億滋國際 (MDLZ) 2012 Q4 法說會逐字稿

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

I would 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. With me are Irene Rosenfeld, our Chairman and CEO, and Dave Brearton, our CEO. 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 will make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. With that, I will now turn the call over to Irene.

Thanks, Dexter. Good afternoon. As you know, 2012 was a transformational year for our Company. During the first nine months, we intensely prepared for the spinoff of our North American grocery business. The separation into two world-class companies was a massive undertaking, culminating in the successful launch of both Mondelez International and Kraft Foods Group on October 1 and the significant increase in shareholder value. We executed this spin while delivering solid results on both the top and bottom lines. For the full year, organic revenue increased 4.4%. That is lower than our long-term target, reflecting second half coffee price declines and the temporary issues we discussed in the third quarter. As expected, fourth quarter trends improved significantly, setting us up to deliver 2013 revenue growth in line with our guidance. We also staged 2013 on the bottom line, delivering high-quality earnings growth and solid margin expansion. Specifically, we fully recovered higher input costs through pricing, we significantly increased the contribution of volume mix and we delivered strong productivity. As a result, we expanded gross margin by 70 basis points. This provided the fuel for a substantial increase in advertising and consumer support to drive strong growth in our Power Brands and to take advantage of whitespace opportunities.

We held overhead spot on a constant currency basis despite significant investments in sales. Even with these investments in A&C and sales, we increased adjusted operating income by more than 7% on a constant currency basis and expanded our adjusted operating income margin by 70 basis points. That is the virtuous cycle at work--focusing on our Power Brands and core categories to drive the top line, expanding gross margins, leveraging overheads and reinvesting savings to drive future growth. Turning to the fourth quarter, organic revenue increased 3.7%. Revenue growth, while below our long-term target, was largely in line with our expectations, with strong volume mix supported by sequential improvements in Brazil and Russia. This was partially offset by lower coffee pricing, which tempered growth by more than a half a percentage point. Developing markets grew 7.6%, which is in line with the high single-digit guidance we provided three months ago. In Europe, our team delivered another quarter of strong volume mix gains despite a challenging economic environment. In North America, the benefit of our focussed direct store delivery sales force drove another strong quarter of growth in our US biscuit business.

Power Brands continue to drive our top line and were up nearly twice the rate of the Company's overall growth. In fact, Power Brands were up 8% for the year. Specifically, with the exception of gum and candy, our Power Brands are growing at rates that are at or above our long-term growth targets. Let's take a closer look at the performance of each of our core categories. Biscuits revenue rose 7%. The US and Europe were both up mid-single digits, driven by strong innovation and a focus behind Power Brands. In developing markets, biscuits increased double digits, led by China and Russia. Our biscuits Power Brands were up by 12%, fueled by Oreo, belVita and Barney. Oreo, which crossed the $2 billion revenue mark last year increased mid-teens, including growth of more than 20% in developing markets. BelVita, which anchors our sustaining energy platform, grew more than 50%. In fact, belVita generated over $400 million in revenue last year as we expanded the platform across Europe and introduced it to new markets such as North America and Australia. Barney, which leads our kids wholesome platform, increased more than 20% as it expanded across Eastern and Western Europe. Overall, Barney generated nearly $200 million in revenue last year.

We are especially proud of our share performance. In 2012, 80% of our biscuit revenue gained or held share. That is a real testament to the strength of our brands, to our strong sales and marketing efforts around the globe. In chocolate, our revenue increased 5%. In developed markets, chocolate was up low single digits, led by strong volume mix growth in Europe. The gains were driven by innovation platforms such as snacks, small bites, and bubbly aerated chocolate, as well as creative programming around the London Olympics. In developing markets, chocolate was up high single digits, with strength in India and Brazil, as well as in smaller markets such as South Africa, Argentina and Poland. Australia also posted solid growth, driven by double-digit gains of Cadbury Dairy Milk fueled by successful innovations such as Marvelous Creations. Our chocolate Power Brands grew 10%, led by Cadbury Dairy Milk and Lacta, which were each up low to mid-teens. Milka also posted strong growth, increasing high single digits.

Despite strong performances in biscuits and chocolate, results in gum and candy were disappointing. Revenue was down 2%, mostly due to gum. In developed markets, gum was down high single digits, although the rate of decline slowed in the fourth quarter. In developing markets, gum performance was mixed. Brazil and Japan declined as we discussed in the third quarter. But this was more than offset by strength in several other markets such as Argentina, South Africa and Egypt. Growth was also supported by the successful launch of gum in China last summer. Frankly, I'm disappointed that gum remains a challenge. As we said before, we attribute roughly 60% of the issue to category declines, with about 40% due to share losses. The share losses are clearly fixable. We have already implemented a number of tactical sales and marketing initiatives, as well as launched some strong innovation. We are beginning to get some traction and we are confident that these efforts will improve our share in the near term. But the category declines will take longer to fix. We continue to expect the turnaround in gum to take a couple of years before we began to see it returned to mid-single digit growth.

