Mondelez International Inc. (NASDAQ: MDLZ) reported its second quarter 2014 results reflecting strong Adjusted Operating Income growth and margin expansion.
"We're making good progress on the strategic and cost-reduction actions we announced in May to strengthen our core snacking business, simplify our operations and enhance our margins," said Irene Rosenfeld, chairman and CEO. "We delivered strong, high-quality operating margin expansion and EPS growth again this quarter in the face of a continuing challenging macroeconomic environment. Our revenue growth reflects this difficult global retail and consumer environment as well as a temporary dislocation related to our decision to lead the industry on pricing. Despite these challenges, we remain on track to achieve our margin and earnings commitments for the full year."
On a reported basis for the second quarter, net revenues were $8.4 billion, down 1.8 percent, and operating income was $957 million, up 10.6 percent. Diluted EPS increased 9.1 percent to $0.36.
Year to date, reported net revenues were $17.1 billion, down 1.5 percent, and operating income was $1.8 billion, up 5.9 percent. Diluted EPS was $0.46, down 17 cents, including a loss of 18 cents related to debt extinguishment and a negative 8 cents from the remeasurement of net monetary assets in Venezuela.
Organic net revenue
Second quarter Organic Net Revenue increased 1.2 percent. Overall, pricing was up 3.6 percentage points, as the company realized the effects of significant pricing actions implemented over the course of the first half. Volume/mix declined 2.4 percentage points. In addition to price elasticity, the decline was largely due to a slower response by competitors to higher input costs and significant price-related customer disruptions in some European markets, which were more challenging than expected. Coffee revenues were a 0.2 percentage point headwind in the quarter. Market share performance through the first six months was solid, with more than half of revenues gaining or holding share, but softened in recent months with the implementation of significant pricing actions.
In the second quarter, Organic Net Revenue from emerging markets5 was up 4.7 percent while developed markets6 decreased 1.2 percent. Overall, Power Brands grew 1.3 percent.
On a regional basis:
- Latin America increased 11.8 percent, largely driven by pricing gains, especially in the inflationary economies of Venezuela and Argentina. Brazil grew high single digits, with solid growth across all categories.
- Asia Pacific was down 8.3 percent due to continued weakness in China and a more intense retail and competitive environment in Australia and New Zealand. India delivered another quarter of double-digit growth.
- EEMEA was up 6.3 percent, with balanced contributions from volume/mix and pricing. Russia grew mid-single digits with solid gains in biscuits, candy and coffee. The region also delivered strong double-digit growth in Turkey, Central Asia and the Middle East.
- Europe was down 1.9 percent. Volume/mix declined due to pricing-related customer disruptions, particularly in France. While chocolate and cheese prices were up, overall pricing in the region was down slightly due to the pass-through of lower green coffee costs. Lower coffee revenues tempered growth by 0.4 percentage points.
- North America increased 2.7 percent, driven by mid-single digit growth and continued share gains in biscuits and candy. Volume/mix was the primary driver of growth despite modest pricing.
Operating income and diluted EPS
In the second quarter, Adjusted Gross Profit1 decreased 1.6 percent on a constant currency basis. Adjusted Gross Profit margin declined 0.9 percentage points to 36.9 percent. Higher prices and a strong contribution from supply chain productivity offset input cost inflation. The decline in Adjusted Gross Profit margin was entirely due to a negative 0.9 percentage point impact from unrealized gains and losses associated with mark-to-market adjustments on hedging activity. North America and Europe delivered strong Adjusted Gross Profit margin expansion, fully offsetting weaker margins in the other regions that were largely due to the impact of higher currency-driven input costs.
Adjusted Operating Income grew 11.8 percent on a constant currency basis. Adjusted Operating Income margin expanded 1.2 percentage points to 12.6 percent, despite a negative 0.9 percentage point impact from unrealized gains and losses on hedging activities. Lower SG&A expense, primarily in Europe and North America, drove the growth. Overhead costs declined as a result of the company's continued cost management efforts, while advertising and consumer support expense was also lower as the company cycled higher investments in the prior year. The company also continued to drive A&C efficiencies by consolidating media providers, reducing non-working media costs and shifting spending to lower-cost, digital media outlets while maintaining its share of voice at historical levels.
Adjusted EPS grew 19.4 percent on a constant currency basis, including a negative 3-cent impact from unrealized gains and losses on hedging activity. Growth was driven by operating gains, lower interest expense and share repurchases.
Share repurchases and dividends
In the first half of the year, the company repurchased $0.9 billion of its common stock at an average price of $35.13 per share.
Additionally, the company declared a regular quarterly dividend of $0.15 per common share of Class A stock, an increase of $0.01 per share, or 7 percent. The dividend is payable on Oct. 14, 2014, to stockholders of record as of Sept. 30, 2014.
"Given the strong cost programs in place, we're maintaining our targets for 2014 Adjusted Operating Income margin and Adjusted EPS," said David Brearton, executive vice president and CFO. "Our top line remains challenged by a combination of weaker category growth and some temporary customer and consumer dislocations, as we lead pricing in many of our key markets and categories. We anticipate revenue growth to improve in the second half as coffee pricing headwinds reverse and we cycle more favorable comparisons in China, but we expect the challenging operating environment to continue. As a result, we expect Organic Net Revenue growth in the range of 2 to 2.5 percent for the full year, down from our previous expectation of approximately 3 percent."