Mondelez International, Inc. (NASDAQ: MDLZ) Q4 2021 earnings call dated Jan. 27, 2022
Presentation:
Operator
Good day and welcome to the Mondelez International Fourth Quarter 2021 Year-End Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by the Mondelez management and the question-and-answer session. [Operator Instructions]
I’d now like to turn the call over to Mr. Shep Dunlap, Vice President Investor Relations for Mondelez. Please go ahead, sir.
Shep Dunlap — Vice President Investor Relations
Good afternoon and thanks for joining us. With me today, are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides which are available on our website. During this call, we will make forward-looking statements about the Company’s performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements.
As we discuss our results today, unless noted as reported, we’ll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted.
We are also presenting revenue growth on a two-year CAGR basis to provide better comparability, given the impact of COVID on 2020 results. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. In today’s call, Dirk will provide a business and strategy update, and then Luca will take you through our financials results and outlook. We will close with Q&A.
Before turning it over to Dirk, I would like to remind you of two upcoming investor events. First, we will present virtually on February 22 at [Indecipherable], focusing on our EMEA region; and second, please save the date for a Mondelez Investor Day on May 10th.
With that, I’ll turn the call over to Dirk.
Dirk Van De Put — Chairman and Chief Executive Officer
Thank you, Shep, and thank you everyone for joining the call today. I am starting off at Slide 4. 2021 marked another year of strong top and bottom line results. Growth was driven equally by volume and pricing as we leverage the strength of our brands and execution capabilities. We continued to deliver on our long-term growth algorithm returning nearly $4 billion in capital to shareholders while investing in our growth initiatives, positioning us well to deliver strong performance in 2022 and beyond.
The COVID-19 pandemic continues to impact both consumer behavior and the broader operating environment. Against this backdrop over the past two years, consumers continue to choose our trusted and beloved brand for both comfort and sustenance at home and on the go. We have delivered on this strong underlying demand across our brands and geographies with continued strength in execution, activation and innovation. As a result, our cumulative market share remains higher than pre-COVID levels.
At the same time, we are continuing to operate in a dynamic environment characterized by global input cost inflation, alongside supply chain, labor and transportation disruption. We are effectively mitigating these challenges through ongoing cost discipline and strategic pricing actions. We also continue to execute well against our strategic growth priorities investing in our brands, capabilities and sustainability initiatives, while expanding our portfolio with the addition of several growth accretive acquisitions. Hu, Grenade, Gourmet Food and Chipita, which closed earlier this month. These addictions increase our exposure to broader snacking categories and growing profit pools.
Along with our financial performance, we made progress in other areas. We continue to advance our ESG goals setting ambitious new targets for achieving net zero by 2050, and we continue to accelerate our DEI agenda. And none of this would be possible without our people, the best in the CPG industry. We proud of the way our teams continue to focus on delivering great products to our consumers as pandemic conditions continue to impact both our work lives and our personal lives. I am especially grateful to our frontline teams whose hard work and dedication delights families all over the world. We are confident that the strength of our brands, our proven strategy and our continued investments position us well to achieve our long-term financial targets in 2022 and beyond.
Let’s take a closer look at the market and macro trends on Slide 5. With the recent rise of the omicron variant, the rebound in mobility that we saw earlier in 2021 has slowed down in both developed and emerging markets, and is expected to remain 10% to 15% below pre-COVID levels in many markets. Time at home and eating at home look likely to remain elevated. In the US, for example, 60% of adults are not expecting to eat out more in 2022 than they did in 2021. This positions our core biscuits and chocolate portfolios well, as they are skewed towards in-home consumption.
The pandemic continues to fuel the desire for comfort and indulgence, benefiting our categories and trusted brands. And overall as we found in our state of snacking survey released last week, the tendency for daily snacking is up for a third consecutive year. And although 70% of global consumers report concerns about inflation. It has done little to date to change their grocery shopping behavior. This is consistent with the observed price elasticity which has been much lower than historical levels, as well as a continued share weakness for private label.
