億滋國際 (MDLZ) 2013 Q3 法說會逐字稿

Good day and welcome to Mondelez International's third 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 slide are available on our website Mondelezinternational.com.

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

Thanks, Dexter. It's easy to forget, but we just marked our one year anniversary on October 1. We've accomplished a lot this past year and have taken a number of actions to sharpen our focus and strengthen our capabilities. In the face of challenging economic conditions, we've delivered solid results, strong volume mix, in fact, the strongest in our industry, accelerating growth in emerging markets in line with our double-digit target, strong market share performance in four of our five regions, and double-digit adjusted EPS growth at constant currency.

We're also taking some major steps to improve margins, cash flow, and return on invested capital. As we detailed a couple of months ago, we've identified significant supply chain savings. Together with reducing overheads, these savings underpin our margin improvement targets, including gains of 500 basis points in North America and 250 points in Europe by 2016. We've also authorized a $6 billion share repurchase program and increased our quarterly dividend. In fact, so far this year, we've returned nearly $1.5 billion to our shareholders.

At the same time, we've had some challenges. Our revenue growth was solid but it was below expectations. This is due in part to factors outside our control, like the precipitous slide in coffee prices and the slowdown in global categories. But other challenges rest squarely on our own shoulders. As you know, we hit some speed bumps in Brazil and Russia last year just as we came out of the spin. In a manner of months, we identified the root causes and implemented effective solutions. Both Brazil and Russia have rebounded well and are now growing in the mid to high teens.

However, as you've read in our earnings release, like many of our peers, we're now facing some headwinds in China. In a global enterprise there will certainly be challenges from time to time, but our job and our promise to shareholders is to manage those challenges and deliver our commitments. This needs to be a combination of more quickly adjusting expectations to marketplace realities, improving early warning systems to stay ahead of potential issues, and having the right leaders and capabilities in place. We've addressed each of these issues. As we look ahead, we remain optimistic about the power and the potential of our unique assets to deliver significant value to our shareholders.

With that perspective, let's look at our third quarter and year-to-date results. In Q3, organic revenue growth increased 5.3%. That's up sequentially from 3.8% in each of the first two quarters. Volume mix was very strong, driving all of the revenue growth in the quarter and the vast majority of our growth year-to-date. The strength was also broad-based with vol mix up in all regions. The contribution from pricing year-to-date has been modest, largely due to the impact of lower coffee prices.

Growth in emerging markets continue to improve sequentially, from 9.4% in Q1, to 9.7% in Q2, and 10.7% in Q3. The BRIC markets have been the key drivers of this increase, up double digits in the third quarter. Brazil, Russia, and India each grew mid to high teens, more than offsetting the weak results in China which I'll talk about in a moment. Developed markets also improved sequentially, up 1.8% in Q3, versus performance that was essentially flat in the first half. There's no question that 5.3% revenue growth driven entirely by vol mix is strong, especially in a difficult operating environment. We have good underlying momentum in four of our five regions, but we missed our expectations, 5.3% is below the 6% rate we had forecasted. I'm extremely disappointed about that.

Lower coffee pricing and weak results in China drove the shortfall. We've been talking about the pass-through impact of lower coffee prices on our revenue growth for more than a year now. We expected that coffee pricing would be a headwind in the first half and then would stabilize. But instead, coffee has continued to fall, and it's now trading below $1.05. As a result, coffee was a 50-basis point drag to our growth in Q3. With green coffee prices at this level, we expect coffee will be a similar drag in Q4 and at least for the first half of next year. Remember, though, we price the to protect gross profit dollars, so the pass-through of lower green coffee prices on our topline doesn't impact our bottom line. It certainly affects our headline numbers.

The more significant issue this quarter was in our billion dollar China business. It's no secret that China's GDP growth has slowed from north of 9% in 2011 to about 7.5% this year. The macro slowdown is affecting consumption across most consumer goods, and our biscuit category is no exception, dropping from the 18% growth in 2012 to 3% in Q1. As we observed a sharp slowdown, we invested to stimulate category growth. We increased marketing and sales support behind Oreo and Chips Ahoy. We launched Golden Oreo which has been highly successful in other markets. From a share standpoint, these investments worked with shares up for both Oreo and Chips Ahoy, and the launch of Golden Oreo was also successful with product placement in over 500,000 outlets in just six weeks.

What happened? Our incremental investments did not stimulate sustainable category growth. After an initial increase in Q2, the biscuit category was up only 2% in Q3. Second, as we shifted spending to our Power Brands, our second tier brands lost more share than expected. While our trade stock targets were appropriate for double-digit growth, they became excessive when the category slowed. We've taken a number of actions to address the situation. We're reducing and closely monitoring trade stocks while shoring up our analytical capabilities to get more and better data in real time. This will allow our newly appointed leadership to quickly address changes in the marketplace.

Looking ahead, with an extensive multi-tiered network of nearly 1,000 distributors, it will take some time to recalibrate trade inventories and regain biscuit momentum. We expect biscuit revenue in China to remain soft in Q4, while progressively improving next year. Despite these near term headwinds, we remain optimistic about the future of China. From 2009 to 2012, organic revenue grew 25% annually. The economy and the biscuit category will recover, and our gum business continues to grow nicely in a very robust category.