While that is a slower recovery than we would like, let me put our gum business in perspective. At only 9% of our total revenue, we do not need an immediate turnaround in gum to achieve our 2013 revenue guidance or our long-term targets. In contrast to gum candy, excluding some product pruning in Canada, grew low single digits in 2012, with growth in the US and developing markets. This momentum, together with our share rebound in gum, should help stabilize total category performance in the near term. Finally, in the beverages and cheese and grocery categories, revenue rose 5%, driven by Power Brand growth of 6%. Coffee was up low single digits, with solid gains in volume mix led by our on demand Tassimo platform. Coffee pricing however was a significant headwind in the back half of the year as we reflected lower green costs. In powdered beverages, Tang, our newest billion-dollar brand, continued to grow strongly, up low teens. In sum, we delivered solid revenue growth in 2012, laying the groundwork for a strong 2013. Q4 revenue rebounded from a soft Q3, with significant improvements in both Brazil and Russia. We expanded both gross and operating income margins, while significantly stepping up investments. As we enter 2013, we remain laser focused on driving our Power Brands, our global snacking platforms and our strong routes to market to deliver on the exciting promise of our new growth Company. Let me now turn it over to Dave to discuss our fourth quarter and full-year results in more detail.

Thanks, Irene, and good afternoon. As Irene mentioned, we delivered solid top-line growth up for the year, up 4.4%. Q4 grew 3.7%, while below our long-term target, this was largely in line with our expectation of mid-single digit growth. Power Brands continued to drive our top line, up 7% in the quarter and 8% on the full year. For the year, adjusted operating income increased more than 7% on a constant currency basis. Higher gross profit drove the growth and was partially offset by a high single digit increase in A&C, largely in support of our Power Brands. For the year, A&C as a percentage of net revenue, increased 60 basis points to 9.4%. Even with this sharp increase in A&C, we boosted adjusted OI margin by 70 basis points to 12.2%. For the year, operating EPS was $1.39, up about 5% on a constant currency basis. The increase was driven by a strong $0.16 improvement in operating earnings. This was partially offset by an increase in the tax rate from an unusually low base in 2011, as well as a number of one-time items.

For the quarter, operating EPS was $0.36. That's down about 5% on a constant currency basis. Similar to the full-year result, the quarter included strong operating earnings growth of about 10%. But this was more than offset by a tax rate increase from the low 2011 base, as well as a number of one-time items incurred in 2012 or the prior year. Let's now take a look at each region's performance. In developing markets, revenue growth accelerated sequentially to 7.6% in Q4. As Irene mentioned, that is in line with our recent guidance of high single digits for the quarter. Vol/mix was strong, contributing 4.4 points of growth, which was the best quarter of the year. Pricing added 3.2 points but its contribution was tempered by lower coffee pricing in Central and Eastern Europe. The sequential rebounding growth also translated into better share performance, with more than half of our developing markets revenue gaining or holding share in the quarter. Power Brands once again drove growth across these markets, up 13% in the four quarter and 12% for the full year. There were several star performers in 2012--belVita, Barney, Chips Ahoy, Oreo, Eclairs and Stride each increased more than 20%, while Cadbury Dairy Milk and Lacta grew mid to high teens.

Let's take a closer look at each of the developing markets subregions. In Latin America, organic revenue was up high single digits. We closed the year on a high note with revenue up low double digits in the fourth quarter. Brazil rebounded in Q4 to mid-single digit growth. Gum remained a challenge as category dynamics remained weak and we cycle difficult comparisons from a year ago but we had terrific performances and chocolate, biscuits, and powdered beverages, led by Lacta, Club Social, and Tang. We also continued to expand distribution in the fast-growing North/Northeast region where we grew mid teens. In Asia Pacific, full-year revenue increased high single digits. Revenue was up low double digits in the fourth quarter as China and India continued to post strong growth. Our business in China crossed $1 billion threshold in 2012 with growth of 25% for the year. Biscuits grew more than 20%, behind continued strength in Oreo. Gum and candy increased more than 60%. This reflected strong growth of Cadbury Eclairs and the successful launch of Stride gum, which has exceeded expectations since its introduction in the third quarter.

Our business in India was up about 20% for both the full year and the fourth quarter. As we told you before, we are experiencing capacity constraints in India. These will continue until new production lines come on stream in the middle of the year. So growth rates in 2013 are likely to be lower initially and build as the year progresses. In Central and Eastern Europe, organic revenue was essentially flat for Q4 and for the year. In the fourth quarter, vol/mix was strong but it was largely offset by lower pricing. In Russia, revenue trends improved significantly. In the fourth quarter, revenues declined modestly as lower pricing in coffee and chocolate more than offset vol/mix gains of about 4%. Biscuits were especially strong, up mid-teens in the quarter behind category growth and successful innovation. In the Middle East and Africa, revenue increased low double digits for the year and mid-single digits for the fourth quarter. The full-year growth rate reflects strong performance in the Gulf region, South Africa and Egypt. Looking ahead, we are especially excited about our new joint venture in the Gulf region announced last month. The transition to the new JV structure will temper our top-line growth in Q1 but beginning April 1, will see a step up in revenues and higher profits.

Turning to profits. 2012 adjusted segment operating income increased 5.2% on a constant currency basis. We grew gross profit by recovering higher input cost through pricing and posting vol/mix gains. This fueled a double-digit increase in A&C support and significant investments in sales capabilities. Adjusted OI margin was essentially flat for the year as overhead leverage generally offset the increase in A&C support. Moving to Europe. We continued to deliver solid results in a difficult economic environment. In fact, this is the 12th consecutive quarter of organic top-line growth. Organic revenue increased modestly in the fourth quarter as strong vol/mix was mostly offset by lower coffee pricing. For the year, growth was 2.3%, fueled by gains in vol/mix. In fact, the consistency of our vol/mix gains in Europe is one of the highlights of our 2012 performance. This strength also manifested itself through impressive share performance. In 2012, more than two-thirds of our European revenue gained or held share, a level we sustained throughout the year. Our European Power Brands were up 3% in the quarter and 5% for the year.

