億滋國際 (MDLZ) 2011 Q3 法說會逐字稿

Good day and welcome to Kraft Foods' third-quarter 2011 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Kraft's 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.

Thanks, Paula, and good afternoon and thanks, everybody, for joining us. With me are Irene Rosenfeld, our Chairman and CEO, and Dave Brearton, our Chief Financial Officer.

Earlier today, we sent out our earnings release. The release, along with today's slides, are available on our website, KraftFoodsCompany.com.

As you know, during this call we'll make some 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, so 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 reconciliations within our earnings release, as well as at the back of the slide presentation. So now, let me turn it over to Irene.

Thanks, Chris, and good afternoon.

Q3 was another strong quarter within a very challenging macroenvironment. We continued to have good momentum in all geographies, on both the top and bottom lines.

On the top line, consumers are responding favorably to our investments in new products and in better, more effective advertising. This has been a powerful combination. It's enabled us to take the necessary pricing to offset unprecedented increases in raw material costs, while delivering solid volume mix and market shares.

On the bottom line, we grew our underlying operating income at a double-digit rate, both in the third quarter and through nine months. We did this by effectively managing our input costs through pricing and productivity, while leveraging overheads and driving integration savings.

Our profit growth is broad based. We're delivering higher profits in every geography. This reflects the virtuous cycle across the portfolio. We're also growing operating EPS double digits and we're doing this even as we increase investments to drive future growth.

But what gives me even greater confidence as we look ahead is the excellent momentum on each of the businesses that will comprise the new North American grocery and global snacks companies. Let's start with North American grocery.

These businesses are delivering strong revenue and profit growth. In fact, the fundamentals are better than ever. Tony Vernon and his team are driving growth through great marketing and a solid pipeline of new products.

Through the first nine months, we've increased our advertising and consumer investments on key brands. Our big-bet grocery innovations have added more than $350 million in net revenues. This stepped-up innovation, together with increased brand support, has enabled us to offset significantly higher input costs through pricing.

And finally, we are continuing to make tangible progress in end-to-end cost management. We're leveraging our Lean Six Sigma efforts and driving negative overhead growth to cut costs, while at the same time improving effectiveness.

Turning to our global snacks portfolio, it's already delivering strong growth and we've only begun to tap its potential. Most important, all parts of the snacks portfolio are growing.

Global biscuits is up 9% year to date on a constant-currency basis. Developing markets are up more than 20%. China and Russia are leading the way with biscuits in each country growing more than 40%. This strong performance is driven in part by a combination of revenue synergies from the LU Biscuit acquisition and the beginning of synergies from Cadbury.

Global Chocolate is up 8%. This includes low teens' growth across our developing markets. India increased nearly 50%, and we also delivered strong growth in Brazil, Argentina, Russia, and Ukraine.

Gum and Candy is up about 2%. As I discussed last quarter, we continue to see success in our new developing markets with growth of nearly 9%. Candy is up double digits, led by Halls and Eclairs. Performance was especially strong in India, China, and Turkey.

Turning to Gum, in Brazil Trident has achieved record market share, and revenue is up more than 15%. In Japan, gum has grown double digits, led by strong performance of Clorets and Stride. What's more, we've expanded market share by more than 3.5 points.

So gum and candy is on a roll in developing markets. The challenge remains in Europe and North America, where the gum category is down in most markets. The short- and long-term fixes for gum in developed markets that we outlined on our call last quarter are on track. Our market shares are beginning to stabilize. In fact, our U.S. gum share was essentially flat versus last quarter. While that's not where we want to be, we are making progress.

Three months ago, we discussed the importance of innovation and the need to hit lower price points in the Gum category. In the third quarter, we introduced several new flavors of base Trident and Trident Layers, as well as new Stride Whitemint, featuring Olympic snowboarder Shaun White. And later this month in North America, we're rolling out smaller $0.50 packs of Trident and Stride.

Together, these actions are helping our Gum business and the category get back on track. As we move forward, we remain confident that we'll see continued improvement.

In terms of Cadbury integration synergies, we are fully on track with our targets. We're on plan to capture 70% of the cost synergies by year-end. These savings are already showing up as overhead leverage in a number of businesses. Revenue synergies are also on track, and we expect them to contribute about 50 basis points to our topline growth in 2011.

In short, we're quite pleased with our strong performance this quarter. So now let me turn it over to Dave to provide more details on our results.

Thanks, Irene, and good afternoon.

Before we dive into the numbers, I'd like to offer some perspective on the quality of our results. There's no question that the consumer environment remains difficult and input costs remain high for everybody. Neither is likely to change anytime in the near future. Despite that, we are encouraged by the operating momentum we're seeing across our Company. That gives us great confidence as we develop our plans for 2012.

Specifically, we're confident that our strategies are the only answer in these tough times. They include continued investments in our brands with big bets on new products, on key countries, on key categories, as well as relentless cost management. We're seeing that play out in our Quarter 3 topline performance where we delivered strong organic growth of 8.4%.

Stepped-up pricing was the primary driver of growth. However, vol/mix continued to provide a steady contribution, once again demonstrating the strength of our brands. Our power brands had another strong quarter, up 10% globally.

We also generated significant gains from innovation. For example, across continental Europe we're successfully expanding into bite-sized chocolates, this as a result of our ability to fast-adapt Cadbury Bites to our Milka franchise.