Outside of China, we're also experiencing a slowdown in most of our global categories. They're still growing well in excess of other food categories, but realistically it will affect our near- to mid-term growth aspirations. In aggregate, our categories last year grew approximately 6%. In fact, that was the basis for our forecast last September. So far this year, however, growth has slowed to under 4%. We've offset the category slowdown somewhat with strong share performance, especially behind our Power Brands.

In aggregate, we're gaining or holding share in nearly two-thirds of our revenue. Year to date, biscuits were up 7.5%. In emerging markets, revenue increased 11%, despite China's weak performance. In developed markets, revenue rose 6%, led by strong growth in both North America and Europe. Biscuit's share performance was terrific, with more than 75% of revenue in key markets gaining or holding share. Our Power Brands grew nearly 12%, led by Oreo, belVita, Tuc, Club Social, Barni, and Chips Ahoy.

Turning to chocolate, year-to-date revenue was up more than 6%. In emerging markets, chocolate was up 14% with strong growth across all geographies. In developed markets, chocolate revenue rose 2%, led by mid-single digit growth in Europe. Power Brands grew over 10%, with Cadbury Dairy Milk, Lacta, and Milka each up double digits. Our share performance through September was only about 45%, with strength in emerging markets offset by share losses in some larger developed countries, like the UK. We're encouraged to see that recent UK share performance has recovered. It's now flat for the year, through the latest tracking period ending in early October.

Turning to gum and candy, global revenue declined about 1% but we're beginning to see some signs of improvement as revenues rose modestly in Q3. That's the first increase we've seen in quite some time. Candy was up 4% through September driven by Halls. Gum in emerging markets was up 6%, including strength in China and most of Africa. While gum in developed markets was down 16% year-to-date, the rate of decline slowed in Q3. Global gum share was strong, with about two-thirds of our revenue gaining or holding share. Clearly, we're gaining traction in those markets where we've implemented our four-step play book to fix gum. As we discussed last quarter, we expect those share improvements will be a precursor to revenue gains as we implement our play book in other markets and as customers reset their shelves.

Finally, in beverages and cheese and grocery, revenue grew about 1%, with Power Brands up nearly 4%. As expected, coffee was down 3% as we passed through significantly lower green costs. Vol mix, however, continues to be strong, contributing 8 points year-to-date. Our convenience coffee platforms continue to drive positive mix with Tassimo up nearly 40% year-to-date, and Millicano sales doubling. After only about one year in the market, Millicano is nearly $100 million business. Coffee share performance has also been strong with about 70% of revenue in key markets gaining or holding share.

Even in this more challenging environment, we've been able to deliver strong growth and share performance in most of our categories. We're clearly not immune to the stronger headwinds that will temper our growth for the balance of the year and into 2014, but we remain confident in our ability to weather the slowdown and deliver top tier performance over the long term. Now, let me turn it over to Dave.

Thanks, Irene. As Irene detailed earlier, weak China performance tempered our Q3 results. For Asia-Pacific region overall, organic revenue growth was flat in the quarter, with vol mix gains essentially offset by lower pricing in the developed part of the region. While revenue was up 3% year-to-date, we expect Q4 to be down low-single digits, due largely to issues in China. The region's emerging markets were up mid- to high-single digits year-to-date, tempered more recently by slower China growth. In contrast, India was up mid teens. With new capacity now on-stream, our chocolate business grew more than 20% in Q3, in line with continued robust category growth. Additionally, the region's Power Brands grew 11%. With the notable exception of Asia-Pacific, however, our four other geographies delivered solid results in the quarter.

In Latin America, organic revenue was up about 17% in the quarter and 13% year-to-date. Despite a persistently weak economy, softening category trends and consumption declines, our business in Brazil has grown mid-teens year-to-date. Incremental investments in A&C have delivered attractive returns, driving strong vol mix and high-teens growth in the rapidly growing north-northeast region. Share performance in Brazil remains solid with particular strength in chocolate. Outside of Brazil, pricing in the inflationary economies of Venezuela and Argentina drove most of the growth. Our teams there have done a good job of responding to the challenging economic conditions, but we have a cautious outlook for these markets due to their volatility. Importantly, share performance in Latin America was strong, with more than 70% of our revenues gaining or holding share. Finally, the region's Power Brands increased 15%, led by Lacta, Club Social, Oreo, Halls, and belVita.

Turning to EMEA, organic revenue grew 13% in the quarter and nearly 10% year-to-date. Strong vol mix gains of 16 percentage points in the quarter and 12 points through September drove the regions' growth. Lower coffee and chocolate pricing in Russia accounted for the bulk of the pricing decline. Once again, Russia's performance was exceptional, up nearly 20% in the quarter, due to very strong vol mix growth as well as a favorable year-ago comparison. Other markets including Ukraine, the GCC countries, South Africa, and West Africa also posted strong growth in the quarter. Year-to-date share performance across the region was solid with more than 60% of revenues gaining or holding share. Overall, the region's Power Brands were up 14%.

