億滋國際 (MDLZ) 2012 Q1 法說會逐字稿

Good day, and welcome to Kraft Foods' first-quarter 2012 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. This is Chris Jakubik. Good afternoon and thanks for joining us. With me are Irene Rosenfeld, our Chairman and CEO; and Dave Brearton, our CFO.

Earlier today, we sent out our earnings release. This release, along with today's slides, are available on our website -- kraftfoodscompany.com. As you know, during this call, we'll 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. 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. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

So with that, let me now turn it over to Irene.

Thanks, Chris, and good afternoon. Let me summarize what you're about to hear by saying we're off to a terrific start in 2012. We delivered strong growth in the first three months on both the top and bottom lines, and we're on track to deliver top tier results again for the full year.

Let me highlight several reasons why I'm so confident. Our brand-building investments continue to win over consumers around the world despite tough economic conditions. Our sharpened focus on power brands, successful new product innovation, and advertising investments, have all continued to pay off. This has enabled us to implement the necessary pricing, and still deliver positive volume mix gains and solid market shares.

Of course, there were some puts and takes in the quarter. But our continued business momentum, both in an absolute sense and relative to competition, is undeniable. We expect to maintain that momentum for the balance of the year as we prepare to separate our global snacks and North American grocery businesses.

Speaking of snacks, we continue to deliver broad-based growth around the world. Global biscuits were up 8% on a constant currency basis, with developing markets growing in the high teens. China was up 40%, leading the way, with OREO growing by more than 60%. Tock and Club Social Crackers also continued to post strong performance, up 12% across developing markets. Our biscuit businesses in North America and Europe were also solid, with mid-single-digit growth in each region.

Again, OREO was a major driver, while new platforms, such Velveeta Breakfast Biscuits and Choco-Bakery in Europe made significant contributions. Global chocolate was up 10%. Developing markets posted a double-digit increase, led by strong growth in Latin America. Brazil was up nearly 30%, driven by strong Easter shipments and leveraging marketing campaigns supporting Lacta's 100th anniversary.

Chocolate in Europe was up high-single digits, including a benefit from the Easter shift. In addition, new products, especially the success of our Snacks Small Bites platform and increased marketing support behind Cadbury dairy milk and Milka drove solid underlying growth.

Our sole disappointment remains gum and candy, which was up only 1%. Frankly, it's taken us longer to change gum's trajectory than we had anticipated, largely due to the sluggishness of the macro environment. In particular, Europe, especially southern Europe, was a significant factor tempering our global gum and candy growth. Unfortunately, this will likely continue until the European economic environment recovers in key gum markets.

Fortunately, despite the market softness, we're seeing some encouraging growth elsewhere in the world. For instance, in the US, our retail sales were up slightly in the first quarter. This was driven by new packaging formats, including $0.50 and value packs, as well as strength in Dentyne. And as promised, we'll be launching an exciting gum innovation in the second half, supported by a very creative marketing plan.

In markets such as Brazil and Japan, our brand strength has enabled us to gain share, and we're seeing signs of improvement in key countries. We're up nearly 20% in Turkey. We grew by almost 30% in Russia and by more than 35% in Argentina. We remain confident that gum will be a significant contributor to our long-term growth, and that we will see improvement in the second half of the year.

Turning to our North American grocery business, Tony Vernon and the team delivered another solid quarter of growth. Innovation and focus on key brands continues to pay off. For example, MiO just celebrated its first birthday and continues to grow rapidly with the introduction of two new energy skews, Black Cherry and Green Thunder. MiO is already the number two brand in the energy shot category.

Velveeta Skillets has proven to be 90% incremental to our Mac and Cheese business. Well-established brands like Philadelphia and Miracle Whip each grew double digits.

On the cost front, our renewed pricing power has allowed us to offset historically high input costs. This includes providing significant value to consumers by offering good, better, and best options at different price points in key categories. And finally, the grocery business continues to benefit from end-to-end cost management, including negative overhead growth. This provides the fuel to reinvest in brand support.

Let me now turn it over to Dave to provide more detail on our first-quarter results.

Thanks, Irene. And good afternoon. As Irene noted, we delivered strong first-quarter results. Our investments in marketing and innovation continued to strengthen our brands. This, in turn, has enabled us to take the pricing necessary to offset higher input costs in all of our geographies. As a result, we delivered organic topline growth of 6.5%. Our power brands led the way, up 11%. New products also made significant contributions around the world. For example, as Irene mentioned, MiO posted a strong performance.

Oscar Mayer Selects continued to drive incremental growth in North America. Our little snacks, bite-size chocolates, Millicano Coffee, and Philadelphia with Chocolate excelled in Europe. And the launch of Barney Biscuits in the Middle East brought local favorites to new whitespace countries in developing markets.

It's important to note that we delivered 1 point of vol/mix growth despite substantially higher pricing. The Easter shift benefited vol/mix by about 1.3 percentage points, and of course, this will reverse in the second quarter. Product pruning in North America also had a negative effect of about 50 basis points. So, after netting the impact of these two factors, vol/mix was still up modestly.

Turning to profits, underlying operating income grew 6%, as pricing fully covered raw material inflation of about $550 million. Vol/mix made a solid contribution to growth. Our underlying operating income margin increased 20 basis points to 14.1%. Although the denominator effect of pricing on the margin calculation tempered margin expansion by about 70 basis points, this was largely offset by overhead leverage.