In Biscuits, we're generating good revenue growth from various whitespace opportunities. Examples include the introduction of Oreo in India, as well is breakfast biscuits, including Velveeta in the UK and Jubilee in Russia. And our new-to-the-world innovations, such as MiO liquid beverage mixes in the U.S. and Philadelphia with Milka in Europe, continue to perform quite well.

Turning to profits, underlying operating income rose 12% in the quarter. We delivered growth in every geography. North America rose 4%, despite a three-point headwind from the exit of the Starbucks business. Europe was up 18% and developing markets grew 45%. Overall, currency added just over four points of growth and vol/mix was favorable as well.

But the key driver of operating-income growth was effectively managing input-cost inflation through pricing and productivity. In fact, we've offset roughly $1.7 billion in higher raw material costs year to date. But despite some recent moves in spot prices, costs will continue to climb and remain volatile. So we must and will remain vigilant on pricing and productivity.

For the full year, we expect input costs to increase in the low teens versus 2010. That means we'll have another meaningful increase in costs in the fourth quarter. And as we look into 2012, costs will likely be up again, at least through the first half of the year.

In terms of margin, despite the strong increase in operating income, our underlying OI margin was up only 10 basis points, to 13.7%. The reason is simple. The impact of a higher revenue base due to significant pricing negatively weighed on the margin calculation by about one percentage point. This masked solid contributions from overhead leverage and the timing of A&C spending versus the prior year.

Turning to earnings per share, operating EPS rose to $0.58 in the third quarter. That's up more than 23% from $0.47 in the year-ago quarter. After the first nine months, operating EPS is more than 10% to $1.72 from $1.56. Favorable foreign currency and a lower tax rate have contributed some of the upside, but for both the quarter and year to date, operations drove the majority of our earnings gains.

And as I mentioned earlier, it is most encouraging that all geographies are making a solid contribution to our earnings. Let's start with a look at North America.

Despite a very difficult operating environment, our virtuous cycle continues to gain momentum. Every North American business segment delivered strong growth. Organic net revenues were up 5.9%. As expected, pricing was a key driver, representing 6.8 percentage points of the growth.

Despite this, vol/mix declined only modestly and was slightly better than the first-half trend. We're continuing to invest behind our key brands and new products in North America, and they're responding well.

Non-promoted volume has been strong, and several of our brands grew revenue double digits in the quarter. They were led by Newtons, Velveeta Shells & Cheese, Wheat Thins, and Oreos.

In addition, several of our new product successes are truly redefining our categories. They include our new MiO liquid beverage mixes, which are on track to reach the $100 million mark in their first year; Oscar Mayer Lunchables with Fruit, which are driving record sales in our Lunchables franchise; and Velveeta Skillets, which are expanding our dinners business by taking share in adjacent categories.

Our overall vol/mix result was affected by price elasticity. This continues to weigh on consumption in a few categories, like cheese. In these categories, we're dealing with some of the highest input costs in history, and a number of competitors have lagged our pricing as we cross psychological price thresholds on a few marker brands and SKUs.

However, our market-share performance remained solid for the portfolio as a whole. This reflects our strong investment in marketing and innovation.

Now let's take a look at profitability. Here, underlying operating income grew 4% in the quarter. We delivered that growth despite the negative impact of about three points from changes in the Starbucks CPG business.

OI growth was broad based, with gains in every business segment. In particular, the North America team has done an outstanding job managing input cost through pricing. They offset more than $800 million in higher commodity costs this year. Despite productivity gains and lower SG&A, however, OI margin declined slightly this quarter. This is due to the negative impact of roughly one percentage point from the higher revenue base, driven by significant pricing.

In Europe, operating results remain very strong. The team here delivered its seventh consecutive quarter of both top- and bottom-line growth. Organic revenues were up 5.2%. Pricing contributed four points to growth, led by double-digit pricing in coffee.

Our European power brands rose 13%. Here are some highlights. Oreo, up 35%; Tassimo, up 30%; Milka, Velveeta, and Philadelphia were all up about 20%. Growth benefited from the timing of some shipments between the second and third quarters, but even after adjusting for this impact, power-brand growth was still in the high single digits.

Topline growth also reflected benefits from revenue synergies in Chocolate and Biscuits from both the LU and Cadbury acquisitions. This help fueled nearly 70% growth of our chocobakery platform. And despite significant pricing, market shares were strong across the board.

Now, let's turn to profits. Underlying operating income rose 18%, including a positive 11 percentage-point impact from currency. The increase in both operating income and margin was driven by vol/mix gains, lower overheads, and improved productivity. Margin increased despite the negative impact of the higher revenue base on the calculation of about 0.5 percentage point.

Even with significant pricing this year, net price realization continues to lag cost inflation. We've announced additional pricing actions in certain categories and we expect to see these fully implemented in the coming months.

In developing markets, we delivered another quarter of very strong growth. The virtuous cycle continues to pay off and the benefits of integration are beginning to take hold. Organic revenues grew 15.3%, with a good balance between pricing and vol/mix.

Growth benefited somewhat from the normalization of trade inventories last year. In addition, at the end of the third quarter we did observe some customers buying ahead of announced price increases. This may soften growth in the fourth quarter, but we still expect solid double-digit growth for the full year.

