億滋國際 (MDLZ) 2013 Q1 法說會逐字稿

Good day, and welcome to Mondelez International First Quarter 2013 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'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. With me are Irene Rosenfeld, our Chairman and CEO; and Dave Brearton, our CFO. 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 do 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 this slide presentation. With that, I'll now turn the call over to Irene.

Thanks Dexter, and good afternoon. Our first-quarter performance was in line with the expectations that we communicated earlier this year. Revenue growth remained below our long-term target, and we're certainly not satisfied with that. Behind the aggregate numbers, our underlying business momentum continued to improve, as we drove a virtuous growth cycle in each region. Emerging markets accelerated sequentially, while results in developed markets continued to be solid. Revenue growth was high quality, driven by volume mix, strong power brands, and market share gains. Our biscuits, chocolate and candy categories continued to grow strongly. Adjusted gross profit increased, which provided the fuel to step up our investments in emerging markets.

While we're well-positioned in many of these countries today, the race is clearly on to fortify and expand our presence. As a focused snacking Company, we believe that now is the time to step our investments in brand-building, in sales, in route to market, and in capacity, to ensure we've planted the necessary seeds that will bear fruit for many years to come. You'll begin of to see the pay-off of these investments more clearly as revenue growth accelerates in the second half. With this solid underlying momentum, we remain confident in our ability to deliver our full-year commitments, as well as sustainable, profitable growth over the long term.

Let's start now with the details for the quarter. Organic net revenue grew 3.8%. As we've said, the impact of lower coffee prices and capacity constraints again tempered top-line growth. These two factors will continue to affect our second quarter until we lap the price declines and new capacity comes on-stream. We're encouraged, however, by the underlying quality of our revenue. Our focus on power brands continues to pay off. In fact, they grew 7.5%, nearly double our overall rate. Our volume mix trends are also strong, accounting for two-thirds of our growth. These vol/mix and power-brand gains in turn translated into solid market shares.

Looking at our results geographically, we see the same underlying trends. In developed markets, Europe delivered solid vol/mix growth, and US biscuits continued to benefit from a focus direct-store delivery sales force. In emerging markets, revenue was up over 9%. That's about a point higher than last year, despite the impact of capacity constraints. Our performance in the BRIC countries was also solid. Brazil grew strongly, up mid-teens; China up more than 20%; India grew low double digits, despite capacity constraints in chocolate. Russia was up modestly, but its growth represented a significant turnaround from the declines posted in the back half of 2012.

We continue to focus on increasing gross profit to generate the fuel to sustain our growth. In the first quarter, adjusted gross profit grew nearly 4% on a constant-currency basis, driven by vol/mix gains. This helped fund advertising and consumer support at 9.6% of revenue, up 20 basis points from our full-year 2012 rate. Higher adjusted gross profit also enabled us to invest in sales capabilities, and route-to-market expansion in our emerging markets. These increased investments, along with some one-time items, dampened operating income growth and margins. We remain committed to expanding overall operating income margin by an average of 20 to 30 basis points annually. But in the near term, we will continue to use cost savings, particularly from Europe and North America, to strengthen our emerging markets position.

Let's now take a look at each of our categories. Globally, biscuits were up 8%, including 13% growth of our power brands. Oreo was the key driver, up mid-teens. The world's favorite cookie posted strong growth in each region, and was the top-selling biscuit brand in China during the critical New Year season. A number of other biscuit brands also performed well. Barni grew mid-teens. Chips Ahoy was up high teens, as we continued to broaden distribution in emerging markets. Our TUC and Club Social savory brands increased nearly 30% behind new marketing campaigns.

Geographically, biscuits grew low double digits in emerging markets, with strong growth in Latin America and Asia-Pacific. In developed markets, both North America and Europe drove mid-single-digit gains. Biscuits also delivered outstanding share performance, with nearly 90% of our revenue in key markets gaining or holding share.

Turning to chocolate. Global revenue increased 5%. Power brands grew nearly twice as fast, led by Milka, Cadbury Dairy Milk, and Lacta. In emerging markets, chocolate revenue was up double digits. In Brazil, a solid Easter season and strong growth of Lacta drove the gains. In India, chocolate grew low double digits despite the impact of the capacity constraints I mentioned earlier. Smaller markets such as Egypt, Argentina, and Poland also delivered good growth. In developed markets, chocolate revenue was up low single digits with a strong showing in Europe. Overall, more than half of our chocolate revenue in key markets gained or held share.

Gum and candy revenue, however, remained disappointing, declining 1%. The decrease was driven entirely by gum's poor performance in developed markets. Here, revenue was down high teens as category trends continue to soften. We also lost some share. As we've stated before, we're not counting on a significant turn-around in gum this year, and our guidance reflects that.

But let me assure you, we are not sitting idly by and accepting these trends. We're actively testing a number of ideas to rejuvenate the category, and we've begun to roll out several initiatives to stem our share declines -- first, we're changing price-size architecture on both ends of the spectrum, more small packs and lower price points, and more value offerings in larger-pack sizes; second, hard-hitting advertising that focuses on functional benefits such as oral care; third, driving better placement of high impact displays; and fourth, getting the right product assortment on shelf. Early results of these initiatives have been encouraging, but due to the sheer breadth of retail outlets to be addressed, as well as the timing of shelf resets, rolling out these initiatives broadly has taken much longer than we would have liked.

In contrast, gum in emerging markets grew nicely, up mid-single digits with solid share gains. The launch of Stride in China last August and strong results in Brazil led the way. Also helping to offset the gum challenges, candy again delivered strong results, up mid-single digits, with growth in both emerging and developed markets. Halls was a standout, up low teens, behind innovation and the benefit of a rough cold and flu season.