Let's take a closer look at performance in Europe's key categories. Biscuits had a strong year, up mid-single digits led by continued strength in belVita, Oreo, and our Chocolate Bakery platform. Our $ 1 billion Lu brand also posted solid growth in France. In addition, biscuits captured higher market share in Europe with notable gains in France, the UK and Germany. Chocolate and coffee also posted strong results for the year, each up low to mid-single digits. In chocolate, innovation and strong marketing campaigns behind our Power Brands fueled that growth including mid-single digit increases for both Cadbury Dairy Milk and Milka. Last year, we gained or held share in 15 of 17 countries in which we compete including key markets such as the UK and Germany. In coffee, the growth story was drastically different in the front and back halves of the year. Strong price-driven growth in the first half reversed itself in the second half with coffee prices declining but strong vol/mix gains.

As we discussed on our last call, we expected coffee revenue growth to be modest in the fourth quarter due to lower coffee prices. We expect coffee prices to continue to be a headwind in the first half of 2013 until we cycle the price declines beginning in Q3. Our on demand coffee platforms continued to deliver excellent growth. Tassimo was up more than 20% for the year and more than 40% in Q4 behind a significant increase in marketing support. Our new Millicano whole-bean instant platform has generated $40 million in revenue as well as high incremental sales with strong repeat rates. In contrast, gum and candy declined high single digits in 2012 with gum down sharply. Trends improved somewhat in the fourth quarter with the introduction of 40 Minutes in France and Spain and Twist and Greece and Portugal. The category remains challenging due to economic weakness in our key markets as well as aggressive promotional activity by competitors. But at less than 8% of our European revenue, gum and candy's impact on Europe's total growth is modest. We remain very pleased with our performance in biscuits, chocolate and coffee.

Turning to profits. Full-year adjusted OI increased 5.2% on a constant currency basis last year. Pricing, strong productivity and volume mix gains drove the improvement. In addition, absolute overhead spending declined mid-single digits on a constant currency basis, fueling a double-digit increase in A&C. Adjusted OI growth however was tempered somewhat by the negative impact prior-year accounting calendar changes, which more than offset the reversal of an accrual related to the Cadbury acquisition. Adjusted segment OI margin expanded 90 basis points to 13.2%. Higher gross margin and overhead leverage drove the improvement, which was partially offset by the increase in A&C. Turning to North America, biscuits grew mid-single digits in the US, driving top-line performance in Q4 and for the full year. As we discussed last quarter, we are seeing the benefits of a DSD sales force focused solely on biscuits. These benefits include more feature and display opportunities, additional facings for new products and an increase in total distribution points.

Momentum picked up in the fourth quarter. Our biscuit Power Brands increased high single digits and belVita continued its strong performance. We captured 60 basis points of market share across total biscuits in the quarter, in part due to better in-store merchandising. Gum and candy in the US was flat for the year. However it improved slightly for the second consecutive quarter. In Q4, gum was down low single digits as declines in Base, Stride, and Dentyne offset mid-single digit growth in Trident and the successful launch of ID. In candy, Halls increased mid-single digits due to innovation and a more severe cold and flu season. Other candy brands were up nearly 10% due to expanded distribution. Canada declined high single digits in the quarter due to the transition after the spinoff of the North American grocery business. So what happened? Our Canadian operations in the former Kraft Food North America structure were highly integrated from a sales, systems and distribution standpoint. The full separation on October 1 resulted in some temporary sales disruption in the quarter. But we're confident the Canadian business will be back on track in Q1.

Despite minimal contribution from gum and candy in Canada, we delivered solid organic revenue growth in North America driven by our Power Brands, which were up 6% for the quarter and the year. There were several star performers. Honey Maid and Triscuit each grew double digits last year. BelVita performed exceptionally well in its first year, generating more than $60 million in revenue. And nearly all the other biscuits Power Brands posted solid mid-single digit growth including our largest brand, Oreo. Turning to profits. Adjusted segment operating income increased 5.1% on a constant currency basis. Adjusted segment OI margin expanded 50 basis points to 14.8%. Similar to our performance in developing markets in Europe, the increase was driven by a higher gross margin as we successfully priced away higher input costs and drove strong productivity, partially offset by an increase in A&C.

Now, let's turn to our outlook. Fundamentally, the factors underlying our previous guidance are unchanged. We continue to expect to deliver organic net revenue growth at the low end of our long-term target of 5% to 7%. This is due to three things--lower coffee prices in the first half of the year, the challenging economic environment and the need to build incremental capacity to support our developing markets growth. While we do not expect the global economy to improve any time soon, the other two factors, coffee pricing and capacity constraints, are really first half challenges. As a result, we expect our growth to be more modest in the first half as we gain steam in the back half of the year. On the bottom line, we're updating our 2013 guidance due to a couple of currency impacts. First, our outlook now reflects average full-year 2012 foreign currency rates. These are about $0.06 favorable versus the rates we used last September. We provided some of the key 2012 rates in the appendix to this presentation. Second, we have included the expected impact of the devaluation of the Venezuelan Bolivar. We have a large and successful business in Venezuela. The 32% devaluation will negatively impact our full year by about $0.04. Therefore, we are raising our operating EPS guidance to a range of $1.52 to $1.57, up from our previous range of $1.50 to $1.55. Again, this change is due entirely to currency.

