億滋國際 (MDLZ) 2013 Q4 法說會逐字稿

Good day, and welcome to Mondelez International fourth quarter 2013 year end earnings conference call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. Dexter Congbalay, Vice President of 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 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. As you know, 2013 was our first full year as a global snacking Company. Frankly, we're very disappointed that our performance was below what we and our shareholders originally expected. It turned out to be quite a challenging year as we faced slower category growth and volatility in some of our key markets.

In the context of this macroeconomic environment, we delivered solid results. For the full year, revenue increased 3.9%, in line with the overall growth of our categories. Our revenue was high quality, driven by strong volume mix. In fact, our volume mix was the best in our industry. Our share performance was also strong with about 70% of our revenues gaining or holding share. In emerging markets, we grew 9% despite the fact that they were disproportionately affected by the category slowdown.

As we enter 2014, four of our five regions have strong underlying momentum, with Asia-Pacific being the lone outlier. As you know, we've already taken a number of steps to regain momentum in Asia including strengthening our management teams at the end regional level and in China, India, and Australia. We've also improved our monitoring systems of leading indicators like trade stocks and shored up our analytical capabilities. These changes will help us detect potential issues much earlier and make us a stronger operating Company.

Turning to profitability, we delivered adjusted OI margin of 12%, in line with our guidance. Our margin improved sequentially each quarter last year exiting with Q4 margins at nearly 14%. Finally, our adjusted EPS was $1.51. That's up 13.5% on a constant currency basis, consistent with the double-digit guidance we gave throughout the year. Our favorable tax rate allowed us to accelerate our growth investments in emerging markets while still delivering strong double-digit growth on the bottom line.

Before I turn the call over to Dave, let me give a few more details on our revenue and share performance. Vol mix was the primary driver of our growth with all of our regions posting gains. Overall, vol mix contributed 3.4 percentage points to our top line. Pricing was only a modest contributor, mainly due to the impact from coffee as we passed through lower green costs to our customers. In the final analysis, coffee tempered organic revenue growth by 80 basis points for the year and 70 basis points in the quarter.

As I mentioned earlier, our emerging markets performed well, up nearly 9%. Our BRIC markets grew about 10%. Brazil, Russia, and India each posted double-digit growth, while China was up low-single digits reflecting the significant slow down in their biscuit category. Our developed markets increased 0.8%, with North America and Europe both posting solid growth.

Our power brands, which represent about 60% of our total revenue, grew 6.5%. They continue to fuel both our growth and our margins as we distort our spending to these brands. Cadbury Dairy Milk, Lacta, Oreo, belVita, TUC, Club Social, and Barni all posted double-digit gains.

From a category perspective, in aggregate we grew in line with our categories. We used our strong share performance to offset volatility in markets such as China, Egypt, and Southeast Asia. The rollout of proven innovation platforms into new markets continues to be a key driver of our category growth. Biscuits and chocolate had a terrific year, and despite continuing challenges in gum, our snacks revenue was up nearly 5%.

Let's take a closer look at each category. Biscuits continued to perform well. Revenue was up 7%, clearly outpacing category growth of 5.5%, and we grew or held share in 70% of our revenue. Oreo led the way, up double digits, with annual revenue now approaching $2.5 billion. BelVita, which anchors our sustaining energy platform, continued to grow rapidly, up 25%. BelVita now generates revenue of over $0.5 billion, more than doubling in size since 2010.

Chocolate revenue growth was also strong, up nearly 6%, and share performance was outstanding with 80% of revenues gaining or holding share. Cadbury Dairy Milk had a stellar year growing low-double digits overall, including more than 20% in India. Milka was up nearly 10%, driven by strong growth in emerging markets.

Gum remains the only soft spot in our snacks portfolio. Gum and candy revenue declined 1.5% as the mid-single digit decrease in gum more than offset the low-single digit increase in candy. Despite continuing weakness, we're seeing improvement in gum, as we implement a number of initiatives to rejuvenate the category. Over half of our revenues gained or held share last year. In the fourth quarter, although gum revenue in developed markets was down mid-single digits, that's encouraging progress from the mid-teens decline we saw earlier in the year.

Outside of snacks, beverages revenue increased about 1%. Coffee decreased low-single digits. That was in line with the category and a clear reflection of the pricing environment driven by lower green costs. The pass-through was especially pronounced in roast and ground coffee which makes up roughly 40% of our business.

From a share standpoint, two-thirds of our revenue gained or held share, led by on demand and soluble coffee. Tassimo in particular continued to show strong growth with revenue increasing 30% to over $450 million. That's on top of a gain of more than 20% in 2012. Powdered of beverages, primarily our billion dollar Tang brand, had another robust year with high-single digit growth and strong market shares. Finally, the remainder of our portfolio, cheese and grocery, grew 1.3%.