Let me spend a moment on the current operating environment on Slide 6. Like other companies, we are experiencing cost inflation globally, particularly on transportation costs, dairy, edible oils and packaging. We have implemented material price increases, ensures we are significantly hedged across key commodities and we are continuing to drive productivity measures. We also continue to manage through significant volatility in the supply chain due to labor shortages at third parties as well as a continuing gap between demand and supply of trucking capacity and containers in places like the US and the UK. In addition, the US strike in Q3 although resolved impacted our production output and inventory levels in the quarter.
Additionally COVID-19 continues to cause disruption in consumer mobility in certain geographies impacting our gum business and on the gold [Phonetic] products. This currently affects a small portion of emerging markets. Additionally, the rise of the Omicron variant is driving high levels of absenteeism in certain markets, while limiting recovery mobility. We are focused on reactivating part of our COVID playbook from the early pandemic days and also looking to further simplify our operations to offset this pressure. And although challenging, we are managing effectively through each of these dynamics. We implement our revenue growth management levers and continue to invest in our brands, while taking extensive measures to lighten the supply chain disruption. By applying the lessons learned from earlier waves of the pandemic and maintaining our focus on execution, we are confident that we remain well positioned to deliver our growth targets.
Turning to Slide 7, you can see that our strategy is continuing to drive a virtuous cycle. Strong volume momentum combined with brand investments and strategic pricing options position us well to consistently deliver profitable top and bottom line growth as well as strong return of capital to our shareholders. We grew revenue by 5.2% in 2021, lapping 3.7% growth in 2020. Volume was once again a big contributor to this growth, which demonstrates the fundamental strength and health of our business. Despite the ongoing impact of cost inflation and supply chain volatility, we delivered gross profit growth of 3.6%.
Our working media investments have increased double digits versus last year on the back of a double-digit increase in 2020. Combined with our advantaged portfolio of brands and our execution activation capabilities, we gained or held share across 75% of our revenue on a two-year cumulative basis. We increased operating income by 5.8% and delivered $3.2 billion in free cash flow. We view these results as a healthy indicator of our ability to continue to deliver on our long-term growth algorithm.
As you can see on Slide 8, we are now averaging at 4.2% quarterly growth rate, since the launch of our strategy in September 2018. We are proud of our strong and consistent track record over this time, and we’re continuing to focus on profit dollar growth, local first commercial execution, high return investments and aligned incentives. We are confident that we can continue to consistently deliver attractive growth.
On Slide 9, you can see some highlights of our successful execution against our long-term growth drivers. These include delivering our strongest Christmas sales on record in Europe growing double-digit versus 2020 and 2019 led by Cadbury in UK and Milka in Germany. It also includes continuing to expand distribution in emerging markets, adding 300,000 stores in China, and more than 200,000 stores in India. It includes investing to sustain growth in digital commerce, which grew 29% on a reported basis, lapping 75% growth in 2020.
Digital commerce now accounts for approximately 6% of revenue, up from 3% in 2019. And it also includes expanding our presence in high-growth segments, where we are under-represented, including well-being where we launched breakthrough innovations on key brands like Oreo Zero sugar in China as well as Cadbury Plant Bar and plant-based Philadelphia in the UK. As consumer demand for well-being options psoriasis each of these innovations as a clear potential to expand to additional geographies.
We also grew our presence in the premium biscuit space with double-digit growth led by Tate’s, which we successfully transition to direct store delivery. Additionally, we expanded our presence in close in adjacencies such as baked snacks with the successful integration of giving go. By realizing revenue and cost synergies, we grew that business double digit in 2021. We also expanded our presence in snack bars with the acquisition of Grenade in the UK.
Switching to Slide 10. We continue to further enhance and strengthen our portfolio in 2021, expanding our exposure to the growing profit pools in chocolate and biscuits as well as adjacent categories and the well-being and premium segments. We acquired four high growth strategic assets. Chipita baked snacks in Europe, which just closed in January. Grenade well-being snack bars in the UK. Gourmet Food premium crackers in Australia and Hu premium well-being snacks in the US. These acquisitions are worth $800 million in annual revenue, and they are well positioned to collectively deliver high single-digit growth for years to come. This takes our total number of acquisitions to seven since 2018 and contributing over $1.5 billion of revenue. We also earned $1.5 billion in net proceeds from selling down on our beverage assets in 2021, enabling further investment in our brands in growth drivers.
