Mondelez Misses on Q4 Earnings, Rev; Q1 View Soft - Analyst Blog


Mondelez International, Inc. 's ( MDLZ ) fourth quarter was worse than the third, which dragged its share price. The consumer food company missed the Zacks Consensus Estimate for both earnings and revenues due to category challenges and slowdown in emerging markets.

Though the maker of Oreo cookies and Cadbury chocolates expects to do better in 2014, the first quarter is expected to be tough as most of the headwinds that hurt results in the second half 2013 are expected to persist.

Mondelez's fourth-quarter adjusted earnings of 42 cents per share missed the Zacks Consensus Estimate of 44 cents by 4.5%. Adjusted earnings, however, increased 10.5% from the prior-year quarter as higher operating margins, lower interest expenses and lower share count made up for the weak revenues and higher taxes. Earnings grew 15.8% on a constant currency basis. Currency hurt earnings by 2 cents.

Adjusted earnings excluded loss on debt extinguishment, costs related to restructuring and integration, spin-off costs and some tax adjustments.

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.

Revenues Still Soft

Net revenue in the quarter decreased 0.1% year over year to $9.49 billion, missing the Zacks Consensus Estimate of $9.595 billion by almost 1.0%. Currency headwinds hurt the quarter's revenues by 2.6 percentage points (pp) as 80% of Mondelez's sales are generated outside the U.S. Once again, global category slowdown (particularly in the emerging markets), weak biscuit sales in China and lower coffee pricing hit the top line.

Organic revenues (excluding impact from acquisitions, divestures and foreign exchange) increased 2.5% driven entirely by volume mix gains of 2.3%. Organic top-line growth was below the company's expectations of about 3% and was also weaker than third-quarter 2013. Pricing increased only 0.2% in the quarter largely due to the impact of lower coffee prices. Lower coffee prices adversely affected top-line growth by around 70 basis points (bps).

Revenues from emerging markets were up 5.9%, down from 10.7% in the third quarter. Strong performance in Russia, India and Brazil were offset by weakness in China. Revenues declined in China due to economic slowdown and weak biscuits performance. Management warned of difficult economic conditions in emerging markets in 2014.

On the other hand, revenues in developed markets grew 0.5% as growth in North America and Europe was offset by weakness in developed markets of the Asia Pacific region.

Mondelez's Power Brands grew 4.1% in the quarter driven by brands like Tuc, Club Social, belVita and Barni biscuits and Cadbury Dairy Milk, Milka and Lacta chocolates and Tassimo coffee.

Operating Margins Improve

Adjusted gross margins declined 50 bps in the quarter to 37.1%. Adjusted operating income increased 31.5% year over year to $1.37 billion on a constant currency basis. Adjusted operating margin increased 290 bps to 13.9% in the quarter, almost in line with management's expectation of its being above 13%. Operating margin gains were driven by overhead reductions and productivity gains.

Annual Results

In fiscal 2013, the company witnessed 0.8% increase in revenues to $35.3 billion, slightly short of the Zacks Consensus Estimate of $35.39 billion. Organically, revenues grew 3.9%, slightly less than management's expectation of approximately 4%.

Adjusted earnings were $1.51 per share, which missed both the Zacks Consensus Estimate of $1.55 as well as the company's guidance range of $1.57 to $1.62. Earnings increased 13.5% from the prior-year figure. Currency headwinds hurt earnings by 9 cents, much more than management's expectation of 5 cents.

Adjusted operating margin was 12%, in line with the expectations.

2014 Outlook Better

Constant currency adjusted earnings are expected in the range of $1.73 to $1.78, in 2014 representing a double-digit growth over 2013 levels to be driven by better margins.  Currency is expected to hurt earnings per share by 7 cents.

Organic top line is expected to grow at or above category growth rate which is estimated to be approximately 4%. Previously, the company had expected 4%-5% growth.

Constant currency adjusted operating income is expected to grow at a low double-digit rate in 2014. Adjusted operating margin is expected to be in the high12% range for the full year which will be slightly better than the 2013 levels. Management expects margin growth to be driven by improved efficiency, lower supply chain and overhead costs and an improved product mix. Margins are expected to improve year over year in all the quarters.

Taxes are expected to be a significant headwind in 2014. The tax rate is expected to be about 20% in 2014, higher than 2013. However, lower interest expenses and share count should boost earnings in the year.

First-Quarter 2014 to be Weak

Revenues are expected to grow in the range of 2%-3% in the first quarter, lower than full-year expectations. Continued biscuit weakness in China, lower coffee pricing and shift in Easter timing to the second quarter are expected to hurt the first-quarter sales. Moreover, management expects to increase pricing across most geographies in the second quarter to cover higher commodity costs and currency headwinds. Increased pricing is expected to hurt volumes in the quarter.

Mondelez carries a Zacks Rank #3 (Hold). The company has been under pressure and has reported disappointing top-line results since the split. Mondelez joins 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: GIS , K , KRFT , MDLZ

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