Shares of Mondelez International, Inc. (MDLZ - Analyst Report) rose more than 3% in pre-market trading after it reported improved sales and margins in the first quarter of 2015 as higher prices and aggressive cost cuts offset headwinds from currency.
However, the snacking giant expects a greater-than-previously-expected foreign exchange impact on its 2015 sales and profits.
Earnings Beat
Mondelez’s first-quarter adjusted earnings of 41 cents per share beat the Zacks Consensus Estimate of 37 cents by 10.8%.
Adjusted earnings increased 5.1% from the prior-year quarter driven by improved organic revenues and margins.
With many foreign currencies deteriorating against the U.S. dollar, currency headwinds hurt first-quarter earnings by 8 cents. Earnings, however, grew 25.6% on a constant-currency basis.
Mondelez International Inc. - Earnings Surprise | FindTheCompany
Organic Revenues Grow
Net revenue decreased 10.2% year over year to $7.76 billion due to a 14.5% headwind from Fx as 80% of Mondelez’s sales are generated outside the U.S. Revenues were in line with the Zacks Consensus Estimate.
Organic revenues (excluding impact from acquisitions, divestures and foreign exchange) increased 3.8%, better than 2.9% in the last quarter as pricing gains offset weaker volumes.
Organic revenues grew 10.8% in emerging markets but declined 0.5% in developed markets, like Europe and North America.
Mondelez’s Power Brands grew 5.9%, better than 5.2% growth witnessed in the previous quarter driven by advertising support for these brands.
Pricing increased 6.5%, higher than 6% rise in the previous quarter, which offset commodity and currency related cost inflation. A large chunk of the price increases included carryover benefit of significant pricing actions taken last year in response to the sharp increase in commodity costs, especially dairy, coffee and cocoa.
Volume mix declined 2.7% due to volume erosion in response to significant pricing actions and increased competitive pressures. Divestiture of certain low-margin businesses, mainly in Europe, also pulled down volumes in the quarter. However, the volume decline was narrower than 3.1% in the previous quarter due to favorable timing of Easter related shipments in the first quarter.
Mondelez has witnessed sluggish volume growth ever since it separated from Kraft Foods Group, Inc. (KRFT - Analyst Report) in 2012 due to a global snacking category slowdown following soft global retail and consumer demand. Mondelez, like many other U.S. food producers, has struggled due to shifting consumer preference toward natural and organic ingredients over packaged and processed food. The category weakness is not expected to improve much in 2015.
Margins Increase
Though sales have been slower, Mondelez has consistently improved margins through cost savings and productivity improvement.
Adjusted gross margins increased 90 basis points (bps) year over year and 230 bps sequentially to 38% driven by improved organic revenues, supply chain productivity and favorable product mix which offset input cost increases.
Adjusted operating income increased 19.1% year over year to almost $1.05 billion on a constant currency basis. Adjusted operating margin increased 160 bps year over year and 60 bps sequentially to 13.8% due to improved gross margins, productivity gains and cost reductions. In particular, profits were strong in North America, Europe and Latin America.
Mondelez’s $3.5 billion restructuring plan (2014-2018 Restructuring Program) has already started yielding positive results and played a pivotal role in driving operating profits. The program is accelerating supply chain cost savings and reducing overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB) to offset the rising short-term pressure from input costs and currency.
2015 Outlook
Though Mondelez maintained the previously issued 2015 constant currency sales, margin and earnings guidance, it raised its estimate for negative currency impact on sales and profits in 2015.
Management expects adjusted earnings to increase at a double-digit rate on a constant-currency basis. However, currency headwinds are expected to hurt adjusted earnings by about 33 cents per share, higher than 30 cents expected previously as well as 14 cents reported in 2014.
Organic net revenue is expected to increase at least 2%. Foreign currency is expected to hurt net revenue by about 12%, higher than previous expectations of 11%.
Adjusted operating margin is still expected to be around 14%.
Stocks to Consider
Mondelez carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader food and beverage sector include B&G Foods Inc. (BGS - Snapshot Report) and SUPERVALU Inc. (SVU - Analyst Report). Both the companies sport a Zacks Rank #1 (Strong Buy).
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