of the things that will continue to distinguish us," she said.

On the call, Barclays Capital analyst Andrew Lazar estimated that, excluding actions on SKUs, Mondelez was estimating its organic net revenue would in fact grow faster in 2016 than 2015. However, he asked, given the challenging trading conditions and the fact the company was expecting category growth to slow, why Mondelez was forecast an acceleration in its underlying sales.

"It reflects the underlying strength of our business fundamentals," Rosenfeld insisted. She said Mondelez would continue to invest behind its brands and make progress on volume and mix. "There's obviously a lot of moving pieces in this challenging environment. But we're doing what we said we're going to do. We think our underlying business is sound, and we think we're well-positioned to continue to deliver strong growth in a challenging environment," she added.

Mondelez's new margin target

For 2016, Mondelez forecast margins of between 15% and 16%, in line with its targets. However, yesterday's announcement included a target for the 2018 fiscal year, by when it expects to achieve operating margins of 17-18%.

Along with the 2016 top-line forecast, this new target appears to have disappointed investors. Gladden sought to play down the significance of the target. "It really is just better line of sight to the actions that we're working now to deliver on this target. Good momentum and cost reduction programmes as we execute on those plans, supply chain. As you know, those actions continue even beyond 2016 and 2017, and that will continue to generate benefits. So it's really not anything new or incremental. It's the same playbook," he said.

Stifel's Chris Growe was sanguine. "It seems many investors were keyed in on 18% or higher as a target so, while perhaps disappointing to some, provides an achievable target and on that allows for proper reinvestment in the business."