Dean Best

On the money: Mondelez will recover in Brazil, Russia - Rosenfeld

By Dean Best | 9 November 2012

Rosenfeld said there should be no "over-reaction" to one quarters problems

Rosenfeld said there should be no "over-reaction" to one quarter's problems

Irene Rosenfeld, the CEO of Mondelez International, has said the newly-formed snacks group will bounce back in Brazil and Russia, two key emerging markets that hit the company's sales in the third quarter.

Mondelez, formed last month after Kraft Foods split in two, this week reported a fall in underlying third-quarter sales amid problems in the two countries.

Speaking to analysts after Mondelez filed the results, Rosenfeld said the company had taken action to correct the "mis-steps" and insisted it would see a "rebound" in the fourth quarter and next year.

"The issues that we're facing, we believe were of our own making. They're very much in our control and they're quite fixable. So we have every confidence that they will continue to be growth markets for us," Rosenfeld said.

In Brazil, Mondelez reacted too slowly to a "gradually weakening economy" and its gum sales suffered, Rosenfeld said. The company, she insisted, would act. "We have increased our marketing and our sales support. We're looking to continue to expand our distribution in the fast-growing north-north-east part of the country, and we have taken a number of steps to improve the offerings from a price/size standpoint as we have watched the GDP in Brazil, as well as we see in a number of countries, declining somewhat," she explained.

Mondelez also, Rosenfeld admitted, reduced its marketing investment behind its biscuit business in Brazil. "The category was growing fine. We just reduced our marketing support to offset some of the gum weakness and it was a mistake. And we have since restored that marketing support and we're quite confident that, that business will rebound," she said.

In Russia, Mondelez, which owns brands including Milka chocolate, did not react quickly enough to competitors in the chocolate and coffee sectors cutting prices, Rosenfeld said.

"We were slow to respond to the fact that competitors had dropped prices and we didn't. It resulted in share losses and that was the biggest issue that we had in coffee and chocolate. We've taken the necessary price reductions. Both categories, again, remain quite robust in Russia and we're quite confident that we will be able to correct that situation," she explained.

Mondelez's presence in a number of key emerging markets was seen as a potential benefit to the company. The split, it was argued, would enable Mondelez to focus on driving further growth from these faster-growing markets. Despite the issues in the last three months, Rosenfeld insisted Mondelez was well placed in the developing markets.

"We've had a terrific run in our developing markets these past few years by any measure," Rosenfeld, who was chairman and CEO of Kraft Foods before the split, said. "And, in fact, our first half, we were up 9.5%. So we had a speed bump in the third quarter and we're not happy about it and it's a fact, but we shouldn't overreact to one quarter."

After reporting its third-quarter results, Mondelez reaffirmed its 2013 forecasts of organic net revenue growth at the "low end" of an increase of 5-7% and of operating EPS of $1.50 to $1.55.

Janney Montgomery Scott analyst Jonathan Feeney upped his 2013 EPS forecast for Mondelez to $1.57 from $1.53 after what he described as "solid" third-quarter profits.

He was also sanguine about the issues Mondelez outlined in Brazil and Russia, although he noted the factor behind the problems in the Latin American country underlined the investment the company will have to make in its wider gum business.

"In a portfolio as large as Mondelez's developing markets, execution issues are bound to occur, but we see the driver behind the Brazil piece – slowing in gum due to high prices in a weakening economy – as indicative of the acceleration in A&C against gum and candy (43% of total sales) that will likely be required to restart growth," he wrote.

Mondelez said revenue from its gum and candy business fell 1% in the third quarter, as the category grew by 4%.

"The key challenge remains Gum, especially Trident, whose revenue declined low-single digits. Although the brand grew in developing markets, it was more than offset by weakness in developed markets," Rosenfeld told investors.

"To be frank, gum has been disappointing for quite some time, and it's taking us longer to change the trajectory than we anticipated. We have, however, taken a number of steps to fix our performance, and we expect to see gradual improvement over the next year."

For the full transcript of Mondelez's third-quarter conference call, visit seekingalpha.com.

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

Companies: Mondelez International

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