DEERFIELD, ILL. — Boosted by growth in the U.S. biscuit business, the North American segment of Mondelez International, Inc. showed good growth in 2018 and is positioned for further gains ahead.
Improvements in North America helped Mondelez achieve its financial objectives in the year ended Dec. 31, 2018. Mondelez net income was $3,381 million, equal to $2.30 per share on the common stock, up 20% from $2,842 million, or $1.87 per share, the same period a year ago. Sales were $25,938 million, essentially unchanged from $25,896 million.
Earnings were bolstered by a pre-tax gain of $757 million in connection with the merger between Keurig Green Mountain, Inc. and Dr Pepper Snapple Group, Inc. in July. Mondelez is a 13.8% owner of the merged company. Adjusted net income per share was up 15%, boosted by operating gains, share repurchases, equity income and lower taxes.
“We delivered on our key financial and strategic commitments for the year, including solid top-line and bottom-line growth and strong cash flow generation,” said Dirk Van de Put, chairman and chief executive officer. “In 2019, we will continue to progress against our new strategy, which includes new investments to drive organic revenue growth and operational excellence across the organization.”
Investors were impressed by the results. In trading Jan. 31 on the New York Stock Exchange, Mondelez shares jumped $2, or 4.6%, to $45.83 at mid-day, not far beneath the 52-week high of $46.54.
In North America, sales in 2018 were $6,884 million, up 1.3% from 2017. Breaking down the sales gain, Mondelez said organic growth was up 0.6%, boosted by a 1.1 percentage point contribution from pricing, offset from a volume/mix setback of 0.5 percentage point. In the fourth quarter, net sales were $1,829 million, up 1.6% from the same period in 2017. Organic sales were up 0.8%, of which pricing contributed a positive 2.9 percentage points and volume/mix was a 2.1-percentage-point drag.
Globally, sales were boosted by stepped-up marketing spending during the quarter, Mr. Van de Put said. The effort boosted U.S. sales of Oreos, which posted high single-digit sales growth for the year.
“We (also) invested in our recent Mexico Oreo chocolate launch, which has received very positive feedback from our customers,” he said.
Overall, the Mondelez cookie business was a source of strength in North America, said Luca Zaramella, executive vice-president and chief financial officer.
“U.S. Biscuits continued to see good momentum, with low single-digit growth and share gains driven by brands like Oreo,” he said. “We are proud that the team delivered material progress for the quarter. That said, there is still work to be done to drive improved levels of consistency, and we continue to expect progress in 2019, albeit not linear.”
Acquisitions by Mondelez in recent years have been focused on the company’s biscuit business. In June 2017, the company acquired Tate’s Bake Shop, a premium biscuit company. Tate’s added $22 million in Mondelez sales in the fourth quarter of 2018.
“We are also pleased with our recent acquisition of the Tate’s premium cookies business, which delivered another quarter of strong double-digit growth,” Mr. Van de Put said during a Jan. 30 call with analysts.
Operating income margin in North America held within a tight range the last three quarters of the year, between 20.6% and 20.9%. The margins represented an improvement from the first quarter (18.7%) and the fourth quarter of 2017 (19.5%). Mondelez said it scored “solid share gains” in 2018 in the biscuit and candy categories and achieved improved service levels in the fourth quarter due to enhanced supply chain consistency.
Supply chain challenges in North America have been discussed extensively by management in recent quarters. Executives last year said only 60% of the company’s volume was produced on “advantaged assets” with the balance made on lines that “do not provide full reliability.”
In the Jan. 30 conference call, Mr. Van de Put said Mondelez was progressing in its efforts to enhance North American efficiency, though he did not offer much detail.
“As you know, in recent quarters, we have put particular focus on our North American supply-chain performance, where we are aiming to significantly improve its operational excellence,” he said. “Q4 was a good quarter where our gradual improvement continued in the right direction.”
Operating income of Mondelez for the year was $3,312 million, down 4.3% from a year earlier. A major contributor to the decline was pension participation charges during the year.
“In the fourth quarter of 2018, the company executed a complete withdrawal from the Bakery and Confectionery Union and Industry International Pension Fund,” Mondelez said. “The company estimated a withdrawal liability of $573 million, which represents the company’s best estimate of the withdrawal liability absent an assessment from the Fund. The company expects to pay the liability over a period of 20 years from the date of the assessment. During 2018, within its North America segment, the company recorded a total discounted liability and related charge of $423 million or $321 million net of tax.”
In the fourth quarter of 2018, Mondelez net income was $823 million, or 56c per share, up 18% from $695 million, or 46c, in 2017. Sales were $6,773 million, down 2.7%.
Offering an outlook for 2019, Mondelez projected organic sales growth of 2% to 3% and adjusted earnings growth of 3% to 5%.
Boosting the company’s optimism going into 2019 is continued growth of the global core snacks market — up 2.7% in 2018, 2.1% in 2017 and 2.3% in 2016. The figures were based on Nielsen data and weighted for Mondelez results in the biscuits, chocolate, gum and candy categories.
With changes at the company, including a corporate restructuring launched in 2019, improved results will follow in the coming years, Mr. Zaramella said.
“Our new approach will set the stage for our long-term growth algorithm of 3% plus organic net revenue growth with a ramp-up in the outer years, high single-digit adjusted e.p.s.,” he said.
“I believe this strong 2018 financial performance is just a first indication of what is the potential of this company,” Mr. Van de Put said.