億滋國際 (MDLZ) 2012 Q2 法說會逐字稿

Good day, and welcome to Kraft Foods' second-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.

Good afternoon, everyone, 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 view things today, and 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.

Let me now turn it over to Irene.

Thanks, Chris. Good afternoon. We had a terrific first quarter and we continued our momentum throughout the first half. Specifically, we delivered strong growth on both the top and bottom lines, consistent with our full-year guidance.

What's more, our business performance has been quite resilient. That's despite a weakening macroeconomic and consumer environment in some markets. That resilience is a direct result of our strategy to drive a virtuous cycle of growth around the world. We focused on our power brands and priority markets to drive strong organic revenue growth. We aggressively drove productivity and managed overhead costs. And we reinvested our savings in sales and distribution, in marketing support, and in new products to perpetuate that growth.

We've now got a virtuous cycle operating in each of our regions. And it provides a solid foundation to launch our global snacks and North American grocery businesses later this year.

From a global category perspective, through the first six months of the year, we delivered strong growth in both biscuits and chocolate. Biscuits were up 8%, with strength in both developed and developing markets. In North America, biscuits grew mid-single digits. This result was driven by great performance of Triscuit and Honey Maid crackers, together with the continued strength of new products like belVita and Newton's Fruit Thins.

Across Europe, biscuits increased high-single digits, led by global growth platforms such as belVita and OREO. Each platform was up 30% or more. Choco-Bakery, another one of our global big bets, was up more than 20%. In developing markets, biscuits grew low to mid-teens, led by OREO, up 27%, and strong contributions from other brands, such as Club Social Tuck and Barney.

Global chocolate grew 5% in the first half. In developing markets, chocolate rose high-single digits, led by mid-teens growth of Lacta in Brazil and Cadbury Dairy Milk in India. In Europe, chocolate increased low to mid-single digits. Global platforms like snacks, bite-size chocolates, Crispello and Cadbury Bubbly Bars, have continued to drive strong revenue growth, as well as market share in 14 of 17 countries.

In fact, the only challenge in our global snacks portfolio remains gum and candy, with revenues essentially flat in the first-half. Gum in particular continues to be weak. In fact, in developed markets, the rate of decline was similar to 2011 levels. In developing markets, though, gum is still growing, but at a slower pace.

Brazil is a case in point. In the second quarter, our Brazilian gum revenue declined, driven by softening category trends. Despite the lower revenue, however, we gained share due to strong merchandising and programming. But we offset much of the weakness in markets like Brazil by posting robust growth in other regions. For example, in Central and Eastern Europe, revenue was up high-teens. And in some other markets, especially the Middle East and Africa, we generated strong growth.

That said, given the high consumption among teenagers and a disproportionate impact of the economy on this group, we believe gum is unlikely to return to historical growth rates in the near-term. We do, however, expect trends to improve in the back-half of the year with the launch of a number of innovations. And we remain confident that gum will be an important contributor to our long-term growth.

On the bottom line, global snacks is doing quite well. We successfully priced to recover higher input costs. And we continue to increase productivity and leverage overheads to fund further investments to drive growth and improved margins.

Turning to the North American grocery business, Tony Vernon and his team also delivered solid top and bottom-line growth in the first half. Driving this growth are power brands like Kraft Macaroni and Cheese, Kool-Aid, and Oscar Mayer Lunchables, as well as new products, like MiO Beverage Concentrates and Velveeta Cheesy Skillets.

We've also successfully priced across the portfolio to recover higher input costs. This pricing, along with a continued focus on productivity and reducing overheads, drove bottom-line growth. So, while our teams around the world have been delivering these strong first-half results, we've also been busy preparing to launch two industry-leading public companies. Those preparations are going quite well.

In fact, we announced today that we plan to spin off Kraft Foods Group, our North American grocery business, on October 1. As we outlined in today's press release, the spin-off remains subject to a Canadian tax ruling and final approval from our Board of Directors. The timing of the spin reflects good progress on several key milestones. Earlier this year, we separated our US sales operations. And the division of our manufacturing facilities, distribution network, and IT systems is on track to be completed by the start of the fourth quarter.

Both leadership teams are now complete, with the appointment of Kim Rucker as General Counsel of our North American grocery business, and Tracey Belcourt as head of Strategy for our Global Snacks business. We've made all the key personnel decisions throughout the organization, and both teams are ready to hit the ground running at launch.

Today, we also announced the composition of the Boards of Directors for each company. As you can see in today's release, both Boards will include current Kraft Foods Inc. Directors, who will provide continuity, as well as new individuals who will bring fresh perspectives. In addition, we essentially completed the migration of $10 billion of debt to Kraft Foods group, consistent with its capital structure.

As a result, I am confident and truly excited that each business is ready and well-positioned to drive top-tier shareholder returns by focusing on its distinct shareholder priorities.

Now I'll turn the call over to Dave to discuss our results in more detail.

Thanks, Irene, and good afternoon. As you can see, we delivered another solid quarter of topline growth, with organic revenue up 3.4%. Through the first half, which equalizes the impact of Easter, organic revenue grew 4.9%. That's right in line with our annual organic revenue growth guidance of around 5%. And consistent with our virtuous cycle, power brands led the way, up 8% in the first half, with gains in each region.

