Dean Best

On the money: Mondelez scales back top-line ambitions

By Dean Best | 14 February 2014

The Oreo owner saw biscuit sales continue to suffer in China in the fourth quarter

The Oreo owner saw biscuit sales continue to suffer in China in the fourth quarter

In the year or so since Mondelez International was formed, the Cadbury owner's sales performance has, generally, fallen below expectations. Some in the market believed company's sales target was too ambitious, given the slowdown in its key snacks categories around the world. Reflecting on its 2013 performance and 2014 outlook, Mondelez appears to have rejigged its sales goals to follow market performance more closely.

Throughout 2013, the first full year after the then Kraft Foods split in two, Mondelez has faced questions about its top-line performance. When Mondelez was created, chairman and CEO Irene Rosenfeld hailed the new company's ability to tap into growing emerging markets. However, the going has been anything but smooth, with issues in Brazil, Russia and, more recently, China, holding back the company's sales growth.

Speaking after Mondelez filed its 2013 results on Wednesday, Rosenfeld said the company "delivered solid revenue growth and strong market share performance" amid a "significant slowdown" in its categories.

However, she acknowledged: "We're disappointed that our results were below what we and our shareholders originally expected. It turns out to be quite a challenging year as we faced slower category growth and volatility in some of our key markets."

One such market was China. In Mondelez's most recent quarter, the company again admitted China had been an issue. During the final three months of 2013, sales in China slumped at a "double-digit" rate, Mondelez said, due to "a weak biscuit performance".

The decline in sales in China in the fourth quarter followed problems in the country in the third quarter of 2013, when, again, a "weak" performance in the biscuit sector was a factor in Mondelez cutting its forecast for annual sales.

Speaking to analysts at the time, Rosenfeld said it would "take some time" to see biscuit sales in China recover and insisted she expected sales to remain "soft" in the fourth quarter.

On the conference call to discuss the results for the fourth quarter and for 2013 as a whole, Rosenfeld said Mondelez had improved how it monitors trade stocks. "These changes will help us detect potential issues much earlier and make us a stronger operating company," she said.

The Oreo owner said it still expects its growth in biscuit sales in China to be "soft" in the first half of 2014 - but mainly due to how the numbers will compare with the first six months of 2013.

CFO Dave Brearton said Mondelez's Chinese biscuit business was "pretty stable" and, although he expected the first-half comparison to be "difficult", he was upbeat about the company's recent sales.

"Obviously we didn't have a terrific back half so we are costing in a much easier in the back half. But in absolute dollar shipments and time is going out the door, I think we are already in a pretty good run-rate month over month," he said.

Nevertheless, there are signs Mondelez's ambitions for sales growth have taken a step back from when the company was formed.

"Moving forward, we will frame our organic growth opportunity in relation to overall category performance. As we outlined in the third quarter and again today, our categories have slowed across the board," Brearton said. "2014 will have some of the same category challenges we faced last year but we expect the top line to grow in line with our categories."

"Many investors have viewed Mondelez's 5-7% long-term organic top-line growth target to be overly aggressive, which has not been helped by the fact that in most quarters thus far, that concern has been justified," Barclays Capital analyst Andrew Lazar wrote toay.

"Part of the challenge for Mondelez in delivering on its goal has been the slowdown in its global snacking categories, which were growing roughly 6% per year when the company was formed, but have slowed to around 4% more recently. It appears clear to us that Mondelez is finally transitioning off its absolute 5-7% growth range, and instead moving rapidly towards a category growth/market share top-line algorithm – not just for 2014, but also over the longer term. In other words, Mondelez is marking to market growth.

"We don't want to underestimate the importance of this shift – as it should allow for far more achievable top-line goals moving forward, not to mention a better balance between top-line and margin. Simply put, in our view, this is the right thing to do for the business and shareholders and, while this shift may be too late for some, we believe the vast majority of investors will applaud this move."

On the call, Lazar put to Mondelez management whether they were moving to "a long term top line target that is more market growth based".

Rosenfeld agreed - but said Mondelez wanted to grow faster than its categories in the longer term.

"I think we're taking the first step in that direction with the guidance that we have given you for 2014 but without a doubt as we monitor these markets and we see how our categories are evolving it will be our intent to grow as we have said at or above those category growth rates," she said. "I think that's the right way to think about it."

Sectors: Confectionery, Dairy, Emerging markets, Financials, Snacks

Companies: Mondelez International

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