億滋國際 (MDLZ) 2014 Q1 法說會逐字稿

Good day, and welcome, everyone, to the Mondelez International first-quarter 2014 earnings conference call. Today's call is scheduled to last about one hour, including remarks from Mondelez management and the question-and-answer session.

(Operator Instructions)

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

Good morning and thanks for joining us. With me are Irene Rosenfeld, our Chairman and CEO, and Dave Brearton, our CFO.

Earlier today we issued two news releases, one detailing our first-quarter earnings and plans to improve profitability, and another on our intention to combine our coffee business with DE Master Blenders. These releases and today's slides are available on our website mondelezinternational.com.

As you know, during this call we will make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements.

Some of today's prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

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

Thanks Dexter, and good morning.

When we launched Mondelez International in October 2012, we set out to create a global snacking powerhouse, that would deliver top-tier financial performance and be a great place to work. Since our launch, we've made good progress in many areas.

We've grown our market shares, fueled by investments behind our power brands and innovation platforms. We've strengthened our geographic footprint and route-to-market capabilities.

We've stepped up cost reductions, in both our supply chain and in overheads, to drive margin expansion. And we've strengthened our balance sheet, while significantly boosting cash returns to shareholders through both share repurchase and higher dividends.

But despite these many accomplishments, we are not where we should be at this point in our journey. The recent global slowdown in our categories has tempered our near-term top-line growth, as well as that of our peers. This slowdown has made it imperative that we act more quickly and more aggressively to address the inefficiencies in our cost structure. So today we're taking two bold steps, both to improve our near-term results and to increase confidence that we'll deliver sustainable top-tier financial performance over the long-term.

First, we are focusing our portfolio even further on snacks, by combining our coffee business with DE Master Blenders 1753, to create the world's leading pure-play coffee company. Second, we're stepping up and accelerating our cost reduction efforts to deliver best in class costs in both our supply chain and in overheads.

Together, these actions will enable us to become an even more focused and nimble global snacking powerhouse. To achieve world-class margins faster, to simplify how we work around the world, to speed up and clarify decision-making, and to generate the fuel to invest more in our people, in our brands and in our execution of capabilities. All of this will help us deliver superior returns to our shareholders.

I'll take the next few minutes to discuss these strategic initiatives in more detail. Let me start with the coffee transaction. We intend to combine our nearly $4 billion coffee business with DE Master Blenders to create the world's leading pure-play coffee company.

This new company will have annual revenues of more than $7 billion and an EBITDA margin in the high teens. It will bring together our portfolios of iconic brands, our complementary geographic footprints, and our innovative technologies to transform two strong businesses into an even stronger one.

The combined company will feature our market leading brands, like Jacobs and Tassimo, and Douwe Egberts and SENSEO from DE Master Blenders. The combined company, to be called Jacobs Douwe Egberts, will have an advantaged position in the $81 billion global coffee category, including leading market shares in more than two dozen countries and a sizable footprint in all key emerging markets.

With greater focus and increased scale, the new company can operate more efficiently and invest more effectively in innovation, manufacturing, and market development to capitalize on the significant growth opportunities in coffee.

When we close this transaction we'll receive after cash tax proceeds of approximately $5 billion and a 49% interest in the combined company. Our partner, Acorn Holdings is the current owner DE Master Blenders and will have a 51% interest in the combined company, as well as a majority of seats on the Board.

Acorn is owned by an investor group led by JAB Holding Company, an investment vehicle managed by three highly respected senior partners, with whom we're delighted to team. Bart Becht, the former CEO of Reckitt Benckiser and current Chairman of DE Master Blenders; Peter Haas, a former senior executive at InDev, Reckitt, and Coty; and Olivier Goudet, the former CFO of Mars.

Bart Becht will be Chairman of the new combined company. Pierre Laubies, the current CEO of DE Master Blenders, is the perspective CEO of the new company. The other members of his leadership team will be drawn from both coffee businesses, using a best of both approach.

The deal is expected to close in the course of 2015, subject to limited closing conditions. During the interim period, both companies will undertake consultations with all works councils as required.

We're delighted with this transaction and the substantial value we expect it to create for our shareholders. By retaining a 49% stake, we'll continue to benefit from the future growth of the coffee category and share in the synergies and tremendous upside of this leading pure-play pop coffee company.

We expect to use the majority of the approximately $5 billion of cash proceeds to expand our share repurchase program, subject to Board approval. The balance of the cash proceeds will be used for debt reduction and for general corporate purposes. Let me assure you, that while deploying the cash proceeds, we remain committed to maintaining an investment-grade credit rating with access to tier II commercial paper.

In terms of our P&L, we expect the transaction to be accretive to adjusted EPS in the first full year after closing. In addition to unlocking and creating significant value for our coffee business, this transaction will also enhance the profile and prospects of our core snacking business. Once completed, approximately 85% of our net revenue will come from snacks, up from about 75% today.

Going forward, this sharper focus will help optimize our capital allocation, including investments to drive growth of our global platforms and to expand routes-to-market.