Each quarter, we will provide you with an update on the potential currency impact to our outlook based on recent spot rates. As an example, using January 31 spot rates, our guidance would increase by another $0.02. Our earnings guidance reflects double digit operating EPS on a constant currency basis, which is consistent with our long-term growth target. We expect to drive this strong increase in EPS by delivering high single digit operating income growth on a constant currency basis, again consistent with our long-term target. We will deliver this operating income with stepped-up investments behind our Power Brands and other initiatives to drive growth including enhancing our sales capabilities, broadening our distribution, expanding our innovation platforms globally, and launching our categories into new markets. Below the line, we expect a tax rate in the low 20%s. That is lower than our long-term projection of mid-20%s but in line with 2012 tax rates. In summary, our guidance on both the top and bottom line is in line with the outlook we provided last September. Our top-line growth will be more modest in the first half and accelerate as the year progresses. Our bottom-line results will continue to be high-quality, driven by strong margin gains and sustained by continued investments in our brands. Now I will turn the call back to Irene for some concluding remarks.

Thanks, Dave. As I said at the start of this call, 2012 was truly a transformational year for our Company. I'm excited to continue on our journey as a more focused growth Company. As we enter 2013, we have all of the ingredients in place for sustainable, profitable growth, a diversified geographic footprint with a significant presence in emerging markets, a focus on faster growing snacks categories and unrivaled portfolio of beloved Power Brands and advantaged innovation platforms and strong momentum from high-quality operating results. With that wind in our sails we remain very bullish about the future of our business. Now, we would be happy to take your questions.

(Operator Instructions)

Bryan Spillane of Bank of America.

There has been a heightened amount focus going into this quarter just about how you would perform relative to expectations. Can you just talk a little bit about as the quarter unfolded what came in line, what was in line or better than expectations, maybe what would have been-- how things mapped out relative to what your original expectations were.

Most importantly, we delivered growth that was essentially in line with our mid-single digits guidance. It represented a significant sequential improvement as we had said in Brazil and Russia. We're quite happy with the quality of the results in each region. We saw solid contributions and significant step ups in the volume mix contribution, very strong share performances, as Dave mentioned, around the world, and strong growth in our Power Brands. Net/we felt quite good about the overall performance of the quarter. Frankly it was-- the top line was a little lighter that we had expected. We were expecting a growth rate to have a four in front of the. As we said, the shortfall was largely attributed to the transition issues that we experienced in Canada as we separated what was the most integrated business in our Company. We feel very good about the quality of our revenue growth. We continue to make the necessary investments in A&C and sales, which will fuel the growth in 2013 and beyond. We feel very good about the overall momentum of the business and so we're quite confident that we will deliver our 2013 guidance on both the top and bottom lines.

If I could follow up, Dave, on SG&A in the quarter. It came in higher than what we were modeling. I was just trying to get a sense for-- did you end up with higher A&C spending than you originally thought in the quarter? And then also, are there just other moving parts especially related to the transition that affected SG&A?

We came in pretty much where we expected, probably a bit higher than you modelled because of a couple of things. Number one, in the fourth quarter, we ended up (at the date of spin) we had to revalue our pensions. So we actually took about a $0.02 hit on pension costs in the fourth quarter that we were expecting but you probably would not have anticipated. We also had dys-synergies kicking in in the first quarter-- in the fourth quarter. That was really when they started. We had said last year that we expected dys-synergies to be about $235 million for 2013 and one-quarter of that hit quarter four. Those are probably the two numbers that might not have been in your model.

Andrew Lazar of Barclays.

Two things from me. First would be you gave a number of reasons for why the organic top-line growth would be somewhat tempered in the first half of 2013. I was hoping you can help us a little bit with maybe the magnitude of that or helping us to quantify it. The reason I'm going down this road is things are going to have to accelerate as you talked about in the back half to get to 5% for the year. I'm trying to get a sense of how much of an acceleration in the back half you are going to need to get to 5% to make it seem like that is a reasonable expectation for us to have.

Andrew, this is Dave. I think the-- I do not want to get into the habit of giving quarterly guidance. We have guided you to the low end of the 5% to 7% range. Clearly, given coffee and some of the capacity constraints, you would expect us to be below that in the first half. So we will be below the low end of 5% to 7% in the first half, which means we're going to need to be higher than that in the back half. In terms of should you be concerned about the kind of turnaround that requires, no, I do not think so. Because if you actually look at our results this year, we were up around 6% in the first half of the year. I think we have demonstrated we can grow at the kind of levels we will have to grow the back half of the year. We just need to get through the coffee pricing headwinds and the capacity constraints in front of us right now.

In Europe, that was one area where I think you had said on the last call, organic top line would be up at a low to mid-single digit pace. It was flattish in the quarter and you talked about how the volume mix piece was something that you were pretty happy about. So was it that coffee pricing was down more severely than you thought or volume did not rebound quite as strongly as you had hoped as you lap some of that pricing? I'm trying to get a sense. Because that seemed to be the one area where the organic top line differed most clearly from what you had said last quarter.