Within the region, Asia-Pacific, led by India and China, and Latin America, led by Brazil, continued their double-digit growth rates. But CEEMA also grew double digits, reflecting a significant turnaround in a region that has been hard hit economically. Ukraine continues to stand out, delivering growth of more than 35%, and Russia was up sharply, due to gains in Chocolate and Biscuits.

Power brands grew more than 17%, led by growth of nearly 50% for Oreo, TUC, and Club Social biscuits.

Underlying operating-income margin increased significantly in the quarter to 15.3%. Underlying operating income grew 45%. This improvement reflected effective management of input costs and vol/mix gains. As with revenue, the year-on-year comparison also benefited from the normalization of trade inventories a year ago.

We continue to support growth in developing markets. We have made significant investments in sales capabilities to leverage opportunities from the combination of Kraft and Cadbury. We're funding these investments from end-to-end cost savings and integration synergies.

Turning to our guidance, we've again increased both our top- and bottom-line guidance for the year. This is due to our strong operating performance and business momentum in each region through the first nine months.

On the topline, we're raising our outlook for organic net revenue growth to at least 6%. That is up from at least 5% previously.

And on the bottom line, we've increased our operating EPS guidance to at least $2.27, up from at least $2.25. This reflects several things -- strong operating gains year to date, our continued increases in investments to accelerate future growth opportunities and cost savings, and the currency benefits we have realized through the first nine months.

I should note that given the recent volatility in exchange rates, our operating EPS guidance excludes any potential impact from currency in the fourth quarter. We will, however, flow the currency impact, positive or negative, through to EPS in the fourth quarter.

Now I'll turn it back to Irene.

Thanks, Dave.

Let me update you on the process of preparing for the launch of our two new companies. Over the past three months, we've made great progress. Since our last presentation at the Back-to-School Conference in September, we have defined the strategic foundations for each. This work included the detailed brand splits and licensing structures between the two companies.

The most significant of these was about the Planters brand. Specifically, we decided that Planters would fit best within the North American grocery company. Why? Because Planters is a U.S.-only business. Most of its sales are in supermarkets, and its route to market and supply chain aligns much better with a warehouse network, rather than with the direct-store delivery system used for cookies and crackers. Until the separation is completed, though, the business will continue to be managed and reported as part of U.S. snacks.

We've also decided on the name for the North American grocery company when it launches next year. It will be Kraft Foods. This company will keep the Kraft name because it has very strong consumer recognition and brand equity in the U.S. and Canada. We're still working on the name for the global snacks company, which will be put to a shareholder vote in May.

In addition, the tax filings in the U.S. and Canada are on track, with the Canadian filing recently submitted, and we'll file our initial Form 10 during the second quarter next year.

We're well underway in designing the frameworks for each organization. Transition teams across the company are developing detailed plans to prepare for the spin. Finally, we expect to announce the leadership for each company by the end of the year.

So to summarize, our momentum remains strong across our businesses and around the world. We've raised our outlook for 2011 and we remain confident that we'll perform in the top tier of our peer group for the full year. We're on track to take the next logical step in our transformation -- the creation of two highly-attractive independent companies, each with a clear mandate and each with the ability to deliver attractive returns to shareholders.

With that, let me open it up for your questions.

(Operator Instructions). Chris Growe, Stifel Nicolaus.

Hi. Good afternoon.

Hi, Chris.

Hi. Just two questions for you. The first one I wanted to ask, and I know you don't want to give guidance for next year, my only question would be it sounds like you're at least indicating some -- obviously some continuing cost inflation, at least in the first half. And I guess you have some more pricing going into place now. So do you see those two as -- can you give a little more color on that for 2012, just what to expect at least maybe the first half of the year?

Sure. This is Dave. I think as we sit here today, I know the commodities have come down over the last month or so, but that's on the headline commodities. As you look year over year, we would still expect to see a cost increase in the fourth quarter.

And if you look at the full list of potential cost increases, including packaging, energy, transportation, the more secondary ingredients, as we sit here today we would still see costs up again next year. Nowhere near the impact we've had this year. That could obviously change positive or negative, but certainly not like this year.

But I think most important, our intention would be to price away the input cost inflation the same as we have this year and to drive our brand equity investments through continued overhead and productivity drive focus. So, I think the strategy will be the same, but we're not expecting any reduction as we sit here today next year.

Okay. Do you have pricing in place for next -- have you put in place any price increases that you've announced yet for 2012?

We have not announced any increases for 2012. We still have some pricing that we've announced this year that is not yet fully implemented in a couple of categories and geographies. But we have not yet announced the 2012.

I just had a final question, more kind of a modeling question in relation to -- you have an extra week in the fourth quarter. I know that not all the businesses necessarily have a benefit coming through in Q4. So if you said what kind of benefit that could provide to the fourth quarter volumes, I guess, or revenue overall?

The organic revenue guidance we're giving excludes the incremental calendar timing. So we've had a few minor calendar changes actually as we've gone through this year, as we bring on the LU and the Cadbury businesses and sort of true things up. But when we report organic revenue growth, it's on a comparable basis, so it excludes that kind of incremental benefit.

Okay. Thank you.

Alexia Howard, Sanford Bernstein.