So that's the first part of the news. Now let's turn to the second part.

We're taking actions today to accelerate and enhance margin expansion. Specifically, we're fast tracking our previously announced supply chain reinvention program and significantly reducing overhead costs. As Daniel Myers explained last September, over the next three years we expect to deliver $3 billion in gross productivity savings, $1.5 billion in net productivity, and $1 billion in incremental cash.

We've already make good progress against those goals. We're on track to open our state of the art biscuit facility in Mexico in the fourth quarter. We've initiated significant projects in India, China, and Russia. We're expanding biscuit manufacturing in the Czech Republic and investing in new biscuit manufacturing technology in the US.

In addition, we've made some tough decisions to close or sell nine plants and streamline another 21. As a result, in 2013 alone, we reduced headcount in our supply chain by 3000, plus another 1000 contractors. All of these actions will enable delivery of the benefits we previously outlined.

We also laid out additional opportunities through 2020 to manufacture more of our power brands on advantage lines of the future and to streamline our production base. Today we're taking steps to accelerate some of those projects.

This will allow us to capture savings even sooner and result in additional margin upside through 2018. With this accelerated program we now expect our net productivity to increase from the 2.3% we talked about in September, to around 3% over the next few years.

With respect to overheads, as we discussed at Cagney in February, we're committed to creating a leaner, simpler, and more nimble organization by significantly reducing operating costs. Achieving best-in-class overhead costs across our business is particularly important, given the near-term slowdown in the growth of our categories, especially in emerging markets. In addition, the combination of our coffee business with DE Master Blenders allows us to create an even simpler, more focused global snacking company.

To drive overhead savings, we're starting with a clean sheet of paper and employing a zero-base budgeting approach. With the help of Accenture we used ZBB analytical tools to look objectively at our overhead costs and compare them to best-in-class external benchmarks. This has enabled us to question how, where, and why we spend our money. While this certainly involves addressing headcount, we're also targeting non-headcount costs.

The lowest hanging fruit is to look at our policies and practices across a dozen major cost areas to identify changes that will help us to quickly reduce costs in a sustainable way. As an example, our travel costs are significantly higher than peers. That's partly because we travel more, reflecting the coordination necessary during the Cadbury and LU integrations, as well as the startup of our new company.

But it's also because we weren't effectively leveraging our scale with suppliers. If you multiply that example to many other cost areas across our Company, it adds up pretty quickly to some big savings.

To enable us to capture these savings in both our supply chain and in overheads, our Board has approved a new $3.5 billion restructuring program through 2018, comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs. We expect to incur the majority of the restructuring charges in 2015 and 2016. Capital expenditures in support of these programs are already included in our CapEx target of about 5% of revenues for the next few years.

As a result of this program, we expect to generate annualized savings of at least $1.5 billion by 2018, with savings about equally split between supply chain and overheads. With $1.5 billion of savings on $2.5 billion of cash costs, it's clear that these projects have very strong returns, well in excess of our cost of capital. The cost savings from this restructuring program will enable us to accelerate and increase our future margin expansion plans.

Specifically, we're raising the bottom end of our 2016 adjusted OI margin range, so that we are now targeting 15% to 16%, up from 14% to 16%. This improvement comes largely from greater overhead savings. After 2016, along with continued improvement in overheads, we expect the contribution from supply chain to build. This will enable us to drive further margin expansion beyond our revised 2016 target, while continuing to fund growth.

Taken together, the strategic initiatives we've announced today underscore our determination to become a leaner, more focused, and more nimble global snacking powerhouse.

Let me now turn the call over to Dave to provide details on our first-quarter results.

Thanks, Irene.

As you'll see in the next few slides, we're off to a solid start this year. We are making meaningful progress toward our margin goals, while continuing to deliver growth and strong market shares. Specifically, our organic net revenue growth was 2.8%, in line with the overall growth of our categories and within our 2% to 3% guidance range for the quarter.

On the margin front, we delivered a big increase in adjusted operating income margin, up 140 basis points to 12.2%. And our adjusted EPS was $0.39. That's up 17% on a constant currency basis, and on the higher end of the double-digit guidance we gave for the year.

Looking more closely at our revenue growth, pricing was the key contributor as we began to implement price increases in all of our regions and across most of our categories to offset higher input costs. Despite these pricing actions, we were able to drive a modest increase in vol/mix. And while the shift of Easter was a headwind for the quarter, the 40 basis point impact was lower than expected.

Coffee remained a headwind with the pass-through of lower green coffee costs tempering our growth by 60 basis points. Emerging markets were up nearly 7%, reflecting challenging conditions in a number of key countries. While developed markets were essentially flat growing 0.2%. Overall, our power brands continued to drive our growth, increasing 4.8%. In particular, Cadbury Dairy Milk, Milka, Chips Ahoy, Velveeta, TUC, Club Social, and Tang were among the best performers in the quarter.

Now let's take a closer look at our results by category. For the second consecutive quarter, category growth was slower than historical averages, with growth of only 2.8%. This was due in part to the Easter shift, but also reflects continued weak demand in emerging markets and lower coffee prices.

