Mondelez ends year with sluggish sales growth

by Monica Watrous
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Mondelez brands - Chips AHoy! Ritz, Triscuit
In fiscal year 2016, Mondelez continued making progress toward its long-term goal of adjusted operating income margin expansion.

DEERFIELD, ILL. — While a number of global economic and political factors dampened top-line growth for Mondelez International, Inc. in fiscal year 2016, the company continued making progress toward its long-term goal of adjusted operating income margin expansion. Looking ahead, the company is bracing for the impact of a proposed border adjustment tax on its operations.

Brian Gladden, c.f.o. of Mondelez

“We do import from Mexico and other parts of the world into the U.S.,” said Brian Gladden, chief financial officer, during a Feb. 7 earnings call with financial analysts. “Our imports represent a minority of our U.S. revenues and profits… We’re not going to do anything to adjust our operations or plans until we really know what the policies are going to be and they’re much more concrete.

“We’re very involved. We’re watching developments. We have a voice in this process of providing feedback. And to the extent that we face higher costs for imported products, we’d obviously need to look for ways to cover these costs, adapt our supply chain model, and we'd do that over time.”

Reported net income for the fiscal year tumbled, driven by the prior-year gain of $7 billion from transactions connected with the company’s coffee businesses.

Mondelez coffee
Mondelez experienced a prior-year gain of $7 billion from transactions connected with the company’s coffee businesses.

Net earnings attributable to Mondelez International for the year ended Dec. 31 were $1,659 million, equal to $1.07 per share on the common stock, down 77% from $7,267 million, or $4.49 per share, during the prior fiscal year. Net revenues were $25,923 million, down 12% from $29,636 million.

Adjusted earnings per share rose 24% on a constant-currency basis, driven by operating gains. Adjusted operating income margin was 15.3%, a 230-basis-point improvement from the year before, reflecting continued reductions in overhead costs and supply chain productivity savings. The company remains committed to achieving adjusted operating income margin of 17% to 18% in 2018.

Fourth-quarter net earnings were $93 million, or 6c per share, which compared with a loss of $729 million in the year-ago period. Net revenues for the quarter were $6,770 million, down 8% from $7,364 million in the same period last year.

Adjusted earnings per share in the fourth quarter increased 12% on a constant currency basis. Adjusted operating income margin was 14.4, a 110 basis point improvement from the same quarter in 2015.

Irene Rosenfeld, Mondelez
Irene Rosenfeld, chairman and c.e.o. of Mondelez

“Slower GDP growth, currency and commodity volatility, the uncertain impact of the Brexit vote, market shocks like the recent demonetization in India, and complex developments in the political landscape, including a backlash against globalization — the impact from these events are being felt across many companies and industries, and we are not immune,” said Irene Rosenfeld, chairman and chief executive officer. “While we are encouraged by our results in 2016, we acknowledge that our top line is not yet where we want it to be. Some of this is due to factors outside of our control. Some is due to mixed execution on our part. And some reflects deliberate actions we’ve taken to run a more profitable business.”

At the core of the company’s strategy is disciplined investing for growth. Mondelez is increasing resources and investment behind its “power brands,” which include Oreo, Milka and belVita and collectively represent nearly 70% of revenues. The company also is bringing these brands to new markets and usage occasions and strengthening its e-commerce snacks business, targeting at least $1 billion in revenue in this channel by 2020.

Mondelez Milka and Oreo
Mondelez's “power brands" include Oreo and Milka.

Organic revenue growth of 1.3% for the year fell shy of targets, dragged down by demonetization in India and planned revenue management actions, including product rationalization. 

“While these actions do temper growth on the top line, they improve the overall quality of our portfolio, allowing us to focus on more attractive and higher profit opportunities,” Ms. Rosenfeld said.

In the tough environment, she said the company is not afraid to experiment or innovate, particularly with an eye toward health and wellness, where consumer tastes are shifting.

“So net-net, we’re not quite where we want to be on the top line,” Ms. Rosenfeld said. “We’re very pleased with the strong bottom-line performance that we delivered. But we do see some green shoots underlying those aggregate numbers.”

Mondelez belVita breakfast biscuits
Mondelez's “power brands" collectively represent nearly 70% of revenues.

For the year ahead, management expects to achieve organic net revenue growth of at least 1% and adjusted operating income margin in the mid-16% range. Additionally, the company expects double-digit adjusted e.p.s. growth on a constant-currency basis.

“We’ve built our plans for 2017 assuming that the category environment remains consistent with what we saw in the fourth quarter,” Mr. Gladden said. “We believe this is an appropriately conservative stance. Even in this slower growth environment, however, we expect to deliver another year of strong margin expansion and exceptional e.p.s. growth… This outlook is built on a category growth rate as we see it today and includes both the benefit of new white space launches, as well as our continued revenue management efforts.” 
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