億滋國際 (MDLZ) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the Kraft Foods second quarter 2005 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Kraft Foods Management and the question and answer session. [Operator Instructions] I will now turn the call over to Mr. Mark Magnesen, Vice President of Investor Relations for Kraft. Please go ahead, sir.

Good afternoon, and thank you for joining us for Kraft Foods second quarter earnings call. On the call with me today is Roger Deromedi, Kraft's Chief Executive Officer who is joining us from Europe and Jim Dollive, Kraft's Chief Financial Officer, who is with me here in Illinois. I mention Roger's location today only in the event that we have any connection issues or there is a delay in phone response time. We will be referencing slides during our remarks today, and these slides are available on our website at www.kraft.com.

Our comments and prepar - - and presentation contain projections of future results and are made only as of today's date. Earlier this afternoon, we issued a press release with our results and full year outlook. And this release is also available on our website. Both the presentation and release contain our Safe Harbor Statement, which reviews some of the factors that could cause actual results to differ materially from projections.

Roger will begin today's call with his perspective on our sustainable growth plan progress and key challenges we face. Jim will take you through the second quarter results and an update of our full year outlook. Then we'll open it up for questions. As was the case in the first quarter, we will be discussing our results today on a continuing operations base only, which excludes the results for the divested sugar confectionary business. The sale of this business was completed at the end of the second quarter. At this point, I'll turn it over to Roger.

Thank you, Mark, and good evening, everyone. You know, looking back on the second quarter, I characterize our results overall as mixed, as I feel very good about the progress we've made on our sustainable growth plan, but we did have to manage through a very difficult commodity cost and pricing environment that impacted our financial results. Specifically on our sustainable growth plan, I believe we're doing the right things for the business that will continue to benefit us for the rest of this year and over the longer term. In fact, in the second quarter, progress included a very strong new product results, our positive product mix, continued portfolio transformation, solid growth in developing markets and a continuing on-track cost restructuring program. Overall, I'm very pleased with the progress in each of these areas.

And, in fact, when we began our sustainable growth plan a year and a half ago, it was a year with a very challenging and difficult business environment, and I will tell you the cumulative commodity cost impact on Kraft since 2003 is now projected to reach $2 billion by the end of 2005. Obviously with this magnitude of cost increases, we need to raise prices, and I think we've done so in a very prudent and very very effective way. But I guess as you would expect, growth rates in some of our U.S. categories have softened and in our price increases in Europe have taken a little bit longer to realize, given the competitive and retail environment there.

But despite these challenges, we remain very committed to our sustainable growth plan and we continue to increase our marketing spending to build our brands and the long-term health of our business. In fact, because of the progress against our sustainable growth plan, we are on track to deliver against our previous top line and earnings guidance. Clearly the environment is more challenging to be sure, but we feel good about our second half plans. But before we get into the second half that Jim will talk about; let me take a few minutes to update you on our progress to date.

When we began our sustainable growth plan, our top priority was to improve brand value, or as we defined it: the bundle of benefits delivered versus the prices charged all relative to competition. And I think it's here that we've made very good progress. Last year's new products continued to perform very well and items launched in the first half of this year have been very well received by both our customers and our consumers. In fact, one of our goals for our new products was to focus on fewer, bigger and better ideas, and I think we made great strides in this area.

Among our many health and wellness initiatives, I know that some people were skeptical about our new South Beach Diet products. I think this line represents the right nutrition along with great taste and is very much in line with consumer shift and more balanced nutrition, and I'll tell you the business has gotten off to a great start, both in terms of retail authorizations and initial consumer take-away. In fact, so much so that we project revenues from the line will exceed $100 million in 2005, which is an excellent result, especially since it reflects only nine months of shipments. Importantly, these new product revenues will be highly incremental for us, given the new categories in which they compete.

In our U.S. convenient meals business, our frozen pizza group continues to innovate by targeting popular take-out pizza varieties with DiGiorno Thin Crust, Tombstone Brick Oven and new flavors of California Pizza Kitchen. And our new DiGiorno microwave frozen pizzas, including both the rising crust and the thin crust are also both doing very, very well. Together, these items will contribute approximately $200 million in revenue this year, while also driving positive mix for our pizza business. Also in our U.S. convenient meals group, our new Chicken Dunk and Chicken ShakeUp varieties are helping to rejuvenate our Lunchables brand with the combination of a fun taste and good nutritional profiles, these products represent some of our new sensible solution choices for kids and will add about $40 million in revenues this year.

In our U.S. snacks business, our Nabisco 100 Calorie Packs continue to be highly successful. After launching the line last July, we added two new varieties this year with Ritz Snack Mix and Honey Maid Cinnamon Sticks. Our data continues to indicate that this business has been highly incremental to our current cookie and cracker businesses and has already achieved nearly $100 million in revenues in its first year.

In refreshment beverages, Crystal Light On-the-Go is a simple but very innovative idea; it allowed us to tap into the growing bottled water category. This product will reach $50 million in revenue in its first year and is a key driver for the strong, positive mix we've seen in our beverage business.

And, finally in coffee, we expanded Tassimo hot beverage system from its lead market in France to both the United Kingdom and Switzerland, and Tassimo is projected to exceed $75 million in sales by the end of this year and expansions in Germany and the U.S. are planned in quarter three.

As I said, we set out this year to focus on fewer, bigger and better new product ideas; what we call growth platforms. Overall, our new products are tracking to hit revenues of around $1.5 billion this year, which will be our highest total since tracking this metric. More importantly, the combination of six growth platforms I just described will generate around $600 million of revenue alone this year, or 40% of the total.

We've also delivered well on our goal to improve product mix. Our mix was positive again in the second quarter, driven by combination of higher revenue per pound new product and an increase focus on revenues by both our sales and marketing organizations. In fact, five of our seven segments had positive mix in quarter two. And six of seven had positive results in the first half. Mix was particularly strong in our U.S. beverages businesses, as we shifted to higher value powdered beverages and in U.S. convenient meals due to strong growth from the new Digiorno Pizza items and also Oscar Mayer deli shaved meats.

We also continued to build brand value through our increased consumer marketing spending. End market consumer spending was up around $30 million in the second quarter, bringing our first half increase to around $85 million, and for the year we continue to expect increase marketing spending by more than $200 million. In fact, there are two marketing campaigns I feel particularly good about that have been really instrumental in driving our growth so far this year. In cookies, our new Oreo television and print advertising helped drive Q2 revenue growth of 10% for the brand and in cereal improved Honey Bunches Oat advertising helped - - and along with new product helped deliver over 20% growth in the quarter. And this strong Honey Bunches Oats' growth also helped us increase our overall cereal dollar share by half a percentage point in quarter two.