Good evening, everyone. Can I ask about productivity improvement? I think at the beginning of the year, you were talking about not just the Cadbury cost synergies, but also the underlying productivity improvement on the base Kraft business being 4% of COGS. Is that still on track? Could you give a little bit of color about where that is coming from, what kind of things are being cut out, and is that the kind of pace that could be continued going forward?

The short answer is yes. We announced at CAGNY that we were targeting 4% of our cost of goods sold as productivity going forward. We're on track to deliver that this year and we would expect to deliver that going forward as well.

And that cuts across the entire supply chain. In our factories, we're doing a lot of work with Lean Six Sigma techniques. It was led by North America, but we've taken that globally now. We have a procurement program. We call it SAVOR, and we introduced that a couple of years ago, and that continues to deliver benefits. And obviously, we have a lot of logistics benefits as we sort of leverage both of those things to relook at our network.

So, it is across the entire supply chain and it is globally. And all three of our geographies will hit that 4% number. So it's got some good momentum.

Great. Thank you very much. I'll pass it on.

Bryan Spillane, BofA Merrill Lynch.

Hi, good evening. Just two questions. First, in terms of the full-year guidance, the tax rate that you're assuming for the year?

It's basically -- obviously, we had a very favorable tax rate in Quarter 3. We had some one-off benefits in Quarter 3. I think Quarter 4, I would expect to return to the normal guidance we give you of low 30s tax rate. And I would use that as you're thinking going forward.

So low 30s tax rate for the fourth quarter or for the full year?

I think that would be kind of our ongoing normal tax rate. So if nothing else one time happens, it would be in that low 30 range.

Okay. And then, how much is the geographic -- if you look at the profit mix, at least in this quarter, I think roughly 90% of your profit growth came from your International segment. So how much is that driving down the tax rate as well?

It has. I mean, I think a few years ago, our tax rate was more in the 33% to 35% range, and we've been sort of guiding you toward low 30s, and that really is the geographic mix playing out. So we would expect to see that continue going forward.

Okay. And then, just in terms of how you're thinking about, I guess, incenting people for 2012. You've got a -- this split could happen at some point or should happen at some point during next year. And just what are you doing differently, Irene, to sort of make sure that people stay focused on the end of the full year and appropriately within the business segments they're in, versus maybe getting distracted or having targets that are a little bit vague relative to what happens once the company splits? It's just -- it's a bit of a unique situation.

Yes. It's a really important question, Bryan, and what I will tell you, probably most important is we are dividing and conquering. So Tim McLevish and his team and the workstreams that are focused on the spin, much of that is back-room stuff. Much of that is at corporate, and those teams are very much focused on execution of the spin. Those are different people than our business operators, who are very much focused on delivering the business results.

And we are incenting -- all of our employees are incented on KFT and are shareholders in KFT, and I'm quite confident that that will enable them to remain focused on delivering the results that we have committed to.

So the targets that will get set for 2012 will be -- will still be for -- or at least the total company component will still be total KFT, and then somehow that will adjust after the split?

Absolutely. We will set the 12-month target. We don't know exactly when the spin will be completed. What we have said is that it will be done by the end of the year, and we will go out with 12-month targets for the full company, and that is what our folks are incented on.

Okay, okay, great. And just one last question, you said that the name for the snack company will be -- it'll be up for a shareholder vote. Is that correct?

Yes. It happens to be related to the legal structure, but I promise you it will be a delicious name, and we will share it with you as soon as it is public.

Do we get a chance to submit our own suggestions?

In fact, you will.

Thanks.

Thank you.

Eric Katzman, Deutsche Bank.

Hi. Good evening, everybody. A couple of questions, I guess. Have you detailed what the cost of this split is going to be, both in terms of expenses and estimated cash? And if things are going so well, why are we going through all of this?

I'll answer the first question, Eric. We have not yet given out guidance on what the cost of executing the transaction will be.

We have said there will be some costs related to the tax impacts from disaggregating the legal entities. There will be some refinancing costs and advisor fees, and there will be some costs around setting up the two companies to be successful as we go forward. So we've outlined there will be some costs. We have not quantified them.

We're actually in the process now of going through the detailed separation planning, and so we'll have more information probably in early next year and we'll hope to come to you when we do the Quarter 4 release to give you more insight into that.

In answer to the question, Eric, why are we doing this, I'll come back to the fact. We were very clear when we announced it. We are doing this from a position of strength. Our business has never been healthier around the world.

But we do see, as we have evolved our portfolio, we have two very distinct portfolios between our global snacks business and our North American grocery business. They're different brands, they have different profiles, they have different margins structures, and we really believe as we look at them the opportunity to address their different selling needs, their different routes to market, and the different managed -- opportunity to manage them differently can create greater value for each of those businesses independently than we would be able to create together, and that is why we are choosing to separate them.

It adds -- we feel terrific about the underlying momentum of the business, and I feel quite confident that as we set up these two companies, they will be two world-class companies that will be successful.

And then, as a follow-up, Dave, I guess on page eight of the slides, I've tried to track this for a while, but it looks like if Cadbury this year to date added $0.03, but maybe you have some currency benefit because it is so international, but then you've got the higher interest expense and the higher share count, was it still dilutive year to date?