Looking to Europe, revenues increased nearly 2% in the quarter and 0.7% year-to-date, despite the continued economic challenges in the region. In Q3, vol mix was again up sharply contributing 4.7 percentage points to growth. As we mentioned earlier, coffee pricing remains a significant drag on the topline. Lower coffee revenue reduced Europe's overall growth by 1.4 percentage points in the third quarter, and 1.7 points year-to-date. Looking at performance by category, chocolate revenue was up mid-single digits year-to-date, driven almost entirely by vol mix. Milka and Cadbury Dairy Milk each delivered strong growth while innovations like Marvellous Creations also made a meaningful contribution. Biscuits were up mid-single digits with most coming from vol mix. Oreo, belVita, and our Choco Bakery platform drove much of that growth. Coffee declined mind-single digits, due to lower pricing, more than offsetting solid vol mix, but our convenience coffee platforms continued to grow strongly. Gum and candy revenues were down mid- to high-single digits mostly due to gum. Here too we're beginning to see some improvement in share performance as we implement our new play book. Overall, the region's Power Brands were up 4% year-to-date.

In North America, organic revenue increased 2.4%, at the same rate at the first half. US biscuits continued to perform well with revenues up at least 5% for the ninth consecutive quarter. Most of this growth was due to vol mix, behind strong execution by our direct store delivery sales force. Oreo was up double digits in the quarter and year-to-date on the strength of base SKUs as well as innovations such as Birthday Cake and Mega Stuf. US biscuits continued to gain market share as well, up 100 basis points in Q3 and 110 points year-to-date.

Candy once again delivered solid growth behind Halls. As Irene mentioned, US gum share rose for the second consecutive quarter with especially strong share gains in convenience stores. Gum revenue though declined as anticipated as our customers continue to reset the shelf assortments to reflect faster moving SKUs. We're also lapping a high quarter through a year-ago in preparation for the spinoff. We expect revenue trends to improve beginning in Q4.

Turning to profits, adjusted gross margin declined 50 basis points in the quarter and was down modestly year-to-date. In the third quarter, higher commodity costs more than offset benefits from strong vol mix and net productivity. In fact, net productivity accelerated to more than 3% of cost of goods sold in the quarter, about double the rate of the first half. However, the lag in implementing pricing to recover higher commodity costs and currency impacts offset the benefit from strong net productivity. Going forward, pricing actions are expected to fully offset commodity and currency movements, allowing net productivity benefits to flow through to margin.

Adjusted operating income margin in the third quarter was 12.2%, consistent with our guidance of sequential improvement each quarter. As expected, margin declined year-over-year. That's because last year's Q3 margin was unusually high due to the spinoff of Kraft Foods Group and some prior year one-time items. Year-to-date, adjusted OI margin was 11.3%, down 140 basis points versus the prior year, reflecting various factors including about 30 basis points from the devaluation of the Venezuelan currency, about 50 points from cycling of prior-year one-time items, and about 50 points from incremental investments in emerging markets. We continue to expect adjusted OI margin will be above 13% in Q4 and about 12% for the full year, in line with our previous communications. The sequential improvement in margin reflects a greater contribution from net productivity and continued focus on overheads. In fact, overhead costs as a percentage of net revenue were down more than 50 basis points in the third quarter, led by significant overhead reductions in Europe. As we said before, we expect to see greater overhead leverage in the fourth quarter, since absolute revenue is typically 10% to 15% higher than in other quarters.

Turning now to earnings per share, adjusted EPS for the third quarter was $0.41, including a negative $0.01 impact from currency. On a constant currency basis, adjusted EPS was up 16.7%, driven by lower taxes. For the first 9 months, adjusted EPS was $1.12, including a negative $0.07 impact from currency. On a constant currency basis, adjusted EPS increased 15.5%, again driven by lower taxes. Incremental investments in emerging markets were a key driver of the $0.03 decline in operating earnings. Lastly, our cash flow continues to be on track. Comparisons are difficult because the year-ago period is pre-spin and included North American Grocery. But the cash conversion cycle outside North America has improved more than 10 days this year versus the same period a year ago. Our year-to-date cash flow is in line with prior experience and our expectations for the full year.

Turning to guidance, we're lowering our 2013 revenue guidance to approximately 4%, down from the low end of 5% to 7%. That means our growth in Q4 will be only about 3%. This is much lower than we were expecting, but it again reflects the impact of lower coffee prices, slower global category growth, and a Q4 revenue decline in Asia-Pacific, largely due to China. Taken together, these factors will temper growth by 2 to 3 percentage points in Q4. Importantly, we expect the solid underlying momentum in our other four regions to continue, and as I mentioned, despite the lower revenue, through a combination of increased net productivity and overhead management, we still expect to hit our adjusted OI margin of approximately 12% for the full year. In addition, we're raising our 2013 EPS target range by $0.02 to $1.57 to $1.62, to reflect the flow-through of some tax favorability. This range is based on guidance currency rates.

Looking ahead, our long-term goals remain the same, including 5% to 7% organic revenue growth, operating margin of 14% to 16%, double-digit EPS growth, and strong cash flow to invest in our future and return capital to shareholders. That said, when we laid our long-term revenue growth target over a year ago, our categories were growing about 6%. As we've discussed, our categories have slowed this year to below 4%. While we believe that the industry-wide slowdown is temporary, we don't expect categories to accelerate in the near term.

Although we won't provide definitive 2014 guidance until February, we wanted to let you know how we currently see next year playing out. We expect the slower category growth and lower coffee pricing will continue to pressure our topline. As a result, we believe our revenue growth next year will be more in the 4% to 5% range. Nonetheless, we expect to leverage our advantaged brands to continue to drive strong share performance. Even in the face of slower growth environment, we believe we have the financial and operating leverage to deliver strong adjusted OI growth and margin expansion while the benefits from our share repurchase program should help mitigate some of the tax headwinds on EPS.

