億滋國際 (MDLZ) 2012 Q3 法說會逐字稿

Good day, and welcome to the third-quarter 2012 Mondelez International earnings conference call. Today's call is scheduled to last about one hour, including remarks by Mondelez International's management and of the question-and-answer session. (Operator Instructions).

I'd now like to turn the call over to Mr. Dexter Congbalay, Vice President, Investor Relations, for Mondelez International. Please go ahead, sir.

Good afternoon and thanks for joining us Mondelez International's first quarterly earnings call following our successful spinoff of Kraft Foods Group.

Earlier today, we sent out our earnings release. This release and today's slides are available on our website, MondelezInternational.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. 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.

Before I hand it off to Irene, let me first outline how we put the numbers together. Please note that the financial information in this presentation highlights standalone results from Mondelez International on an adjusted pro forma continuing operations basis. Specifically, this reflects the spinoff and divestiture of Kraft Foods Group.

It also includes the following items as if they occurred at the beginning of the periods presented -- the impact of transferring certain North American benefit plan obligations to Kraft Foods Group at the spinoff date and the reduction of debt related to the completion of the spinoff capitalization plans. These financials also exclude spinoff costs, the 2012-2014 restructuring program costs, and integration program costs.

The basis of this presentation is consistent with the adjusted pro forma results in our Form 8-K filed on October 5, 2012, and it facilitates comparisons of the Company's current and future operating performance. I'd also like to note that our Q4 reported results will show Mondelez International on a standalone basis.

With that, I'll now turn the call over to Irene.

Thanks, Dexter, and good afternoon.

Let me start by saying it's great to be here in our new headquarters and to see the energy and optimism of our team as we begin our journey together as a new global snacks company.

Year to date, we delivered solid performance. Organic net revenue increased 4.6% and operating income rose more than 9% on a constant currency basis.

In the third quarter, as we expected, our revenue growth slowed, increasing only 1.5%. This was due to three factors. First, we were up against some tough comparisons. Indeed, we delivered exceptionally strong growth in the third quarter last year when organic revenue was up nearly 9.5%.

Second, pricing contributed less this quarter. Much of this was due to passing through the impact of lower green coffee costs. Arabica, for example, has dropped by nearly a third in the past 12 months. We're also beginning to lap some of the significant price increases we took last year.

And finally, we had some short-term executional issues in a few key markets like Brazil and Russia. We've already taken actions to address these missteps such that their impact will be largely confined to the third quarter.

As a result, we expect organic revenue growth to rebound to mid single-digit levels in the fourth quarter.

So despite the slower Q3 growth, I'm confident that we'll have a strong finish to the year and that we'll be on track to deliver the 2013 guidance that we provided in September.

We're continuing to invest heavily in our power brands, and they're responding well with strong growth in each region. We're expanding our successful global innovation platforms, including bubbly aerated chocolates, our chocobakery line, belVita breakfast biscuits, and teen gum brands, like Stride ID in North America and Twist in Europe.

Revenue growth in our two largest categories, biscuits and chocolate, continues to be strong, increasing mid to high single digits. And gum and candy revenue growth, while still challenged, should increase modestly next year.

Let's take a closer look at each of our global categories, starting with biscuits. Our biscuits revenue is up 7% with strong growth in both developed and developing markets. That's in line with the 7% increase for the category.

In North America, biscuits increased mid-single digits, and Europe is also posting solid growth. In developing markets, biscuits grew low double digits, led by China, Russia, the Middle East, and Africa.

Our biscuits' power brands rose 13% year to date with Oreo continuing to grow in the mid-teens. Our belVita innovation platform has been another star, up more than 45% this year as we expand across markets in Europe and the Americas. In fact, belVita is on track to exceed $300 million in revenue this year.

Global chocolate revenue increased 6% year to date, about the same rate as the category. In developed markets, chocolate grew mid-single digits behind successful innovation like our snacks Small Bites platform and activities around the London Olympics. In developing markets, continued strength in India and Brazil drove growth of mid to high single digits.

Our chocolate power brands have increased 10% this year. Cadbury Dairy Milk, Milka, and Lacta had each posted strong growth.

Gum and candy remains below our expectations. Revenues were down 1% despite the category growing about 4%. Candy delivered solid performance with Halls up low single digits behind new marketing campaigns and Eclairs up 20%, driven by strong growth in China, South Africa, and India.

But the key challenge remains gum, especially Trident, whose revenue declined low single digits. Although the brand grew in developing markets, it was more than offset by weakness in developed markets. To be frank, gum has been disappointing for quite some time and it's taking us longer to change the trajectory than we anticipated. We have, however, taken a number of steps to fix our performance and we expect to see gradual improvement over the next year.

In sum, our year-to-date results are solid, but our third-quarter topline was disappointing. I want to assure you that the factors that affected us in the quarter are temporary. They're within our control and will largely be resolved by the end of the year. As a result, we fully expect our revenue growth in Q4 to rebound and to set the stage for a strong 2013.

Now let me turn it over to Dave to discuss our third quarter in more detail.

Thanks, Irene, and good afternoon.

As you can see, we delivered modest organic net revenue growth of 1.5% in the third quarter. Through the first nine months of the year, our growth was 4.6%.