No. No, the $0.03 on page eight is actually just the January benefit. So last year, we only had 11 months; this year, we had a full year of Cadbury.

So we cull that out because it's not really operating growth; it's just an extra month of earnings. So we've culled that out separately. We said at the start of the year that Cadbury would be slightly accretive this year, and we're still on track for that. So you should view it -- it's not big, but it will be slightly accretive this year.

Finally accretive. Okay, last thing. You said that the tax rate was quite low. I guess that we confirmed that when we went through the numbers. But as an offset, the corporate expense was a lot higher. Is there like initial cost from the split or is that something else that is running through that corporate line?

No. There's nothing in there on the split, one-time costs or anything like that. It really is just timing of expenses here at corporate. We've just had a few lumps to come through. We're still on track for the year, and truthfully, overhead continues to be a source of investment for the rest of the P&L, not the other way around. (Multiple speakers)

What does on track for the year mean? Because I had -- you were running at, like, $65 million in the first and second quarter, and now it's $150 million.

Eric, it's Chris. Frankly, it was just in terms of timing, of booking some of the corporate expenses. It didn't relate to the spin. In fact, when you look at it year to date, it's lower than it was last year, and as a percentage of net revenue, it's coming down as we would have expected from synergies.

(Multiple speakers) as you think about those different segments, Eric, we're going to be down on overhead year over year in North America. We'll be done in overhead year over year in Europe, and the overhead growth really is going to be driven by sales investments in developing markets. So that's what I mean by on track.

I'll pass it on. Thank you.

David Driscoll, Citi Investment Research.

Great. Thanks a lot. Good evening, everyone.

Irene, I wanted to ask you a little bit here about price and volume and the elasticity. Certainly a lot of questions have been coming from clients. We've had relatively terrible headlines in the news on GDP reductions in the United States and Europe, and certainly consumer sentiment's been going down.

Your price and volume elasticity, though, in North America, it actually looks very good. I mean, I would say in comparing to the nine-month numbers, your pricing has accelerated 160 basis points and volumes are about 20 basis points better than the nine-month results. What do you think is happening here at the consumer level? How strong is -- are you seeing the North American business in context of this environment and can we continue to see it this strong on the price and volume elasticity?

I will say we feel good about the response that we've seen so far around the world. The elasticity levels, especially in North America, have been in line with what we had expected.

And I think the two metrics that we look at that give us the most confidence is the strong vol/mix performance underneath the revenue growth, as well as the strong market share performance. I think the combination of the investments that we've made in our brands, the big bets that we've made on new products, as well as the relentless focus that (technical difficulty) and the team have placed on cost management have all been the factors that have enabled us to essentially win in this very challenging environment.

And maybe just a follow-on to that whole topic is just private label. In 2008, the answer seemed to be just drastically different. Is there something you can point us to about the private-label threat and how you envision it right now today, and maybe contrast it to how you envisioned it or thought about it in 2008?

Well, we take the presence of private label very seriously. They are an important player in the marketplace, but we believe that the key to success is to have strong brands that are well supported with a strong innovation pipeline, and that's been the key to our performance.

I would say one of the lessons that was learned in 2008 was that when a lot of our retail partners supported private label to the exclusion of the strong brands, the categories did not perform well, and I think it was a really important lesson that was learned. And it is making the response this time around quite different.

And at the end of the day, our obligation and our ability to compete is to drive traffic to their stores. And again, as long as we have strong brands that are well supported and a strong innovation pipeline, that's what gives us the ability to be able to take the pricing.

Final question is on marketing. You mentioned in the release that you continue to push the investment in marketing. Is the investment for the full-year 2011, is it up beyond your original expectations? And can you give us any kind of quantification of that?

I think -- year to date, our spending is up year over year. It is probably in line with what we would expect, and we'd expect it to be up on the year as well. So we do continue to invest in marketing.

We also invest in the sales, particularly in developing markets. So when we talk about investing for growth, it is really those two pieces, and that is a key part of the strategy we continue to push going forward.

Thank you very much.

Scott Mushkin, Jefferies.

Hey, guys. Thanks for taking my question. I want to get back to the kind of breaking up the company. I've been dying to ask this question for a while, so I appreciate the forum to do it.

So, looking at the European grocery business, I kind of believe I understand why it is staying with the snacks business. Maybe it's a scale issue. But it doesn't seem to fit as we look at it. So I was wondering if you could kind of talk to us on why keep that business with the snacks business. It seems like it just moves the problem from the whole company over to the snacks business.

And then, it also seems to complicate things by having to split trademarks like Philly cream cheese, so I was wondering if you can go through the logic there because, besides that, we really like the idea of the split.

First of all, what I would tell you is as we contemplated the best way to do the split, we tried to get the right balance of understanding the different business characteristics, as well as making sure it was simple to execute.

And so, we chose to keep our international business essentially intact because it's primarily a snacking business. 85% of the revenue in the international business is in snacks. And then, we kept in primarily coffee and powdered beverages in selected geographies for scale purposes.

Brands like Philly are very strong contributors to portfolios like in Europe. In fact, it was up about 19% in the third quarter, as it was elsewhere in the world.

