Mondelez International, Inc. quarterly report, Q2 FY2018

Business context and reporting period

Mondelēz International, Inc. manufactures and markets snacks and related products, including biscuits, chocolate, gum and candy, cheese and grocery products, and powdered beverages. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in U.S. dollars unless otherwise noted.

Financial performance and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net revenue	$6.112 billion	$5.986 billion	$12.877 billion	$12.400 billion
Operating income	$481 million	$636 million	$1.705 billion	$1.461 billion
Net earnings attributable to Mondelēz	$323 million	$498 million	$1.261 billion	$1.128 billion
Diluted EPS	$0.22	$0.32	$0.84	$0.73
Adjusted EPS, non-GAAP	$0.56	$0.48	$1.17	$1.00

Revenue grew 2.1% in Q2 and 3.8% in the first half. Organic Net Revenue, a non-GAAP measure excluding currency, acquisitions and divestitures, rose 3.5% and 2.9%, respectively. Growth reflected favorable volume/mix and higher net pricing; prior-year divestitures reduced reported revenue.
Q2 gross profit was $2.540 billion (about 41.6% of revenue), versus $2.314 billion (about 38.7%) a year earlier. GAAP operating margin was about 7.9%, versus 10.6%; adjusted operating margin was 16.7%, versus 15.4%. For the first half, GAAP operating margin was about 13.2%, versus 11.8%, and adjusted margin was 16.7%, versus 16.0%.
Q2 GAAP earnings and EPS declined, principally reflecting a $408 million pre-tax multiemployer pension withdrawal charge and a $140 million debt-extinguishment loss, partly offset by favorable derivative mark-to-market results and operating gains. Adjusted EPS increased 16.7% in Q2 and 17.0% in the first half; constant-currency increases were 14.6% and 12.0%.
First-half operating cash flow was $1.182 billion, compared with $262 million in 2017. Investing cash use was $1.041 billion, including the $528 million Tate’s Bake Shop acquisition and $532 million of capital expenditures. Financing provided $389 million; cash ended the period at $1.246 billion.
At June 30, cash was $1.246 billion; short-term borrowings were $4.074 billion and long-term debt was $14.857 billion. Total debt was approximately $19.7 billion, versus $17.7 billion at year-end 2017; debt-to-capitalization was 0.44, up from 0.40. The weighted-average interest rate on total debt was 2.4%. The company reported compliance with its debt covenants and no amounts drawn on its $4.5 billion multi-year revolver.
Dividends declared were $0.22 per share for Q2. After quarter-end, the company declared a quarterly dividend of $0.26 per share, an 18% increase, payable in October 2018.

Material changes versus the prior comparable period

Regional revenue was mixed in Q2: Europe rose 6.1%, North America 6.5%, Latin America fell 8.7%, and AMEA fell 2.4%. North America segment operating income was a loss of $95 million, primarily due to the pension withdrawal charge; Europe and AMEA segment operating income increased.
First-half revenue benefited from $363 million of favorable currency translation, while divestitures reduced revenue by $246 million. The Brazil trucking strike and higher raw-material costs were headwinds; management cited productivity, lower advertising and promotion costs, and overhead leverage as offsets.
Q2 interest and other expense increased to $248 million from $124 million, including the $140 million debt-extinguishment loss. First-half effective tax rate was 22.8%, versus 19.2%, including discrete tax items related largely to U.S. tax reform.
The company acquired Tate’s Bake Shop on June 7 for $528 million net of cash received. Its Q2 revenue contribution was $7 million; purchase-price allocation was preliminary.

Outlook, commentary, risks and unusual items

The filing provides no clear quantified full-year revenue-growth or EPS guidance. Management expected 2018 capital expenditures of up to $1.0 billion, funded from operations, and expected a slightly higher aggregate commodity-cost environment and continued price volatility.
Management said cash from operations, credit facilities and access to financing were expected to meet working-capital needs, capital expenditures, contractual obligations, share repurchases, taxes and dividends. Approximately $780 million of long-term debt was expected to mature over the next 12 months.
The $408 million pre-tax pension charge reflects a provisional estimate of partial withdrawal liability from a U.S. multiemployer pension fund. The company estimated the underlying liability at $567 million, may receive a fund assessment later, and said the final amount could change; payment is expected in installments over 20 years.
Beginning July 1, 2018, the company expected to apply highly inflationary accounting to Argentina and change its subsidiaries’ functional currency to the U.S. dollar. Argentina represented 2.1% of first-half revenue; management said its net monetary liability position at June 30 was immaterial, but the earnings effect was difficult to predict.
On July 9, 2018, Keurig completed its merger with Dr Pepper Snapple, leaving Mondelēz with a 13.8% interest in Keurig Dr Pepper. The company expected to recognize a gain in Q3 2018 on conversion of its Keurig investment and shareholder loan; the amount is not stated here.
Other notable exposures include foreign-exchange and commodity volatility, U.S. tax-reform implementation, Brexit, and legal proceedings. These include Indian excise-tax demands and the CFTC wheat-trading action and related class actions. Management said it believed legal matters would not materially harm results, while noting outcomes are uncertain and an unfavorable resolution could be material.
The 2014–2018 restructuring program had incurred $3.6 billion of charges and implementation costs through June 30; the company expected to incur the full $4.1 billion of program charges by year-end 2018. Thirteen brands with aggregate carrying value of $938 million had limited fair-value headroom, creating potential future impairment risk if expectations or valuation factors change.

Important facts for investors to verify

Reconcile GAAP results with adjusted measures, particularly the pension charge, debt-extinguishment loss, restructuring costs and derivative mark-to-market gains; adjusted measures are non-GAAP and exclude significant items.
Track the final multiemployer pension withdrawal assessment and payment terms, and monitor North America operating performance after the charge.
Assess debt levels, interest expense, commercial-paper reliance, upcoming maturities, and the funding of dividends, repurchases and capital investment.
Monitor organic growth, pricing versus input-cost inflation, foreign-exchange exposure—including Argentina—and the effect of divestitures and the Tate’s acquisition.
Verify the amount and timing of the expected Keurig Dr Pepper investment gain and the subsequent equity-method reporting treatment.
Follow U.S. tax-reform accounting, the cited tax and legal matters, and potential impairment of brands with limited valuation headroom.