億滋國際 (MDLZ) 2009 Q1 法說會逐字稿

Good day and welcome to Kraft Foods' first-quarter 2009 earnings conference call. Today's call is scheduled to last about one hour including remarks by Kraft management and the question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Chris Jakubik, Vice President Investor Relations for Kraft. Please go ahead, sir.

Thanks, Brandy. Good morning and thanks for joining us on our conference call. With me are Irene Rosenfeld, our Chairman and CEO, and Tim McLevish, our Chief Financial Officer. Our earnings release was sent out earlier today and is available on our website, KraftFoodsCompany.com. We've also made available on our website a set of slides that we will refer to during our prepared remarks.

As you know, during this call we may make forward-looking statements about the Company's performance. These statements are based on how we see things today, so they contain an element of uncertainty. Actual results may differ materially due to risks and uncertainties, so please refer to the cautionary statement risk factors contained in the Company's 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements.

Some of today's prepared remarks will include non-GAAP financial measures and you can find the GAAP to non-GAAP reconciliations within our news release. Today Irene will lead things off with an overview of our Q1 results in 2009 outlook and Tim will highlight our financials and review the results for each of our business segments. Afterward we'll take your questions. With that, I'll hand it off to Irene.

Thanks Chris. Good morning. Earlier today we reported a very solid start to 2009. The confidence I expressed in our business momentum during our January call played through in our first-quarter financial results. As you know, we faced an extremely challenging economic environment. Despite that, we remain on track to deliver our 2009 guidance and to complete our turnaround.

Our management team is successfully navigating through the abrupt shift from a period of cost spikes and unprecedented pricing to an environment of exceptionally weak consumer confidence. We remain focused on flawlessly executing our plans while improving our cost profile. We're using those savings to both build our brands through investments in product quality, marketing, and innovation, as well as to invest in our sales capabilities to improve retail execution.

Additionally as we discussed at CAGNY, we're leveraging our portfolio around the world by focusing our investments on priority categories, core brands, and key markets. We're driving profitable growth in the categories that matter most. We're also pruning less profitable product lines to further improve our product mix. As a result we delivered solid gains on both the top and bottom lines.

Organic net revenue grew 2.3% and that includes a negative impact of about 1.6 percentage points from two things -- the shift of Easter into the second quarter and the targeted discontinuation of less profitable product lines. Pricing continued to be the main driver of our revenue growth, but volume mix improved sequentially from Q4 and I'm pleased to say it beat our expectations.

At the profit line, operating income margin increased 290 basis points to 13.5%. That was also stronger than expected. Both gross and operating income margins increased for the total company with contributions from nearly every business. Even adjusting for the absence of restructuring program charges, margins still increased significantly. They were up about 170 basis points over last year's ex items margins.

So we remain on track to deliver our 2009 guidance. From a topline perspective, we're still targeting organic revenue growth of approximately 3%. As we said in January, we expect the effect of pricing actions taken last year to contribute to more than half of this growth. As you recall, we priced aggressively in 2008 to protect gross margins in a rapidly rising cost environment and we will begin lapping those pricing actions in Q2.

In addition, in the second half we'll start to lap the impact of the discontinuation of less profitable product lines and the elimination of less productive trade programs. As a result, going forward we expect vol/mix to turn positive and to contribute to further margin expansion.

On the bottom line that, in light of our strong Q1 operating performance, I'm even more confident about our outlook for the balance of the year. Having said that, at this time we believe it's prudent not to raise but rather to maintain our guidance because of the continuing strength of the dollar and the uncertain economic environment. We will deliver diluted earnings per share of $1.88. This represents double-digit growth versus our 2008 ex items EPS on a constant currency basis.

In the broader context of our three-year turnaround, we've continued to make steady progress toward our ultimate goal of sustainable, profitable growth. For 2009 our focus is on expanding profit margins and on growing market share. As the year unfolds, we expect market share to improve as we lap last year's pricing actions and benefit from continued investments in our brands and sales capabilities.

Volumes and product mix will strengthen as we continue to focus investments on priority categories, brands, and markets. And the leverage from improving vol/mix trends and additional cost reductions will further expand margins for the full year. In sum, despite the current economic challenges, I believe the investments we've made since 2007 are serving us well. They will enable us to emerge from this environment an even stronger company. I remain confident in our ability to deliver sustainable, profitable growth. Now I'll turn the call over to Tim.

Thanks, Irene, and good morning. Let me start by saying I'm quite encouraged by our financial results on both the top and the bottom lines. In terms of our topline growth, as you can see, organic growth in Q1 was 2.3%. This quarter was our most difficult comparison because the majority of our reporting segments were adversely affected by the Easter shift and several saw the impact of targeted discontinuations of less profitable product lines.

Excluding these factors, organic growth would've been about 4%. Higher pricing drove 5.7 points of revenue growth, reflecting the cumulative effect of the cost-driven price increases we took last year. At the same time, vol/mix in the quarter was down about 3.5 points versus the prior year.

At CAGNY you may recall we estimated a Q1 volume decline of about 5%. Our volume came in stronger than we had expected for two reasons -- retailer inventory reductions were less than anticipated, and several of our priority categories turned in better-than-expected performance. As we look ahead, we expect the contribution from pricing to moderate as we lap pricing actions taken last year. At the same time we expect vol/mix to turn positive beginning in Q2 and to be a significant contributor to higher earnings and profit margins.

No doubt you've noticed that we're now combining volume and mix in our reporting. We're combining them because they are so closely interrelated. Either figure taken alone can be misleading because it tells only half the story. In addition, it's consistent with our long-term growth model. The underlying premise of that model is that we expect pricing plus productivity to cover our input costs while volume growth and stronger product mix will leverage our overhead costs to increase profit margins.

