億滋國際 (MDLZ) 2011 Q2 法說會逐字稿

Good day, and welcome to Kraft Foods' second quarter 2011 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'd now like to turn the call over to Mr. Chris Jakubik, Vice President, Investor Relations for Kraft. Please go ahead, sir.

Thank you. Good morning, and thanks for joining us. Particularly, since this call is quite a bit earlier than you were expecting today. With me are Irene Rosenfeld, our Chairman and CEO, and Dave Brearton, our Chief Financial Officer.

Earlier today we sent out two releases; our second quarter earnings report, and an announcement of our intent to create two independent companies. These releases along with today's slides are available on our website kraftfoodscompany.com

Before we get started, please note that during this call, we will make forward-looking statements about the Company's performance. These statements are based on how we see things today, actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures, and you can find the GAAP to non-GAAP reconciliation within our earnings release and at the back of the slide presentation.

Let me now turn it over to Irene.

Thanks, Chris, and good morning, and thanks to all of you for getting up so early for our news.

As you have now seen, we made two very significant announcements today. First we reported terrific second-quarter earnings. Concurrently, we announced our intention to create two independent publicly-traded companies by the end of 2012, as the next step in the transformation of Kraft Foods.

We will begin today with a review of our quarterly results. Then we will spend the balance of our time on the strategic rationale and benefits of our plan. So, let's get started.

In the second quarter, we delivered strong top and bottom line results, continuing our positive momentum, through the first half of the year. This sets the stage for strong growth in the second half, and positions us well for the next phase of our transformation. We talked a lot in the first quarter about the challenges facing us due to high input costs. We said we would manage them, and we have. I am pleased to say, as we exit the first half, with strong results and good momentum, that we're over the hump and we are quite confident about the balance of the year.

There are three reasons why. First, as input costs increase, we quickly price to offset them. Across our categories, we have announced about 85% of the pricing that we currently expect to take. More than 80% of these increases are already reflected on store shelves.

In most cases, we took action earlier than others, and in certain categories, we priced quite a bit more aggressively than our key competitors. The fact we responded quickly to these higher-than-anticipated costs has put us in a much more favorable position in the marketplace.

The second reason I'm confident about the balance of the year, is that we are winning with our consumers. We have been able to post a solid market shares while pricing aggressively. This is due to our ongoing investments in innovation and marketing.

Revenue gains for innovation are up in each region. We are continuing to improve the quality of our advertising, and we're supporting these efforts by increasing our investments in advertising and consumer marketing support, which are up strongly year-to-date. Of course, as we raise prices, we have experienced some near-term dislocations in certain categories, but overall, we are seeing solid market share performance across our four categories, and each of the three geographic regions. It is important to note that private label's market share is essentially flat in our categories.

What also gives me confidence in our business momentum is that despite the substantial increases in input costs, we are growing profit dollars through a combination of pricing and end-to-end cost management. In fact, despite the loss of the Starbucks CPG business into comparisons against peak margins in the second quarter last year, we grew profit dollars year-on-year. Cost savings are enabling us to continue to fund significant increases in A&C. That in turn is doing are virtuous growth cycle.

I would especially like to highlight the progress where making in our global snacks categories. Many of you have asked if the Cadbury acquisition is driving the growth we thought it would. The answer is an unqualified yes. Last fall, at our Investor Day, we laid out the long-term growth target of mid-to high single digits for global snacks. As you can see, the 6% growth we have delivered year-to-date is right in line with that target, and we have only just begun to realize revenue synergies.

Let's look at the key contributors to that growth. Global biscuits is up 7% on a constant currency basis, led by strong double-digit growth in developing markets.

Let's look at some number. Oreo, a $1.5 billion brand has grown 22%. Chips Ahoy, a brand sold primarily in developed markets, is up 18%. And Club Social, our leading cracker brand in Latin America is up 35%. Our global chocolate category is growing even faster than biscuits, it is up about 9%, including gains of low to mid teens in developing markets. Our $1 billion Cadbury Dairy Milk brand, first introduced in 1905 and now sold in 30 countries around the world, has grown 13%.

Just for perspective, that is the best growth in many years. Lacta, a $700 million brand in Latin America, is up 18%. And Cadbury Flake, a leading brand in many hot weather markets is up 13%.

Even gum and candy, which has experienced significant challenges, has grown 2% year-to-date including a high single digit gain in developing markets. As we said before, the key challenge for gum and candy is then developed markets. Revenues are down double-digits in North America and are flat in Europe.

While we are certainly not satisfied with our gum results, we expected a slow first half, due to two factors. First sluggishness in the instant consumption channel as a result of the challenging macro economy. Specifically, the decline in pocket money among teens, our biggest consumer segment. And second, our new products this year were simply not as robust as we had hoped, or as strong as last year's innovations.

We understand the issues and we are in the process of fixing them with additional innovation and smaller pack sizes to hit lower price points. We expect to see better results as the year progresses. With that said, gum and candy remains an attractive category, with excellent long-term growth prospects consistent with our global snacking goals.

