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Will Tough Times Endure for Food Manufacturers in 2Q17?

PART:
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Part 2
Will Tough Times Endure for Food Manufacturers in 2Q17? PART 2 OF 6

Among Food Manufacturers, Cost Savings Is the Name of the Game

1Q17 EPS benefitted from cost cutting

Food manufacturing companies are relying on streamlining operations, generating productivity, and cost savings to drive bottom-line growth amid the current soft sales environment. In 1Q17, three of our select four major food manufacturers generated positive earnings surprises.

Among Food Manufacturers, Cost Savings Is the Name of the Game

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EPS performance and outlook

Hershey (HSY) posted 1Q17 adjusted EPS (earnings per share) of $1.31, exceeding the Wall Street estimate by 5% and rising 19.1% YoY (year-over-year). Increased sales of new products and cost-savings initiatives boosted the company’s bottom line results. Hershey’s management forecasts that its EPS will grow in the range of 7%–9% in 2017, driven by its industry-leading portfolio, marketing strategy, and cost-cutting measures.

By comparison, Mondelēz International’s (MDLZ) 1Q17 adjusted EPS of $0.53 surpassed the analysts’ estimate and rose 3.9% YoY, as lower sales were offset by higher pricing and strict cost-control initiatives. Despite starting the year on a tough note, Mondelēz’s management projects double-digit growth in its adjusted EPS for 2017 on a constant-currency basis.

Mondelēz’s bottom and top lines

Mondelēz’s management believes its new product launches planned for 2H17 and the traction in Well-Being segment is likely to drive top-line growth, which should boost its overall bottom-line performance.

Supply-chain reinvention and the adoption of zero-based budgeting are likely to drive productivity savings. However, the company’s 2Q17 is likely to remain challenged by macroeconomic headwinds in Brazil and declining sales in China (FXI). Meanwhile, softness in the US has further pressured profitability.

Kellogg’s results and bottom line

Kellogg (K) posted better-than-expected 1Q17 bottom-line results on the back of incremental cost savings and a lower effective tax, which offset the fall in volumes. The company’s 1Q17 adjusted EPS of $1.06 exceeded the Wall Street analysts’ consensus estimate by 7% and grew 10.4% YoY.

The company remains upbeat and expects its bottom line to increase in the range of 4.5%–6.1% in 2017, despite marking lower sales. Kellogg projects that tighter cost controls, a recovery in consumption, and a lower effective tax rate will boost the company’s bottom-line performance in coming quarters.

Kraft Heinz’s results and bottom line

Kraft Heinz’s (KHC) 1Q17 adjusted EPS of $0.84 fell short of analysts’ estimate by 2% as a slowdown in consumer uptake took a toll on its performance. However, the company’s tighter cost controls and preferred stock refinancing led to a 15.1% YoY growth in its bottom line.

Given its persisting challenges, Kraft Heinz 2Q17 results are likely to be negatively impacted by weak consumer spending. However, the latter part of the year could benefit from new product launches, as the management expects sales of cost savings to pick up the pace in 2H17.

Continue to the next part of this series for a look at how these four companies have performed in sales.

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