For the full year, we delivered high quality revenue growth, in line with recent category trends, strong share performance, and sequentially improving margins consisted with our guidance. Looking ahead, we're committed to improving results in 2014 and beyond. We remain focused on increasing efficiency and aggressively reducing costs, both in our supply chain and in overheads. Although near term economic conditions will remain challenging, the plans we're executing give us great confidence in our potential to significantly expand margins and deliver strong top line growth. With that, let me now hand it over to Dave.

Thanks, Irene. 2013 was indeed a challenging year, and no more so than in our Asia-Pacific region. Organic revenue was up only slightly for the year, 0.6%. Emerging markets were up mid-single digits offsetting a mid-single digit decline in developed markets.

Revenues were notably weak in the second half of the year, including a 6% decrease in the fourth quarter. This was primarily due to the issues in China biscuits that we discussed in our third-quarter earnings call. As expected despite strong growth in gum, China was down double digits in Q4, as our distributors reduced excess biscuit inventory. While the impact of the destocking is that behind us, we expected biscuits growth in China will continue to be soft for the first half of the year, consistent with recent category trends, and as we lap a strong year-ago revenue comparisons.

In the fourth quarter, Asia-Pacific's revenue growth was also tempered by aggressive promotional spending in our developed markets, especially in Australia and New Zealand. This was a key factor driving our pricing down 4.4 percentage points in the quarter. On the positive side, India continue to perform well, up low teens for the year driven by strong chocolate growth. Our share performance across the region was also strong, with over 60% of our revenues either gaining or holding share, and power brands significantly outperformed the rest of the portfolio, up 6.5%.

Now let's turn to the other regions. As Irene mentioned earlier, all of our four other regions exited the year with good underlying momentum and solid results. In EMEA, organic revenue grew 9.2%, driven by double-digit gains in vol mix. Pricing was a bit lower, down 1.8 percentage points. This mostly reflects lower prices in coffee, particularly in Eastern Europe as well as chocolate in Russia. Importantly, we delivered growth across the region, and in almost all of our categories, even with the pricing pressures in coffee and chocolate.

Russia was up double digits, led by strong vol mix across much of its portfolio. These gains were due in part to the incremental A&C and route-to-market investments that we made earlier in the year. Other stand-out performers included the Gulf States, West Africa and Egypt. Market share across the region was very strong with over three-quarters of revenue gaining or holding share, and power brands were up 14%, as Cadbury Dairy Milk, Milka, Barni, Jacobs, and Tang all posted double-digit gains.

Turning to Latin America, organic revenue grew 12.3% for the year, almost entirely due to pricing and the hyperinflationary economies in Venezuela and Argentina. Each of these businesses has revenues of about $800 million. After our $2 billion Brazilian business, this makes them our second and third largest markets in Latin America. Our teams in Venezuela and Argentina have done a good job responding to the challenging economic conditions all year. However, given each market's volatility, we continue to have a cautious outlook.

In Brazil, despite softening category trends as the year progressed, revenue was up double digits with a balanced contributions from both vol mix and pricing. Biscuits, chocolate, and candy each grew double digits while growth in powdered beverages was up high-single digits. Like Russia, the incremental investments we made in A&C and route-to-market expansion began to pay off, especially in the fast growing North, Northeast region of the country.

Market share performance in Latin America was mixed with a little less than half of our revenues gaining or holding share. Overall, shares of our power brands fared well, especially in Brazil. However, in markets like Argentina and Venezuela the effects of high inflation have led some consumers to trade down to cheaper brands. Finally, power brands were up 13% with Lacta, Oreo, Club Social, Halls, and belVita all delivering double-digit growth.

In Europe, organic revenue was up 0.8%. Vol mix contributed over 3 points of growth on the year, while pricing declined nearly 2.5 points mostly due to coffee. For the full year as well is in Q4, lower coffee revenue tempered the region's growth by about 2 percentage points.

Looking at performance by category, chocolate revenue was up mid-single digits, driven almost entirely by vol mix. Growth across the region was broad based with double-digit growth in Central Europe. Milka and Cadbury Dairy Milk each delivered strong growth, while innovation platform such as Marvellous Creations and Bubbly made strong contribution.

Biscuits were also up mid-single digits with most of the gains coming from vol mix. Oreo, belVita, and our Chocobakery platform drove much of the growth. Coffee declined mid-single digits due to lower pricing, more than offsetting solid vol mix. Our convenience coffee platforms, notably Tassimo and Millicano, continued to perform strongly.

Gum and candy revenues were down mid-single digits entirely due to gum. However, gum revenue in the fourth quarter was only down mid-single digits, a significant improvement from earlier in the year. Candy was up modestly, driven by strength in Cadbury Eclairs and Milka toffees. Europe's market share performance remained strong, as about two-thirds of revenue gained or held share, and our power brands grew 4% with double-digit gains in Oreo, Cadbury Dairy Milk, Tassimo, and Chocobakery.