We're making the appropriate trade-offs on this front and the successful execution of our 2009 plans will result in improved product mix that will be a significant contributor to earnings growth. Here's why -- as we continue to focus our investments on priority categories, core brands, and key markets, we'll see the benefit in improved volume and mix.

Of course, as we discontinue less profitable product lines and cut inefficient trade spending, we expect some hit to volume, but the net of these actions will be a positive impact to mix and profit margins. As a result, we'll report and focus our analysis on volume and mix combined.

Turning now to slide 10 and the drivers of Q1 earnings per share, as you look at this chart, there are several things I'd like to highlight. First, the $0.06 of growth from year-over-year operating gains. This reflects our successful investments in brand building and sales capabilities, and we achieved this operating gain despite headwinds. They included unfavorable pension costs of $0.02, another $0.01 of cost from the pistachio recall, and the spending on our 2009 cost savings initiatives that we're now treating as a regular cost of doing business.

All things considered, a very strong contribution from operations and we have more cost savings ahead of us. We had a $0.03 favorability from hedging activities. Most of this was expected -- the resulting benefit of having booked unrealized losses in Q4 last year. The rest was a mark-to-market of new positions that will be offset in subsequent quarters later this year.

Finally, taxes were an unfavorable $0.01 year-over-year. Our Q1 effective tax rate was 33% compared to the 31.5% we expect for the full year. This is due to the timing of certain discrete tax items. In the end, we reported a 15% increase in diluted earnings per share, or 29% on a continuing operations basis.

I'll take a few minutes now to share some highlights of our business segment results. I'll start North America, where investments in focused categories and sales capabilities drove solid gains. As you can see, organic growth in Q1 was 1.3%, however it would have been 2 points higher if not for two factors -- the shift of Easter into Q2, which affected most of our business units; and the targeted discontinuation of less profitable product lines that we've talked about before.

Pricing contributed 4.5 points to revenue growth, reflecting the cumulative effect of the cost-driven price increases we took last year. This pricing offset approximately $150 million in higher input costs in the quarter. Overall on the revenue line we turned in a very solid quarter in a difficult environment. In fact in the priority categories, where we focused our investments, revenue growth was up 6%, demonstrating once again that our investments in product quality, innovation, and marketing are working.

On the bottom line, North America delivered a 230 basis point increase in operating margins to 15.9%. Benefits from targeted product line discontinuations, as well as lower overhead and restructuring program costs, drove margin games.

I would note that while the discontinued product lines pressure our topline growth by about $50 million, those same product lines collectively lost $12 million in the year ago quarter. Hence a significant contribution to improved product mix and profit margins. Going forward in Q2 we'll see a pickup in quality, innovation, and marketing initiatives and as the year unfolds we expect vol/mix to improve and margin games to continue.

Before we look at individual North American segments, I'd like to address Q1 market share. As you can see on this slide, our share performance reflects difficult comparisons to the year ago period, not only due to the higher pricing levels this year, but also due to a weaker consumer environment. And those comparisons were compounded by the shift of the Easter selling period where leading brands carry a higher than average share. As we said at CAGNY however, we do expect comparisons to improve as we lap the pricing actions and weaker consumer sentiment in the back half of the year.

Now let's look at performance by segment. In US beverages we saw both strong vol/mix and margin gains despite difficult comparisons. In particular, the re-stage of Capri Sun drove double-digit revenue gains in our ready-to-drink category, and value-oriented marketing behind Kool-Aid continued to drive solid growth in powdered beverages. Organic revenues grew 1.4% overall despite about 2 points of pressure from the Easter shift and product line discontinuations.

OI margins rose to 20.7%, reflecting growth in powdered beverages, lower overhead, and restructuring program costs, as well as the timing of marketing expenses. As we look ahead, we expect stronger vol/mix and further year-over-year margin expansion. Our second-quarter results will benefit from the Easter shift and the second half will benefit from new products and marketing programs in powdered beverages and coffee.

In US cheese, our Q1 results again reflected comparisons against the period prior to the implementation of our adaptive pricing model. We showed lower vol/mix but a large increase in margins. This growth profile reflects unusual circumstances in the prior year where our pricing actions had not caught up to costs, versus this year with a more normal matching of prices and costs.

Beginning in Q2 our comparisons will be more like for like under the adaptive pricing model in both years. We expect year-over-year pricing to be lower, reflecting a decline in dairy costs. The vol/mix will turn positive as we focus incremental marketing investments behind advantaged categories such as Kraft Singles and Philadelphia Cream Cheese. And I'll remind you that this model targets absolute dollar profit levels as opposed to margins. As input costs come down, we'll adjust pricing accordingly, therefore input cost volatility will be absorbed by pricing actions. And vol/mix growth will drive improvement in profit.

Now moving on to US convenient meals, our investments in quality and innovation continue to drive strong organic growth and margin gains. The continued success of Oscar Mayer Deli Fresh, Lunchables, and Deli Creations contributed to this growth. And pizza delivered its sixth consecutive quarter of double-digit growth, with sizable gains across multiple price points. Base DiGiorno and Jack's grew strongly, and our new "For One" single serve platform continued to gain traction. As a result, organic revenues grew 8.2%, with vol/mix contributing 2.4 points.

Overall we're especially pleased with the consistent gains by this business. At the profit line, despite significantly higher input costs, operating margins jumped 360 basis points to 12.6%. This was due to improved product mix and lower overhead and restructuring program costs. Looking ahead, we'll continue to increase investment behind our highest margin items to maintain our momentum.

And on to US grocery where we delivered very solid gains despite difficult comparisons. On the top line, organic revenues were up 3.3% despite an impact of about 3 points from the Easter shift and product line does continuations. Pricing contributed 7.4 points to growth as we benefited from the impact of pricing actions taken last year. Kraft Macaroni & Cheese continued to perform well as quality investments and value-oriented marketing drove double-digit growth.