Finally, in our beverages and cheese and grocery categories, revenue was flat, while power brands grew 2%. Coffee revenues declined mid-single digits as we passed through significantly lower green coffee costs, especially in our roast and ground business. On demand and soluble coffee, on the other hand, which together account for more than half of our global coffee revenues, performed well. Finally, powdered beverages continued to deliver strong performance with revenue up mid-teens. In sum, our overall results were in line with expectations, with encouraging evidence of strong underlying momentum. Let me now turn it over to Dave to provide additional information about our first quarter performance, as well as our updated outlook.

Thanks Irene, and good afternoon. Before reviewing our quarter-one results in more detail, let me first highlight the changes to our reporting structure for 2013. Previously, we reported our operations in three segments -- North America, Europe and developing markets. With the spin-off of our North American grocery operations, we've changed our reporting segments this year to give investors more clarity into our operations. We now report in five segments -- North America; Europe; Eastern Europe, Middle East and Africa or EMEA; Asia-Pacific; and Latin America. We issued an 8-K last month that provided a historical breakdown of revenue and operating income based on these new reporting segments. The 8-K included annual results for 2010 to 2012, and quarterly results for the past two years.

In another effort to provide insight into the business, we've delineated our portfolio into two parts -- emerging markets and developed markets. We define emerging markets to include all of the Latin America and EMEA segments. Our Asia-Pacific segment, excluding Australia, New Zealand and Japan, is included as well. We also add the central European countries that are now part of the Europe segment. Using this definition, 39% of our revenues were generated in emerging markets last year. Developed markets include all of North America, our Europe segment, excluding the countries of central Europe, and Australia, New Zealand, and Japan. When discussing our performance in emerging and developed markets, we'll limit the commentary to revenue. We'll continue to report profitability only for our five regional segments.

With that, let's now take a closer look at our top-line results. As Irene mentioned, we delivered 3.8% organic revenue growth. Vol/mix drove 2.5 percentage points, or about two-thirds of the increase, while pricing contributed 1.3 points. This included the impact of lower coffee prices, as well as capacity constraints in a number of markets. Overall, coffee revenues negatively affected our growth rate by 1.3 points. That's higher than what we expected, largely due to the timing of sales of gross and ground coffee in Europe. In addition, capacity constraints provided a head wind of about half a point.

This impact was lower than expected, as we successfully stretched capacity and used co-manufacturers to increase production. Emerging markets grew 9.3% in the first quarter, en route to our double-digit target. That compares favorably to the 8.4% rate we delivered in both Q4 and for the full year 2012, as growth in both Brazil and Russia improved considerably. Developed markets grew 0.4%. That's primarily due to the impact of coffee pricing.

Let's now take a closer look at top-line performance in each of the regions. In Latin America, organic revenue was up a strong 12.6%. To offset inflation, we took aggressive pricing actions in several markets. As a result, pricing contributed 9.4 percentage points, with 3.2 points due to vol/mix gains. Brazil was the region's star performer. In the first quarter, revenue was up mid-teens, well above the mid-single-digit increase posted in the fourth quarter. This growth was high quality, driven by vol/mix. It was also broad-based, with strong performance in each of Brazil's key categories. The north-northeast region also performed well, up 25%, as we continued to expand distribution. Brazil posted notable market share gains in chocolate, gum, and powdered beverages.

Performance in other key Latin American markets also was solid. In Venezuela, growth was quite strong, despite the country's economic challenges; and in Argentina, growth remained solid, but slowed in the face of price controls that limited our flexibility. The region's power brands increased 12%, led by Club Social, Oreo, and Halls.

In Asia-Pacific, organic revenue grew 5.8%, including 4.1 points from vol/mix and 1.7 points from pricing. Double-digit growth in emerging markets drove the region's top-line performance. China and India led the way. China grew more than 20% due to solid growth in biscuits, and contributions from Stride gum. Since launching last August, Stride has been a strong performer, already capturing about 5 points of market share. China also gained share in biscuits, behind Oreo and Chips Ahoy, although biscuit category trends softened this quarter. In India, our business was up double digits. Certainly not bad, but growth and share continued to be tempered by capacity constraints in chocolate. We look forward to a return to faster growth as new production lines come on-stream by mid-year. At that point, we'll be better able to meet the demands of a chocolate category that's growing over 20%.

In contrast to strong growth in emerging markets, the region's developed markets declined low single digits. This was largely due to a double-digit decrease in gum in Japan. Overall, the region's power brands grew more than 20%, led by Stride, Tang, Oreo, and Cadbury Dairy Milk. In EMEA, organic revenue grew 4%, driven by strong vol/mix gains of 7.4 percentage points. These gains were partially offset, however, by lower coffee and chocolate pricing in Russia and other eastern European markets.

Russia continued to improve sequentially despite this pricing pressure. Revenue rose 2% overall, with vol/mix up about 9 points, offset by 7 points of lower pricing. We're very encouraged with the progress of our new Management team. In addition to revenue rebounding, shares are also recovering in biscuits and gum. Coffee and chocolate, however, still have room to improve. In addition to Russia, other countries in the region, including Ukraine, Egypt, Nigeria, and South Africa, also contributed meaningfully to growth in the quarter. Power brands grew 8%, led by double-digit growth in Cadbury Dairy Milk, Oreo, Barni, TUC, and Tang.

Turning to Europe, organic revenue increased modestly, as strong vol/mix was mostly offset by lower coffee pricing. In fact, lower coffee revenues reduced Europe's overall growth by more than 2 points. Vol/mix was especially strong in biscuits, chocolate, and on-demand coffee. Power brands increased 3%. In biscuits, vol/mix gains drove mid- to high-single-digit growth, led by continued strength of belVita, Oreo, and the [Shako] bakery platform. In fact, Shako Bakery is on track to cross the $250-million mark this year.

Biscuits also delivered strong share performance across Europe, with notable gains in France and Italy. In chocolate, revenues rose mid-single digits, nearly all due to vol/mix. Sales were strong across continental Europe. Milka led the way, up double digits behind a successful Easter season and strong marketing efforts. We also gained share in Germany and other key markets. In the UK, revenue was down modestly as we cycled last year's successful Bubbly launch.

