Mondelēz International, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; amounts in U.S. dollars unless noted. Mondelēz sells snack products across four geographic segments: Latin America, AMEA, Europe and North America.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net revenue | $5.911B | $6.062B | $12.618B | $12.600B |
| Gross profit | $2.331B | $2.469B | $4.782B | $5.062B |
| Operating income | $713M | $1.025B | $1.569B | $2.061B |
| Net earnings attributable to Mondelēz | $544M | $803M | $1.280B | $1.770B |
| Diluted EPS | $0.38 | $0.55 | $0.89 | $1.21 |
| Operating margin | 12.1% | 16.9% | 12.4% | 16.4% |
- Organic net revenue, a non-GAAP measure, rose 0.7% in Q2 to $6.080B and 3.7% in the first half to $13.004B. Adjusted EPS rose 12.5% in Q2 to $0.63 and 4.0% in the first half to $1.30; constant-currency adjusted EPS rose 16.1% and 8.0%, respectively.
- Cash from operations was $1.558B for the first half, versus $1.046B a year earlier; capital expenditures were $445M, leaving $1.113B after capex. Investing used $1.037B and financing used $181M. Cash and cash equivalents were $1.602B at June 30.
- At June 30, total debt was $19.704B, versus $18.426B at year-end 2019; debt-to-capitalization was 0.43, versus 0.40. Current assets were $7.995B and current liabilities $14.539B. The company reported $6.95B of available borrowing capacity as of the filing date and compliance with debt covenants.
Changes versus the prior period
- Q2 reported revenue declined 2.5%, while first-half revenue was nearly flat. Currency reduced revenue by $283M in Q2 and $532M in the first half; organic growth and acquisitions partly offset the impact.
- North America was the strongest region: revenue increased 17.3% in Q2 and 16.3% in the first half, supported by at-home biscuit demand and acquisitions. Latin America revenue fell 30.7% in Q2; AMEA and Europe also declined. Emerging-market organic revenue fell 5.1% in Q2, while developed-market organic revenue rose 4.1%.
- GAAP operating income fell 30.4% in Q2 and 23.9% in the first half. Adjusted operating income declined 6.5% in Q2 and 2.4% in the first half; on a constant-currency basis, it fell 3.8% in Q2 and rose 1.1% in the first half.
- Gross profit declined year over year in both periods. Management cited higher input costs, COVID-related expenses, unfavorable mix and currency, as well as unusual charges. Q2 included $90M of intangible-asset impairments; first-half results also included $187M of unfavorable derivative mark-to-market impacts and a $103M pre-tax loss on interest-rate swaps.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or EPS guidance. Management said elevated developed-market at-home demand may not persist and expected continuing revenue pressure in some emerging markets, gum and candy, world travel retail and foodservice. It expected commodity-cost volatility and a higher aggregate cost environment to continue through the remainder of 2020.
- COVID-19 had not caused material consolidated supply-chain disruption through the first half, but the company reported higher labor, logistics, safety and cleaning costs, absenteeism, and temporary disruptions in some emerging markets. A prolonged or worsening pandemic could affect demand, operations, distribution, customers and financial markets.
- Q2 included a $121M pre-tax gain on the JDE Peet’s share sale, $48M of related transaction costs and a $261M tax expense associated with the transaction. The reported effective tax rate was 51.7%; excluding the transaction tax expense, management stated the Q2 rate was 12.1%, including discrete tax benefits.
- The April 1 acquisition of Give & Go cost $1.141B net of cash acquired and contributed $91M of revenue and an $8M operating loss in the reported period. Management reduced expected 2020 capital expenditures from up to $0.9B to up to $0.8B.
- The company recorded $90M in impairment charges on six brands, primarily in gum. It identified eight additional brands with aggregate book value of $576M whose fair value exceeded carrying value by 10% or less, and warned further impairments could occur if expectations or valuation assumptions change.
- Other risks include Brexit-related trade and supply-chain disruption; currency and commodity volatility; Argentina’s highly inflationary accounting; and legal matters. A European Commission competition investigation is ongoing. The CFTC wheat-trading matter and related investor class action remain unresolved; the class was certified in January 2020. Management said it could not predict outcomes, though it did not believe proceedings would materially harm the company overall at present.
- The company had $383M of remaining discounted liability for withdrawal from a multiemployer pension plan. It declared a quarterly dividend of $0.315 per share on July 28, an 11% increase, payable in October. Share repurchases were suspended in March as a precaution.
Important facts for investors to verify
- Whether demand shifts, emerging-market restrictions and reduced out-of-home consumption persist, and how these affect organic growth and product mix.
- Whether pricing and productivity can offset commodity inflation, currency effects and COVID-related operating costs.
- How much reported earnings are affected by transaction-related tax, derivative mark-to-market items, impairments and other exclusions in non-GAAP measures.
- Debt refinancing and liquidity developments, including upcoming maturities of approximately $143M in October 2020 and $763M in January 2021; also note the $686M of receivables subject to non-recourse factoring at June 30.
- Further impairment indicators for the identified brands, outcomes of the CFTC/class-action and EU competition matters, and the eventual Brexit terms and related operating impacts.