BOCA RATON, FLORIDA, U.S. – By 2018, new, highly efficient production “Lines of the Future” of Mondelez International, Inc. will account for 70% of the production of the company’s leading brands, said Brian Gladden, executive vice-president and chief financial officer.
Gladden, together with chairman and chief executive officer Irene Rosenfeld, spoke Feb. 17 at the Consumer Analyst Group of New York Conference at the Boca Raton Resort and Club in Boca Raton, Florida, U.S.
The 2018 target of 70% compares with about 25% of “power brand” production currently and 15% in 2013.
“At the end of 2015, we had 35 ‘Lines of the Future’ installed around the world, and we expect to double that number over the next few years,” he said. “These lines offer tremendous advantages as they deliver about 400 to 600 basis points of savings, on average, as compared to our older lines.”
The capital spending program is a central part of efforts to help Mondelez lift margins toward a 2018 goal of 17% to 18%. The company ended 2015 with a margin of 13.2%, an increase of 250 basis points since 2013.
“Our Salinas, Mexico, facility opened in late 2014, but really started to ramp production in the second half of 2015,” Gladden said. “At the end of the year, the plant had seven lines producing our key power brands, such as Oreo, Ritz, and Chips Ahoy!. We are installing an additional four lines, which will be up and running by the middle of this year. As we've discussed previously, these state-of-the-art lines are expected to deliver about 1,000 basis points of savings versus products produced today on older lines in our North American facilities. As production volumes continue to build, we expect Salinas to increasingly contribute to further margin expansion in North America.”
Other major capital projects undertaken by Mondelez globally include a biscuit facility in Opavia, Czech Republic, which will bake brands like Oreo and belVita; Sri City, India, which will focus principally on chocolate initially; and a Bahrain biscuit plant, to open in 2017 and to produce power brands such as Barney and Oreo for distribution in Europe, the Middle East and Africa.
Gladden discussed other initiatives aimed at enhancing margins, including rationalization of stock-keeping units and reducing the number of suppliers it uses.
“We've made good progress over the past couple years, reducing our sku count from a high of around 74,000 skus after the split to about 30,000 today,” he said. “We’ve also taken aggressive actions to consolidate our supplier base, which increases our buying power. As a result, our supplier count is down about 40% since 2013 to about 60,000 suppliers. There is still more opportunity.”
Pricing discipline also is an important component achieving targeted margins, Gladden said.
“In 2015, our pro forma adjusted OI (operating income) margin was 13.2%. Over the next three years, we expect to expand gross margin by 275 to 375 basis points as we price to recover commodities, inflation, and currency impacts; deliver world-class productivity; and improve our revenue mix. We also expect another 50 to 150 basis points of improvement from reducing S.G. and A. (selling, general and administrative expense), net of prudent increases in A. and C. (advertising and communications) and route-to-market investments.”