Andy Coyne looks at what might be learned from Mondelez International‘s 2017 results and the snacks giant’s outlook for the year ahead.
In 2017, Mondelez International, the US-based Cadbury and Oreo owner, had what it described as a “solid year”.
The snacks maker will be pleased things picked up in the last three months after a cyber attack this summer affected its business in North America, trimming three percentage points off growth from the group’s overall sales.
But new CEO Dirk Van de Put – who started in the role on 20 November – believes Mondelez can improve on its 2017 performance. Speaking to analysts in his first results call since taking charge, the former McCain Foods CEO said: “We know we can do better.”
Looking back on 2017, Mondelez appeared pleased with its margins – but less so with sales.
Mondelez booked rising annual profits. Operating income was up from $2.57bn in 2016 to $3.51bn last year.
On an adjusted basis – which stripped out factors including tax benefits, restructuring costs (lower in 2017 than 2016) and higher gains from disposals – operating income was $4.18bn, up 9.9%.
Mondelez’s adjusted operating income – a closely-watched metric at the business for a number of years – was 16.3% in 2017, compared to 15% in 2016.
The company’s 2017 net earnings stood at $2.92bn, compared to $1.66bn a year earlier – or up 11.9% on an adjusted basis. Indeed, fourth-quarter profits beat analyst estimates.
However, Mondelez’s sales were sluggish in 2017, down 0.1% at US$25.9bn, although, on an organic basis, it saw some growth, with net revenue inching up 0.9%. It also saw sales grow in the last three months of 2017.
Over 2017 as a whole, Mondelez saw its net revenue rise on an organic basis in the three operating regions of Latin America, the combined Africa, Middle East and Asia (AMEA), plus Europe. It was down, however, in North America.
It is worth mentioning that the aforementioned cyber attack last summer impacted sales to the tune of $100m. Mondelez said the attack had a negative impact of 0.4 percentage points on its organic net revenue in 2017, which would have seen that metric hit 1.3%, the same as in 2016.
In his first post-results call, some 60 days after taking the helm at Mondelez, food industry veteran Van de Put – formerly of Mars and Danone, as well as McCain – stressed he would be looking for improved performance, highlighting the company’s organic growth rate.
“Overall, I would call 2017 a solid year. We delivered another strong year on the bottom line. Our adjusted operating income grew by 130 basis points and adjusted EPS was up by 15%,” he said. “This was achieved largely through a strong operating performance. On the top line, our organic net revenue grew 0.9%. And while that was in line with our latest outlook, we know we can do better.
“It’s encouraging to see that we exited the year with an increasing momentum, as our organic revenue grew 2.4% in the fourth quarter. So we are cautiously optimistic we can carry some of that momentum forward in 2018.”
CFO Brian Gladden echoed the same sentiments. “We’re pleased that we delivered another strong year of margin expansion and double-digit adjusted earnings growth, but we’re not satisfied with our top-line growth.”
Using BRICs to build momentum
Mondelez continues to prosper in emerging markets with the BRIC countries a particular focus.
Van de Put said: “Emerging markets revenue increased 3.6% as we see improving fundamentals across an increasing number of markets, such as India, Russia, South East Asia and Mexico.
On an organic basis, annual net revenue from the AMEA region grew 2.7% with “exceptionally strong growth” in India, as well as “solid results” in South East Asia.
Margins in AMEA increased by 140 basis points to 13.1% while Latin American margins increased 260 basis points to 15.5%.
Central to the original investment case when Mondelez was set up was its prospects in emerging economies. John Baumgartner, an analyst at Wells Fargo, saw the company’s performance in these markets as a positive.
“Emerging markets showed nice revenue acceleration and the fastest expansion since Q4 2015,” he said. “AMEA outperformed.”
But another analyst, Pablo Zuanic, an analyst at US investment and trading firm Susquehanna International Group, is less impressed with the group’s achievements in emerging markets.
“Emerging markets are 28% of sales but only grew 3.6% in FY17, but the bulk of that was local inflation pass-through,” he said.
“Yes, we can give them time, but the notion that Mondelez is a faster-growth story due to emerging markets has not played out.”
Not the American dream
It is perhaps starting to sound a bit like a broken record but, after a year of falling sales in North America, Mondelez said it remains focused on improving its performance in this region – albeit it is a new CEO delivering the familiar message.
The malware incident in June had a “significant negative effect” on its results for the year, Van de Put said, highlighting in particular the pressure the attack put on Mondelez’s biscuits business.
“Since the malware incident last summer, our supply chain execution has been challenged. While we are making progress, returning to normal service levels is taking longer term than anticipated. We do know what needs to be done. And as such, our performance is gradually improving, but we do expect it will take a few quarters to seek all systems improvement in this business.”