Finally, in North America organic revenue increased 2.9%. Biscuits delivered another outstanding year. Revenue was up more than 5% largely through vol mix. Both Oreo and Chips Ahoy grew double digits, driven by strong flavor and packaging innovations, highly successful marketing campaigns, and increased in-store displays. BelVita also had an excellent year, nearly doubling revenues and crossing the $100 million threshold.

Candy had a strong year behind double-digit gains of Sour Patch Kids and Swedish Fish, while Halls grew mid-single digits. In gum, revenue declined in line with the category, down mid-single digits in the fourth quarter. That's an improvement from the first nine months of the year, as we began to benefit from the impact of the shelf reset. Overall, market share performance was outstanding with over 85% of the region's revenue gaining or holding share.

Turning to profits, adjusted gross margin was essentially flat for the year. But this masked a significant improvement in our cost structure. Supported by the supply chain initiatives we described last September, we generated gross productivity of well over 4%, and record net productivity of 2.5%. These savings however were offset by commodity inflation, especially in emerging markets such as India and Brazil.

As local currencies weakened, the cost of purchasing raw materials traded in dollars, euros, or sterling spiked. While we usually have good commodity coverage, it's significantly more difficult to cover the ForEx impacts, so it hit our cost of goods quickly. Of course, we fully expect to offset commodity inflation over time, including the impact of currency, but we are unable to price quickly enough to protect gross margins in the back half of the year. Once recent price increases are fully implemented the benefits from net productivity will flow through to improved gross margins.

Adjusted OI margin was 12% on the year, and 13.9% on the quarter consistent with our guidance. The full year result was essentially flat compared to the prior year, including a 10-basis point impact from the devaluation of the bolivar, and a 30-basis point impact related to our decision to accelerate some investments in emerging markets. We offset much of these impacts through overhead leverage in developed markets. In Europe, margins rose 60 basis points to 13.6%, and in North America, margins increased 110 basis points to 14.9%. Clearly, we're already making progress towards our long-term margin goals for these regions.

Moving on to earnings per share, adjusted EPS for the year was $1.51. Currency was a negative $0.09 headwind, including $0.03 from the write-down of the net monetary assets related to the devaluation of the bolivar. On a constant currency basis, adjusted EPS grew 13.5%. Operations were favorable $0.04 on the year, despite the investments we made in emerging markets. Much of the remaining increase in adjusted EPS was due to tax favorability related to discrete items.

However, as we progress through the year end closing process, we determined that some of these items should have been recorded in prior years. As we described in our earnings release, we've increased our 2013 taxes to reflect this revision resulting in a $0.02 reduction in adjusted EPS. We've also made corresponding reductions to taxes for the years 2009 to 2012, and adjusted retained earnings for any items prior to 2009. All of these items are non-cash.

Even with this revision, as well as an unusually high tax rate in Q4 due to a recent change in French law, our 2013 adjusted effective tax rate of around 15% was low, due to many of the discrete items we discussed during the year. In 2014, we continue to expect our tax rate to be about 20%, in line with our mid-term guidance.

Turning to cash, free cash flow was $2.3 billion after excluding the impact of the Starbucks arbitration. This is well above the midpoint of our previous guidance of $3 billion for 2013 and 2014 combined. Improvement in working capital was a key driver of the favorability. We cut our cash conversion cycle by 14 days, or nearly 50% to finish 2013 at 15 days. Cash flow was also aided by delays in capital and restructuring projects which we expect to catch up in 2014. As a result, we're updating our expectations for the combined total free cash flow for 2013 and 2014 to at least $3.7 billion. This increase from the original target reflects the phasing of CapEx spending and stronger working capital performance.

Turning to our 2014 outlook, our goal is to grow our top line at or above the growth of our categories. In 2014, we anticipate organic net revenue growth will be approximately 4%. We expect adjusted OI to grow low-double digits on a constant currency basis. The combination of top and bottom line growth will adjust in an adjusted OI margin in the high 12% range. In terms of pacing, we expect year-over-year margin improvement each quarter. We continue to evaluate opportunities in both overhead and supply chain to accelerate margin expansion, and we'll update you if those opportunities firm up.

Finally, we expect to deliver adjusted EPS of $1.73 to $1.78. As we did last year, we're providing this guidance on a constant currency basis. Based on spot rates as of January 31, currency would be a $0.07 headwind to our current range. You can see the details of the spot rates used in the appendix of this presentation. We will continue to give updates on currencies each quarter based on the latest spot rates.

Let's take a closer look at our organic revenue and adjusted EPS guidance. Moving forward, we will frame our organic growth opportunity in relation to overall category performance. As we outlined in the third quarter and again today, our categories have slowed across the board. In 2013, our categories grew in aggregate about 3.8% with fourth quarter growth at about 3.2%. While that fourth quarter deceleration is not indicative of our 2014 expectations, it does show continuing volatility in the marketplace. Based on current trends, we expect the category growth rate to be about 4% in 2014. We'll use market share gains to offset potential volatility and provide upside.