So, the reality is these are businesses that are a part -- particularly in a given country, they are an important part of the overall portfolio that we take to market in a particular country. It does not significantly impact the overall profile of the snacking company. And in fact, the simplicity of North American grocery, in terms of being concentrated in the U.S. and Canada, is part of what allows us to do some things differently than we would be able to do otherwise, in terms of system support, in terms of sales support, and a lot of the infrastructure. And that's really the basis for our ability to simplify that business and drive down the cost structure considerably.

So it was a consideration, a practical consideration, of how best to execute this in a way that would allow the business to continue to perform, but it was also part of the rationale for the North American grocery business is to make it a much more focused, homogeneous business. And in that sense, we felt that this is the right way to execute it.

I would also just add that Philadelphia is the exception. So it is clearly shared and we are working through how we are going to manage that going forward.

Most of the grocery business in Europe and developing markets is pretty unique. It's Vegemite in Australia, it's Simmental in Italy, it's [Moroccalli] in Germany. It's a lot of brands that actually aren't shared with North America. So it's not really cutting trademarks in half. With the exception of things like Philadelphia, but that really is the exception.

Thanks for that explanation. And how about distribution of grocery overseas versus the U.S.? I mean, obviously there is DSD here for the snacks business, and that's why Planters is staying with U.S. grocery. Can you talk me through a little bit about how distribution works overseas? Was that part of the consideration, or no?

No. It's actually -- the DSD consideration is primarily a North American consideration, but certainly the route to market, the commonality of the portfolio within the global snacking business makes the route to market and our selling to distributors in the various countries that much easier.

And then, maybe if I could just have one more. I know we've talked about this on previous calls, but I think we've picked on the Indian market a lot and maybe a little progress report on small-pack Oreos and I think you've given some color on that. I wonder if you had anything to share more on that and maybe other developing markets?

I think we quoted some of the incredible statistics. I talked about some of the incredible statistics in some of our countries around the world.

But I mean, as we look at some of the developing markets, we look at our Biscuit business, in the third quarter Biscuits were up more than 26%. China was up 55%; Brazil, 23%; Russia, 59%.

Chocolate grew 12%. India led the pack with growing over 40%. Russia grew 22%.

I talked about the record performance of Gum in markets like Brazil, which was up in the high double digits. So, I mean, it's no accident. That 15% growth that we just delivered in developing markets was pretty much across the board.

Thank you very much. Appreciate it.

Andrew Lazar, Barclays Capital.

Good afternoon.

Hello, Andrew.

Hi, Andrew.

Just a couple of quick things. One is, I know you're still in the process of searching for a CEO for North America grocery. You'll have some of that, I guess, towards the end of the year. And you said it could be either internal or external, but that business, meaning North America, is doing quite well. It's going to have a bit of a different profile going forward or reason for being, as you've talked about. What specifically is the sort of skill set that you're looking for as you think about who's best able to run that business going forward, and how might that be different given the strategy is changing?

I would say, actually, the strategy of the grocery co does not look dramatically different than from the strategy of North America today.

I think the underlying momentum that we're seeing in our North American business, again the factors that have contributed to that success, the focus on key brands, the distortion of our investment, the strong innovation pipeline, all of those will be important contributors, together with the cost discipline. All of those will be important contributors to the success of grocery co going forward.

And so, we feel quite good about the team in place and the results that they are delivering. As we have said before, the Board has an obligation to carry out its fiduciary responsibilities and follow a disciplined process, which is what is going on right now. But we remain confident that we'll be in a position to make the announcements by the end of the year.

You've talked about progress also on market shares. I know we've gone back and forth a little bit around what the best way to represent that, both internally and externally, would be, whether it's percent of sales that are either holding or growing share, and I know there's not a perfect metric for a bunch of reasons, but is there a way you can give us a sense of maybe how to quantify what you mean by shares continue to improve?

At this point, Andrew, we are still talking about what percent of revenue is essentially flat or growing. And we think that's the best broad-brush metric to use. Obviously, our focus internally is looking at key categories and key brands versus key competitors.

But I think as an aggregate metric, to just give you a sense of the health of the business, and again I think the best shorthand we can provide to you as to why we have confidence about the strength of our brands and why we have performed well even as we have taken pricing, the fact that we've been able to hold share in North America in about half of our categories, hold or grow share, and that internationally in developing markets, in Europe, it is upwards of 60%, is what gives us great confidence that, together with the vol/mix performance, that we have the ability to continue to invest in our businesses and drive the performance that we've committed to.

That's helpful. And then, one last thing, a quick one. Dave, in thinking about the fourth quarter, currency obviously very volatile. Given where things and rates are today, do you have sort of an estimate around what that would impact sort of EPS by in the fourth quarter, by any chance?

I don't want to speculate because a couple of days ago, I probably would've told you it was favorable. Yesterday, I probably would've said it is neutral. Today, it's probably neutral to slightly positive, but it moves a lot.

I think it's more likely to be neutral or positive than neutral to negative, but it's a bit early given the kind of volatility we have going on right now.

Absolutely. Okay, thanks very much.

Eric Serotta, Wells Fargo.

Good evening. Wondering whether you could give a bit of color, particularly for North America, as to how the business progressed during the quarter and as we moved into the fourth quarter? Certainly, the tone of the economic data got markedly worse, and I realize there is seasonality to your business. But could you provide some sort of color as to how things progressed month to month?