It's important to note that we delivered modest vol mix growth despite the impact of pricing actions taken over the last year. This reflects the continued investments in and the health of our brands. As we said last quarter, we expect the impact of pricing in the second half to diminish, as we begin to lap actions taken in the back-half last year.

Our product pruning initiatives in North America will continue. Pruning negatively affected our first-half results by about one-half a percentage point. For the full-year, we expect pruning to reduce our growth rate by up to 1 point.

Let's turn to profits. Adjusted operating income increased 8% in the second quarter. Pricing and productivity gains more than offset about $365 million of higher raw material costs. Please note that adjusted operating income is what we previously called underlying operating income. There is no change to the definition; only the label.

To drive our virtuous growth cycle, we continue to invest in advertising and consumer support. A&C spending in the quarter grew in line with sales and remained at about 8% of revenue. To help fund this investment, we continue to leverage overheads, which were essentially flat. As a result, adjusted operating income margin increased 118 basis points to 15.8%.

What about earnings per share? Operating EPS rose nearly 10% in both the second quarter and first half of 2012. On a constant currency basis, operating EPS was up about 13% in the quarter and more than 11% in the first half. This puts us slightly ahead of our full-year guidance. In the second quarter, operating gains drove the improvement despite a penchant headwind of about a penny.

Outside of the operating gains, three factors netted to neutral in the quarter. We had a favorable impact of $0.05 from the change in unrealized gains and losses from hedging activities, which was offset by unfavorable currency of $0.03, and the lapping of last year's benefit from accounting calendar changes of $0.02. Below the line, the benefit of lower interest expense was offset by the change in taxes. [NES], as you can see, we posted a high quality increase in operating EPS.

Let's now take a look at each region's performance. In North America, we delivered solid topline growth of 1.7% to the second quarter, and 2.3% for the first half. Across each business segment, carryover pricing drove the growth. Given the significant increase in pricing, first-half elasticity was essentially in line with expectations. Vol mix was down about 2.5 percentage points, of which about 1 point was from pruning low margin products. Power Brands fueled growth in the first half, increasing 6%. As Irene mentioned earlier, MiO and Velveeta Cheesy Skillets were standout performers in the first half on the grocery side of the business.

In only its second year, MiO continues to have high awareness among consumers, and repeat buying levels have been excellent. Revenue through the first half of the year more than doubled, to over $100 million. This was propelled by especially strong results from recently introduced energy SKUs. Velveeta dinners was up more than 30%, driven by the excellent performance of Cheesy Skillets. And in beverages, our Kool-Aid brand grew 7%, fueled by strong results from Kool-Aid Jammers.

On the snack side of our house, Newton's increased 23%, as new Fruit Thins and 100% Whole Grain SKUs drove the growth. OREO continued to reap the benefits of retail support around its 100th birthday, growing 9%. And in crackers, Honey Maid and Triscuit were up 17% and 10%, respectively, driven by base business gains, strong sales execution, and innovation.

New products continue to provide major contributions to growth in North America. For example, Planters Men's Health Nutrition is on track to generate more than $25 million this year. BelVita Breakfast Biscuits is expected to reach at least $50 million. And Oscar Mayer Selects is expected to be $100 million platform this year.

Now let's take a look at profit in North America. Adjusted segment operating income grew 9% in the second quarter, while margin increased 150 basis points to 19.7%. This was driven by two factors -- carryover pricing actions and significant productivity that more than offset higher raw material costs; and overhead cost discipline has led to lower SG&A.

Turning now to Europe. Our European business once again delivered strong results. This is especially encouraging in light of the increasingly difficult economic environment in the eurozone. Organic revenues grew 1.4% in the second quarter and 4.2% in the first half, normalizing for the Easter shift.

Power Brands led the way, up 7% in the first half. Vol mix was strong, contributing 1.6 points to growth, despite the weak economic environment and significant carryover pricing from prior periods. Topline growth in the first half was broad-based. Biscuits revenue was up high-single digit, with a good balance between vol mix and pricing. As Irene mentioned, growth of OREO, belVita, and our Choco-Bakery platform led the way. In addition, LU was up 10% behind the new marketing campaign.

Coffee also increased high-single digits, all due to pricing. Vol mix was essentially flat, as the mix benefit from double-digit growth of the Tassimo and Millicano platforms offset volume declines in roast and ground. Chocolate grew low to mid-single digits, driven by strong vol mix. Milka, for example, grew high-single digits, fueled by growth in our snacks, small bites platform, plus strong marketing support behind its 111th anniversary.

I'd also note that our chocolate market share in the UK is higher than at any time in recent history. And we expect that strength to continue, supported by our new Cadbury campaigns around the London Olympics and Joyville, as well as successful product launches, such as our Bubbly platform.

Cheese was up low single digits, led by 7% growth of Philadelphia across the continent, and our new Philly line with Cadbury is off to a strong start in the UK. So, what about gum? Gum and candy remains our main challenge, and was down double digits in the first half. With much of our European gum business in France, Spain, and Greece, we felt the full impact of the eurozone crisis, and we're prepared for a challenging, if not deteriorating, economic environment for the remainder of the year.