Our portfolio transformation also progressed during the quarter, as we finalized the sales of our sugar confectionary and fruit snacks businesses and we continue to evaluate other potential divestures, but as I said before, these would primarily be small, non-core brands that represent less than 5% of overall revenues.

In developing markets, we continue to drive solid top line growth. Second quarter ongoing constant currency revenues in developing markets were up 4%, despite a significant impact on our Latin American chocolate business from the shift in Easter. For the first half, revenues were up 9% in developing markets, and growth this year has been particularly strong in eastern Europe, led by gains in Russia and Ukraine.

Finally, our restructuring program remains fully on track and is a critical enabler for us to reinvest back into our business. We announced another facility closure in June, bringing the total announced closures to 16 since the beginning of the program. We also continued our SKU pruning efforts and expect to eliminate an additional 10% of our SKUs globally this year on top of the 11% net reduction last year.

Now, as I said earlier we initiated our sustainable growth plan to prove our overall growth profile in what we projected to be a continuing difficult operating environment, and that's certainly what we've been seeing, in particular with significantly higher commodity costs. With a projected aggregate impact of around $600 million in 2005, the cumulative increase in commodities since 2003 will be $2 billion. While we'd anticipate a higher cost environment, I never expected, particularly from commodities like energy and packaging, to reach this magnitude by 2005. To recover these costs, we need to increase prices on many of our products around the world and from the market data, most other manufacturers and private label have been raising prices as well because of the same cost pressures. The net result is that these higher overall prices have impacted category growth trends.

More specifically over the past four quarters, we have increased prices on many businesses, beginning with cereal in quarter three of last year, and most recently in some of our meat and coffee businesses. Our price increases have steadily been making their way into higher retail prices, both shelf and promoted prices, according to the AC Neilson data. For example in the first quarter, Kraft's average price per pound in our top 25 U.S. categories was up 3.1%. In the second quarter average prices increased 5.1% with higher promoted prices [primorial today] being a key driver of the increase.

As you would expect, these higher category retail prices have had a near-term impact on category growth trends. In our top 25 categories on a pound basis, the aggregate category declined a little over 1% in quarter two, versus growth of 0.3% in quarter one. Specific categories where higher prices led to a slow down in category volume, trends include coffee, nuts and meat. And the net effect of this category volume slowdown offset by the higher prices resulted in weaker growth on a dollar basis as well, with quarter two growth at 2.4%, down from a 3.8% growth rate in quarter one. Although our prices were higher in quarter two, our price gaps generally remained within target ranges, and were able to minimize the share impact during this pricing transition quarter, with our aggregate weighted average share down only one tenth of a percentage point.

I would also point out that the earlier Easter this year shifted about one tenth of a point from quarter two to quarter one, giving the importance of this holiday to many of our categories in the merchandising. You know, our ability to maintain our price gaps is a key difference between the pricing situation this year versus our experience two years ago when price gaps widened, and we ultimately lost significant market share. The impact of pricing actions was very significant this quarter in the competitive European market, specifically in Germany and France.

Beginning with Germany, we increased prices on coffee a second time in quarter two, and key competitors lagged the increase as they did in quarter one. As a result, our ongoing constant currency revenues declined 15% in the quarter. However, by the end of last quarter, key competitors had taken pricing and our price gaps were back within targeted ranges. Importantly, as we get into quarter three, as I said, we'll be launching Tassimo into Germany, which will help differentiate even further our [Jacob's] brand from price-based competition.

In France, our revenues were down about 2.5%, but the situation's a bit different from that in Germany in that private label has taken limited pricing, given the very confusing regulatory environment in the retail trade. While we have strong second half programming plans in France, we remain cautious about the retail situation there. Beyond these two markets, our international business grew, with the remaining developing - - developed market up about one point and developing market up 3.5%.

So in summary, I feel good about the progress we've made on our sustainable growth plan this quarter and how our teams have executed the needed price increases against the higher commodity costs and our actions did help offset so much of the cost increases, which obviously impacted our financial results. For the remainder of the year new products, product mix and increased marketing spending will be key to continue the momentum we built in the past few quarters. Most importantly, I'm confident that steps we're taking will position us well for sustainable growth of a longer term. And with that, let me just turn it over to Jim who will take you more through the details of quarter two and our 2005 outlook.

Thanks, Roger. Looking at the specifics of our second quarter results, net revenues were up 3% in the quarter, including 2.3 points from favorable currency and a negative six-tenths a point from the impact of the divestitures of our U.S. yogurt and desserts businesses. Excluding these items, ongoing constant currency revenues grew 1.3%. Second quarter revenues were impacted by nine-tenths of a percentage point from a double-digit decline in Germany. Additionally, we estimate that the Easter shift negatively impacted second quarter revenues by about seven-tenths of a percentage point. On a year to date basis, net revenues were up 4.6% with ongoing constant currency revenues up 2.8%.

Looking at the components of revenue growth, volume declines impacted the second quarter by 1.6 percentage points and the first half by 1 point. This was more than offset by positive mix of 1.7 points in the quarter and 2.1 points in the first half and by net pricing of 1.2 and 1.4 points on the quarter and on the half. Acquisitions had no impact on the second quarter, as we fully lapped our very fine beverage acquisition from last March. By segment, revenue growth was strongest in our U.S. snacks and cereals, U.S. beverages and U.S. convenient meal segments, driven by new products, the impact of increased marketing and commodity-driven price increases. In total, North America was up 2.3%, despite the slowdown in category trends.

International net revenues were down 1.1% with, Europe, Middle East and Africa down slightly as declines in Germany and France were largely offset by strong growth in Russia and Ukraine. Latin America-Asia-Pacific was also down primarily due to the shift in Easter timing. Looking further at the impact of a few key drivers on our top line performance, the most significant contributor to the volume decline was lower shipments of U.S. ready to drink [aseptic] beverages, primarily our Capri Sun pouch business, reflecting both trade inventory reductions as well as category softness due to increased competition from bottled water. While the business impacted volume growth by over one point, its impact on revenue growth was less significant.

Other key items impacting top line growth include the decline in Germany and the estimated effect of the shift in Easter timing. The balance of our portfolio contributed 0.5 percentage point to volume growth and 3.1 percentage points to revenue growth, reflecting the benefits of both pricing and favorable mix.

