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Mondelez International, Inc. (MDLZ - Analyst Report) reported dismal third-quarter 2013 results, managing to meet the Zacks Consensus Estimate for earnings but missing the same for revenues due to weak performance in China. The maker of Oreo cookies and Cadbury chocolates also lowered its organic revenue guidance for 2013 as the present headwinds are expected to continue.

Mondelez’s third-quarter adjusted earnings of 41 cents per share were in line with the Zacks Consensus Estimate. Adjusted earnings, however, increased 13.9% from the prior-year quarter driven only by lower taxes while revenues and margins continued to be sluggish. Earnings grew 16.7% on a constant currency basis. Currency hurt earnings by a penny.

Adjusted earnings excluded gains from indemnity accrual reversaland costs related to restructuring and integration.

Mondelez International, previously known as Kraft Foods, Inc., spun off its North American grocery business in to a separate independent company, Kraft Foods Group (KRFT - Analyst Report) in October last year.

Mondelez International focuses on the global food and snacks business of the old Kraft Foods. It markets products in food categories like chocolates, biscuits, gum, candy, coffee and powdered beverages.

Revenues Still Soft

Net revenue in the quarter increased 1.8% year over year to $8.47 billion. Revenues missed the Zacks Consensus Estimate of $8.55 billion by almost 1.0%. Currency headwinds hurt the quarter’s revenues by 2.8 percentage points (pp) as a significant portion of Mondelez’s sales are generated outside the U.S. Global category slowdown (particularly in emerging markets), weak biscuit sales in China and lower coffee pricing hit the top line.

Organic revenues (excluding impact from acquisitions, divestures and foreign exchange) increased 5.3% driven entirely by volume mix gains of 5.3%. Organic top-line growth was below the company’s expectations of 6%, though it was better than the first two quarters of 2013.

Volume/mix gains were driven by growth in emerging markets and market share gains. Pricing was flat in the quarter largely due to the impact of lower coffee prices. Lower coffee prices adversely affected top-line growth by around 0.5 pp. Coffee pricing is expected to hurt the top line similarly in the fourth quarter as well as in the first half of 2014.

Revenues from emerging markets were up 10.7% as strong performance in Russia, India and Brazil made up for weakness in China. Revenues declined in double digits in China due to economic slowdown and weak biscuits performance. On the other hand, revenues in developed markets grew 1.8% as North America and Europe performed well in the quarter.

Among the food categories, biscuits and chocolates were up in the quarter, while the gum/candy and coffee businesses were down. The company’s gum business has been down since the last few quarters, mainly in the developed nations.

Mondelez’s Power Brands grew 6.9% in the quarter driven by brands like Tuc, Club Social, belVita and Barni biscuits and Cadbury Dairy Milk, Milka and Lacta chocolates.

Margins Unimpressive

Adjusted gross margins declined 50 basis points (bps) in the quarter to 37.3% as gains from volume/mix and productivity improvement were offset by headwinds from higher input costs.

Adjusted operating income increased only 0.8% year over year to $1.07 billion on a constant currency basis.  Adjusted operating margin declined 80 bps to 12.2% in the quarter due to difficult year-ago comparisons and higher spending for advertising, consumer support, sales capabilities and route-to-market expansion in emerging markets. However, operating margin grew sequentially due to improved productivity and cost control.

Segment Discussion

Latin America: Revenues increased 1.7% to $1.30 billion. Organically, revenues increased 16.9%, driven largely by price increases and also favorable volume/mix. Brazil was up in mid teens, driven by volume/mix gains and higher pricing. Pricing gains in Venezuela and Argentina also drove revenue growth.

Asia Pacific: Revenues declined 7.5% to $1.14 billion, hurt largely by currency headwinds of 7.6 pp. Organically, revenues were almost flat as volume/mix gains were offset by lower pricing. High-teen growth in India was offset by double-digit decline in China, due to weak biscuits performance. In China, the company lost significant market share of second-tier biscuit brands as it shifted marketing spending to Power brands. Biscuit revenues in China are expected to remain soft in the fourth quarter. The chocolate category was strong in Asia Pacific gaining from new capacity additions.

Eastern Europe, Middle East & Africa: Revenues grew 7.0% to $948 million. Organically, revenues increased 13.0% as volume/mix gains were offset by lower coffee and chocolate pricing mainly in Russia. Russia grew in high teens despite the pricing pressure due to strong volume/mix performance and easy comparisons. Ukraine, South Africa and West Africa also did well in the quarter.

Europe: Revenues improved 4.3% to $3.30 billion. Organically, revenues increased 1.9% as volume/mix gains mainly in chocolates, coffee and biscuits were offset by lower coffee pricing and weakness in gum.

North America: Revenues grew 1.0% to $1.79 billion. Organically, revenues increased 2.4% driven by solid biscuit and candy sales in the U.S. However, the gum business continued to decline.

2013 Revenue Outlook Lowered

Mondelez lowered the 2013 outlook for revenues but raised the same for earnings.

For 2013, Mondelez expects its organic top line to grow approximately 4%, lower than prior expectation of growth at the lower end of its long-term range of 5%–7%. Slower global category growth, lower coffee pricing and weak China sales led the company to lower the guidance. These headwinds are expected to persist in the next year as well, thus pressurizing the top line. Accordingly, revenue growth next year is expected in the 4% to 5% range, also lower than the long-term target.

The company expects constant currency earnings in the range of $1.57 to $1.62, higher than prior expectations of $1.55–$1.60 per share. The guidance was increased only due to expected tax benefits. Currency headwinds are expected to be 5 cents per share. Adjusted operating margin is expected to be approximately 12% for the full year.

Fourth-Quarter Outlook

In the fourth quarter, net revenue is expected to decline in low single-digits. Organic revenue growth will only be about 3%, much lower than previous expectations due to lower coffee prices, slower global category growth and continued weakness in China. Operating margin is expected to be above 13% in the fourth quarter.

Mondelez carries a Zacks Rank #3 (Hold). The company has been under pressure and has reported disappointing results since it split from Kraft Foods. Activist investor, Nelson Peltz has been pushing PepsiCo, Inc. (PEP - Analyst Report) to take over Mondelez. Another food company that is struggling with the top line since the past few quarters is Kellogg Company (K - Analyst Report), hurt by its choppy cereal business.

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