That said, we are optimistic about our innovation pipeline. We'll have some great new products launching later this year, and they'll be supported by strong merchandising and programming. As a result, we expect some improvement in gum trends in the back half.

Turning to profits, adjusted segment operating income declined 13% in Europe. However, this includes negative impacts of 8 percentage points from unfavorable currency and 9 points from the lapping of calendar changes a year ago. Excluding these impacts, Europe's segment operating income was up mid-single digits. In the quarter, we benefited from pricing catching up to higher input costs, productivity gains and continued overhead leverage. These gains more than offset the significantly higher A&C investments we've made behind our Power Brands.

A&C was up high-single digits versus Q2 last year. OI margin, therefore, expanded 30 basis points to 13.7%. In developing markets, organic revenue grew 7.6% in the second quarter, and 9.5% for the first-half, which normalizes for the Easter shift. Growth reflected good balance between pricing and vol mix. Power Brands grew 13% in the first half, fueled by OREO, up 27%, as well as Tang and Lacta, each up 16%.

We deliver these results despite challenging economic conditions in certain key markets. Here's where geographic diversity differentiates us. As you may remember, we don't rely on any single country or region to deliver growth. Brazil, for example, accounts for less than 5% of Kraft's total revenue. China and India continue to grow strongly, but so did our Middle East and Africa region, especially in Egypt and the GCC countries, as well as other markets such as Argentina. This helped offset slowdowns in Russia and Brazil.

Overall growth was broad-based, across each of our four regions, led by Latin America and the Middle East and Africa. Both were up double digits. Asia-Pacific grew high-single digits, while Central and Eastern Europe increased mid-single digits.

So, what about our BRIC markets? China increased more than 30%, driven by 45% growth of OREO and strong programming behind our biscuit portfolio, Cadbury Eclairs, and Hall's. India grew more than 20%, with a strong performance in chocolate and candy. However, Russia slowed to mid-single digits, due primarily to weakness in the chocolate category.

In Brazil, we delivered mid-single-digit gains in the first half, but growth was essentially flat in the second quarter. This reflected weakening economic conditions in categories as well as the Easter shift. Adjusting for Easter, chocolate performance in Brazil remains strong in the quarter. Biscuits growth was also solid. However, gum declined low teens due to a category slowdown, and higher than expected volume elasticity as we increased prices.

We recognize that we're not immune to the increasingly challenging economic environments in certain markets, but we believe we're positioned to deliver top-tier growth in developing markets. Why? Because of our geographic diversity, focused investments in Power Brands, and continually improving sales and distribution capabilities.

Turning to profits, adjusted segment operating income declined 1% across developing markets. However, this included negative impacts of 8 percentage points from unfavorable currency, and 2 points from lapping accounting calendar changes in the prior year. Excluding these impacts, adjusted OI grew high-single digits, as effective cost management and vol mix more than offset significant investments in A&C. As a result, adjusted OI margin rose 40 basis points to 14.6%.

Now let's turn to our outlook. Our first-half results are on track with the guidance we provided at the start of this year. We continue to expect organic net revenue growth of approximately 5%, including a negative impact of up to 1 point of growth from product pruning in North America. It's clear that the economic picture remains challenging, with some markets softening further from the start of the year. Nevertheless, our brand-building investments continue to pay off in the form of solid topline momentum.

In terms of earnings, we continue to expect operating EPS growth of at least 9% on a constant currency basis. That's within our long-term target range of 9% to 11%. As you may recall, this guidance includes a pension headwind of approximately 4 percentage points, yet also reflects the expected increase in our operating effective tax rate to about 28% this year. That's up from around 24% a year ago.

As I mentioned earlier, we're running a little ahead of operating EPS guidance by growing 11% on a constant currency basis in the first half. But we're maintaining our current guidance, and would expect to reinvest any upside in the second half. Bottom line, our first-half momentum has us on track to deliver solid performance, consistent with our outlook for the full year.

So, let's talk about the spin. Again, subject to receiving a tax ruling from Canada Revenue Agency, and final approval from our Board of Directors, we're targeting an October 1st spin-off date.

Between now and then, there are several key activities. We expect the Kraft Foods Group [Form 10] to become effective in mid-August. We plan to have the Mondelez investor presentation in the afternoon of Thursday, September 6 in Boston at the end of the Barclays back-to-school conference. Kraft Foods Group will hold its investor presentation the following morning, September 7, also in Boston. Both companies will then have separate roadshows in mid to late September.

On the spin date, each eligible shareholder will receive one share of Kraft Foods Group for every three shares of Kraft Foods Inc. We expect when issue trading of both companies stock to begin in mid-September, with regular trading of both companies on the NASDAQ Exchange on October 2. Kraft Foods Group will trade under the symbol KRFT. Today's Kraft Foods Inc. will change its name to Mondelez International and will trade under the symbol MDLZ. The KFT ticker symbol will be retired at that time. Of course, we'll provide more details as they become available.

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

Thanks, Dave. As you can see, we continue to deliver excellent results in the second quarter and first half. Our business momentum remains strong, and we're well-positioned to launch two industry-leading companies on October 1.