Let me turn it over to Dave who will provide more detail on our second quarter results.

Thanks, Irene.

In a nutshell, we have seen terrific results on both the top and bottom lines during the first half of the year. We are seeing payoff from our focused investments behind our power brands, big bets on innovation, and improved marketing. As a result, we have built good volume mix, share and revenue momentum in the face of aggressive price increases.

In the second quarter, organic revenues grew more than 7%, including power brand growth of about 9%. Of course the second quarter benefited from Easter. But looking at the first half, which normalizes for the Easter shift, organic revenue was still up nearly 6% with very solid contributions from all mix of 1.3 points. This was despite substantial pricing of 4.6 points.

What can we expect going forward? For the full year, we now believe input costs will be up in the low teens versus last year. That is up from the high single digit increase that we forecast on our call three months ago.

As a result, we do anticipate additional pricing actions to offset these higher costs. But as Irene mentioned, we have already announced or implemented about 85% of the pricing actions we expect to take for the year, so we are confident in our outlook.

Turning to profits, we continue to gain momentum. Pricing and productivity gains essentially offset higher raw material costs on a dollar basis. At the same time, continued improvement in overhead and other cost savings funded a strong increase in A&C. To put it another way, we projected operating profit dollars in the quarter, even though our OI margin declined compared to peak levels a year ago. This was essentially due to the impact of pricing on the denominator of the margin calculation. Despite this, the underlying operating income margin improved sequentially from the first quarter, and for the second half, we expect to see increases in year-over-year margins.

Turning to EPS, as we outlined in our last earnings call, we expect second-quarter operating EPS to be down versus the base of $0.60 last year. We knew we were up against difficult comparisons with peak margins in Q2 2010, as well as the reversal of mark-to-market gains from Q1 this year. But clearly, we did better than our initial expectations. Mark to market gains did reverse, and at $0.05, they were a bit more than we expected. As for the upside, part was due from favorable currency, and some was due to a lower than anticipated tax rate. The rest came from operating gains.

On a year-to-date basis, we are encouraged that we delivered $0.06 of operating gains year-over-year, despite the fact that we were up against some very difficult market comparisons to the prior year. All of our geographies contributed to the strong performance in the quarter. In North America, despite a very difficult operating environment, our virtuous cycle continues to build momentum. Organic revenues were up 4% in the quarter and 3.1% for the first half.

As expected, pricing was a key driver. As we said, we price to offset higher costs earlier than most of our competitors. As a result, vol/mix declined as we saw some near-term dislocation in certain categories.

Despite the significant pricing, however, we were pleased overall with the limited volume elasticity. It was consistent with our expectations and further evidence of the improved strength of our brand equity. While our power brands grew at about the same rate as our broader portfolio, several of our innovations made significant contributions.

Our new meal liquid beverage mixes continued to generate revenues well ahead of plan. Oscar Mayer Carving Board cold cuts, Newton Fruit Thins cookies, and Philadelphia Cooking Cream also performed well. As a result, through the first half of the year, our market shares in North America remain solid. More than half of the business as holding are gaining share in a dollar basis. And we are even more encouraged by the fact that to date, we have announced roughly 85% of the pricing we believe we need to take this year. Almost all of that pricing is already reflected on store shelves.

Now, let's take a look at profitability. North America did a good job of pricing to offset higher raw material cost on a dollar basis. The region also continued to benefit from lower overhead. Nevertheless, operating income margins declined from peak levels a year ago due to changes in the US premium coffee business and the denominator effect of higher pricing on the margin calculation. Looking ahead, we expect year-on-year margin improvement in the second half.

On the other side of the Atlantic, our European team recorded a sixth consecutive quarters of top- and bottom-line growth. Organic revenues grew 6.4% in the quarter. Following the first half, they rose 5.4%. As expected, pricing drove the majority of this growth, as we successfully implemented action across all categories. As we look ahead, price increases for the third quarter have been announced in coffee. With that, we have now announced all of the pricing we expect to take in Europe this year, and about 80% of our pricing is now reflected at retail.

Power brands rose 8% including 17% of Oreo, fueled by launches in Germany and Austria, leveraging our global playbook. Tassimo grew 19%, while Kenco Coffee increased 24%. In addition, Philadelphia continued to grow strongly, up 18%. And while retail sales are slowing across the region, we are continuing to drive growth, for our brands, and for our categories. On a pan-European basis, year-to-date, we are increasing share in biscuits and cheese, and shares are holding up well in chocolate, gum, and coffee.

There's also good news at the profit line. Despite a difficult environment, Europe delivered another strong quarter. On a dollar basis, pricing and productivity offset the significant increase in raw material costs. While the denominator effects of pricing were significant headwind to margin performance on a percentage basis, our continued focus on lowering overhead enabled us to post a modest increase in OI margin.

