億滋國際 (MDLZ) 2009 Q4 法說會逐字稿

Good morning, everybody. Our next presenting company is Kraft Foods.

Before we start, please join me in thanking Kraft for sponsoring our lunch today, following the presentation. With us here today are Chairman and CEO, Irene Rosenfeld, Tim McLevish, CFO, as well as Chris Jakubik, who all of you know well. Now, as analysts, and a generally very curious bunch of people, we, of course, want all the answers yesterday. But given Kraft is still in the midst of closing on the Cadbury acquisition, the Company is still subject to some extraordinary disclosure rules that, among other things, limit their ability to provide earnings guidance.

Today, we are specifically more about 4Q results, which can provide us with a bit more perspective on the progress of the core Kraft business, certainly very important going into a sizable integration process for Cadbury. Irene, Tim, and Chris, thanks for joining us and following what was a most interesting and I'm sure draining few months, I'll hand it over to Chris for a few additional comments. Thank you.

Thanks for having us today and welcome everybody.

Before we get started, I must deliver a legal chant as Andrew referred to. This is not a tactic to shorten the time for Q&A. It is more a function of the extraordinary legal requirements we've had to comply with of late. As you know, during this presentation, we may make forward-looking statements about the Company's performance, the 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. Please refer to the cautionary statements and risk factors contained in our SEC 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.

Also, in connection with our acquisition of Cadbury, I would encourage everyone to read the various filings that Cadbury and we have made with the SEC because they contain important information related to this transaction. I will also note that we continue to be restricted by the UK Listing Authority in terms of what we can say particularly around financial guidance whether in the current year or on a longer term basis.

So, with that out of the way, let me turn it over to Irene.

Thanks, Chris. Good morning to all of you. How has your new year been? We've been a little busy. I must say it is especially nice to see so many familiar faces in the audience today.

There are three things that we want to address today. First, we're exiting the turnaround that I laid out three years ago on this very stage with strong operating and financial momentum. I'd like to take a few minutes to review the progress we made in 2009, including highlights from our fourth quarter results announced earlier this morning. Second, I will view our combination with Cadbury, and underscore again why we believe the combination of Kraft foods and Cadbury has created a global powerhouse, one that can deliver top tier margins and growth on a sustainable basis. And third, Tim will provide an update on the transactions, where we are in the process, including our early thoughts on integration.

So, let's begin. Three years ago, we laid out our plan to return Kraft Foods to long-term sustainable growth. In the first year, we said we would rejuvenate top-line growth. And we did. In the second year, we said we would grow both the top and the bottom lines. And we did. In the third year, we said we would focus on building our profit margins and market share. And as we've done this, we have a strong foundation underlying our long-term model, targeting EPS growth of 7% to 9%.

Three years ago, no one could have predicted the environment we would face in the ensuing years, from record high input costs to global recession. But despite it all, we did what we said we would do, and we've emerged a much stronger company. We began our turnaround by decentralizing and aligning our businesses and functions with common incentives. Our business unit leaders have been focused on three simple metrics, revenue growth, income growth, and cash flow, and they've been the key drivers of our turnaround.

Over the past three years, we've made tremendous progress on each measure. Since 2006 on average, we've driven 4.5% organic revenue growth per year. We've made significant investments in product quality, marketing and innovation, while growing operating income 10% per year on average and raising our operating income margin to 13.7% in 2009. That's up from 12.6% in 2008. We've put a greater focus on cash flow and it has paid off. In 2009, we generated cash flow equal to 124% of our net earnings. That's up from 83% in 2006.

But the true measure of success for any turnaround is how well we've staged our business for future growth. On that criterion, I'm pleased to report that we exited 2009 with strong operating and financial momentum. Since 2007, we've invested more than $500 million to improve our product quality. As our products have gone from good enough to truly delicious, consumers have noticed. Today, about two-thirds of our products are preferred to the competition versus only 44% in 2006. Putting quality back into our products and differentiating ourselves from the competition has enabled us to re-establish our pricing power. And, as a result of stronger brand equities, we've been able to manage higher input costs and improve the alignment of our prices and our cost structure, while still investing in our franchises. This was a necessary step to restoring profit margins and has been a key contributor of our results to date. As a consequence, going forward, the ability to manage changes in input costs through pricing will allow more of our productivity gains to flow to the bottom line.

