Mondelēz International, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts are in U.S. dollars; unless noted, amounts are in millions. The interim financial statements are unaudited.
Business context
Mondelēz makes and sells snacks, including biscuits, chocolate, gum and candy, as well as cheese, grocery and powdered beverage products. It reports four geographic segments: Latin America, AMEA, Europe and North America. Management’s stated strategy focuses on consumer-led growth, operational excellence, culture and sustainable snacking, with portfolio emphasis on chocolate, biscuits and baked snacks.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $7,763 | $7,182 | $22,801 | $21,062 |
| Operating income | $679 | $1,294 | $2,700 | $3,449 |
| Net earnings attributable to Mondelēz | $532 | $1,258 | $2,134 | $3,297 |
| Diluted EPS | $0.39 | $0.89 | $1.54 | $2.33 |
| Adjusted EPS (non-GAAP) | $0.74 | $0.70 | $2.22 | $2.14 |
Q3 revenue rose 8.1%; organic net revenue, a non-GAAP measure, rose 12.1%, reflecting higher pricing and favorable volume/mix. Nine-month revenue increased 8.3% and organic net revenue 11.2%. Pricing was the largest organic growth contributor; currency translation reduced reported revenue by $590 in Q3 and $1,305 year to date. Acquisitions contributed to growth, while divestitures reduced revenue.
Reported operating margin was 8.7% in Q3 versus 18.0% a year earlier, and 11.8% for the first nine months versus 16.4%. Adjusted operating margin was 16.1% in Q3 versus 17.2%, and 16.4% year to date versus 17.1%. Management cited higher input costs and unfavorable mix as pressures on adjusted margins. Gross profit was $2,613 in Q3 versus $2,824 and $8,237 year to date versus $8,421.
Reported earnings declined substantially, while adjusted EPS increased 5.7% in Q3 and 3.7% year to date; on a constant-currency basis, adjusted EPS increased 15.7% and 12.6%, respectively. These are non-GAAP measures and should be considered alongside GAAP results. Q3 GAAP results included $292 of acquisition-related costs, primarily the Clif Bar employee stock ownership plan buyout, and $186 of unfavorable derivative mark-to-market impacts. The prior-year quarter included a $250 gain on equity-method investment transactions. Year-to-date GAAP comparisons also reflect higher acquisition and integration costs, Ukraine-related charges, impairment charges and unfavorable derivative mark-to-market movements.
Cash flow, liquidity and debt
- Cash flow, first nine months: Operating cash flow was $2,516, down from $2,720. Investing cash outflow was $3,410, versus $106 of cash provided in 2021, mainly due to acquisitions. Financing cash outflow was $297, compared with $2,971.
- Cash and working capital: Cash and cash equivalents were $2,177 at September 30, 2022, versus $3,546 at year-end 2021. Inventories increased to $3,393 from $2,708.
- Debt: Total debt was approximately $21.7 billion versus $19.5 billion at year-end 2021; debt-to-capitalization was 0.45 versus 0.41. Commercial paper outstanding was $1.7 billion. Long-term debt had a weighted-average term of 8.4 years.
- Liquidity: Management reported $9 billion of unused credit facilities and stated that cash from operations and access to financing should be sufficient for expected needs. The company said it complied with debt covenants.
- Capital returns: The company repurchased approximately $1.8 billion of shares and paid $1,457 in dividends during the first nine months. Remaining share-repurchase authorization was approximately $1.8 billion.
Material changes and significant items
- Acquisitions: Clif Bar was acquired August 1 for $2.9 billion of total cash payments, including $0.3 billion of one-time ESOP compensation expense. Chipita was acquired in January for approximately $1.8 billion total purchase price. After quarter-end, on November 1, the company completed the $1.3 billion Ricolino acquisition.
- Clif Bar contingent consideration: Additional payments could range from zero to $2.4 billion based on 2025–2026 performance targets; the recorded fair value was $440 at acquisition.
- Portfolio plans: The company began seeking buyers for its developed-market gum and global Halls businesses. It described this as part of its portfolio reshaping.
- Equity investments: The company sold a portion of its JDE Peet’s holding in May for $529 proceeds and recorded an $8 loss. It retains equity-method accounting for JDE Peet’s and Keurig Dr Pepper.
- Ukraine: The company recorded $143 of direct charges in Q1 related to the war, including damage to two manufacturing facilities; it reversed $22 of prior charges in Q2 and Q3, primarily due to receivable collections and inventory recoveries. It continues to consolidate its Ukrainian and Russian subsidiaries.
- Impairment and restructuring: Year-to-date intangible impairment charges were $101, including charges on local biscuit brands. No goodwill impairment was recorded in the annual test. The Simplify to Grow program is extended through 2023; management expects remaining program charges by year-end 2023.
Outlook, commentary and risks
The filing does not provide a clear quantified full-year revenue or EPS guidance target. Management expected inflation and a higher aggregate cost environment to persist through the remainder of 2022, citing raw materials, energy, labor, transportation and supply-chain disruption. It expected 2022 capital expenditures of approximately $0.9 billion. Pricing actions and productivity initiatives are intended to help offset cost pressure, but management cautioned that pricing may lag cost increases and hedging cannot eliminate exposure.
Key uncertainties include the war in Ukraine and sanctions, currency volatility and highly inflationary accounting in Türkiye and Argentina, continued inflation and supply-chain constraints, consumer demand and mix changes, and potential cyber threats. The company also noted future U.K. restrictions on certain food advertising and promotions, expected to take effect in 2024, with some in-store placement restrictions effective from October 2022. The company’s continued operations in Russia may create reputational, demand, sanctions and supply risks.
Legal matters include a settled CFTC wheat-trading action with an immaterial impact and a continuing related class action for which the outcome cannot be predicted. A European Commission competition investigation also remains ongoing. Management stated that it believes the ultimate outcomes of legal matters will not materially harm the company, while acknowledging litigation uncertainty. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether pricing can continue to offset input-cost inflation without further weakening volume, mix or margins.
- The underlying contribution to adjusted growth versus reported GAAP results, including the scale and recurrence of acquisition costs and derivative mark-to-market effects.
- Clif Bar integration, performance against earn-out targets, and the potential contingent payment of up to $2.4 billion; also the financial contribution and funding of Ricolino.
- Debt, commercial-paper and interest-cost trends following acquisition funding, and the continued availability of credit facilities.
- Exposure to the Ukraine war, Russia operations, foreign exchange and highly inflationary markets, including any new impairment or operational consequences.
- Progress and proceeds from planned gum and Halls divestitures, and potential effects of U.K. advertising and promotion restrictions.