We're also exploring additional opportunities to accelerate cost reduction efforts both throughout our supply chain and in overheads. Of course, while we take significant steps towards our long-term margin goals, we're continuing to prudently make foundational investments to strengthen our sales and route to market capabilities, especially in emerging markets. In the addition, we'll be flexible in how we deploy A&C investments, to balance affordability, opportunity, and ensure attractive returns. As a result, we expect to not only weather this slower growth environment but also be well-positioned when these markets accelerate once again.

To wrap up, through the first 9 months this year we've delivered solid results, including strong vol mix gains, 10% growth in emerging markets, and increased market shares. At the same time, we continue to face headwinds from slower global category growth, lower coffee pricing, and weak China sales, causing us to reduce our full year 2013 revenue outlook. Although these factors will continue to pressure topline in 2014, we believe we have the plans in place to deliver strong operating income growth and make significant progress towards our long-term margin goals. Now, we'd be happy to take your questions.

(Operator Instructions)

Bryan Spillane, Bank of America Merrill Lynch.

Hi. Good afternoon, everybody.

Hi, Bryan.

Just two questions. One, Dave, looking at how you've preliminarily laid out 2014, I think previously you had talked about a margin goal for 2014, it being high 12%. I'm assuming that also was with a higher organic revenue growth. Should we still be thinking about that high 12% margin for next year? Or is that somewhat in flux?

We're not officially giving 2014 guidance, but as I said a minute ago, I think we're pretty confident that we have the productivity and overhead programs in place that we should be able to stick to the margin guidance we gave before.

Okay. Then second question, Irene, you spent some time talking to investors over the last couple of months, and there's certainly been a lot of discussion, debate about the balance between spending in emerging markets, what the right growth rates are, and pacing of cost savings. Could you just talk a bit about your experience with that. Albeit, you're lowering organic growth for next year, how do you feel about those investments and the opportunities, and if anything has changed in your mind in terms of what the opportunities are?

Yes, I think the meetings that we had with our investors were very productive, and they gave us a lot of insight how they're thinking about their business and gave us an opportunity to talk about how we see the business. If I step back, I think there were five take-aways. I think first and foremost, there was universal agreement among all of our investors that we have created a very advantaged portfolio that's got an incredible collection of brands in very fast-growing categories with a nice emerging markets footprint. I think that was a fairly universal sentiment. There's no question, I'd say second, all investors believe that we have significant margin upside, as we do. We've laid out very aggressive plans as you had seen, particularly in our developed markets in North America. As you know, we set a goal of 500 basis point improvement over the next three years which should get us to peer averages, and similarly in Europe we set a goal of about 250 basis points improvement. That also will bring us actually to the high end of our peers in Europe. We did at the same time hear many investors tell us that they want to make sure that we continue to invest in the emerging markets. They all see the same opportunities there that we do. The question really is just to make sure we are continuing to make those foundational investments, but we're doing it prudently and at the appropriate pace relative to market conditions to make sure that we're getting a good return.

I think the third point that you referenced is that a number of investors told us that they thought that our topline targets might be too aggressive, especially in the current environment with as we have seen our categories slowing. We agree that when we set the targets back in September, it was predicated on our categories growing about 6%. When we set a topline target of 5% to 7%, that was a reasonable expectation. The reality is, as we have shown you, those categories have slowed from 6% last year to 5% in the first half and now to less than 4%. We clearly have to accommodate that in thinking about what our targets are. I believe we have done that as we've given you the outlook as we think about 2014.

Fourth, I think there's certainly some frustration about our ability to deliver expectations. I'll say again, we've got operations in nearly 80 countries including some very volatile emerging markets. We're clearly going to have challenges from time to time, and we're not going to always deliver things in a straight line. As we did with Brazil and Russia and now with China, we will get on it. We'll fix it, and we'll make it better. The key though is to make sure that we have the right targets out there so that we're able to make the appropriate tradeoffs. Without a doubt, I think all investors recognize that our fundamental business is really quite healthy, and I think you see that again today in the results that we've reported.

Finally, I'd say we got very universal support and gratitude for our $6 billion share repurchase program. That was quite well received. I think it was a very productive set of meetings. I think we learned a lot. I think it was a good opportunity for us to continue to talk about how we see the future and why we are as confident about where things are going as we are.

Thanks for the insights, Irene.

Andrew Lazar, Barclays.

Good afternoon. Irene, you talked a little about the need to improve upon some of the early warning capabilities that you have in some of these more volatile emerging markets. I know that last year following the issues you saw in Brazil and Russia, I think you talked about some of this back then. Some of that wasn't seen as early as maybe you would have liked. I guess I was hopeful that we wouldn't see something come a little bit out of the blue in a big emerging market again. China, it seems like, was not something that at least you were talking about or more recently whether it be on the second quarter call or in presentations you've done since then. I'm trying to get a sense, did that also come out of the blue where you didn't have enough early warning? And if not, why? Following Brazil and Russia, why weren't there better controls from that perspective on China?

Let me answer the question in two parts, Andrew. Without a doubt, as I've mentioned, we've taken a number of steps as we continue to evolve our thinking and our learning with the portfolio as it now exists. We went from a Company that was almost entirely in developed markets to one that has a very significant emerging market footprint. As we've said, these markets have different characteristics than some of our more mature markets.