Shifting to earnings, EPS was $0.45 cents per share on a continuing basis in Q2, up $0.05 cents from 2004. Earnings growth versus last year reflects $0.03 cents in lower restructuring impairment charges, $0.04 cents in favorable taxes, and a $0.02 cent decline from all other operations. Lower taxes resulted in a second half effective tax rate of 29.4%, bringing our first half effective tax rate to 29.1%. We continue to project the full year tax rate of 31.5%, which implies that second half rate of around 33.5%. The $0.02 cents decline in all of our operations in the quarter includes the higher commodity costs net of pricing, $56 million in higher post employment benefits and restricted stock expense and $30 million in higher marketing spending, primarily offset by the contribution from positive mix in our cost reduction efforts.

Earlier Roger showed the full year projection for $600 million in higher commodity costs. In the second quarter, we experienced $150 million in higher costs, bringing our first half impact to approximately $400 million. Higher Q2 commodity costs resulted from increases in a few key items, most notably nuts, coffee and energy costs, including the related impacts on packaging materials. A few commodities were down in the quarter, most notably cheese with the barrel cheese market down 24% versus last year. Looking at second quarter margins versus last year, our reported margin increased slightly from 14.9 to 15%, benefiting from lower restructuring charges. Margins from operations were down one percentage point due in large part to higher commodity costs net of pricing of nine-tenths of a point. As our pricing catches up to the commodity increases, we expect to recover more of this margin impact.

Other negative impacts in the quarter include pensions and restricted stock expense of six-tenths of a point and the investment in marketing support of four-tenths of a point. As was the case in the first quarter, these impacts were essentially offset by positive contributions from favorable mix and productivity savings.

Turning to cash flow, our first half discretionary cash flow plus divestiture proceeds was $2.5 billion, with $1.6 billion from divestitures. First half discretionary cash flow of $851 million was down $128 million from last year, due to $88 million in higher capital spending and increased cash spending against the restructuring program. Importantly, we continue to manage our working capital effectively with a net two-day reduction in our overall cash conversion cycle versus June of last year.

Turning to our outlook for the balance of the year, our revenue guidance remains unchanged, with ongoing constant currency revenue growth projected at 4.5 to 5.5% on a 53-week basis or 3 to 4% on a comparable 52-week basis. First half growth of 2.8% and a 52-week outlook of 3 to 4% requires second half growth that is slightly better than our first half or in the 3 to 5% range. The factors that would help us achieve this improved second half growth are the continuation of new product momentum, increased marketing support, and the full effect of pricing on revenues.

In addition to the carry-over from new products launched in the first half, we have many new items planned for the balance of this year. These include the expansion of Tassimo into the U.S. and Germany, Good Seasons premium salad dressings, new whole grain versions of Chips Ahoy! cookies and Fig Newton bars, Wheat Thins chips, building on our Ritz chips product line success, and the expansion of our [Klite Sticks] single-serve powdered beverages to Argentina.

Our EPS guidance on a continuing operations basis remains at $1.73 to $1.78 per share. Consistent with our past guidance, this includes an estimated $0.22 cents in restructuring and impairment charges and $0.04 cents of gains on sales of businesses. This guidance does not assume any additional portfolio changes for the balance of this year. There are three primary risks to our earnings as we look at the remainder of the year.

First, we expect the category declines that we experienced in Q2 to moderate as we manage through the transitional pricing period and consumers become more accustomed to new price points. Second, while costs for many commodities have steadied, the outlook for others remains uncertain, particularly for energy and packaging. And finally, further weakening of the Euro against the dollar could negatively impact our results.

On cash flow, our guidance for discretionary cash flow plus divestiture proceeds remains at $4.3 billion. Within this total, discretionary cash flow will be approximately $2.7 billion, and divestiture proceeds will be 1.6 billion. At the end of the second quarter, the cash received from divestitures in Q2 is reflected in our balance sheet as lower debt. Our priorities for the use of cash longer term remain the same, which are to fund acquisitions, return cash to shareholders through dividends and share repurchases and lastly, to reduce debt.

In summary, as Roger highlighted, some significant challenges continued to impact our results in the second quarter. Progress against our sustainable growth plan has helped to offset these issues, and overall we remain on-track in 2005. Most importantly, we believe our efforts and progress this year continue to position us well for long-term sustainable growth.

That concludes our prepared comments. Now Roger, Mark and I would be pleased to take your questions.

Thank you. [Operator Instructions] Our first question is coming from David Adelman from Morgan Stanley.

Hi, David.

Good afternoon. Or good evening, Roger.

Or good night. [Laughter]

Two questions. First, don't you think it's a real stretch after this quarter to retain your existing earnings targets for '05?

Actually, no, I don't, because as I look at the pipeline of new products we have in the back half of the year, what we have in our plan for increased marketing spending, for the remainder of the year, and also I guess as we look at price elasticities and what's happened in [inaudible] pricing, we know we go through some short-term transitional periods that we've been going through in quarter two, and I just feel like as I understand the programs we have in place for the second half, I feel like we're on track to be able to deliver that. You know, as Jim pointed out, there's always uncertainty on commodity costs, and, again, the one that's probably the greatest is where is oil going to go, but [inching] like on barrel cheese today it, dropped from $1.51 to $1.41. These things can change and chance quickly. Coffee's close to $1 now than it when it was at $1.20. So, these things can change as we get into the second half and that's why, given the programs we have and given where some of the volatility on these commodities, I feel like maintaining the guidance is the appropriate thing.

Maybe, Jim, you can help me with this very quick question. Can you help me reconcile the fact that you're talking about at retail in your top 25 categories you saw in the second quarter a 5.1% increase in consumer pricing and yet your revenue - - sorry - - your pricing improvement in the U.S. business in the quarter was only up 1.1%.

Go ahead, Mark.

I mean what you're seeing, Dave, is you're seeing the flow-through of price increases that happened all the way back till the third quarter of last year that have fully made their way through higher promotive price points in a couple categories, cereal being a good example. Also, what you are seeing is you're beginning to see the lapping of dairy pricing last year, so if you look at the total Company, I think the pricing impact in Q1 was 1.6 points. I think in Q2 it was 1.2 points. All of that differential in terms of slowdown was the lapping of last year's dairy pricing. Everything else was up more in Q2 than Q1.

Okay. Thank you.

Thanks, David.

Thanks, David.

Thank you. Our next question is coming from David Nelson from CSFB.

