In its earnings release on May 7 of this year, Mondelez International (NASDAQ:MDLZ) announced that its board of directors had approved $2.2 billion of capital expenditures over the next four years. Its goal for the overall 2014-2018 restructuring program is to invest in ways that save the company a minimum of $1.5 billion per year by the year 2018.
The conference call that followed the earnings release helped shed some light on details. Part of the plan for the cash is, as CEO Irene Rosenfeld put it, "to expand routes to market." The goal here is an even split in savings between supply chain costs and reduced overhead costs.
As an example, she cited a biscuit factory going up in Mexico. She went on to say, "We've initiated significant projects in India, China and Russia. We're expanding biscuit manufacturing in the Czech Republic and investing in new biscuit manufacturing technology in the U.S." By bringing the source of production closer to the end users, there are costs along the supply chain that can be eliminated.
The company's most recent 10-Q filed with the SEC in August mentioned that increased capital spending in 2014 is being used for "building new plants, modernizing manufacturing facilities and launching new productivity initiatives" with the goal of cost savings.
Safeguarding the future
The prepared remarks delivered during the most recent conference call (and earnings release) didn't bring many new insights. CFO Dave Brearton simply stated, "We continued to deploy capital to where we expect to deliver the best returns whether it's reinvestment in the business, M&A, reducing debt or returning capital to shareholders."
During the Q&A this time, however, Rosenfeld stated something interesting. She said:
We are continuing to make the necessary investments -- we're protecting sales to a large extent as we look at some of the overhead initiatives but the end in mind is to make sure that we are making the necessary foundational investments in these key markets to capitalize on the opportunities that will emerge as the economies recover.
The phrase "protecting sales" might jump out at you. Commodity prices have been escalating lately, particularly with cocoa over Ebola fears since 70% of the world's cocoa supply comes from West Africa, and Mondelez has been trying to pass those cost increases onto its customers. However, it has run into a backlash as not all competitors followed Mondelez's lead, and the company lost some distributors as a result.
Could the predicted reduced supply chain costs (despite higher commodity costs) also act as more of a safety net should Mondelez be put in situations like this in the future? By having more of a profit margin cushion, it could perhaps shield itself from temporary commodity cost inflation without necessarily raising prices and angering customers.
In the meantime, Rosenfeld hinted that capital expenditures made last year regarding "route to market" are already starting to bear fruit. She stated, "We continue to feel good about the investments that we made in route to market, in places like Russia, like Brazil, like India and you will continue to see those investments and making sure that we're getting an adequate return."
As long as Mondelez's results unfold even close to its plan, its spending seems like a good plan. Spending $2.2 billion to save $1.5 billion annually pays for itself in just a year and a half. While it's true that $1.5 billion in annual savings won't happen for another three to four years, if things go according to plan, there should be some partial savings realized along the way as the expenditures are implemented. All things being equal, that $1.5 billion should flow straight to the pre-tax bottom line.