Before we move on to EPS, I'd like to highlight a couple of pacing considerations on our revenue growth this year. We expect the first quarter to grow between 2% and 3% due to a number of factors. Easter is coming three weeks later in 2014. As a result, some holiday related shipments will shift from the first quarter last year to the second quarter this year.

We expect coffee prices will be a headwind in Q1, and likely for the first half as we compare it to 2013 periods when prices were still coming down. Obviously, the recent spike in coffee prices, if sustained, could change our full year outlook, but it won't affect Q1. In China, we expect the biscuit category will reflect the same weakness it did in 2013. While the impact of the destock is behind us, in the near-term China biscuits will not be a significant source of growth.

Lastly, we're increasing prices across most geographies this quarter, in line with our strategy to fully cover commodity and ForEx impacts. In the near term, we may face temporary disruptions with customers and consumers as the market adapts to the new prices. We expect this impact will be most pronounced in Q1.

Turning to EPS, we expect to deliver adjusted EPS of $1.73 to $1.78, up double digits on a constant currency basis. Consistent with our expectations of double-digit operating income growth, the majority of EPS growth will be delivered by operations. Taxes will be a significant headwind this year, but will be more than offset by lower interest expense and shares outstanding. The figures on this chart are directional, reflecting what we know today, but to provide a frame of reference for you to understand the expected EPS drivers.

To wrap up, 2013 was a challenging year, but we delivered solid results. More importantly our emerging market investments and our early progress on cost reductions in both overhead and productivity set the stage for a strong 2014, especially as it relates to margin improvement. Of course, 2014 will have some of the same category challenges we faced last year, but we expect the top line to grow in line with our categories as we use share gains to offset market volatility. Furthermore, strong growth in our operating income and margin will deliver double-digit EPS growth, which should put us at the top of our peer group. With that, I'd like to open it up for questions.

(Operator Instructions)

Andrew Lazar, Barclays.

Just two quick things for me, first, of the 300 basis points in margin that you're targeting through 2017, I think about 250 basis points was highlighted initially as coming from the gross margin side. I guess you're now talking again more aggressively about potential overhead opportunity. I think you even brought somebody on board fairly recently to help look into this a bit more deeply. What which you peg the overhead portion of margin through 2017 now if that's changed? Does this increase the overall margin target and/or maybe accelerate it, or shift the composition of how you get there?

I think the way to think about overhead, Andrew, is it has been the single biggest driver of our margin increase over the last few years. It was again the biggest driver of the margin increase in North America and Europe last year. We still believe we have some road ahead of us on that.

You're correct; we brought James Kehoe back in -- at the end of last year as our cost management person, and a key part of his role is in fact overhead management. He's in the process now of working with us to implement his [air base] budgeting approach going forward. I would say yes, overheads will be an opportunity in 2014 and beyond. I think it's too early for us to quantify that, but we'll probably give you some more insight into how we're thinking about overheads in CAGNY.

Irene, as you have spoken about in your prepared remarks and even last quarter, your category growth rates have slowed since the time of the split. That certainly had the largest impact on our recent top line trends. Do you think it makes sense to move more towards a long-term top line target that is more market growth based, in other words, market growth plus some factor for share gains, Proctor for example?

Absolutely, Andrew. We're taking the first step in that direction with the guidance that we've giving you for 2014. But without a doubt as we monitor these markets and we see how our categories are evolving, it will be our intent to grow as we've said, at or above those category growth rates. I think that's the right way to think about it.

Just as part of that, in 2014 obviously you'll grow in line with the market because you've got share gains offset by some volatility. Over time, I would think you would expect to grow ultimately at market growth rates plus some factor, so i.e, faster than your category growth rates over time. Is that the right way to look at it, and it's just now the market volatility that's bringing it back down to inline with category growth?

I think it's a question of how we frame up the expectations. We've given guidance to be at or above category growth rates. I think that's the approximately 4%. Last year we actually grew share in most of our markets, and as you saw we were slightly above category growth rates. And I think we strongly believe that the brands that we've got are capable of growing faster than the categories. I think as we think about it, we'd rather keep that share upside for either covering any emerging market volatility, like things in the Ukraine or Venezuela, or ideally to deliver upside to the guidance we're giving. That's how we're thinking about it, but clearly internally, we're driving for share growth.

Chris Growe, Stifel.

I wanted to ask as you look at your growth profile for 2014 and the 4% revenue growth, you had a pretty sluggish environment in the developed markets. Some of that is coffee, I realize. I'm just try to get a sense of emerging market versus developed market growth in 2014, if you can give any more color on that?

I think we haven't given specific guidance for 2014 by segment, but I think it's fair to say that the categories last year in emerging markets grew in the 8% to 9% range, and our revenue growth in emerging markets last year was about 9%. To the extent that we're saying we don't see the category trajectories changing a lot, those are probably reasonable guidelines for next year.