Turning to earnings per share, operating EPS rose nearly 10% to $0.57, up from $0.52 a year ago. $0.06 of operating gains drove this improvement. And please note that this included a negative impact from higher pension costs of about $0.02. Outside of the operating gains, a number of other factors netted to a negative $0.02 impact. They include the change in unrealized gains and losses from hedging activities, an asset impairment charge, the loss of the Starbucks CPG business, and a gain on the sale of an asset in Russia.

Below the line, the benefit of lower interest expense was offset by the impact of higher shares outstanding. Favorable foreign currency added a penny, which means we grew nearly 8% on a constant currency basis.

So, as you can see, we posted a solid increase in operating EPS and we did so in a high-quality manner. Now, let's take a look at each region's performance in the quarter. I'll start with North America, where our virtuous cycle continues to gain traction.

We delivered solid topline growth with organic net revenues up 3%. Power brands fueled the growth, increasing 6%. Let me give you some examples of standout performers. OREO, which celebrated its 100th birthday in March, and Miracle Whip, behind a new marketing campaign, each grew double digits. Philadelphia increased by more than 20% behind the launch of Philly Indulgence, and Newtons were up nearly 50%, with the continued success of Fruit Thins.

In addition to MiO, key new platforms, such as Gevalia Premium Coffee and Velveeta Breakfast Biscuits, each delivered great results in their first full quarter in the market.

As expected, pricing was a key driver of topline growth. representing 5.8 percentage points of the total. Pricing was higher across each business unit, as we offset higher raw material costs. Although we did take pricing in several categories -- notably biscuits, snack nuts, and ready-to-drink beverages, most of the pricing reflected the carryover impact of actions we took last year.

Despite the higher pricing, vol/mix was solid, with few puts and takes. The benefit of the Easter shift was essentially offset by product pruning of about 1 percentage point. Most of the pruning was in Oscar Mayer, food service, and Canada. In addition, vol/mix was negatively impacted by approximately 70 basis points from trade inventory reductions in US beverages.

So, what happened in beverages? Two factors. First, customers built Capri Sun inventories last year in advance of an announced January price increase. This trade load helped drive 15% growth in beverages in the fourth quarter. As a result, Capri Sun volume was soft in quarter one, as customers reduced stocks.

And second, customers, anticipating possible price reductions in the second quarter, reduced inventories of Maxwell House Coffee. The timing of marketing programs also impacted Maxwell House sales.

These two factors affected both the top and bottom-line performance of the beverage business in quarter one. However, sales at the cash register remains strong across the business. So we're confident the beverages will show solid top and bottom-line growth for the full year.

Now, before moving on, let me just add, as a proud Canadian, I'm also excited about a new partnership announced earlier today. Second Cup, Canada's largest specialty coffee franchise, is entering the on-demand segment with our market-leading Tassimo system. Starting this fall, consumers can enjoy Second Cup's most popular coffees at home with Tassimo. Tassimo Brewers and Second Cup tea discs will be sold at Second Cup Cafes across the country.

Now let's take a look at profitability in North America. Underlying segment operating income grew 3%, including a negative 1.5 percentage point impact from the loss of the Starbucks business. Higher pricing and productivity offset significant raw material inflation and unfavorable vol/mix. Lower SG&A, including the timing of ANC spending, drove the gains. As a result, OI margin increased 30 basis points to 17.9%, though this upside was tempered by about 1 percentage point from the denominator effect of pricing.

Our European business continued a streak of both top and bottom-line growth for a ninth consecutive quarter. This is especially encouraging in a challenging political and economic environment of the euro zone. Organic revenues grew 7.2%, led by power brand growth of nearly 11%. Pricing, in response to higher input costs, contributed 2.8 percentage points. As in North America, some of this benefit was due to the carryover impact of actions that we took last year. However, we did implement some additional pricing.

Despite this, market shares remain strong across the region, with about two-thirds of our revenues gaining or holding share. Vol/mix was especially encouraging, even after discounting a 2 point benefit from the Easter shift. Topline growth was broad-based, with coffee, chocolate, and biscuits leading the way. Coffee was up mid-teens, with pricing a key factor, but we also realized significant gains in vol/mix, driven by double-digit growth of Jacobs and Kenco.

In addition, we continue to gain momentum with Tassimo. Last month, we announced a new agreement with Costa Coffee in the UK, the world's second-largest coffee chain, to offer Costa's most popular beverages on the Tassimo on-demand system. Tassimo brewers and Costa tea discs will be available in Costa retail outlets in the southwest of England this month, before going on sale across the UK this fall.

Chocolate grew high-single digits behind our power brands and pan-European big bets, such as Milka Snacks, Small Bites; Crispello, a crispy chocolate-covered wafer and pudding treat; and Cadbury Bubbly aerated chocolates. Our chocolate portfolio is winning in the midst of the recession with solid share gains. Biscuits grew mid-single digits behind our focus on growth platforms. Our Choco-Bakery offerings grew nearly 30%, while OREO and Velveeta each grew nearly 40%.

Turning to profits, underlying operating income rose 12% in Europe, despite a negative impact of 3 percentage points from currency. Strong vol/mix and lower overheads, including the benefit of synergies, drove the increase. Pricing and productivity gains offset the impact of higher input costs and the double-digit increase in advertising and consumer spending. As a result, OI margin expanded 90 basis points to 12.8%.

