Mondelez International (MDLZ)- Part Two

How Organic Sales Overstate the True Growth Rate

It is common for companies to cite “organic” growth rates when discussing their results. The spirit behind these numbers is to show how rapidly the company’s core operations are growing and to give an idea of how much growth from this period will carry over to the next. Common adjustments include removing the impact of acquisitions and divestitures. A headline sales growth number of 9% may look acceptable at first glance. However, what if 12% was a result of sales generated by a company acquired during the year? That means the company’s core operations actually experienced a 3% decline in revenue which does not bode well for revenue growth the following year.

Another typical non-GAAP adjustment for companies with global operations is to remove the impact of foreign currency exchange rates. Let’s assume a US company reporting in dollars has a foreign subsidiary that grew revenue by 6% during the year. However, the subsidiary's functional currency depreciated against the dollar by 3%.  This would result in reported revenue growth from the subsidiary growing by only 3%. Let’s assume that history indicates that the functional currency typically appreciates/depreciates in the 2-3% range against the dollar from year to year. In such a situation, it makes analytical sense to adjust the 3% penalty from foreign currency out of the foreign subsidiary's reported growth to get a clear indication of the real business activity in that segment and the likelihood of a repeat performance next year. However, when a company generates a significant part of its business from a geography that is experiencing a high level of lasting inflation, such adjustments can significantly overstate the true growth rate.

We have been documenting such a distortion in MDLZ’s results for the last several years.