Company Overview: Mondelez International, Inc. is a snack company. The Company manufactures and markets snack food and beverage products for consumers. It operates through four segments: Latin America, Asia, Middle East, and Africa (AMEA), Europe and North America. As of December 31, 2016, its brands spanned five product categories: Biscuits (including cookies, crackers and salted snacks); Chocolate; Gum and candy; Beverages (including coffee and powdered beverages), and Cheese and grocery. Itsportfolio includes various snack brands, including Nabisco, Oreo, LU and belVita biscuits; Cadbury, Milka, Cadbury Dairy Milk and Toblerone chocolate; Trident gum; Halls candy, and Tang powdered beverages. The Company sells its products to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores and retail food outlets. As of December 31, 2016, it sold its products to consumers in approximately 165 countries.


MDLZ Details

Mondelez International Inc (NASDAQ: MDLZ), an American multinational confectionery, food, and beverage company, has been able to develop strong brands and geographic coverage over time. While the stock has undergone a correction owing to recent weak earnings report; improving operating cash flow, heavy international exposure and mix of sales, and other efforts on product revamping are set to pave the path for margin expansion. In September, the group was named to the Dow Jones Sustainability Index (DJSI) for both the North America and World indices.

Second quarter performance softened by many challenges: Mondelez had reported a soft second quarter of 2017, with net revenues falling 5%, on the back of the malware incident and currency pressure. Organic net revenue fell 2.7% as malware incident impacted shipments at the end of June. The group’s gross profit margin fell 110 basis points to 38.8% impacted by currency and commodity hedging activities while adjusted gross profit margin lost 10 basis points to 40%. Their biscuits business revenue performance was also not as expected due to pressure in US despite decent UK, Japan and Germany performance. Gum and candy lost over 7% as the gum category continued to face major weakness, especially in the U.S.
On the other hand, their chocolate business enhanced 5%, on the back of better results in Germany, India and Brazil. Their U.S. chocolate business benefitted from better capacity coming out in the second half, while Milka in China, also performed well. China performance was weak on the back of soft category trends. Their India business enhanced by mid to single digits even though there was a GST impact. But, the group expected a double-digit from India excluding this headwind. Middle East pressure continued to hurt the category growth, while Brazil performance was also lowered by ongoing economic weakness. The group delivered a diluted EPS rise of 10% year on year (yoy) to $0.32, boosted by operating gains and falling divestiture-related costs, which were partially offset by currency and commodity hedging activities pressure coupled with higher intangible asset impairment charges. Their adjusted EPS rose 19% yoy to $0.48 driven by operating gains during the quarter. Meanwhile, the Board decided Dirk Van de Put, to succeed Irene Rosenfeld as CEO of Mondel?z International.



Second quarter performance (Source: Company reports)

Delivered a better adjusted OI margin performance:Mondelez International’s operating income margin enhanced 60 basis points to 10.7% driven by better adjusted operating income margin coupled with falling divestiture-related costs, despite currency and commodity hedging activities’ headwinds as well as higher intangible asset impairment charges. Adjusted Operating Income margin rose 90 basis points to 15.8% driven by fall in selling, general and administrative costs driven by their Zero-Based Budgeting program execution. The group forecasts that their advertising and consumer promotion spending would be about flat for the total year as they move some spending to the second half. Their adjusted OI margin reached 16.3% during the first half of 2017 while they are on track to deliver their mid-16% outlook for the year.

The group expects to face a further one-time cost in the second half as well but do not expect them to be material at this point. Europe enhanced their adjusted OI margin of 220 basis points to 19% driven by solid net productivity, falling A&C costs and the ongoing overhead reductions. The region showed a strong vol/mix growth in chocolate as well as biscuits, while their chocolate business performance was led by Germany and Russia. Adjusted OI margin enhanced 530 basis points to 14.3% in Latin America, due to falling overhead costs and A&C spend, as they adjusted their spending levels to match the market dynamics in countries like Brazil and Argentina. On the other hand, the group’s North America Adjusted OI margin fell 250 basis points to 19.2%. The group’s adjusted gross margin fell 10 basis points hurt by higher input costs, especially in dairy. While there is ongoing net productivity and better pricing, Mondelez expects gross margin improvements as a major enabler to deliver their 2018 margin expansion commitments. 

Improving adjusted OI margin (Source: Company reports)

Focusing on healthy snacks:Mondelez International is a major snacking company in the world with 85% of their net revenue accounted from snacks. More than 70% of the group’s revenue is coming from the profitable Power Brands, which has a presence in over 165 countries, while a significant portion of their sales comes from the faster-growing emerging markets. The global market for snack food is expected to reach USD 630 billion by 2022, growing at a CAGR of 5.8% (Source: Mordor intelligence). Accordingly, to leverage the ongoing preference for health and well-being products, the group is making major steps, in terms of renovating their current brands leading to organic Triscuits, belVita Protein, RITZ Crisp & Thins. They are also launching new products like Véa, which are in the process of coming into the marketplace. Moreover, the group intends to focus on e-commerce, even though it is still a small piece of the business snacks. The group is also making efforts to launch different package formats and different package sizes based on the channels the consumer is shopping.
 
Delivered strong shareholder value: The group has delivered over $120 billion to its shareholders via their share price appreciation and dividends over time and returned over $900 million during the second quarter of 2017. Having over 45 old brands in their portfolio which have been at least 100 years old, the group built a strong brand value; and is now positioning in the fast-growing markets in snacks which include Asia Pacific, and Healthy categories. Moreover, the board enhanced the quarterly dividend by 16%, showing their solid free cash flow. The company bought back over $600 million of their common stock and paid over $300 million in cash dividends. They declared a quarterly cash dividend of $0.22 per share and have a share repurchase target of $1.5 to $2.0 billion in 2017. 


Capital Return (Source: Company reports)

Positive Guidance:For the full year of 2017, the group expects their organic net revenue growth target to be at least 1%. They forecast their adjusted OI margin to be in the mid to 16% range as well as deliver a double-digit adjusted EPS growth on a constant currency basis. For the next two quarters, the group expects a higher revenue in the fourth quarter as compared to the third quarter of 2017 due to seasonality even post the impact of the further malware incident related to shipments. They also expect to absorb the dilution from the two divestitures, while adjusting for interest expense for the year. The group is forecasting to deliver over $2 billion for the year as they expect a lower CapEx, better margins and good working capital efficiency. They forecast a better biscuit business trajectory as they relaunched Oreo this summer with improved packaging as well as a new product formula. In fact, Google recently announced that the next version of its mobile operating system, Android, is named after the favorite cookie as Android OREO. Moreover, the group is aiming to enhance their Digital mix in their portfolio and accordingly targeting 30% of the spend on digital.
 
Stock performance: The shares of Mondelez International corrected over 6% in the last one year (as of September 28, 2017) owing to softness in performance and concerns over their Snacks Category Growth which rose only 1.5% in this year to date as compared to 3.4% in 2015 and 2.3% in 2016. On the other hand, the group is now focusing on Well-Being Snacks and accordingly, aims to have Better Choice options, to enhance the whole grains while including information on calories on all front-of-pack labels globally. The group is now aiming at three growth areas which include enhancing the current 10 well-being brands at twice the rate of the base portfolio; increasing the nutrition and ingredient profile of their Power Brands; and delivering 15% of revenue from individually wrapped, portion-control snack options that are under 200 calories. Given the trading scenario and ongoing developments, we give a “Buy” on the stock at the current price of USD40.57. 


MDLZ Daily Chart (Source: Thomson Reuters)

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