Efficient pricing, contributions from buyouts and focus on innovation have been working well for Mondelez International, Inc. MDLZ. Also, the company’s strong emerging market presence has been a driver. Additionally, Mondelez has been undertaking some solid steps to enhance savings. This is likely to help the company counter soft margins.
Pricing Aids Organic Sales
Mondelez’s pricing initiatives have been yielding results. In fact, during the fourth quarter of 2019, balanced pricing and volume/mix led to a rise of 4.1% in the company’s organic revenues. We note that the company’s organic sales have been rising for a while. Management continues to strike the right balance between volumes and profit through disciplined pricing. Encouragingly, Mondelez expects organic net revenue growth of more than 3% for 2020.
Buyouts & Innovation: Major Drivers
Mondelez has always been keen on expanding its business through acquisitions. To this end, it recently inked a deal to buy a majority interest in Give &Go, which is a pioneer in fully-finished sweet baked goods. In previous developments, the company made investments in Hu Master Holdings and Uplift Foods (in April 2019) as part of the SnackFutures platform. In July last year, it acquired minority stakes in Perfect Snacks. These investments indicate management’s efforts to boost healthy offerings. In fact, management earlier stated that it expects 50% of its product portfolio to comprise “well-being” items by 2020.
Apart from this, the company is refreshing its brand portfolio through product innovation and expansion of brands to newer geographies and platforms. In 2018, the company introduced an innovation platform — Joy Fills — for the growth of brands such as Oreo, Cadbury and Milka. Also, the introduction of Lickables in India has been doing well. Further, the company’s continued product innovation under the SnackFutures platform bodes well. In fact, management plans to focus on enhancing the snacking portfolio, an area that is growing rapidly across the globe.
Boulders on Way
Due to international-market exposure, Mondelez is prone to currency fluctuations. In fact, adverse currency movements have been hurting the company’s performance for a while. Management anticipates currency fluctuations to negatively impact net revenues in 2020 by nearly 1%. Apart from this, Mondelez’s margins were strained in the fourth quarter due to plant transition hurdles in Brazil, increased inflation in Argentina and weakness in powdered beverages. Also, the company’s adjusted operating margin contracted 30 bps to 15.9%, thanks to lower adjusted gross margin and higher overhead expenses. Persistence of such headwinds is a threat to profitability.
Mondelez is on track with its saving initiatives, which are being invested in brand-building endeavors. To this end, initiatives such as zero-based budgeting, and focus on eliminating other unnecessary costs from the supply chain are noteworthy. Further, the company’s Simplify to Grow Program is aimed at reducing supply chain and overhead costs.
All said, this Zacks Rank #3 (Hold) company is likely to sustain momentum on the back of strong growth endeavors. Notably, its shares have gained 5% in the past three months against the industry’s decline of 3.8%.
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