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Mondelez (MDLZ) Beats on Q3 Earnings, Revenues in Line

Zacks Equity Research
Updated

Mondelez International, Inc.’s MDLZ third-quarter 2015 adjusted earnings of 42 cents per share beat the Zacks Consensus Estimate of 39 cents by 7.7%. However, adjusted earnings decreased 16% from the prior-year quarter owing to a decline in revenues.

Meanwhile, on a constant currency basis, earnings remained flat, as a strong operating performance was offset by a dilution related to the coffee joint venture..

On Jul 2, Mondelez’s coffee business (including the coffee portfolio in France) was merged with that of D.E Master Blenders 1753, per a deal announced in May 2014, to form a new Dutch coffee company called Jacobs Douwe Egberts (JDE). Mondelez received €3.8 billion in cash for the divesture and a 44% stake in the combined company.

Organic Revenues Improve

In the reported quarter, net revenue decreased 17.8% year over year to $6.85 billion due to a 13.6 percentage point impact from unfavorable foreign exchange as 80% of Mondelez’s sales are generated outside the U.S. Revenues were also hurt by the coffee business transactions and an unfavorable volume mix.

Organic revenues (excluding the impact of acquisitions, divestures and foreign exchange) increased 3.7%, lower than the 4.3% improvement recorded in the previous quarter. Organic revenue increase was helped by higher prices and enhanced revenues from emerging markets. Organic revenue growth was strongest in Latin America and Eastern Europe, Middle East and Africa.

Organic revenues grew 10.3% in emerging markets and declined 0.5% in developed markets like Europe.

Pricing increased 7.4%, higher than the 6.6% rise in the previous quarter.

Volume mix declined 3.7% due to volume erosion in response to significant pricing actions (taken last year) and intense competition. The divestiture of certain low-margin businesses also hurt volumes in the quarter. Moreover, this decline compared unfavorably to the 2.3% drop in the previous quarter.

Mondelez’s Power Brands grew 5.1%, lower than an increase of 6.6% in the second quarter and 5.9% in the first quarter.

Margins Shoot Up

Adjusted gross margins increased 180 basis points (bps) year over year to 39.1% driven by improved organic revenues and solid net productivity. However, adjusted gross margins decreased 110 bps sequentially, owing to a negative impact from mark-to-market adjustments related to commodity and currency hedging.

Adjusted operating income increased 17.7% year over year to $965 million on a constant currency basis. Adjusted operating margin increased 170 bps year over year to 14.1% due to improved gross margins, supply chain-related productivity gains and lower overheads. However, adjusted operating margin decreased 110 bps sequentially.

However, selling, general and administrative costs increased as Mondelez stepped up advertising investments in all regions, especially in its high-margin Power Brands.

Management Changes

Mondelez appointed Mark Clouse for the newly created position of Chief Commercial Officer. On the other hand, Tim Cofer was named as Chief Growth Officer. These changes will become effective in Jan 2016.

2015 Outlook

Mondelez has maintained its outlook for 2015. We note that Mondelez is well on track to achieve its 2016 adjusted operating margin target of 15–16% on the back of costs savings from its restructuring program.

Organic net revenue is expected to increase at least 3% in 2015 (from 2014 levels of $30.5 billion). Foreign currency translations are expected to hurt net revenue by 13 percentage points.

Adjusted operating margin is still expected to increase approximately 14% in 2015, excluding headwinds from stranded overhead costs.

Management continues to expect adjusted earnings to witness double-digit growth on a constant currency basis. However, currency headwinds are still expected to hurt adjusted earnings by about 33 cents per share.

Stocks to Consider

Mondelez carries a Zacks Rank #2 (Buy).

Other well-ranked stocks in the consumer staples space include Cal-Maine Foods, Inc. CALM, Flowers Foods, Inc. FLO and B&G Foods, Inc. BGS. All three companies sport a Zacks Rank #1 (Strong Buy).

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MONDELEZ INTL (MDLZ): Free Stock Analysis Report
 
B&G FOODS CL-A (BGS): Free Stock Analysis Report
 
CAL-MAINE FOODS (CALM): Free Stock Analysis Report
 
FLOWERS FOODS (FLO): Free Stock Analysis Report
 
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