Mondelēz International CFO Luca Zaramella joins Yahoo Finance to discuss the company's strong third-quarter earnings report and weigh in on the demand for snacks during the pandemic.
BRIAN SOZZI: All right, snack giant Mondelez out with better-than-expected third-quarter sales and profits, and the stock is slightly higher this morning. Let's bring in Mondelez CFO Luca Zaramella to discuss. We're also joined by our very own Julia La Roche. Luca, always good to speak with you here.
I think a lot of folks on the Street are talking about the turnaround sequentially in your chocolate business. What drove that?
LUCA ZARAMELLA: Thank you, Brian, and thank you for having me. We're very happy with the quarter. Performance was strong-- revenue growth, share gains, profitability, and cash flow. Happy with chocolate. It bounced back. We reported 5% top-line growth. There is part of that business which is what we call world travel retail that is still down year over year at 20% of last-year levels. When adjusting for that, the business was growing 7 plus percent, so very happy.
The market is very solid in chocolate. We see continuous consumer snacking trends, more at-home consumption. People relate well to our brands. We were very happy with the outcome of the chocolate business, both in Europe and in Asia, which are our biggest businesses. India came back quite well, and so quite pleased.
But, quite frankly, the overall business did quite well, and it was not only top line. It was also profitability, which was remarkable. 10 plus percent EBIT growth and free cash flow that topped last year, a record-high number by half a billion dollars. And so we reinstated share buybacks back on that as well.
JULIA LA ROCHE: Hey, Luca, it's Julia La Roche. And you're right, the chocolate and biscuit business did quite well. Of course, chewing gum and candy still remain under pressure, though they did improve quarter over quarter compared to last time. What are you seeing globally? You're kind of touching on it there in terms of the recovery. And are you seeing chewing gum and candy sales come back in certain markets where maybe lockdowns are starting to ease up?
LUCA ZARAMELLA: Yeah, thank you, Julia. The gum is the category that is most impacted negatively by COVID. The category is down 20% on a year-to-date basis. It is quite consistent across all the markets.
It is a category whose consumption is mostly skewed on the go and out of home. And so while, you know, in-home consumption favors categories like biscuits, if you're not out of home where 75% of the gum consumption happens, there is an impact. And I would also say that channelwise the category is skewed towards convenience channels and traditional trade, and that is where we see the most impact.
Again, I think taking this point in time and assuming that gum is-- all of this is a little bit unfair. So we really expect the category to bounce back. But at this moment, the category is seriously impacted.
JULIA LA ROCHE: One of the stats that really stood out to me, Luca, on the earnings call was the investments that you all are making in working media. And did I read this right, that you all are starting to invest more in digital advertising, for the first time surpassing TV advertising? Would love to kind of contextualize that, dig in more on that and the ROI that you're seeing on digital versus traditional TV.
LUCA ZARAMELLA: Yeah, absolutely. We are enjoying material share gains. And so, you know, the reason why we amplify category growth, it is because all of our brands pretty much consistently across the world, they are gaining share as they are trusted, as people relate to them, as we are creating emotional bonds with our consumers. And we believe that keeping that relationship with the consumers is key, maybe in a context where we head towards a recession next year. And so being able to enjoy share gains is critical. That's why we are doubling down and investing more in work in media.
Digital is a vehicle, and it ties very well into e-commerce as one example. And there, you know, we talk a lot about personalization and scale. We have the opportunity to have meaningful cohorts of consumers and talking directly to them in a way that is more personal than you would otherwise be on television. And so this is a way we have really to engage with consumers, to keep them motivated, and to tie back into a channel that is booming in majority of the markets, which is e-commerce.
BRIAN SOZZI: Luca, everyone I talked to on the Street as pertains to Mondelez, they all note this one word to me, optionality. Take us through some of this optionality the Street talks about. You have an 11% stake in Kuerig, 23% stake in Peet's, and now there's some speculation that maybe you would be open to selling your gum business. What are your intentions with the gum business, and how much longer do you expect to hold those stakes in those two other companies?
LUCA ZARAMELLA: Let's start maybe with gum. I think you might imagine we always look at all possible options. I don't think it is the right time to sell gum, quite honestly. It is at its lowest. I think we have the right to turn the business around, and I think potentially we are, as always, assessing all possible options. It is 5% of our revenue.
It is importantly integral part of the way we do business in some emerging markets, and we are very happy with that business in emerging markets where it provides us the scale, the cash flow, and the ability to go to market with biscuits and chocolate. So I think, quite frankly, in emerging market that's off the table, and we remain open to all possible options as we look around. But I don't think this is the right time to consider a sale of gum.
On coffee, [? JDEs, ?] look, we remain quite optimistic about both KDP, which had a tremendous quarter, and JDE. But as we said many times, our job is to sell snacks. And while we remain extremely positive and why, you know, we don't see the opportunity at these levels to sell down those two stocks, we believe that, you know, for the long term, it is better for us to convert those assets into snacking.
Our balance sheet is quite strong. We took on quite a bit of debt to refinance maturities that come next year. We sold down part of KDP. We have an unbelievable balance sheet, a lot of liquidity on it, $2.7 billion of cash at this point. The stake of both coffee for KDP and JDE are worth around about $9, $10 billion. And so we really have that flexibility to be able to make acquisitions to see if anything becomes available.
JULIA LA ROCHE: Well, Luca, I've certainly eaten a lot of your cookies and biscuits and have only chewed one piece of gum during COVID-19 lockdowns.
Another stat that stood out to me was a 25% reduction in SKU. You were right. It does sound like a big number. Help us kind of contextualize and frame that up and how you think about the physical retail and the e-commerce side of things.
LUCA ZARAMELLA: It is only 2% of our revenue, and the last thing we want to do is really to lose shelf space or lose sales. And quite honestly, we believe that by simplifying the portfolio, we can increase our sales. So it is a lot of simplification that is going on.
What I can say is those SKUs are tough to make in our factories. They are tough to sell. And by getting rid of those SKUs, we free up resources, and we create space into our profit and loss to be able to invest in our brand.
So it is not as drastic as it sounds. It is only 2% of revenue. And look, when you look at the results in Q3 and you see EBIT growth up plus 10% considering all the money we have invested in work in media, it is because we went after cost savings, and one of the cost-saving sources is SKU reductions. So we think it is the right thing, and we grew 4.4% in the quarter.
BRIAN SOZZI: Well, I'll say this. Julia may not be chewing gum, but I'm chewing a lot of caffeinated gum during the past few weeks, that much for sure.
All right, we'll leave it there. Mondelez CFO Luca Zaramella, always good to see you. Julia La Roche, always good to see you as well.