Another example of our operating momentum has been our improvement in volume and product mix, despite significant headwinds. The challenging economic environment has led to weakening consumption trends around the world. In North America, unemployment is higher than it's been in 18 years, and many of those who hold a job don't feel secure. In Europe, unemployment continues to rise both in western and eastern Europe. And in Asia and Latin America, while consumption is still growing, it is well below historical levels. From a planning perspective, we're expecting a continuation of these trends until at least the back half of 2010. But we're certainly not sitting still in the face of these macroeconomic factors. We've taken some strategic actions over the past several quarters to discontinue less profitable product lines and to forgo unprofitable volume. Thereby resetting our revenue base. While this has reduced near-term volume, it has clearly been the right long-term decision and enables us to grow off of a much stronger base. Despite these headwinds, you can see that we delivered sequential improvement in vol/mix in every quarter of 2009.

Having said that, I do want to acknowledge that our fourth quarter came in somewhat lighter than our forecast of approximately 3% growth. Why is that? Two reasons. One is lower than anticipated consumer offtake for the macroeconomic reasons I just cited, particularly in North America and Europe. The other is that we made the decision to avoid chasing certain US competitors, particularly in main stream coffee and snack nuts, competitors that were chasing unprofitable, unsustainable volume. Instead, we chose to invest in more sustainable long-term brand building by significantly increasing our fourth quarter advertising and consumer spending. This will clearly pay dividends in 2010. Nonetheless, in contrast to many of our peers, we continue to drive sequentially better volume mix in the fourth quarter, delivering more than 1.5 points of growth.

Looking at another measure of our momentum, we're expanding both gross and operating margins, while continuing to invest in future growth. In 2009, we increased our advertising and consumer spending to 7.2% of net revenues. That's up from 6.7% in 2008. What's more, A&C spending increased even though advertising rates have come down considerably year-over-year.

Take a look at three of our newest spots from the US.

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These spots have been extremely well received and are doing a great job of building our brand franchises. In addition to increasing our marketing investments, we were able to accelerate a number of cost savings programs related to our reorganization in Europe and our broader overhead initiatives. We spent more than $300 million in 2009, considerably higher than the more than $200 million we had identified in early November.

As this chart shows, we've improved our operating margin year-over-year in every quarter of 2009. Vol/mix continued to be a key driver of margin upside. In the fourth quarter, vol/mix drove 70 basis points of margin improvement. And for the full year, operating margin rose to 13.7% with vol/mix driving 50 basis points of the increase. As you can see, we've made good progress toward our goal of restoring our profit margins to industry benchmarks, while still investing significantly in productivity and brand building. Finally, our momentum is broad-based. To be fair, we're not pitching a perfect game. As you know, that's difficult when you're managing a broad portfolio, but our businesses in each region are making good progress against their objectives in a very difficult environment.

Let's take a closer look at each region starting with North America. In the fourth quarter, organic net revenue declined 2.7%. This was due entirely to a pricing decline of almost four percentage points. Lower dairy costs and the related adjustments under our adaptive pricing model represented about 2.5 percentage points of the decline. Vol/mix rose more than one percentage point fueled by growth in priority categories. This growth was tempered by three factors. First, we continue to optimize the size of our natural cheese business. This more than offset the vol/mix gains in our more profitable priority brands, Kraft Singles, Philadelphia Cream Cheese, and Velveeta. Second, we made the conscious decision not to chase unsustainable promotional activity in both mainstream coffee and snack nuts. And third, we saw declines in a number of our noncore biscuit brands. This was the result of weaker trends in the biscuit category in the second half of the year due to reduced merchandising at a key customer.

Operating income margin in North America rose to 16.6% in the fourth quarter, as we improved the alignment between input costs and pricing. It is also important to note that margins rose even as we made significant investments in cost savings and marketing initiatives. In fact, we increased our investments in A&C at a double digit rate versus the prior year. For the full year, organic net revenue in North America declined slightly. During the year, we effectively managed the transition to vol/mix driven growth from price-based growth. In the end, the contribution from pricing was a negative 50 basis points due entirely to 160 basis point impact from lower dairy costs. Priority categories fueled the gains in vol/mix. However, these gains were offset by a 70 basis point impact from discontinuing less profitable product lines. The good news is that as we exited the fourth quarter, we've now fully lapped the major product line discontinuations, and we'll be on an apples to apples basis going forward.