As Irene mentioned, we expected revenue growth in the third quarter to be challenging for several reasons, including a tough prior-year comparison and significantly lower contribution from pricing. Some executional missteps in a few key markets also affected the quarter.

Encouragingly, despite the low overall growth, our power brands still grew 6% and are up 8% year to date.

Turning to profits, adjusted pro forma operating income increased 7.5% on a constant currency basis. The effect of management of input costs and lower SG&A more than offset the impact of lower vol/mix.

We continue to invest in our brands with A&C spending increasing in line with revenue growth. A&C, as a percent of revenue, was about 9% through the first nine months.

Year to date, OI improved 9.3% on a constant currency basis, consistent with our long-term target of high single-digit growth. OI margin in the quarter increased 90 basis points to 13.1%. Year to date, OI margin increased also 90 basis points to 12.7%.

Regarding earnings per share, for the quarter diluted EPS was up 2.6% on a constant currency basis. Strong operating gains of $0.04 were tempered by a $0.03 increase in taxes. Year to date, EPS grew by 7.8% on a constant currency basis. The improvement was driven by operating income growth of more than 9%, offset by a nearly four-point increase in the effective tax rate, due to some significant one-time benefits last year.

Let's now take a look at each region's performance. In developing markets, organic net revenue was up a modest 1.7% in the quarter, led by Power Brands' growth of 8%. Pricing drove 4.4 percentage points of the growth. However, this was partly offset by vol/mix declines of 2.7 points. This compares to exceptional growth of 15.5% in the third quarter of last year as customers stocked up prior to price increases that became effective in Q4.

This performance also reflects the executional challenges referenced earlier. Year to date, developing markets grew 6.8%.

Results across each of our four developing market subregions were mixed. In Quarter 3, Latin America was up mid single digits and up high single digits year to date. Growth in the quarter was tempered by executional missteps in Brazil. We were slow to react to the softening gum category. This led to rising inventories at our distributors.

As we work through these inventories, we're stepping up efforts to drive category growth through increased A&C support, promotions, innovation, and better price size architecture.

Our biscuits performance in Brazil was also weak, despite continued strong growth of the category. This was due to lower marketing support and innovation. To stimulate our growth, we've restored marketing and promotional support and are introducing new flavors of Club Social.

In contrast to these two categories, we continued to generate robust growth in chocolate and powdered beverages, and in the north-northeast region of the country, we also continued to grow rapidly by expanding distribution.

Asia-Pacific increased low single digits in the quarter and was up mid to high single digits so far this year. India and China continued to post strong double-digit results, more than offsetting weakness in Indonesia, Australia, and Japan.

In India, our challenge is keeping up with demand for our chocolate. We've run into capacity constraints after posting extraordinary growth over the past couple of years. We're driving productivity and removing bottlenecks at existing plants to stretch current capacity, and we expect new production lines to come on stream by the middle of next year.

In China, biscuits continued to drive our strong performance. Oreo led the way, growing more than 30% year to date, while continuing to gain market share.

As we mentioned at our investor day, we launched Stride gum in August, and so far, so good, although it's much too early to declare success. Overall, China continues to deliver. In fact, we expect this market to surpass $1 billion in revenue this year.

Revenue in central eastern Europe declined mid-single digits in the quarter, due largely to Russia. Year to date, the region is up low single digits. In Russia, Q3 revenue fell, due to both lower vol/mix and price. Coffee price reductions were clearly a major driver, accounting for half the decline. But lower vol/mix was largely our own doing. We were too slow to react to widening price gaps in coffee and chocolate, which negatively affected our shares.

We've taken a number of corrective actions to regain momentum, including getting pricing back to competitive levels. We've also gotten back to basics on sales capabilities and increased marketing support. This has yielded significant improvements, beginning in September.

Finally, the Middle East and Africa was up significantly, low teens this quarter and low to mid teens year to date. The robust growth reflects strong results across the entire region, including South Africa, the GCC countries, and Egypt.

As we look to the fourth quarter, topline growth in developing markets should recover and increase high single digits. That's just below our double-digit growth target as we work through the final stages of the short-term executional issues I mentioned.

Turning to profits in developing markets, adjusted pro forma segment operating income declined 1% on a constant currency basis. The impact of lower vol/mix was largely offset by effective management of input costs. OI margin held constant at 15.2%.

Our European business, once again, delivered solid results and has now posted 11 consecutive quarters of topline growth. This is especially impressive in light of the increasingly difficult economic environment. Organic revenues grew 0.7% in the quarter and 3.1% year to date. Power Brands were up 2% in the quarter.

Vol/mix has remained consistently positive through the year, delivering about 1.5 points of growth. In the third quarter, however, vol/mix gains were offset by lower prices, especially in coffee.

Our share performance continued to be very strong, with about two-thirds of our revenues gaining or holding share. At a category level, chocolate and biscuits led the way. Chocolate increased high single digits, reflecting continued strong performance of new products. Our Power Brands also performed well, with Milka up double digits, Cadbury Dairy Milk up high single digits, and Toblerone up mid-single digits.

Biscuits rose low single digits, driven by solid results from Oreo, belVita, and our chocobakery platform. But coffee offset much of this growth, decreasing low single digits. Strong vol/mix gains were more than offset by lower pricing. As we anticipated, coffee prices declined in the third quarter, due to lower green costs. That alone depressed total year revenue in the quarter by about one percentage point.