Obviously, we're not going to talk about results month to month. There is a fair amount of volatility. Obviously, a lot of it has to do with our programming.

But I would tell you that we feel quite good about the fact that we are just about now to lap the pricing that we took last year. And given the strength that we're seeing in our franchises, we feel quite good about where we stand.

So I think the results as we exit the quarter are indicative of what we're carrying into the fourth quarter, and we have every confidence that we will deliver the results that we've suggested.

Okay, that's helpful. I'll pass it on.

Jonathan Feeney, Janney.

Good evening, thanks. Could you -- is it possible you could break out, or at least give me a directional sense of what -- you gave us those year-to-date figures on Biscuits, Chocolate, and Gum and Candy. What the components are of vol/mix and pricing in those sales figures and if they've changed over from the first-half figures to Q3?

That would be a tough thing to do because I was quoting some specific figures within developing markets. Obviously, we have the global category results that I mentioned in my script at a very high level.

But to be able to do the components, the vol/mix, and pricing pieces of it, it's many different countries and it would be an almost impossible task. So we actually don't look at it that way. What you can look at is the vol/mix contribution within each of our key geographies, which you saw was quite positive, underlying the 1.4 points of vol/mix contribution year to date.

So, actually the 1.4 was the third quarter.

And so, I think you can see that each geography had a very strong aggregate performance. North America was down slightly. The other geographies were up, and those were the components. But it would be impossible for us to try to break those down at a global level.

The category, but even the sort of product category volumes globally?

At this stage, and truthfully, even if I did, I wouldn't have the book here with me, Jonathan.

Okay, thank you. I guess following up on the split-up a little bit, has it caused you to re-evaluate in any cases or do over some of the integration plans you've had in place? Have you heard any stories of people either confused and thinking they'd be selling certain products, and now they're not going to be representing those products within your North America, you know, sales and marketing force since the split was announced?

Well, first of all, when you think about the synergies and the integration activities, the vast majority of those are outside North America, as you know. So there's been no change to that, and as we've said, we're on track for the $750 million of cost synergies, as well as the $1 billion of revenue synergies that we've identified, and there is no change there.

Probably the only place where it's a relevant conversation is in our Canadian business because we had completed that integration and we are splitting that up, but we made the decision that we didn't feel that that was an important enough consideration as we looked at the aggregate benefit to the Company of splitting it up.

Okay. So as it relates to the United States Cadbury business, no real change from the integration plans (multiple speakers)

Not at all. In fact, it's important that our Biscuit business and the Gum business are integrated and are ready to go as we create the U.S. snacks business going forward.

And we actually turned on the SAP system we have. We put Cadbury on to that on October 1 here in the U.S. So we continued very much with that integration because we need that as we go forward.

Thank you. Just one final one. You talked a little bit last quarter about Gevalia, and some of the -- I guess January was the targeted launch there. Is that still on track for January sort of launch of Gevalia in U.S. beverages, and what, if anything, has changed there?

Nothing. We're still on track. We're delighted by the retailer response that we've gotten. We expect very strong distribution and we fully expect that this will enable us to participate fully in the premium coffee segment in the U.S.

Great. Well, thank you very much.

Robert Moskow, Credit Suisse.

Hi, thank you. Just for modeling purposes, I was wondering if you could help us. I think in your comments you said at fourth quarter, some customers had pulled forward volume, I think in developing markets, in advance of price increases. What do you think, just quantitatively, that would mean to our modeling for fourth quarter?

And then, secondly, the last two fourth quarters, the operating margin has been quite a bit lower than the other three during the course of the year. Can you tell us why that is and whether we should expect that to happen again?

I guess on both of those, I would just refer you to the annual guidance, really. I mean, we will be 6% or higher on the revenue side, and in developing markets in particular, I think the reason we made those comments is because Quarter 3 was so darn good. At 15%, we wouldn't want people to think we're going to run at that rate going forward. We did have a couple of one-offs that helped us hit that number.

But developing markets is a double-digit growth business, and we would expect to see double-digit growth on the year, and we would expect to be 6% or higher on total KFT on the year. So I think on the revenue, that explains that.

In terms of Quarter 4 and the margin trends, we have a seasonal business. We sell different things as we go through the year. So traditionally, Quarter 4 is a lower quarter in terms of margin. I think last year, in particular, it was lower because we made the decision to invest more for growth in the back half, so both Quarter 3 and Quarter 4 were a little bit lower than typical. And this year, frankly, I think it's a little more normal pacing of our operating income.

So, I think last year was a bit of an anomaly, but yes, most years, you would see Quarter 4 a bit lower than the other quarters. It just won't be as dramatic as happened last year.

Great. Thank you very much for that. And one last thing, on Planters, Planters has had a rocky past. It seemed like the business was starting to improve a little bit this year, and I thought part of that was that it was getting some front-end distribution, thanks to the Cadbury sales force in Wal-Mart, specifically. And now you're saying it's going to go to the grocery business, and that may be the best place for it, but are you concerned at all, Irene, that this business is kind of getting bounced around again and may lose focus next year?

No, Rob. We actually -- obviously, we feel good about the work -- the support that we got in the Wal-Mart front end, and we talked a lot about that as a consideration as we thought about where the business was best housed.