Good afternoon.

Hi, David.

Hello.

Hi, David.

First question is on cheese. Is this the new normal? Is this the new level of normal margins ? Obviously things were down a lot last year, I guess $90 million from the year before. This year they are up almost $40 million. You've got much lower costs just this year in your [taking pricing]. Is this the kind of profit level we should expect here from cheese? And also, it looks like your price gaps are getting a little wider at least on singles.

No, I think as we said, as we went into this year we expected the cheese costs to go down and that we would have some recovery in our margins. We are seeing that. That I would tell you, David, cheese costs have come down quite a little more slowly than we anticipated. Milk, you can follow this very carefully, milk production is very good in the month of May; up 4%. But as you know, demand continues to be strong on a worldwide basis. As I just mentioned to David Adelman, I was very encouraged to see that dairy - - that cheese prices dropped $0.10 cents today down to $1.41. And, I think hopefully we're start reflecting more supply and demand that we're going into. So, no, I think we're seeing again, we will expect to see improved margins as we're going through, but dairy prices did hang up a little bit higher than we thought as we got in quarter two.

So margins are still at a depressed level?

Yep.

And the issue you cited on Capri Sun: you seem to have had a lot of innovation, at least at your Analyst Day you talked about a number of innovations there. But, you cited in your comments some trade destocking. That's something I don't often hear where you're - - in a category where you're doing a lot of innovation, you hear trade destocking. It just doesn't sound good and I'm not sure I understand that.

The- - basically, particularly in a business like where you're doing trade inventory levels are particularly difficult given the size and magnitude of the swings you can get given the promotional phases we get into and particularly around the July 4th period of time, how much you have at the end of June can vary dramatically versus year-over-year, but, no, the biggest impact we had was on the overall category. In fact on, a pound basis, the category is down over 6%, and that was the biggest driver of the shortfall in terms of pounds and the impact it had on our overall business. As Jim alluded to, as we looked at it, we feel good about our innovations, but the overall category seems to be impacted both by the growth and the competitiveness within the beverage market, but most importantly by the impact in water.

I guess on the flip side, David, we feel very good that we're capturing some benefits from water both with our success of our very fine water business with our Crystal Light To-Go, and so sometimes there's a positive coming out of a negative because our positive mix we got in the U.S. beverage group was driven by the fact we saw a lot of Crystal Light To-Go that goes into water.

Right, that's good. Lastly, and is marketing- - talking about the marketing increases. Is it growing as fast as sales? Is it projected to grow as fast as sales for the full year?

We never quantify the total amount, but we are committed to at least at the beginning is spend at least 200 million more in marketing. As you saw in the first half we spent 85 million more. So actually in the second half, you'll see a faster increase in marketing spending.

That will be faster than the top line, David.

Right.

Thank you very much.

Great, thank you.

Thanks, David.

Thank you. Our next question is coming from John McMillin from Prudential.

Hello, everybody.

Hi, John.

Hi, John.

I won't compliment on you your numbers. At least you kind of laid it out for everyone to and see it's been easy to read. It is what it is, and I compliment you on that. Not playing games. Just in terms of, you know, David Adelman asked about your keeping your earnings target, but I guess you're - - to keep the high end of your sales target, you know, the 4% like - - just it's hard with the volumes down this much in this quarter, to see how you could possibly do the high end of your sales guidance. So kind of why keep that?

I guess, John, as we look at the keys, you look at quarter two year to date ongoing constant currency revenues, which is the metric we're talking about, were up 2.8% and importantly, you know, Easter timing had a shift of about 0.7 points, and so as we looked at - - if you took out the Easter shift, you're around 2% on the metric in quarter two when we know about the significant impact we had on the transitional pricing and so forth, to achieve that 3 to 4, yeah, we have to do 3 to 5 for the second half. That's where you can make your own projection where you think we'll come out on the second half.

But as we looked at - - again as I said to David, the pipeline of new products we have, what they do in terms of both the revenue mix and the mix improvement we'll get out of those and then also the full effect of pricing as it flows through. And importantly as some markets that had very big challenges in quarter two, like the Germany where we were down 15%, you know, already as we're getting into quarter three, that's the business is performing closer expectations again. So this is where as I look at it, it's not unachievable and given,- - and can be realistic when you look at the revenue realization we'll get.

Even if we kind of account for Easter and do everything you want, you know, even take Germany out, it was a noticeable sales deceleration that I don't know if you saw second quarter to first quarter, that I don't know if it was properly conveyed in May or you knew about it. Just kind of in terms of what changed since that May meeting that surprised you the most, one or two things?

Well, I'll tell you what, as we went through quarter two, and I'll tell you as you as you look at both promoted price points and I think one of the things as we - - what we're quoting here is the average - - the 5.1% average price increase. As we went through the quarter, prices continue to rise and importantly around Memorial Day we saw promoted price points up even more so and so that was, as we went through, we saw the impact of the higher promoted price points, so I think that was the difference as we went through quarter two.

You didn't get enough retail cooperation with lower price - -

No, actually, it's interesting. What you're finding is back to, when we look at the total merchandising, quality merchandising points, was actually up for Memorial Day. What we saw was we got - - that's a promotional lift because the promoted price points were at higher levels and not surprising that as the price points rose, promotional period [inaudible] you got a little bit less lift. So that was the impact we saw around Memorial Day.

Some of it's confusing because while your price points are up you took them down last year at this time, so it's - - I don't know if we have to go through two years of data to kind of get what can be properly viewed as category changes and price points and lifts up in the category and down, but it just seems to me big picture that every time you try to get some margins, your volumes go down. And kind of vice versa, that you can't kind of walk and chew gum at the same time. You can't - - sustainable growth is not lower tax rate and so forth. It's getting margin growth and volume growth the same time, and it seems like whenever you try to get one, you lose the other. Do you think - - do you see my point?

No, I understand your point. I think it varies by category, and this is where in some categories that's somewhat true, but we need to do a better job of building our brand value equation in terms of the quality of our marketing, but in other categories, such as frozen pizza and so forth, we've been innovating, we've seen terrific both revenue and mix improvements driven by those and even as we got into higher price points. So I think it varies by category, and I won't generalize it and the is onus on us is to continue to build brand value, which we're doing with continued investment in our marketing in terms of continued investment in new product innovations.

