Mondelez International

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Mondelez International is a global snacks and confectionery giant, known for its iconic brands like Oreo, Cadbury, and Toblerone, facing a changing landscape of consumer preferences and intense competition.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Mondelēz International, Inc. (MDLZ) operates as a global snacks and confectionery company, with a portfolio of iconic brands that include chocolate, biscuits, gum, and candy. The company’s products are sold in over 150 countries across the globe, and its sales are spread across four geographic segments: Latin America, AMEA (Asia, Middle East, and Africa), Europe, and North America.

The company’s operations are organized into product categories as well, like chocolate, biscuits, gum & candy, cheese & grocery and powdered beverages.

Industry Trends & Competitive Landscape The global snack market is characterized by increasing consumer demand for convenience and indulgence products, as well as growing health consciousness that is creating demand for healthier alternatives. The competition is fierce, with a mix of large global players (like Nestle and PepsiCo) as well as smaller regional companies and private labels, all vying for a share of the market.

The company’s main competitors include Nestle, Mars, and Hershey in chocolates, and other multinational players in its other categories. Private-label brands and local brands also pose a challenge as consumers are increasingly demanding value for money.

What Sets Mondelēz Apart?

  • Global Brand Portfolio: MDLZ’s portfolio includes globally recognized brands that enjoy high customer loyalty. This provides a strong foundation for stable demand and pricing power.
  • Extensive Distribution Network: As a major international player, MDLZ has a vast and well-established distribution network, which allows it to efficiently get its products to retailers worldwide. This is a significant barrier to entry for smaller players.
  • Innovation and New Product Development: The company has a dedicated research and development unit that focuses on creating new products, improving existing products, and adapting flavors to local consumer preferences.

Revenue Distribution Mondelēz’s revenue streams are diversified by region and product category:

  • Geographic Segments (2022 Revenue Mix)
  • North America contributes the most revenue (33%), followed by Europe (30%), AMEA (23%) and Latin America (14%) .
  • Emerging markets generate a large portion of revenue, which implies that a large part of their growth comes from non-developed markets.
  • Product Category
    • Biscuits, the largest product category (44%), followed by Chocolate (34%). Then Gum & Candy contributes only 13%, while Cheese & Grocery and powdered beverages together make up only 9%.

Recent Financials (Analysis is based on their 10-Q for quarter ended September 30, 2024)

  • Revenue and Growth: Net revenue increased by 5.6% on the year-over-year basis to $9.0 billion for the last reported quarter. This revenue growth was primarily driven by higher prices which was partially offset by a decline in volume. Organic net revenue increased by 16.7%. While most geographical segments had positive growth in net revenues, Europe had very little growth, while AMEA grew the most.

  • Margins: Reported gross profit was $3.5 billion, a gain of 11.1% over last year with a margin of 39.1% but operating income fell by 41.3% to $759 million primarily due to increased costs and higher operating expenses. * Adjusted operating income on a constant currency basis improved over last year by 22%, which was mainly driven by higher pricing and increased productivity. * Adjusted diluted EPS was at $0.99, a decrease of 15.4% compared to last year, while the diluted EPS was at $0.44, a large increase of 294% over last year. The main reasons were an increase in operational expenses and lower income taxes.

  • Liquidity and Capital Resources: The company has strong cash flows from its operations, and it has enough liquidity to fulfill its obligations. Their cash as of September 30, 2024 was $1.9 billion. The business generated ~$3.8 billion of operating cash flow in the last 9 months and is expected to have capital expenditures of $1.1 billion, most likely in manufacturing. This should result in a very positive cash flow by year end, which management intends to use to repurchase shares.

Recent Controversies & Problems

  • War in Ukraine: The company has closed its factories in Ukraine and also paused operations and sales in Russia. This has greatly impacted revenue, expenses, and their overall operating margins, as they had to take on costs related to the closure of operations.
  • Price Sensitivity in Emerging Markets: Their performance has been slightly worse in the AMEA markets mainly due to price elasticity of demand. Consumers in this segment are very price sensitive. As a result, the demand has come down as the company is increasing prices.
  • Currency Fluctuations: Strong dollar has impacted sales growth and profitability significantly by increasing the effective exchange rate they need to convert profits from non-USD currencies.
  • Supply Chain Issues: Supply-chain disruptions and volatile commodity costs, along with an increase in transportation costs, negatively affected the company’s supply chain and margins.

Moat Rating: 3 / 5 Mondelēz has a narrow economic moat. Here is why:

  • Intangible Assets (Brands): The company’s portfolio of iconic brands like Oreo, Cadbury, and Nabisco commands strong consumer loyalty and provides pricing power. This is a definite moat, but it is not as durable as it once was. Consumer preferences change with times, and with increased popularity of small, innovative brands, legacy brands are losing their luster.
  • Distribution and Scale: Their well-established distribution channels give them scale advantages, but this advantage is offset by competitors that are just as big and have more or similar economies of scale.
  • Cost Advantages: Some cost advantages in their manufacturing segments, but they are facing growing competition from low-cost manufacturers and private labels.
  • No Switching Costs: Consumers are not particularly tied to their products, switching costs are negligible, and competition is fierce. Therefore, it cannot be considered to have any switching costs moat.
  • No Network Effect: This is not a tech company, or any other kind of company that has any kind of meaningful network effect. Therefore, they have no network moat. This overall means that the company is mainly reliant on its brands for its mote, and has a fragile hold on its market.

Risks to the Moat & Business Resilience

  • Shifting Consumer Preferences: Consumer preferences are ever changing, and their demand for healthier options, or unique experiences, could undermine the relevance of existing brands and products.
  • Competition: Intense competition from established giants, new entrants, and private labels that could weaken their profitability and market share.
  • Supply Chain: Supply chain problems and any unforeseen circumstances can greatly disrupt the company’s sales and profitability. The war in Ukraine has caused them problems, as they had to close all operations and factories in the area. The company is also exposed to commodity price increases due to the war and various other economical factors, like a global pandemic.
  • Currency Fluctuation: As they operate in many countries, it is vulnerable to currency exchange issues, which may increase costs, hurt profitability, and also complicate things as its profits are reported in a number of different currencies.
  • Brand Erosion: If they fail to properly invest in and maintain their brand, it may erode in value, and may not be able to command the same premium.

Understandability: 2 / 5 The company’s financials are easy to understand, however, the details that shape its prospects are harder to assess. The industry itself is not too complicated, as they sell mostly consumer snacks. However, the market is incredibly competitive, and it is tricky to properly understand how different companies might be affected by changing consumer preferences, economic factors, and local regulations in the markets where they operate.

Balance Sheet Health: 3 / 5 While Mondelēz has a large amount of cash on hand, they have a high debt-to-equity ratio, and are constantly taking on more debt as a method to finance their operations and investments. However, they are able to take on more debt without being greatly limited because of their high cashflows and profitability, the company itself is not in any kind of financial distress, as of writing this, but there is still the risk that the added debt may be a problem in the future.