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Tickers in this Article: MDLZ, KRFT
Mondelez International, Inc. (MDLZ), formerly known as Kraft Foods Inc, recently reported its first quarterly results. The snack company missed on both the top and bottom lines in its third quarter 2012 mainly due to currency headwinds. However, the company re-affirmed its financial outlook for the next year. Mondelez International focuses on the global food and snacks business of the old Kraft Foods. It markets products in fast growing food categories like chocolate, biscuits, gum, candy, coffee and powdered beverages. On October 1, Kraft Foods spun off its North American grocery business into a separate independent company, Kraft Foods Group, Inc. (KRFT). Both Kraft Foods Group and Mondelez started trading regularly on the NASDAQ stock exchange from October 2.

Following are the adjusted results of Mondelez that reflect the impact of the spin-off.

Mondelez's third quarter earnings of 37 cents per share missed the Zacks Consensus Estimate of 39 cents by 5.1% and also declined 2.6% from the prior-year quarter. Currency headwinds, weak top line and higher taxes led to the earnings miss. On a constant currency basis, earnings increased 2.6% helped by operating gains.

Revenue & Margins

Revenues (excluding revenue from Kraft Foods Group) declined 5.1% to $8.3 billion, hurt largely by currency headwinds of 6.6 percentage points (pp). Stronger dollar has pulled down revenues of all companies like Mondelez, which have a significant international presence. Also, revenues were well short of the Zacks Consensus Estimate of $10.6 billion.

In constant currency terms (organic), revenues grew only a modest 1.5%. Tough year-ago comparisons, lower-than-expected pricing gains, volume/mix declines and executional issues in some countries including Brazil and Russia hurt revenue growth.

Mondelez's billion dollar brands like Milka and Cadbury chocolates; and Trident gum and Tang powdered beverage, which have been christened Power Brands, grew 6% in the quarter.

Among the food categories, biscuits and chocolates increased in mid-single digits, while the gum and candy business declined 1% with the Trident gum brand remaining most challenging. Management expects overall organic net revenue growth to rebound to a mid-single digit level in the fourth quarter.

Operating income improved 2.2% to $1.1 billion as the revenue shortfall was offset by effective input cost management and lower selling, general & administrative (SG&A) expenses. On a constant currency basis, operating income grew 7.5%. Operating margin improved 0.9% to 13.1%.

Segment Discussion

Developing Markets: Revenue in these emerging markets declined 6% to $3.77 billion, hurt by currency headwinds of 7.7 pp. Lower volumes, strong prior-year comparisons and some executional errors in markets like Brazil and Russia hurt the top-line growth. On a constant currency basis, revenues increased 1.7% helped by 7% growth in the region's power brands like Cadbury Dairy Milk, Lacta and Milka chocolates.

Softening gum demand and lower marketing support for biscuits hurt sales in Brazil, while market share losses in chocolates and biscuits crippled growth in Russia. Management hopes to resolve the executional issues in this region by the end of the year and expects this segment to generate high-single-digit organic revenue growth in the fourth quarter.

Operating income was flat on a constant currency basis as gains from effective management of input costs were offset by a lower volume/mix.

Europe: Segment revenues declined 8.1% to $2.85 billion, also hurt by currency headwinds of 8.8 pp. In constant currency terms, revenues increased 0.7% as volume/mix growth was offset by lower pricing, especially in coffee.

The company saw volume mix growth in the chocolates, coffee and biscuits categories, but found it difficult to raise prices in coffee. The region's Power brands grew 2%. In the fourth quarter, organic top-line growth in this region is expected to be in the low-to-mid single-digit range.

Despite the modest revenue growth, operating income improved 7.4% on a constant currency basis. Despite currency headwinds of 8.2 pp, productivity gains and lower overheads led to the improvement in operating income.

North America: Segment revenues increased 1.9% to $1.77 billion driven by pricing gains and a mid-single digit growth in biscuits. On a constant currency basis, revenue grew 2.2%. While the gum and candy category was flat, Power Brands grew 9%. Management expects top-line growth in this region to accelerate in the fourth quarter to a low-to-mid single-digit range.

Segment operating income grew 14.5% on the back of price hikes and productivity gains.

2013 Outlook Retained

Mondelez retained its 2013 outlook that was provided at the Barclays Capital Back to School Consumer Conference held in September.

In 2013, Mondelez expects its organic top line to grow at the lower end of its long-term range of 5%-7%. Pricing and the challenging economic conditions are expected to lead to lower growth versus the long-term targets.

The company retained its constant currency operating earnings guidance of $1.55 and $1.60, which was based on average exchange rates of August. However, on the basis of the more favorable exchange rates of October, management expects earnings to come in 5 cents higher.

Our Recommendation

The stock carries a Zacks #5 Rank (a short-term 'Strong Sell' rating), which we believe is justified given the third quarter's dismal performance.

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