Just my last question, because you made it clear that your focus is on the divestitures and fewer, bigger, better, and all of that. Obviously there's - - there's some acquisition talk now and I don't want to get specific, but some people feel that you're handcuffed as your 84% owner kind of contemplates spin-offs and so forth. Do you feel handcuffed towards acquisitions now in this period, and kind of what is your willingness to maybe change some of the cards in your hand via acquisitions?

I think, John, as we said before, we continue to explore all types of acquisitions, whether it be tack-ons, or even larger ones. We are focused, as we said, within categories that are within primarily our global cores or other growths within our regional cores and we will continue to do so and look at them in a very disciplined approach. Our focus has been things to increase our scale on an international basis, but beyond that, I can't comment further and do I feel handcuffed ? No, I think we have considerable firepower to do what we need to do when we find the appropriate acquisitions.

Okay. Thank you.

Thanks.

Thanks a lot.

Thank you. Our next question is coming from Eric Katzman from Deutsche Bank.

Hello everybody. Hi, Eric.

I guess John's question could have been a bit more specific. Are you in France or are you in Germany at the moment?

Actually, if you want to know, I'm in Buccharest, Romania.

Okay, fair enough.

Actually I'm in - - we've had, as I mentioned in our webcast, we're having terrific results in eastern Europe, it would be in Russia, Ukraine, but also in Bulgaria and Romania and having a chance to sort of talk with consumers and visit with retailers and so forth.

Okay. I guess kind of following up on some of the other questions, you know, when we were at your headquarters in May, towards the end of the meeting I was pretty kind of specific with you about whether you kind of expected better price realization in the second half, and you were kind of fairly confident of that and at the same time, you kind of said that, even in Europe where I was kind of really surprised, that private label was following you, and yet the dynamic that kind of John talked about, which is kind of an industry dynamic at the moment with pricing leading to lower volumes because maybe pricing - - maybe private label is not following immediately. You know, it doesn't seem like it's playing out like you said, so maybe you could kind of comment on that a little bit more specifically.

No, actually, I think Eric it is playing out as I had expected, maybe to a greater magnitude on some of the impacts we saw in some of the categories themselves. You know, in terms of my confidence of getting pricing realization, that is occurring and in fact that's why as you look at quarter two, pricing impact in our overall revenue growth is 1.2 points; and initially you may look at that and say it's even less than quarter two, but when you dissect it into the pieces, we had a huge year-over-year actually decline in pricing rosation in cheese because we had a big price increase in cheese year-ago. So we are getting pricing realization in quarter two and that will be sticking to the ribs as we go in to quarter three and quarter four. Importantly, to the question of similar price increases by competition and by private label, as I said, we - - we have maintained ourselves within our price gaps we had set. Overall, as went through this transition period, in many cases we were the leader in pricing in many categories, to basically maintain our share being down a tenth. I feel that like the group executed the pricing in a very good way.

Specifically, for instance, in the Germany, we took a price increase at the beginning of the year and we took a second one in quarter two. In both cases, as has been typical in the German market, competition, this includes both branded competition and importantly hard discounters, did follow with similar price increases, given the cost increases they were experiencing, but as they have done in the past, they have lagged after us. I guess what I feel good about in Germany is we've exited the year - - exited the second quarter our price gaps are within the targeted ranges. Actually as we look at whether it be markets like the UK and other parts of western Europe, being able to manage through the pricing and get it affected the way we thought we should. The market that actually is probably the most confusing right now is France and it's just a crazy retail environment after the [login law] and the repeal of that and then the [law log of] Jacob that's coming and the confusion that's causing with the retail trade, it just led to a lot of uncertainty on retailers and what retail prices are doing relative - - private label there.

So, no, I think it's actually playing out as I had expected it, a little more impact on the category short-term, but as we look at our modeling, you know, consumers will pass through these prices and we expect demand to be reasonable as we get into the second half.

Okay. Let me follow up and then I'll pass it. With Jim, you know, in terms of the second half forecast, I understand that obviously commodity inputs are a pressure point for you and for everybody, but given - - I mean it's still early in the season, but with kind of a questionable yields and drought in the Midwest, are you - - did your plan kind of assume higher grain and oil costs, oil seed costs as opposed to just talking about packaging, and is that really going to make a difference in terms of the mix of input costs?

Well, we - - I can't get into specific forecast, but clearly some of those costs with the drought in the Midwest have gone up a bit. Their impact is not as significant on us as some of the other components like coffee, like packaging material. Although those markets just like we saw the cheese market move down today and the coffee market, the grain markets in the Midwest with rain in the forecast also had some fairly sizable declines today as well.

Okay.

- - I guess I would say on top of that, as you know, on different commodities, we do take forward positions and take coverage in different regards, so I think for the balance of the year, while there may be some impact, it would be reduced by whatever coverage we have.

Okay. So where you - - basically what you're saying is where you can take coverage, you, you have kind of done so, but the wild cards are stuff that you can't really, that you can't really cover, which is I guess stating the obvious.

Right.

Yep.

All right. Thank you.

Thanks a lot, Eric.

Thank you. Our next question is coming from Chris Growe from AG Edwards.

Good afternoon.

Hi, Chris.

Hi. Just to follow on some of the questions of the price and mix realization, I guess I'm trying figure out what's going to change in the second half. You have this confidence level in, say, your marketing and your new products that we should see the categories be less weak or therefore growing in second half amidst this higher pricing? And also I'm curious why price and mix was not more beneficial to earnings. I realize the cost constraints. Is that the quick answer to that question?

Yes, the second part, the answer is yes. And go back to what I said, and I guess it's me looking at the plans we have for the second half and the pipeline of new products that are coming both out, but also the carry-over effect from the first half of the success we've had on our growth platforms, I feel very good in that regard. Also as we get into second half, what we have in place and on quarter two, we were basically [inaudible] down a tenth on share. We've been doing better in that in previous quarters and I think what we're going to spend terms of increased marketing, as we've gone through now, I guess I'll call it the transitional quarter of getting prices up, we'll do better on share as well so. Think about that balance of getting to the revenue number, is that combination of category and share. So I feel better in that regard. So those are the things that drive it along, as I said, with the increased marketing spending as we get into the second half.

In the first quarter you talked about a reserve, if you will, taking some money and putting it aside for marketing behind, not only Tassimo, but any of the new chocolate-based biscuits. Is there any sort of update on - - obviously we've heard about Tassimo, but is there any update in terms of the return or how that money's being spent in this quarter?