In the case of China, as we saw the biscuit category slowing as I mentioned, we could see it was going from plus 18% last year to plus 3% in the first quarter. We took a number of steps to try to address the slowdown, and frankly in the second quarter, we actually saw some results. We saw second quarter the biscuit business was up 9.5% and through July, frankly it was up about 4%. We were feeling pretty good that we were able to offset that. We had very strong share performance in a number of our categories, and so we really felt pretty comfortable that it could be offset. The speed with which that plus 9.5% in Q2 became plus 2% in Q3 was really the issue that we're wrestling with, and again, the good news is we know it. We took actions. We saw it. We took actions starting in August to start to pull back a little bit. As I said in my remarks, when you have inventory planned to be at a double-digit growth rate to support a double-digit growth rate and it plummets down to plus 2%, it leaves us in a difficult situation. We've got over 1,000 distributors in China and there's a fair amount of inventory at each level of the system. That's why it's just going to take us a little bit of time to clean it up. Net-net, we understood that the category had slowed. We thought we had some actions that would help to stem that and to offset that, and they simply didn't work as well as we had thought.

More broadly, as I've said before, we have a number of new processes in place. We've created dashboards for all of our key businesses that leverage our SAP instance and allows us to give our local leaders and us at headquarters the right data to be able to see the business in real time. For example, we're now able to see daily sales in China which is a critical piece in our ability to continue to monitor how things are doing. We have much better inventory visibility in our distribution networks. We are continuing to train our leaders. For some of them, this is the first time these categories have slowed down on their watch. They're learning how to plan a little bit more, in a more disciplined way. They're now doing 24 month rolling forecasts which allows us to have better visibility out into the future. We're doing marketing ROI analyses much more frequently.

In China, for example, we used to look at marketing ROI once a year. In the United States and in Europe, that's a fine idea because it doesn't change. In an exclusively growing market like China, it changes quite rapidly, so our ability to get that feedback quickly and make sure that we're getting the good return for our marketing investments is really essential to us. We're helping to develop capabilities in strategic pricing. In so many of these emerging markets, coinage, price size architecture is the name of the game, particularly as we go into these traditional trade outlets. We're doing a lot of work to make sure that our leaders have that capability and that our factories have that ability to make products that can deliver on those price points.

We've done a lot of work in a number of our markets on what we call perfect storm, which is just making sure that the point of buying execution is as good as the marketing programming. For example in markets like Russia, we used to have what we call a strike rate which is how many times you get an order for your visit of about 30%. It's now up close to 80%, and we've got much better compliance to make sure that the right items are in distribution. We've taken a number of steps to improve the processes, the capabilities, and in a couple of cases, we've made some leadership changes to make sure that we've got the right managers in place. Clearly, the leaders that took a business from $50 million to $500 million may not be the same leaders that take it from $500 million to $5 billion. Slowly but surely, we're making sure that we have in each of our key growth markets, we have the right leadership to accomplish that. Net-net, we've taken a number of steps, and that's why I feel increasingly more comfortable that we will be able to continue to monitor this and that we have the early warning capabilities in place. In China, we took a number of actions to try to address that situation, and they just didn't work the way we had hoped.

Got it. Well, thank you for all that detail. That's helpful. One quick one. In the global category slowdown that you talked about, from 6.3% to 3.8% year-to-date, was the primary change in that volume or price? Or was it a mix of both?

It's a mix of both, Andrew. It's fairly broad. It actually goes across all the regions. It's not just emerging markets. Obviously, pricing, when it relates to coffee and a number of the other commodities, have been fairly stable, but the vol mix portion of it has also been slow.

Thank you very much.

Chris Growe, Stifel.

I just have a question for you, first of all, on the China business. You mentioned that that was a factor and, obviously in this quarter, was the reduction in your growth rate in revenue for the Asia-Pacific region. It looks like it's going to bounce right back though in Q4. If I heard you correctly, Dave, you said it was actually going to be a drag on fourth quarter revenue for the Asia-Pacific region, but in the slides it indicated it was going to be up nicely in the fourth quarter. I'm just trying to put those two statements together, if I could.

No, it's not going to bounce back in Q4. In fact, our Asia-Pacific region will be down low-single digits in Q4, mostly driven by China, and it'll be biscuits and mostly inventory. We started taking inventory out of the system really in September when we saw what was coming through in the market and share data. That's playing its way through and because there's up to four different levels of distributors to get through before you get to the consumer in some parts of China, it's going to take us through the end of the year to do that. It's a double-digit decline in China this quarter. It's going to be a double-digit decline again in quarter 4. That's the biggest part of the reason why we've called our quarter 4 down.

Okay. Just a question for you, as you look ahead and you have a little more modest revenue growth for 2014, is it just the persistence of slower category growth that you expect? I think you still expect to gain share. Is it just that basis for the softer revenue growth in 2014 that you expect?

Yes, what we have done is we've said given that the global categories are growing slightly under 4% today, we felt it was prudent to give you an eye to how we're thinking about going forward next year. The guidance we've given of 4% to 5% is assuming we'll continue to drive for share growth, similar to what we've done this year. We will drive for share growth everywhere. That will be one of two things. It will either drive upside versus the guidance we've given, or if we have a disruption somewhere, an unexpected event in a place like Egypt or Venezuela, it will help drive an offset. I think by giving you guidance that's more in less in line with the category growth as we see it today, I think it gives us room to hopefully have upside, but at worst at least be able to offset the unexpected.

