The most recent strategic update provided by Mondelez International appears to have lifted Wall Street’s spirits, with even the snacking giant’s planned disposals helping to sweeten the mood.
In general, the investment community has been very complimentary of Dirk Van De Put’s performance as Chief Executive Officer of Mondelez, which is now entering its fifth year. Additionally, his plans for the company, which were updated and presented at an investor day just a week ago, appear to have been well received.
Mondelez has stated that it intends to place a greater emphasis on chocolate and biscuits, two categories that are already at the core of the Cadbury owner’s product offering. It is also considering expanding into the baked snacks market, which is a segment that the US business has developed through mergers and acquisitions in recent months.
Van De Put, the CEO of the company that makes Oreos, stated at the three-hour investor update that took place on Tuesday that “Looking ahead, we will continue growing our exposure to increasing profit pools in chocolate, biscuits, and baked snacks.”
The enhanced emphasis placed on the three components was praised by analysts. “These categories are core to Mondelez and boast attractive growth prospects,” says Erin Lash, director of consumer equity research at Morningstar. “Annual sales are growing in the mid-single digits, outpacing the low-single-digit marks that tend to characterize packaged food more broadly,” she adds. “Mondolez is well positioned to capitalize on these growth opportunities.”
According to Van De Put, expansion in these product sectors will include both organic initiatives and more mergers and acquisitions.
Mondelez International sees chances in “filling geographic white spots” as an organic growth strategy. According to Van De Put, the corporation can be “skewed” to one category in some important regions. He gives the example of the majority of the group’s revenues coming from chocolate in the United Kingdom and India, or its business in south-east Asia being predominantly in cookies. He went on to clarify that in order to overcome this imbalance, “we are working hard to address it by utilizing our iconic brands and established distribution, in addition to strategic mergers.”
Aside from geographic expansion, Mondelez also sees opportunities for growth in two other domains: the sale of products through high-growth sales channels and the sale of products at varying price points.
Mondelez plans to increase the percentage of its total sales that come from e-commerce to 20% by the year 2030, up from the current 6% that comes through that channel. In other parts of the world, the manufacturer of Milka chocolate is looking into “conventional” methods of distribution in developing countries, bargain merchants in Europe, and “alternative channels” in the United States, including convenience stores.
One recent example of these attempts is the acquisition of the confectioner Ricolino, situated in Mexico, from the baking behemoth Grupo Bimbo. This deal was announced around three weeks ago. The acquisition of Ricolino, as stated by Van De Put, “provides significant route-to-market capabilities in the traditional trade and gives us a platform to further build our biscuit company.”
Regarding pricing, the company that owns Lu biscuits is working to extend its position at both the low-end and the high-end of the pricing spectrum by focusing on both more affordable and costlier goods.
He stated that even though his company’s primary focus is on mainstream price points, there are significant chances for his company to better penetrate opening pricing points while also moving consumers up to premium price points.
Mondelez is “under-represented in low-priced items, such small-sized, single, chocolate bars,” according to Van De Put, who is Mondelez’s vice president of global communications. Efforts may bear results despite the strain that is being placed on the incomes of consumers.
In a similar vein, the CEO of Mondelez believes that his company needs to strengthen its presence in the “premium” end of its product categories in both developing and established markets. However, he acknowledges that the business may need to proceed with caution for the time being because inflation is reducing the purchasing power of consumers. When Mondelez announced its first-quarter results a month ago, the company that makes Toblerone stated that elasticity had, so far, been below usual levels. However, CFO Luca Zaramella indicated that the company plans to increase prices again in order to try to absorb continued pressure on costs. As a result, the company anticipates that “we will return to more historical levels of elasticity later this year.”
It would appear that Mondelez has not lost its hunger for further mergers and acquisitions despite having completed eight deals in the past four years. “Our mergers and acquisitions strategy consists of three primary components. To begin, one of our top priorities is to identify the best possibilities in terms of their attractiveness, longevity, and the stringency of their return criteria. Second, we are able to quickly produce value because of our robust integration as well as the effective cost and sales efficiencies we have created. And finally, we aim to maximize growth by making focused investments with the goal of generating multi-category strength, addressing capability gaps, and filling whitespaces.
Lash from Morningstar writes, “We think that it will remain a consolidator, with a hunger to expand in new categories and/or geographies from time to time.” Lash is an analyst at Morningstar.