With Easter occurring three weeks later than last year, some consumer demand was pushed into the second quarter. However, revenue was less effective as we started shipping Easter related products in March. This can best be seen in chocolate, where a 2.3% growth significantly out paced the category growth rate of 1%.

The ongoing global slowdown was the second factor that contributed to sluggish growth across most of our categories. The good news is that our market share performance was solid, with over 60% of our revenues gaining or holding share, despite the price increases mentioned earlier.

A closer look at our categories shows that our biscuit performance remains strong, while 4.7% revenue growth in biscuits was below the category rate, our overall share performance was strong, especially in North America and Europe. The difference was solely due to our China business.

Turning to chocolate. Our Cadbury Dairy Milk and Milka power brands each grew high-single digits, fueling our growth. In addition, over 50% of revenues gained or held share. Our share performance in India, in particular, was strong up over 2.5 points in a category that continues to grow about 20%. Our results reflect recent capacity investments to support the tremendous growth in that market.

Turning to gum and candy, our revenues fell 2.1% as an increase in gum was more than offset by a decline in candy. Our gum share performance continued to improve as we gained or held share in over half of our gum revenues.

In beverages, our revenues increased 2.3%, despite the headwinds from lower coffee pricing. Although the cost of green coffee has surged over the past two months, from about $1.20 to about $2 per pound, those prices are not yet reflected in the market. Input costs for the first half are still being covered at pre-spike prices.

However, we recently announced price increases in Europe that will begin to take effect in the late Q2, so we expect higher pricing to be reflected in the back half of the year. As for powdered beverages, category growth continued to be robust with Tang up in the low 20s.

Let's now take a look at our regional results, where we delivered solid top-line performance in four of our five regions. In Europe, while revenue fell 1%, coffee tempered growth by about 1.5 points. Vol/mix was up nearly a point, despite the impacts of the Easter shift and some short-term customer disputes as we took pricing. Over 70% of our revenues gained or held share.

North America had another strong quarter with revenue of 2.5%, fueled by 5% growth in biscuits. Share performance again was exceptional, with over 85% of our revenue gaining or holding share. Gum in the US was up over 1 point.

In emerging markets, as expected, we experienced some share dislocations, as consumers adjusted to our higher pricing. As a leader in our categories in many of these markets, we're typically one of the first to price in response to higher input costs. Input costs began to creep up at the end of last year, especially in dairy and cocoa. And in many emerging markets, weaker currency further magnified this impact.

As a result, we began to price aggressively early this year. In some cases competitors have been slow to follow, resulting in share dislocation and some key markets. We expect this to be temporary, as competitors ultimately price to offset the higher input cost, which are common to the entire industry.

Our EMEA region grew nearly 8%, with good contributions from both vol/mix and pricing. Russia increased high single digits, driven largely by vol/mix. Coffee, biscuits, and gum drove the increase.

Also in the region, the Gulf states, Turkey and Egypt all delivered strong growth. Not surprisingly, Ukraine declined double digits.

In Latin America, pricing, especially in the high inflation markets of Venezuela and Argentina, drove organic growth of 14.7%. But importantly, Brazil was up high single digits. Powdered beverages and biscuits drove the bulk of the revenue increase, while chocolate growth was modest, due to the Easter shift.

Asia-Pacific was our lone lagging performer, down 2.7% for the quarter. As expected, China was week, with organic revenue down mid-teens, primarily due to biscuits. The issues we're working through in China are not new. We expected China to be a drag in Q1 and through the first half, as we lacked last year inventory build in support of our A&C investment and the launch of Golden Oreo.

While we continue to expect the China biscuit category to be soft for the remainder of the year, likely growing in the low-single digits, our revenue trends in the second half should improve as we begin to lap last year slower growth. In contrast to biscuits, gum in China continues to grow rapidly as we expand distribution. Gum share is now over 7%, just a year and a half after launching in that market.

We're taking a number of steps to improve China's overall performance. Earlier this week we hired Stephen Mars, our new head of China. Stephen joins us from Carlsberg Group where he was CEO of the company's China business.

In total, he has 16 years of on the ground experience in China, including stints at both P&G and Colgate. We're looking forward to Stephen's leadership as he and his team get China back on a growth trajectory.

India continues to deliver strong performance. With our new chocolate capacity in place, we've been able to regain the share we lost in the first half last year. Our beverages business, which is now a fifth of our sales there, was up mid-teens. We continued to successfully expand our Tang business and increase support behind our top-selling chocolate beverage, Bournvita.

Turning to margins, adjusted gross margin was essentially flat at 37.1%, as gross profit grew 2.3% on a constant currency basis. Pricing fully offset commodity inflation in dollar terms, despite the fact that we've not yet fully realize the impact of the pricing actions we implemented earlier this year. On a percentage basis, of course, the denominator effect of this pricing pressured the gross margin percent.

Net productivity was strong and in line with our goal to deliver 2.3% of cost of goods sold this year. As a result, our gross margin percentage was essentially flat to prior year.