Segment operating income rose to 17.3% again better alignment of input costs and pricing drove the improvement, despite incremental investments in cost savings and marketing. In terms of US market share, as we lapped the significant pricing actions of 2008, we're making slow, but steady progress in regaining US market share. Our 52-week trends are improving with 45% of our retail revenue gaining or holding share. We're not yet where we want to be, but we expect this positive trend to continue in 2010. In fact, according to the data, we've just received, we are gaining or holding share in well over 50% of our US retail revenue, for the 52 weeks ending January.

Turning now to Europe, organic net revenues were down slightly as we continue to take the necessary actions to improve margins. The discontinuation of product lines and our decision to forgo unprofitable volume resulted in a two percentage point headwind to vol/mix. In addition, the economic slowdown has continued to negatively impact consumption with particular weakness in Spain, Portugal, and France. And given the strong position of the LU biscuit brands in these markets, it caused a modest revenue decline on our overall European biscuit business as well.

Despite the difficult economic conditions we posted solid market share in most categories due to continued investments in our focus brands. At the profit line, fourth quarter operating margins were 8.2%. Improved product mix contributed 90 basis points of the margin improvements. But this was offset by significant investments in cost savings initiatives and a strong increase in marketing investments to support our priority brands.

For the full year, our European business posted solid results in a very eventful year. We shifted to a category-led operating structure and integrated the LU biscuit business, all while managing through a very tough recession. On the top line, organic revenue in Europe declined by 1%, as vol/mix was negatively affected by the discontinuation of product lines and our decision to forgo unprofitable volume. At the same time, market share performance was good, particularly in chocolate, coffee and cheese. On the bottom line, our operating income margin rose to 9%. Vol/mix improved margins by 90 basis points, while we continued to make major investments in cost savings initiatives and marketing.

Turning to developing markets, organic revenues grew by more than 10% in the fourth quarter. Our priority brands drove strong revenue gains across the board. In Asia, priority brands grew about 30%. In Latin America, up 25% and in Sima, up double digits. What's more, we grew market share in almost every one of our key country category combinations. Operating margin was 8.1%. This reflects improved vol/mix and cost price alignment offset by strong double digit increases in A&C spending versus the prior year. Our full year developing market results showed that our 5-10-10 focus continues to pay off. We posted strong revenue and share growth despite softening category trends. Overall, organic revenues grew nearly 10%, and our priority brands grew even faster, up 18%.

Operating income margins were 11.8%, and, as in every region, we continue to invest in additional cost savings initiatives and incremental A&C to fuel future growth. As a result of the improved regional operating performance, we've got strong underlying financial momentum. In 2009, we earned $2.03 per diluted share. That represents 7% EPS growth over 2008 on a GAAP basis, and 14% growth on a constant currency basis. I would also note that our 2009 EPS includes a negative impact of $0.04 from expenses related to the Cadbury transaction.

I know that breaking the $2 barrier may seem like the end of an era for many of you, but rest assured it is just the beginning from our perspective. In fact, let's take a closer look at the drivers of EPS growth. As you can see on this chart, operating gains were a key driver delivering $0.15 of improvement over prior year. We've also made exceptional progress in terms of cash flow. In no small measure, this reflects the fact that cash flow is now a key compensation metric for our managers. We generated significant gains in 2009 from intense focus on working capital efficiency and improved earnings while ensuring we're supporting our growth with sufficient CapEx. Looking at the numbers, free cash flow for 2009 increased 35% to $3.8 billion. I would note that we got a working capital benefit due to timing of some payables at the end of the year, but even excluding this impact, our free cash flow still rose considerably in 2009. So, to recap the progress we've made, we're exiting our turnaround with our base operations in great shape in every region around the world, and there's solid momentum behind each line of our P&L.

The four turnaround strategies I laid out three years ago have positioned us well to deliver sustainable, profitable growth, and, as promised, the flywheel is now turning. I firmly believe that going forward, we can benefit now from a virtuous cycle. We're setting growth objectives off a solid base. We're managing input costs by maintaining strong brand equities and pricing accordingly. We're driving vol/mix gains through focused, prioritized investments. We're leveraging our scale while driving down overhead costs. And we're meeting or exceeding our earnings commitment while reinvesting in future growth. We've made good progress, but we're certainly not satisfied that our base business has reached its full potential.