This reflects the strategy and actions we've taken over the past six years, when we began our journey to change the trajectory of our business and deliver sustainable profitable growth. We've made excellent progress by focusing on Power Brands, high-growth categories, and fast-growing markets; driving savings to end-to-end cost management, and using those savings to expand margins, and reinvest in brand-building and innovation.

These actions, together with some significant portfolio moves, have fundamentally changed the face, the footprint, and the prospects for our Company. That's a tribute to the dedication of our 126,000 employees around the world. I am truly indebted to them for their hard work, for their love of our company, and their willingness to do what it takes, regardless of the obstacles, to achieve our goals.

As a result of these efforts, we've created a virtuous cycle in each of our regions. All the ingredients for sustainable profitable growth are now in place for both companies. They include terrific portfolios of beloved iconic brands, strong operating momentum, and world-class leadership teams, ready and able to take the business to the next level. Following months of preparation, we're poised to take the next step toward an even brighter future.

With that, let me open it up for questions.

(Operator Instructions) Brian Spillane, Bank of America.

Just two questions. One, I guess more of a clarification. Just in terms of the October 1 date, are there any hurdles in between now and then that we have to think about, that might -- that could potentially postpone that date?

We don't see any deal-breakers, Brian. As we've said, we're on track to do the spin. We have a lot of stuff to do between now and then. The Canada Revenue Agency ruling is not a deal-breaker, but it is the biggest outstanding item that we have. But we do expect to hear shortly about that.

Okay. Thanks. And then second, in terms of your organic revenue outlook for the year, you know if you look at the second quarter slowed sequentially from the first quarter, but you've maintained your 5% growth outlook for the year. So can you talk a little bit about some of the factors that you see that gives you the confidence to re-accelerate the growth rate in the second -- in the second half?

And then also, just I guess, has there been any change in the way that Kraft has looked at where the contribution of that growth would come from, I guess more -- between the three segments? So, is the trajectory -- the growth rate -- organic growth trajectory changed at all in any of the three segments, versus what you were looking at earlier this year?

Simple answer is that most of the slowdown that you see in Q2 is really attributable to the Easter shift. And we actually feel quite pleased with our first-half performance. And we've got some challenging comps in the back half of the year, but we do believe that the virtuous cycle that we've got going in each of the regions, the strong growth that we've got of our Power Brands, and our continued strong A&C support and strong innovation pipeline, should allow us to continue to fuel the momentum. And that's consistent with our reconfirming the guidance that we've given for the full year.

Okay, thank you.

Alexia Howard, Sanford Bernstein.

Can I ask just a question on the separation? Would I be right in thinking that the plan is not to have another step-up in overall corporate costs as a result of the separation? I believe that the cost savings are from the sale of outsourcing initiatives and other restructuring activities that you announced earlier in the year, that I think cost about [$1.7 billion]. Any step-up will be included within that so we won't see yet another step-up in overall costs. Am I right in thinking that?

What we've said, and I think we actually talked to it in the Form 10, Alexia, was that there would be some dyssynergies and corporate would obviously be part of that. But that we've taken a clean sheet, and really tried to design organizations for both companies that would allow them to focus on the strategies and the value creation opportunities they each see. And that the savings, as we do that, would offset the dyssynergies over time. So we have said that, and you're right, that's really where the restructuring money came back to.

That's great. And then one quick follow-up just on the fundamentals. It looked as though developing market margin expansion was very strong last quarter but it's fairly weak this time. Was there anything going on with brand-building or were there other factors that were really driving that inflection?

No, I think our developing market margins actually increased again this quarter. I mean, I wouldn't get overly uptight about it going up hugely one quarter and less the next quarter. I think year-to-date, we're up, and even in the second quarter, we are up about 40 basis points. But we feel pretty good about the margin trends in our developing markets.

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

Andrew Lazar, Barclays.

In looking at the margin structure in North America grocery this quarter, obviously, there was a pretty healthy level of margin improvement on a year-over-year basis. A lot of that you talked about being the dynamic between pricing and cost and productivity starting to work a lot more in your favor.

So what I'm trying to get a sense of is, how much of a margin improvement that you're starting to see there, is that versus a lot of the structural actions that you're taking right around your cost structure and such? Because what I'm trying to get a sense of is, how much, obviously, on the margin side for grocery is there to come? Because, in theory, that I think should be a large part of this or a major part of this story for grocery, right around where the potential opportunity may be going forward.

So I'm trying to get a sense of any perspective -- I know you can't lay it all out yet -- but any perspective of the magnitude around the opportunity in margins for grocery, given that you've already seen quite a bit, but I'm assuming that's more the cost dynamic playing out rather than the structural actions.

I think -- you know, you're right. I'm not going to give you any guidance going forward. We'll have to wait until we have those investor days in September, and Tony Vernon and his team will give you a better sense of the margin going forward.

In terms of quarter 2, it's both. I mean, 19.7% in the quarter is a high number, but I'd remind you, the quarter 2 is usually our highest quarter on margin. And while that's been the case over many, many years, the increase this year was a result of overhead savings. So, those are the structural savings you're talking about; but it also was gross margin improvement, as we were able to price and recover some of the costs that, last year at this time, were kind of lagging commodities a little bit. So we were able to get back on track of that.