Operating margins grew 32% -- grew to 32%, benefiting from the timing of certain marketing costs as well as lower overhead and restructuring program costs. As we look ahead to the second quarter, we'll begin to roll out new initiatives in Mac & Cheese and in pourable and spoonable dressings. As a result, we expect to see a sequential improvement in our vol/mix trends as the year progresses.

Now let's look at US snacks. Organic revenues were up only modestly as higher price levels were largely offset by a number of factors. They included, ongoing weakness in bars and nuts and a negative impact of about 2 points from the Easter shift and the pistachio recall. Nevertheless cookies and crackers continue to perform well, up 3.5%. In fact, our top-five biscuit brands grew more than 10%. Oreo led the way with more than 20% growth.

We expect topline trends to improve as the year progresses. We have new initiatives in crackers and nuts launching in the second quarter and we expect our pistachio items to return to the shelves by the end of this month.

At the profit line, operating margins rose to only 10.8% due to the negative impact of about 1.4 points from the pistachio recall. Also keep in mind the first quarter is a seasonally low-margin quarter for snacks. We expect sequential improvement in margins over the course of the year.

Now turning to Canada North America Foodservice -- our business in Canada continued to perform well, delivering double-digit organic revenue growth. This was driven by continued volume gains from marketing investments and improved customer programs. Vol/mix was down for the segment overall. The gains in Canada were more than offset by declines in foodservice. These were the result of the impact of the slowdown in casual dining traffic and from the effects of discontinuing lower margin product lines.

While we have a number of new branded programs for this channel, our foodservice revenues are likely to be down with the industry for the balance of the year. So between the currency impact in Canada and lower foodservice volumes, operating margins fell in the quarter to 9.4%. We're working to mitigate the near-term pressure on profit margins. We've announced price increases to offset higher product costs in Canada and if the economic conditions deepen the slowdown in restaurant traffic, we're implementing programs to aggressively reduce manufacturing and overhead costs.

Now turning to our business outside North America. Europe is executing its plan to improve profitability. As expected, revenues were lower but margins were up significantly. The 3.3% decline in organic revenue reflects tough year-on-year comps as well as changes we're making such as discontinuing certain product lines. These discontinuations and the Easter shift negatively impacted revenue by about 2 points.

In addition, the year-ago quarter saw a 7.2% increase in vol/mix in part due to retailers buy-in prior to our price increases. Market share performance in Europe was solid due to continued investments in focused brands. This was driven by good revenue gains from Kenco, Carte Noire, and Tassimo in coffee, Cote d'Or in chocolate, and biscuit gains from Oreo, Mikado, and [Orson].

At the profit line, despite an unfavorable impact from currency, operating margins rose to 7.6%. These gains were driven by a combination of factors -- better alignment of prices and input costs; improved product mix; and the absence of restructuring program costs and divestiture-related losses. We'll continue to invest in our category-led European operating company structure. As a result we expect further improvement in both organic growth and margin trends.

In developing markets, we continue to see the benefits of our 5-10-10 strategy as our focus on priority categories, core brands, and key markets drives strong growth. Organic revenues grew 12% with solid gains in each region. Our core brands led the way with growth of more than 17% and we continue to gain share in most markets. Despite a significantly negative impact from currency, operating margins grew to 11.8%. The gain was driven by better mix and higher price levels, which offset increased input costs and local inflation.

As we look ahead, we remain cautiously optimistic despite what remains a highly volatile environment. To be sure, volume comparisons will remain difficult, but we'll continue to drive improvements in product mix and we have contingency plans in place to protect our investments.

Before I finish, a quick word about our balance sheet. Despite the difficult economic environment, we continue to make progress on working capital and cash flow. Our cash conversion cycle is down more than a day and cash flow is positive in what is seasonally a cash consuming quarter. With that, I'll hand it back to Irene for some closing comments.

Thanks, Tim. I'll sum up our first-quarter results quite simply -- our strong operating gains represent a very solid start to the year. We're on track to deliver our 2009 guidance. And despite the challenging environment, we will improve market share and expand margins as we complete our turnaround. Now we'd be happy to take your questions.

(Operator Instructions). Robert Moskow, Credit Suisse.

A question for Irene. Irene, I noticed in your opening comments you said that "we will deliver $1.88". You didn't say we're forecasting $1.88. The tone is different from what we typically hear when guidance is given. So can you give us some explanation as to why you chose those words?

Rob, I didn't particularly choose those words to signify anything other than the fact that we had a very strong quarter. It exceeded our expectations, as I said, but it is only the first quarter. It's still a very volatile environment out there and we believe we are best served by maintaining our guidance at this time. My remarks were simply meant to suggest that we are quite confident that we will deliver the guidance that we've given of $1.88.

Okay, and then just one follow-up. We've heard some comments from other companies saying that they think that the economic environment has bottomed and is starting to improve. You've gotten off to a good start here. How much of this do you think is a function of consumers starting to reawaken or is it just you're executing very well in what continues to be a tough environment?

I would say our first quarter represents excellent execution in a difficult environment. But we are starting to see some signs of recovery, but there are a number of spots in the world, particularly in Central and Eastern Europe, where we believe that we will continue to see some weakness. In aggregate though we remain confident in the outlook that we've given.

Okay, and then the inventory reductions, I think second quarter was supposed to be a tough one for Europe. Is that going to the case anymore or are you no longer worried about inventory reductions?

Well, we did see some inventory reductions in Q1, but did not add up quite as much as we had anticipated going into the quarter. The deload clearly was not as high as it was in Q4 of last year, but we are seeing -- we have seen some, as Irene pointed out, a bit more in the Eastern and Central European markets. I would point out that our receivables remain solid, our collection was just fine and they're in good shape.