We remain focused on driving further improvements in our vol/mix growth and in strengthening US market shares. We've essentially completed our product line discontinuations and we now have a solid base from which to grow. We'll continue to further optimize trade spending while increasing A&C, and as the economic environment stabilizes and stockholder sentiment improves, we'll be shifting the balance of efforts back toward new product development from value-based marketing. On the cost side, we're continuing to execute significant programs to improve productivity and reduce overhead. We're well into the execution phase of our end-to-end productivity programs and the overhead cost reset initiatives we outlined in September. These initiatives will enable us to continue to fuel our investments in quality, marketing and innovation while delivering on our targets of reaching mid-teens margins on our base business by 2011.

So, as I've said before, we didn't need to acquire Cadbury to deliver our existing growth targets. In fact, when we first announced our intention to acquire Cadbury, many of you asked "why now"? The answer is that having successfully reinvigorated our base business, we're now ready to write the next chapter in our transformation. The time is right for us to accelerate our transformation from a position of strength. We can leverage our strong financial momentum to accelerate our progress, and we prepared our organization to execute with excellence in a number of important ways. We strengthened our leadership team. We've streamlined our organizational structure. And our global organization has the skills and appetite to integrate a large scale combination. Now, we're ready to take both Kraft foods and Cadbury to a level neither could reach on its own, and to create a combined growth company with unmatched talent, brands, capabilities, and resources.

Let's take a brief look at the newest member of our family.

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As I've said over the past several months, this combination is all about growth. The new Kraft foods will deliver top tier organic revenue growth through a focus on higher growth, higher margin categories, and expanding footprints in developing markets and a greater presence in growing trade channels. And we'll target industry-leading margins through improved product mix and leveraging our global scale. Cadbury and Kraft each had strong plans to get to mid-tier margins prior to our combination. And the synergies inherent in combining the two companies will enable us to take things to a whole new level of long-term growth and margin potential.

Let's start with our category mix. The fast-growing, confectionery and snack segments will now make up the majority of our portfolio. In fact, almost 70% of our revenue outside North America now comes from snacks and confectionery, two rapidly-growing, highly expandable categories. We go to market with a portfolio of iconic brands that consumers around the world love and trust. In fact, we now have 11 brands with annual revenues of more than $1 billion. Six of them are confectionery and snacks brands. And we have at least $1 billion brand in every consumer segment in which we compete.

On a local basis, we're even stronger. 80% of our worldwide revenues are derived from brands where we hold the number one market position. This is driven by more than 70 brands, including more than 40 confectionery brands with revenues in excess of $100 million. These brands are icons in their respective markets. We take enormous pride in our stewardship of these brands and the legacies entrusted to our care. And I'm confident that these beloved brands will thrive with focused, incremental marketing and merchandising investments that we can now provide.

From a geographic perspective, more than half of our business is now outside North America. More than a quarter of our revenue comes from fast-growing, developing markets, up from 20% before. Our developing markets scale is now greater than any of our North American food tiers, and this scale, this presence is the cornerstone on which we will grow our strong brands even faster. For instance, as we've said before, the geographic footprint of Kraft and Cadbury is highly complimentary. We now have considerably greater scale in two developing markets that will benefit all of our categories.

As this chart shows, combined net revenues will be approximately $1.5 billion in Brazil, $1 billion in Russia, about $400 million in India, $500 million in China, and about $800 million in Mexico. This will lead to significant revenue synergies as we expand the distribution of each of our respective brands into new markets. For example, products under the Cadbury and Trident brands will benefit from a substantially strengthened presence in countries like Brazil, Russia, and China. For Kraft brands such as OREO and Tang, Cadbury gives us a meaningful entry into India and fundamentally transforms the reach of our brands in Mexico and South Africa.

But that's only half the story. We now go to market from an even stronger position. Together, we possess exceptional and complimentary sales and distribution capabilities. Kraft foods is strong in modern retail channels, that is traditional grocery stores. Indeed, our scale is unmatched in North America, where we have unique capabilities to drive performance. And as large retail formats grow globally, we're in a strong position to capitalize on that. At the same time, Cadbury is very strong in instant consumption channels. This is an important class of trade in both developed and developing markets, in part because instant consumption channels provide incremental reach to large retail formats. What's more, these channels typically carry opportunities for higher margins and higher growth, and nowhere is this more important than in the confectionery and snack segments.

From a distribution perspective, our leadership and confectionery is highly complementary to our biscuit business. Being a global leader in both confectionery and biscuits will not only provide our combined business with significant scale. But also with exciting innovation platforms. Together, we will be the global leader in sweet snacks with leading market shares in every major region in the world. This scale will be an increasing source of competitive advantage in both the confectionery and snack segments and the food industry as a whole.