In developing markets, we delivered another quarter of double-digit growth. Organic revenues grew 11.5%, led by power brand growth of 18%. Notable strong performers included Tang, up more than 20%; Lacta, up 30%; and OREO, which was up nearly 40%. Total developing markets growth was a good balance between pricing, in response to higher raw material costs, and vol/mix. The Easter shift added about 1 percentage point.

Growth was also broad-based across each of our four regions. Latin America, and Middle East and Africa, grew double digits, while Asia-Pacific and Central and Eastern Europe each rose high-single digits.

Before I get further into specific market discussions, please note that beginning this year, we have split our CEEMA region into two parts -- Central and Eastern Europe, and Middle East and Africa. We've done this not only because we now have the size and scale to operate each as two distinct regions, but also to ensure that we fully capture the significant growth opportunities in each region, enabled by the combination of Kraft, Cadbury, and LU.

Now, several markets really stood out in the quarter. Brazil was up low-teens, driven by chocolate, continued expansion in the Northeast region, and the timing of Easter. Russia was up mid-teens, largely on pricing across its portfolio. India grew by 20%, driven by chocolate and revenue synergies. And in China, our business continued to deliver outstanding growth of more than 35%. Outside of the BRIC countries, growth in Argentina, Poland, Indonesia, the Philippines, South Africa, and the Middle East, was also particularly strong.

Underlying operating income grew 24% across developing markets. This includes the net impact of about 8 percentage points from a gain on the sale of some property in Russia and an asset impairment charge in Japan. Favorable currency also added about 1 point to growth. Excluding these impacts, operating income was still up sharply.

A strong contribution from vol/mix and effective management of input costs more than offset a double-digit increase in ANC spending and investments in our sales force. As a result, OI margin rose 170 basis points to 13.9%, with about 80 basis points of that due to the net impact of the asset sale gain and the impairment charge.

Turning to our guidance, we continue to expect organic net revenue growth of approximately 5% in 2012. That includes a negative impact of up to 1 percentage point from product pruning in North America. On the bottom line, we also continue to expect operating EPS growth of at least 9% on a constant currency basis, which is within a long-term target range of 9% to 11%.

As you may recall, this guidance includes a pension headwind of approximately 4 percentage points versus 2011. It also reflects the expected increase in our effective tax rate to about 28% this year, up from about 24% a year ago. Bottom line, our strong quarter one momentum in every geography gives us great confidence in our outlook for the full year.

Now, I'll turn the call back to Irene for some concluding remarks.

Thanks, Dave. As we look ahead, we're making significant progress as we prepare to launch two industry-leading companies. Here's a quick update.

We filed applications with tax authorities in January, and we expect rulings around mid-year. We filed the initial Form 10 registration statement for the North American grocery business on April 2. Within the next few weeks, we expect to file an amended Form 10, including updated financials, reflecting our Q1 results.

We're making good progress on IT infrastructure and our plans to migrate $10 billion of debt to the North American grocery company. We're continuing to build out the teams for each new company. And as we approach the launch date later this year, we'll host investor events for each company.

So, to summarize, we delivered a terrific first quarter, and our business momentum remains strong. We're firmly on track to create two industry-leading public companies. And we're confident that we'll deliver top tier results for the full year.

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

Ken Goldman, JPMorgan.

Irene, you've said previously to expect a higher dividend payout ratio on Grocery Co. than Snack Co. Your total company dividend yield is already higher than the group average. You're at 51%, I think. I realize you're limited in what you can tell us or maybe even have decided, but how should we think about that payout ratio on Grocery Co.? Is it 55%, 65%? Is there some range we maybe could use? Or is it just too early to tell?

Well, it's too early for us to talk about that. Obviously, that will be part of our conversation as we head into the roadshow. But I think just the math is that we are -- we have about a 51% payout ratio today. What we said is that our dividend will be the same as the total for KFT, and that our grocery business will provide a competitive dividend, and our snacking business a modest dividend. And so you can expect that the payout ratios will be higher for the grocery company and somewhat lower than today's average for the global snacks company. But we'll give more of that detail as we head into our roadshow.

And then on the top line, your power brands again grew more quickly than the portfolio as a whole. I realize you want to be focused on a select number of brands and not spread yourself too thin. And I guess some of this question goes away after the spin, but is there anything you can do to migrate some of the learnings from growing these power brands over to the rest of the portfolio?

I'm just wondering whether there's maybe some easy wins, so to speak, that you don't really require a lot of company effort or capital to achieve. Do these managed for cash brands, do they have the potential to grow faster someday? Or is it just not the right way to think about it?

Well, I think what you'll see is, underneath the aggregate numbers, clearly, our power brands around the world grew at an 11% rate versus our aggregate revenue up 6.5%. So they are growing disproportionately fast, and we are disproportionately focusing our resources there. But clearly, all of our businesses are contributing, which is enabling us to deliver the 6.5% growth.

So, the simple answer to your question is yes. We're learning a lot as we take some of the lessons from one part of the world to another, from one category to another. And that's what's enabling us to get the whole portfolio to perform at an above-average level.

Okay, thanks.

Andrew Lazar, Barclays.

I think last quarter, you gave a number, I think it was at CAGNY in the quarter itself, I think about 30% of the portfolio had held or gained share. And I think part of that was just the issue of kind of pushing through sort of pricing in some of the larger passthrough categories at grocery. And you were expecting that to kind of start to turn around a bit and look better this quarter. Is there a way you can give us a sense of how that shaped up this quarter?