Tassimo continued its strong performance. It was up nearly 20% in the quarter due to significantly higher A&C support.

Gum and candy declined high single digits. Candy was essentially flat with gum down sharply in key markets such as France, Spain, and Greece.

So how are we responding? We're driving innovation. In France and Spain, we're introducing 40 Minutes, a new gum that promises extra-long freshness. And in Greece, we're launching Twist, which is similar to Stride ID in the US. We're making it easier for consumers at the point of buying, including resetting our hot zones in nearly 30,000 outlets and expanding our offerings across a full range of price points.

And finally, across several European markets, we're strengthening our brand equities through new marketing campaigns. We're confident that we're taking the right steps to stabilize the category in the near term and to drive modest growth in the long term.

Looking ahead, we expect Europe's overall topline growth in the fourth quarter to be similar to Q3 as we continued to deliver solid performance in a tough environment and as we reflect the decline in coffee prices.

Turning to profits, Europe continued to focus on productivity and drive overheads lower, using those savings to fund increases in A&C support behind our Power Brands. Adjusted pro forma segment operating income increased 7.4% on a constant currency basis. This increase, as well as the improvement in OI margin, includes the reversal of an accrual related to the Cadbury acquisition.

Turning to North America, strong performance in biscuits drove solid topline growth in the region. Organic net revenue was up 2.2% in the quarter and 2.4% year to date. US biscuits increased mid-single digits with our biscuit Power Brands up double digits.

Cookies grew mid to high single digits with strong growth in Oreo and Chips Ahoy! Crackers were up mid-single digits with strong growth from Honey Maid, Ritz, and Triscuit.

Biscuits' improved performance and market-share gains are a direct result of the realignment of our US sales force in April. We're now realizing the benefits of a direct store delivery system that's focused solely on biscuits. For example, we've increased feature and display conversion opportunities, with displays up 5% year to date. And we've gained additional facings on existing products, as well as drove new products into stores more quickly. So far this year, our total distribution points are up 6%.

The performance of gum and candy in the US improved versus recent trends. Gum revenue was nearly flat as the successful launch of Stride ID in August largely offset declines in other brands. And while it's still early, we've been pleased with the performance of ID to date. In candy, Halls and other brands were up mid-teens, driven by innovation, as well as expanded distribution.

Our business in Canada declined mid-single digits, but this was largely due to planned product pruning.

Looking ahead, North America's topline growth in Q4 is expected to accelerate. We continue to build momentum in biscuits with a more focused DFV sales force. And we've lapped the product pruning actions we took in Canada last year.

Now let's take a look at profits in North America. Adjusted pro forma segment operating income increased 14.1%, while margin rose 180 basis points to 16.6%. These improvements reflect strong gains from pricing and productivity that more than offset a significant increase in A&C support behind Power Brands.

Before I get to our guidance, I'd now like to update you on our current estimates for transaction-related and restructuring costs. Please note that these costs are for Mondelez International only and exclude any costs incurred by Kraft Foods Group.

In the left column, you can see our year-to-date costs, while the right column shows what we expect in future costs. We've occurred around $400 million in spinoff costs to date and expect another $150 million going forward, with the majority in Q4. This is consistent with the approximately $600 million in spinoff costs that we originally anticipated.

Through September, we've also occurred about $100 million of restructuring and implementation costs, and expect about $825 million going forward. This is consistent with a total of $925 million that we outlined in our recent 8-K filing. Although some of the restructuring costs will hit in Q4, the vast majority will be booked in 2013 and 2014.

As I mentioned in September, in the near term we'll use the restructuring savings to help offset dyssynergies next year. After 2013, we expect the remaining savings to support the bottom line or to fund ongoing programs.

And finally, we've incurred about $600 million of costs associated with setting up the capital structures of both Mondelez International and Kraft Foods Group. This is consistent with the $600 million to $100 million range that we highlighted at our investor day.

We incurred a $436 million expense this quarter related to a forward-rate swap contract. These contracts were terminated in October, and we do not expect to incur further debt migration costs.

Now, let's turn to our outlook. We remain confident in our ability to deliver the guidance we outlined in September. Specifically, we're confirming 2013 guidance of organic net revenue growth at the low end of our long-term target of 5% to 7%. We expect good underlying momentum on our business, but economic conditions are likely to remain challenging. We also anticipate only a modest contribution from pricing, largely due to coffee.

On the bottom line, we're confirming our guidance of operating EPS of $1.50 to $1.55 on a constant currency basis. Please note that this range was based on average currency rates in August 2012. As most of you know, currency rates have been more favorable recently. In fact, if we were to use average rates from October 2012, our operating EPS guidance would increase by about $0.05.

We'll review the impact of currency again when we report fourth-quarter results in February next year. And since we give EPS guidance on a constant currency basis, we'll adjust our guidance to reflect the impact of currencies, either up or down, as appropriate.

So, to wrap up, our revenue growth hit a bit of a speed bump in the third quarter. But we fully expect it to rebound in Q4 to mid-single digits. Developing markets should be up high single digits, with Europe and North America increasing low to mid-single digits. We continue to enjoy an advantaged geographic footprint. Growth in our categories remains robust, and our Power Brand and global innovation platforms will continue to drive top tier growth. As a result, we remain confident in our ability to deliver our 2013 and long-term targets.