Again, we feel, as you mentioned, we feel good about our progress on Tassimo and that's why we're expanding into more markets. Importantly, I think we feel like we have the right bundle that addresses consumer needs there in terms of what they are looking for on milk-based beverages in combination with coffee and tea and so forth. On the chocolate products, continue to have good success with those and many of those were in and out items that we sold through very quickly, so we've been very encouraged on that and continue to expand more of those products and you'll see more in the second half of the year.

Then my last question, then, is on western Europe in general and the extent to which - - I should say on international in general. The extent to which you, have was it 9% growth in developing markets in the first half? Is that a good run rate for the second half of the year and what I'm most concerned about here is western Europe potentially working against that and bringing your overall growth down. Any comment on that?

It is interesting, different countries at different times have different results, but I know I feel very good - - I'll just sort of rattle through regions in the world in developing markets. Part of the reason I'm visiting in eastern Europe right now is we have continual strong results across eastern Europe. Like I said, Russia and Ukraine doing very well, Romania, Bulgaria doing well. I had a chance to visit some of the easter Adriatic markets as well and even in the middle east, we had a good quarter in quarter two. So this is - - we feel very good about the market growth or revenue growth we've had there.

Brazil, we've had some challenges in quarter two given the shift in Easter, and actually overall our business in Brazil year to date is up slightly, so this is where I think Brazil and Latin America will continue to see improved progress. We've had good progress in Southeast Asia. China, as we mentioned before, has been a challenge for us because the increased in competitiveness in the biscuit category, but we have a strong pipeline of new products coming out in the second half and feel good about the improved progress there. So, as we think about developing markets being in that high single digits; I think that's a good run rate going forward.

Thank you.

Okay. Thanks so much.

Thank you. Our next question is coming from Jonathan Feeney from Wachovia Securities.

Hi, Jonathan.

Hi, Roger. Hi, everybody.

Hi.

Couple of questions. You know, when you - - I know people have asked this a grillion different ways, but let me ask it pretty simply. You - - the first quarter you did a good job of, I guess, funding some increased volume growth with increased marketing. In the second quarter you did that in a couple of spots with Oreos and Honey Bunches of Oats. But across the board, the pricing that came with the increased marketing didn't really stick. Do you plan to take - - was that consist went your expectations and if not, do you plan to kind of [rejiger] that and maybe take down pricing and drive a little bit more volume in the second half of the year across the portfolio?

We will always continue to look at that balance of - - in our brand value play in terms of how we're driving the overall growth, but we don't see a need to dramatically change what we're doing. I think if you looked at quarter two there was - - we went through some transitions, particularly in some categories and particularly what was impacted us, like what would be the coffee category that was actually in pound basis down nearly 10% in quarter two. So some of this is just consumers transitioning through the higher prices, but we don't see a major shift in what we're doing on marketing. Again, I think as we look at it, our commitment to spend at least $200 million for the full year and spend 85 in the first half there will be another 115 million of consumer marketing in the second half. We feel good about where we're going to be spending that. And I think again as I said about the new products and what they are going do in terms of driving revenue mix is going to be very strong.

You've had some pretty aggressive SKU reduction here that's impressive as far as improving the efficiency. If you're down a total - - if you're down 10 off a down 11 year - - maybe have I that backwards, how much do you plan to be down over the next couple of years?

You know, we have, we have a whole program under the umbrella of what we call decomplexity, which is to simplify all of our business systems, would be business processes, or what's in our manufacturing processes, and SKU reductions is one part of that whole simplification effort. We see that we can probably keep continuing to reduce SKUs. We're getting smarter about which ones are driving our business and interestingly, while there is a need for us to offer different types of packages and formats for different channels, whether it be for a club store versus a traditional grocer versus dollar store, we're finding more efficient ways to do that and simpler ways to do it. But at the same time we've gotten smart better what to offer. In many cases, what we're finding is our volumes actually improve as we reduce the SKUs because we actually have more of what consumers want on shelves and suffer less out of stocks, and so. We've just gotten smarter how we manage the whole thing. We see it being probably continuous, whether it be 5 to 10% going on for several years going forward. So while it's a hard thing for us to quantify, it probably has some impact on our volumes obviously, but it's another key driver of our improved mix as well.

Thanks. If I could just ask one quick one of Jim. When you talk about the dairy benefit you got, could you give us a ball park quantification of what that, in dollars of what that barrel cheese decline helped you, and how is that consistent with your budget for Q2?

Well, as we said earlier, the barrel cheese market was down I think 24% year to year and it was down another $0.10 cents today. We said, I think at the beginning of the year, we expected, and, Mark, help me out here, it was about $0.07 cents on EPS impact on the cheese change year to year, and Q2, where we peaked last year is probably the strongest impact. I think it's , Mark on the order of 50 to $60 million of improvement, so $0.02 to $0.03 cent impact improvement in Q2.

Great. Thank you very much, everybody.

Take care, Jonathan.

Thank you. Our next question is coming from Christine McCracken from FTM Midwest.

Good morn - - afternoon.

Good evening, Christine.

Just on coffee, you know, you obviously have talked about the cost pressures there and, but at the same time you've had some success with Starbuck's and Tassimo. Can you talk about your plans for launching in the U.S. in this very high cost environment and whether or not that's played into how you spend against the launch of that product?

Actually it's, you know, as you look at the value of one of the great things about Tassimo, the coffee itself as a cost of the overall products is a much smaller percent than when you're selling a three-pound can of coffee, and so it actually - - the higher coffee price environment is not one that's going to discourage us in what we're doing. Actually it encourages us because in a sense it decommoditizes what is we're doing in the coffee category. Importantly, I think what it allows to us do is to sell things consumers are looking for because it's not just coffee, but - - the tea just with milk in them and using our proprietary dairy technology, we've got - - be able to get that frosty latte and cappuccinos that, like people are used to in their coffee shops, is what people are looking for. That's what where we deliver the benefits they're looking for at a very reasonable price at home. So I think it's actually the right environment to come with Tassimo.

And I assume it's working similarly well in Europe?

Yes. As I say, we continue - - France was our lead market. We've learn a lot. I think I described a little bit when we had various meetings that we actually had a unique market research technique because we actually created a test panel of consumers who had within their Tassimo machines mobile phones that called our computers every time they made a beverage, and so we actually knew the time of day and what beverage they made at that time of day and we've learn a lot in terms of how to make sure they have the right variety of flavors in stores and where to target the different times of day and it's been a terrific learning experience. We've applied that as we've gone into Switzerland and the UK and have had success in those markets and continue to apply those learnings as we go into Germany and the U.S. later this year.