On the other side of the ledger, Mondelez has just revealed that it intends to sell its chewing-gum business in developed nations and offload the cough-sweets brand Halls. Both of these assets have remained stagnant for some time, and Mondelez is looking to get rid of them.
Van De Put explained that as a result of these decisions, the company now has more time to focus on its core chocolate and biscuit franchises and to reinvest in those companies.
The announcement, particularly regarding gum, did not cause many people to raise their eyebrows, especially considering that Mondelez had declared the previous year that it was evaluating the company.
“The Mondelez gum business has not presented any major shocks. Alexia Howard, a research analyst covering US-based food companies for AllianceBernstein, told Just Food that “they’ve acknowledged publicly that they’ve been seeking for choices on that for quite some time.”
“And not that surprising that they’ve thrown in Halls cough candy to sweeten the deal,” the author writes. “As the gum business in developed markets has been in decline for some time, whereas Halls was hit hard by the initial lockdowns of the pandemic, but is likely recovering as we are all mingling and getting coughs and colds more easily these days.” [Citation needed] “And not that surprising that they’ve thrown in Halls cough candy to sweeten the deal
She continues by saying that “[it’s] interesting that the Stride brand was not included on that slide” (Trident is obviously the flagship brand in developed markets), presumably because Stride is the brand that has been around for longer and is the one that they have launched into key emerging markets like China.
According to analysts covering Mondelez at the investment bank Stifel in the United States, the gum and cough-sweets assets that the snacks major is looking to sell amount to approximately 3% of its group sales (which is equivalent to approximately $920 million) and “are declining at approximately 10%.”
In a note that was sent to clients, the analysts from Stifel added the following: “With its M&A playbook, we expect Mondelez to continue accelerating its growth profile through increased exposure to snacking, snacking adjacencies, well-being products, premium segments, and geographical expansion of the core business into white spaces.” These are the areas that the company’s eight acquisitions since 2018 have focused on.
“The company continues to hold a high degree of optionality through its strong balance sheet,” with net leverage standing at 2.5x and close to 1.5x when considering the approximately $6.2 billion in value of its equity investments, “The company continues to maintain a high degree of optionality.”
Van De Put brings up the shareholdings that Mondelez has in the beverage companies Keurig Dr. Pepper and JDE Peet, both of which are suppliers of coffee and tea. “We… hold sizeable ownership stakes in KDP and JDE Peet’s, which provides significant firepower for growth-accretive, snacking M&A going forward,” the company explained.
The company that owns the Belvita biscuit brand has added a bit more sweetness to its update by announcing that it is increasing its prediction for the long-term, yearly growth of sales by raising it from at least 3% to 3-5%.
“We are working to increase our leadership positions in snacking categories that are both appealing and robust.” In order to keep the momentum going, we are capitalizing on our competitive advantages and making investments in both brands and capabilities,” Van De Put commented. And at this point, we are moving on to the next phase of our company’s evolution, which will involve acceleration and a concentration on our portfolio.
Naturally, Mondelez is struggling with a variety of problems, such as inflation and disruptions in supply chains, as well as the conflict in Ukraine, just like the majority of the other global food heavyweights, if not all of them. These will provide Van De Put and his colleagues with a great deal of material to mull on.
However, his track record as CEO since taking over the reins is nothing to scoff at (as Erin Lash of Morningstar points out, it includes 4% organic sales growth on average since 2018 and 110 basis points of adjusted operating margins increase). This is a significant achievement.
And the recent efforts to rearrange the portfolio (with even more to come) are leaving investors with the impression that their needs are being met, at least for the time being.
Investors should keep this leading global snacking manufacturer on their radar, as there are a number of challenges (inflation, supply chain disruptions, and geopolitical angst) on the horizon for the next several quarters, Lash reflects. “While we aren’t sweet on shares, which trade about 5% above our intrinsic valuation, we think investors should keep this leading global snacking manufacturer on their radar.”
Stifel is maintaining its ‘buy’ rating on Mondelez’s stock and recommends investors do the same. It has set a target price of $71 for the shares, which was determined by applying a 17x EV/EBITDA multiple to the bank’s estimations for the year 2023.
They contend that “Mondelez remains a best-in-class global consumer staples firm,” as seen by the company’s “strong sales growth momentum,” which is fueled by “its category exposure, country exposure, and leading market share positions.”
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