Turning to developing markets, we generated double-digit growth and a good balance of vol/mix and pricing. Organic revenues grew 13.5% in the quarter, and in the first half, revenues were up 11.6%. Power brands rose 20% in the quarter, led by 62% growth of Oreo. Club Social crackers grew more than 40%, [Blocks of] Chocolate was up 23% and Halls rose 16%.

Within this segment, Asia Pacific and Latin America continued to grow double-digits and CEEMA was up nearly 10% as economic conditions began to recover in many parts of the region. Operating income margin in the quarter rose to 14.2%, driven by overhead leverage and vol/mix change. OI margins increased even as we continue to invest in our brands, including a strong double-digit increase in A&C.

So what does this mean for the whole year? Based on our solid results through the first-half and our outlook for the balance of the year, we are raising our full-year 2011 guidance.

On the top line, we have increased our organic net revenue guidance to at least 5% from at least 4% previously. This was mainly due to the impact of additional pricing. On the bottom line, we are raising our operating EPS guidance to at least $2.25 from at least $2.20 previously. Our guidance reflects cautious optimism for the balance of the first year. Through the first half, we have delivered strong operating gains and currency has been favorable. As a result, we are dropping the year-to-date currency benefit to the bottom line.

We remain cautious with a number of uncertainties in the environment, but our end-to-end cost management initiatives and strong revenue growth give us confidence that we will continue to deliver high quality, sustainable growth for the balance of the year. As our performance over the past several quarters have demonstrated, our virtuous cycle is working well around the world. A key focus on power brands, categories and markets is driving top-tier growth in each region.

We are successfully managing unprecedented input costs through renewed pricing power and improving productivity. And our end-to-end cost management is generated with savings necessary to expand profits and reinvest in further brand building and innovation. As a result, Kraft Foods is now positioned to deliver reliable, top-tier growth on both the top and bottom lines.

Now, I will turn the call back over to Irene.

Thank you, Dave.

As you can see, our year-to-date results are strong. Our operating momentum continues to improve, and we are confident in our outlook for the balance of the year. Clearly, our strategy is working, and it would be easy to leave it at that, but we believe there is a significant next step that we can now take that will put our business on an even higher trajectory.

Over the past four years we have reinvigorated our iconic brands around the world, and we have successfully transformed our portfolio. We have built a global snacks powerhouse, and we have strengthened our presence in fast-growing developing markets through several strategic acquisitions, including LU biscuits and Cadbury. In addition we divested certain slower-growth, lower-margin businesses. The combination of these actions has fundamentally changed the face and the footprint of our Company.

As we look to take our performance to the next level, we recognize that there are very different opportunities to enhance shareholder value between our global snacks business and the balance of the portfolio in North America. Outside of North America, there is no question that our strong snacking portfolio is well-positioned to grow. We see tremendous opportunities ahead as we continue to leverage our global product platforms, our scale in developing markets, and our route to market capabilities. We also have an ample opportunity to grow in whitespace markets and instant consumption channels.

With the addition of the Cadbury business, the North American snacks portfolio now has the opportunity to pursue many of the same growth drivers, and to become a truly ubiquitous snacking powerhouse. Specifically, it will leverage our global innovation platforms in biscuits, chocolate, gum and candy. And will also deliver significant growth from investments in direct store delivery and in instant consumption channels. Now that we have rejuvenated the grocery brands within our North American portfolio, it can fulfill its promise of becoming a lean, mean, center of the store machine.

It will leverage its category-leading market positions and continue to deploy its capabilities and innovation in marketing, while focusing on warehouse sales and distribution efficiency. But it will require very different investments and resource allocations. Simply put, we have now reached a stage in our development with the global snacks and grocery businesses in North America would with each benefit from standing on their own, and focusing on their unique drivers of success. Today's announcement, to create two independent companies, will enable us to do just that.

So how will it work? The global snacks business will consist of the current Kraft Foods Europe and Kraft Foods developing market units, as well as the North American snacks and confectionery brands. As an independent company, it will have estimated revenues of approximately $32 billion and a strong growth profile in the top-tier of its global peer group. Approximately three-quarters of revenues will be from snacks, and more than 40% will come from a diversified footprint in highly attractive development markets. The business will also have a strong presence in fast-growing and high-margin instant consumption channels.

The non-snacks portion of the portfolio will consist primarily of powdered beverages and coffee, which have strong growth and margin profiles in developing markets and Europe. Key brands will include Oreo, and LU biscuits, Cadbury, and Milka chocolates, Trident gum, Jacobs Coffee and Tang powdered beverages. Strategically, global snacks will focus on industry-leading growth, by extending its global product platforms, leveraging the significance scale in developing markets, expanding in instant consumption channels and aggressively entering whitespace markets. Global snacks will leverage its cost structure through volume growth and improved product mix, with disciplined investments in sales, distribution and manufacturing.