Well, first of all, I have to tell you we're feeling quite good that our category growth rates and our volumes have held up as well as they have. We certainly feel quite good about our market share performance around the world. The number you're quoting was a North American number and we certainly are seeing improved progress there, as we see pricing in a number of new categories.

As you know, Andrew, we led pricing in a number of our four categories. And as other of our competitors deal with the same input costs that we are, we're starting to see those gaps close. So, net-net, we're seeing some -- continuing to see some dislocation in a couple of categories, but we feel quite good in aggregate.

As we said, our market share performance has been exceptionally strong in Europe, with over two-thirds growing in developing markets; and North America, it's more in the 40% range. But we're seeing a very healthy recovery, and I think you have a good sense of that as you look at the vol/mix contribution underneath the revenue growth.

That's helpful. I appreciate it. And just a quick one on -- just on FX. I know that your guidance for the full year and from earnings is obviously in a constant currency basis. I guess, based on where sort of rates are today, and that could certainly change, any big impact one way or the other on the earnings line from FX, as you see it, based on how your portfolio shapes up?

Yes, I think -- I don't want to give any guidance on currency because I'll be wrong for sure. And that's what we prefer to talk constant currency. Obviously, the impact this quarter was pretty small. I mean, it was actually slightly unfavorable in OI and slightly favorable on EPS. But the numbers were pretty small.

So I think it will move around with the currencies. And frankly, to give you a simple formula would be kind of tough. But I don't see it today as being huge. I think it's -- it will continue to be either a headwind or a tailwind, depending on how the markets go. But right now, we don't see it as being huge.

Thanks very much.

Chris Growe, Stifel Nicolaus.

I just want to ask you, first of all, you had mentioned that you're making some investments in the emerging market. I know that was a key investment area last year in 2011 as well. I assume we should expect those sort of investments to continue. I wonder if there was any color you can give around that, whether it be sort of a drag on profitability that could be? Or any color around those investments you're making today?

No. I would tell you part of the virtuous cycle is the opportunity for us to have strong enough brands that enable us to price, together with our productivity so we cover our costs. And then that basically together with the focus that we've got on cost management and overheads, provides us with the money that we need to invest. So we see this as sort of a closed loop. And in fact, that's what will allow us to continue to invest in these businesses and fuel their growth.

(multiple speakers) If you'll look at our EMC, we said was up double digits. So, that's part of the investment. Our overheads are not up completely in line with revenue, but that's largely because of discipline on the G&A line and some synergies. Sales is actually up. But we are investing in ANC; we're investing in sales. And we still delivered a very healthy OI increase in the quarter. So, I think it's -- the numbers kind of hold together and sort of prove out the virtuous cycle.

Okay. I wanted to ask you as well, in relation to the strong growth you showed in global biscuits and global chocolate, I know it's probably not an easy number to aggregate, but are you gaining share in your categories? Do you believe you can look at that broadly? Do you have a broad measure of that, that as you look at the growth in [your] biscuit and travel business versus the categories?

Yes, I would say that, in general, we are gaining share in our core categories around the world. It's a bit of a funny number to calculate with Euromonitor data, et cetera. But we feel quite comfortable that we are outperforming our competition in our key markets.

Okay, thank you.

Jon Feeney, Janney.

I wanted to specifically ask about the Easter effect. I mean, clearly, I think some of those chocolate products are going to carry maybe a little higher contribution margin. And I kind of was wondering, could you give us a sense of the profit effect? That maybe just specifically that significant -- the very strong performance and profit in Europe, how much of that maybe is some of the profits coming in from just a big Easter chocolate season that we didn't figure on? Am I right in that assumption that's higher contribution margin stuff? And did that have a significant effect on Europe?

No. It's not a significant difference in contribution margin. You are right. The chocolate is more impacted. Chocolate and coffee in Europe are kind of the two big ones that are impacted by the Easter shift. But there's not a significant difference in the contribution margin on those two versus the rest of the portfolio.

So, no, there's not a big mix benefit. It's legitimate bottom-line growth driven by 7% topline growth.

Okay. So, the benefit from that at the profit line, what you're saying is pretty much in line with what you gave us the guidance on the topline for Easter effect?

Correct.

Great. Thanks. And just one for Irene. You know, you referenced in answer to Andrew's question, I think it was 40% range or so gaining or holding share in brands. And I guess it's a bigger picture question for the industry.

I mean, is it just a -- I know you're continuing to make the investments and you've really made some significant improvements in a lot of those North American businesses, but, I mean, do you feel like, as an industry, maybe second-half of this year, that people need to buy volume back at some point? I mean, the industry as a whole, Kraft, whatever, it seems like a lot of maybe lower income consumers.

And Tony talked about that a little bit at CAGNY, you are maybe losing -- or trading out of these categories and that's why some of these inveterate brands are losing share. I mean, do you expect that continued losing share will eventually lead to price declines in the second-half of this year in select US categories?

You know, I have to say, John, I think the industry -- obviously, we all remember the 2010 period. And I think the industry learned a pretty important lesson at that time in terms of the impact of deep discounting on category growth.

The reality is we are the category in many of our important segments. In fact, products like Mac and Cheese, we share it off of a smaller category than the larger segment in which we compete. So our focus, a lot of the spending is designed to drive the overall category, and there will be some share impact as a result.

