Mondelez International, Inc.’s (MDLZ) second-quarter 2014 results were weaker than the last quarter, with the snacking giant beating the Zacks Consensus Estimate for earnings only by a penny and missing the same for revenues.
Also, Mondelez lowered its sales outlook for 2014 — for the second time this year. Shares declined around 4% in pre-market trading. The company increased its quarterly dividend by 7%.
Mondelez’s second-quarter adjusted earnings of 40 cents per share beat the Zacks Consensus Estimate of 39 cents by a penny. Adjusted earnings increased 11.1% from the prior-year quarter as higher operating margins and lower share count and interest expenses made up for the weak revenues and high input costs. Earnings grew 19.4% on a constant currency basis.
Adjusted earnings excluded spin-off costs, restructuring costs and re-measurement of net monetary assets in Venezuela. Including these items, earnings increased 9% to 36 cents in the quarter.
Revenues Continue to Lag
Net revenue in the quarter decreased 1.8% year over year to $8.44 billion, missing the Zacks Consensus Estimate of $8.71 billion by almost 4% due to weak volumes. Currency headwinds hurt the quarter’s revenues by 2.9 percentage points as 80% of Mondelez’s sales are generated outside the U.S.
Organic revenues (excluding impact from acquisitions, divestures and foreign exchange) increased 1.2% driven entirely by pricing gains. Pricing increased 3.6% in the quarter as management increased the prices of most of its products in the first half to cover higher commodity costs. However, lower coffee prices continued to hurt the top line, this time by around 20 basis points (bps).
Volume mix declined 2.4% in the quarter in response to the significant pricing actions and increased competitive pressures. Mondelez claimed that competitors did not increase prices of their products as aggressively as it did which hurt volumes in the quarter, mainly in Europe.
Revenues from the emerging markets were up 4.7%, less than 6.7% in the previous quarter. Strong performance in Russia, India and Brazil were offset by weakness in China. Revenues continued to decline in China due to economic slowdown and weak biscuits performance.
On the other hand, revenues in the developed markets declined 1.2% as growth in North America was offset by weakness in Europe and Australia/New Zealand.
Mondelez’s Power Brands grew 1.3% in the quarter, slower than 4.8% growth witnessed last quarter.
High Input Costs Hurt Gross Margins, Operating Margins Improve
Adjusted gross margins declined 90 bps in the quarter to 36.9% as pricing gains and supply chain savings were offset by commodity cost inflation. Input costs have begun to rise sharply in 2014, especially dairy and cocoa. Strong gross margins in Europe and North America were offset by weakness in the other regions.
Adjusted operating income increased 11.8% year over year to almost $2.0 billion on a constant currency basis. Adjusted operating margin increased 120 bps to 12.6% in the quarter driven by overhead reductions, productivity gains and lower advertising costs than last year.
Mondelez’s proposed spin-off of its coffee business to Netherlands-based coffee company, D.E Master Blenders 1753 for $5 billion in cash is on track and is expected to be completed in 2015.
2014 Top-Line Outlook Lowered
Management lowered its 2014 organic top-line growth target to reflect slower global category growth. Organic top line is expected to grow in the range of 2–2.5%, lower than prior expectations of approximately 3% growth. In addition to category weakness, volume erosion due to significant pricing actions is expected to hurt the top line.
Constant currency adjusted operating income is expected to grow at a high single-digit rate in 2014, lower than prior expectations of a low double-digit rate. Adjusted operating margin is still expected in the high 12% range for the full year which will be slightly better than the 2013 levels.
Constant currency adjusted earnings are still expected in the range of $1.73 to $1.78 per share in 2014, representing a double-digit growth rate over 2013 levels to be driven by better margins. However, currency is now expected to hurt earnings per share by 9 cents, higher than prior expectations of 6 cents. Including currency headwinds, adjusted earnings per share are expected in the range of $1.64–$1.69.
Though rising coffee prices and favorable comparisons in China should benefit the top line in the second half, management expects the challenging retail and consumer environment to continue.
Mondelez carries a Zacks Rank #3 (Hold). Previously known as Kraft Foods, Inc., Mondelez changed the name following the spin-off of its North American grocery business into a separate independent company, Kraft Foods Group, Inc. (KRFT) in Oct 2012.
Mondelez joins Kraft and other food companies like Kellogg Company (K) and General Mills, Inc. (GIS) which are facing top-line headwinds from category challenges.
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