For these reasons, I'm highly confident we're well-positioned to drive top tier organic revenue growth for the foreseeable future. Our portfolio is now more heavily weighted toward faster-growing categories and geographies. And on top of that, we have a long runway of meaningful revenue synergies ahead of us. With every geography benefiting. In the end, I firmly believe that this portfolio, with its unique profile, can deliver at least 5% organic revenue growth on a consistent basis over the long-term. This assumes highly achievable growth objectives for every geography, 3% to 5% in North America, 2% to 3% in Europe, and 10% plus in developing markets.

On the cost side, we will access the benefits of our significant global scale. With about $50 billion in revenue, we're the world's second largest food company and number one in North America, but I'm not talking about big for bigness sake. In an ever consolidating market place, scale is a source of great competitive advantage. Our size and presence in more than 160 countries gives us that scale. Greater scale should lead to meaningful cost savings. As you know, both Kraft and Cadbury each had strong cost savings pipelines. But we're targeting cost synergies of at least $675 million on top of each Company's base plans including Cadbury's vision into action program.

Thus far, we've identified potential annual pretax cost savings in three areas. Operational synergies of $300 million, the result of efficiencies and economies of scale and procurement, manufacturing, customer service, logistics, and R&D. General and administrative synergies of approximately $250 million. And marketing and selling synergies of $125 million from efficiencies and economies of scale in marketing, media and selling expense. We expect to achieve the run rate on those savings by the end of a third year. And we estimate one off implementation cash cost of about $1.3 billion.

We believe these targets are highly achievable. We'll provide more detail on the flow of both the costs and the benefits in the coming months. This strong pipeline of cost savings initiatives is designed to accelerate our margin expansion. Productivity savings will better leverage our scale in manufacturing and operations. We'll leverage our overhead costs to fuel further margin expansion. We'll use a portion of these savings to fund higher A&C as a percent of net revenue, and we'll increase investments in sales, R&D, and marketing to support future growth. As a result, I firmly believe we can simultaneously fuel investments in quality, marketing and innovation for top line growth while still delivering healthy, sustainable margin expansion. In fact, we've set our sights on a long-term operating profit margin in the mid- to high teens, up from 13.7% in 2009.

This combination improves our overall growth profile and positions us for sustainable, profitable growth in the top tier of our industry. We'll be driving high-quality organic revenue growth, executing a strong pipeline of cost savings initiatives while still increasing investments in marketing, sales and R&D. As we do this, we're targeting long-term organic revenue growth to accelerate from 4% or more to 5% or more. We'll drive our margins as I said to the mid- to high teens. And we'll enhance our long-term EPS growth rate from 7% to 9% to 9% to 11%. We know that these are aggressive financial targets, but we also know that we have a very unique portfolio and a unique set of opportunities in front of us. I look forward to updating you on our progress in the months ahead.

Now, let me turn it over to Tim McLevish.

Thanks, Irene. Good morning.

At this point, I would like to update you on the status of our transaction and discuss what you can expect from us going forward. First, here's where we stand in the tender offer. As of February 4, 75% of Cadbury shares had been tendered, which enabled us to initiate the delisting process. So, Cadbury will be de-listed from the London stock exchange as early as March 8th.

In terms of tenders received to date, as of late last week, over 90% had been tendered. And yesterday, we initiated the process for compulsory acquisition also known as a "squeeze-out." So, within six to seven weeks, we expect to own 100% of Cadbury. And finally, through yesterday, we've completed settlement of all shares accepted through February 2nd or about 72%. We've also completed the financing for the transaction. On this chart, you can see a profile of our current debt, including Cadbury's outstanding debentures.

Earlier this month, we successfully raised $9.5 billion in the US and a four-tranched bond offering. As we committed at the outset of the process, we've maintained our investment grade credit rating, importantly, while maintaining good access to tier true commercial paper. We expect to reduce our debt to EBITDA ratio to around three times over the next 18 to 24 months. We'll deliver through a combination of debt reduction and EBITDA growth. We'll apply proceeds of approximately $2.5 billion from the sale of our pizza business. Also, under the terms of our agreement with European Commission, we're required to divest certain Cadbury operations in Romania and Poland. The combined renew of these businesses is approximately $200 million. So, these divestitures will provide additional funds, albeit modest, for further de-levering. As we've stated throughout the transaction, we'll maintain our dividend. However, until our debt leverage targets are achieved, we have no plans to increase it, nor will we be repurchasing any shares. We also expect to draw on our bridge facility in the near term, but will quickly take out the balance through a combination of proceeds from the pizza divestiture and cash generated from our operations.