However, that is not the whole story and Van de Put recognises that, pointing to “a tough operating environment and mixed execution”.
“The only region that hasn’t been performing in line with our expectations is North America,” he reflected, adding “solid execution is key in a “competitive retail environment”.
Investors could perhaps be forgiven for growing impatient.
Anthony Riva, an analyst at GlobalData Retail, said: “Moving forward we believe that Mondelez needs to find a more permanent solution to their difficulties in North America.”
While Baumgartner at Wells Fargo described North America as “particularly disappointing” and Alexia Howard, an analyst at Sanford Bernstein, called the market “a work in progress” for Mondelez.
Barclays added: “The fact that Mondelez’s North America segment remains stubbornly weak (in part due to the 2Q17 malware issue) is likely to remain an investor concern, not to mention potentially dampen top-line through 1H18.”
“We have to be more innovative”
The Belgian is following in the footsteps of former CEO Irene Rosenfeld, who had been in the role for 11 years, having taken the top job in 2006 (at Mondelez forerunner Kraft Foods).
After just two months at the helm, it is too early to expect Van de Put to fully flesh out his plans but he hinted at what he wants to focus on.
“When I became CEO in November, I established three immediate priorities. The first, pretty obvious, get to know our business, our consumers, our clients and my colleagues. The second, we have to execute our 2018 business plan with excellence. It is the last year of our current strategic plan and so we want to finish the job. And, third, lead the comprehensive review to develop a new strategic framework for the next three to five years,” he said.
“During the past two months, I’ve travelled the world meeting with customers, colleagues, suppliers and investors. I have visited all four of our regions, eight of our ten biggest markets and I plan to continue to visit critical markets in the months to come. My visits have confirmed my belief that our company is uniquely positioned to differentiate itself based on our brand leadership across major snacking categories.
“Through our attractive geographical exposure, especially in emerging markets, our strong innovation capabilities and a continuous innovation of our assets, we will be able to drive solid growth, both on the bottom and the top line. We have made excellent progress on margins. We have delivered an improvement of 600 basis points since 2013.”
Van de Put said the aim is to leverage its competitive advantage to “also accelerate our top-line growth”.
He added: “It’s early, but we are seeing some signs of category improvements in some markets. However, we do have a lot of work to do. We must continue to evolve to meet today’s fast-changing consumer expectations. We have to be more innovative, forward looking and fast moving than ever before. And we’ll have to combine that with excellent execution in each of our markets. And all of that must be done while remaining obsessed with our cost structure in order to stay competitive.”
Baumgartner at Wells Fargo is prepared to give him time. “We think patient investors will be rewarded as new CEO Van de Put unveils more details behind his vision for growth,” he said.
What Van de Put did not mention is whether Mondelez might consider taking some bolder steps, acquisitions perhaps.
Other large foods businesses with off-trend lines and stodgy top-line growth – in an era where consumers are increasingly looking for healthy alternatives – have sought to add faster-growing products to their portfolio by buying the businesses that make them. Kellogg and Hershey (with RXBar and Amplify Snack Brands respectively) to name just two recent examples.
If this is on Van de Put’s mind, it is not something he is saying out loud. But it is occupying the thoughts of some analysts. SIG‘s Zuanic said: “We wonder whether chocolate in developed markets – about one-third of chocolate for them, as per our Euromonitor-based estimates – will be challenged by consumer trends. In the US, Hershey and Mars have sought to diversify.”
The task at hand
Of immediate concern is what happens in 2018.
Van de Put said: “Overall, we expect our top-line trajectory in 2018 to improve over 2017. Our category has improved in the second half, but we’re taking a balanced approach to our outlook this year. As such, we expect our organic net revenue to grow between 1% to 2%.”
He said he expects 2018 will be another year of double-digit EPS growth at constant currency.
“We have strong foundational goods in place, and we enter the year with momentum in several areas of our business. Our 2018 plan reflects an emphasis on execution, on-going improvements in top line growth and continuous actions to expand our margins. And as we develop our strategic plans for sustainable growth, we are focused on how we can optimise and accelerate our strength to create more value for all our stakeholders,” he said.
Gladden said Mondelez’s 2018 outlook includes “the return to modest growth” in North America.
“Our first quarter is likely to have revenue growth at the low end of our total year outlook as we continue to work to stabilise our North America performance.”
Gladden also said will be another year of significant supply chain reinvention as “we move more production to our new lines of the future”.
Howard at Sanford Bernstein suggests the targets are doable. She said: “Organic sales growth guidance of 1-2% seems prudent and manageable, especially given the easy negative 2.7% comparable from the cyber attack in the US in 2Q:17.
“And EPS guidance of ‘double digit on a constant-currency basis’ is consistent with the company’s guidance at the start of year historically. Overall, the business seems to be strengthening while valuation remains attractive.”