I think if you were to go back a couple of years, the quarter 2 margin was actually around 19%. So you are seeing a benefit as we look at this quarter versus, let's say, two years ago. And that is, I would say, structural from productivity as well as overheads. But I can't translate that for you into future trajectory.

And then just as a second one, thinking about gum again for a minute, in covering or having tracked the two sort of major gum players as individual public companies over a number of years going back a while, it always seemed like in developed markets -- and especially in developing markets -- quarter in/quarter out, the rate of growth from a category perspective for gum and for the major players was generally, without fail, sort of top tier, when you think about global categories in food. And frankly, even beyond, across staples.

I realize there's been a very big macro shift that, Irene, you've talked about over a number of quarters, that's certainly impacting the category a bit. But from all of the work that you've been doing, and the study on this, do you think that's really it? Like, does that explain all of the sort of slowdown that we've been seeing, in your commentary around not getting back to that historical rate of growth, certainly, in the near-term? I mean, is there something else going on that you can sort of determine? Because it just seems like this is a category that, over a very long period of time, has been an incredibly consistent grower.

Yes -- no, I mean, I -- we remain confident that as we look to the longer-term, Andrew, that it will continue to get back on that trajectory. As I said in my remarks, though, I think it's going to take a while.

Teenagers are the biggest consumers of gum. Their per-caps are down. That's a key driver of the softness that we're seeing. And it's going to take some time to be able to -- a lot of that is about the macroeconomic environment. But then there are some actions that we've talked about unique to our franchise -- the price value offerings, to make sure that we have adequate offerings under $1.00. And we've taken a number of actions in key markets around the world to address that. And we're starting to see the benefits of that play through.

Both players over the last couple of years, as we've discussed, for different reasons, had cut back on A&C while aggressively pricing. We have taken actions to restore our A&C support behind the category. We've got a new campaign behind our Trident brand and it's having some good, early results.

And last, there are some things we're doing to just simplify our overall architecture. We frankly got over-skewed. So I do think there are a number of actions that we're taking. We're starting to see that play through. Our share performance has been quite strong around the world. I think some of the macro trends will get better, and we're making sure that we're making the necessary investments, so that as those trends improve, we're well-positioned.

But I don't think there's anything we're seeing structurally that would preclude this category from coming back to its long-term trends. It's just going to take a little longer than we thought.

Got it, thank you.

Chris Growe, Stifel Nicolaus.

I wanted to ask you first if I could, Irene, in relation to developing markets, you obviously have -- you noted some more challenging macro conditions overall. You talked about Brazil, for example, as a market where you've had a strong share position, but certainly just weaker overall growth. So my question would be that, what markets beyond Brazil should we be kind of aware of or watching out for? And then, in those markets, it sounds -- are they like Brazil? Are you seeing a pretty strong share position, just a softer overall growth rate?

Yes, I tell you it's the two markets that are of some concern to us are Brazil and Russia, as we look in our overall developing markets mix. But as we said earlier, the reality is, we've got a pretty diverse footprint among our developing markets. And so although we have seen a slowdown in markets like Brazil and Russia, we've been -- that's been offset by strength in markets like China and India, as well as the results we've gotten in Middle East and Africa.

So, we've had -- it's very strong; grew almost 10% in the first half, as you see in our developing markets. We feel quite good that we've got a nice virtuous cycle growing. We're continuing to support our key franchises and we're quite confident that it will continue, that that group of countries will continue to be strong contributors. We may see some weakening in one country or another over time.

Okay. And if I could just ask one quick follow-up, and that would just be -- I don't know if you gave any numbers around this, Dave, but to what degree -- what's the amount of cost inflation we should expect for the year? Is that changed at all? Certainly, there's been a lot of questions, given the recent grain inflation that we've seen. Has that affected your outlook at all?

Yes, I think at the start of the year, we said that our cost inflation and our cost of goods sold would be in the low to mid single digits. As I sit here today, it's likely to be towards the top end of that. So around the mid-single digits.

So, costs have gone up from a bit from what we thought. It's nothing dramatic. Truthfully, I think we live in a world where commodities are going to go up and down quite a bit over time. I think we're just going to have to live with that. The most important thing is that we can price to recover that.

And I think we've shown over the last couple of years that we -- as long as we invest in our brands, as long as we have new products, we can invest and we can drive pricing to recover the commodities. And so we're pretty comfortable that we can manage the cost inflation that you're seeing today.

Okay, thank you.

Robert Moskow, Credit Suisse.

Just a very quick question. I was a little unclear about the guidance. You're guiding to operational EPS growth at the low-end of 9 to 11. But it looks like currency is a greater headwind than anyone would have expected. So, do you have like an EPS kind of hit estimate for what currency would be this year? Thanks.

Yes, we don't give currency forecasts. Actually our 9% to 11% EPS growth over the long-term as well as the at-least 9% guidance we gave for 2012 were both constant currency figures. So you saw in the quarter that currency hit us for $0.03. Currency has been pretty volatile over the last year or so, so we don't do forecasts for currency. I can say with confidence that we will hit the guidance we gave you of being at least 9% EPS growth on a constant currency basis.