Do you have a recommended tax rate then for the year now, where you'd expect the tax rate to come in?

Yes, I think it's obviously very low year-to-date, about 5%. I think it's in line pretty much with what we said last time, about 10% to 13%, maybe a little bit lower, but in the 10% to 13% range. Quarter 4, I would expect our tax rate to be in line with what we said it will be over the next 3 to 5 years, 20% plus or minus a couple of points. I think we're not expecting any big discrete events in quarter 4.

Okay. That sounds great. Thank you.

Ken Zaslow, BMO Capital Markets.

Good evening, everyone. Just thinking about a big picture question, do you think Mondelez should operate in all 80 countries? Or are they some non-core regions that might be worthwhile to retrench from, and reallocate your time and capital to other more core regions?

I think we've done a pretty good job, Ken, of focusing on the countries that matter most. It starts with the BRIC countries. That's the biggest piece today of the 40% of revenue that comes from the emerging markets. We have begun to invest in what we've talked about as our next wave markets, which are primarily the Middle East and Africa. Beyond that, we're not planting flags in lots of different countries. I made the point simply to give you a sense that there's always going to be something happening. It is our job however to manage that reality and to ensure that the guidance that we're giving to you, that we can deliver the guidance we're giving to you.

My second question, you talk a lot about the North American, European margin opportunity. Can you talk about the opportunities to restore Latin American margins to mid-teen levels? Your sales growth has been good. Your margins have come in. What opportunities do you have to actually re-establish the Latin American margins back to more historical levels?

I think historical levels, they were relatively high last year because we had a number of one-time items last year. We had insurance proceeds. We had some asset sales. The Latin American margins last year were actually unusually high. Having said that, I would say that year-to-date, they haven't been the greatest because as I talked on the call, on the gross margin line our gross margins are down. Part of that, it's fairly common across the emerging markets, but as currencies have devalued, the cost of imported, raw, and packaging materials into those countries goes up. In a lot of these markets it's very difficult to hedge that, so it hits the P&L almost immediately. There's a lag between that and when the pricing goes. I think you'll see the pricing come through. You'll see the gross margins improve, not specifically in Latin America. I think it will be across all the emerging markets as we go forward into next year.

What interest expense should we use for the year? That's my last question. Thank you.

We have a coupon rate of about 6% right now, but the interest expense on the P&L is down around 5.3% in the quarter, which is probably as good a rate as any right now. The reason for the gap between the coupon and the 5.3% is because as we've been paying off debt we've put more of our debt into commercial paper and short-term. Obviously, those cost less, so it's about 5.3% in the quarter. That's probably a reasonable number for the year.

Great. Thank you very much.

Eric Katzman, Deutsche Bank.

Hi. Good evening. Quick one, I don't know if the you said it, but do you have guidance on tax rate for 2014? It seems to be a big hurdle.

It's probably going to be a big hurdle. We haven't given guidance for 2014. What we have said in the past is that this year's unusually low. For the next 3 to 5 years after this, we would expect our tax rate to be 20%, plus or minus a couple of points. Eventually over the very long term, it will probably go up to the 25% range. I think for the next 3 to 5 years it's going to be 20%, plus or minus a couple of points. We haven't given anything specific for 2014.

Okay. Second question, a lot of companies have been talking about India actually slowing down, and yet you posted very good results there. Does some of your lower revenue guidance outlook assume that India slows, aside from the China issue?

Actually, we have high hopes for India. In fact, our challenge is that our growth in India has been constrained because we were out of chocolate capacity. We're now putting that capacity on-stream, and we should continue to see growth in line with the category which has been growing in the high-double digit rate. Our outlook on India remains quite bullish, and I think we have the programs in place. We've made some significant investments in route to market as well as in capacity. We're just starting up a greenfield, and we just broke ground on the greenfield and so anyway, our outlook is quite bullish.

Okay.

Chocolate are still up well over 20%, so chocolate is growing well. There are some other categories that for us are not nearly as important in India that are slowing down, but chocolate continues to be really robust.

Okay. Irene, if I could ask you just a last, more philosophical, longer term question. The emerging market investments, I think on the slides that you gave over the summer, I don't have them in front of me because I'm on the road, in 2014 you were going to lower those EM investments to 10 basis points from this year which were 50 to 70. It seems like in the race for market share out there, when you look at some of the very successful companies, whether they're private of public like Wrigley or Coke or other names, when EM markets have slowed down, that's when those companies have put their pedal to the metal. That's when they've really pushed. Even though you've got pressure from all kinds of sources these days, why wouldn't you take the opportunity in the slower EM to actually really invest heavily and try to gain share, so if the categories do come back, you have that much more land underneath your feet?

Yes. We agree absolutely with your premise, Eric. As you know, we accelerated some of our investments in emerging markets this year. We feel very good about the return that we've gotten, particularly in markets like Brazil, Russia, and India. We will continue to do that, but because we had accelerated those investments what we said was we didn't see the need to invest again next year incrementally. For that reason, that's the 10 bips that you remember. We just said we made the investments this year, and in fact, that's playing through in our margins. You'll see that we don't need to invest incrementally, we don't believe, next year while we play through and ensure that we get a good return on the sales capability and route to market investments that we made this year. We believe very strongly as you do that the opportunity to invest prudently in these markets, the time is now, and we will continue to do that.

