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Despite Mixed Results, Mondelez Is Still Poised for Long-Term Growth
Posted by: Sarfaraz A. Khan (IP Logged)
Date: November 20, 2013 10:14AM

Activist investor Nelson Peltz has been pressuri ng the confectionery, food and beverage giant Mondelez International (MDLZ) to cut down on costs. He believes that the company can double its earnings by 2015 if it is managed properly. And he could be right, given the company owns several powerful brands, such as Cadbury, Oreo, Tang and Trident, and has a strong presence in the emerging markets. Peltz is also known for criticizing the company’s name, which, he thinks, “sounds like a disease.” Earlier in July, Peltz came forward with an interesting proposal which involved the merger of the food and beverage behemoth PepsiCo (PEP) with Mondelez’s snack business to make a $70 billion snack food giant. As of March 2013, Peltz owns a $1.23 billion stake in Mondelez and a $952 million stake in PepsiCo.

Mondelez has recently released its quarterly results in which it managed to beat the earnings estimates but failed to impress on the revenues front. The business reported strong performance in the emerging markets, with the exception of China. However, Mondelez continues to target considerable growth in revenues, earnings and margins, over the long term.

Top and Bottom Line

In its results for the third quarter ending September, Mondelez’s net earnings rose 57.1% to $1.02 billion, from $652 million in the same quarter last year. Strong organic sales in most of the markets are the reason behind the better than expected performance. However, the increase in commodity costs had an adverse impact on profitability, as gross margins dropped by 50 basis points, despite higher productivity and gains from strong volume/mix.

During the quarter, Mondelez’s revenues increased by 1.8% from the same quarter last year to $8.47 billion while adjusted earnings rose 13.9% to $0.41 per share. On the other hand, according to data compiled by Thomson Reuters, analysts were expecting earnings of $0.40 per share from revenues of $8.56 billion. Analysts’ estimates typically correspond to the adjusted earnings.

The company faced several challenges in the quarter such as its biscuits performing poorly in China, the growth in the emerging markets being slow and coffee prices declining. As a result, Mondelez ended up missing the market’s revenue estimates. The company witnessed organic growth of 5.3% due to a 5.3% growth in volume mix. The improvement in volume mix is mainly due to better market share and growth in the emerging markets. The growth was clearly well below Mondelez’s 6% organic growth estimates. On the revenues front, Mondelez has not delivered a strong performance.

Some of the food categories, like gum and candy, performed poorly and witnessed a 1% drop in revenues. On the other hand, some of the other brands, such as Club Social, Tuc, Barni and belVita biscuits, Cadbury Dairy Milk, Milka and Lacta chocolates delivered an above average performance in their respective regions.

Emerging Markets

The company gets nearly 40% of its revenues from the emerging markets.

Mondelez witnessed the highest organic growth in Eastern Europe, Middle East and Africa (EEMEA) region and Latin America. The growth in Latin America was attributed to the increase in prices in Venezuela and Argentina as well as a strong performance by its power brands that witnessed a growth of more than 18%. Similarly, the power brands also witnessed growth of 19% in the EEMEA region. In Eastern Europe, the company’s growth, to some extent, was offset by lower chocolate and coffee pricing in Russia.

Region 2012(In Million) 2013(In Million) OrganicRevenuegrowth
Europe $3,098 $3,158 1.9%
North America $1,755 $1,797 2.4%
Latin America $1,286 $1,503 16.9%
Asia Pacific $1,228 $1,229 0.1%
Eastern Europe, Middle East and Africa $861 $973 13.0%

Overall, the company reported impressive growth numbers from emerging markets. Mondelez was able to grow by 10.7% in these regions. This shows consistent improvement from a growth of 9.4% in the first quarter to 9.7% in the second quarter and finally a double-digit growth in the third quarter. However, Mondelez’s performance in China was far from satisfactory. In this key emerging market, which represents a $1.1 billion business of the company, Mondelez reported a double-digit drop in revenues.

Positive Outlook

Despite the mixed performance, Mondelez is well positioned for long-term growth in the emerging markets. While it has witnessed revenue declines in China, it still remains the leading player in the biscuits, coffee and gum categories in the country. The poor performance was largely due to the broader macroeconomic factors, which should improve in the long run due to the global economic recovery.

Mondelez has delivered on its promise of posting sequential improvements in adjusted operating margin, which came in at 12.2% in the previous quarter. For the next quarter, Mondelez is eyeing operating margin of 13% which would take its full year operating margin to 12%. To reach these objectives, Mondelez has planned to cut costs through the restructuring of its supply chain. The company is anticipating that this restructuring will save around $3 billion in gross productivity and will generate $1 billion incremental cash in the next three years. These measures could provide an annual boost of 60 to 90 basis points to its operating margins.

Mondelez has lowered its organic revenue growth target from 5% to 7% to just 4% because of weak biscuit sales in china, decreased coffee prices, slower category growth and the anticipated revenue decline from Asia Pacific in the next quarter, particularly China. However, on a positive note, Mondelez continues to target 5% to 7% grown in organic revenues, improvement in operating margins to 145 to 16% and double-digit growth in EPS, in the long run. For the current fiscal year, Mondelez has increased its adjusted EPS guidance from $1.57 to $1.62.

Notes:

Mondelēz International Q3 2013 Results - Earnings Call Transcript

Mondelez International Third Quarter 2013 Results PR

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.


Stocks Discussed: MDLZ, PEP,
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