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Mondelēz’s Looks for Cost Savings through Plant Modernization

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Is Mondelēz ripe for a takeover?

As we discussed in the last part, Mondelēz’s (MDLZ) profitability has historically trailed international peers like Nestlé (NSRGY) and Hershey (HSY). That’s one of the main reasons Mondelēz has been the subject of speculation among investors. Will the company be the subject of a takeover or another restructuring target?

On September 10 Mondelēz’s management unveiled new restructuring measures aiming to boost its profitability. The company’s CFO Brian Gladden outlined plans to enhance productivity and cut costs.

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Productivity enhancements

A big part of Mondelēz’s cost transformation plan hinges on improving manufacturing facilities and practices. The company has either closed down, sold, or upgraded 78 existing plants since 2012.

The company envisions future manufacturing in state-of-the-art plants termed “lines of the future.” These would be located primarily in countries that have a more advantageous cost environment and where Mondelēz is looking to drive future growth.

According to CFO Brian Gladden:

  • 40 new plants are expected to be up and running by the end of 2015 with 75 such plants coming on-stream by 2018.
  • 70% of Mondelēz’s production of “Power Brands” will come from these newer plants—up from ~25% currently
  • Each plant will generate over $300 million in revenue

Profitability upside

As a result of its manufacturing improvements, Mondelēz has seen biscuits’ conversion costs fall by 30% per ton. The output in North America is also slated to double. The costs for chocolate and candy fell by more than 20% per ton. The newer plants will also give Mondelēz the capability to vary package sizes. This is a critical part of the company’s growth plan.

Implications

Plant modernization is a positive for Mondelēz. Besides the cost savings advantages, it also makes strategic sense to locate manufacturing where the company expects to derive most of its future revenue streams—Latin America and Asia. Also, having newer biscuit plants in North America would allow Mondelēz to maintain its number one leadership position in the category.

Together, Mondelēz and Hershey account for ~1% of the portfolio holdings in the iShares MSCI USA Minimum Volatility ETF (USMV) and 0.50% of the iShares Core S&P 500 ETF (IVV).

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