Additionally, we are in the process of completing a strategic review of our developed market gum business. We expect to complete that review and have more information to share with you at our May 10 Investor Day. 2021 was a strong year, and we are well positioned for another year of strong shareholder returns in 2022 and beyond. By staying close to our consumers, executing our proven strategy and taking the appropriate actions to navigate input cost inflation and supply chain volatility, I am confident that we can deliver strong performance for years to come.
With that I will hand over to Luca for more details on our financials.
Luca Zaramella — Executive Vice President, Chief Financial Officer
Thank you, Dirk, and good afternoon. Our full year and fourth quarter performance was strong in terms of revenue growth, volume, earnings and free cash flow. We delivered revenue growth for the year and quarter of 5.2% and 5.4%, respectively. Importantly, half of these performance was underpinned by volume. Emerging markets increased 12% for the year and 11% for the quarter with strong performance across significant majority of countries, especially the brakes. Despite a small group of countries, specifically in Southeast Asia, continuing to face COVID-related challenges overall, we are encouraged about the outlook for EMs in the near and long term. Developed markets grew 1.6% for the year coming off an exception of 2020, and 2.5% for the quarter of a strong comparison. As with our emerging markets, we are encouraged by the sustained performance, particularly in our key core snacks categories.
On Slide 13, you can see our portfolio performance. Chocolate and biscuits remain attractive and durable categories with very strong results both pre-pandemic during the pandemic, and importantly as we enter 2022. In addition, improved mobility as yielded growth in gum and candy, versus 2020 approaching a return to pre-pandemic levels in many markets and back to growth versus 2019 in China. Biscuits grew 3% for the year, and 3.2% for the quarter. EMs were the big driver of performance with majority of our EMEA and LA business delivering double digits or high-single digit growth. This underscores the large long-term opportunity for our EM biscuit businesses, as we continue to make investments in A&C [Phonetic] portfolio goals and distribution expansion.
Both global and local brand, including Oreo, [Indecipherable] Social deliver strong growth. Chocolate grew more than 10% for the year and 8% for the quarter, with significant growth across both developed and emerging markets through both our global and local brands. Chocolate is a great category to be and as in biscuits, we continue to make investments in our brands and capabilities to continue to drive is performance for the years to come. Gum and candy posted 7% growth for the year and more than 11% growth for the quarter as increased mobility resulted in a return to growth in several key markets, especially within Latin America.
Now let’s review our market share performance on Slide 14. We continue to see good share performance on a two-year cumulative basis as we prioritize A&C investments and execute well in most markets. We held or gained share in approximately 75% of our revenue base on a two-year stack. Our biscuits and chocolate categories continue to do well with 80% of our revenue base holding or getting share. Overall, share gains versus 2019 were broad-based with all regions growing share over a two-year period. A few of the more notable areas of share gains over this time include China, Russia, India, Brazil and Mexico biscuit, UK, Russia and Australia and chocolate and China gum.
As we move into Q1, we expect softer share performance driven by our North American segment. As the combination of supply chain constraints from third parties and labor shortages will pressure stocks and service levels. While the immediate effect of the strike is behind us, we have 2022 with low stocks and we are working to rebuild inventory levels, which takes time in this environment, particularly as demand continues to be strong. We expect a gradual improvement of the situation as the year progresses.
Now turning to Page 15. For the year, we deliver strong wide dollar growth of almost 6%, driven by solid gross profit dollar increases and reduced overheads. For the quarter profitability was pressured, primarily due to the lag between commodities and forex-related inflation and implementation of pricing actions, specifically North America, where price increases became effective at the beginning of January.
Turning to regional performance on Slide 16. Europe grew 5% for the year and 6.5% for the quarter supported by strong execution and activation and continued recovery in the convenience away from home and travel retail channels. Our Q4 results were driven by strong growth across major markets including the UK, Germany and Russia, underpinned by solid share gains. In chocolate, we delivered record results for the Christmas season growing double-digit against both 2020 and 2019. Biscuits and meals categories also deliver good results. Why dollar growth for the year was high-single digits driven by continued volume leverage cost control and strong overhead management.