Okay, but do you think the currency hit -- if it's $0.03 in second-quarter, is it -- do you think it's going to be worse in third and fourth?

I don't want to get into forecasting currency, but $0.03 in the second quarter is -- I think it's an average of a bucket of currency. So you could probably check where the US dollar is versus last year.

Okay. And just to keep hammering on it, but if you did $0.68 here and it was a $0.03 hit, did you -- were your results about $0.03 better than you thought they would be then?

(multiple speakers) Yes, I think our results were stronger than we expected in the first half, that's true. We're about 11% up versus prior-year in the first half on a constant currency basis. And our full-year guidance is at least 9% on a constant currency basis. So we are running ahead of that trend. And as I said in the script, our intention would be to reinvest that favorability and keep the virtuous cycle momentum going through the balance of the year.

Okay. So reinvest the [first-half's] upside. All right. Thank you.

Yes.

Eric Katzman, Deutsche Bank.

I want to understand the advertising, the A&C spending across the quarter. First, just let me clarify. Dave, you said that on slide 6, that A&C spending was in line with revenue. But revenue was down 4%. Were you talking on a local currency basis?

Yes. I'm talking constant currency basis. So our revenue in the first half is up about 5%. And A&C spending on a constant currency basis as well would be about the same.

Okay, so in the slides in the developing markets and in Europe, you said that A&C support was up significantly. But you didn't list what it was in North America, and it kind of goes to Andrew's question that you show in 19.7% margin and no comment on A&C direction. Can you give a little more clarity to that? And did that have some impact on the fact that volumes were down in the quarter? Because I assume mix was a positive for the North American business in the vol mix component.

A&C was not a significant impact on margins. So if you're worried that we were, I'd say, cutting back in A&C and boosting margins to hurt our -- and that hurt our volumes? No, that was not the case. We continue to support our brands and I think you can see that with Power Brand growth. So the stuff that we're really focusing on was up 6% in North America in a pretty difficult economic environment. So, no, there's nothing hidden behind the numbers.

All right. And then I guess, I've kind of focused on this cash flow issue, and now you're splitting the Company up sooner than expected. And maybe we'll get some clarity on this in the Form 10's and stuff, but you had roughly $2 billion of cash flowing out this year between the old Cadbury restructuring costs, the debt stuff, and then the restructuring to make all this happen.

So where are we on all that cash flow? And how does the date being earlier affect it? Does that mean that the cash outflow could be into the December quarter, but it will be absorbed by the separate companies however it splits? Or is it all going to get done by October 1? How does all that work with this split being brought forward?

Yes, I think the amount of cash that hits the calendar year, if I just focus on the 12 months, I wouldn't expect that that will change much. Because the spin costs were obviously all going to happen this year anyway. So the stuff that was going into next year was more completely in the restructuring, as we set up both businesses for success.

We didn't talk about cash flow in the earnings release, but you'll see in the 10-Q when we file that, that our cash flow is above where it was last year. So we're actually off to a pretty good start, despite, as you indicate, signing the Cadbury integration as well as the spin costs in the year-to-date results.

Okay. And then -- well, I'll just -- I'll pass it on. Maybe I'll speak to Chris a little later. Thanks.

David Driscoll, Citi Research.

Irene, is this the last quarter then that you'll report as the CEO of the combined companies? Because if it's October 1, I'm thinking we're not going to get another combined report. That's correct, right?

I think -- I can tell you we're probably not going to talk to it. We will have to file a KFP 10-Q at the end of the third quarter, just like we will at the end of this quarter. So we'll have to do that. We will then have to file Carbo Financials as an addendum to the Form 10 for grocery codes, so we will do that. And we will also need to file revised Mondelez International financials that show Grocery Co. as a discontinued operation.

All that will come out in the third quarter. And as you think forward to November, when we do our third quarter earnings call, we'll probably focus on that last bit -- we'll focus on Mondelez International, and so that you can start thinking about the future. We're not likely to give you any commentary on what will by then be a standalone Kraft Foods Group.

Okay. That makes sense. Irene, can you compare and contrast the difficulties of growing volumes in the United States today versus the Kraft European business? And what's so interesting about the numbers today is that most investors seem absolutely worried about Europe, but it grew volumes 1.6% in the first half, while the North American operation saw volumes down 2.4%. What are your thoughts?

Yes, well, first of all, I feel really quite good about the performance that we've seen around the world in some very challenging economic conditions. We've delivered solid growth everywhere, and I feel this contribution of vol mix, if you take out the impact of Easter and pruning, is really quite impressive in each of the regions around the world.

The difference you would see, though, David, as you look at North America, is the impact of pruning. And that would have been about a point in -- actually a point in the first half. So, we feel that -- and the contribution, therefore, of vol mix in each of our regions was really quite strong, particularly in light of the fact that we took very aggressive pricing.

Do you see anything slowing the Kraft European momentum in the back half of the year?

Well, look, it's a challenging economic environment. We are very pleased with our performance. And I think a lot of the elements that have driven that performance so far will be in place, as we look at the balance of the year. We will continue to distort our resources toward our Power Brands within the gross that we shared with you of approximately 4% for the first half. Our Power Brands were up about 7%, because we've been distorting our resources.