Coffee revenues declined mid to sigh single digits due to significantly lower coffee pricing. In addition to the impact of lower prices, gross and ground volume also fell due to the timing of some promotional activities. That said, Tassimo grew nearly 30%, behind significant marketing support, and revenue for Millicano soluble coffee rose 35%.

Gum and candy revenues decreased high single digits. Nearly all of that was due to poor performance in gum. The gum category continued to decline across Europe. Unfortunately, our share performance was also soft, as competitors stepped up promotional activity, and private label gained share in southern Europe. We're just beginning to implement some of the gum initiatives here that have been successful elsewhere in the world. In candy, Halls grew double-digits, and indulgent candy did well; but overall candy revenues were down slightly, as we continued to de-emphasize lower-margin SKUs.

In North America, organic revenues increased 2.4%, with a good balance of 1.5 points from pricing, and 0.9 of a point from vol/mix. Strong performance in biscuits drove solid growth across the region. In the US, biscuits grew mid-single digits for the seventh quarter in a row, as our focused DSV sales force continued to increase distribution points. As a result, we gained 80 basis points of share in biscuits year to date.

There were several stars among our US power brands in the quarter. Chips Ahoy was up high teens, behind increased distribution, improved velocities, and innovation. BelVita also continued its strong performance, up low teens. Honey Maid and Triscuit each delivered strong growth, driven by innovation and solid performance in the base business. Oreo generated double-digit growth, despite lapping strong performance a year ago related to the brand's 100th birthday. US gum and candy fell about 10% overall, due to gum weakness. As Irene mentioned, gum was down sharply, as the decline in the category accelerated. Finally, Our Canada business stabilized in the first quarter. It was up low single digits as we resolved the sales disruptions resulting from the spend.

Turning now to profits. Adjusted gross profit on a constant-currency basis increased 3.9% in the first quarter. This was driven by strong vol/mix gains. In addition, we were able to fully offset higher input costs through pricing. Gains were broad-based, as adjusted gross profit at constant currency increased in each region. This provided the fuel for growth investments. Adjusted gross margin was flat to the prior year, at 37.2%. Adjusted operating income on a constant-currency basis was down 4%. This was largely due to cycling the net benefit of one-time items in the prior year. Excluding this impact, adjusted OI at constant currency was only down modestly. As Irene noted earlier, we re-invested our higher gross profit to fortify and expand our position in emerging markets.

Adjusted operating income margin was 10.3% in the quarter. The decline of 160 basis points reflects 60 points from the devaluation of net monetary assets in Venezuela; 40 points from cycling the prior year one-time items; and the balance from a variety of factors, including the increased investments in growth initiatives.

Turning now to earnings per share. Diluted EPS was $0.32, and operating EPS was $0.34, up nearly 10%. On a constant-currency basis, operating EPS was up more than 20%. Stepped-up investments in growth initiatives resulted in a $0.01 decline to operating earnings. Cycling the net impact of the prior-year one-time items was also a $0.01 drag. As a result, the increase in operating EPS was attributable to a positive impact of $0.09 from lower taxes, about $0.07 of which is from discrete items.

Turning to our 2013 guidance. On the top line, we continue to expect organic net revenue growth at the low end of our long-term 5% to 7% guidance. As we've outlined previously, we expect growth in the first half to be around 3.5%. Similar to Q1, lower coffee prices and capacity constraints will continue to temper growth in the second quarter. However, we expect revenue growth to accelerate in the back half of the year, as we begin to cycle the impact of lower coffee pricing in the third quarter, and as new capacity comes on-stream mid-year.

We increased our operating EPS outlook to $1.55 to $1.60. This represents an increase of $0.03 from our previous guidance, as we flow through about half of the $0.07 tax benefit from discrete items. Since it's still early in the year, and considering the volatility of many of our markets, we're holding the other half in reserve at this time.

Let me make one last point on our EPS outlook. As you may recall, this range reflects average 2012 foreign exchange rates, as well as an estimated negative $0.04 impact from the devaluation of the Venezuelan Bolivar. Of course, currency rates will vary from the average 2012 rates that are our operating EPS guidance uses. Based on currency impacts recorded to date, and spot rates as of April 30, our EPS would be about $0.03 lower than the $1.55 to $1.60 guidance. We'll continue to provide you with ForEx sensitivities as the year unfolds. With that, let me now turn the call back to Irene for some concluding remarks.

Thanks, Dave. Although our results were in line with expectations, we're certainly not satisfied with our revenue growth this quarter; but the underlying fundamentals of our business are solid. Our emerging markets continue to improve sequentially. Vol/mix gains and power brands drove high-quality, top-line growth. Our biscuits, chocolate, and candy categories continued to post strong revenue and share. Adjusted gross profit grew globally, enabling us to step up our investments in emerging markets. We'll continue to build on this momentum as our growth accelerates in the back half of the year. Now we'd be happy to take your questions.

The floor is now open for your questions.

(Operator Instructions)

Our first question comes from Andrew Lazar of Barclays.

I guess my first question is I realize you invested back much of the discrete tax benefit in the quarter to drive future top-line growth, and that accounted for some of the EBIT shortfall, I guess, versus where sort of many investor models were. I guess my question is regarding the balance between operating profits and top-line growth, and whether I guess the two can co-exist going forward, given the Street view that there's a significant margin opportunity to be had. Or perhaps do they prove mutually exclusive just for some period of time until you get the top line moving to where you went it to be?

There's a couple of questions in there, Andrew. Let me start by saying the money that we re=invested in our emerging markets is from operating earnings, it is not from the tax benefits. We have not re-invested that money. As Dave mentioned, we've dropped half of it to the bottom line, and we're holding the balance in reserve. It's early in the year, and we want to make sure that we keep our powder dry.