So what about the North America grocery business? It will consist of the current US beverages, cheese, convenient meals and grocery segments, plus the non-snack categories in Canada and food service. With approximately $16 billion in revenue, this business will continue to be one of the largest and most-admired companies in North America. This portfolio will include many of the most popular brands on the continent, with the number-one branded position in 12 of its top 15 categories. Just look at these key brands; Kraft Macaroni and Cheese, Oscar Mayer meats, Philadelphia Cream Cheese, Maxwell House Coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing.

And as an independent Company, the North American grocery business will continue to leverage great marketing, innovation and leading market shares to deliver reliable revenue growth, in line with its categories. This Company will concentrate on capital efficiency by focusing on three things; low-cost, enhancing margins, and delivering reliable cash flow. If we use a variety of tools, including optimizing trade spending, lean six sigma manufacturing and negative overhead growth. Its primary use of free cash flow will be to provide a highly competitive dividend payout. When managed in line with these objectives, we believe each of these portfolios will provide unique investment opportunities and attractive returns.

Creating two independent companies offers a number of benefits. Each business would focus on its distinct strategic priorities, with financial targets the best fit its own markets and unique opportunities. Each would be able to allocate resources and deploy capital in a manner consistent with its strategic priorities, in order to optimize total returns to shareholders. And investors would be able to value the two companies based on their respective operational and financial characteristics, such as growth and yield, and thus to invest accordingly.

We have successfully built two strong portfolios. As a result, we are now in a position to see the opportunity to create two great companies. Each will have the leadership, resources and mandate to realize its full potential. I believe this is the best way to stage our businesses for long-term success, the best way for shareholders to value each business. And the best way to ensure a bright future for our people around the world.

So, to summarize today's news, we reported terrific results for the second quarter, continuing our strong business momentum. We are raising our outlook for the year and remain confident that we will deliver top-tier performance for the full year. Our virtuous cycle is working well in every region around the globe. So we are in a strong position to take the next logical step in our evolution, the creation of two highly-attractive independent public companies, designed to increase shareholder value. I am sure you have many questions, and as you can understand, we won't have all the answers today, but of course will provide further updates as appropriate in the coming months.

Operator, let's now open it up for questions.

(Operator Instructions). Your first question comes from Andrew Lazar of Barclays Capital.

Good morning, everyone. So my first question would be, it's always interesting to get a sense of why now? You are still obviously somewhat in the integration phase of getting Cadbury to be where you want it to be and you have a lot of the cost synergies flowing through, was it more of a matter of just a way to accelerate, whether it be the growth on the growth side of the assets and get more aggressively after the cost side for margin gains on the cash-generative North American grocery business, or was there something you saw developing in the core business that made now the right time?

Actually, Andrew, when you think about why now? This is going to take is 12 months to implement, and as we think about the Cadbury integration, it is well underway, our international businesses are relatively untouched by this announcement, and they will continue to focus on delivering their results and completing they integration and once we made this decision, every decision that we make going forward has some implications for the future state, so it just made the most sense to make it public and begin to implement some of those actions as we move forward here.

It'll take some time to separate the two businesses, but in the meantime, we can have our international businesses focused on completing the cat very integration in the book of the separation activity on North American business and we can begin to make the decision that is consistent with their future growth and future role and future metrics that will be used to evaluate that business.

To help investors start to get a better sense of how to evaluate these two companies on their own, I realize a lot more information is still to come, perhaps you can lay out, even in an initial way, the type of growth profile you see for each of these businesses, both top line and bottom-line, to get a sense of the type of targets you think of that when you look at these individual assets.

I think it's premature to talk about specific targets, Andrew, obviously we see them having different growth profiles, and we are not in a position today to issue guidance for 2012, but our long-term growth rate expectations have not changed. What we do expect is the very consequence of the different mandates and portfolios of these two businesses, that we would see some different profiles.

Okay, I'm going to leave it there. Thanks again.

Your next question comes from Bryan Spillane of Banc of America.

Good morning. Just two questions. One is a follow-up to Andrew's line of questioning in terms of why now? How much of the changes in the industry, there has been a profound set of changes affecting the food industry, especially in North America, over the last few years. How much is the change and the pressures on the industry maybe affected the long-term outlook for Kraft and just your outlook for the industry and has that at all influenced your decision to do the split now, and second, the announcement this morning that Tim McLevish has decided to stay, or you have asked him to stay, and just what his role will be in the transition.

Let me talk first about the long-term outlook. As I mentioned, we see no change in the long-term outlook, our growth targets of 5%-plus, organic revenue growth 9% to 11%, EPS we feel quite confident in fact, given the updated guidance today we feel quite comfortable that we will meet or exceed those targets in the 2011. The reality is as we look at the economic developments around the world, we would expect that there is likely to be some rebalancing in the profiles of the different regions, but as a consequence of being more targeted and more focused, in defining the mandates of these two different businesses, we would expect a better bottom line performance. So net-net, the long term growth rate targets in aggregate will not change. We would expect to see, underneath that, some rebalancing, but as I said to Andrew, we're not in a position today to begin to give guidance for 2012 and beyond.

