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Mondelez Details Margin Growth Plans

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Mondelez International Inc. (MDLZ - Free Report) recently updated its long-term growth targets and detailed its margin improvement plans at the Consumer Analyst Group of New York (CAGNY) conference.

Mondelez’s long-term targets include organic sales growth at or above the category growth rate, adjusted operating margin growth in the range of 14–16% and double-digit earnings growth. While the operating margin and earnings growth guidance remain unchanged, the organic sales growth outlook was revised from 5–7% expected previously.

Last week, the consumer food company announced dismal fourth-quarter 2013 results, missing the Zacks Consensus Estimate for both earnings and revenues due to category challenges and slowdown in emerging markets. In fact, the Zacks Rank #3 (Hold) company has been under pressure and reported disappointing quarterly results ever since its separation from Kraft Foods Group, Inc. in Oct 2012.

Weak biscuit sales in China, continued headwinds from coffee pricing and slower global category growth hurt revenues in the second half of 2013. Moreover, Chief Executive Officer (CEO) Irene Rosenfeld, admitted at the CAGNY conference that Mondelez’s “margins were lower than peers.”

Also, Mondelez has been criticized for its profits/margins by activist investor Nelson Peltz in the past. Peltz joined Mondelez’s board of directors in Jan 2014, putting an end to his agenda of pushing food and beverage giant, PepsiCo, Inc. (PEP - Free Report) to take over Mondelez.

In order to grow its operating margins from 12% in fiscal 2013 to 14–16% by 2016, the company plans to accelerate cost savings and improve productivity. To accelerate cost reduction, the company has hired consultant firm, Accenture plc (ACN - Free Report) for the implementation of a zero-based budgeting system. Under this system, every line item of the budget must be approved by department managers unlike the traditional budgeting system under which only the cost variance needed to be justified.

The biggest driver of the long-term operating margin target is the reinvention of the supply chain. Mondelez is building an integrated supply chain organization, while simultaneously restructuring the supply chain network and driving productivity improvement through Lean Six Sigma, procurement transformation and simplification. The company has already closed/sold/streamlined 30 facilities and lowered global headcount by more than 3000.

These efforts are expected to deliver $3 billion in gross productivity savings, $1.5 billion in net productivity and $1 billion in incremental cash over the next three years.

Mondelez is primarily focusing on expanding operating margins in North America and Europe by 500 bps and 250 bps (from 2012 level), respectively, by 2016. These margin improvements will be reinvested to support growth in the emerging markets.

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