We've got a very strong innovation pipeline in each of our core franchises. We've got the Chocolate Philly in the cream cheese business; we've got Millicano in the coffee business as well as Tassimo. We've got Bubbly, as well as Crispello, and Small Bites in the chocolate business. And we've got the opportunity to extend our biscuit -- core biscuit innovations, particularly belVita, into new territory.

So all of that will continue to be in place as we look at the back half of the year. All that said, we would expect the contribution from pricing in the back half will moderate a little bit, as we start to lap some of the pricing that we took a year ago. But net-net, we feel very good about the performance of our European business. And we believe that the elements that have driven it are sustainable, and we will continue to outperform.

Irene, that European business has been really wonderful. So a very good job on that. Final question from me is just if you could speak -- it's probably a question better for Tony, but I really want to ask -- the North American single-serve coffee strategy, if you're willing to talk about it, the Starbucks and Green Mountain have launched new machines. And this is a massive brand for the North American business. How is Tassimo set up to compete in the big holiday season this year? And can you comment on the arbitration proceedings with Starbucks, related to the ground coffee business?

Well, obviously, this is a very important subject that Tony will be talking about in the context of the roadshow. But what I will underscore is that coffee remains a critical category in our North American portfolio. Our opportunity to compete in all the key segments of the coffee business is important to us. On-demand, obviously, one of the fastest-growing segments, and we will be a player.

Tassimo is our global lead, and we will continue to look at opportunities to expand our participation in on-demand coffee. But I think you'll hear more about some of those details, as Tony and the team take you through the roadshow materials. With respect to Starbucks, we remain confident in the merits of our case. As you are aware, the arbitration began in mid-July. It should be folding up momentarily. And so I've got nothing to update beyond that.

Thank you very much. Congratulations on the results.

Thank you.

David Palmer, UBS.

Two questions on revenue. The first, organic revenue of about 5% for the year, I think you did about the same number for the first half. So, implying about the same for the second half, you're talking about, I think, pruning perhaps being a little bit more of a drag in the second half, and pricing rolling off. So, I assume that means accelerating volume trends. And if so, you made the comments on gum. Is that really the source of the acceleration in volume? Or are there other factors at work?

Yes, I think the -- we would -- as pricing tails off last year, pricing really kicked in and our vol mix was not that strong in the back-half. So as we get into the back-half this year, pricing is going to tail off a bit as a driver. But we would look to vol mix to become a bigger source of growth. So we would see for those two to kind of balance out and allow us to still be approximately 5% on the year.

And second on revenue, could you comment on revenue synergies at the Mondelez part of your business? It would be around this time a little -- we've gotten some time in between now and the Cadbury acquisition, that you should be harvesting opportunities that the cultures would be there and in place, such that you'd be finding the whitespace for each of your big parts of your business in certain geographies. Are you seeing that accelerating synergies at play this year?

We are, David. I think certainly on the cost side, we feel terrific about the performance so far. On the revenue side, we said that we would generate approximately $1 billion; through 2012, we will have generated about $700 million of that $1 billion. So, we generated about $400 million last year. We'll hit about $300 million this year.

And we feel quite good about the source of those revenue synergies; about half of them are coming from route to market. The opportunity to take brands -- for example, in India, to take our Tang and our OREO brands through our chocolate distribution system; the opportunity in Mexico to take some of our biscuit businesses through our gum distribution system. So we're seeing nice synergies in terms of route to market as we had expected. About one-third of our revenue synergies will come from just the opportunity to just expand our brand franchises.

We've delivered the highest share in our UK chocolate business in the history of the business. And so we feel very good about the performance there. We've had very -- continued very strong performance against Cadbury Dairy Milk in markets like India and Australia. So those brand extensions, the acceleration of global platforms, businesses like Crispello or Bubbly, are serving us quite well.

And the remainder is coming from whitespace opportunities, bringing brands like OREO into Greece, and the opportunity to bring OREO into India, and again on the back of the distribution system. So we feel the revenue synergies are coming in. We had said that we would generate about 0.5 to 1 point of growth in 2012 from revenue synergies, and we're very much on track to do that. That will be about $300 million. And, as I said, we will exit this year at about $700 million of the $1 billion in revenue synergies.

Thank you.

Ken Zaslow, Bank of Montreal.

You said that any outperformance would be reinvested back into the Company. Can you talk about two things with this? One is, is there a part of it that would just go back to offset the FX side of it? And then any outperformance that would not go back and just be allocated back to the Company, how would you decide on allocating between the global snacks and the North American grocery?

Yes, we're not going to cover the Forex, so we've said we'd give guidance of at least 9% on a constant currency basis, and that's really what we're targeting. So we're not going to reinvest to cover Forex. It really would be reinvesting to sustain the virtuous cycle and continue investing on our brands.

In terms of specifics --?

Like, how would you allocate it between the global snacks and the North American grocery? Is it where it's earned? Is it like a philosophy to which you're going to be thinking about it?

I think, you know, I don't want to get into guidance for quarter 4 or quarter 3 at this stage, which is kind of what that would come down to; but I would say that, like any time we face these decisions, we would be focusing on our Power Brands first, and we'd be focusing on the investments with the highest payback, both for 2012 and 2013.