Looking ahead in this region, we expect muted profitability in Q1 with the improvement beginning in the second quarter as price increases in the number of countries take effect. North America declined by 0.6% for the year, and 0.3% for Q4, lapping very strong high-single digit growth in the previous year. This performance includes healthy growth from our ventures portfolio, softening the quarter in second half. We’re also driven by supply chain constraints and low inventory levels due to the strike and third-party labor constraints. North America declining minus 10.4% for the year and minus 20% for the quarter, due to inflationary pressure and supply chain constraints. As mentioned earlier, we expect sequential improvement as pricing actions go into effect in Q1.
EMEA grew 7.3% for the year, and 5.8% for the quarter. So we continuous trends across most of the region. India grew double-digits for the year and continues to execute well and reinvest for the future. We continue to extend our leadership position in chocolate, while the growth of our biscuit business continues to outpace larger competitors in the region. China grew low double digit for the year and high-single digits for the quarter driven by continued share gains in both biscuits and gum. Australia-New Zealand, also did well with solid performances in the year and in the quarter in chocolate and biscuit.
EMEA increased oil dollars by more than 13% for the year due to strong volume leverage productivity and overhead management, while also increasing working media by double-digit. Q4 growth was more muted due to commodity inflation. As in other regions, pricing actions through our GM are being implemented as of Q1. Latin America turned in strong growth for the year of 20.4% and 19.7% for the quarter, with overall share gains for 2021. Brazil deliver strong double-digit growth for the year and quarter. Mexico grew high single digits for both the year and the quarter and now Western Andean [Phonetic] business grew high single digits for the year and mid-teens for the quarter.
Adjusted OI dollars in Latin America, increased high double-digit for the year and more than 40% for the quarter. These increases were driven by broad-based growth across core snacking categories, effective pricing and the volume and mix impact of higher gum and candy. Inflationary pressure remains challenging, but we believe both our GM and volume growth will enable us to largely offset this dynamic in 2022. Moving to EPS. Full year EPS grew 9% at constant currency. This growth was primarily driven by top line driven operating gains.
Turning to free cash flow and capital return on Slide 18. We deliver full year free cash flow of $3.2 billion, which included $300 million higher tax payments year-over-year. Some related to our coffee, JVs, IPOs and sell downs. We continue to feel confident about our free cash flow trajectory as we move forward. And for the year we returned $3.9 billion to shareholders in the form of dividends and share repurchases.
Now let me provide some color on our 2022 outlook, on Slide 20. We expect to deliver against our long-term growth algorithm that we see as a performance floor, particularly as revenue goals. As you are hearing across all sectors, we anticipate another year of material cost inflation, which in percentage terms is expected to increase high single digits versus 2021. As such, pricing will be a larger top line contributor than in the previous years, but we do expect volume growth to also be a positive factor.
In this regard, a few more points. Our superior portfolio brands and the consistent investments we have made and will continue to making working media marketing and sales route to market and our GM capabilities position us well for sustained growth and profitability in this higher inflation environment. We believe we can continue being unaffected driver of category value and volume growth specifically in biscuits and chocolate. Our focus is not changing as we aim at growing profit dollars and dollar growth underpins our sustainable algorithm cash flow and capital return. We had a history of cost excellence, which we expect to remain the case for 2000-2020 going forward.
Our algorithm continues to be predicated on brand building and capabilities in sales and marketing also in 2022. All included for the year, we expect mid-single digit like dollar growth and high single-digit EPS growth. Earnings phases will affect the current inflationary environment and these sequentially introduction of pricing. We expect improved year-over-year gross profit dollar growth as pricing is fully realized and as we implement additional our GM stoppages, but we do still expect some pressure in Q1 and partially in Q2.
For Q1 specifically, we still expect to face largest supply chain headwinds in North America related to third-party partners and loan Van Cleef from last year’s strike that should improve as the year progresses. With respect to free cash flow, we expect another year of $3 billion plus. In this outlook, we also expect an ETR in the low to mid-20s, based on what we know today. Interest expense of approximately $325 million and said purchases of approximately $2 billion.
With that, let’s open the line for questions.
We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.