But Tim, should we dampen our revenue expectation for second quarter at all for inventory deload or not at all?

There will be some, but on the margin I wouldn't expect it to be a material amount.

Got it. Great, thank you very much.

Judy Hong, Golden Sachs.

Thanks, good morning. Irene, you've talked about Q1 being off to a good start here. But if we look at your market share trend and you've shown the chart that shows the sequential deterioration in your market share number there. Why aren't you more concerned about that number? And what gives you confidence that as you start to lap the pricing actions that you will start to -- you'd start to see improvement in your market share and maybe you need to do something a little bit more aggressive to show better market share behavior going forward?

Judy, there's a couple of reasons. The biggest issue is that our Q1 numbers were hurt by the Easter shift, as we have said. About 40% of our global revenue is impacted by the Easter shift, things like chocolate, things like crackers, and typically leading brands carry higher than average shares at the holidays. We have visibility obviously to our April sell-through. Easter went quite well, and so I think Q2 and the six-month numbers will give you much better visibility to performance.

But I am quite confident that as we look out to the future that you will see steady improvement in market share as the year progresses, not only because of the holiday shift but for a number of the other reasons that we had suggested. We're going to start to lap some of our printing activities in the second half as well as we expect to have a competitive advantage in terms of share of voice in the back half of the year as we continue to invest some of our media savings.

Okay, and then just a follow-up on cheese. Can you just talk about the performance in the quarter with volume still down 9.6%, or vol/mix down 9.6% and with pricing moderating pretty substantially from the fourth quarter. So I'm just wondering if you can just talk about that volume performance in the context of much more moderate pricing. And if you look at the SCANA data, it just seems like the private labels continue to gain share in that category.

Well again, as Tim mentioned, Q1 would be our last quarter of dislocation in terms of the adaptive pricing model that we've laid out. So as the year progresses, you will start to see vol/mix turn positive. We're making significant investments in our advantage segments, particularly cream cheese and singles. And I believe that as the prices come down in response to cost, consumers will come back in the category and we will benefit from that as well. So net net, we had a challenging comparison in the first quarter on the top line for our cheese business, but you should see some progress as the year progresses.

Okay, thank you.

Alexia Howard, Sanford Bernstein.

A couple of quick ones. On product mix, it seems as though that's becoming a big theme for the top line this year. I know that you're very focused on things like Macaroni & Cheese, Kool-Aid, and Jell-O, very high-priced per pound, high margin products, but it seems as though in some ways they're too small to really move the needle. Could you talk a little bit about where this mix improvement is coming from and maybe some of the broader brush strokes that are helping you to get this positive mix effect?

Well, the focus on mix, Alexia, as we've mentioned, is a key part of our model going forward and particularly of our margin expansion. We are focused on those categories that have the greatest profit potential and that in aggregate can move the needle and I think you're starting to see that play through in our numbers.

In North America our priority categories represent about 45% of our revenue; they grew in aggregate about 6%. But about 44%, the balance of the North American portfolio, grew at about the North American average. So in aggregate we are focused on a number of those categories, some of which you mentioned, that tend to have high margins, but we are looking across the portfolio at those opportunities to invest in categories that have good margins as well as can move the needle.

We saw solid share performance in our key brands in countries in Europe and that was a key contributor to the margin expansion that you saw this quarter in our European business. And similarly, in developing markets we're seeing about a 17% growth in our priority brands and that is contributing to the strong performance there. So I feel very good that the focus that we've got on our priority brands, our core categories and our key markets is serving us well and that's contributing to the strong results that we delivered.

Okay, great. Thank you very much. I'll pass it on.

Eric Serotta, Consumer Edge Research.

Good morning. I'm wondering whether you could talk a bit more about European trends. You still had negative organic net revenue trends in the quarter. I'm wondering as you start to get a few more quarters under your belt of this newer category alignment, when do you expect that to turn positive on a year-on-year basis.

I am confident that you will start to see it improve as the year progresses, Eric. Obviously our top line in Europe was more a matter of some difficult comparisons with year ago, as well as the Easter shift. We have a very significant chocolate business, as you know, and that is impacted greatly by when Easter falls. We also had last year in our base a significant buy-in against a lot of the price increases that we took as well as the continue to do pruning in that geography as we do elsewhere in the world.

So our topline performance in the EU in this quarter is as much a function of some difficult comparisons as it was anything else. Having said that, we would like to see a better balance between top and bottom lines and I'm confident you will see that as the year unfolds.

Okay, and then along similar lines, Tim commented recently that across Europe things probably aren't quite as bad as the headlines look. You do have particular problems in one -- or particularly tough conditions in one country which we are left to infer was Germany. Would you say that since then the overall picture has started to -- or has continued to improve in Europe -- the overall macro picture or it remains as challenging as people might've thought in the fourth quarter and early first quarter?

I think Europe remains a bit uncertain. There's different growth patterns in each of the countries. Germany does remain difficult and there is some uncertainty. We shifted some of the European -- the old Central European into our CEMA region and there's particular pressure on there that you saw play through a little bit in the developing markets is offset by particular strength in some other regions. But I would say Europe continues to be a bit difficult market overall.

Thanks, I'll pass it on.

David Palmer, UBS.

Good morning. As you think about 2009, I believe you're thinking volume trends will turn positive by the second half of the year, and perhaps you can confirm this. And can we assume that the cheese division will be the biggest source of that anticipated improvement versus the 1Q trend? And perhaps could you go through other divisions or even product platforms that you're expecting significant improvement from, again, 1Q trend? Thanks.