With that, we're now happy to answer your questions.

(Operator Instructions). Alexia Howard, Sanford Bernstein.

Good morning, everyone. Good afternoon, everyone. Sorry. Used to the morning calls. The margins were down quite a bit in developing markets this time around. Clearly, some of that was due to these execution issues. Are you able to parse out how much of that decline might have been driven by those execution problems in Brazil and Russia?

Actually, Alexia, the margins were flat for this year, at 15.2%, which is actually slightly up from where it's been year to date. So maybe we can bridge to you what you're looking at later, but as we look at our margins, we're actually quite pleased with where our developing market margins were in the quarter.

Right. And then, just as a follow-up, your margin expansion across the Company has been very good over the last nine months. I think you mentioned up 90 basis points on an adjusted basis year to date. It seems as though commodity costs are likely to be moderating going forward, and yet the outlook, it feels as though you're being very muted in your expectation for margin expansion next year. I'm just wondering what you're seeing as the key risks in 2013 and why the margin expansion might not be better than you're expecting?

Well, I think the guidance we've given for next year is 5% to 7% topline growth and $1.50 to $1.55, which I think will be close to the, or at the, double-digit EPS growth number that we've discussed as a target.

I think both of those will be top tier, so I don't think we're being conservative. I think how that translates into margin growth obviously will depend on where input costs are, and that could depend on inflation in developing markets or commodities, as you mentioned. But for us, we're focused on delivering top-tier top- and bottom-line growth, and the margins are the output of that, as opposed to the input. So I think it will depend how we go, but we're really focused on making sure we deliver those results.

Can you comment briefly on the input cost outlook from here? Everything I'm seeing, with coffee and other inputs that you've got, looks as though it's going to get much easier. What are the main puts and takes there? Are there things that are getting harder or do you see a general relief on input cost inflation over the next few quarters?

I think as we talk costs going forward, we'll probably focus on input costs in total, and I think you're right. As it looks today, and it can always change, it would be more for modest inflation.

Our input costs today as a snacking company have a lower level of commodity impacts and a lot bigger impact from things like inflation in developing markets on some of the other factors.

But as we sit here today, inflation is pretty muted around the globe. Coffee, as you indicated, is going down. A lot of commodities tend to be flat. Clearly, in the US and some of the other countries, the green complex is up. But we would say, today, that this quarter it was relatively muted. Next quarter, there would be no reason to change that.

We don't like to give guidance going forward 15 months from now, but at the moment we would not see a significant input cost increase next year, which is why, when we gave our guidance for next year, we said we'd probably have a relatively low pricing contribution to our revenue growth. So that's consistent with the outlook you're describing.

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

Ken Goldman, JPMorgan.

Good morning, everyone, or good afternoon. I did the same thing Alexia did. I realized you touched on this a bit, but could you provide a bit more color on exactly what happened in Russia and Brazil? And also, if you can, it would be helpful to understand from a revenue and EBIT standpoint which results -- or excuse me, to what degree results were affected by those execution issues?

Yes. So let me start by reiterating the factors that led to the missteps that I talked about are temporary and they're very much within our control.

We've taken the necessary actions that we need to take to address them and we anticipate that they will be largely resolved by the end of the year.

The issues are a little bit different in each of the two big markets which really are at issue here. Again, we mentioned to you that we had foreshadowed the fact that our momentum -- our growth in the third quarter was going to be a little bit lower than year to date because of the fact that we had -- there were a number of factors in terms of the difficult comps, as well as lower contribution in pricing. And that is the main -- those were the main contributors.

The incremental impact of the missteps that occurred in Brazil and Russia, they're a little bit different in each of the two countries. In the case of Brazil, we've got two issues -- gum and biscuits. Gum, as Dave mentioned, we were slow to react to a gradually weakening economy. That category had been growing in the high single digits, and we continued to ship as the category growth slowed almost in half to about 4%. And as a result, we found ourselves in a dislocation between our distributor inventories and our consumption.

So our consumption continued to be reasonably okay, but we had some short-term dislocations and we expect that the rebalancing that's in process right now will be completed by year end.

The bigger issue is, why has the category growth slowed? And we've talked about the fact we have taken a number of actions to accelerate our growth. We have increased our marketing and our sales support. We have focused very much on our execution at point of sale, particularly our assortment at point of sale. We've got increased merchandising support. We've got increased support behind our new advertising campaign.

We're looking to continue to expand our distribution in the fast-growing north-northeast part of the country, and we have taken a number of steps to improve the offerings from a price size standpoint as we have watched the GDP in Brazil, as well as we've seen in a number of countries, declining somewhat.

So all that said, that was the issue with gum. We feel we are very much on it and on track to address that.

The bigger -- the other issue, though, in Brazil turned out to be biscuits, which, quite frankly, became a knock-on impact from gum. It's about reduced marketing support. The category was growing fine. We just reduced our marketing support to offset some of the gum weakness, and it was a mistake. And we have since restored that marketing support and we are quite confident that that business will rebound.

As Dave mentioned, no issues with chocolate in Brazil. Our powdered beverage growth was quite strong and continued strong growth in the north-northeast. So that's the situation in Brazil. We've got our arms around it and we're taking the necessary actions.

