Mondelez International, Inc. quarterly report, Q1 FY2019

Mondelez International, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless stated otherwise. Unaudited consolidated results. Mondelez sells snack products in more than 150 countries.

Financial results and liquidity

Metric	Q1 2019	Q1 2018	Change
Net revenue	$6.538 billion	$6.765 billion	Down 3.4%
Operating income	$1.036 billion	$1.224 billion	Down 15.4%
Net earnings attributable to Mondelez	$914 million	$1.046 billion	Down 12.6%
Diluted EPS	$0.63	$0.70	Down 10.0%
Operating cash flow	$465 million	$407 million	Up $58 million
Capital expenditures	$265 million	$284 million	Down $19 million

Gross profit was $2.593 billion, versus $2.849 billion; gross margin was approximately 39.7%, versus 42.1%. GAAP operating margin was 15.8%, versus 18.1%.
Organic net revenue, a non-GAAP measure, rose 3.7% to $7.016 billion: higher net pricing contributed 2.0 percentage points and favorable volume/mix 1.7 points. Currency reduced reported revenue by $498 million; Tate’s Bake Shop added $20 million.
Adjusted operating income was $1.094 billion, down 3.4%; on a constant-currency basis it increased 4.2% to $1.181 billion. Adjusted operating margin was 16.7%, flat year over year. Adjusted EPS was $0.65, up 3.2%; constant-currency adjusted EPS was $0.71, up 12.7%. These are non-GAAP measures.
Investing cash use was $223 million and financing cash provided was $201 million. Cash and equivalents ended the quarter at $1.542 billion, up from $1.100 billion at year-end 2018.
At March 31, current assets were $8.539 billion and current liabilities $17.721 billion. Total debt was $19.420 billion carrying value, compared with $18.372 billion at December 31, 2018; debt-to-capitalization was 0.43 versus 0.42. Short-term borrowings were $4.065 billion and long-term debt was $12.437 billion.
Available revolving credit facilities totaled $6.0 billion and were undrawn at quarter-end. The company reported compliance with its debt covenants. It expects approximately $2.3 billion of long-term debt to mature in October 2019.

Material changes versus prior period

Reported revenue and earnings declined, chiefly reflecting unfavorable currency translation and a large year-over-year reduction in derivative mark-to-market gains. Prior-year mark-to-market gains were $206 million, compared with $16 million in Q1 2019.
Underlying organic revenue grew despite the reported revenue decline. Higher pricing and favorable volume/mix were partly offset by higher raw-material costs and currency headwinds.
Segment revenue was lower in Latin America (down 10.2%) and Europe (down 5.7%), nearly flat in AMEA (down 0.1%), and higher in North America (up 1.2%). Segment operating income declined in Latin America, but increased in AMEA, Europe and North America.
Adjusted operating income decreased 3.4% reported, but grew 4.2% excluding currency. Favorable pricing and lower manufacturing costs were offset by higher input costs, selling expenses and currency effects.
The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $710 million of lease assets and $730 million of lease liabilities at adoption. Quarter-end operating lease liabilities were $649 million.

Outlook, management commentary, risks and unusual items

The filing gives no specific full-year revenue, earnings or EPS guidance. Management expects 2019 capital expenditures of up to $1.0 billion, funded from operations, and expects a slightly higher aggregate commodity-cost environment and continued price volatility.
Management cited continued growth in snack categories and emphasized consumer-centric growth, operational excellence and growth culture. It said cash from operations, credit facilities and financing access should support working capital, investment, debt obligations, buybacks and dividends.
Foreign exchange was a significant headwind. The company highlighted potential Brexit-related currency, tariff, shipping and supply-chain disruption; the U.K. generated 9.3% of Q1 revenue. It is building inventory and logistics capacity to prepare.
Argentina has been accounted for as a highly inflationary economy since July 2018; Q1 included a $2 million remeasurement loss. The company also highlighted volatile input costs, U.S. tax-law uncertainty, and economic and currency volatility across markets.
The Simplify to Grow restructuring program was extended through 2022. The overall program now comprises $5.4 billion of charges and up to $2.3 billion of capital expenditures. Q1 restructuring charges were $20 million and implementation costs were $50 million; $4.0 billion of restructuring and related implementation charges had been incurred since inception.
The estimated multiemployer pension withdrawal liability was $573 million, with a formal assessment expected in 2019; payment is expected over 20 years from assessment. The final amount may differ.
Q1 included a $23 million pre-tax gain related to a KDP acquisition that reduced Mondelez’s ownership interest to 13.6%. The effective tax rate was 19.4%, helped by $63 million of discrete net tax benefits, primarily releases of uncertain tax-position liabilities. The estimated annual effective tax rate, excluding discrete items, was 25.9%.
Contingencies include Indian excise-tax disputes, with demands and related penalties and interest potentially material, and CFTC and related class-action litigation over historical wheat futures trading. The company said the parties had reached an agreement in principle on the CFTC action; the class actions remained unresolved. Management stated it did not expect the legal matters, individually or together, to materially harm financial position, results or cash flows, while noting outcomes are uncertain.

Important facts for investors to verify

Whether organic revenue growth and constant-currency adjusted earnings persist, and how pricing, volume/mix and input costs develop.
The size and duration of currency impacts, particularly in the U.K., Argentina and emerging markets, and the eventual effects of Brexit.
Cash generation and funding plans for the October 2019 debt maturity, planned capital spending, dividends and share repurchases; Q1 buybacks were approximately $0.7 billion.
The final assessment and payment terms for the estimated $573 million pension withdrawal liability.
Developments in the Indian excise-tax disputes and CFTC/class-action proceedings, as well as any material impairment risk for brands identified as having limited fair-value headroom.
Non-GAAP reconciliations and exclusions when comparing adjusted results with GAAP earnings; reported results were materially affected by derivative mark-to-market changes and discrete tax items.