Mondelez’s second-quarter results are indicative of the tightrope food manufacturers are still walking as they juggle volume recovery with pricing.

In the Cadbury chocolate maker’s case, the pricing environment has been made worse by record high cocoa prices, although finance chief Luca Zaramella suggested this week that a market “correction” could well be in sight.

At least for the rest of the 2024 fiscal year, however, the CFO said cocoa is likely to remain a “headwind” as volume-mix fell 2.2% on the back of second-quarter pricing of 4.7%.

Much of the volume decline, nevertheless, came from the spill-over of pricing negotiations in Europe, disruptions that are now largely over after weighing on group volume-mix by 1.3 percentage points in the quarter.

Nonetheless, volume-mix was down in all geographical regions, led by Latin America at minus 3.2%, followed by a negative 1.8% for Asia, the Middle East and Africa (AMIA).

As chairman and CEO Dirk Van de Put reiterated once again how the operating landscape “remains challenging and dynamic”, the numbers reflected it.

Organic growth slowed for a fifth straight quarter, as did price increases, with the smallest rise since at least the opening quarter of 2022. But volumes registered a third straight quarter of declines, and at a faster pace, too.

Although organic growth of 2.5% missed consensus estimates of 3.8%, market watchers were cheered as Mondelez stuck with the year’s target for the “upper end” of a 3-5% range.

Van de Put aired an element of confidence that both volumes and organic growth will pick up through the year, albeit with pressures from cocoa-linked pricing offsets.

“Consumer trends vary by region, but overall, we are seeing volume growth start to rebound as inflation cools,” he told analysts.

“Consumer incomes are rising, which helps to reduce the inflation-driven financial strain on many households. As a result, private-label growth in our categories is decelerating, while branded share growth is improving.”

In the troublesome pricing region of Europe, the CEO said “elasticities are moving slightly higher but remain modest”, although he suggested the end to retail negotiations “helps position us well for the second half in terms of top-line and volume growth”.

Van de Put suggested the European consumer “seems to be in a better place” than those in North America amid “softening inflation”, wage growth and “quite stable” employment, even though those factors appear to be playing out in both regions.

Growth rebound?

Alexia Howard, a US food analyst at investment firm AllianceBernstein, wrote in a research note: “Given lackluster measured channel data in the US and Europe, some investors had wondered if sales guidance of the upper end of the company’s long-term 3-5% range might be too much of a stretch this year, so it’s encouraging that this was kept intact.

“And management seems confident that this isn’t optimistically being kicked down the road for a disappointment next quarter. This implies an acceleration from the 3.4% organic sales growth delivered year to date.”

Howard estimated the collective guidance implies an “inflection” in second-half organic growth to about 6.5%, led by pricing on the back of “inflationary pressures” from higher cocoa prices.

However, she said Mondelez’s outlook for constant currency full-year adjusted EPS in the high single-digit area, from 16% growth in the first half, suggests the metric will “come under pressure”, likely declining mid-single digits including the currency headwind.

"Cookies crumble"

Slowing organic growth was enough to prompt TD Cowen to adjust its 2024 forecast, despite Mondelez sticking with its outlook, with analyst Robert Moskow heading up a research note with “cookies crumble a bit”.

The US investment bank said it had lowered its growth forecast for Mondelez to 3.9% on the assumption the pace will quicken in the second half to 4.3%, from 3.3% year to date.

“Mondelez curiously maintained 2024 sales guidance at high-end of 3-5%, despite a 2Q miss,” Moskow wrote.

“We lower our forecast and our PT to $75 to reflect our concern that guidance will prove overly optimistic due to weaker conditions in [the] US, India, and Mexico. We also forecast EPS growth of 3.6% in 2025, below the LT algo of 6-9% due to cost pressure from cocoa cost inflation.”

Van de Put explained that Mondelez is continuing to see “modest elasticities” in emerging markets, where volume-mix dropped 2.2% in the quarter, but with variations.

“Our China business is delivering strong growth in online and social commerce. In Brazil, we're seeing an uptick in elasticities, but the consumer and economy remain resilient,” he said.

“In Mexico, the economic backdrop is healthy with solid employment and consumer confidence. And within India we see some food inflation impacting lower- and middle-income households driving a pullback in spend and causing some down trading, particularly in biscuits.”

He is confident volumes will improve in North America during the second half from minus 1.2% in the second quarter, with Mondelez “well positioned to deliver sustainable long-term growth in chocolate”.

Moskow gave his interpretation: “Management cited ‘green shoots’ in July as evidence of a stronger back half. They expect growth in Europe to improve to about 5-6% due to the new price actions, strong marketing programming, and refilling customer inventory that got too low during price negotiations.

“In the US, they expect value actions in the back half to materially improve volume trends.”

Brand boycotts

Another weight on Mondelez’s volumes, albeit not so heavy as Europe, was the continuing boycott of western food brands in the Middle East and Asia linked to the conflict in Gaza. Both Nestlé and Swiss bakery business ARYZTA have also cited similar pressures in their recent results.

Mondelez witnessed 40 basis points of “boycott headwinds” to volumes as a result in AMIA, CFO Zaramella said, with an overall impact on group growth of two percentage points. And further disruption is expected in the back half.

While he sees volumes improving through the year, a flattish volume-mix outcome is anticipated for 2024.

John Baumgartner, a US-based managing director at Mizuho Securities, said the Japanese investment bank has a “high conviction” that the volume-mix guidance will be met.

However, the bank is cutting its organic growth outlook for Mondelez to 4.8% from 5.2%, although it expects volume-mix to recover to 1.2% for the year with positive pricing of 3.6%. EPS was maintained at $3.48.

“Although we believe that demand remains vulnerable to elasticity, and notably from the incremental stress inherent with likely additional price increases, industry peers appear to be acting rationally which should limit the potential for adverse price gaps to develop,” Baumgartner wrote in a research note.

Cocoa strains

Cocoa was a key discussion topic given it’s inherent in Mondelez’s current pricing strategy, although Zaramella said commodity prices have been pretty much locked in for 2024.

Pricing will be taken in “the least elastic segments and consumer occasions”, he told analysts, adding: “Our objective is to limit elasticity and volume losses, while protecting our gross profit dollars to the extent possible, as we believe cocoa prices will adjust eventually.”

Zaramella said he “soon” expects a correction to a “more sustainable price, as the mid-crop is emerging in line with historical trends, and early signs on the main crop are encouraging”.

Looking beyond 2024, the CFO explained: “We believe there is going to be a correction. The market, in light of the mid-crop, and importantly of the evolution of the main crop sees a clear adjustment of prices going forward.

“And I think there might be even more than this. Obviously, we are not going to go blind into 2025 - we cannot wait and bet on the main crop to be good.”