Russia is a little bit of a different situation. Half of that decline was due to the significant drop in coffee costs, but the other half was volume/mix, and it was driven by price gaps -- excessive price gaps in both chocolate and coffee. We were slow to respond to the fact that competitors had dropped prices and we didn't. It resulted in share losses, and that was the biggest issue that we had in coffee and chocolate.

We've taken the necessary price reductions. Both categories, again, remained quite robust in Russia, and we're quite confident that we will be able to correct that situation.

The other piece of our issue in Russia was just our sales execution wasn't where we need it to be. We've stepped up the focus in that area. We've made some -- we've strengthened our leadership in a couple of places, particularly in sales, and again, we feel quite comfortable that we will be able to resolve that.

So net net, these are temporary issues. They're issues that are entirely within our control, and we're quite confident that we will be able to see a rebound in the fourth quarter and into 2013.

And that's helpful (multiple speakers). Go ahead. I'm sorry, Dave.

In terms of impact, it depends what your base assumption was. So I'll let you make your own base assumption, but Brazil is about a $2.5 billion business, and it was flat, so you can determine what you thought it was going to be. It was double-digit growth last year.

And Russia is about a $1.5 billion business, and it was down low double digits, and last year it was not. So I'll let you establish your own base, but those are kind of the parameters that you could work with.

You've been (multiple speakers) listening to too many politicians, Dave.

And guys, I'm sorry. One more question, if that's okay. All the moving pieces you have, any insights you can provide into 4Q's interest expense and tax rate would be useful. And just to clarify, should we be comfortable with roughly the pension expense you saw in this quarter and the corporate expense you saw this quarter going forward in our models, or maybe there's some puts and takes there we're not aware of going forward?

Yes, I think the -- if I start from the corporate expense, I think the geography may change between businesses, et cetera, going forward, but I think in aggregate it's directionally correct in the stuff we'd provided.

In terms of interest expense, similarly we've tried to do pro forma adjustments that sort of assume the entire $10 billion of debt had been transferred across to Kraft Foods Group. So again, that should be roughly in line.

Tax rates, we've given you guidance of mid-20%s. I'm not going to give you a specific guidance for Quarter 4, but I will remind you that last year we had a very, very low tax rate because we had a big one-timer. So you can expect what I call close to a normal tax rate probably in Quarter 4 this year, but the comparison to last year will be quite different.

Okay. That's very helpful. Thanks, guys.

Matthew Grainger, Morgan Stanley.

Hi, everyone. Thanks for the question. Two questions, actually, for Dave. One, just very briefly, you mentioned a favorable one-time item in Europe. I believe it was the reversal of a Cadbury accrual. Can you quantify what the benefit of that was? On an operating-income basis?

Yes, I think -- it'll show up in the 10-Q, so I guess I can. It's just over $0.01, $0.015, in that range, of impact for the quarter.

Okay. And as you continue to explore the options you have around allocating the excess cash on your balance sheet right now, have there been any changes or new developments in your thinking on how you're approaching the debt issuances you have maturing in early, mid next year or the potential for any other refinancing going forward?

Yes, I think there have. I mean, essentially what we've agreed is -- as you know, we've got about $3.5 billion of debt maturing during the course of next year, about half of that in the first half and half of that in the second half. And I'm sitting on about $2 billion of excess cash, plus or minus.

So we have decided we will not -- that we will hold onto that cash and just pay down the debt as it matures in the first half of the year. And it's a little early to talk about cash for utilization in the back half of the year. But that decision really is what triggered the expensing of the swap loss. So we're not going to be issuing any debts in the first part of the year and we're going to be sitting on our cash and just paying down those maturities as they come due.

Okay. Thanks very much.

Chris Growe, Stifel Nicolaus.

When I look at the gum and candy category, it seems to have improved a bit in the quarter. I think you mentioned about 4% overall category growth.

So I wanted to ask two questions around that. One would be that, is that due to candy growth and gum remaining still soft? And then, just to better understand the difference between your reported 1% decline in that category and then the underlying category improving, is the gap just those markets where you were mis-executing, if you will, or is there other areas or factors to consider?

Yes. So within the 4% that I talked about, Chris, that's a combination of essentially a flat gum category and a 7% growth in the candy category.

So when I talk about why we are quite optimistic, virtually all of our categories are growing. Our issue is gum. And we did lose some share in gum in a number of key markets. Actually, Brazil, which we've talked a lot about some of the executional issues, we actually grew share in Brazil. But we do have some share opportunities in a number of markets.

And a lot of the work that we're doing on price size architecture, on restoring spending will help also to -- as well as stepped up innovation, things like ID that we've just launched in the US will have to step up our share performance.

So they're going to help to not only stimulate the category, but also, in select cases, should help to improve our share performance as well. But the big issue is really the category, and that's really what we've been focused on.

Okay. And then, I just had a follow-up question, I think for Dave. Just regarding -- you cited constant currency EPS growth this year, year to date, at plus 8%. Is that a bit of apples and oranges? Is that including Kraft as well, North America, or is that a good number to cite for Mondelez here to date?

No, that's a good number, as best as we can do for Mondelez here to date.

We took out Kraft Foods Group as a discontinued operation. It's technically not discontinued until Quarter 4, but we've done it on a pro forma basis for you. And we've tried to adjust interest and pensions to align with how our business will be going forward. So it's a good number.