Actually, Andrew, let me just give you a perspective on that. Because the reality is the results in developing markets in Europe were pretty much where we thought. The number that you're quoting, we said was US-- North America and Europe we said would be low to low single digits. If you look at the individual regions, our developing markets delivered essentially in line with the high single digit guidance we had given. As we said, they were up 7.6%. Europe delivered essentially in line with our expectation of modest growth. We grew about 0.5%, 0.7% in the third quarter and we were essentially flat in this quarter on the top line, consistent with the expectations associated with the coffee price decline. The real issue, again, the variance versus our expectations, was in North America. We had expected that growth to accelerate from Q2-- from Q3 into Q4 given the strength that we were seeing particularly on our biscuit business. But the impact of the Canadian transition tempered that growth somewhat. That is what led us to be a little bit below what we had expected.

One quick one. I apologize. One quick thing. When you gave the 5% to 7% organic long-term, top-line growth rate guidance, that is my understanding is obviously inclusive of everything. That would be even the vagaries of coffee prices being up or down depending on what is going on with green coffee costs. I'm trying to make sure is-- should we expect more volatility maybe to that 5% to 7% than maybe I am thinking about in the way you think about the algorithm based on coffee? Or is it just that there are a number of other things going on that you've talked about, whether it be the challenges in-- broadly in Europe or in gum or what have you that have just made getting to 5% difficult, even including these changes in coffee prices.

First of all, our long-term guidance is 5% to 7% inclusive. We feel quite comfortable that over time, coffee pricing will not become-- be a major factor. As you know, the volatility over this last year-- we went from a Arabica at about $2.40 a pound all the way down to-- it's trading about $1.40 today. So the volatility that we saw was really quite unusual and really had a profound impact on the first half versus the second half, which is why it leads to the trends that Dave described. But net/net, we feel quite comfortable that as we get beyond the spin, we get all of the pieces of the enterprise moving properly, we're quite confident that we will be able to deliver 5% to 7% growth on a consistent basis over the long term.

David Driscoll of Citi.

I wanted to ask just two questions related to input cost expectations in 2013. The first one would relate specifically to chocolate. Dave, can you talk about the input cost environment for the chocolate business? Should we expect I think reasonably significant deflation as one of the big positives at the wind-- the wind at the sails of the back of that particular operation? That's the first question. The second question would relate to coffee on commodity inputs for 2013. Some businesses in coffee are passed through, and really you just do not get the benefit. You guys have described a lot about the top-line impacts. I care probably more about the profit impacts. I think the Tassimo operation may in fact be much stickier in terms of holding price points while seeing green coffee costs come down. But maybe you can talk us through that a little bit.

If I start with the chocolate-- I think chocolate, like most of our products, there is no individual commodity that is a significant portion of the cost. We tend to look at the total input cost bucket, which includes cocoa, obviously, and sugar and various other ingredients. It also is impacted by currency rates because cocoa is denominated in British pounds for us, packaging, energy, labor costs, et cetera. The amalgamation of all of those things, we do not see a cost decline in any of our major businesses next year. We would probably say across the Company would be in the low single digit inflation across all of those components. Our strategy has been and continues to be we will price to recover those input costs and we will leverage our aggressive productivity programs to grow our gross margins. That is implicit in the whole cycle and chocolate will be no different.

In terms of coffee, you are right that a good portion of the coffee business is the roast and ground coffee business, which is a bit of a pass-through category. We would expect to cover the price increases when costs go up and we did last year and the year before. To return a lot of that to the marketplace when costs go down, again, relative-- assuming that has to cover (four EPS) and all the other items, that is also likely to be true over time. It is not going to be abrupt, and I think you should look at coffee, really, no different than the other categories. The on demand stuff you were talking about, Tassimo, soluble coffee, et cetera, that we talked about, it is growing at a higher percentage of our business, and clearly coffee is a lower percentage of those costs than it is on roast and ground. You will see less dramatic swings over time. But again, that will be in the pricing line. On the OI line we price to recover costs and the opportunity to make huge money on the way up or down really is not there in most of that business. It's-- we really view it as managing our margins as part of the overall strategy.

Two additional perspectives on that. One is that we're quite confident, as I said a few minutes ago, that we can manage our way through some of these issues over time. When we-- as we made the commitment to 5% to 7% revenue growth we're quite confident that we can deliver that. But I'd also say even coffee you cannot look at the revenue per se as the only measure of how healthy that franchise is. In fact, our coffee revenue was essentially flat in the fourth quarter, despite the fact we had a seven point headwind in pricing. This very strong vol/mix performance, as Dave mentioned, as we continue to improve the vol/mix with focus on our on demand offerings that will continue to strengthen. But as you look at coffee you need to get underneath the actual revenue a little bit to get a better sense of the health of the franchise.

Ken Goldman of JPMorgan.

I know you don't want to give specific guidance on any quarter but given the unpredictability of your organic top-line rate the last couple quarters, is there any kind of range you can think about or help us think about for the first quarter? It's just such an issue for the stock right now, I'd say.

I think, again, I don't want to get into quarterly guidance. We gave some last quarter really because it was our first quarter out of the gate and we were trying to get people used to it. I really do not want to go beyond what I said to Andrew earlier. It will be below that low end of 5% to 7% in quarter one, quarter two. I think we are going to have many of the same factors impacting us that impacted us in quarter four. But I cannot go beyond that.

