Snack manufacturing company Mondelez International (MDLZ, Financial) seems to be surrounded by a number of problems, as evident in its fourth-quarter results reported recently. Nonetheless, the company managed its way out and reported a mixed bag of numbers, wherein the top line was below the Street’s estimates and the bottom line was ahead of it.
What made the top line weak?
Revenue for the quarter slipped 6.9% to $8.83 billion, over the prior year. This was lower than the analysts’ estimate of $9.08 billion. The top line was affected by weakness in the North American market and lower volumes due to increase in product prices as well as competitive pressures. Thus, overall the volume mix of the company was down by 3.1%. Revenue from North America dropped 3% due to lagging demand for packaged food.
One of the primary reasons for the decline in revenue was unfavorable currency movement, which affected revenue by 9.5%. Since the snack food retailer makes 80% of its top line from its international operations, weakness in other currencies against the U.S. dollar affected the results. However, organic revenue, which excludes all kinds of one-time gains of losses, surged 2.9% during the quarter. This was mainly due to an increase in the product prices by 6%, which offset the effects of higher commodity costs.
The Power Brands was one of the star performers, which reported a revenue increase of 5.2% over last year. The margins of the company shrank 140 basis points to 35.7%, due to lower revenue and higher input costs. Nonetheless, Mondelez International’s bottom line jumped 12%, to $0.47 per share, over last year. On a constant currency basis, earnings surged 26.2% during the period. The analysts’ estimate was that of $0.43 per share. Further, it plans to cut costs and achieve productivity gains which will help in improving the margins and the bottom line.
The future
The snack food maker expects currency headwinds to continue in the future. Hence, it cut its earnings guidance by $0.30 per share and revenue guidance by 11% for the current year. Although this news disheartened the investors, it has some positive points to look forward to.
It is making efforts to ramp up its image and strengthen its foothold in various parts of the world. With the aim of strengthening foothold in Vietnam, Mondelez bought 80% stake in Kinh Do Corp, a snacks company in Vietnam.
Also, it has signed a deal with D.E. Master Blenders of Europe, which will expand its footprint in the coffee market in Europe. According to the deal, it will provide its coffee brands to Master Blenders and form a new company called Jacobs Douwe Egberts. For this, the snack maker would receive $5 billion in cash.
Furthermore, it plans to introduce new products like red velvet Oreos and make low-priced promotions this year. These efforts will help it grow its business. Also, the company has put a cost cutting plan in place, through which it should cut $1.5 billion in costs by 2018. This will be achieved by reducing first class travel for employees, cutting staff and shifting to virtual meetings. Also, it will limit its marketing budgets.
Finally
Demand for Mondelez International’s products continues to rise in the international market. It is mainly because of the currency changes that its top line was affected. Excluding that, it did register growth in revenue. Also, its efforts to expand its product portfolio and geographic footprint further, should be rewarding. Thus, I believe investing in this snack maker should be rewarding in the long run.