Okay. Just one area that you've touched on in previous conference calls and in process meats with the commodity cost pressures there were an issue for you earlier. With the cost declines we've seen lately, specifically in bellies; are you seeing any improvement in margins there? It didn't show up in - - it seems in segment operating margins and I'm just wondering what's the disconnect there?

Jim, you want to take a shot at that?

Yes. Actually I feel very good about where we are with some of our the meat businesses, particularly on the slice pack business. While we certainly had higher costs on the meat side, some of the innovations we've done, particularly on the deli selects combined with some additional marketing support have really helped drive that business, so despite the higher commodities, the cold cuts business is doing quite well. The meat business you referenced, pork bellies for bacon, we actually do move that price fairly regularly depending upon how the underlying commodity goes, and the objective there is to protect the margin overtime and that in fact continues to be the case on the business. So overall, Oscar Meyer business had a very good second quarter.

And again, as Jim was saying cold cuts, gained nearly two share points, so again that combination of what we're doing both on the existing packages , on the zipper packs and very importantly the deli shaved has all done very well for us.

Going forward with the commodity cost declines that we've seen, you should see more margin improvement as we go into the second half?

That's our expectation in certain categories, but, again, we will be very cognizant of our price gap targets and make sure we maintain the right price gaps.

Thank you.

Thank you. Our next question is coming from David Driscoll from Smith Barney.

Hi, good afternoon, everyone.

Hi, David.

Jim, can you just give us a little bit of insight on net interest events going into the final two quarters of the year?

Obviously with the proceeds from the divestitures, our debt level has come down quite a bit. That will have a bearing on interest expense as we - - for as long as we continue to operate with those lower debt levels. Short-term interest rates have moved up quite a bit over the last year. I think you've seen that, so that will have an impact, but our short-term debt level is down to less than $1 billion right now. You put all that together, and you can expect us to see less than a - - actually a slight decrease versus where we were prior year for the balance of the year, despite having a slight increase for the first six months of the year.

So that decrease should be relatively evenly spread over Q3 and Q4 with no one quarter showing a much higher interest number than the other?

I haven't looked at it that closely, but that would be a fair assessment. In terms of the remaining cash flows, we are skewed a little bit more to the fourth quarter, so that will have an impact on bringing down the debt levels as well. Third quarter will have the tax payment associated with it for the - - for the divestitures, and that will affect the third quarter cash flow number.

All right. So, you have a modest benefit, then, on the interest expense side versus where we've been trending on a run rate basis in 1Q and 2Q. The EBIT margins then - - when I looked at the actual results for the quarter and for the first quarter, operating margins were - - they'd taken very significant hits: 15% in the first quarter, 15.7% in the second quarter, excluding one-time items. What, then, does your guidance imply - - can you do the math for me and tell me what the once - - what's your EBIT margin are, kind of collectively in the back half of the year, because it would seem that they have a fairly significant improvement in it.

Well, we certainly - - just given the guidance that we've provided, we are anticipating our margins to improve in the second half of the year. And that's just evident from the - - from the overall metrics. Now, I would say that the things that we've mentioned in terms of our outlook: successive new products, in terms of the pricing taking effect, and a less onerous commodity increase versus what we've seen in the first half will all contribute to that improvement.

Then I guess the final question I would have is to Roger. In the cereal category, this is one where General Mills was trying to lead a price increase and has lost a significant volume share to competitors which would include Post. I don't think many people out there would really grade the cereal category as highly successful in getting the the price increase that would otherwise seemingly be warranted by the increase in cost. In this category, that is a reasonably strong branded category. I'm going come back to you, Roger, and ask you why you feel so confident then that the price increases in many other categories that Kraft has that don't appear to be as well branded as cereal is likely to result in a real positive outcome.

Well, it's interesting as you look at quarter two in the cereal category. The category itself was up around 3%. And importantly even on pound basis, it was up a couple percentage points and as we mentioned, we gained about half a share point. And so I think it comes down to different competitors effect pricing in different ways, so, again, as I look at it, there has been some pricing that's been achieved in the overall category and, again, it depends on how competitors are effectuating that pricing and what they have in the rest of their, as we say brand value equation.

Okay. Very good. Thank you very much.

Thanks, David.

Thank you. Our next question is coming from Terry Bivens from Bear Stearns.

Good afternoon, everyone.

Hi, Terry.

On the currency risk thing, Jim, that you mentioned, I assume you're using spot rates right now as the basis of making that comment.?

Pretty much, although it does vary with any particular currency.

Well, with regard to the Euro, maybe, is a good way to peg it. Are you kind of looking at where that rate is now, and you're okay with the guidance so long as rates between the U.S. and the Euro remain in kind of the range they are now, is that the right way to look at it?

That's a fair assessment, yes.

All right. And one more question, just on this entire price and volume mix, Roger, as I look at green coffee costs coming down, I think you referenced the May report on milk production. The June report was even more robust, up 5%. Is it realistic to think that you can hold to the current level of pricing in those two important lines?

Well, this is where I guess I'll start with cheese and we manage the cheese price I think very effectively both between shelf, but also very importantly with promoted prices. And I feel good as the prices come down and as the group manages through that they were able to continue to improve their margins as we had expected to do so as, through their judgment of feature prices and so forth as it comes down again, depending on the magnitude of how much it declines.

In coffee, it's the same thing in terms of where we stand, and this is back to how long everyone has in terms of their weeks of supply going out and what their overall cost structure is, but everyone tends to have forward positions in these commodities and so while we're seeing - - some coffee coming down, it's not going to be effecting pricing immediately. The question will become where do coffee prices go and more importantly - - and we'll probably see more of the Christmas time than say in quarter three.

Okay.

Again in, this range, we're in this dollar-plus, I think we've taken pricing that's been necessary to be in that dollar-plus sort of price range for coffee.

Several questions have kind of centered around the notion that your second half guidance now I guess to some people appears somewhat optimistic, but are you factoring in there that we may get a period where your retail price, particularly as we look at cheese, particularly as we look at coffee, may go through a period where the raw material cost is coming down, but you're remaining a bit more sticky at the retail level? Is that a fair comment?

You always have some of that, but that's not a key overriding assumption for us for our second half. It's really driven by the pricing that we have taken as importantly as what we're doing to drive our business ourselves, which is the new products and marketing spending we're putting behind our businesses. Okay.

Fair enough. Thank you very much.

Thanks so much, Terry. Take care.

Thank you. Our next question is coming from Pablo Zuanic from J.P. Morgan.