In answer to the question about Tim, I'm quite thrilled that Tim has agreed to postpone his departure from Kraft. He will actually lead the steering team that will oversee the creation of these two world-class companies, and we are delighted to have somebody with his background, his knowledge of Kraft and the financial markets, to really bring some objective and transformational thinking to the creation of these two companies. Tim will be in the role until both companies are launched.

Great. thank you.

Your next question comes from Chris Growe of Stifel Nicolaus.

Good morning. Hi. I want to ask, in relation to your full-year EPS guidance, you have pushed back the launch of Gevalia a little bit. At least incorporating your thinking of the drag of the total Starbucks effect on your business, I want to get a sense of where that stands today, and also, from just reading the press release, it looks like you have FX built in from the first half of the year, but I do forecast some strong FX contribution in the second half of the year. Is that embedded in your guidance as well? I guess what I'm trying to understand, Irene, is I know you want to reinvest back in the business as well, so how are you -- are you increasing investments, if you will, along with the strong underlying earnings growth performance?

We will continue to reinvest as appropriate, we have set very aggressive targets for our A&C, and as you have seen year-to-date we are up quite strongly, and we will be for the balance of the year, so you will see us continue to invest in our franchise around the world. We feel terrific about the momentum behind our Gevalia launch. In fact, it has been stronger than we expected, and we have chosen to avoid disappointing our consumers, we chose to delay that launch until January 2012. We are still quite excited about that opportunity, and we believe it will be a very strong brand for us as a complement within our North American coffee portfolio.

Was that a meaningful component of the $0.05 to $0.07 adjustment that you called out for the total coffee business this year?

Actually, it was not, we were expecting to invest behind it, so it was -- the dilution was primarily coming from the absence of the premium coffee at Starbucks in that equation, not so much from the launch of Gevalia.

Okay, and my final question is just relation to what looks to be another round of pricing, I guess you have one in Europe and you are done for the year, a little bit more North America. Just a question for you, I think you alluded to it, at least in part, in your comments about the elasticity and I guess I'm trying to understand if you see another further pick up in elasticity, if you will, in this next round of pricing given the sequential price increases this year.

This is Dave, about 80% of the pricing has actually hit the shelves, so not all of it is on there, not all of it has been there for a while, so there could still be a consumer reaction against the elasticity, and that is why we said at one point that we remain a bit cautious on the vol/mix but we are pretty confident that we have really good levers, whether that's in the end-to-end cost management and our overhead program to manage through that and deliver the EPS for the year. The key metric we are going to keep tracking is market shares, because the elasticity has been in line with our expectations, but importantly, our market shares are holding up well, and that is the key metric we are looking at from the top line. We will obviously have to keep on top of it, but it's pretty much, so far so good I would say.

Thanks for your time.

Your next question comes from Alexia Howard of Sanford Bernstein.

Good morning. Can I ask how you are phasing the revenue synergies? I think last quarter you talked about how Oreo and Tang have been launched into India, you've more than doubled the number of outlets for the Kraft-based products in Mexico and Brazil. Can you give us a little bit more color about how you are thinking about how this all rolls out, which brands, which countries, and how it is going to be phased over the next few years?

We are still confident in the approximately $1 billion of revenue synergies estimate that we have laid out. If you recall, we had built in about 50 basis points of growth in our 2011 guidance, due to revenue synergies, and as I mentioned in my earlier remarks, most of that hasn't really played through in our numbers which is why we feel particularly encouraged about our results to date, but we should see another 50 to 100 basis points as we look into next year and beyond, as we begin to capitalize on putting legacy products through the route to market, or entering a whitespace market. It's a combination of those two actions.

Great, and just a quick follow-up, the cost inflation this quarter, last quarter it was around 7% to 8%, and that was your guidance for the year, has it jumped up a little bit this quarter, or how is that playing out?

We said high-single digits last quarter, we are saying low teens this quarter and the difference really is coffee and dairy prices, so yes, they have gone up in the last three months, we are putting pricing in place so we're feeling good about it, but the total impact on our input cost has gone up since the last time we talked.

Great. Thank you very much, I will pass it on.

Your next question comes from David Palmer of UBS.

Thanks, hi. It's my understanding from another spin transaction, Ralcorp is doing a spin itself, that each part of the NewCo, the new Kraft would be acquirable in stock even before the spin was consummated, and then post spin, again in your timetable, presumably 2013, the parts would be acquirable for cash as well. Is that your understanding with the help of your advisors, is that your understanding?

I'm not sure what sort of a structure you are describing, but what I will tell you, we feel very good about the opportunity to create these two terrific companies, and that is our focus.

You don't have an opinion about the taxable nature of would-be acquisitions of the SpinCo for instance, if someone were to approach you after this was announced, they could not buy it for stock near-term or buy it for cash in 2013 without a tax event? No opinion on that?

We prefer not to comment on M&A generally. The spin we are proposing here is a tax-free spin, and that is really what we are concentrating on for the next 12 months.

Thanks very much.