Long-term, we are committed to growing our shares around the world. We believe that the model that we've got in place will enable us to do that. In the short term, particularly in North America, given the fact that we price quite aggressively and quite early, relative to competition, we did see some dislocation. And that's what you're reflecting -- what you're seeing reflected in our shares at this point.

But we are committed to getting that share back. We believe that the combination of continued investment in our brand equities, the strong innovation pipeline that we've laid out, is what will be necessary to get that back and not deep discounting.

Thank you. And just a quick follow-up, if I may. In terms of your organic net revenue guidance, I guess, for the second-half of this year, with these -- in some cases, pretty significantly following commodity costs, you don't -- you expect the cadence of pricing to -- you don't expect to be discounting significantly in the second-half of North America, even with these cost declines?

Yes, I think overall, it's -- you should see the cost declines pretty mixed. I mean, yes, they're down in some areas -- clearly, coffee, cocoa, grains, and some of the vegetable oils are down. Other things like actual heating oil and diesel in transportation and packaging are actually up. Nuts is up quite a bit.

So there's a blend. On balance, as you sit here today, yes, it is kind of down. We may have to take some adjustments in some categories. But I don't think you're ever going to see this year a negative year-over-year pricing trend. I think the increases last year were just simply too big for us ever to sort of end up in a negative year-over-year trend. So, I would not be concerned about that.

You know, John, I think the bigger impact that you're going to see on the revenue, as we think about the first-half, is really caused by the Easter shift, as well as the acceleration of our pruning efforts, that will play through in the second-half. And that's the difference between our aggregate guidance for the full year and what you might have seen in the first quarter. But it's not reflecting a big price discount.

Great. That's really helpful. I appreciate it. Thank you.

Bryan Spillane, Bank of America.

Just a couple of questions. First, gross margins, just trying to understand, with your pricing -- with pricing covering commodity costs, why the gross margins were still down so much year-on-year? So if you could just talk a little bit through that dynamic?

Yes, I think you're looking at the P&L and the gross margin was down on the P&L. There were a couple of things. Number one, you've got some of the integration costs and restructuring costs going through the cost line there. So that's an impact.

But even after that, our gross margin was down about 1 percentage point on a percentage basis. I think we're looking at it very much on a -- I'll start with the dollars, and we'll get to the percents later. Because we have covered $550 million worth of raw material costs with pricing. The productivity helped us grow gross margin dollars. But with that significant a step-up in revenue, the percentage number ends up declining because of the increase in the denominator.

So it's kind of a mathematical thing. Over time, we would expect to get our percentage margins back as the commodity cost curve kind of flattens out going forward. We don't expect to see this level of pricing going forward. And that will allow us to catch up on the percentage margins. But I think the important message for you is we're covering gross margin dollars, and we're going to make sure we do that going forward.

Okay. And then as we look at, optically, just as we're looking at the percentage margins going forward, it's just going -- if I heard it right, it's just a function of when the commodity cost inflation component begins to ease, is that right?

Yes, when the denominator stabilizes effectively. When costs continue to run up at kind of double digits rate, like they did in this quarter. It's just the percentage margin is a little bit misleading. But we're recovering the costs.

And you were still dealing with double-digit inflation in this current quarter?

In this quarter. It was -- we expected it and we gave you full-year guidance that it would be in the low to mid-single digit increase this year. And that's still the number. But it's going to be higher in the first half and lower in the second half, as we kind of cycle through the cost increases we saw last year.

Okay, great. And then in developing -- in the developing market segment, can you just talk a little bit about the sequential improvement from fourth quarter to first quarter? You had a much better performance in organic sales growth. And just -- was there anything different that you did in the first quarter that didn't take place in the fourth quarter? Or was there just something about the fourth quarter that maybe pulled some sales out of the fourth quarter or the first quarter? Just trying to understand the sequential change there.

Yes, I think we're actually fairly stable. I think if you go back to the third quarter is really the answer. The third quarter last year, you may recall we were up 15%. And we said at the time that some of that was being pulled in from the fourth quarter. Fourth quarter was up about 7%, so between the two, about 11%. And we're up 11.5% this quarter. So we view it as actually a continuation of a pretty solid double-digit trend. I know there was a shift between Q3 and Q4 last year.

Okay. And then finally, just in terms of regions within developing market segment. Just Eastern Europe and Russia, if you could just talk a little bit about -- it just appears that the macro or the consumer, at least, is stabilized in that part of the world, or maybe even beginning to show signs of improvement. Is that consistent with what you're seeing? Is just the backdrop a little bit better there than it's been the last year or so?

Generally, I'd say yes, Bryan. Certainly, we felt good about our growth in Central and Eastern Europe, and we were glad to see Russia recovering somewhat. Ukraine was down, and so we're still seeing some category impacts from the economy there. But, in general, we felt pretty good about what we're seeing in Central and Eastern Europe. We had very strong performance, as Dave said, in Russia, in Poland. And those are the major countries in that region for us.

Okay, thank you.

David Palmer, UBS.

If we were to focus on your US business for a second, I wonder how you're thinking -- what the first quarter means for 2012? Really specifically focusing on what will be the new Kraft Foods. We had a small profit, it looks like, in that part of the business and what will be the new Kraft Foods. In spite of the big quarter for the cheese business, the Easter boost on the other hand, you had that tough quarter in the beverages segment.

So, how should we think about that quarter? It sounded like you were positive on it. But again, maybe I'm missing something. How is that setting up the year on that part?