Well David, cheese will be an important factor given the variables I talked about earlier as we start to lap the pricing of year ago. But the reality is we're going to see improvement across a whole host of our businesses in response to the initiatives, the absence of the pruning impact year over year, as well as the fact that, as I mentioned, we're going to be reinvesting some of our media favorabilities, which will help us to improve our share of voice.

So the vol/mix contribution to our second-half results is going to be fairly broad-based across the portfolio. But because the EU and cheese have been more significant drags in the first quarter, by definition they will play a greater role in that change.

And when you think about from a macro perspective your ability to control your destiny, so to speak, in some of the more indulgent categories like cookies versus some of the things that have a little bit more of a macro tailwind like Mac & Cheese or all other kind of mass product for the family type categories, how do you think about -- how much you might be along for a ride, so to speak, with the economic environment in some of those more indulgent categories?

I would tell you, David, we're feeling quite pleased with our category performance across the board and around the world. So for the most part we are still seeing very solid category trends even in our more indulgent categories. Probably chocolate in Europe is the category that has seen the greatest impact. And even there some of it comes from the away-from-home business as people travel less.

But in general we are seeing very strong trends, even in our more discretionary categories like cookies. But there's no question that we're also benefiting from the value orientation of consumers and so businesses like Jell-O and Mac & Cheese and Kool-Aid are doing exceptionally well and we feel very good about that because they tend to carry higher margins as well.

And one quick last one. Do you think that, as you look back to 2008, the price shocks to the consumer in cheese, for instance -- this is the one we think about -- was a large part of the problem in terms of the consumer take-away from a volume perspective, particularly for a branded platform? And are you baking into your thinking as you go through the year just quite simply as price to the consumer comes down the consumer will be tempted to trade back up to brands? How much are you sort of baking in your numbers from this reversal of price shock?

It should have an impact on both category as well as share, but I feel quite good about the programming on our cheese business in the out quarters, I feel very good about the focus of the team on our advantage categories of cream cheese and singles, and I think you'll see that play through in both our category performance as well as in our market shares, so it will be both.

Thanks very much.

Eric Katzman, Deutsche Bank.

Good morning, everybody. A few questions. I guess more specifically to the first quarter, at CAGNY you talked about a 5% volume drop. Was it -- and you obviously knew what was going on in the first two months of the quarter to kind of point to that. Is the recovery that you're talking about in terms of maybe things not being as bad, was that really related just to March? And as you kind of came into April did you continue to see pretty good results?

Eric, we actually only had about a month of visibility at the time we put the CAGNY presentation together. And I think, as we pointed out, we anticipated that we are going to see a little bit more retailer destocking and we did see more pressure. I don't think it is simply a March phenomenon, although March also came in better than we had anticipated.

And April as well?

We had a good sell-in in Easter -- from Easter. So the preliminary indication says that we're confident that we will turn the flip of Easter being in the second quarter.

Okay. And then I was kind of surprised, again talking specifically about the US beverages, I was kind of surprised at how strong the profitability was there. I had heard from some competitors that -- kind of complaining that you're basically giving away product, it's been discounted so much. Can you talk a little bit about why the profitability there was so strong?

Well, in part. I'm not sure exactly what competitors you're referring to that are complaining, but I would say that we had -- as you know, we had a very strong margin quarter in the quarter, gains reflected particular strength in powdered beverage, and also some operating improvements and lower overhead restructuring costs.

We do expect as 2009 progresses we'll see volume and mix expansion. I'll also point out that the second quarter will benefit from the Easter shift and in the second half we have a number of new initiatives coming in in all of the categories, powdered beverage and coffee in particular.

Okay. And then if I can, Irene, two let's say bigger picture questions. One, how do you feel about the ability of the industry, if need be, to take higher pricing should we have let's say unexpectedly high input costs. If Mother Nature doesn't help us out this summer, some people expect a weakness in the dollar given how much money we're printing if the dollar weakens and the emerging markets recover one would expect some of these same dynamic that occurred the last time to drive input costs higher. Do you think the industry is in a position vis-a-vis the retailer and the consumer to actually take pricing up if necessary?

I think the key to our ability to price has to do with the equities of our brands. I feel quite comfortable for Kraft's portfolio that the investments that we've made over the last couple of years in brand equity and marketing and innovation are serving us well and so that we are in a much stronger position to protect our gross margins as costs may increase but I also would tell you I think is our retailers continue to be in a number of these categories they too are experiencing these input costs firsthand and I think the dialogue we have with them is a much more important dialogue than it might have been in the past. So again, I think we're well positioned to be able to address the cost environment as it evolves.

That helpful. And then just one follow-up, I'll pass it on. I've heard claims that Wal-Mart, for example, would ultimately like to go down to about a week's worth of inventory. I don't think that's a short-term issue, but I think the last few years the industry has existed with two to three weeks of inventory in the US. Do you think that -- have you heard that? Do you think that that is something that the industry and your organization could work with?

I would say, Eric, we're pretty close to that right now. I think we're working well with Wal-Mart as well as with our other retail partners. Everybody is focused on cash as are we. And I think jointly we've got a number of initiatives in place to shorten our supply chain and to ensure that we can meet customer service levels. At the end of the day though, as our customers choose to lower inventories they're going to be disproportionately focused on the leading brands and I believe in that environment we are well positioned to win.

Okay, thank you.

Bryan Spillane, Bank of America.

Good morning. Just two quick ones. One, did you give a volume figure ex mix for the quarter?

We didn't separate it out, I don't think. But volume was down about 2% in the quarter. Again, we want to focus the emphasis on vol/mix because, as I pointed out earlier, there are inherent trade-offs between those two and that really is one you should focus on. But in fact our volume was down about 2%.

