Mondelez International’s work on costs looks to be paying off with the snacks giant seeing its margins improve and lifting its forecast for annual earnings this week. The Cadbury owner is seeing some pressure on sales – particularly in Europe – after lifting prices to offset higher commodity costs but analysts are generally upbeat about the US group’s prospects.
Following a third consecutive quarter of margin expansion, the Ritz maker upped earnings guidance. Shares shot up 6.05% to US$37.15 per share yesterday (6 November).
Margins were boosted as a result of the group’s aggressive cost reduction strategy – announced in May – which includes the “zero-based budgeting” programme – one which sees managers build budgets from scratch each year rather than basing them on the previous one. Executives must re-justify expenses every year.
CFO Dave Brearton said a reduction in overheads was driving margins. Over the past year, Mondelez has enhanced its cost-cutting initiatives with announcements including stopping production in Kenya, while shifting much of its global media spend to digital platforms.
“Changes in our spending policies are already making a difference in overheads, and we expect these savings to continue to build as we enter 2015,” he asserted. September, he pointed out, saw all five of the regions in which Mondelez operates, deliver higher margins than the previous year.
Erin Lash, analyst at Morningstar , said: “We’re encouraged by the margin improvement, as the firm’s efforts to reduce overhead costs and improve efficiencies appear to be gaining traction.”
But it’s not all been plain sailing for Mondelez over the last quarter. Negative currency impacts saw the Oreo owner adjust its pricing earlier this year in most of its markets in a bid to fully recover pressure from commodity costs (notably cocoa) and foreign exchange. Mondelez expected the price increases to have some short-term impact on sales.
“As we discussed in our last earnings call, in the short term, this will temper revenue growth until gaps narrow and customers and consumers adapt to the higher price,” Rosenfeld told investors in the wake of the third quarter results on Wednesday.
Nowhere more so was this the case than in Europe – the region that accounts for 40% of its business in terms of revenue. Organic revenue here was down 2.4%, with much of the impact coming from France, where retailers reacted badly to price increases resulting in temporary distribution losses and longer than expected disputes. This has improved in the third quarter, assured Rosenfeld, and while the Cadbury maker lost distribution with a few of its retailers, it did reach agreements with others.
Brearton added many of those disputes “were only resolved in October” making him hopeful Mondelez will hit its full-year organic sales growth target of 2% to 2.55%.
While facing challenges from one of its key developed markets presented a challenge, Mondelez reported encouraging progress in its emerging markets – refreshing news given competitors Nestle and Unilever struggled with slow growth in China and Russia.
Organic revenue growth for the group rose 2.7% “driven by an increase of 9% in emerging markets,” Rosenfeld said. Chinese sales grew high single digits, while Brazil, Russia and India each posted double digit increases.
Eric Katzman, analyst at Deutsche Bank , noted “most companies” had reported slower growth in Brazil, Russia and China. While Katzman said Mondelez was reporting “very strong growth”, he claimed the company “has a history of over-shipping consumption”. The analyst asked: “Why should we be comfortable that that these volumes performances are okay?”
“We continue to watch the performance of the macro economy in key markets like Russia to make sure that our inventories are properly balanced and as I’ve shared with you in the past, we’ve got very good visibility and to that to make sure that our sell out and sell in are properly balanced,” Rosenfeld said. “So we’re very pleased with the performance of our businesses in some of these markets where the macro economies have suffered, but I think it’s partly because we’re taking a number of steps to control our own destiny in those markets with respect to the marketing support and the inputs that we’re providing.”
Mondelez generally remained upbeat about a steady finish to 2014 and entering 2015 with a positive step. The macro-environment will continue to be daunting, said Rosenfeld, and Mondelez was not expecting any “dramatic change” to trading conditions.
Rosenfeld indicated Mondelez would see further benefits from its focus on costs. “We are beginning to make conscious cost reduction productivity a part of the DNA. We are starting to see it play through, it’s a critical piece and a critical driver of our margins as we look ahead. And I have every confidence that that will continue to play through as we look to the future. The facts are though we haven’t begun yet to implement the new organisation model … I think that will be a further help to our overall ability to deliver the targets that we’ve laid out,” said Rosenfeld.
The analyst world favoured the focused approach to its continued cost-saving strategy and offered confidence in the firm. Even the disruptions in France were expected to be “short-term” in nature and likely to ease, said Lash.
Alexia Howard, analyst at Sanford Bernstein agreed, adding that while there may be a “carry-over drag” into the fourth quarter, guidance for the full year was still “reachable”.
The prospects for the start of 2015, she added, looked good. “Cost savings remain strong and if Mondelez reaches its 13% operating margin goal in 2014, this positions it well to achieve its target of at least 300bp of operating margin growth between 2013 (12% operating margin) and 2016. Margin expansion looks promising for 2015 as input cost headwinds moderate and new lower cost plants come online”.