Well, I think, David -- we feel very good about the quarter. We think we demonstrated very solid growth in a very difficult environment. The portfolio in aggregate continues to perform quite well. We feel good that we've got a virtuous cycle even around the world, especially in North America. We've been very pleased with our ability to price to recover the significant spike in input costs. And the response that we've gotten, the pricing elasticity, has been in line, if not slightly better, with -- than what we had expected.

We feel good about the OI performance; the growth in North America, as I told you, we're up 3%, which is closer to 5% with Starbucks. And margins were up despite this aggressive pricing as the cost savings have come through. So net-net, we feel really quite good about the aggregate portfolio in North America. And probably the big drag among the portfolio was our beverage business, and we expect that to recover as the year progresses. But the fact is, despite a challenging performance in beverages for a variety of reasons, the aggregate portfolio performed quite well and I would suggest quite well relative to peers.

Well, thank you. And separately, regarding Europe, it looks like nice results there. As you're looking through the Easter effects and your own marketing, are your folks in any parts of that continent seeing any perceptible deterioration in demand in your categories? Obviously, you saw that earlier in Southern Europe, but is there any migration of that weakness upwards?

Well, I will tell you, without a doubt, our categories are softer than they had been, as a result of the macro environment. But we feel quite good about our ability to perform within the environment in the first quarter. We had strong revenue growth, as you saw. It was a nice balance of pricing and volume mix. We made good progress on our margins. And we're well-staged to continue to deliver that, as we look for the balance of the year.

We're continuing to invest in our key brands. We've got very strong power brand growth, over 11%, on top of the aggregate 7% revenue that we delivered. And we will continue to see upside coming from the LU and the Cadbury synergies. So, the environment is tough. We're certainly seeing that in our categories, but we've been able to weather the storm quite well.

And is there particular categories or countries where you're seeing that deterioration that's worth calling out?

Well, it's -- of course, across the board without a doubt, Southern Europe is the worst. But even there, our revenue was up. So, as I said, we worked very hard to make sure that we've got the right investments in the right countries behind the right brands. And it seems to be serving us quite well.

Thanks, Irene.

Alexia Howard, Sanford Bernstein.

So a couple of questions. Firstly, the transition of the distribution system to the third-party distributor here in North America, I think that was completed on April the 1st. Would love to hear a little bit about how that's all going.

We actually heard from Sara Lee this morning that I think they're going through a similar transition with the same company. And they've run into a few execution issues along the way. Nothing too disastrous, but it's holding volumes back as they try to integrate the systems. Could you make a few comments about how that's going?

Sure. I'll tell you, mechanically, the switch went with no significant issues. I give enormous credit to Mike Hsu and Tom Corley and Don Quigley, who are leading these efforts. And so far, so good. It's obviously too early to declare victory. We did cut over, as you said, on April 1st. And so far, so good. We've got very good continuity and stability at the top levels of the team. But the key, as we move forward here, is to make sure that we're tied in properly with our categories and that we get the execution that we need. But so far, so good.

That's good to hear. And then just as a follow-up, what's your strategy with regard to Tassimo here in the US? It sounds as though you've got some new stuff going on in Canada. Given the recall of the Bosch machines recently, and given the fact that that business has struggled, would you consider launching a Maxwell House K-Cup to be able to participate in that faster growth single-serve market more fully?

First of all, you were right in saying that our Tassimo business in the US was up only modestly. As you heard from Dave, it was up quite significantly in Canada, and we continue to feel quite good about its performance around the world. We do believe that on-demand is a clear consumer trend. It's an important part of our portfolio, and Tassimo is our leading brand. Obviously, as we have done with the soft pod platform in Europe, we're going to continue to look at strategic ways of growing our coffee brands.

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

Eric Katzman, Deutsche Bank.

Can I just ask just a real detailed question of Dave, first? I'm trying to understand the difference between the $98 million asset impairment on the consolidated P&L versus only $20 million on the segment reporting. What (multiple speakers) -- what's the difference there?

(multiple speakers) Yes, I think that the -- the actual line was the asset impairment and exit costs. So there's two pieces to that. One is $20 million, the impairment we talked about in Japan, and the $78 million is basically restructuring costs that tie into the program we announced in February.

Okay, so, the $20 million is the $20 million and then there's $78 million additional?

Correct.

Okay. All right. Okay. And then I guess two questions kind of related to -- for Irene. The -- if we exclude the Easter benefit in the first quarter for North America, volumes were down about 4% -- actually I should say vol/mix. And it sounds like mix was a positive. So wasn't volume down even more significantly?

I mean, I realize that that's kind of average versus the industry. But shouldn't we kind of view Kraft as basically just operating kind of in line in terms of volume with the rest of what is a very difficult environment?

Let me just give you a perspective on that, Eric. The reality is that the Easter benefit was certainly a positive. It was more than offset, though, by the combination of the pruning we had in North America, as well as the ready-to-drink de-load that Dave talked about.

If you exclude those two impacts, the entire vol/mix decline that you see came from two businesses -- cheese and nuts, both of which had very strong double-digit pricing. And so we're really feeling quite good about the recovery that we see in the rest of the business.

Going forward, as we've said, the pruning impact will accelerate because we've suggested it will be about 2 points on North America, 1 point on total Kraft for the full year. But the vol/mix will improve in the second half as we start to lap last year's pricing. So net-net, we feel quite good about the aggregate vol/mix performance in North America and elsewhere in the world.