We still think emerging markets over time will return to double-digit growth, but that's probably not in the next 12 months. Developed markets growth, as you say, the categories have slowed along with the emerging markets. A big driver of that, particularly in Europe, was in the coffee business. Again, we're not counting on a big recovery in that in the short term, but in North America the growth rates tend to be in the 2% to 3% range. In Europe, it's a little bit lower because of coffee.

I had a quick follow up if I could on your pricing versus cost inflation. If you gave it, I didn't hear it. Is there any range, I know you don't talk in specifics, about the percentage increase in cost inflation? How much pricing you should expect across the year as a contributor to revenue growth?

We haven't given a specific number here, but I think it's actually not so much commodities. It's more currency which frankly makes it a little harder to pin down because it's more volatile, and we have less coverage on it. It's going to be a fairly significant driver of the revenue growth in the first half of the year in particular. It'll be more skewed to emerging markets. There is some significant pricing in Europe, but it's going to be more skewed to emerging markets.

David Palmer, RBC Capital Markets.

This is Chris Carril in for Dave. Just a quick question, a follow-up on coffee. You mentioned it's still headwind in the first half, but can you provide any visibility on whether it'll be a drag in the second half -- or your view on the second half?

I think the reason we said it's a headwind on the first quarter specifically is last year at this time coffee prices were still coming down. Was about $1.45 last year at this time, and the pricing in the marketplace today is more in the $1.10 to $1.20 range. That's where green coffee had been for most of the last six months. If you ask me about the back half of the year, then I'd have to start projecting what green coffee costs are going to, and as you might have noticed, coffee costs spiked up about two weeks ago. We're up about $1.40 today.

If it stays there, we would obviously adjust our prices upwards to reflect that because coffee is a pass-through category. That's not built into our guidance, but I think it's way too early to say whether that's going to stick or not. Regardless, it wouldn't affect quarter one. Quarter one will play a more or less based on where the pricing in the marketplace is today against that $1.45 base last year.

Bryan Spillane, Bank of America.

A question on marketing investment in emerging markets, I think you'd previously talked a bit about $100 million incremental investment in 2013, and then I think an extra $100 million in 2014. First, are those still good numbers for us to be working with? Second, given the change in the environment, is there anything different you're doing with those dollars versus your original plan? Does the environment change that your perspective on marketing investments in emerging markets?

I'll answer the first part, and let Irene answer the second. In terms of the numbers, we had a plan to increase emerging market investments over time. This year, we made the decision to accelerate about $100 million of that investment from 2014 into 2013. That has played through and that's part of our results this year. We did make that step up. We're not pulling back on that, but we'll sustain that kind of spending as we go into next year, so we're not have another step change. We'll sustain that level of spending as we get into next year. In terms of how we think about the investments, I'll let Irene address that.

We continue to see the opportunity to make foundational investments that we think can get a good return, investments in route-to-market, investments in sales capabilities, for example. So that we're well-positioned as these markets recover. We certainly did see a good return on our investments in markets like Russia and India and Brazil last year. We will continue to look at those investments.

We're going to pull back a little bit on some of the A&C investments, as we see the categories continue to grow at the rates that are out there today because we are just not finding that we're able to change the trajectory much with those investments. That's how we're thinking about it, but we'll obviously continue to monitor the markets and make the adjustments accordingly.

Eric Katzman, Deutsche Bank.

A couple of questions. First on, you call it marketing, admin, and research, it looks like you've been running in that line roughly $2.1 billion to $2.2 billion a quarter. Is that a decent run rate because the comparison for whatever reason -- I am not sure what it hurt you or what was so costly a year ago, so much margin expansion came from that line. Your gross margins were actually down in the quarter, so I am trying to get a sense as to what is the right level there? If you could also say what advertising and promotion were up, or where it was for the year and the quarter, that would be helpful.

Sure. That line is called selling, general, and administrative expenses includes all of what we call our advertising and consumer promotions. It includes all of our overhead outside the manufacturing area. It also includes our income expense which has some of the one-off items that would come from asset sales and stuff. It is a broad bucket.

I think the reduction year-over-year is partially ForEx, frankly, but also partially overheads are down, particularly down in North America and Europe, where we've had pretty good programs all through the year. We've been building savings as we went through the year. Quarter for a year ago was also relatively high, particularly in North America because that was the first quarter after the spin. That's really when the dissynergies hit with the full wack in the fourth quarter last year. That's what's in that bucket and what's driving the reduction.

In terms of the A&C spending, we said that we spent just over 9% in 2012. We finished last year about the same actually. We invested more in emerging markets but we have some good productivity programs in the developed markets that allowed us to get some efficiencies out of that. Again, the same kind of range.

What are your plans for 2014 on that number?

We haven't given the guidance on that, but I would expect any material changes up or down.

We'll talk probably a little bit more at CAGNY about that, too.

Just so I understand it more clearly, your reported revenue, right now you've got up organic [2% to] 3%, but you ended the fourth quarter on a negative 2.5% on currency, but you're saying that you're implementing pricing? You're hopeful that the pricing offsets the currency on the top line? In dollar terms you hope for the year for your organic to basically equal your reported?