But most importantly is you asked this question about the balance between margin and top-line growth. I'd ask you first of all to not over-react to a single quarter, especially given the strong margin performance we had last year. If you recall, we grew about 70 basis points. We certainly can expand margin and drive top-tier growth. We've done it in the past, and in fact our long-term guidance assumes we're going to do it in the future.

But the race is clearly on for us and our competitors to fortify and expand our positions in these fast-growing and highly contested emerging markets, and so we've chosen to re-invest some of the upside that we've got in the EU and North America to strengthen our position in these emerging markets, and stage our future sustainable growth. I want to remind you, though, that these investments are all built into our guidance, and we're still in that guidance calling for a double-digit increase in operating EPS. So net-net, there does not need to be a trade-off. There does need to be a balance, and I think we're striking the appropriate balance.

That's helpful, thank you. Just as a last one, the increased re-investment that you're doing, I assume that's meant to be part of the ongoing base going forward, as opposed to sort of a one-time increase in investment. I'm just thinking about next year as you lap some of this higher spending, and then what I guess potentially could also be a higher tax rate -- how that flows into '14?

Yes, it is just part of the base. Again, I wouldn't over-react to one quarter. We've given guidance on the year of $1.55 to $1.60. To get to that range we're going to need to see significant progress in our OI. Obviously quarter one isn't typical of the year for a lot of reasons we talked about. But we're on track with the guidance we gave for the year. Those investments were already assumed within that guidance, and I think the key really is you need to see the revenue growth pick up in the back half so that we deliver that top-line guidance in the back half and then that will drop through the bottom. But this isn't a one-timer that you need to worry about as you look at 2014.

Thanks very much.

Your next question comes from Matthew Granger of Morgan Stanley.

Hi, everyone. Thanks for the question. I just wanted to follow up first on Andrew's question regarding the tax rate going forward. Dave, can you just first give us an update on where we stand for full-year tax rate guidance? Then, given that the realization of one-time items seems to have set the bar fairly low this year, as we think forward to 2014, 2015, and what you would consider normalized tax rate, how should we think about the risk that this could potentially impact your ability to meet constant-currency EPS targets over the next year or two?

Okay. Yes, as we said, we're $0.09 favorable in the quarter, but $0.07 of that was from discrete items. The other $0.02 was the base tax, and that was already built into the guidance. So that $0.07 is favorable on the year, and that would drop our tax rate from around 20% to sort of the high side of mid-teens, but in that mid-teens range. We would expect as I sit here today for that to drop through in the year. You're right, we'll have a lower tax rate this year than we'd originally anticipated.

As we look into next year, we've given you a long-term tax rate of 25%, and that's nothing more than the mathematical average of the statutory tax rates around the globe. That's still the right long-term tax rate, but I think as we're working through the impacts of the spin and how our capital structure will evolve with that over time and we unwind some things, it's going to take us two or three years to get there. I think I'm looking, as I sit here today, at 2014 probably being closer to the 20% we were originally targeting this year. There will be a head wind, but it's not going to be as big as you're probably worried about; and it's probably going to be at that 20% rate, plus or minus a point or two, for the next two or three years before we start to see it migrate up to that 25%. I hope that helps.

That does. Thanks, Dave. Then sorry, just on the phasing of first-half sales growth, can you help us think a little bit more about any discrete impacts that could weigh on second-quarter organic sales growth? Because your guidance seems to imply stronger organic sales in the first quarter versus the second quarter, despite having a much tougher prior-year comparison. So are there any other factors besides what you called out explicitly in the presentation?

No. In fact, we actually have easier comps in the back half if you look at the year-ago base. But I think a couple ways to think about it. If you exclude the coffee and capacity constraints that we've talked about, we're already in the mid-fives. So we're quite comfortable that the underlying business -- and I talked a lot about the underlying quality of our results. We're quite comfortable that the underlying quality of our business is quite strong, and we feel quite confident about the back half of the year.

We've got the solid underlying momentum driven by good share performance, solid volume/mix performance, strong performance of our power brands. Our categories continue to grow. We will be lapping the coffee pricing. Our new production capacity will come on stream. As I mentioned, of course, we've got low comps in the back half of the year. So net-net, we're quite confident that the back half will accelerate, and that we will deliver the guidance of -- at the low end of the 5% to 7% range for the full year.

Okay. Thanks, Irene, and I apologize. One very quick clarification. For the first quarter was there any Easter timing benefit that would have resulted in -- that would have flattered the rate of organic sales growth?

Not really, because Easter was really early last year. It was a little earlier this year, but given the time we have to ship to our customers, it really didn't move any volume into Q1. As you look into 2014, you will see a shift from quarter one and quarter two as it goes back to normal timing, but this year versus last year, not really. We had a big plus last year. This year it's kind of neutral.

Okay. Thanks again, everyone.

Your next question comes from the Alexia Howard of Sanford Bernstein.

You made a reference to potential volatility in global markets as one of the reasons that you wanted to keep your powder dry with the guidance for this year. Could you maybe talk a little bit about where your biggest concerns are around that, and has that got worse over the course of the last couple of months?

Yes, there's nothing really specific. The reason we kept half of it in reserve is basically because it's only quarter one, and we're a global Company. We operate in a lot of markets where there's a lot going on. We're in Nigeria, Egypt, all parts of the GCC, Argentina, Venezuela. These are all sizable businesses which we're doing very well in, but stuff could happen. So I mean, it's not a specific risk. Frankly, even on the tax line we had discrete items go in our favor, we could have discrete items go against us. It's more a question of just being prudent at this point in the year. There's nothing specific that I would you call out and worry about. It's just being prudent, given we're really only talking about the first quarter right now.

Thank you. Then maybe as a follow-up, you mentioned that India managed to grow low double digits, despite the capacity constraints in chocolate. Was that driven by Oreos and Tang and their launch, I guess, almost a couple of years ago now? Does that mean India's almost a $1 billion business now that those new businesses or new product launches have hit a run rate of about $100 million or so? Just want to make sure I've got the math right on that.