Irene and I are interested in the success of both companies next year. So we're not going to be biased one way or the other where we invest that.

Okay. And my other last question is, you kind of pointed out that Brazil, Russia, Spain, and Greece are somewhat of a little bit more challenging. And, in there, you kind of more pointed to gum. Are there parts of your portfolio within those four regions that you feel very comfortable about, that is actually outpacing expectations anywhere? Or is it -- I guess what I'm trying to get at is, is it all gum in those four regions? Or is it other (multiple speakers) products?

(multiple speakers) I guess the most important point, Ken, is that we do feel good about our share performance in those regions. It's just the categories are taking a huge hit. In markets like Greece, it is disproportionately about gum. But in Brazil and Russia, we have a fairly strong portfolio, and we are seeing good performance from a share standpoint. But some of our categories are being hit, given the macroeconomic environment.

Great. I really appreciate it. Thank you.

Ed Aaron, RBC Capital Markets.

Most of my questions have been answered. I just wanted to ask a question on the North American beverage business. I thought the numbers might bounce back a little bit more, just given the under-shipment that you had in Q1. Can you maybe just give us an update on kind of a sell-in versus the sell-through dynamics in beverage, especially around the coffee business?

Yes, I don't think we have a sell-in versus sell-through sort of issue as we look at the beverages business today. So, it was certainly weaker in the first quarter than the second quarter; but I think through the first half, we've kind of equalized that.

Thanks.

Matthew Grainger, Morgan Stanley.

Thanks for the question. Just wanted to revisit Europe. Results have obviously been very resilient through the first half of the year, but you did highlight more difficult macro conditions during the second quarter, spoke to gum and candy in southern Europe. Could you go into just a bit more detail on what you're seeing across key markets? And where on the margin things might be becoming a bit more difficult outside of southern Europe? And, if you look at market share in aggregate across your categories, are you still comfortable that you're gaining share in more than 50% within the region?

Again, I feel very good about our performance in Europe. In fact, we've got over 70% of our shares there growing. So I think we've seen very strong performance.

As I mentioned in my remarks, we saw our share growing in 14 of 17 countries. So we're feeling quite good about our performance across the continent, including the UK. The challenge really has been southern Europe, and there, it has been disproportionately a gum issue. But our core categories really are doing exceptionally well across the landscape there.

And it comes back to the fact it's about distorting our resources on those key Power Brands. We've got some exciting new campaigns in support of Cadbury Dairy Milk as well as Milka, as well as some terrific innovation pipeline that I've talked about a couple of times on this call, all of which together are helping to fuel our strong performance. And I expect that that will continue as we exit the year, despite the challenging macroeconomic conditions.

That's great. Thanks very much.

Priya Ohri-Gupta, Barclays.

Thank you for taking the call. Just a quick one. It looks like you used just over $4 billion of the Kraft Foods Group bond issuance to pay down some of your short-term obligations. How should we think about the remaining $2 billion of debt reduction? Should we think about it in terms of 1H '13 maturities? Or is there another piece that we should be thinking about? Thank you.

We're just -- we're working through those alternatives today. You're right, we've got about $2 billion of excess cash, I'll call it, today versus where we normally would be at this time of year. And we're working through the options, and it will depend on the economics and the debt market what makes sense.

Thank you very much.

Operator, maybe one more question.

Okay. Your final question comes from Ken Goldman of JPMorgan.

Hi, your North American velocities, if you look at Nielsen data, they've been a bit more sluggish than usual lately. And I realize velocities can ebb and flow, and they're down across food. But yours maybe seem down a bit more than most, at least per the data.

So, a couple of questions based on that. First, do the Nielsen data correspond with what you are seeing in your US numbers in terms of velocity? And second, if so, what are some of the drivers behind that?

Because it seems your distribution points and promotion are down. And historically, we've seen a high correlation between velocity and promotion points for you. So maybe that's a cause? I'm just trying to really understand a little bit better what we're seeing in the public data right now. Thanks.

Yes, I guess it's hard for me to bridge your data to our data here, so maybe you can follow-up with Chris or Dexter afterwards. But I think directionally, the numbers that we're seeing, we're pretty happy with. Since the separation of the sales force on April 1 and signing in with the [costs], we've actually seen our TVP's go up.

You know, as you've seen in the data, our Power Brands are up 6% year-to-date. We're feeling pretty good. And I think even on the secondary brands, beyond our sort of standard Power Brands. We're getting a lot better secondary support on things like A1 and Cool Whip.

So I'm not sure exactly what you're looking at. We're actually very happy with the way the separation has gone, and the way our grocery brands are being supported. And on the DFD side, we're equally happy. Our biscuits revenue in the second quarter was up 7%, which has got to be the highest since the Nabisco acquisition. So I think we are seeing good feature support, we are seeing good TVP's, but we're happy to talk to you about the data you're looking at.

Great. Thanks.

This concludes the question-and-answer session today. I'll now turn the floor back over to management for closing remarks.

All right. Thanks, everybody, for joining us today. For those in the media that have follow-up questions, Mike Mitchell will be available to take your questions. And any of the analysts and investors that have follow-ups, Dexter Congbalay and myself will be available. So, thank you and have a good evening.

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