When we talk to pricing to cover commodities and currency, we're talking about transaction, the impact of currency on the cost of importing materials into a specific country. We don't try to price to recover the translation impact of currencies. That's part of when, we gave guidance on a constant currency basis, the approximately 4% is on a constant currency basis. If currencies stay where they are today, then it would come off of it because of that. As we said, the EPS impact of the spot today is about $0.07, so you would expected that to come down a bit on a reported basis. But I'd expect those currencies to move around a bit as we go through the year.

Last question to Irene, Europe, you talked about some margin improvement out of that market. It sounds like in some places, France in particular, is very important to you. France in some ways becomes more challenging in terms of their regulatory government approach to business. Some of the improvement that you were hoping for in that region, is that still feasible? Or is that maybe being pushed out until the environment becomes a little bit more friendly for you to do so?

No, France has always been a challenging environment in which to do business, and we adjust our timing typically accordingly as a result of that. I am very pleased with the performance of our European team this past year, in that they've improved their margins about 60 BPS, and it was primarily driven by lower SG&A across the board. The challenges in an individual country doesn't affect our overall confidence in the ability to continue to drive margins in that region.

David Driscoll, Citi Research.

First one, just a little one and then a bigger picture question, can you quantify the Easter effect in 1Q? Is that worth about a point?

I'd rather not quantify because truthfully I think last time we had an Easter shift that shifted literally the entire Easter shipments. This year, it's three weeks. It will only be partial. I think it's going to depend, frankly, as we negotiate with each customer. We've given you an aggregate of 2% to 3%, and a number of factors below that but I'd rather not get into specifics on Easter.

On gross margins, is it fair to say that the gross profit margin was strong or stronger in North America and Europe, and hit pretty hard in the emerging market regions? Would that explain the weak fourth quarter gross margin?

Yes. Directionally that would be right. The biggest hits we got on the gross margin line were from currency, which as I said, we don't have coverage on currency in a lot of the emerging markets, whereas we can cover that pretty easily for Europe or North America. That hit us pretty quickly. We're putting the pricing in place across the globe today, but in the back half of the year, there was a lag as we got the hit from the currency, and we didn't get the pricing through until Q1. Yes, the gross margin was more in emerging markets, less than the developing markets.

Any way to quantify that number?

I think as you look at the -- some of the OI bridges, you can see by region where the margin declines were. Gross margin was a decent component of that.

Related to this then, you're taking pricing in these emerging markets. It's FX based pricing, not really the underlying commodities. How is it being received? What's the volume sensitivity here? Frankly, is this kind of the key risk to Q1 and Q2 in 2014?

That's correct. It is resolving the underlying cost trends. The issue on the currency is not the translation which I would agree would be more unique to US companies. If India buys cocoa, they're buying in British pounds. As the Indian rupee devalues, they've got to pay more to get the cocoa. It is a local cost increase. All the competitors face the same thing. We're not going to be out of step with the industry.

The reaction we talked about in the sensitivity in emerging markets is likely to be more from consumers. It just takes a while to get the price pack architecture right to make sure that in every channel, there's a right pack, and the right size, and right price point for every consumer, and get that all the way through the system. It takes consumers a little bit to get used to that, and typically it's a quarter in an emerging market. That's really what we talked about in the first quarter as being one of the headwinds. I would consider that normal when you take these kind of price increases.

If I can stick one final question in, Irene, can you comment on the coffee operations? Frankly, I have always thought that this was a scale provider in Europe and perhaps even in Russia. Would you agree with that? Is there any desire or sensitivity on your part that this would be an operation that you would consider selling?

I'm not going to comment on any hypothetical stuff, David. I think the reality is that it does provide an important role, scale role, as you say in Europe and Eastern Europe. It has been historically a strong contributor to our profitability and our cash flow. This past year has been quite an anomaly given the tremendous volatility that we've seen in pricing, and as we've mentioned, it has had a disproportionate impact on the top line. We've able to protect margins. Net-net, it is a volatile category. It has performed reasonably well and well in line with our portfolio over the last couple of years, but 2013 was a rather unique year.

Jason English, Goldman Sachs.

First, real quick housekeeping question, I apologize if I missed this already. The SG&A drop in the quarter was much bigger than we expected. Can you help us decompose how much of that was advertising related versus real overhead efficiency?

I don't want to get into breaking that out every time, but I would say in the quarter, the biggest contributor to the margin gains we saw in North America and Europe were overhead. I think a lot of the other stuff that's in that line, there's other income expense, which had some asset sales. Last year, we had some as well, but they were in a different quarter. This year it happened to hit in fourth quarter. There's a lot of numbers in there. I think the takeaway you should have is we're continuing to support our business on the A&C side, and the real underlying OI margin growth in North America and Europe is driven by a good overhead cost management, particularly as we went through the back half of the year.