In terms of adjusted OI margin, we jumped 140 basis points to 12.2%. Half of this gain was a direct result of our efforts to significantly reduce overheads. The other half came from A&C, which was about 9% of net revenue. This compared to last year's quarterly high of 9.6%, when we accelerated investment in China.

To be clear, we didn't cut our base brand support, we successfully lowered A&C cost through efficiencies gained by consolidating our media accounts, especially in EMEA, reducing non-working media spending, and continuing to shift towards more efficient and targeted digital outlets.

Consistent with our margin goals, we made great progress this quarter towards achieving our adjusted OI margin target in developed markets. Europe was up 130 basis points to 13.9%. And North America was up 240 basis points to 13.8%.

Moving to EPS. Adjusted EPS grew 17.1% on a constant currency basis, driven by double-digit growth in operating income. Below the line, the impact of having a more normal tax rate was a negative $0.06 impact, but that was partially offset from $0.04 of favorability delivered through debt restructuring and share repurchases.

Before turning to guidance, I'd like to quickly update you on where we stand on cash flow and capital allocation. Our approach to capital allocation remains the same. We'll continue to deploy capital to deliver the best expected returns, whether it's reinvesting in the business, M&A, reducing debt, or returning capital to shareholders.

With regard to free cash flow, we remain on track to deliver a two-year combined target of $3.7 billion. As you may know, we tend to be free cash flow negative in the first quarter as we rebuild inventories after seasonal lows at the end of the year. At the end of Q1 this year, while inventories were unusually high due to the Easter shift, we were still able to improve our cash conversion cycle by 17 days versus Q1 last year.

In the first quarter, we returned more than $700 million to our shareholders in the form of share repurchases and dividends. For the full year we still expect to return $2 billion to $3 billion to our shareholders, including $1 billion to $2 billion in stock buybacks.

With respect to our debt, we were up about $2 billion versus year end, largely reflecting cash return to shareholders and the working capital increase that I just described. In addition, we paid the taxes associated with the $2.8 billion Starbucks award that we received in December.

Turning to our outlook for the year. We expect to deliver organic net revenue growth that's in line with overall category rates.

However, as I described earlier, global category growth has slowed to around 3% over the last two quarters, due largely to the weakness in emerging markets and lower coffee prices. We expect these trends will continue in Q2, likely resulting in top-line growth similar to what we saw in Q1.

In the second half, we expect the pass-through of higher green coffee costs will benefit revenue, but we may also experience some disruptions to our top-line as we implement our strategic initiatives. As a result we expect revenue growth to improve modestly in the second half.

For the year then, we expect organic revenue growth to be in line with global category growth of about 3%. Importantly though, we remain confident in our profit outlook. Specifically, we're confirming our guidance of double-digit adjusted OI growth on a constant currency basis, adjusted OI margin in the high 12% range, and adjusted EPS of $1.73 to $1.78 on a constant currency basis.

With that, let me turn it back to Irene for some closing thoughts.

Thanks, Dave.

So to sum up, the strategic and cost reduction and actions that we announced today underscore our determination to become a leaner, more focused, and more nimble global snacking powerhouse. As our first quarter results show, we're making meaningful progress toward our margin goals, while continuing to deliver solid growth and market shares.

The actions we've outlined today will sharpen our focus on snacks, simplify our operations, enhance and accelerate our ability to deliver world-class margins, provide the fuel to invest in our core snacking business to drive top-tier growth, and position us to deliver superior returns to our shareholders.

With that I'd like to open it up for questions.

(Operator Instructions)

Bryan Spillane, Bank of America Merrill Lynch

I've got a question about the coffee business -- the coffee transaction. I guess the first is just simply, Irene, can you talk about the strategic rationale and maybe more specifically -- was it driven more by your view of some changes potentially occurring in the coffee industry? Or was it more specific to just how coffee fit in your portfolio?

Actually, Bryan, coffee continues to be a very attractive category today within our portfolio. It's growing, it's got good margins. In fact, the margins are actually above our Mondelez average. And we've seen terrific growth, as you know, on on-demand in particular.

But we saw a unique opportunity to combine our very strong business with the DEMB portfolio. And I really think the partnership is a win-win.

We received the upfront cash proceeds that we described of approximately $5 billion after tax. We intend to use the majority of that, as I've said, for share buybacks subject to our Board approval. But the balance will be used for debt reduction and general corporate purposes, while still maintaining our investment grade credit rating.

We also, though, at the same time receive 49% interest in a very attractive company. It's a leading pure-play coffee company. It has a set of iconic brands with, as I mentioned, leading positions in over a dozen markets.

It provides greater global scale and it's highly complementary, in terms of the geographic footprint. Both businesses come with some very unique technologies, us in R&G and on-demand, D.E. Master Blenders have strong technology in liquid coffee.

We're going to combine the best of both from a management team standpoint. We feel very good about our partners, as I mentioned, they're highly respected business executives. And it gives us the ability to focus our snacking portfolio much more directly and ensure that we have the opportunity to optimally allocate our resources.