But I will tell you that it is disproportionately a center of the store supermarket business, despite the fact that we've made some good penetration in some of these other locations and some of the other outlets. And on that basis, together with the considerations of supply chain, as well as the fact that it's a warehouse-distributed product, led us to the conclusion that it would be best served in the North American grocery business.

That said, we have high expectations for it. It's on a roll. We had a very strong quarter and we expect to see continued growth as we go forward.

Are you going to move those folks to Chicago?

At this point, we have made no announcements about what happens with the group. We're working our way through that as we think about a number of the other items regarding the spin.

Okay. Thanks very much.

Todd Duvick, BofA Merrill Lynch.

Hello, good afternoon. A couple quick questions on the balance sheet. You've got about $3 billion of notes coming due over the next eight months or so, and you had about $1.1 billion that matured yesterday. Can you talk a little bit about how much you plan to pay off as you work towards deleveraging to your target of about three times leverage?

Yes. I think the -- let's start with the note yesterday. We said we would pay off that note when it came due with cash, and we did. So that one is behind us.

We have a $2 billion euro note in March, and there's a $900 million U.S. note coming due in June.

We're still working through how to manage those maturities. Obviously, those are an opportunity to help us try to get debt on the right side. So we're working through our options as we speak.

But you know, we will probably need to refinance all or most of that in some fashion or other, but we're working through the option now and we'll probably be able to give more details when we get to the Form 10 in Quarter 2.

Okay, that's helpful. And then, just finally, with respect to the split-up, have you gotten any further on your thinking in terms of are you going to split up the bonds between the two different organizations, or do you think most of the bonds or all of the bonds will stay with one entity? And if so, which entity?

Yes, I think we've gotten a lot further, but not to the point where I'm at liberty to tell you much.

Again, we'll come to you in probably Quarter 2 when we file the Form 10. We're working through the various scenarios, but before we can decide where the bonds go, we have to make sure we understand where all of the liabilities go within the rest of the balance sheet and make sure we've really thought through the dividend policy of both, then the capital structure, and then the specific bonds.

So, there's a fair bit of work going on. And again, I think probably the Form 10 will be the point at which we'll be at liberty to be more specific on that.

That's helpful. Thank you very much.

Okay, if we could maybe take one more question.

Rob Dickerson, Consumer Edge Research

Thank you. Just a quick question on the revenue synergies. I know you've reiterated that you still expect the 50 basis points for this year. I'm assuming that some of that has already come through in Q3. So I was -- I'm curious if you could just comment as to where you've seen the most synergies come through thus far?

Actually, the most revenue synergies that we've seen so far have come from the LU Biscuit synergies. I think we're seeing that play through in some of our marketing and merchandising activities. We're seeing it play through in the launch of ideas like chocobakery, which is essentially the integration of Biscuit and Chocolate. So that's the bulk of what we're seeing play through.

That said, we certainly are beginning to see some of the Cadbury synergies play through in a number of markets, primarily on the distribution side. So, for example, in markets like Brazil, we've now got Kraft products that are being sold in twice as many outlets, going from about 300,000 outlets to almost 700,000 outlets.

I've talked about the investments that we've made in India that have -- and basically, we're distributing our Oreo product through the Chocolate distributors in India. In Mexico, we're combining the 380,000 outlets that Cadbury had together with the outlets that Kraft Biscuits were distributed in.

So we're seeing those kinds of contributions in the course of the year, but the bulk of those revenue synergies will really start to hit us in 2012 and 2013.

Okay, perfect. And then one more, on just back to the tax, not to -- not to beat the dead horse again, but I'm just curious. It looks like about 65% of your total segment operating profit did come from developing markets in Q3. So I'm just curious. If you were to see continued operating profit at such a rate in Q4, is there a possibility that the tax rate could still be a little bit lower than you originally thought at the beginning of the year for the full year, if Q4 actually still performs?

I don't think you'll see a 45% increase in profit again going forward, other developing markets. They're doing really, really well, but that included a lot of one-time stuff, as we discussed.

But I think it is fair to say that as we continue to grow double digits in developing markets and more in the low single digits in North America and Europe, you're going to see ongoing progression to lower tax jurisdictions. But that is not going to happen overnight.

I think it will become a lot more visible when we get through the separation when global snacks as a stand-alone entity has 42% of its business in developing markets and 36% in Europe. Then I think you will start to see that, and you will probably start to see the impact of the migrating profit over time.

But in total KFT today, I think it will show up, but not quickly.

Okay, perfect. And then, one last question. I know, obviously, we all talk about what is happening in your larger categories. But I'm just curious. I don't hear mentioned your Greek yogurt brand, Athenos, that much, and I was just wondering if you do ever plan or you could plan to potentially increase the growth in capacity in that market, just considering what we're seeing in the category in the U.S.?

I think that was one of our very entrepreneurial activities. I don't think it was a big strategic play for us. (Multiple speakers) don't see a big push behind that one, but I think we've got about $400 million-plus of very strong innovation that is at the root of our performance.

Okay, perfect. Thanks so much.

Thanks a lot.

So I think that concludes the call. And as usual, Dexter Congbalay and I will be available for any follow-up questions from the analysts, and Mike Mitchell will be around for any questions from the media. So, thanks very much for joining us today and we'll speak to you soon.

Thank you. This concludes your conference. You may now disconnect.