Your next question comes from David Driscoll of Kraft Foods.

I don't work for Kraft Foods, I work for Citigroup but I appreciate the thoughts.

So do we.

Good morning, Irene, I wanted to ask a first question, was that the plan all along, once you were able to acquire Cadbury, was that in your mind from that day?

We've been evaluating it for quite some time, David. Obviously, a transaction of this magnitude cannot be pulled off overnight. As we acquired LU, as we acquired Cadbury, we began to put the businesses together and we continued to look at our strategic plans for those combined companies, it was clear that we had very different businesses in the portfolio and we believe it could be great value created by unlocking those two businesses and allowing them to be free to pursue their own unique strategic priorities.

Can you comment on wall to wall, and what -- I want to get at here, I was under the impression that the theory on wall to wall was that Kraft in this combined form had tremendous ability to create a sales force that had no peer in the United States with this wall to wall theory. When you disaggregate the entities, number one, it sounds like wall to wall would have to be dismantled, and number two, does it really say something about the effectiveness of wall to wall?

The reality is, one of the benefits of wall to wall was the opportunity to leverage scale across the portfolio, and there is no question that played out quite well for us and as you remember, it was generating some revenue growth in excess of one point versus the control stores. But it did come with some complexity, and as we continue to revisit our sales structure, looking at the balance of effectiveness as well as efficiency, we came to believe that grocery, there was still enormous benefit across the grocery portfolio to leverage the various parts of the portfolio in events like meal solutions or huddle for hunger, those kinds of programs, but the focus of the business needs to be on a low-cost warehouse selling system for center of the store products, it is very much on a shelf management as distinct from a DSD system, which is highly focused on front of the store impulse merchandising and immediate consumption channels, and so the differences of those two businesses, we believe allows us to create two very effective selling capabilities that will optimize the performance of both pipes.

If I could sneak in one last question on the revenue synergies, you commenting on revenue synergies for biscuits going into other countries. I also thought that after the Cadbury deal was done, there was some idea that maybe powdered beverages could also be layered upon those international operations. Does the revenue synergy pieces fundamentally change with the disaggregation of the Company and is now the revenue synergy some lower number? I know you probably don't have the number but I would suspect it is lower.

Not at all, in fact one of the reasons we believe strongly that Tang is an important part of the global snacking business is because of its opportunity and its strong presence, its growth potential, as well as its profit contribution in our developing markets, so it remains a very important part of the equation, as you are aware, we have launched Tang in India on top of the chocolate distribution system and you will see us continue to make those moves as we leverage our strong route to market capabilities around the world, but particularly in developing markets.

I didn't understand that Tang was going with that piece. I do now. Thank you.

Your next question comes from Eric Katzman of Deutsche Bank.

Good morning. Going back to the first question, I am not exactly clear, Irene, why this is occurring. If the pieces are going to grow at a faster rate, because they are more focused or because the tax rate efficiencies are greater with the global confection business, why do it? I have been questioning the growth rates for a long time, after your took over from Roger, you raised the growth targets, then we made the big Cadbury acquisition. I am not exactly clear as to why we should view this positively, unless you think it's going to increase the growth targets, or increase the amount of cash that could be brought back to investors, and then I'll have a follow-up.

For starters, Eric, we do expect that there will be the opportunity for grocery co to return more cash to investors and for snack co to better capitalize on its growth by having a much more focused approach to managing those businesses. The rationale for separating these two businesses really comes from two places. Primarily, it's about operational benefits, strategically as a think about the significant difference in the strategic priorities, the focus on the grocery business on low cost efficiency, particularly within a warehouse distribution system versus the profile of the global snack business which is about high growth and essentially, the leverage that comes from volume and mix growth.

As you think about resource allocation, rather than having these two entities competing for an incremental dollar investment, now we have the opportunity to be able to use a dollar within each of those companies to better achieve their objectives. I think from our customer standpoint, they have a very different go-to-market strategies as I described a few minutes ago. The difference between a much more stable off-the-shelf management kind of approach to our grocery businesses, as distinct from top zones, end-aisle merchandising, impulse purchasing of our snacking businesses, I think for investors, better understanding the growth drivers and the priorities for the use of cash.

We have never been able to get credit for the tremendous snacking portfolio that we have within the Company. I think the opportunity as we separate these two businesses, for that to be much more visible, and for investors to see the incredible profile that our snack business has in aggregate and certainly relative to peers, I think will serve us well. Ultimately, I believe the separation from an operational standpoint allows us to perform better, and then of course there are clearly some financial benefits that we believe will come as a consequence of the better clarity in the investment thesis between the two entities.

Thank you for that. And as a follow-up, you have $27 billion of net debt today, that really hasn't changed much. I think you have been a bit below your targets, although I suppose working capital because of all of the inflation is something that is affecting everybody, but how will the debt to be allocated between the two entities, because obviously, given how much leverage there is, that could have a pretty big impact on the equity value of either piece.