So net-net, this is opportunity to take what is a strong business and make it even stronger while creating great value for both partners, I believe, as well as for our shareholders.

Thank you. And if I could just follow-up question. Question for you, Dave.

In terms of the value of the deal, I think back of the envelope if you get back a little bit less EBITDA than what your contributing, but you net the $5 billion of proceeds after cash, it's roughly somewhere in the neighborhood of $3 of incremental value creation that we saw this morning. So I guess my question would be, is that kind of the right way to think about how we should be thinking about valuing the transaction? And then also just connected to that, in terms of cash flow with this business going in the JV -- what's the mechanism for the JV to kick the cash flow back to Mondelez? Thank you.

I think on the valuation, you can look at it a lot of ways. Truthfully, we're putting in our business and so it's more about the upside of the two businesses combined that's going to generate the value for this business. It gets kind of complicated when you talk about joint ventures, so I don't think we'll get into that.

But I think you've seen the multiple that D.E. Master Blenders was purchased at. And I think clearly that was one of the considerations as we put our business into that.

In terms of cash flow, today the coffee cash flow is obviously part of our ongoing free cash flow. And as Irene mentioned, the OI margin is above the average of our business, so it's pretty healthy cash flow. That we obviously lose.

We're going to pick up $5 billion upfront. And then the ongoing cash flow will come from dividends. And actually we filed an 8-K this morning along with the press release and you can see the dividend specifics in there. But it's a relatively fixed amount for the first three years and that it's tied to net operating profit thereafter.

So we'll get a dividend instead of the ongoing cash flow of our business. Clearly that will be a lower number in aggregate, but we get $5 billion up front in cash.

Can we get to the next question, please?

Andrew Lazar, Barclays.

Should we expect -- on slide 12 you show the impact from the coffee transaction. First off, I assume that's the impact of stranded overheads. And if so, it looks like you expect these accelerated cost saves and GDB and such, will more than cover those overheads by 2016. But would we expect this to be a linear path, or margins need to take a step back in 2015, on these stranded costs come out may not be immediately offset by the incremental savings?

Yes, I think when you look at that page, the red the bar there -- it isn't so much of stranded overheads, it's just that, as Irene mentioned earlier, the OI margin on coffee is higher than the Mondelez average. So it has a small detriment to our average OI margin.

I think the stranded overhead piece is actually quite small. Most of the people in the overheads that are associated with our coffee business today will transfer over to the new company. There will be some stranded overheads, but it's relatively small and it would be taken out through the restructuring program that we talk about today as well.

As it relates to 2015 margins, we didn't give you a margin target for 2015 today, mostly because it's going to be tied largely to the timing of the closing of the coffee transaction and the progress we make in the works councils and union discussions. But this year will be in the high 12%s on our OI margin. And 2016 will be between 15% and 16% and we'd expect to make measurable progress toward that 2016 goal next year.

It's hard for me to give you guidance specifically on 2015, given some of the timing things that I can't predict today. But we'll make measurable progress.

That's very helpful. And then, the one thing that surprises me about your comment about stranded overheads is, that was always one of -- I think -- one of the reasons that was always given as to why it was important that coffee, and grocery to an extent, be part of Mondelez. It's for that scale impact and the covering of fixed costs and such in some of that European region.

And so I guess I would have thought by parting with that, it would be a bigger headwind to cover from that. And I even think in certain markets like Russia, if I'm not mistaken, you even kind of go-to-market between coffee and chocolate kind of on a similar system. So just a little clarity on that would be helpful

Yes, I think it's because of the structure of the transaction we talked about today. As we create the new company, the two businesses are highly complementary. There are that many countries where we have major overlaps, so in a place like Russia we're going to be carving out a coffee sales force for the new company and providing that to the new company.

So that's the biggest difference from what you would've expected from a straight sale transaction. Because there's a new company that we're partnering with, we can contribute most of the people and the overheads attached it to that new company. And because it's largely complementary, in terms of geography, they're going to need most of those costs.

That's really what's different versus the historical practices we've had. But you're right, a lot of the countries have combined sales forces today, so that's an exercise we need to go through over the next year.

Okay. That's helpful. Thank you.

Chris Growe, Stifel.

Hello. Good morning.

Hello, Chris.

Good morning, Chris.

I have just a follow-up on the interest question. I had a question regarding -- looking at scale a little differently, and that is scale at retail, and how -- taking away the coffee assets be it in Europe or even Eastern Europe, would have an effect on your growth profile? The European, call it, grocery business. Do you see any effect from losing this business, in that regard?

We actually see the opportunity, because coffee is much more of a center of store kind of item and our snacking business tends to be more front-end and impulse driven, we actually see the opportunity to focus the respective selling organizations on what they do best. It's not unlike the kind of thinking we had as we slipped North American grocery business off. So we actually are looking for these new selling organizations to be a lot more focused on their respective categories and actually, we believe, that will help to drive growth.