Okay. And just for clarification, if I remember it right, on the fourth-quarter earnings call your expectation was that volume alone would be down 5%. So the volume performance was -- in and of itself was better than you were expecting, is that correct?

That's absolutely correct. 5% relates to the 2%.

Okay, great. And then (multiple speakers) just touching back on the market share, if I remember this right, on the fourth-quarter earnings call you had talked about even though there was still a large number of product categories where you weren't gaining or holding share, that the magnitude of the share losses in a lot of those instances was relatively small.

So if you could just talk a bit about in those categories where you're not holding or gaining share, are the magnitude of the share losses getting worse, are they staying the same? And then also, where the share is going, is it a private label share shift or is it going to other brands?

Brian, obviously it varies a little bit by category. I'd say the magnitude is about the same and, again, we've got a number of categories, just as we shared with you at CAGNY, where our performance continues to be quite strong and it's just that the category is growing even faster. But as I said, I am quite confident that given the programming that we've got in place, given the fact that we'll be lapping some of the larger product line discontinuations that we would have had a year ago, together with the fact that we expect our share of voice to be increasing over the course of the year, I feel quite confident that you will see share improvement.

Also, I was trying to jump in earlier to just say to you the minus 2% volume decline that Tim referred to is the raw number and, in fact, it's -- our volume is closer to flat ex Easter and the pruning. So we do feel quite good about our overall vol/mix performance in the quarter.

Okay, that's great. Thank you very much.

David Driscoll, Citi Investment Research.

Just a quick point. You used to give the mix as a separate item and, Tim, I hear you that you want to focus us on volume and mix. But from my seat I would say that the clarity was a lot better when mix was a separate item within your disclosure. It's not helpful to have rolled it into volume. Just a comment.

Two quick questions. The first one was, was marketing spending up or down in the first quarter and what you expect it to be for the year? And then a second question, what's the impact of the Wal-Mart Great Value relaunch? And specifically we're seeing a lot of activity within their pizza business. So can you just make comments on those items, please?

Yes, I'll comment on the first one, Irene will pick up the second. A&C spend was about flat with last year, but within that there's a number of moving parts. Clearly FX was a component. If you adjust FX out of it, it was a little bit higher than last year. And also, as you know, ad cost was down, therefore we increased the share of voice even though we held overall A&C about flat.

With respect to the Wal-Mart initiative, David, we feel there's no question that they are increasing their push behind their private label. We don't expect that that will significantly impact the leading brands. And once again, I feel quite good that we are well positioned, given the investments that we have made in our brand equities and in our innovation pipeline, we are well positioned to be able to win even as they increase their focus behind their brand.

Just a quick follow-up, Irene. On that Wal-Mart relaunch, some categories that Wal-Mart was launching in were actually the first time that they'd ever had a great value product in there. Do you know how many categories that you compete in that actually have a new great value product that did not previously exist?

I'm reasonably certain there were none, but we can follow up on that one. Most of the categories that we are in have not changed their relative position, but we can get back to you on that.

Thanks for the color. Thank you.

Terry Bivens, JPMorgan.

Good morning, everyone. Two questions. On the market share, Irene, I think when we talked about the fourth quarter the market share was down of course. But I think you said the bulk of that was due to Velveeta, Mac & Cheese, cold cuts and pizza. Was it the same dynamic this time or did we see changes in those four big lines?

We actually -- some of those changed their position relatively. I think the most significant impact that we have in the first quarter is on a number of our cheese items and some of our Easter sensitive businesses like Cool Whip, for example, where as the holiday shifts to the second quarter we're going to see a stronger share performance in the second quarter than we saw in the first.

So there is some shift relative to what we saw in the fourth quarter, but overall I feel quite good about the trends. And as I mentioned, our Easter sell-through has been quite good and we feel quite confident about the forecast on the balance of the year.

Okay. And with regard to your new cheese pricing policy, this adaptive pricing, I assume that is meant to more closely match the market price of cheese with your retail prices, right?

That's correct. I mean, the market has been so volatile and driven by so many factors that are outside of our control and somewhat less -- we're somewhat less capable of forecasting them, we decided to get out of the forecasting business and ensure that our pricing is more closely aligned with our cost profile.

That seems to make sense to me, but here's my question on this. I understand why that would drive a focus on getting the absolute operating dollars up, but typically as you kind of edge a little bit closer, not totally to a pass-through mechanism but closer to that than you have been, typically what you see is margins go up when the raw material goes down. But as I look at your margins, they went down pretty significantly from Q4 to Q1. Is that a Q1 specific issue or should we look -- I guess I'm trying to get a better bead on the implication of that pricing policy for the margins in cheese? If I could get some help on that.

The sequential performance you're alluding to is really more about seasonality. If you look at the relative performance in the fourth quarter year over year and then you look at our cheese margin performance in the first quarter, we were up over 600 basis points. We feel quite good about that performance. The sequential issue is a lot more driven by the holiday than about anything else.

So I feel very good that this adaptive pricing model that we've put in place will serve us well. And as Tim mentioned, as we hit the second quarter and beyond we'll be much more in a like-for-like comparison and it will be much easier to interpret the results.

Okay. Fair enough, thank you.

Vincent Andrews, Morgan Stanley.

Good morning, thank you. Can you -- if volume was expected to be down 5% and then came in down 2% or flat ex Easter, at the time you thought volume was one to be down 5% what did you think was going to happen to mix?

Well, we thought mix would be a positive in that. So I mean there was an inherent trade-off. And again, that's why we go to a volume/mix metric. But we benefited by the improvements overall of the vol/mix environment, that drove some of the improved profits that we reflected.

I guess. And can you help us understand -- during the time between expecting 5% volume dip and mix to be up and then what wound up happening, what was happening in the channel so to speak and what actions did you take to reverse that course and to wind up where you were?