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

Robert Moskow, Credit Suisse.

Hi. Thank you. When I visited your team out in China, again I would echo what Andrew Lazar said, that the message again there was that yes, the category had slowed for biscuits, but Mondelez expected to outgrow its category. Maybe it's just at that point you just had to keep with the corporate line, but it does raise the question about these early warning systems and how much your management team was communicating internally. That's more of a statement. But I was impressed by what I saw from the infrastructure in China. I thought that you were thinking of launching chocolate in China because you had a very good hot zone distribution capability building up with gum, and it seemed to be setting the stage. Does your experience this year slow that down in terms of the timing of when you might launch chocolate?

As you might imagine, Rob, we're not talking about any things that we haven't launched before we launch them. Clearly, there are many white space opportunities, and we will pick them one and a time as we feel that the organization is ready to handle them. At this moment, I feel that the act of making sure that we get the biscuit momentum back together to continue to fuel the momentum on gum which we just launched a year ago should be and is the main focus of our China team. That's what they're doing. There will be continued white space launches over time, and as we do them we'll tell you what we've done.

Can I ask a follow-up on gum in China? I imagine it was negative in the quarter. When do you expect gum to turn positive in China, Irene?

Gum in China has been a phenomenal success. It's actually about $100 million business in about a year, so we're feeling quite comfortable with the progress on gum in China. All that hot zone activity that you saw is a key driver of that success. The gum category in China is growing mid-double digit rates, and in fact, it's one of the reasons we launched there. We feel quite good about the performance there. Frankly, gum in all of our emerging markets continues to grow for the most part. The issue has been in our developed markets. The good news is we're starting to see some good traction on share improvement as we've put our play book in place.

Despite the tough comp to Stride's year-ago launch in the third quarter, you were still up versus that tough comp a year ago?

That's correct.

Okay. Good. Thank you.

Matthew Grainger, Morgan Stanley.

Hi. Good evening, everyone. In developed markets, you've talked about supply chain cost reduction opportunities on both the manufacturing side, and also in terms of removing some of the SKU complexity from the business. I understand what the hurdles are, the uncertainty around timing and addressing some of the less efficient manufacturing capacity. If you wanted to more aggressively go after margin improvement in North America and Europe, is there an opportunity to accelerate the portfolio simplification aspect of the plan?

The plan we've laid out so far is 500 basis points of margin improvement in North America, and as you've talked about, the supply chain is a key part of that. We've started construction of the plant in Mexico. That's a key part of it. I think simplifying the portfolio is a key part of that. We've already accelerated by about a year the speed at which we'll get the 500 basis points. We had originally said it would take us to 2017. We've now brought it back to 2016. The 500 basis points though is programs we have in our sights. We have milestones and action plans and accountabilities against that. We know how to do it. If there's ways to accelerate beyond that, we're continuing to look at those, and obviously we'd pursue those.

What we've given is our 500 margin point objective is what we know we can achieve, and it is based on some of the stuff we talked to you earlier. We're clearly happy to accelerate it. We've already done it once. If we could do it again, we would. If we could go further, we would, and we'll continue to look for those kinds of opportunities.

Okay. Thanks, Dave. Irene, I just wanted to get your thoughts on category growth dynamics for biscuits within the US. Obviously, Mondelez has continued to do extremely well, but I think we're starting to see the categories themselves slow a bit along with the rest of the center of the store. Do you see low-single digit growth in those categories as the new normal for a while? Or have you observed anything in terms of the phasing those innovation or merchandising across the competitive set that you think is weighing on the category growth?

That category growth actually has been quite solid relative to many other categories in North America and in the US. I've been very pleased with the share performance that our team has delivered, and we see continued opportunity as we leverage the strength of our brands, and we leverage the strong DSD selling organization that we have. We see continued opportunity to pick up share. That's been a business that's grown. Our biscuit business in the US has grown over 5%. I think this is the ninth quarter that it's grown over 5%, and we feel quite good about the outlook there. The category has been, as you rightly say, in the mid-single digit range, but we've been able to grow in excess of that as a result of our strong brands and our strong programming and our strong execution.

Okay. Thank you again.

Alexia Howard, Sanford Bernstein.

Good evening, everyone. Can I ask another question on the margin trajectory? Not just in North America, but you've obviously got some quite big goals in place for margin expansion over the next few years. As you think about the levers that are really going to get you from here to there, could you tell us a bit more about what the biggest ones are? Is it mostly cost saving? Are you looking at cost of goods sold or input costs moderating a bit from here? Is there positive mix from innovation worked in? Could you give us some flavor of which are going to be the drivers that will really help you out there? Thank you.

I guess I'll start with, on the commodity and ForEx side, we're really only looking to price to recover commodity and ForEx. We won't be looking to increase margins as part of our strategy to get there. If there's opportunities, clearly we'll take those. But our assumption is we price to recover commodity and ForEx. That's kind of a wash.

It's really driven by a combination of mix, as you say. Things like convenient coffee has higher margins. The Power Brands have higher margins, so we'll continue to drive that, and we can control that. It is overheads. Overheads have been the biggest source of our margin improvement over the last three years. We've driven about a 3-point margin improvement between 2009 and 2012. That was entirely driven by overheads. I think overheads, just by virtue of how quickly you can do those versus supply chain programs, will continue to be a key driver of our margin progress through 2014 and into 2015.