The reason it's 8% versus -- you know, we would normally be expecting higher [as again] the tax rate. So last year was a very low tax rate. It's about four points higher this year than last year. It's about 22% year to date. Last year, it was about 18%. And that's why you're seeing some of the operating-income growth get lost from the 9% of the OI level down to 8% of the EPS level. But it's a pretty comparable number.

Okay. That's helpful. Thanks so much.

Eric Katzman, Deutsche Bank.

A couple of questions. I guess when we were up in Boston and we went through the company for the first time, there wasn't a whole lot of focus on the non-Power Brands, and it seems as if, if I'm doing the comps correctly, that the non-Power Brands in most markets were down. Could you talk about that and what that means? And I understand that, if my math is right, your EBIT was up about 4%, so it didn't necessarily impact your EBIT, but how should we think about that?

Well, first of all, Power Brands represent almost 60% of our revenue on a year-to-date basis, and as we continue to grow them disproportionately relative to the base business, they will become an increasingly large portion of the business.

One of the reasons you don't see as much of an impact on the OI line is that typically they are not Power Brands because they have lower margins, and so that's why we are essentially de-emphasizing them.

So for the most part, we are seeing weaker performance on the brands that we are de-emphasizing. Many of them are local brands, and again, our Power Brands will continue to be an increasingly large percentage of the portfolio, and that's what's going to fuel our topline growth.

And Eric, just so you don't panic on all other brands, in the quarter it is true that the Power Brands grew and the non-Power Brands declined. If you look year to date, the Power Brands grew 8% and the non-Power Brands were about flat. So it's not like they're falling off the cliff.

We are making ongoing strategic decisions on the portfolio, but we don't see this as a huge headwind. It's more a question of they're going to be growing a lot less, maybe flat some years, maybe growing slightly other years. But we don't see it as a huge decline. Quarter 3 really was a bit unusual. But you're right. They were down in Quarter 3.

All right. And then, just so I'm, again, getting this right, since we're all getting to know the standalone company correctly, so the 60% that's Power Brands and the 40% that's non-Power Brands, that is of the snack and confection side of things, and there's another 27% or so that is --

No, no, no. The numbers I just quoted to you, Eric, that's for the total company.

Total company.

But we have Power Brands in -- you know, Tang is a power brand. When we talked at the investor road show, we really only talked to snacking because that is three-quarters of our business.

In coffee and in powdered beverages, which are also strategic categories for us, we also have Power Brands. So in coffee, you've got Jacobs coffee in Europe, for example, that's huge. And you've got Tang and powdered beverages. Those are also Power Brands, and they're equally significant, they're equally high margin, and they're equally good growth.

Okay. And so, the -- thanks for that. And so, the non-snack and confection side of things, it sounds like coffee, given the competitive issues in Russia and the price passthrough that you took, that that was at least part of those non-snack and confection business that was part of the drop?

Not really. I think -- you know, coffee actually is up around the same as the rest of the business year to date.

So we said we're up about -- we're up 4.6% year to date on our total organic growth. Coffee actually would be consistent with that. I think what you'll see on coffee is, as we lap the pricing we took last year and we're adjust to lower pricing, the price portion of that revenue growth is getting much, much smaller. And in the quarter, it was actually negative. You're right.

But the vol/mix is getting much stronger. And so, coffee, for us, has been a pretty good growth driver this year. It's been about in line with the total Company.

Okay. All right. I think that's what I need. Thanks. I'll pass it on.

Bryan Spillane, Bank of America.

I guess just a question back on developing markets, and I guess more particularly Russia. And if I remember it right, the second-quarter organic sales in Russia was also soft. It appears like, especially ex-Russia, the rest of central and eastern Europe, you're seeing some softness in the consumer. So I guess -- as you look forward in Russia, beyond just fixing some price gap issues, were you all concerned at this point that there is more of a macro headwind there? And I guess I would say the same thing for Brazil. It's been such a strong market for you. And is there any concern there that the macro picture is a little bit different today than maybe what we were thinking about back in September?

I don't think so, Bryan. I mean, as we look at our peer performance in these markets, they continue to be strong.

We certainly have seen GDP slowdown in both of the markets, Brazil to a greater extent, perhaps, than Russia. But the issues that we're facing, we believe, were of our own making. As I've said before, they're very much in our control and they're quite fixable. So we have every confidence that they will continue to be growth markets for us.

Irene, were you surprised that biscuits in Brazil slowed as quickly as it did? It was as responsive or reactive to the reduction in [mute] marketing support. It seems like a pretty quick linkage between reducing marketing support and seeing the volume drop. Were you surprised by that?

Yes, but there's -- we're doing a pretty deep dive on these two businesses, as you would imagine. And there's a lot of moving parts there. I'm trying to give you a best sense of the headlines there.

But we did end up with a fairly significant loss of share or voice, and we can trace that pretty directly to our share performance. So I believe that we have a good sense of what the issue is there. It's not entirely marketing support, but it was predominantly that.

Okay. And are there competitors increasing their share of voice or do you have some competitor in biscuits that are spending more now?

No. Again, it was just -- we did it to ourselves. We just basically reduced our levels. We've now restored our levels back, and we've got a very strong biscuit business in Brazil, and we're quite confident that that business will rebound.

