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Mondelez (MDLZ) Beats on Q1 Earnings, Sales; Stock Gains

Mondelez International, Inc. MDLZ started the year on a strong note, beating the Zacks Consensus Estimate for both earnings and revenues in the first quarter of 2016 despite rising currency headwinds and other global pressures. Shares rose almost 6% in pre-market trading.

The maker of Oreo cookies and Cadbury chocolates also announced that Mark Clouse, its Chief Commercial Officer (CCO), will leave the company. The 20 year Mondelez veteran will join as CEO of Pinnacle Foods Inc. PF, effective May 23. Mondelez will not appoint a new CCO.

Earnings Beat

First-quarter adjusted earnings of 48 cents per share beat the Zacks Consensus Estimate of 40 cents by 20.0%.

Adjusted earnings surged 23.1% year over year. With many foreign currencies deteriorating in comparison with the U.S. dollar, currency headwinds hurt earnings by 3 cents per share. On a constant currency basis, earnings grew 30.8% on cost savings and improved volumes in developed markets. Lower share count also boosted earnings in the quarter.

Mondelez is aggressively reducing costs under its $3.5 billion restructuring plan, which was announced in 2014. Under the plan, the company is accelerating supply chain cost savings and reducing overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB). The savings from the program are being used to fund marketing investments and capacity expansion to accelerate top-line growth and gain market share.


Sales Beat

Net revenue decreased 16.8% year over year to $6.46 billion due to 7.2% Fx impact as 80% of Mondelez’s sales are generated outside the U.S. Moreover, the Jul 2015 divesture of the company’s coffee business hurt revenues by 9.4%, while the historical Venezuelan operations hurt sales by 2.4%.

Last July, Mondelez formed a joint venture (JV) to combine its coffee business with that of D.E Master Blenders to create Jacobs Douwe Egberts, the largest global pure-play coffee company. As a result, the maker of Cadbury chocolates and Oreo cookies, received a 43.5% interest in the JV.

Revenues, however, beat the Zacks Consensus Estimate of $6.44 billion by 0.3%.

Organic revenues inched up 2.1%, less than 4.7% recorded in the last quarter as improved organic growth in developed markets offset slower growth in emerging markets.

Organic revenues grew 3.6% in the emerging markets, less than 12.4% in the previous quarter. Organic sales rose 1.3% in the developed markets, better than flat in the previous quarter. Improved performance in Europe and continued strong trends in North America drove the upside.

Pricing increased 2.8% to recover commodity and currency-related input cost inflation. However, the pricing gains were less than 7.8% rise in the previous quarter.

Volume mix declined 0.7% due to elasticity impact from higher pricing, challenging category trends and increased competitive pressures.

The volume decline was, however, narrower than the 3.1% drop in the previous quarter. Increased volume/mix in developed markets, which made up for slower growth in emerging countries, limited the downside.

Mondelez’s Power Brands grew 3.8% on an organic basis, less than 5.5% in the previous quarter.

Margins Up

Adjusted gross margins increased 170 basis points (bps) year over year and 90 bps sequentially to 39.7% as supply chain productivity gains offset the negative impact of mark-to-market adjustments related to commodity and currency hedging.

Adjusted operating income increased 20% year over year on a constant currency basis to $974 million. Despite higher advertising and consumer support, adjusted operating margin increased 240 bps year over year and 120 bps sequentially to 15.1% on the back of improved gross margins and lower supply chain and overhead costs.

2016 Outlook

The company largely reaffirmed its previous guidance for 2016 but lowered expectations of negative currency impact on sales and earnings per share.

Organic net revenue is expected to increase at least 2% in 2016. Foreign currency is likely to hurt net revenue by roughly 3%, less than 6% previously.

Adjusted operating margin is still expected in the range of 15–16% in 2016 on the back of lower supply chain and overhead costs.

Management expects adjusted earnings to increase at a double-digit rate on a constant-currency basis. Currency headwinds are now expected to hurt adjusted earnings by about 5 cents, much less than 13 cents expected previously.

Free cash flow is anticipated to be at least $1.4 billion.

Stocks to Consider

Mondelez carries a Zacks Rank #2 (Buy). Other food stocks worth considering are Kellogg Company K and The J. M. Smucker Company SJM. Both the stocks have the same rank as Mondelez.

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SMUCKER JM (SJM): Free Stock Analysis Report
KELLOGG CO (K): Free Stock Analysis Report
MONDELEZ INTL (MDLZ): Free Stock Analysis Report
PINNACLE FOODS (PF): Free Stock Analysis Report
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