From the very beginning of this process, we set out four key criteria to maintain financial discipline. First, accretive to cash EPS in the second year. This transaction is expected to add approximately $0.05 to earnings in 2011, the first full year of our combined companies. Second, a return on investment well in excess of our cost of capital. And we expect to deliver mid-teens internal rate of return. Third, maintain our investment grade credit rating. This has been confirmed by the rating agencies. And fourth, maintain our dividend per share; with our strong cash flows and the capital structure we've put in place, we expect to work down our leverage while still maintaining our dividend. Throughout the process, there were some doubters and much talk about the ultimate size of our checkbook. But as you can see, the final terms of the deal fell well within the bounds of our original criteria. So, not only is this deal a strategic home run, we've touched all of the bases on the financial front as well.

Let me now turn to integration. At this point, we've been working with the Cadbury team for less than two weeks. While we don't have all of the answers yet, I can share some early thoughts about how we will proceed. Let's start with back room systems and processes. It would generally be more cost-effective and efficient to adopt the Kraft platform. On the other hand, with front room activities, we'll go with the best practice from whichever Company has it. And when it comes to people decisions, which is the best person for the right role. And how will we make those decisions? We have a global team of executives from both Companies in charge of bringing our Companies together.

Tim Cofer is leading from Kraft and he's paired with Mark Reckitt from Cadbury. Tim is ideally suited for his role. He's an 18-year veteran of Kraft. He most recently led our pizza business. Perhaps even more important, Tim managed our 26 country European chocolate business from 2003 through 2006. He's a proven leader who's familiar with growth businesses and has a relentless focus on costs and quality.

Working hand in hand with Tim will be Mark Reckitt. Mark is a 20-year Cadbury veteran. He knows the Company through and through from structure to financials to people. Indeed, he's been a chief architect of the strategies that have made Cadbury so successful. We're delighted that Mark has accepted our offer to partner with Tim in helping us combine our two great companies. Mark embodies the heart and soul of Cadbury. We know he will be a great partner in helping us truly capture the best of both and capitalize on the growth opportunities created by this combination.

As we work our way through this, Tim, Mark, and the rest of the team will be guided by six practical principles. First and foremost, we'll maintain business momentum. Many integrations fail, not because of the cost synergies have not been captured, but rather because the base business has not been properly looked after. We'll minimize the disruption to our day-to-day business so as to keep building and growing our brands. Second principle, we'll follow the money using the 80/20 rule. By that, we mean spending time on those things that would bring the greatest benefit to the organization. Third, capture best of both. Fourth, treat people fairly and with respect. Fifth, move quickly. And sixth, communicate, communicate, and communicate. The process will be as fair and as transparent as possible. And we're going to move quickly, but prudently. The reality is we all have a lot of homework to do because of the way this transaction came together. We're just starting some critical conversations.

So when can you expect some more answers? Let me share a time line. Within the first 45 days, we intend to name the executive team, the leaders of the regions, areas and countries and direct reports to the functional leaders. Once those are completed, within the first 90 days, we intend to announce the next level of management for each region, country, and category. We'll also determine whether and how we'll consolidate any region, area, and country office locations or various research and development facilities. Within six months, we'll finalize the blueprint for our combined manufacturing network.

I hope now you can appreciate all that's going on to ensure both a smooth integration and to validate our original assumptions on the deal, which brings me to earnings guidance. At present, our ability to issue earnings guidance remains limited for two important reasons. First, UK listing authority rules require any earnings forecast to be reported upon by an independent third party, and I can tell you from recent experience, it is a time-consuming and expensive process. Second, and even more important, is the fact that it is still very early in the integration process. As I mentioned, we've had less than two weeks to evaluate Cadbury's existing operating plans and financial statements and to begin verifying our initial assumptions regarding synergies.

We won't make you wait six months. We expect to issue 2010 earnings guidance and an outlook for 2011 when we announce our first quarter results in May. In the meantime, this is what I can offer to help you build your models. We deliver $2.03 per diluted share in 2009 in line with our recent guidance. We continue to target EPS growth for the Kraft foods base business at the high end of our 7% to 9% long-term growth objective, in the near term. We will be consolidating Cadbury results from February 2nd onward. We're targeting about $0.05 cash accretion to our 2011 base business from the Cadbury acquisition. That excludes one-time implementation costs of about $1.3 billion, which will be incurred over the next three years. It also excludes expenses related to the transaction and the incremental noncash items, such as the amortization of the intangibles related to the acquisition. The divestiture of our pizza business is expected to lower earnings by about $0.05 per share on an annual basis, and that transaction is expected to close mid 2010.