Well again, we continued to invest in marketing. We had good programming and improved our overall position. And markets -- we talked a little bit about retailers destocking wasn't as much as we had anticipated. So I think overall the volume and mix combined was better than we anticipated (multiple speakers) by some of the actions we took with some help from markets.

So there was no specific consumer behavior or anything, because I would assume that less deloading wouldn't impact mix, right? Or did they just not deload the -- nevermind, I think I got it.

My next question would be, Irene, what are market share goals going to be in the new environment? You used to talk about getting to a 65% number of gaining share against revenue. Where do you want to see 2009 end up in order to declare victory on this issue?

We're never going to declare victory on this metric. The facts are we essentially start at zero each quarter, we're looking at percent of our revenue that is growing or holding share, I think it's a very rigorous metric and I think it's the right metric. I would say in the current volatile environment there has been some dislocation which makes it more challenging to get to that number faster. But I expect that on a reliable basis over half of our revenue will be growing or holding share and I am quite confident that you will see progress as this year unfolds given the programming that we've talked about.

Okay. But there's no internal goal?

Well, we have goals certainly for each of our businesses, externally the goal that we're sharing is the one that I've given to you.

Okay. And just so I understand, the pruning that you're doing, theoretically my guess would be that would help your market share trends. Because I would imagine you're pruning products where you're losing share or is that not the case?

No, actually our focus in the pruning activities has been on profitability. I come back to the issue we were just talking about with respect to mix. We are taking a number of actions to proactively manage our mix which is why we are so confident as we look at the future that we will continue to make progress in expanding our margins.

But as Tim mentioned, the collective businesses that we pruned in this quarter lost about $12 million year ago. And so we are looking to improve our mix by simply taking out some of the items that have less attractive margins. In the short-term though it does have somewhat of a hit to volume which is why we are focusing on vol/mix as the more relevant metric.

Okay. And lastly, I'll just echo David Driscoll's comment in that it would be nicer to see mix separated out. But thank you very much.

Andrew Lazar, Barclays Capital.

Good morning. I think last quarter you talked about inflation or input cost inflation for '09 potentially being around $200 million and I think in one of the slides it said in the first quarter it was up $150 million. Have you changed the overall inflation estimate for the year or are we just going to start to see much less inflation going forward and then potentially deflation in the back half of the year?

Well, actually the number that we talked about, $200 million in the fourth-quarter call was actually just on -- specifically on commodities. We do anticipate that the overall inflation will be a bit higher than that. We do expect that it will subside a bit as we get through the year, but the $150 million that we reflected in this quarter is more representative of the quarterly average.

Of what you expect to see quarterly going forward?

I would expect going forward we'd see somewhere in that range and it will subside a little bit as the year progresses. But that's probably a good number for a quarterly (multiple speakers).

Okay. But those perhaps expecting something really dramatic with respect to a moderation in the back half of the year, because we don't have as much access to where you're hedged and how your other costs are coming through, but don't necessarily expect something really dramatically lower in the back half?

No.

Okay. And --

Our hedge positions are pretty typical of where we would be, there's not a dramatic lengthening or shortening of our hedge positions at this point.

Okay. On the top line, I think vol/mix down 3, 4 with volume down 2. So does that mean -- I just want to make sure I understand this, I'm sorry if I missed this before -- mix down 1.4, is that -- obviously you're getting rid of a lot of SKUs, that in theory would help mix. Was that something more across geographies or across categories versus intra-category?

I would say it's across the board, and you're right, some of the product running. There's a difference between the mix at the revenue line and the mix at the profit line. And what Irene alluded to before, as we take out the losing product lines that's helping bottom-line mix, but the topline mix is down about 1%, 1.5%.

Okay. And then the last one, I guess as you think about how the year will likely flow, we know that pricing -- as you start to lap some of your pricing actions and what have you that becomes a much less significant driver. The leverage on that obviously in the P&L is pretty significant, so obviously the confidence around the volume and mix piece, as you've talked about today, needs to come through as we go through the year.

Do you worry a little bit about the transition times, so I mean more like second quarter given the dramatic reduction that we'll see in pricing until volume momentum gets going? I guess what I'm getting at -- is it more of a back end loaded year from an EPS perspective because you've got to see volume and share come back even though you start to lose pricing as you go through the second quarter?

Well, we always see a stronger fourth quarter, that's a typical seasonal pattern. I would say we're going to see improvements in both vol/mix in the second quarter as we benefit from the Easter mix. And again, a lot of our programming will kick in in the second half, we've got new products coming to market and we're confident that we'll see progressive improvement over the course of the year.

Thank you.

Tim Ramey, D.A. Davidson.

Good morning. I have to congratulate you on I think what is the best quarter I've seen Kraft put up since its IPO, really nice to see. A couple of questions and, first, also another comment. I really agree with the other couple comments on volume, love to see that number alone, if you have to put mix in with something put it in with price. But we'd like to know how many tons go out the door.

Just a question on the advertising and merchandising spending. We understand you're probably getting rate relief and you're getting currency benefits. But if you think about it in terms of real impressions or kind of share of mind, what's your goal for that this year?

Well Tim, we actually have not set a specific goal because the costing of the media is going down and we're looking at reinvesting most of that. We do expect that we will see a higher share of voice as the year progresses and it's one of the reasons that we're so confident in our outlook for the balance of the year.

So although we have set a long-term target of 8% to 9% of revenue based on share of voice under normal circumstances, the combination of lower media cost and currently impact makes it harder to peg a percent of revenue as our target. But I'm quite confident that our share of voice will increase as the year progresses.

Great. And then just on the balance sheet, will you continue to use the majority of your cash flow for debt reduction or will there be some share repurchase in the mix this year?