You're about right on the debt, and it has not come down from the prior year, that is basically because we always have a back-half loaded cash flow. Our cash flow this year is in line with where was last year if you adjust for the contribution in the first quarter. We will see that debt come down in line with our deleveraging commitments in the back half. As it relates to the two companies, it's too early to speculate on exactly how much debt goes into each business, but I can confirm that both businesses will be investment grade and both businesses will have access to CP markets, so we are going to make sure that the debt is balanced with the cash capability each of those companies bring.

I want to sneak in one more. Does that mean that the Kraft brand is going to be split in terms of cheese and Tassimo, is that being contemplated, or is there some possibility that we would own choosing euro?

No, for the most part, the Kraft brands will go with the North America grocery business but there will be a couple of trademarks, like Tassimo, like Philadelphia for example, that will be shared, and obviously, we will work out the details of that as we move forward, but for the most part, we detailed the brands within each portfolio, it's a pretty clean separation.

And just the timeline, how do you see these updates in terms of when we will know about the allocation of debt, when we would hear from the IRS as to whether this is a tax-free spin approved transaction, can you give us a better timeline as to how we should think about this?

I think you'll see more, we will continue through the end of this year, but I think the IRS ruling probably will not be until sometime next year. I think we will close out the books on the current structure and we will probably give guidance on the current structure next year, but we will start to give you much better visibility into what these new companies will look like as we go through the year next year. As we get more clarity, whether it's on the financial splits or the capital structures, et cetera, we will clearly share that with you, because I know there will be a lot of interest in that, but I think you should be thinking of those broad time frames.

Our best guess, as we said, Eric, is this will take about 12 months.

Thank you.

Your next question comes from Jonathan Feeney of Janney Capital Markets.

Irene, one follow-up, you mentioned on Eric's question that you did not think you were getting credit as far as, for some of the growth, and one of the aspects of the market right now seems to be that some of the faster growing assets are trading sort of multiple-wise right on some of the slower growing assets, so if you can give me some sense what you and your advisors think the comparable group for the snack company, presumably the faster growth business that includes Cadbury, would be, as contrasted with what the comparable group for the grocery company would be, because by my math, they are all within about 1.5 or 2 turns of EBITDA, and that really didn't get you too far as far as realizing value. So any help you could give me around that, I would appreciate it.

Let me start with, it is a fact that the group trades in a fairly narrow range, so your observation is correct, but I do think, the facts are, if you look at the specific companies, what you do see is that the global higher growth companies are trading in the upper teens and many of the North American peers are trading in the lower teens, and so you do see differentiation, but as we said, that is not the major motivation here. The big idea for us is to recognize that these are two very different portfolios, that we believe can benefit with a focused mandate, and that will then drive resource allocation, capital allocation, and ultimately the metrics by which we would encourage investors to evaluate these two companies.

Okay thank you very much.

Your next question comes from Scott Mushkin of Jefferies.

Thank you for taking my questions, and not to beat a dead horse, but Irene, you said, I obviously very much understand the business rationale here, and I think it makes sense, that's my $0.02, but it seems to me when you go to the Board and you do something like this you have to say, what is in it for shareholders, maybe even immediately, that the evaluations aren't where you are, so if you go to the Board and get approval, which I don't think you have yet, are you going to give them any sense on what you think the assets are discounted because there may be some valuation gaps that exist in the business, or is that not part of this process?

First of all, we do have Board approval, or we would not have announced this today. We have had a very significant review of this strategy over the course of many years with our Board and the factors by which the Board made the decision are pretty much the factors are sharing with you today. The reality that as we have taken a number of steps over the last couple of years to restore the health of our brands around the world, to transform the portfolio in our developing markets and immediate consumption channels, we are now ready to take this next step, and it is on that basis that we made the decision.

To clarify we clearly have Board approval for the announcement of our intent to create the two companies. We will need to have separate approval once we have IRS ruling and we have worked out all of the details, again. So it's kind of -- an approval of two steps.

I would say that we certainly believe that the results we have delivered to date and the significant opportunities that we believe can be created by separating these two businesses should merit a premium multiple from where we stand today. And doing the quick math, it seems like if you separate these guys apart that there was an inherent discount involving the current valuation, but it seems like that wasn't a massive or a big part of your thought process, and I was actually a little surprised by that. I completely understand the business aspect but there also seems to be a financial aspect that is pretty compelling as well.

Yes, we agree.

Thank you for the clarification on the Board stuff I must have misread a little bit, but I think I get it now. The second thing, last quarter you gave us some initial things that were going on in India and how Oreo was doing there. I was wondering if you would give us a detailed update on something like that, and I would love to have a follow-up on India and how some of these revenue synergies in particular are working and where we are maybe on the revenue synergies that you promised where we are there, that would be great.