Okay. Great. Thank you.

Ken Zaslow, Bank of Montreal.

Can you just talk about your opportunities and challenges in Japan and Australia? Those are part of your developing markets, and I just wanted to figure out how you see those going out for the next year or so.

Yes, I think Australia, we've got a great chocolate business. And I think we've had some good new products lately.

I think in Quarter 3, it was a bit weak, but it was more of a phasing thing to do with a system go-live that we had in a prior quarter. We always load prior to the system go-live. So not material to the total company, but in Australia it did result in it moving from a low single-digit growth to a low single-digit decline. So it wasn't dramatic, but it's a mature market with a great chocolate business, and we see it as continuing to chug along.

Japan is a gum market, and therefore it shares a lot of the challenges Irene has talked about on the gum business.

Great. Thank you very much.

Ann Gurkin, Davenport.

Good afternoon. Thank you for the question. I was just curious, Irene, now that you look at your global business, if you've done stress tests as to how many markets would have to miss expectations or even exceed expectations before you would change guidance. Like you've seen weakness this quarter in Russia and Brazil that affected the top line. Can you just comment a little bit on stress testing the global portfolio, and what needs to change versus your expectations to make a major shift in expectations?

Yes, let me start by saying, Ann, we've had a terrific run in our developing markets these past few years, by any measure.

In fact, our first half, we were up 9.5%. So we had a speed bump in the third quarter and we're not happy about it, and it's a fact, but we shouldn't overreact to one quarter.

We actually believe that one of the benefits of the Company is that we've got a fairly well-dispersed geographic footprint so that no one market is -- basically, we've got a pretty good footprint around the world, so that we have the opportunity, if we see issues in one particular market, we have good offsets elsewhere.

It just so happens that Brazil and Russia are two very large markets, and simultaneously they had some issues at a time that our capacity was constrained in some of our other growth-engine markets. So it was kind of a little bit of a perfect storm there.

But net net, we of course continue to look at the composite profile of our developing markets, particularly as it represents a significant part of our portfolio. But we're quite confident that those markets will rebound and will improve in the fourth quarter, as we've said, and return to double digits in 2013.

That's very helpful. And then, regarding projected productivity savings, is that still a 4% target?

Yes, that's still -- we'll be 4% or higher on our gross productivity going forward (multiple speakers). We achieved that this year, and -- so far, and we expect to do that going forward as well.

That's great. Thank you.

David Driscoll, Citi.

I wanted to ask a little bit more about the restructuring program. So in the 8-K filing, Dave, I think it's $925 million. Irene, can you talk to us a little bit about the evolution, which is nearly $1 billion? This is an enormous restructuring program. I think there is a lot to say about the blue biscuits and the opportunities that have yet to be realized in restructuring that, maybe the legacy Kraft European operations, and even some restructuring in North America.

I'm not really all that clear on, maybe, more of the story behind the $925 million and then the benefits that we're going to get from it. And I think it's an important part of the story going forward. So if you could, I would love for you to just explain about what's happening here.

I can take that, David. I mean, the restructuring program is $25 million, as you said, and there's really three components to it.

The first would be overheads, as we resize corporate headquarters for the smaller company we now are and as we resize North America snacks to reflect the fact that it is a standalone snacks business now.

Second is manufacturing. And as you rightly say, we need to streamline our manufacturing to reflect the fact that we're now a focused snacks business, and that has some implications. I can't really give you a lot of details on it because, frankly, we have to run those projects through our Board and, as importantly, we have to run those projects through our unions and our works councils.

So we're working through that process, but you probably saw in the last two or three weeks we've announced a closure of a coffee factory in Austria and we announced the closure of a large snacks factory up in Canada. So we're working through these. They'll continue to go.

And then, the third piece is on the distribution network where North America is now a DSD-focused business, and that's got some implications on distribution.

So those are the three pieces. It is $925 million. It is a lot of money. I accept that. About two-thirds of it is cash; about a third is non-cash. The vast majority of the spending will be in 2013 and 2014. And after that, we would see ourselves self-funding an ongoing restructuring program within the guidance we've provided to you.

Now in terms of savings, I think we've said that next year we have a dyssynergy headwind, and the restructuring savings next year will cover about half of that. So the savings will start to flow through next year and it will cover about half of our dyssynergies. We would expect the savings in 2014 to cover the rest of those dyssynergies, and any incremental profit in 2015 and beyond we would look to either support the bottom line or reinvest in growth opportunities. But it's really 2015 and beyond before we'll see a net benefit between dyssynergy and restructuring.

That's really helpful. Two other quick questions. The first one is on the Starbucks arbitration proceedings and any update that you could give us on the timing of that decision.

Yes, the arbitration case actually closed in August. So the arbitrator is considering the arguments as we speak. We remain pretty confident in the merits of our case, but I regret to say I don't have any updates to you on really anything beyond that.

Okay. So, then, that would mean that the decision is sometime very soon. Is that reasonable?

Some time. There is no timeline on the arbitration, so it really is up to the arbitrator when he wants to come back with his decision.

All right. Final question on Brazil, Irene, I believe you had a leadership change down there. Does that have any implications to the problems that you cited in the quarter?

No. I mean, David, one challenging quarter does not cause us to make personnel changes.