Overall, the combination of Kraft Foods and Cadbury promises to deliver substantial value for our shareholders. This combination will increase our long-term growth targets, while still generating significant near-term benefits. It will accelerate our long-term growth targets to 5% plus on the top line and our long-term EPS growth target to 9% to 11%. At the same time, we expect the transaction will be accretive to cash EPS and have a mid-teens internal rate of return. Together these benefits result in a transformational combination that will create a top-tier performer in the global food industry. Thank you and now we'll be happy to take your questions.

I'm wondering if I can just ask a portfolio question here.

Just using Maxwell House as an example, I know you're doing some trimming there, but when you look at some of the sales declines notably Walmart, I guess -- I guess a person more cynical than myself might suspect you're setting this thing up for sale, which I know you can't comment on, but just portfolio decisions henceforth, do you think we're through with divestitures in North America?

And maybe a little more color on what might be divestitures as you merge with Cadbury? Thank you.

We've got a pretty big one to swallow. We're feeling awfully good about the fundamental profile of the portfolio. I like the category composition. I feel very good about the geographic footprint, particularly in developing markets. We like the channel profile. We're going to spend the foreseeable future integrating it and delivering on the financial commitments that we've made.

We will continue to look at our portfolio as we always do. And we'll keep you posted as things evolve, but I feel quite comfortable with the portfolio as it sits today and most importantly, quite confident that we can deliver on the financial commitments that we've laid out.

Thanks. Following up on divestitures a little bit.

I think a lot of us were surprised to see pizza as a choice for something you would sell. It wasn't that long ago that might have been described as the crown jewel as the North America business.

Could you talk as much as you can about how much of that choice to divest that was just that, it was a large, attractive asset that was salable in the current environment and how much of it is that some of the developments we've heard about discounting-wise in the frozen food arena? That's become competitive. How much of that was actually in tactical perspective?

You know, the divestiture of pizza was an important strategic decision for us. It was not something we were looking to sell but the reality was is we looked ahead at the future of that business. The challenge is, it is a frozen business, we don't have any frozen assets outside North America. It did not scale well within our wall-to-wall capability in North America which is an important competitive advantage, as you know.

And so from a strategic perspective, it was a good business to think about divesting at some point. We didn't necessarily -- wouldn't have chosen today except for the fact that we had a very good offer and it made very good economic -- had very good economic returns for us. So, it was a difficult decision, but I think it was the right decision for the long-term profile of our portfolio.

In terms of our margin targets, you ended last year with a 13-7 margin. You used to do 20% several years ago. I believe you closed something in the order of 30 plants. Fourth quarter margin was 11.8. Why should we believe your targets for Cadbury, which, frankly, seem aggressive given your record?

Well, I think we've made good progress in delivering on the margin commitments we've made. We said he would expand margins. We were up about 450 basis points. I feel good about the progress overall both at the gross margin level and the operating margin level.

I think the fundamental programs that we've laid out on our base business in terms of overhead and end-to-end productivity will continue to drive the margins toward the mid-teens commitment that we've made by 2011 for our base business then the overlay of the synergy on top gives us some adding opportunities. So, I think net net, we are not going back to 20; I've been quite clear about that. That was not a sustainable level, but I'm quite confident we can deliver in the mid-teens and that we're well on our way to get there.

I'll just add to that that fourth quarter is not typically our strongest quarter of the year. We did -- you may recall, one year ago, one year ago, that the global economic situation was virtually in crisis. At that time, we chose to gate some of our spending. We lightened up our spending in the first half of the year. We started to release that in the second half. Some of that got released in the fourth quarter. I would say we "heavied up" on a lot of our spending, which took down the margins but that was the right thing to do for our business.

I wanted to touch base on working capital, if you could? Irene, you mentioned as consumer confidence increases, you're going to shift some of the value-based spending approach to more new product development again. That's something we normally associate with a build-up of inventory, which can be a drain on your cash flow. Can you talk about what your expectations are in terms of working capital as a source or use of cash flow and how that may or may not impact your ability to delever in the near term?