But don't necessarily take this 23% of sales to the bank on a go-forward?

I don't want to give guidance at that level of detail, but I think again there's a lot of things in that line. I wouldn't get carried away on trying to quantify a number there.

I want to come back really quick to one of the categories you highlighted as weak, but a little less weak, that being gum. Hershey's had this ongoing campaign to try to crowd out -- or shrink the gum sets at retailers. Get more candy. Get more breath fresheners. It seems like that push is about to accelerate on the back of his new product technology they're bringing to mints. I think it's this Ice Breakers chew product. What are you expecting? I should say, where do we stand right now in terms of shelf resets? What are you expecting to happen in the market? Most importantly, what are you assuming in your underlying outlook here for gum in North America?

As we said, we're not expected any dramatic recovery in the category any time soon. Obviously, our emerging market business continues to grow nicely. It's been the developed markets that have been a challenge, and within that, the US. We have made great progress from a share standpoint, and it's being driven by the steps that we took to address that, our shelf resets, our focus on some of the core benefits, like freshness and oral care. It's been execution at point of buying, as well as the product assortment on shelf.

We're going to continue to use that play book. We've got a nice pipeline of innovation coming behind some of the focus on freshness, for example. We've got a number of tests in place to address the long-term growth of the category that we're hoping will start to bear some fruit. We remain quite committed to the gum category. We do see our competitors taking a number of actions, and we actually think that will be good for the category over time.

Matthew Grainger, Morgan Stanley.

I wanted to follow-up on a candy business specifically. Maybe this is just a rounding issue, but my recollection was that the business through the nine months was glowing closer to mid-single-digits. Today, you cited more of a low-single-digit figure for your own sales despite the category being up 4.5%. Can you talk about any specific challenges you're facing in that business, and initiatives you might be investing behind next year to address them?

We continue to see that as a nice a growth engine for us. There have been some puts and takes on that business. For example, our Halls US business has been a little weaker year-over-year because of the flu season. Up until the end of last year, it was not quite as robust as it had been a year ago. We've seen some challenges in China on our Chocolate Eclairs business, but net-net, candy continues to be quite an attractive category. We do expect that, that will play an important role in our growth algorithm going forward.

Would you expect to be able to grow in line with the category next year, or is there a period of reinvesting?

There's nothing. We've got a nice pipeline of innovation. We would expect to grow in line with the category in 2014.

Thanks. One additional question on Europe, it seems like you have good momentum behind the Tassimo business. You've also been launching the compatibles and other things. Given the expectation for some pretty substantial margin expansion next year, and the need to be very focused in where you're investing, is that a business where you'd expect to continue increasing support next year?

Yes, it was in our European portfolio, the on-demand and convenient coffee as reflected in Millicano have been the key drivers, not only of our revenue growth, but also of our margin improvement. Those are critical enablers in our European and our Eastern European business, so we will continue to invest behind them.

Robert Moskow, Credit Suisse.

Two questions. One is in fourth quarter thought I saw in the notes that there was a $0.03 gain on sale this quarter from asset sales in India, UK, Italy. Just very quickly is that last year, or is that this year?

That's this year. Last year, we had a very similar number but it was in prior quarters, and it was in Russia and Turkey last year. The simple way to think about it is when we bought Cadbury and Lu, we got a lot more facilities than we needed, and we're just cleaning that up because it reduces our cost of maintaining these over time.

How much operating income did that contribute in fourth quarter?

Every penny for us is about $25 million of OI.

Okay, so put a regular tax rate on it. Will that set up a tough comparison for next year because you're leaving it in your adjusted base here for operating income gains, isn't it?

Yes, it's in the adjusted base. As I said, we're still doing clean up. I'm not going to make it a guidance number that I'll give every quarter, but I don't view it as a material headwind for us, no.

The final question is of that $0.15 to $0.20, how much would you characterize as really good visibility? We know how much overhead we're cutting. We know that our marketing dollars are going to -- it sounds like the code here is that marketing dollars are going to be maybe flat, maybe even down, the 2014.

I think if you look at the $0.15 to $0.20 is going to be combination of a few things. Number one, we're growing revenue around 4%, so that's a good start. We are fully pricing commodities and ForEx. While that's not necessarily a margin increment, it gives us the opportunity to take more of that net productivity to the bottom line. We would expect gross margins to improve. We've got good momentum on the overhead programs that we started during the year at this year. We expect to see that continue into next year, and that's going to be a big driver. The drivers of the $0.15 to $0.20 in operating gains or the double-digit OI growth that we've talked about are, in our view pretty, much within our control. That's why we're fairly confident of it.

So that I completely understand. The 4% organic income, organic sales growth, includes pricing to cover transactional currency, is that right, or it does not?

Yes, it does. I think the past year, all our revenue growth came from, pretty much all of it, came from of volume mix. I think it'll be more balanced in 2014 because we're putting in pretty material pricing in emerging markets and in the chocolate and dairy categories to recover positive commodities and ForEx.

