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Mondelez International Inc. (MDLZ - Analyst Report) beat the Zacks Consensus Estimate for revenues, but only met the earnings expectations in the first quarter of 2013. The maker of Oreo cookies and Cadbury chocolates maintained its outlook for revenues, but increased its earnings guidance on tax benefits.

Mondelez’s fourth quarter adjusted earnings of 34 cents per share were in line with the Zacks Consensus Estimate of 34 cents. Adjusted earnings however, increased 9.7% from the prior-year quarter driven largely by lower taxes which made up for the sluggish profits due to stepped up investments in growth initiatives. Earnings grew 22.6% on a constant currency basis.

Mondelez International focuses on the global food and snacks business of the old Kraft Foods. It markets products in fast growing food categories like chocolates, biscuits, gum, candy, coffee and powdered beverages. The old Kraft Foods was spun off from its North American grocery business into a separate independent company, Kraft Foods Group, Inc. (KRFT - Analyst Report) in October last year.

Revenues & Margins

Revenues improved 0.9% $8.74 billion, hurt largely by currency headwinds as Mondelez has a significant international presence. Revenues however, marginally beat the Zacks Consensus Estimate of $8.72 billion.

Organic (excluding impact from acquisitions, divestures and foreign exchange) revenues grew 3.8% driven by volume/mix gains, strong performance of Power Brands and emerging markets, and market share gains. Mondelez’s Power Brands grew 7.5% in the quarter while emerging markets were up 9.3% mainly due to strong growth in Brazil and Russia. On the other hand, developed markets grew only 0.4% due to lower coffee pricing.

Organic top line growth was however, lower than its long term targets. Lower coffee pricing, capacity constrains in a number of markets and continued weakness in its gum business hurt organic revenue growth in the quarter. Lower coffee prices adversely  affected top line growth by around 1.3 percentage points (pp) while capacity constraints created a headwind of 0.5 pp. Volume/mix benefitted the top line by 2.5 pp while pricing added 1.3 pp.

Among the food categories, biscuits, chocolates and candies were up in the quarter, while the gum and candy business was down 1% and also suffered share declines. The company’s gum business has been down since the last few quarters, mainly in the developed nations. Management does not expect any significant turnaround in the gum business in 2013. The beverages and cheese and grocery revenues were flat in the quarter.

Adjusted gross margins were flat in the quarter at 37.2% as gains from volume/mix and pricing were offset by headwinds from higher input costs.

Adjusted operating income declined 4% year over year to $979 million on a constant currency basis as gross margin gains were offset by higher selling, general and administration (SG&A) costs. SG&A costs increased due to higher spending behind brand building, advertising, consumer support, sales capabilities and route-to-market expansion. Adjusted operating margin declined 160 basis points in the quarter to 10.3%.

Segment Discussion

Latin America: Revenues grew 2% to $1.40 billion. Organically, revenues increased 12.6% driven largely by price increases taken to offset inflation. Brazil was up in mid-teens driven by double-digit volume/mix gains and higher pricing. Adjusted segment operating income was flat on a constant currency basis at $96 million as gross profit gains were offset by increased overhead costs and higher investments in sales capabilities and route-to-market expansion.

Asia Pacific: Revenues grew 3.6% to $1.37 billion. Organically, revenues increased 5.8% driven by volume/mix gains. Double-digit growth in emerging markets of China, India and Philippines was offset by low single-digit decline in the developed markets of Asia Pacific, especially the gum category in Japan. Mondelez faced capacity constraints in India in the chocolate category. Adjusted segment operating income increased 4.8% on a constant currency basis to $193 million.

Eastern Europe, Middle East & Africa: Revenues grew 1.6% to $863 million. Organically, revenues increased 4.0% as volume/mix gains were offset by lower coffee and chocolate pricing in Russia and other eastern European markets. Russia grew 2% despite the pricing pressure due to strong volume/mix performance. Adjusted segment operating income declined 46.5% on a constant currency basis to $72 million due to strong year-ago comparisons which included gain from sale of a property in Russia. Increased overheads and higher investments in sales capabilities and advertising also hurt profits.

Europe: Revenues declined 1.0% to $3.46 billion. Organically, revenues were almost flat as volume/mix gains mainly in chocolates and biscuits were offset by lower coffee pricing.  Adjusted segment operating income improved 0.2% on a constant currency basis to $436 million.

North America: Revenues grew 1.5% to $1.66 billion. Organically, revenues increased 2.4% driven by mid single-digit biscuit sales in the U.S. However, the gum business continued to decline. Adjusted segment operating income declined 0.5% on a constant currency basis to $192 million due to lower gross margins resulting from weak gum sales.

2013 Outlook

Mondelez retained its 2013 outlook for revenues but increased the same for earnings.

For 2013, Mondelez continues to expect its organic top line to grow at the lower end of its long-term range of 5%-7%. The first quarter organic revenue growth of 3.8% was below these targets. Management expects the second-quarter organic growth to be tempered again by lower coffee pricing and capacity constraints. However, top line growth is expected to accelerate in the second half driven by Mondelez’s growth initiatives which include boosting its emerging markets business, increasing investments in brand building and improving production capacity.

The company raised its operating earnings per share guidance to the range of $1.55–$1.60 from the previous range of $1.52–$1.57 per share to reflect tax benefits.

Our Recommendation

The stock carries a Zacks Rank #3 (Hold). Mondelez announced its first decent quarterly results after the Kraft split. However, tensions will continue to linger in the gum business.

Some consumer staple stocks that are worth a look include Flower Foods Inc. (FLO - Snapshot Report), carrying a Zacks Rank # 1(Strong Buy) and B&G Foods Inc. (BGS - Snapshot Report) carrying a Zacks Rank #2 (Buy).

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