Okay. Then I'll pass it on after this, but kind of related to Alexia's question, I mean -- I think it's fair to describe General Mills' sales force as being kind of top-rated over the last decade. Hershey, McCormick, very good companies, perform well in their categories.

And they're -- if you talk to them, they're actually investing more in their sales force in their wholly- owned operation, and yet, you're obviously the biggest player on the block and you're -- or Tony is, going the other way in terms of going towards Acosta. Like, how should we think about the fact that you've got this kind of big split going on in the industry with two very different approaches? I mean, why is this -- why is your approach better?

Well, first of all, our approach is not cost-driven, as Tony had told you before. There will be some cost savings, but the main reason for us making the move on our warehouse businesses is we believe it will give us greater reach, greater access to some new technology, and a better ability to flex resources based on business conditions.

And so we see some tremendous effectiveness opportunities that will come from that separation on the warehouse side. And I've got -- said before on the DSD side, the opportunity to focus that organization on what they do best, we believe will be a benefit as well.

So our sales strategy is all about the opportunity to maximize sales support behind these center of the store grocery categories. And we believe that we can do that best with the approach that we're taking. It is a combination of Acosta and our headquarters folks, and we believe that that's going to be a very powerful combination.

Okay. I'll pass it on. Thank you.

David Driscoll, Citi Investment Research.

I wanted to ask a little bit about the restructuring program that you guys have announced. So we've got a part of it, and Alexia and Eric and others have asked a little bit about it, about the sales force and the April 1 conversion. But the total program you guys have laid out is $1.1 billion in restructuring. This is a major program.

Can you quantify for us what you expect total cost savings to be when the program is fully implemented? And I know it usually takes several years for that. But what is the expectations for cost savings on a forward basis?

We've never quantified that. And I think we're looking at the restructuring program as really the basis upon which we launched the two companies. So, there will be cost savings, but they will be part of the guidance that each company provides when we get closer to the actual spend date.

Can you at least say that of that restructuring program, this $1.1 billion, it seems that since it's mostly in North America, that more of it will accrue to the benefit of the North American grocery business, the Kraft business going forward. Is that accurate?

Actually, it'd be kind of tough to split it, because the way we actually went about this is we said, what do we need to run both companies? And we clean-sheeted the organization for the two companies. We then compared that to today's organization of today's folks, and sort of pushed them into both boxes. And the restructuring was more the fall-out, frankly.

So to be able to then go back and reverse-engineer, and say how much of that restructuring savings would be in one company or the other, I think would be kind of an arbitrary exercise. So we're looking at this as one program that launches the two companies. I don't think it'd be very helpful to give you sort of a split of the two. Again, the guidance we give you when we come out to the roadshows will include the savings from this. And I think you'll have a better sense of that as we go forward.

Well, that's what really will matter. Can you give us an update on the Starbucks arbitration proceedings?

Well, as I'm sure you're aware, Starbucks publicly disclosed some information yesterday. We intend to abide by the confidentiality provisions of the process. But what I can tell you is, they publicly stated that they're seeking some damages plus attorneys' fees. And that our expert valued the agreement at $1.9 billion, and then applied the terms of the contract, which calls for a 35% premium and 9% interest, which would -- is causing us to claim damages of $2.9 billion plus attorneys' fees.

These amounts, we believe, were confidential, but following their public disclosure in their 10-K, they're obviously out there. There is a hearing. The arbitration hearing, as we've told you, is scheduled for mid-July. And we intend to let the arbitration process run its course. We remain quite confident in the merits of our case and we will post you as we have anything material to report.

Okay. All right. Well, there's a lot of information there. I do appreciate that. Final couple of questions from me are just minor ones. Can you just talk about the expectation for second-quarter volumes, given the Easter headwind? Would I be right to assume that, given that headwind plus additional SKU pruning, we're looking for negative volumes in 2Q?

Yes, I wouldn't go into negative volumes. I think what we would say, first-half in aggregate will be strong. And clearly, first-quarter will be stronger than second-quarter for exactly the two factors that you've indicated. So, I think you can take that as a key assumption.

Okay. Thank you.

Rob Moskow, Credit Suisse.

I was wondering, Irene, if you could address the $1 billion revenue synergies target? That tends to be a number that some people have skepticism about in an integration business. It just seems like whenever you report numbers, we have these crazy growth numbers in emerging markets like Turkey and India, and they're very strong. Are your revenue synergies coming in above your expectations? And is there any chance that we could get a profit estimate on what those revenue synergies are going to be by 2013? I'm sure you're more than excited to talk about '13 guidance, but (laughter) --.

That's exactly why I'm not going to give you that -- now or then. (laughter) But we feel great about how the revenue synergies are coming in. Without a doubt, a lot of the growth that you're seeing, and the disproportionate growth that you're seeing in our developing markets, is coming from bringing the two organizations together.

And I've given you some very specific examples of what happens in Brazil, as we brought the legacy Kraft products through the Cadbury distribution system; as we -- in India, as we are starting to sell products like OREO and Tang through the Cadbury Chocolate infrastructure. What we're doing in Mexico is we now have expanded our points of distribution.

So, in each of our key markets -- in markets like Russia, we actually are putting the legacy Kraft products through the Cadbury system in immediate consumption, and vice versa in the supermarket channel. So we feel very good that we are on track for our $1 billion target. About two-thirds of that is right -- as you rightly point out -- going to come from developing markets.