We did make some leadership changes in a couple of our markets, but those were things that were in the works for quite some time, and I'm very pleased that we've got a deep bench of talent and we've got some very strong leaders in all of our key markets. So it's not related.

Okay. Thanks so much.

Rob Dickerson, Consumer Edge Research.

Thank you very much. I just have a question, really, on strategy around Western European coffee, again. I know, as you pointed out earlier at the investor presentation and both today in the slides and in the prepared remarks, most of the focus obviously is on snacks. But as you said that you're always looking to potentially make strategic shifts within the portfolio and that Jacobs is still considered a Power Brand, I'm wondering if you could just add a little bit more specific color around what would be your strategy for the next year to really be still picking up share in the coffee category in western Europe? Thank you.

Well, again, Rob, coffee is an important part of our portfolio in our western and eastern Europe businesses.

And as Dave mentioned before, Europe has had a very strong performance on coffee. The revenue decline is reflecting the fact that we took price declines in response to the lower green, but our vol/mix continues to be quite solid. Our Tassimo business is growing in the upwards of 20%. We've continued to support it and we see it as a continued growth engine. We've been very pleased with our Milicano product. It's a whole-bean instant coffee which continues to perform well.

So coffee is an important part of our European portfolio, and we will continue to invest in that franchise and it will be an important source of growth, and the category is growing.

The challenge that I referenced in eastern Europe, coffee is an important business there as well, particularly in Russia. And I referenced the fact that we were slow to respond to price gaps on coffee and it cost us some share. And as I mentioned, we've taken action to address that and we should see that business rebound.

So in both of those regions, we feel coffee plays a very important role, and it is growing.

Okay. Fair enough. Thank you very much.

David Palmer, UBS.

I wanted to just ask a question about the composition of your revenue growth. You may have addressed this earlier, and if you did, I apologize, but with regard to volume versus price for 2013, if you are going to deliver at that 5%, is that half and half volume/mix and price?

We haven't given a specific target, but we have said pricing is going to be a more modest contributor next year than it's been recently. I mean, as an example, year to date, pricing is about four points, whereas in the third quarter it was only two points. So it will be a more modest contributor out of the 5% to 7% next year.

And do you -- one question that certainly comes up when we see this quarter is the issue of volatility. One of the things that we would expect from a global business is that you might have a little bit less volatility in that top line. When you're looking ahead to 2013, as you see how the comps are laid out and the issues perhaps economically and with gum in particular, do you anticipate some quarters that -- do you anticipate volatility to continue, is my question?

David, as I said earlier, we feel very good about our footprint, and we believe we are much less susceptible to volatility as a result.

We've got roughly equal-sized businesses in Asia-Pacific, in Latin America, and in our combined [sema] region. We've got no single country in our developing-markets portfolio that is contributing to more than 5% of our sales, and so we've got a pretty balanced profile. We just had a bit of a perfect storm in two of our largest countries at a time that we didn't have as much of an opportunity to offset it with -- in some of our countries because of some of the capacity challenges.

But year to date, we've certainly been able to offset any of our challenges by the strengths that we've had in China, in India, and in the Middle East and Africa, and we continue to see that profile playing out well for us.

Thank you very much.

Robert Moskow, Credit Suisse.

I thought these split-ups were a good idea until I read where we had to do two conference calls and two notes. I don't know if -- maybe consolidation is the way to go.

But just one last question, I believe the long-term plan has always been for emerging markets to increase overhead at a greater pace than sales. But now that you've had a couple of stumbles here in Brazil and Russia, it looks like the type of spending you're going to have to do there is going to be a little different, at least in the short run. How have these issues impacted your plan for infrastructure investment in those two markets for 2013?

I don't think we've ever said it was going to grow above revenue. Certainly sales, but sales is only one component of the overheads and we would expect to leverage scale on the rest of the overheads as we grow those businesses.

So I would expect overheads in developing markets to grow at or less than the revenue rate over time. I think in Russia and Brazil, in particular, as we talk about these issues, I don't think these issues have an implication on the infrastructure in those countries. It's not like we have to stand back and add a bunch of new people and new capability. I don't think that's the issue.

Will we continue to invest in overheads in those countries where we can expand distribution and gain more sales? Yes, we would. But I think it would be more on the opportunity upside than just correcting some of the things we talked about today.

Lastly, Dave, are you updating your interest expense guidance at all for 2013? It seems like the plan as to how you utilize your cash is different. I have $1.2 billion in my model. Is there any reason for me to change it?

I don't think we've ever given specific interest-expense guidance, but I think you can probably (multiple speakers)

Maybe it's time.

(Multiple speakers) easily. So we are going to end up starting the year with more debt than normal, and as that matures, we're going to use our free cash to pay it down. And the maturities are basically in March and May that we're talking about. So you could probably model that out fairly quickly.

Unfortunately, the cash that I have on the balance sheet doesn't deliver much income, so it really is going to be excess interest costs on the first half and then to a more normal level in the back half.

Okay. Thank you.

This concludes the allotted time for today's Q&A session. I will now turn the floor back over to management for any closing remarks.

Thank you, everyone, for joining us on the call. We'll be happy to take your questions later this evening or, of course, over the next few days. And we'll see you the next quarter. Thank you. Bye.

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