Actually, no, Alexia, the bulk of our growth in India was driven by chocolate. As Dave mentioned, we took a number of steps. We're short on capacity, but we took a number of steps to stretch the capacity that we've got, and we're continuing to push as we bring that capacity on-stream for the back half of the year. We have high expectations for Oreo in India, but frankly, that's still a very small business, and we'll see that play out as the year progresses and then into next year.

Okay. Thank you very much.

It's about an $800-million business right now, so it's in that range. While we've been growing nicely, the currency has been moving against it, so it actually hasn't moved much in reported US dollars.

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

Your next question comes from [Taylor Reed] of Jefferies.

Good evening. Irene, I'm a little bit surprised that gum continues to drag down results in developed markets. I understand it's a structurally challenged category, but at what point -- and you only expect improvement two, three years from now. But at what point do you expect at least stabilization?

Look, as I mentioned, we're not taking this sitting down. We continue to test a number of initiatives, and we've got a number of ideas out in the market place. I mentioned the areas that we're focused on -- price-size architecture, hard-hitting advertising focused on more functional benefits like oral care. We're making great progress in driving placement of high-impact displays in markets like Japan, for example. We've got about 13,000 convenience stores that now have countertop displays, and we're seeing a 20% to 25% up-lift there.

Lastly, the most important action is getting the right product assortment at retail. As I mentioned, that's an area that we have been focused on. It does depend on when our customers reset their shelves. We are starting to see some early signs of success. As we look at markets like the US, for example, you will not have seen the April shares yet but when you see them you'll see where our share's up about almost 2 points. We're starting to see some impact from these actions. I have great confidence that they will start to turn the tide. But most importantly, I want to make it clear as I said a couple of times that we're not counting on that turn-around in the guidance that we've given.

Right. Then maybe if I can ask one more question. You mentioned capacity constraints in several markets. Two quarters ago we had price gap issues in markets like Russia and Brazil. Do you feel like at least in some markets you have a Management issue?

No. I think we talked about the fact that we were slow to respond in Russia, and I'm quite pleased with the turn-around that we've now seen in the Russian market. We've talked about those results. They're quite strong. If you look at them in aggregate, it's only up about 2%, but it's quite a sequential improvement from where we were; and underneath that, very strong volume mix in response to the initiatives that we've put in there. I feel quite comfortable with the teams that we've got.

We have some capacity issues. As I mentioned at CAGNY, these capacity issues, you might say how could you not have known? But before we bought Cadbury, India for example, was growing about 10%. We increased our marketing support. We saw it grow 20%, 30%, and by the time we finished our programming, it was growing 40%. Despite our most aggressive assumptions about growth in markets like India, we just underestimated it. We're on track to bring that new capacity on-stream mid-year into the back half of the year. But it's one of those nice problems to have, and as we've said, the major impact, the major dampening impact on our first half results is coffee pricing. So yes, capacity plays an impact, but the major effect has been coffee pricing, and the decline that we've taken there in response to the input costs.

Okay. Thank you.

Your next question comes from Bryan Spillane of Bank of America Merrill Lynch.

First question, just Dave on the Venezuela, the currency hit in Venezuela, is it a write-down of cash that was sitting on the bank? What's the nature of the hit that you took in the P&L?

Yes, that's part of it. There's really three pieces to the Venezuela impact. Two of them we've called out as the currency impact. One of them we're just saying is regular operating. So the net monetary assets, as you rightly state, we're on hyper-inflation accounting, as is everybody else, so we have to write those down. That was written down, and we're calling that part of that $0.04 impact. Obviously, the Venezuelan bolivar earnings we make get translated back at a less favorable exchange rate. So that's the second piece. Those are both in the $0.04.

There's other impacts around -- the input costs just went up a lot based on the currency shipped, so it costs a lot more to bring stuff into the country. We've got a price. There's some liquidity problems with customers. We're having to push through stuff. All of that is just regular operating, and we're covering that within the regular part of our business. So the piece that's there in the $0.04 are really just those two, the write-down and the dollar translation.

As we kind of model it going forward, assuming there wasn't another de-valuation, the level of impact should lessen as we go through the rest of the year?

Yes. In fact, those two items really should be -- the biggest chunk was the monetary asset write-down, and that is a one-time item. The translation is much less of an impact.

Okay, all right, thanks. One other question, maybe it's a follow-up to Andrew's question, Irene, but I think there's been a lot written in the last six weeks about kind of what Mondelez should do in the future and whether it's merge with Frito-Lay or focus more on margin expansion. Then there's been quite a bit of scrutiny on whether the levels of overhead at Mondelez are too high. Certainly, you're investing more right now and actually trying to build out infrastructure in markets where it sounds like it's pretty competitive to get the rate of investment or get the investments in ahead of your competitors. To the extent that you can, can you just talk to that topic, kind of how you feel about the strategy you have now, the goals you have now, why they're the right ones, and just kind of talk to this debate, I guess, that's going on in the market?

Yes, there's no question there's lots of chatter out there, and I'm not going to comment on the chatter. What I will tell you is we have created a very unique business with tremendous opportunities for growth, as we watch consumer demand for snacks growing at a very healthy rate around the world. We capitalize on our strong positions, especially in these emerging markets. Again, one of the premises for the split of our Company was the opportunity to focus on snacking and to leverage our position in these emerging markets. We are driving shareholder returns. We will drive shareholder returns by focusing on top-tier revenue and EPS growth, but that does not preclude margin expansion. We will continue to see top- and bottom-line growth, while at the same time we will see margin expansion.

As we've said before, the margin opportunities are clearly bigger in North America and Europe, and we're going to take some of that money to -- we'll drop some of that to the bottom line and we'll take some of that to re-invest. But all of that investment is captured in our guidance that we've given, and we will still enable us to deliver double-digit EPS growth. We do believe, though, that these emerging markets that the time is now to make sure that we fortify our position in these rapidly growing markets, and that's why we're choosing to do that.

