Mondelez International, Inc. — Q2 2016 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2016, compared with the same 2015 periods. Mondelez makes and markets snacks and related products across more than 80 countries. Comparisons are affected by the 2015 contribution of its global coffee businesses to JDE, the 2015 deconsolidation of Venezuela, currency movements and changes to the business portfolio.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $6.302B | $7.661B | $12.757B | $15.423B |
| Gross profit | $2.516B | $3.066B | $5.051B | $6.007B |
| Operating income | $638M | $841M | $1.360B | $1.652B |
| Net earnings attributable to Mondelez | $464M | $406M | $1.018B | $730M |
| Diluted EPS | $0.29 | $0.25 | $0.64 | $0.44 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $337M | $571M |
- Revenue and underlying growth: Reported revenue fell 17.7% in Q2 and 17.3% in the first half. Organic net revenue, a company-defined non-GAAP measure, rose 1.5% in Q2 and 1.9% year to date, mainly on higher pricing; volume/mix was slightly negative. Q2 reported revenue included estimated reductions of $875M from the former coffee business, $316M from currency and $301M from Venezuela. First-half reductions were $1.627B, $803M and $519M, respectively.
- Profit and margins: Q2 operating income declined 24.1%, while attributable net earnings increased 14.3% and diluted EPS rose 16.0%. First-half operating income declined 17.7%, while attributable earnings rose 39.5% and diluted EPS rose 45.5%. Reported operating margin was 10.1% in Q2 versus 11.0%; first-half margin was 10.7%, unchanged. Adjusted operating margin, a non-GAAP measure, rose to 15.2% from 13.1% in Q2 and to 15.2% from 12.9% year to date. Adjusted EPS was flat at $0.44 in Q2 and increased 12.0% to $0.93 for the first half; constant-currency growth was 4.5% and 16.9%, respectively.
- Cash flow and investment: First-half operating cash flow was $337M versus $571M. Capital expenditures were $604M versus $790M. Investing cash flow was a $505M use, compared with $583M provided in 2015, when the company received JDE-related hedge proceeds and AGF divestiture proceeds. Financing cash flow was $28M provided versus $297M used. Cash and equivalents were $1.755B at June 30, 2016, down from $1.870B at year-end.
- Debt and liquidity: Total debt carrying value was $17.280B at June 30, compared with $15.398B at December 31; the debt-to-capitalization ratio rose to 0.39 from 0.35. Short-term borrowings increased to $2.691B, including $2.405B commercial paper. The company had no amounts drawn on its $4.5B revolving credit facility and reported compliance with its minimum-equity covenant. Current assets were $8.979B and current liabilities $12.996B. Weighted-average debt interest rate was 3.0%, versus 3.7% at year-end.
- Capital returns: The company repurchased $1.312B of shares and paid $537M of dividends in the first half. In July 2016, the board approved a 12% quarterly dividend increase to $0.19 per share.
Material changes and business developments
- Mondelez contributed its global coffee businesses to JDE in July 2015 and now recognizes income from JDE and other coffee investments outside operating income. In March 2016, it exchanged part of its JDE interest for a 24.2% interest in Keurig; it reported a $43M exchange gain and $187M of equity-method investment earnings for the first half.
- Venezuelan operations were deconsolidated at the end of 2015 following loss of control and currency-exchangeability problems. No Venezuelan revenue or earnings were included in 2016; 2015 comparatives included $519M of first-half revenue. The company had recorded a $778M pre-tax deconsolidation loss in 2015.
- Q2 segment operating income increased in North America (13.0%) but fell in Latin America (76.1%), EEMEA (41.0%), Europe (3.8%) and Asia Pacific (8.7%). Reported segment revenue comparisons also reflect coffee divestiture and currency effects.
- The company continued its 2014–2018 restructuring program: $293M of restructuring charges and $172M of implementation costs were recorded in the first half. Cumulative restructuring and related implementation charges were approximately $1.8B; the company expects most remaining charges in 2016 and program completion by year-end 2018.
Outlook, commentary and risks
- Management did not provide a specific full-year revenue, earnings or EPS forecast in the supplied filing text. It expects 2016 capital expenditures of up to $1.4B, funded from operations.
- Management expects price volatility and a slightly higher aggregate commodity-cost environment in the second half of 2016. Pricing, hedging, productivity and cost controls are cited as responses, though these may not fully offset cost or currency changes.
- The company planned to integrate EEMEA into Europe and Asia Pacific beginning in Q4 2016, with expected operating-performance benefits from office consolidation and overhead reductions beginning in late 2016 and thereafter. North American collective-bargaining negotiations for eight facilities continued into Q3.
- Brexit and currency volatility may affect demand, translated results and relationships with customers, suppliers and employees. The company reported no significant immediate UK business disruption, but the pound’s decline affected reported results.
- Venezuela remains subject to substantial economic, regulatory, supply and currency-access uncertainty. Argentina and other markets also face currency volatility and challenging operating conditions.
- Legal contingencies: The SEC issued a Wells notice concerning a potential books-and-records and internal-controls enforcement action related to an investigation of a Cadbury facility in India; discussions with the SEC and DOJ continued. Indian excise-tax demands and notices, including taxes, potential penalties and interest, are contested. The CFTC wheat-trading action and related investor class actions were in discovery; the company expected to predominantly bear monetary payments under its agreement with Kraft Foods Group. Management stated it did not expect the ultimate costs of legal matters to materially affect results, but outcomes are uncertain.
- After quarter-end, a Spanish court tax decision affecting JDE could reduce Mondelez’s Q3 2016 earnings by up to €31M (about $34M). The company also expected to complete a French facilities and confectionery-brand sale in Q2 2017, subject to regulatory, employee-consultation and other conditions; it had recorded $84M of related costs in the first half.
Most important facts for investors to verify
- Whether organic revenue growth and adjusted margin/EPS gains persist, and how much reflects pricing, cost reductions or non-GAAP adjustments.
- The underlying effects of coffee and Venezuela deconsolidations, foreign exchange and portfolio changes on reported growth and cash generation.
- Cash conversion, pension contributions and capital spending relative to the company’s up-to-$1.4B 2016 capex expectation.
- Debt maturities, commercial-paper funding, liquidity and the capacity to sustain repurchases and the increased dividend.
- Progress and realized savings from restructuring and the planned EEMEA reorganization, alongside associated costs and labor negotiations.
- Developments in the SEC/DOJ investigation, Indian tax disputes, wheat litigation, Venezuela and the planned French divestiture.