Mondelez: Reports Solid Q1/2014 Results

Deerfield / IL. (mdlz) Mondelez International Inc. reported solid first quarter 2014 results. Separately, the company announced that it intends to combine its coffee portfolio with D.E. Master Blenders 1753 NV´s coffee business to create the world´s leading pure-play coffee company. Upon closing, Mondelez International will receive after-tax cash proceeds of approximately five billion USD and a 49 percent interest in the new company.

The company also announced plans to reduce operating costs to best-in-class levels through a restructuring program that is expected to deliver cost savings of at least 1,5 billion USD by 2018, providing additional opportunity for margin expansion beyond its revised 2016 target of 15 to 16 percent.

«The strategic and cost-reduction actions we announced today underscore our determination to become a leaner, more focused and more nimble global snacking powerhouse», said Irene Rosenfeld, Chairman and CEO. «As our first quarter results show, we are making meaningful progress toward our margin goals, while continuing to deliver solid growth and market shares. These strategic and cost-reduction actions will strengthen our core snacking business, simplify our operations and enhance our ability to deliver world-class margins. At the same time, our shareholders will continue to share in the future growth of the coffee category through our ownership interest in an advantaged, more focused coffee company».

Creating the World´s Leading Pure-Play Coffee Company

Also, Mondelez International announced its intention to combine its wholly owned coffee business with D.E. Master Blenders 1753 BV to create the world´s leading pure-play coffee company. The new company, to be called Jacobs Douwe Egberts, will hold leading positions in more than two dozen countries and have a strong emerging markets presence in the 81 billion USD global coffee category. With greater focus and increased scale, the new company will be able to operate more efficiently and invest more effectively in innovation, manufacturing and market development to capitalize on the significant growth opportunities in coffee.

Jacobs Douwe Egberts is expected to have total revenue of more than seven billion USD (five billion EUR) and an Ebitda margin in the high-teens. In 2013, Mondelez International´s coffee business generated approximately 3,9 billion USD (2,9 billion EUR) in revenue with an Ebitda margin in the high-teens.

Upon completion of the proposed transactions, Mondelez International will receive after-tax cash of approximately five billion USD and a 49 percent interest in Jacobs Douwe Egberts, enabling its shareholders to share in the synergies and future growth of the new company. Mondelez International expects the transactions to be completed in the course of 2015, subject to limited closing conditions, including regulatory approvals. The company expects the transactions to be accretive to earnings in the first full year following close.

The company expects to use the majority of its cash proceeds to expand its share repurchase program, subject to approval by the Board of Directors, with the balance used for debt reduction and general corporate purposes. The company remains committed to maintaining an investment-grade credit rating and access to Tier two commercial paper.

Targeting Best-in-Class Cost Levels

In conjunction with the proposed coffee transaction, Mondelez International also announced its plan to create a leaner, simpler and more focused organization by reducing operating costs to best-in-class levels through zero-based budgeting and by accelerating its supply chain reinvention initiative.

To facilitate these efforts, the Board of Directors approved a 3,5 billion USD restructuring program through 2018, comprised of approximately 2,5 billion USD in cash costs and one billion USD in non-cash costs. The restructuring program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. The company expects to incur the majority of the program´s charges in 2015 and 2016. The 2,2 billion USD of capital expenditures to support the restructuring program are already included within the company´s previous guidance of approximately five percent of net revenues for the next few years.

The company expects the 2014-2018 Restructuring Program to generate annualized savings of at least 1,5 billion USD by 2018. Lower overheads and accelerated supply chain cost reductions are each expected to generate roughly half of the total incremental savings. Overhead reductions will be driven by both lower headcount and non-headcount costs.

«Today´s coffee announcement creates an opportunity to further reduce our supply chain and overhead costs and fast-track the implementation of best-in-class cost management practices on a global basis», said Dave Brearton, Executive Vice President and CFO. «The savings generated by this new restructuring program will enable us to accelerate our margin improvement program. Specifically, we are raising the bottom end of our 2016 Adjusted Operating Income margin target, resulting in a revised range of 15 to 16 percent, up from our previous target of 14 to 16 percent. After 2016, we expect the cost savings will provide additional fuel to fund growth and drive further margin expansion».