And we expect to see about 50 to 100 basis points of our 2012 growth come from these revenue synergies. And I can assure you that, again, if you take the virtuous cycle as the model that we are using to operate, I can assure you that these are very attractive margin opportunities that we're pursuing.

Attractive margin opportunities. Okay. A quick follow-up, if I could. I was kind of surprised in the Form 10-K that Kraft's US gross margins were kind of low, you know, 31%. And SG&A was also kind of low as a percentage of sales. And I think the North American business is going to be kind of marketed as a margin expansion story. So, can you help us understand a little bit like, I imagine gross margin is going to be where the biggest opportunity is. What are the major elements that are going to drive that? Is it Lean Six Sigma? Are there more plant closures to come?

Yes, I think we're going to avoid giving guidance for Grocery Co. until we get to the roadshow. But for KFNA in total, Lean Six Sigma is the key driver of the procurement, we talked about our Saver Program in the past. Overhead discipline will continue to be an important driver. And so we feel pretty good about the -- what I'll call the KFNA margin trajectory. As it relates to Grocery Co. specifically and what margins you can expect over time, I think I've got to wait for the roadshow for that.

okay. I'll let it go. Thank you.

Ken Zaslow, BMO Capital Markets.

Just one question is, what is the next -- talking about the revenue synergies, what's the next level of opportunity that you have in the synergies between Kraft and Cadbury? Because obviously, it does seem like you're doing quite well. Can you give us a little bit of a roadmap beyond 2012? No guidance; just some roadmap of how you think the synergies are going to go beyond 2012?

Well, I mean, again, if you step back, they're coming from -- about half of them are coming from route to market. The balance is coming from brand extensions, taking ideas like Bite Sized Snacks from one market to the other; taking products like Choclairs, which is growing at a 30%, 40% rate in China, and bringing it to new markets like South Africa.

So you're going to continue to see us expand our platform -- leverage our routes to market, continuing to put additional products through the expanded routes. We're going to benefit from the opportunity to leverage global platforms in more countries around the world, as well as the opportunity to leverage whitespaced opportunities. And that's where the $1 billion will come from.

So the pace to which you're getting it, you don't expect to decelerate any time soon, I guess, is kind of more my question is. Because the pace you're going at is -- it sounds like it's above what you expect. But is there a slowdown expected in the next 12 to 24 months? Or is this -- do you still feel like your pipeline is pretty stellar?

No, actually it's building. So we feel quite comfortable that we've gotten a lot of the early low-hanging fruit that we got last year. We're just benefiting now -- we now have combined organizations in just about every key country in the world. We're now beginning to train those organizations, leverage those organizations. In markets like Russia, for example, our sales force just came together in the last half-year or so. So, we have many -- we see tremendous benefits out in front of us, that again, is what gives us a great confidence about the $1 billion of revenue synergies that we see out there.

And just my last question, I don't know how you could give us some guidelines or -- how do you think about the taxes -- the tax rate for the two separate entities? You gave us a little bit of a clue on the dividend side. Would you give us some sort of guidelines to work with on the tax implications when they split?

Okay, I won't give you specifics but you can kind of tell. I mean, the rate for Kraft today I'd say is going to be in the high 20's where we are today. So, first quarter was 28.5%. And we said we'll be in that high 20's/low 30's kind of range. So that's the combined rate.

As you tear that apart, the US has a statutory tax rate of 35%. So Grocery Co. is going to be higher than that, clearly. Virtually every other country in the world has a lower tax rate than the US, so they're going to be lower than that. So I think the aggregate is in that sort of high 20's/low 30's. The US has got to be 35%-plus and the rest of the world is going to be lower, just reflecting the lower statutory tax rates elsewhere.

But that's kind of broad. Now, the real specifics about where it comes out will really depend on a lot of the tax planning work and everything else we're working through right now. So again, I think you'll have to wait for the roadshow to get anything.

That's perfect. I appreciate it. Thank you.

Operator, if we could take one more, that'd be great. Thank you.

Your final question comes from the line of Matthew Grainger of Morgan Stanley.

Just if I could try and squeeze in two. But if not, that's okay. We saw relatively strong volumes in US grocery during the quarter on lighter pricing realization than we've seen over the past few quarters. And I assume a fair degree of the volume performance is due to Easter timing. But were there any specific changes from a tactical promotional standpoint, perhaps in support of innovation, that may have temporarily shifted the balance there?

Yes, about three-quarters of it was Easter, so you can expect some of that to reverse out. But despite all the pricing, it was still up on vol/mix on a base level. So they had a pretty good quarter.

Okay, that's helpful. Thanks. And just quickly I wanted to get your take on the convenience channel. We've heard from a number of consumer companies that traffic and sales trends remained relatively strong through the quarter, despite rising gas prices. Is that consistent with what you saw in your products during the balance of the quarter?

We're certainly seeing growth in the convenience channel. And so we're seeing some recovery there, but we certainly -- we do believe that that is one of the factors that's dampening category growth in our dumb business. So it certainly hasn't come back all the way yet.

Okay. Thanks very much.

Well, thanks, everybody, for joining us today. For those of you who have follow-up questions, Dexter Congbalay and I will be available to take it from the analysts, and Mike Mitchell and his team will be available for any questions from the media. So, thanks again for joining us and we'll speak to you soon.

This concludes today's conference call. You may now disconnect.