Forgive the bluntness of this question in advance, please. Your organic growth has now fallen short of street expectations for two consecutive quarters. These are the two consecutive quarters that-- the only two quarters you have had. It is stock that has been invested in because of-- for many investors because of that top-line potential. Just saying we're quite confident that we can deliver on our 5% plus next year, I hope you can understand that may not be enough for some people. Are there any-- I know you have provided some, but any specifics you can provide besides just saying we have done it before that can help people gain confidence that you will get back to that number? Because right now, there is a little lack of confidence that you guys will get to that 5% number, right or wrong.

The one thing I'd say, Ken, in response to your issue, 2012 was a transformational year for our Company. We (were) a $54 billion enterprise. We created significant shareholder value in that process while still delivering solid full-year results and very high quality full-year results. We talked quite a bit about that. The top line rebounded in the fourth quarter, as we said it would. The revenue growth was very much in line with the guidance, the mid-single digit guidance that we gave you. We delivered high-quality results as we've discussed in each of our regions. We have got very strong performance-- underlying performance of our Power Brands, very strong continued expansion of gross margins and operating in margins. We've continue to make the necessary investments in our franchises both in A&C as well as sales and distribution. And we delivered very solid income growth on an operating basis and so-- on a constant currency operating basis. So you put all of that together, this enterprise is performing quite well. It is not quite up to the long-term targets. We understand that. But we have all of the makings underneath of very solid franchise and the opportunity to deliver as we said we would on our 2013 guidance.

I think, Ken, the other thing is the categories-- the reason to believe we can do it over time is our categories are growing in that range. I think as we said when we had the Investor Day in September, the categories we're participating in are growing in that 5% to 7% range. So we do have some stuff we have to get out of the way in the short-term, but I think directionally, it is essentially saying we will grow in line with some pretty high-growth categories, and that will deliver the results we put out there.

Ken Zaslow of Bank of Montréal.

I have two questions. One is can you give us an update on Australia and Japan. I know those were somewhat weakened. I know you said that you have corrected a lot of the issues last quarter, I just wanted to follow-up on Australia and Japan.

I think Australia had a good bounce back. I think they were up in sort of mid-single digits in the quarter and really had some strong marketing campaigns and some good new products there, particularly in the chocolate business. Japan is gum. The discussion we had on gum earlier, you can apply all of that to Japan. They continued to decline in the quarter.

My follow-up is what type of progress should we be looking for to see how your-- I know with the gum side you said, look, it will take two years. I get that. What type of milestones of progress that we should be looking at to see the progress you're making to see that it is actually turning around in that one- to two-year period. I know it is going to take longer but-- could you give us milestones that we should be thinking about?

I think the key milestone to look at is our share. As we talked about, the category in aggregate is down about 2%. We are down about 3%. As we have said, there is a clear opportunity for us to improve our share performance. We have taken a number of steps to improve that in each of our key markets. As I mentioned in my remarks, we're starting to see that bear some fruit. I would suggest that you look at our share performance in our key gum markets, Japan, US, Europe, France, Mexico and Brazil. I would say those will be the key metrics for you to look at.

Are there a greater number of launches that we should be seeing as well?

We have got some new products. We launched Stride ID in US. We have a similar version of that, it's called Trident Twist, in Europe. We have got some new products. But part of what we have suggested has to be improved in the category is that it is a combination of some stronger innovation. I think we're on that case. But it is also about some improvement in tactical sales and marketing execution. We have talked about the price sizing architecture. In a number of our markets, we have actually introduced an economy size to try to address the pack rate in an environment where our consumers are not going to a kiosk quite as often as they might have. We have restored A& C as we have told you to historical levels. We are working on simplifying brand architectures so the category is easier to shop. All of those actions together should have a near-term impact in our share performance. As I said, hat is what we're watching and I would encourage you to look at that as well.

Eric Katzman of Deutsche Bank.

So many questions, so little time. I guess I will start with the-- just some of the nonoperating items, Dave, could you give us some sense as to what you expect for 2013--interest expense, corporate expense. On the tax rate, I thought you had said at the analyst day that you were looking at a mid 20%s rate. The fourth quarter seems to have come in a lot lower than we thought. So this lower rate, that is not a change for the outlook?

I'll (go track) those. The-- to start with, on the corporate expense there should not be anything "special" in 2013. I think I mentioned a couple of items that we had exiting the year in total SG&A. As we look forward, corporate will be a normal year in 2013. Interest, we talked about at the Investor Day that we had a $0.02 headwind in interest versus our equilibrium capital structure. We have said that our target was to get to about $18 billion (of debt) and we would exit the year close to $20 billion, we exited at $19.5 billion, and that we were carrying excess cash. That will work itself out over the first half of the year as debt maturities come due in February and again in May. So we will pay down those maturities. By the end of May, we should be at where we want to be. During that time period, there's some inefficiency built in. There is a couple of pennies of interest headwind versus what you would normally expect. Those are those two. On taxes, we gave long-term guidance of mid-20%s and I will stick to that long-term guidance of mid 20s. That is the straight average of all the statutory tax rates around the world. We said there would be some fluctuations in any given year to discrete events. And I think in 2012 we finished at 20% and the biggest discrete event in 2012 was actually a reduction in the UK corporate tax rate, which has a oversized impact because we not only changed the statutory rate in the UK, you have to write down your deferred tax liabilities. So there's a correction catch up on it. There's another UK tax rate reduction plan in 2013 by the UK government. That is built into the low 20%s guidance. That is why you're seeing that rate come in lower. It is going to be flat year-over-year. But it is lower than our long-term guidance of mid-20%s, primarily due to those kind of items. In terms of where that is going, we basically have said we will continue to drive the virtuous cycle. We will invest in A&C, we will invest in sales and distribution capabilities. We will continue to look at innovation platform roll-outs and we will cover things like the interest headwind. That is all part of getting to our double-digit EPS growth.