First Quarter Results

In the first quarter, the company delivered Organic Net Revenue growth in line with expectations, strong Adjusted Operating Income margin improvement and double-digit growth in both Adjusted Operating Income and Adjusted EPS on a constant currency basis.

On a reported basis, net revenues were 8,6 billion USD, down 1,2 percent and operating income was 843 million USD, up 1,1 percent. Diluted EPS was 0,09 USD, including a negative 0,18 USD from the loss on debt extinguishment and a negative 0,09 USD from the remeasurement of net monetary assets in Venezuela.

Organic Net Revenue Commentary

Organic Net Revenue increased 2,8 percent, including a negative 0,6 percentage point impact from lower coffee revenues, reflecting the pass-through of lower green coffee costs. Overall, pricing was up 2,5 percentage points, as the company increased prices across most non-coffee categories in every region. Volume/mix was up slightly despite these higher prices. The 0,4 percentage point headwind from Easter shifting to the second quarter was lower than expected. Market share performance was strong, with over 60 percent of revenues gaining or holding share.

Organic Net Revenue from emerging markets5 was up 6,7 percent and developed markets increased 0,2 percent. Overall, Power Brands grew 4,8 percent. Tuc, Club Social, belVita and Chips Ahoy! biscuits, Cadbury Dairy Milk and Milka chocolate and Tang powdered beverages each posted at least high single-digit increases. On a regional basis, highlights include:

  • Latin America increased 14,7 percent, largely driven by pricing gains, especially in the inflationary economies of Venezuela and Argentina. Brazil grew high single digits, as strong double-digit growth in powdered beverages and biscuits was partially offset by the impact from the later timing of Easter on chocolate.
  • Asia Pacific was down 2,7 percent. Lower volume/mix was mostly attributable to China where difficult prior year comparisons in biscuits more than offset a strong performance in gum. India delivered another strong quarter with mid-teens growth driven by chocolate and powdered beverages.
  • EEMEA was up 7,9 percent, reflecting strong volume/mix gains and modest pricing. Revenue growth in the region was broad-based, with a high single-digit gain in Russia and strong double-digit growth in the GCC7 countries, Türkiye and Egypt, more than offsetting a double-digit decline in Ukraine due to political and economic instability.
  • Europe was down 1,0 percent. Pricing in the region was lower, reflecting the pass-through of lower green coffee costs. Lower coffee revenues tempered growth by 1,5 percentage points. Volume/mix increased nearly one percentage point despite the impacts of the Easter shift and short-term customer disputes associated with price increases in non-coffee categories.
  • North America increased 2,5 percent, driven by continued strong share performance and mid-single digit growth in biscuits. Growth in the category was balanced between volume/mix and pricing. The rate of decline in gum continued to moderate as U.S. market share was up for the third consecutive quarter.

Adjusted Operating Income and EPS commentary

Adjusted Gross Profit increased 2,3 percent on a constant currency basis. Adjusted Gross Margin was essentially flat to prior year, as higher prices and a strong contribution from supply chain productivity more than offset input cost inflation.

Adjusted Operating Income grew 15,8 percent on a constant currency basis, driven by lower SG+A expense and higher gross profit. Overhead costs declined as a result of the company´s continued cost management efforts. Advertising and consumer support expense was also lower as the company cycled significantly higher investments in the prior year and drove efficiencies by consolidating media providers, reducing non-working media costs and shifting spending to lower-cost, digital media outlets.

Adjusted EPS grew 17,1 percent on a constant currency basis, driven entirely by operating gains. Below operating income, the benefits from the share buyback program and lower interest expense were more than offset by an effective tax rate of 20,7 percent compared to 4,0 percent in the prior year.