Has that urgency to step up the investment in emerging markets intensified at all over the last year?

No, in fact I would say it was one of the main reasons for splitting the Company. It was our opportunity to focus exclusively on using that opportunity to expand our position. It was very much a part of our overall thesis. It will pay dividends. I know it is challenging to see the impact of these investments at this point because of some of the head winds we've talked about. But you will start to see it play through in the back half of the year, and it certainly will play through in the sustainable growth that we will generate.

Okay, thank you.

Your next question comes from Eric Katzman of Deutsche Bank.

A couple of questions, I guess following up on Bryan's point. I think on the de-valuation, isn't it most of the time that companies will take the write-down of the assets and the hyper-inflation into something like between operating income and pre-tax, as opposed to the segment? It appears that you're putting the full impact into the segment. Is that accurate?

Yes, I think it is accurate. We called it a currency impact, and I think that is consistent with what I've seen other companies do. But we did leave it within the Latin America segment, and that's why you see the operating income margin because on a reported basis it's within operating income, and it shows there as a significant write-down. So yes, it's in that segment.

If there are other de-valuations such as Argentina that are material, that's also going to run through your segment line, as opposed to after EBIT?

Yes, it would flow through the segment line. Venezuela's the only material country that's on hyper-inflation, so the write-down of net monetary assets really is a unique Venezuela issue, unless inflation gets high enough in places like Argentina to get us into hyper-inflation. But as of today, they're still on normal accounting.

The next question, I think Dave you said that there was a 50-basis-point drag due to a lack of capacity, I guess focused in EM. Is that -- and that was less than you expected. Is that accurate?

Yes. Back in CAGNY we had estimated that the capacity constraints would temper our growth by up to a full point. It's down to about half a point, mostly because we've spent a lot of effort with the supply chain folks, stretching the capacity, getting some efficiencies, and de-bottlenecking, but also frankly only selling the SKUs that matter, and really focusing on fewer SKUs and fewer change-overs. So that's helped us stretch it out and gotten the impact down to about half a point. As Irene mentioned, we would expect even that impact to disappear in the back half of the year, because we've got some new lines coming on. We've got some [co-mans] stepping up, and we'd expect that impact to disappear for the back half.

So to get to the second half acceleration, which arguably has to be sales growth of -- let's call it 6%, 7%, the drag has to go obviously from not being a drag to a contribution. Can you kind of give a sense as to how much capacity is actually being added that will, let's say bridge the gap, versus -- to get to such a fast growth rate?

Yes, I think --

If you shift to consumption, how much is that going to really add?

Yes, if we shift to consumption, it really is only that half point. We're going to be putting in more capacity, because frankly we want to get ahead of it. That's why we talked about in CAGNY we're going to step up our capital expenditures closer to the 5% of revenue for the next couple of years. We're going to try to get in front of it, but adding more capacity can't help me sell faster than consumption. We'll get the half point back.

I think as you get into the back half, there's a few things to think about. The coffee head wind was 1.3 points this quarter, and probably similar next quarter. That's going to disappear in the back half. The capacity is half a point. That's going to disappear in the back half. If you added those on alone, you're already up to mid-five. On top of that, we've got good underlying share momentum, probably the best we've seen in years. Vol/mix is very strong. Categories are growing -- a little less than historically, but still very strong growth in our categories. Frankly, we have pretty easy comps, comp periods, in the back half as well. If you add all that together, getting to that 6% to 7% range, we're pretty confident in.

Okay. Then on the guidance, are you saying that with currency where it is today, even I guess including currency of a $0.03 head wind and also including the benefit of the taxes, assuming you spend back half, that you're not actually changing guidance?

Well, we've gone to a mechanism of giving you guidance on a constant-currency basis of the prior-year average rates, and then giving your sensitivity around that. We did increase that constant-currency guidance by $0.03 due to taxes and passing through half of that discrete benefit, that's true. It is a total coincidence, but today, at spot, currency would be a $0.03 head wind, and would bring us back down that $0.03. But I think it's only May 7, so I won't over-react to the currency markets. They'll be what they'll be, and we'll give you a sensitivity every quarter as to how that stands. As we get closer to the end of the year, we'll be able to lock in on a firm number. But we'll give you constant-currency guidance, and we'll give you a sensitivity every quarter based on where we sit today.

Okay. Then last question, I apologize. Irene, obviously at least in China -- big market -- Mars has something like 40% to 50% of the chocolate market over there, a lot of other players fighting it out. You're trying to be aggressive by getting your fair share as quickly as possible. But why shouldn't we be concerned that those who are fighting it out are going to struggle with returns. I mean, Hershey has already kind of backed off a little bit on their long-term assumptions about operating margins in their emerging markets. I guess why isn't it going to be a pretty big challenge for all these chocolate players to try to capture profitability in the market?

Let me start by saying we're not in chocolate in China. Our category participation in China is primarily biscuits, and then we've overlaid gum. As I talked earlier, we feel very good about the biscuit performance. We continue to have the number one biscuit in the country, and Oreo growth continues to be very solid. Our biscuit business grew double-digit in the first quarter. Our overall China business is about $1 billion. It grew about 20%, and the incremental benefit there came from gum. As you recall, last August we launched Stride gum in China. China is the second-largest gum market in the world, it's growing 16% annually. Every time I keep talking about challenges in gum, it's in the developed markets. Developing markets are growing at quite healthy rates, and China is one of them.

I would say our early results -- we feel quite good about our early results. We've got about 5% share, and it's certainly performing consistent with our expectations. We view this entry as very complementary to our biscuit business; because in effect, we're basically putting gum on top of the biscuit infrastructure. So we feel quite good about the performance of our business in China today. We continue to make investments in route to market and expanding our participation in the tier 3 and tier 4 cities, investing more in the traditional trade, all of which have very attractive pay-backs, because our gross margins in China are quite good. In fact, they're among the highest in the world. China is a strong market for us. It has performed well. We have every confidence it will continue to perform well, and we will invest behind that growth to fuel the overall momentum.