Just so I understand it correctly. The operating income that you're using as a base to grow off of, is that about $4.4 billion, $4.41 billion?

I think it was in the schedules in the back. It is in that range, yes. I think if you go to the back, you will see the operating income growth on the presentation charts.

So the high single digit growth rate that you are quoting on page 15, does-- how is FX going to impact that? Because obviously, we have to model it in reported dollars. So you're calling out an FX benefit on top of that?

No, I think what we have done with the guidance is we have restated to put everything at the average 2012 rates with one exception. So essentially there should be no FX impact with the exception of Venezuela. That is the only FX impact you would expect to see year-over-year and that is about $0.04. So effectively our 152 to 157 guidance includes $0.04 of negative impacts from the Venezuela devaluation but otherwise there is no 4X impact year-over-year.

The last question, any mention on cash flow? What you generated as a operating cash flow number after CapEx in 2012 and what we should expect in 2013?

You'll see the cash flow when we do the 10-K, which should be end of next week or the following week. Unfortunately, it will be nine months of KFT and three months of Mondelez. We recognize that may not be helpful because you do your cash-- you value us on a discounted cash flow basis. But we will try to, as you get more quarters of Mondelez pure history, we will try to help you work through that.

Jason English with Goldman Sachs.

I wanted to circle back on Katzman's question real quick on constant currency EPS guidance reiterated. You have lowered your tax rate guidance from, say, to mid-20%s to low 20%s, a 5% change there. It is like $0.10. It is a pretty big change. Can you help me understand again what is driving the implicit cut in pretax guidance?

I think the-- we have taken it down from mid-20%s, again, that was always going to be mid-20%s as a range. That is fine. If it was 25% in your models, it would be $0.10. I'm not going to comment on what our internal expectations were but essentially it is covering things like A&C investments, sales investments, distribution, other investments to drive the top-line growth as well as the interest expense we talked about, the headwind we had on that. I think there's going to be some operational challenges in a place like Venezuela that is not part of the currency we just talked about. We cover the operational issues if consumers react negatively to price increases, ourselves internally. Those are the kind of things that will be included in that. I would also remind you the EPS growth on a constant currency basis, if you do the math of we told you today, it would be 12% to 15%, which I think is pretty healthy. That is where it is going.

One more follow-up and then I will pass it on. Coffee price headwind. You are saying it abates as we lap the price reductions in the third quarter. Assuming most of the markets buy it on a lagged cost curve which history suggests it does, costs have continued to fall well past the last price reduction in the third quarter. Isn't it prudent for us to assume that yet another price reduction will be necessary?

We don't comment on our pricing strategies. I cannot really go into what might or might not happen in the future.

David Palmer, UBS.

You mentioned in the slides and several times in the call that A&C spending was up in the fourth quarter. It is going to be going up in 2013. Could you speak to where that investment is going or went and where-- and your hope for the payoff in revenue terms that you're expecting, particularly in developing markets?

It's going almost entirely behind our Power Brands. There is a reason that our Power Brands are going at twice the rate of revenue of the base business. We continue to invest disproportionately in the Power Brands and in these global innovation platforms. That is what is going to fuel our growth.

Are these reinvestment rates representing an acceleration and therefore at least internally you are hoping for and expecting an acceleration in these organic revenue growth rates?

No. Again, if you look at our results for this year, we ended the year up about 60 basis points as a percent of revenue. In terms of our A&C investment, it is a driver of our core franchises, and as we look at the performance of each of our individual categories, as well as our share performance, we are feeling quite good about that.

You mentioned a temporary drag from Canada. Is that something that we should-- I do not know if you mentioned how much of a drag that was and if that was something you're expecting to be corrected by the first quarter results.

I did not mention specifically what it was, but I did say it is the major variance between the expectations that we had for the fourth quarter and the 3.7% that we delivered. We're quite comfortable that we will see a rebound in Canada in the first quarter relative to the performance in the fourth quarter. Again, it is a fully integrated business and is unlike the US sales force where we had a separate DSD organization to begin with. In Canada, our selling organization was fully integrated. We had a lot more complexity as we took it apart, but we are quite comfortable. Most of those issues occurred in the-- early in the quarter and we're quite comfortable as we come out of the first quarter that we will see a rebound there.

Chris Growe of Stifel.

Just had two questions for you. I want to ask about the developing market business overall and if you expect that to achieve double-digit revenue growth in 2013? Did you say that, or is that something that you could speak to for this year?