Let me -- can I respond to that? Yes. Let me tell you. To start out, I sat here two years ago and committed that Kraft could generate an additional $1 billion worth of cash flow, and I guess I didn't realize it would come as quickly as it did. Irene commented the 4.2 or 3.8 that we actually generated depending upon which level you look at it was aided by some -- a lot of the late year spending I mentioned in the fourth quarter, sat in accruals or sat in payables at year end. There is probably a $0.5 billion worth of what I will call not sustainable level of working capital.

I will say though, we do commit to increase our new product development. We still have a ways to go in lowering our overall inventory levels and our working capital levels. We have engaged this year in our project Savor which is a sourcing initiative to generate a fair amount of reduced costs, but also to extend terms and to get our terms right on our payables.

So, I think there's still working capital improvement opportunity. Some may be absorbed as we expand inventories a little bit. Maybe in geographically or new product development. Working capital will still be a source of cash flow as we go forward.

We'll share those actual targets with you in May when we give our guidance for 2010, but I'm quite comfortable that the targets we've laid out will provide adequate capital expenditure as well provide for the inventory build on some of these new products, while at the same time delivering against the EPS commitments we're providing.

Just a point of clarification. 2011 cash EPS accretion? What's that accretive to? Is it accretive to --

well, it is accretive to our base business we've established. The best -- unfortunately, that we haven't laid out specifically. We've said we're going to be at the high end of our 7% to 9% growth target, long-term growth targets in the near term. I would apply that to 2011.

Where that trajectory would have been for 2011?

Where that trajectory would have taken you from 2010 into 2011. From that we would expect to be --

That's with or without the pizza dilution?

That's -- pizza needs to be adjusted.

Taken out.

That's correct.

All right. Thanks.

Just a final clarification. The pizza dilution net was a full year basis or half year?

That's on a full year basis. Obviously, we expect that we'll close sometime mid-year. It will be half of that for the first year. That's not a -- forever thing. The majority of that is stranded overheads. That we'll be working on bringing back down over the coming years.

Just two quick comments. I think it is somewhat scary to say $0.05 delusion from that, $0.05 accretion from Cadbury. The transactions are obviously related. I'm not sure how you really check the box at the top there that says we delivered on your two accretion.

Then also as we go forward on this process, the mixing of vol and mix is really -- you might as well say volume and color. They're just not related. It would be much more helpful -- Kraft for years and years and years delivered a volume number and particularly as this acquisition goes forward and if we're to judge you on have you established this virtuous cycle, which we'd love to see, but we've got see volume to know that.

Yes. I would not agree with your assertion that it is like mixing with volume with color. There is a real reason why we chose to bring them together and largely it results from our ready to drink business, which is very heavy and to the extent that we would see significant distortions when we would see volume up in ready to drink and it would take our mix down and vice versa. So, we chose to bring them together.

However, for the last two years, since we put it in place, we've been hearing pretty consistently, that's not something that's well received by analysts and investors. We're looking at ways of better giving you the information that you need without combining them. We have some ideas. We need to flush them out.

If it is any consolation, Cadbury has the same problem. They're selling lots of Wispa and very light-weight things, which is messing up their volume as well. We need to figure this out, but we understand your issues, and we are. We will attempt to deal with it.

Why don't we take one more. Then we're not going to go to a breakout. Management will be available at lunch for further questions. We'll go right to lunch, which is only one hour.

Irene, just in terms of your base business -- Sorry.

That was a great move. I really liked that.

The fourth quarter vol/mix trend for your base business, the 1.6% growth is an improvement, but you were lapping up pretty easy comparison in the fourth quarter. Can you just elaborate on some of the factors in the fourth quarter and what's to say that some of the heightened promotional activity that you've seen in some of your categories really doesn't spread it into the other categories.

That was my question, too. That's a good one.

I feel very good about the progress we've seen in the fourth quarter; as we said, it came in a little bit lighter than we had hoped, but the reality is as we start to get some of the unsustainable volume out of the base as we see from some of the promotional activity subsiding, we expect that we will see the necessary progress. I was pleased to see progress in market share. I was pleased to see the contribution of vol/mix improving even though it didn't quite hit the number that we had expected to see. And we did see very strong profit and cash flow growth, which we expect to continue.

I suspect the first quarter will reflect the continued improvement in our underlying vol/mix health and in our trends and that should play through not only in our aggregate revenue growth but also in our market share, particularly on our US category.

Ok. Now, we eat. Thank you very much, again, for Kraft for sponsoring lunch today.