Okay. Thanks for that. Pass it on.

Guys, let me just step in. If we can keep the number of questions to like one or one-and-a-half per person. We can try to get through everybody as much as we can. Thanks.

Your next question comes from Chris Growe of Stifel.

I just had a question for you. In the quarter, were your input costs favorable to the gross margin, so were input costs actually deflationary in the quarter overall? I'm guessing with coffee being down, that was the big driver. I'm just curious overall?

No, actually our input costs overall were up about 1%, so pretty small. Coffee was the reason they were small. Within our input costs, commodities are clearly one of the drivers, but as a global Company now, actually a bigger driver is currency rates, and the constant cost to bring materials into the individual markets where we sell, and a lot of other minor raw materials that we buy locally. So commodity costs are by far not our biggest piece. If I looked at those, you're right, they're slightly down, but the overall aggregate input cost was up about 1%, probably the lowest inflation we've seen in quite a while, but its was a slight increase.

Okay. Then just had a follow-on question to that. Are you seeing markets where it's getting more promotional in some of your categories? Also, kind of pushing towards gum, is that a category where you also are getting more promotional even sequentially to try and turn that category around?

Yes, I don't think we're seeing a material change in the promotional activity. Markets have been kind of in a sort of subdued state in the developed world for quite a while. We've maintained our discipline. I think most of the food industry did. Gum, there has been more promotion. We talked about that in Europe, and we're responding to that. But that's really more of an isolated circumstance. I would not say promotional intensity has increased at this stage.

Okay, thank you.

Your next question comes from Ken Goldman of JPMorgan.

Hi, good afternoon. To follow-up on Matt Granger's question, I think he was asking about the second quarter, not necessarily the second half. I'm curious about this too. I'm still not sure I understand. To get to your guidance of 3.5% organic growth in the first half, you have to put out a lower organic growth number in 2Q than 1Q. I'm not sure why that is. You have a much easier comparison. There's no change in the coffee impact. There's no Easter issue. Again, maybe you've talked about this. Are there some head winds I'm not necessarily thinking about that hit your top line this current period?

I think we're talking about a 20- to 30-basis-points gap. I mean simplisticly, we gave you guidance of 3.5% for the first half. 3/8 is above that, but not materially above that. We left the guidance for the first half at 3.5%. I wouldn't over-think it.

All right. It implies 3.2%. Some people would call that meaningful, but I'll move on. (laughter) As you look at your -- Dave, as you look at your weighted average interest rate, it's high versus the group, right? It's the second-highest of any Company I cover. You've talked in the past about a lot of your debt being non-callable, and of course, the high cash cost associated with restructuring that debt, and I understand that. I guess I'm just curious if maybe you could update us on your current thoughts and whether they've changed at all regarding what at least on the outside seems to be arguably a less than optimal debt structure?

Yes, the interest costs are very high. All that debt was taken out, really, for the [genone] acquisition and the Cadbury acquisition. They were taken out at a time -- at the time, I'm sure was reasonable, and today looks high. We paid off some debt in February, as we've scheduled. We said we would pay off the February debt. That's done. We said we would pay off the May debt, there's $1 billion coming due. Actually, tomorrow. So that will be paid off. That will get us down to that $17.5-billion debt level that we said was kind of our equilibrium. There's another $1.8 billion that is due in October, and we're obviously evaluating options for that.

As you think about tenders or other things that would buy back some of that high cost debt, the reality is, it's a pay me now or pay me later. I could buy it back, but I'm going to have to pay the bond holders the net present value of that high interest cost. So the criteria I've established with my treasury group is it needs to be net-present-value positive for it to be worth our while to do a debt buy-back. That means that it continues to be the criteria. That doesn't mean we won't do it. It doesn't mean we will. But that's the test I will continue to apply. In the end we haven't executed a tender so far, but if we decide that the economics actually work in our favor, at some point we'll move forward.

Well, I appreciate that, and I'll let it go in one sec. I would just suggest that perhaps shareholders should come first, right? Stock holders come before bond holders in this kind of situation. If you can drive your EPS significantly higher by paying down some or restructuring some debt, which you probably could, and we would exclude the expenses as non-recurring, at least from our vantage point, you could get your stock higher and do an awful lot of things with that in terms of acquisitions and so forth. Just my friendly $0.02 there.

Okay, thank you.

Your next question comes from David Palmer of UBS.

I'd love to dig into the puts and takes in the quarter with regard to margins. It sounds like global chocolate and biscuits had a solid revenue quarter, with relatively higher-margin power brands doing significantly better than those categories. You mentioned that the overall inflation of your input's about 1%. Obviously gum was weak, and that's a high margin business. You had a tougher margin comparison this quarter, but is there any more detail you can give us with regard to margin drags or re-investments that happened in the quarter that seemed to offset these other areas that would speak to tail winds? Thanks.

Sure. I guess I'd start by saying I wouldn't over-react to margins in a s single quarter, and particularly this quarter had a lot of noise in it. We came off a year where we grew margins by 70 basis points so we had a very strong year. I think this year in total we still expect to have a good year. If you start and look at our margins, our gross margins were flat, and at 37.2%. You rightly point out gum actually hit us within that, because gum is a higher-margin product, by about 50 basis points. We also had the price adjustments we made in eastern Europe and Russia. That hit us as well, and we covered that by continuing to be pretty disciplined around pricing and input costs, and productivity in the rest of the world.

The flat margin really is a decline in a couple of situations, but overall continued progress on gross margins. The reason the OI margin was down was, as I said on the call, it was the Venezuelan bolivar was a one time impact this year. It was prior-year items that kind of set up an artificially high base of 40 bips that we talked about last year. It was dissynergies. We haven't talked about dissynergies much, but we said we had $200 million of dissynergies coming out of the spin. We said we'd eliminate half of that this year, which we will. But inevitably, the savings are going to come out more towards the back half, and the full impact of those dissynergies hit us in the first quarter. And it was the investments in emerging markets that we talked about in A&C and sales and route to market. So those are kind of the drivers.