The third piece is the supply chain savings and that's the program Daniel Myers talked about at the back-to-school conference. We have a pretty comprehensive plan on what is our long-term vision and how do we stage ourselves towards that in both Europe and North America. That's a key part of getting there as well, so I remind you the biggest gap between our margins and our peers' margins is in gross margin. It isn't actually in overheads. Overheads is always an opportunity. We'll continue to drive overheads, and particularly given our size, we think there's more opportunity there and we'll go after that. The gap versus our peers is really in gross margin. That's what Daniel talked about in September. It's everything you mentioned, frankly, with the exception of pricing. Pricing is really just to cover commodities and ForEx.

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

Ken Goldman, JPMorgan.

Irene, I'm hearing a theme today that the breadth and complexity of the business sometimes either makes it harder to turn a problem around or perhaps has some execution challenges at times. I guess a reason for the split-up was to minimize some of that complexity. If it's still a bit of a problem, at what point does it perhaps indicate you're considering making things even simpler? I'm thinking specifically whether you might more strongly consider divesting your coffee and grocery businesses now which frankly are holding back your topline anyway at this point.

I'm not going to comment on portfolio actions. I want to clarify my comment about the fact that we are in 80 countries. It was simply to make a point that there are different things going on. As I said, though, it's our job to manage that, and particularly as emerging markets become and are a bigger part of our portfolio, they're volatile. They don't always deliver their results in a straight line. Egypt went from growing 29% in the second quarter to minus 3% in the third quarter. We just need to have a robust enough target to make sure that we can accommodate that. Again, that's why we gave you our perspective as we look forward because our categories continue to grow in excess of other food categories, but they are growing at a slower rate.

This is not about complexity. It is about the fact that it's a robust set of countries and categories. As a result of the split, as you point out, it's quite focused. We feel quite comfortable that we have the tools in place to be able to manage that complexity. It is a different set of countries that are driving our performance today than used to be driving our performance as Kraft Foods. We need to accommodate that, and that's what I've talked about.

In coffee, why does your EBITDA not benefit from lower costs? Smuckers' does for example. Maybe the answer is that Europe is different than the US, but I thought you might pass back to your customers less than 100% of your deflation?

Yes, it is different in the US, and there's a different dynamic there. In most of Europe, there are many competitors in every country, all of which work to keep the market fairly disciplined. We don't tend to lose margin on the way up. We don't tend to gain margin on the way down. It does tend to be a pass-through both directions, and our customers keep us honest, and our competitors keep us honest. That's just the dynamic in Europe. I'll admit, when I started in Europe 20 years ago it was different. It was actually very much like the US market, but it's a fairly competitive marketplace. You don't get windfall profits up or down. You tend to pass it through and manage the margins at a fairly constant dollar level.

Got it. Thank you.

David Driscoll, Citi.

Great. Thank you. Good evening. Two little tiny ones and then unfortunately a China question. The two little tiny ones, inflation in the quarter, what was gross inflation in the quarter? What do you expect it to be for the year? Then the same thing for productivity, I think you said productivity in the quarter was 3.5 points. What's productivity on the year?

I think on the productivity, we've said it was about 3% net. It was actually about double that on a gross level. It's certainly the highest we've done. We have said that on the year, we would actually expect the average for the year to be in the 3% to 5% range is was we said in September. The first half was only about 1.5%. That's productivity.

Inflation, it varies dramatically from the 40%, 50% in places like Venezuela, to virtually none in Europe. I guess on average, it's probably in the 3% to 5% range, but I'll be honest, I don't add that up on a very frequent basis.

Okay. Because of the strange mix of commodities, coffee in Europe and then the inflation pressures in South America?

Yes. And currency has a huge impact.

I appreciate the complexity there. On China, GDP growth in the second quarter and the third quarter have been relatively consistent for the country at 7.5% and 7.8%. Gum is growing terrific, mid-double digits, I think is what you said, Irene. None of these facts seem to help understand why the China biscuit category slowed to just 2%. If I just try to get at this a little bit more, what's your team saying? What's the consumer insight as to why? Is there a Chinese gifting issue? Sometimes we hear about the quirks on gifting. Maybe bigger picture, really trying to pull the insight as to why it slowed down, I've got to believe that that's what's driving your comments, expecting that the China business, the biscuit operations, will continue to be slow into 2014. I'd really just like to understand a little bit more as to the consumer insight.

The GDP facts are correct, and that's why we really expected that we could see a recovery. It is a reality, though, that we have seen the key gifting occasions under-perform, relative to the year-ago comp. We saw a slow Chinese New Year. We saw a slow Autumn Festival. There's no question that some of the government policies are impacting gifting in particular, and biscuits are a big gifting item as you said. There's no question that there is some impact that these government policies is having on our business. Our job here is to figure out, therefore, how do we overcome that. We've taken a number of steps to improve our pricing and sizing. We're looking at opportunities to make sure that our impacted point of buying is where we need it to be. There's a number of actions that we're taking that we believe can help to offset it, and we'll get the momentum back. But in the short term, the fact is we've got more inventory out there as a result of the fairly precipitous slowdown in our biscuit category. We just need some time to work that through, and that'll probably take us through the end of the year.

I really appreciate the comments. Thank you.

All right. Thank you very much. We're out of time right now. Nick and I will be here to answer any questions later this evening, and of course, through the rest of the week. Thank you.

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