If the only purpose of the pricing is to offset the higher cost, isn't that, as you say, neutral to operating income growth?

It would be neutral to operating income growth other than it makes sure that our gross margin is protected, so the net productivity can drop significantly more than that productivity can drop through. It's more a question of yes, there will be some portion that is volume mix, and that will drop through to OI. Probably more important than that, it gets us more of the net productivity dropping through in a gross margin benefit.

Alexia Howard, Sanford Bernstein.

Can I ask, first of all, about China? We're quarter on now. Are you done with the trade inventory rationalization? Do you have any better visibility into when that business might start to stabilize?

I think the simple answer is yes. We're done with the inventory destocking. That all came out. The end of that came out in the fourth quarter. As we look at the start to the year, we would say the business in on pretty stable footing already. We're feeling good about the business already. What we warned about was more about how the comparisons look versus prior year.

Last year, we had a very strong growth rate in the first half, so the comps will look more difficult in the first half. Obviously, we didn't have a terrific back half, so the comps are going to look much easier in the back half. In absolute dollars shipments and [tons] going out the door, I think we're already at a pretty good run rate month over month.

Thank you. Coming back to free cash flow guidance, I think you were talking about $1.4 billion at least in 2014, when you did the math on the numbers that you shared earlier. Why the slowdown? Is it just that you're taking off the improvement in the cash conversion cycle this year and saying the underlying number is about that level?

Actually, the cash provided by operating activities, which is a combination of our earnings and the cash conversion cycle essentially, is the same. We've said 4.1%-plus because hopefully we would do better than that. As we said, we're not taking our foot off the gas on the cash conversion cycle. The reason it slows down at the bottom is because the CapEx, we started spending about 4% of CapEx. We said we were probably going to spend around 5% for the next two, three, four years. In 2013, we're halfway between. We got up to 4.5%. We'll probably spent 5% of CapEx in 2014.

That's the biggest reason you see the slow down. The other piece is restructuring spending which basically is more skewed to 2014, and less skewed to 2013, so there's a bit of phasing there. In aggregate, across the two years, we're actually spending a little bit less CapEx. We're spending the same amount of restructuring, so that's more of a phasing thing.

John Baumgartner, Wells Fargo.

Irene or Dave, as you look at the landscape in China, we've seen some recent news in terms of Hershey doing a deal, WhiteWave and [Danone] being involved with JVs. Is there anything in the country, either with the change in leadership or otherwise, that maybe you think the environment for opportunities strategically is changing, or that you can have some opportunities as well to build more distribution in that market going forward?

We do see great opportunity there, John, and we're continue to invest, as we've talked about. We've got over $1 billion business there to date. We just launched gum about a year ago. It's a sizable $100 million business for us, and over time you will see us continue to invest in the country. I think the mechanisms by which we choose to invest may vary from category to category, and from company to company but it is a big growth opportunity for us. As we see the biscuit category recover, we're quite confident that China will continue to be a growth engine for us.

Thilo Wrede, Jefferies.

Are you concerned that the inflation that some Latin American countries are experiencing that might ultimately crimp consumers' willingness to spend of the products that you sell, and therefore limit your pricing power in those countries?

I think that's basically an Argentina, Venezuela thing. And I think truthfully -- even last year, as I talked about earlier, the growth in those two countries that we got was basically through pricing, and probably less through vol mix. Yes, consumers are trading down to lower priced brands, and they are having to monitor their cash carefully. Argentina and Venezuela have been and continue to be difficult markets. I think it's truthfully not a lot different today than it was a year or two ago in Venezuela. Argentina may have gotten a little bit worse, but we're pretty experienced with dealing with those markets.

There's really no concern that your pricing power might diminish eventually?

I think it's not as much about consumers. Consumers and most companies are pretty used to having to do business in these countries. There may be regulatory issues. Last year, Argentina put in price controls for a while, and that hurt us a bit. Then, they loosened that up afterwards. Those are the kinds of things that tend to cause a little more short-term issue, but it tends to be temporary. It's just the way those countries operate.

A housekeeping question, can you share with us what you expect for interest expense and shares outstanding for fiscal 2014?

I'm not going to give you a shares outstanding, although you can probably calculate it. We did $2.7 billion buyback last year, and we've said we would spend between $1 billion and $2 billion this year. I think on interest expense, we've said that between interest and shares, we've an $0.11 to $0.13 benefit. The benefit is roughly half-and-half between interest and shares. Interest will be lower mostly because we did a little less debt, and we did the debt tenders and refinancing last year, which took down the cost of our long-term debt. That will come down. I think on slide 17 of the presentation I showed you earlier identifies that.

I will turn the call back over for closing remarks.

Hi, this is Dexter. If there are any follow up questions, obviously Nick and I will be available for the rest of the evening, and frankly for the rest of the week. Other than that, thank you for joining us, and we'll see you at CAGNY.

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