Okay. And then a follow-up question on revenue growth. As you look at revenue for the year, the plus 3%, have you considered a higher degree of price realization coming through to support that growth? And are there any other pricing actions you've taken? There's been, as you've said some short-term challenges with market share. But anywhere where you seen any challenges to getting the pricing through that you expected earlier in the year?

The revenue growth we've given was essentially tied to category growth rate. I think both our revenue and the category will reflect a lot more pricing this year. And probably a lot less volume mix growth. So that's typical, when you have big price increases.

In terms of the pricing so far, it's a bit early to tell. We put in a lot of the pricing in emerging markets early in the first quarter. And as I mentioned a few minutes ago, competitors -- some have followed some have not. But I think it's common to industry, I would expect it to come through.

Europe is a little bit later because it takes a while to negotiate the price increases with the trade in Europe. So were not going to see the full benefit of that come through until Q2.

It's a bit early to tell but I think historically when we've had commodity increases that are common to industry, we've been able to price away those costs. I would expect that it will come through as we're planning this year.

Okay. Thank you.

David Palmer, RBC Capital Markets

Congratulations. You mentioned revenue growth of 3% for the year which is close to the growth rate of the first quarter. That first quarter includes a point drag from Easter and coffee deflation, which are factors that one would think would reverse in Q2, or at least by Q3 in the case of coffee prices.

Are you seeing a slowdown in your base business? Or perhaps anticipating disruption from the restructuring, as you think about that 3%?

I think -- you're correct, the first quarter had 40 basis points of an Easter impact and about 60 basis points of coffee. I think the coffee we expect to continue in the second quarter. I think we did say, we would expect some positive benefit as coffee goes from being a headwind to potentially even a tailwind in the back half.

But I think, the flip side of that is, as you mentioned, there could be some disruption from some of the strategic initiatives we put in place. And frankly we're just being prudent.

The categories have grown, over the last two quarters now, around 3%. And so we felt it was prudent to not count on a terrific turn around and just plan on that for the balance of the quarter. So it's not just a quarter one comment, it's been six months now of about 3% category growth.

And how much of your business will be Europe pre and post this deal? Thank you.

It's down about one or two percentage points, if you look at the configuration post transaction close.

Thank you very much.

Matthew Grainger, Morgan Stanley

Just to follow-up on the questions on revenue growth. I know it's difficult to pull out the crystal ball on this, but how confident are you that you'll see some recovery in category trends in 2015 and beyond?

And as you're thinking about the prospects for EPS growth, given your new margin targets, are you assuming a gradual recovery back to 4% to 5% org sales growth? Or thinking about this is a new run rate?

One of the reasons we took the actions that we announced today is to ensure, that despite what happens on our top-line even if trends continue at the same rate, that we have great confidence that we can deliver on the margin target, and therefore on our EPS commitments.

Okay. Thanks.

And Dave, you spoke to the cash cost of the restructuring program being largely front loaded during the first two years. As we're thinking about the phasing of cost savings and the potential for margin expansion beyond 2016, can you give us a rough sense of what portion of the $1.5 billion in restructuring savings should be realized by 2016?

I think it will flow through pretty steadily. The upfront years will be more overhead, less supply chain. The later years will be more supply chain, because that takes longer to get underway. So I don't think you'll see a massive skew. I wouldn't expect a huge impact this year, though.

Okay. And then just as were thinking about the margin progression, again for those out years, is there any degree of expected base margin expansion that's now just being pulled forward in a way that would moderate the margin prospects for those latter two years?

We haven't given a specific margin target beyond 2016 mostly because it's quite a ways from now. But we have said that will be 15% to 16% in 2016, as an OI margin. And the savings that are going to come beyond then, in 2017 and 2018, should allow us to make margin progress on 2017 and 2018. And obviously we'll continue to invest in our businesses to drive growth while we're doing all of that, for that entire period.

All right. Thank you.

Eric Katzman, Deutsche Bank.

Good morning, everybody

Good morning, Eric.

I guess just first on the coffee, if I could ask a quick question. You're noting it's high teens margins, but that's during a very low cyclical point in coffee costs. So kind of, what is more of a normalized coffee margin for the business?

I think you'd have to define what normal coffee costs are. I think $1.20 two months ago was actually not too far off a ten year average, $2 is obviously pretty high. And you're absolutely correct though, the revenue creates a bigger denominator as green coffee goes up and we reduce that margin. But I think it has been historically, pretty consistently, higher OI margin than the rest of our business.

That's also been particularly true, Eric, as we've shifted from a predominantly roasted ground business, more into on-demand and soluble. And that's been a trend that has been improving over the last couple of years, as we've made those investments in Tassimo and Millicano, for example.

Okay. And then more about kind of the restructuring, maybe following up a little bit on Matt's question. I guess, Irene, I followed you for a long time at Kraft and now Mondelez, you've made a lot of well received strategic moves. But I would say that so much restructuring, so much cash leaving, really historically hasn't led to great fundamental performance. This was growth co 18 months ago and the top-line targets have now taken a complete backseat.