As I look at that whole bucket of events, we're holding gross margin despite some head winds, and we'd expect to continue to do that. We'll continue to invest in our emerging market growth. The dissynergies will disappear. We're on track to hit our total-year guidance, and I'm not worried about the first quarter. I know it looks bad on paper, and it is in isolation. It clearly is. But I think you'll see that margin pick up more in the back half, less so in the second quarter, but I think the back-half margins will improve significantly, and you'll see that in delivery of the full year.

Thank you.

Your next question comes from Jason English of Goldman Sachs.

Hi, guys. Thanks for squeezing me in. I'll keep it to my one and-a-half questions. (laughter) I feel like I'm being beating a bit of a dead horse here, but I wanted to build on some of Driscoll's questions, and back to Chris Growe's, as well, on gross margins. You said price growth of around 1.3%, inflation of 1%, mathematically that alone should have given you some margin expansion. Add in volume leverage and then your productivity, mathematically we should have seen much fatter gross margins. I think you gave 50 basis points offset on gum weakness. Can you help illuminate us to what the other offsets were?

Yes, the other two big offsets would be the coffee and chocolate pricing adjustment we did in Russia and eastern Europe, and it would also be the Argentinian price controls, where inflation is running significantly higher than the price controls right now. We haven't been able to take any pricing this year. Those would be the two biggest offsets, plus the gum.

The coffee -- it's not included in your inflation and price numbers for the overall Company?

The coffee pricing we're managing fairly well, so coffee pricing is down, coffee margins are okay.

And this is my other half question. You gave A&C of 9.6% of revenue for this quarter. What was it last year?

9.4%

Thank you very much.

We have time for one last question. Last question, please.

Okay. Your final question comes from David Driscoll of Citi.

Great. Thank you for getting me in there. I feel like I got in under the wire, although it's past the hour. I want to make one clarification. When you guys were saying that OI was in line with your expectation, and it allowed the SG&A re-investment, at least I think I have that correct. Then this tax benefit, the zero tax paid in the quarter, you're saying that that's not the reason for the SG&A investment, that this is outside of that. Then you're talking about part of this then gets contributed to the guidance raise. Did I say that about right?

Yes, you did. Again, we gave full-year guidance; and on a full-year basis, we expect our EPS to be $1.55 to $1.60. That will be well into double-digit EPS growth. Within that, we've got the tax benefit that we dropped through $0.03, and we've got OI is going to have to grow. We gave a full-year estimate on OI growth, and our top line behind that. It is going to require margin improvement. We never gave you operating margin guidance for quarter one.

So quarter one was in line with what we'd expected internally. We knew about the one-time hits we'd had, and we knew about the investments we would be making all through the year. The fact that those would hit us more in the first quarter -- because we don't have that revenue leverage yet -- and so it's more about, as we go through the year we get the top-line growth accelerating, that will translate into leverage down through the P&L. You'll see that margin gain come through. That's why the quarter one margin in isolation is not great, and it's certainly below what you guys would have expected. It is part of a full-year guidance, and there's nothing in there that should lead you to be concerned about the full year. It's really consistent with the guidance we gave back in February.

Very helpful. On China, the 20% growth is pretty encouraging. Do you think that type of growth rate can be sustained throughout the remaining quarters of the year?

Simple answer is yes, David. Probably not exactly at 20%, but we've been growing healthily at those rates for the last couple of years, and I have every expectation, we've got good category growth. We're in good categories in the country. I talked about the performance of both biscuits and gum. We feel -- we're seeing very strong performance there. We've seen some slow-down in GDP, but it has not disproportionately affected our categories. Even biscuit, when it quote slowed down, grew at a healthy 11% rate over the last 52 weeks. Our share performance continues to be strong. We've got strong brands in both our biscuit and in our gum portfolios. We continue to make investments, as I mentioned, in marketing support, in route to market, as well as in broadening our distribution base. I feel quite confident about the future, and the fact that China will continue to be a key contributor to our overall growth rate.

Terrific. Can I switch over to two final questions?

One, one. (laughter)

They're two good ones, though. They're really good ones. The new products. We don't hear from you guys about like new products as a percentage of revenues, and this I think is a key metric that you look at internally. Can you update us on your thoughts on new products as a percent of revenues? The final question is, Dave maybe you can just give us some understanding as to what's the hold-up with the arbitration proceedings with Starbucks? Hasn't it been like 10 or 11 months since we've gone through this thing, and why aren't we getting a verdict?

I'm going to let Dave answer that one, and I'll come back to your question about innovation.

On Starbucks, we remain pretty confident in our case. We are looking forward to the verdict as much as you are, probably more than you are. There's really nothing new since our last call. We're awaiting the decision. You are correct, the arbitration hearing finished in August of last year, but there's no specific timing. It's really at the discretion of the arbiter. We're pretty confident in the outcome. We're pretty confident in the merits of our case, but we can't dictate the timing.

Your second, innovation, David, we feel very good about the performance of our innovation, particularly our global platforms. It represents about 12% or 13% of revenue, and we believe that that's quite high relative to peers. The drivers of that within each of the categories are the platform innovation behind each of our power brands. As I talked about the performance of power brands, when I talk about Cadbury Dairy Milk or Milka growth, it's coming because of products like Bubbly. When I talk about biscuit growth, it's coming from Oreo and belVita, for example. When we talk about our gum growth, we're seeing a continued improvement as we focus our Trident franchise on breath freshening. That's the source of this innovation. It is an important contributor to our overall top-line growth, and we've seen continued strength in our performance.

Thank you.

All right, guys. Thanks everybody. Any follow-up questions, obviously give myself or Nick a call. We'll talk to you later, thanks.

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