Our India business continues to be on fire, in fact it was up 46% in the quarter, so we feel terrific about that, and actually, the key driver underneath that is Cadbury Dairy Milk, which grew over 60% in the first half. So we feel terrific about the progress within India. It is a critical growth market, it was one of the important aspects of the revenue synergies as we described when we made the Cadbury acquisition, but we feel terrific about the overall performance of all our developing markets. As I talked about each of our global categories, within each of those, we feel good about the aggregate performance, but within each of those categories the performance of the developing market is stand out and most of it is really about investment in our core franchises, and that is describing the growth and gives us great confidence that going forward, we will continue to see benefit.

I just wanted one clarification to the last question I have. When you went to the Board to get the approval, which you got, did you have to give them financial thoughts too, as well, what the discount was, was that is part of the process? Just so I'm clear on that.

I think you can understand it was a particularly thorough review, predicated on how we believe these two businesses could operate differently, under this separation scenario. As we said, we believe we can create great value for our shareholders as a consequence of having a much more focused mandate and the ability to allocate our resources and our capital much more effectively.

You want to give us the discount you thought the assets were trading at?

I think you can actually look at the market multiples, and might be able to estimate that yourself.

We are going to do that, I thought I would give it a shot. Thank you and congratulations on what I think is a good decision.

Thank you.

Your next question comes from Ed Aaron of RBC Capital.

Good morning. I see you've laid about some of your benefits from the spinoff but I'm hoping you can address any dissynergies you might end up seeing in terms of purchasing or corporate overhead and so forth.

We have obviously been through that and looked at it. We don't see huge dissynergies. Both of these companies are enormous. $32 billion and $16 billion each. And they still have a fair bit of procurement scale. They did not share a lot of backroom, and that is why we were able to make this decision. There wasn't a huge amount of backroom sharing finance systems-type things, but they had a different route to market, which is the biggest piece of the costs. So yes, there will be dissynergies. We also think there will be some operational benefits coming out of separating these two and having them focus on their specific routes to market and their specific business fundamentals. We think those benefits will actually offset the dissynergies. So on balance, we are looking at this as a net positive, but yes, they were clearly be some dissynergies in some areas of the P&L.

Would it be fair to allocate depreciation and the corporate overhead roughly proportionally to the size of these two businesses from a revenue perspective?

I think it's a bit early to get into it, but I would say, snacks is growing at a higher pace, so you can assume it will have a higher capital requirement in terms of CapEx expenditures and grocery at a lower pace, so it will have lower CapEx expenditures, but we can't really get into the details at this stage.

One more follow-up on the North America snacks businesses have kind of been a relative laggard in your portfolio recently, and I guess there's a bit of an issue around gum there, but can you address that at a high level and talk about how much the recent performance of that business might be factoring into structural changes that you see, where you might pick up some benefits of this new structure?

The US snacks business this quarter was actually mostly a gum story. Biscuits had a terrific quarter, was up about 3%. The top five brands were up about 6%, we have gotten A&C investment back on track and we've got some good innovation. Biscuits did well. Nuts was up about 6%, with the nutrition platform, candy was up about 9%, so the US snacks business this quarter is really a gum story, and as Irene mentioned earlier, gum in the US is down by double digits. We had some plans in place to get that back on track, and we expect a significant rebound in the back half, but that is really the story this quarter. Ongoing, clearly the idea that we can focus the US snacks business on a DSD route to market and the impulse channel is a hot zone, and leave the grocery business to be a center of the store machine, that is something that we would expect to have operational benefits going forward, but that is not in and of itself a reason to drive this bigger transaction that is one of the benefits we would expect though.

Great, thank you very much.

Operator we can take maybe one more question.

Your final question comes from Diane Geissler of CLSA.

Good morning. Could you talk, it's a very long period time between the announcement and when you expect to complete the transactions, what you'll be doing in the interim to maintain talent, keep people at the organization that you want to keep at the organization that might be feeling like they are being spun off?

I'd start with the fact that we think this is an exciting opportunity for employees around the world and a lot of what we are going to be doing in the coming weeks is helping our employees to understand the opportunity that is available to them as a consequence of creating these two great companies, but we have a lot of work to do in the coming months but our most important focus is to ensure that we will remain one company until we spin, and so it is critically important that we keep our employees focused on delivering our results in 2011and into 2012, but obviously, ensuring that they understand the rationale and they see the opportunities that are available to them as a consequence of the separation will be a key part of our communication strategy to them.

What should we be thinking about in terms of you communicating who will be running the new company?

Obviously we have a number of decisions to make in the coming months, but we have an incredibly talented management team around the world, and they are the ones who got us to where we are today, and so we have a very rich bench from which to populate these two companies and we will keep you posted as we move forward here.

I appreciate it, thanks.

At this time, there are no further questions. I'll now turn the call back to Mr. Jakubik for closing remarks.

Thank you very much and thanks everyone for joining us a bit earlier than anticipated this morning. For those of you have additional questions, Mike Mitchell will be available to take media calls, and Dexter and myself will be around for any of the questions from many of the analysts. Thank you very much for joining us, and we'll see you soon.

Thank you for participating in today's conference call, you may now disconnect.