Without a doubt, over the long term we expect that our developing markets will deliver at a double-digit rate of growth. It continues to be a very exciting opportunity for us. We did say it would take us a couple of quarters to get the momentum back. We are feeling quite good about where Brazil is performing. Russia is taking-- it will take a little longer. It certainly has improved quite nicely from Q3, but it is going to take a little bit longer to get that business performing back up to its historical contribution. So net/net our developing markets over the long term will certainly contribute at a double-digit rate, and we should see that performance begin to play out in the course of 2013.

I know also we have talked before about the gum business and the challenges there. As you think about your revenue growth guidance, not so much for this year but in the next few years, couple of years, is gum continuing to decline an impediment to getting above, say, 5% of the lower end of the range? Is that meaningful and therefore that big of a potential drag that it could keep you more towards the lower end of your guidance range?

Chris, this is Dave. The simple answer is no. Gum is slightly under 9% of our revenue. We're not counting when we gave you the low end of 5% to 7%, that was driven primarily by the coffee and the capacity constraints. Gum at that kind of level costs us a little bit, 20 or 30 basis points, but it is not a significant drag on the total business. We would like to see it get back to its historical growth rates, but it is not a reason to be concerned about our long-term guidance.

If I could just ask one more. Is there-- you had some product pruning throughout 2012, is there an expectation for that to continue or in any territories will that continue in 2013?

It will just be normal pruning that any company does, frankly. There were a couple of big things. There was one in Canada this year that we have talked about where it was essentially a (co-man) contract left over from a previous divestiture. It was large. Most of the other stuff we would do is stuff I think any of the people you cover would do in the normal course of business.

Robert Moskow of Credit Suisse.

I wanted to know if you have an outlook for us for cash flow for 2013. Kraft in the past used to give cash flow guidance. Now, both Kraft and Mondelez do not give it as much anymore. I wanted to know why the change and at a minimum maybe you can help us walk through the big building blocks for cash flow in 2013.

I think the reason for the change is not because I do not like cash flow. It is because it has been really hard through the spin to delineate Kraft's Food Group versus Mondelez full-year cash flow. I know what my cash flow was in quarter four, obviously we are very pleased with that. But as we go through, when you see our cash flow statement, it will be a combination of Mondelez for one quarter and KFT for three. I think that is the same reason you will get a little bit of reticence from your-- from our colleagues over at the Kraft Foods Group. Directionally, we-- I think as part of the spinoff documentation, we actually have information in there that would have allowed you to separate the cash flow between the old KFT companies and for 2011 and 2010 you could more or less say half went to each company.

I'm really asking about guidance for 2013. You used to give cash flow guidance. I don't think you give it as much anymore.

That would be correct at this stage. I'm not going to give guidance today. We will-- as we get a little more information to you on the balance sheet over time, you will get more guidance on that. But it will not be today.

Alexia Howard, Sanford Bernstein.

Can I ask about the gross margins? As I look at the GAAP numbers reported today, it looked as though they were up a couple of hundred basis points. I wondered whether that was as commodity cost pressures have moderated you are beginning to see some expansion there or maybe there are other one-time factors in there that I'm not seeing. But if you look out through 2013, what do you think the shape of the gross margin outlook-- can you quantify whether you expect it to be up, down, or sideways in 2013?

A lot of the gross margin gain for last year would have been to do with the some of the integration costs, et cetera, associated with Cadbury. If you strip all of that kind of thing out, our gross margins, we would say, on the year were up in the mid-50 basis points, let's say. That is we're quite happy with that. We think that is a good performance. There is nothing really one time in nature in that. That legitimately is price and recovery input cost and a very strong productivity program driving gross margin gains. That is what we did in 2012. We do not give guidance going forward, but it clearly is part of our virtuous cycle strategy that we grow gross margin every year as a way to reinvest in A&C and sales.

The 200 basis points in the fourth quarter, is that like for like or is that-- are there too many moving pieces in there?

There's too many moving parts. The P&Ls that get attached to the press release are the continuing operations P&Ls. So there's a lot of moving pieces in there.

Just as we look out to 2013, how much are you anticipating A&C spend being up next year?

Again we won't give guidance on individual parts of the P&L, but it is part of our strategy that we will continue to invest in A&C.

We have time for one more question. Your final question comes from Matthew Grainger for Morgan Stanley. Please stand by. One moment. Thank you, Matthew, your line is open.

I'm just going to try one last time just with a slightly different question regarding cash flow. Specifically on network and capital, if we look at the balance sheet historically, and perhaps there is some degree of pro forma adjustments factoring into this, but it does look like your net working capital relative to sales is fairly high when compared to the peer group. Can you address that in a more general way, what the key opportunities might be for improving working capital efficiency going forward.

I'll start by saying the biggest differentiation on us versus our peer group often comes down to geographics. Roughly 40% of our business is in Europe and Europe tends to have very long receivables versus other markets. Most of our peers have much lower working capital in developing markets in North America as we do. I think that is probably one of the big drivers. That said, we would agree with you there is opportunity in working capital. We're quite active at looking at benchmarks and what are the best practices out there and what are the things we should aspire to. We do see opportunity in working capital. I cannot judge for you whether we are better or worse than some of the peers you're looking at, but I can tell you we do believe there is opportunity, yes.

Thank you, Dave.

Thank you, everyone, for joining the call. Any follow-up questions, please address Nick or I. We will be standing by and ready to talk. Thanks. Goodbye.

Thank you. This concludes today's conference. You may now disconnect. [ End of Transcript ]