So if I was working at Mondelez, I would be kind of wondering what are my targets? I used to be recruited here to be a brand manager with growth and now it's all about cost savings and ZBB. So I guess as we kind of go through this next iteration of change and restructuring, how do you keep people focused or motivated? And how much disruption do you think is going to occur from so much going on within the company?

Eric, I think you make a fair observation. I would remind you, as you know, our last restructuring program was in 2004 to 2008. We did deliver the targeted savings under the program. But had a business that was severely in need of reinvestment at that time.

And if you recall in 2006, our shares were declining, our product quality was not where it needed to be, we didn't have an innovation pipeline. So we did reinvest most of those savings back into the business. And quite frankly, I'd argue it created some great value on a number of those businesses which allowed us to split off the North American grocery business and create great value for shareholders.

At this point though, we're in a very different position. Our shares have now been consistently positive for a couple of years. We've got our investments up to where we need them to be on our core snacking businesses.

And I have great confidence that the savings we've laid out, you will see reflected in our P&L. And in fact, we've made the commitments today to take up the bottom end of our range over these next couple of years. And as we've said, we actually see some additional upside beyond that as a consequence of the investments.

With respect to how should employees react, there's a lot to absorb here. There's no question about that. But our employees are committed to creating this global snacking powerhouse that will win in the marketplace. And it is clear that as the environment has changed in large measure, it was imperative that we take appropriate actions to address some of the inefficiencies in our cost structure, while continuing to drive growth. If anything, the number of the actions that we're describing today will certainly help our margins, but will also give us the fuel to reinvest in growth.

So I actually don't think it's an inconsistent message. We continue to outperform our peers in most markets around the world. It's just a more challenging environment than I think we all had imagined as we created this Company 18 months ago. But net-net, I have great confidence that the actions that we're taking today will make this a stronger company and increase confidence in our ability to deliver top-tier financial results.

Thanks. I'll pass it on. Good luck.

Thank you

Ken Goldman, JPMorgan

Hey, thanks for the question. Dave, I don't think you addressed this, forgive me if you did. Can you help us understand how much net debt the new coffee company will have on its balance sheet?

I'm asking because of for trying to model the improvement in your non-controlling interest, I guess we want to better understand how much interest expense that entity will have. So is it fair to assume D.E. will finance the $5 billion with all debt? How much legacy interest expense debt do they have? Just curious for any color you can help with there. Thanks.

I don't want to get too much into the financing of the new company, but if you look at the AK we issued today, it highlighted that we're out EUR4 billion, which is the $5 billion we referred to. And the JAB folks are taking out EUR2.5 billion. And I think all the financing of that would be in the new company. There will be nothing at our level or above that.

Okay. Thank you.

David Driscoll, Citi Research.

Hello. Cornell Burnette in with a few questions on behalf of David.

Hey, Cornell. Go ahead.

Great. Just wanted to know if you could give us what the combined pro forma EBITDA for the new coffee business will be? Then going forward, what level of cost synergies do you think will be able to achieved by combining the businesses?

Yes, I think as we said today, we think the new company will have margins in the high teens on the EBITDA level. We haven't given any cost synergy numbers. I think I would say, that some of the excitement of this business is that it's highly complementary, both in technology as well as geographic platforms and brands. But, I would say the revenue synergies frankly are as exciting as any cost synergies that could come out of this.

And as I mentioned earlier, a lot of the countries that our business is in, they are not, and vice versa. I think this is as much about being a global pure-play coffee company as it is about traditional synergies.

And so in your kind of accretion analysis and getting to that accretion in the first full year, you're saying there's not much in the way of cost synergy is kind of baked into the projection?

As I said, I'm not going to get into specifics of the new Company's business plan. But I would say as we talk about accretion in the first full year, that reflects the cash we received and assuming the majority of the cash goes to buy back shares, with a substantial portion potentially for debt pay down, as well. So I think that's more a driver and the fact that we will be consolidating 49% of the net income of the company as minority interest position within our earnings per share number. So that's where that really comes from.

Okay. And one last thing on chocolate, can you talk a little bit about the range of price increases that you've taken? And kind of generally how well have they been accepted thus far?

It varies a lot. In Europe obviously, they're pricing to recover the cocoa and dairy costs, and most recently nut costs. And those price increases were negotiated in the first quarter and we've got those lined up. But they really didn't impact our revenue to late in March, so you'll see those flow-through in the second quarter.

I really don't want to get into net price increases, because frankly that gets into trade deals and other things. In the emerging markets it's much higher because not only are we recovering cocoa and dairy, we're also cutting the currency impacts in most of those countries. So you're looking at price increases in emerging markets anywhere from high single digits to mid-teens. It depends on the country.

It's fairly significant in emerging markets. Those, mostly, were put in place in the first quarter. And they're playing through. And I would expect that those are on the shelf in most of those countries as we sit here today.

Okay. Thank you.

Jason English, Goldman Sachs.

A couple quick housekeeping questions on the coffee transaction. The dividend income stream that you disclosed in the 8-K, the split between Acorn and you -- should we use the same ratio as the cash distribution?

I would use the same ratio as the ownership of the future company.