In the current environment, obviously you know that share repurchase is a Board decision and we want to make sure that we're optimizing total shareholder return. In the current environment -- when we see improvement in the environment we'll revisit that, but in the current environment with the financial crisis still affecting I think it's prudent to preserve our cash.

And just a quick one on Oscar Mayer, could you give us any color on how the processed meat business worked for you in the quarter? Was that also a benefit of people trading down to more basic foods?

We had a very strong quarter on Oscar Mayer, a number of our new items like -- products like Deli Creations, our relaunch of Launchables is doing quite well. So Oscar was an important contributor to our strong performance in convenient meals and we feel quite good about the outlook there as well.

Thank you.

Chris Growe, Stifel Nicholas.

I just had a question for you regarding your EPS guidance for the year. I assume this is the case, just wanted to ask if there's improving currency levels would that lead to higher earnings? Or is there any changed view on your need or ability to reinvest back in the business?

Well, when we started the year we indicated that currency at that point at those levels were about $0.16 worth of headwind to the year-on-year performance. As the dollar has weakened a little bit from there we actually -- or strengthened from there, we actually have seen some additional pressure on that. We anticipate that we're going to make that up through operational improvements and that therefore we're maintaining our guidance. But we would have to see a pretty significant change to currencies before that would result in a change to our guidance.

Okay. And then relative to kind of the charges or the one-time items you're bringing through the earnings, there was none this quarter, correct? And you still are looking for roughly $200 million for the year?

Yes, the full-year number is we expect about $200 million. There actually were some in the quarter, it was about $25 million this quarter. And again, it's embedded within the operational number. If you recall the $0.06 year-on-year improvements reflected some of that $25 million spend.

Okay, got you. And the last question I had just is that you're doing this SKU rationalization across the business, are there divisions where we should already be seeing the margin benefit from that activity? Or is this something that happens in, I think as you had suggested, maybe the second half of '09 when you start lapping all that SKU rationalization activity?

No, we progress each quarter. Obviously it's kind of when we phase it in, but some of that activity was affected in each of the quarters last year. And so we see some of the margin improvement each quarter and that will progress over the course of the year.

And Chris, just a point of clarification. It's not SKU rationalization, it's actually taking on entire product lines. So you're seeing it come through in some of the divisions specifically such as grocery where we had Handi-Snacks, we're doing it in Europe and a number of places, particularly some local categories. And then US foodservice came through with a meaningful number. So I can call you afterwards and go through the different areas, but again, it's not a simple act of SKU rationalization which we do on an ongoing basis.

Yes, we do do the SKU rationalization on an ongoing basis, that's not reflected in any of the information that we provide you, that's a normal course of doing business. These are big significant ones where it's almost a trade-off between whether we would sell a business or whether we'd just discontinue the product line. So they're material numbers in each discrete segment and not a normal ongoing SKU rationalization.

Okay, that's good color. So it's happening now, it's in the numbers and I guess it will continue as you -- there's more activity, I guess is that fair to say (multiple speakers)?

There is some more activity, although probably the heavy lifting is behind us. So again, we should see improvement, that's one element as we lap some of that activity as we progress through the year we'll see better volume and we'll see the playing through of the margin improvement.

Okay, thank you.

Ken Zaslow, BMO Capital Markets.

Good morning, everyone. Most of the questions have been asked; I'll just ask one quick one. In terms of your confidence in 2009, how much is it related to the below the line operations -- below the line numbers such as like the mark to market, that came in a little bit stronger than we expected, or is it really above the line? I guess that is your operating profits came almost identical to what we expected and it was all below the line. So I don't know if you guys are seeing the same thing we're seeing or how do you determine between your confidence level above and below?

I would tell you, Ken, the key driver of our guidance confidence is our strong operating performance and that is what gives us great confidence that we will deliver the $1.88 that we have laid out there. So we did have some below the line favorability, but some of that will reverse, some of the mark to market will reverse as the year progresses. Our confidence in the year and our confidence in our outlook is based entirely on our operating momentum.

Great. I appreciate it.

If we just take one more question, that would be great.

John Feeney, Janney.

Good morning. Thank you. Irene, just one question actually on wall to wall and sort of more broadly about the sales execution initiatives you've put in place. It occurred to me earlier that operating in a lower inventory world would put a higher premium on sales execution and particularly the scale that Kraft enjoys there. But if you could comment on that, but specifically to Q1 results here. Where did we see, if anywhere, the impact of improved sales execution as has been a focus of yours? And where can we expect that to see through the course of the year, in what segments and what ways?

We remain convinced that wall to wall is a source of sustainable competitive advantage and we continue to make investments to ensure that we continue to improve that capability. I think the most significant metric that you would have seen in the first quarter and, by the way, you'll see more of it in the second quarter as you start to see Easter merchandising play through. But the most significant metric you'd see in the first quarter is that we had very strong volume performance in North America.

In fact, our volume in North America was up about 2%, it would have been closer to -- it would have been essentially up 2% ex-pruning and Easter, but it was essentially flat on a reported basis. And I feel very good about that given -- again, given the importance of Easter to a number of our businesses in North America. So wall to wall is a clear source of competitive advantage. We do believe that in the current environment it will be an increasingly important capability and we certainly are hearing, as we talk to our retail partners, that they place great value in that capability and it's one of the reasons that we are a preferred partner for so much of their programming.

Thank you very much.

At this time there are no further questions. I would like to turn the floor back to management for closing remarks.

Thanks, everybody, for tuning into the call today. For those in the media who have further questions, Mike Mitchell will be available all day and for any analysts who have follow-up questions myself and [Dexter Convoy] will be around all day. Thanks very much.

This concludes today's Kraft Foods first-quarter 2009 earnings conference call. You may now disconnect.