Hello, everyone. Jim, just one specific question regarding EBIT margins across the seven groups. About two years ago you said that EBIT mar - - that price gaps for all your categories were not sustainable and that hence EBIT margins were not sustainable. Now, if I understand correctly, you said in the case of cheese you're still in the gross margin levels. Just give us a a sense for the seven groups briefly; where are you in normalized margin levels, where are you depressed, where are you at peak and related to that, where you see the most outsite for margins and where you don't see much margin upside.

Well, it would be a little onerous to go through all of those categories, but let me give you an overall sense where we think we'll see the improvement. Clearly as the margins have been impacted by the commodity cost, net of the pricing actions, where the commodities have been most significant have been in categories like coffee, like cheese to some degree, certainly on nuts, and as Roger mentioned earlier, the European businesses have also been impacted. Those are the areas where you would expect to see the recovery. Longer term, we do expect our margins to improve, because we don't expect the commodity cost challenges to continue at the pace they have been continuing, and that would allow our productivity programs and the other initiatives we have to help build that available profit margin.

The other thing I guess I would add on top of that, Jim, is you recall the year-over-year changing impact we've had from both post retirement benefits and pension, in particular, and also restricted stock, some of that which have been head winds with us will be obviously changing as we go forward as well.

Okay. That's good. Thank you.

Thank you.

Thank you. And our next question is coming from Tim Ramey from D.A. Davidson.

Good evening.

Hi, Tim.

Just trying to reconcile the currency outlook to kind of follow on to Terry's question. Do you have a specific point of view as to - - not the currency, but what currency impact will likely be to your business and the two halves that's - - it was almost all of the sales growth year to date if you just isolate it on one item.

Well, normally we - - the number that we quote will be cost in currency growth and on that basis we have seen the revenues continue to increase. The currencies that have been the strongest beneficiaries for us have certainly been the Euro, and the Canadian dollar has also been the other major currency that has played well, although we have seen favorabilites coming from some other currencies like in Brazil, Poland and a few other locations.

Those have to be negative in the two half, don't they?

Not necessarily negative, but less of a positive because we're going to start to compare ourselves to a stronger prior year period.

And, Tim, maybe just to clarify some numbers on the first half - - so our first half of the report of revenue growth is 4.6%. The currency contribution there is 2.2, so I don't want to you put the currency of 2.3 against our - - apples and oranges. The 2.2 currency would be against the reported revenue of 4.6.

Got it. Thanks.

Tim, just as Jim said, the reason why we quote a constant currency ongoing revenue number is to sort of look at the business excluding these effects. As Jim said, year-over-year, you're going have less of an impact maybe whatever on the Euro, but there are some currencies like the Brazilian the Real and so forth who have all the strength in some versus last year as well.

Terrific. Thanks.

Thank you. Our next question is coming from Ann Gurkin from Davenport.

Hello.

Hello, Ann.

Just one question left. I wondered if I could get a progress update on the sale of non-core brands, and also in your May meeting you talked about changes to your distribution system that you're maybe testing right now.

Sure. In terms of - - I can't be more specific other than I will tell you that we are under way on several businesses that we're looking at potentially putting up for sale. We're doing the finishing of internal evaluations and insuring that we're going make those sales at appropriate prices for shareholder enhancing for us, but you'll see some progress against those in both quarter three, and very definitely by the end of this year. And, again, as you have said they are sales, call them non-core brands representing less than 5% of our revenue, so keep that in perspective.

Relative to some of the things that Brian Driscoll talked about at our May meeting, we continue to test combinations of our distribution systems in terms of warehouse and DST. We continue to see good success as we can leverage in and build even better displays, leveraging our DST system, carrying through some of our warehouse items. I guess I'm encouraged on the progress we're making there. We need to put a lot of appropriate systems in place that we can manage that appropriately and not do any negative impact and on the question - - Brian, can you do that without hurting our DST system and we think we can and I think the testing is showing that we can, but there's more work to do on getting system in place before rolling it out more broadly.

Okay. Thank you.

Thanks so much, Ann.

Thank you. Our final question is coming from Evan Morris from Banc of America.

Hi, guys. Thanks for getting me in. I'll just make it quick then. Assuming no change in the commodity outlook or FX from where we are, what level of price realization do you need to hit the bottom end of your guidance, if we were to stay in sort of this, what is it 1.2 percentage points that you got in the second quarter, if we were to see that , or just the slight increase in the third and fourth, could you hit the low end of your range, or what do you need get there?

Without being specific, again, as you think about that 1.2 that we got in quarter two, and actually when you look year to date we're at 1.4. Again, what have you is the year-over-year effect of dairy being a, "negative" on the year-over-year change because again dairy prices were very high last year in quarter 2. But basically as you look at the year to date, if it's in that range, probably a little bit higher than that, we can be back in that 3 to 5% for the second half of the year. Obviously importantly though, we can't - - we do - - our expectations is volumes will not be as negative as we'll be going through the transition of higher prices, so as you saw in quarter two, the negative 1.6 on volumes, but, again, for the quarter - - I'm sorry for year to date, we're down 1. So those are some of the dynamics you have to be at that 3 to 5% for the second half.

I guess just a follow-on on that. The thing I'm having a tough time reconciling is when I look at the AC Neilson data and, again I understand that's only part of your business, it shows the level of promotional activities, just talking for you specifically has picked up. The amount of volume has sold on some sort of deal, and yet volumes were still down pretty meaningful in a lot of categories due to the price increase. I guess I'm having a tough time reconciling how that reverses itself. If your need to get a hire level of price realization, it means you have to pull back on the promotional activity, but then what's going to stimulate the volume growth?

Well, no, let's clarify something. As you look at the Neilson data, one of the [inaudible] point is the data we quoted is including Wal-Mart, so - - three outlet plus Wal-Mart, so we are including Wal-Mart in our data. Importantly as you look at that, what we're seeing is, yes, the amount of quality merchandising points has been improving, but what we're getting is less lift off the higher promoted price points, but what does change is consumers get used to higher price points. Good example on coffee, first time they run into a higher price point on coffee, they have a little bit of, call it sticker shock, when it comes down to buy coffee again and they see it basically the same feature price as they saw in the previous quarter, they move on and get used to that price and purchase again. So that's the expectation you get in the second half and that's normal consumer behavior.

Okay. Thank you.

Thanks so much.

Thanks.

Okay. Thank you all for participating in the call tonight. I hope you all have a good evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.