Okay. That's helpful. Timing wise, sometime in 2015, it sounds like you're pretty confident in terms of regulatory approval. Why such a protracted time line?

It's not just regulatory approval. It's also the works council consultations that we need to go through in Europe. So as with any transaction like this, you need to consult with the works councils. And you need to complete those consultations before you can close the transaction. Or in the case of France, before you can actually accept the offer.

So there's a process we need to follow. We went through the same process when we brought the LU biscuit business from Danone. So we understand that process pretty well. And it's just a question of timing.

So it will be some time in the course of 2015. And that's why we been reluctant to give specific guidance for next year. And we've really focused on this year and 2016.

Got it. That's helpful. And one last question, back to fundamentals.

Looking at slide 16, where you showed geographically your share performance. Great share performance in the developed and relatively soft performance across each region of emerging markets. Can you give us more color on what's driving that share weakness? And on a forward, what you expect and why?

I think if you go back over the last two years, we've been pretty consistently strong in shares across all the regions. So this is an aberration.

As I mentioned a few minutes ago, we took pricing in the first quarter and in most of those markets we are the price leader. And so we've priced to recover commodity and ForEx impacts within our costs. And we successfully got that through. Some of our competitor lagging those price increases.

But in the end, these are all common to industry cost increases. So I'd be surprised if they don't eventually come up. So I would expect that to normalize. It's fairly typical when we're in a price increase environment, the price leader takes a bit of a hit in the first few months.

Got it. Make sense. Thanks a lot, guys. I will pass it on.

Ken Zaslow, BMO Capital Markets.

Hello, everyone.

Hey, Ken.

Good morning.

I have a big picture -- what was the catalyst to push you to reevaluate the extent of your margin structure? You guys have to be looking at the portfolio for some time. What pushed you to do this next restructuring effort?

Well the fact is, as our global categories have slowed down, particularly in the emerging markets, the need to drive best-in-class cost becomes that much more important for us to deliver on our bottom-line commitments. And so we've been talking about that for quite some time. Obviously it was a big subject of discussion with our Board and our strategic plan last summer. And we've been working on a number of these initiatives.

We shared with you the early thinking on supply chain at back to school. We talked with you about some of the work that we were just beginning of zero-base budgeting with respect to overhead at Cagney. And what we've announced today is essentially reflects the culmination of those activities.

Obviously the coffee transaction is something that was happening concurrent with a number of these other thoughts. But they are highly interrelated, and that's why we have great confidence that as we take these actions together, that we will be able to drive additional margin expansion sooner while still continuing to support our franchises.

Would you expect there to be more additional actions to be taken in terms of either the portfolio refinement? Or even from another level deeper into cost?

Not saying the cost restructuring is not excellent, I don't want to minimize that and the effort there. But as you get deeper and deeper in this, do you think the ball is going to keep on rolling in terms of portfolio refinement and cost restructuring?

Look, I think the cost piece of it, we're committing to approximately 300 to 400 basis points improvement over these next three years. That's a substantial commitment that we're making on the margin front. And we've got some very strong programs behind that. We'll continue to push as aggressively as we can.

But I think the targets we've laid out are quite aggressive and as we've suggested, we see the opportunity as we make some of our supply chain investments to help accelerate our delivery there. That will have some benefits beyond 2016. So I think the commitments we've made today are quite aggressive.

At the same time, from a portfolio standpoint, this coffee transaction was a unique opportunity to create the world's largest pure-play coffee company. And we believe we have accomplished that by creating great value for both partners. And creating good value for our shareholders, both today and then looking into the future. So we feel quite pleased with the overall implications of the transactions, as well as the actions that we've announced today.

Great. I appreciate it. Thank you very much.

Alexia Howard, Sanford Bernstein.

Let me ask about two quick questions. Does your emerging market exposure, that I think is 40% today, change after this coffee deal? And the second one is, does the 15% to 16% margin goal by 2016, still stand even after the coffee is excluded from consolidated earnings?

And then finally just following up on Ken's question. Could you imagine structuring a similar deal for the cheese and grocery business, which seems even less strategic than the coffee business does? Thank you very much

So, Alexia, our emerging markets business will still be about 40% of the portfolio after the transaction. The second question was --

The 15% to 16% margin already takes out coffee. So there's a small coffee detriment that goes in there, because coffee has higher margin than the rest of the portfolio. But that's more the made up by the savings of the restructuring program.

And then the last question on the portfolio, as I said, coffee is a very unique opportunity for us to create value. And we're not going to get into any other hypotheticals at this point in time.

Great. Thank you very much. I will pass it on.

John Baumgartner, Wells Fargo.

Irene, in the absence of seeing some reinvestment of these coffee proceeds into route -- market and whitespace growth, how are you seeing the return on investment as global category growth has slowed? Have the returns deteriorated at all? And how are you thinking about developing markets reinvestment, going forward? Thanks.

I think we've seen a number of good returns on the investments that we made, particularly in a number of our markets last year. As we thought -- at the time we made some significant investments in route-to-market in Brazil and Russia and in India. And we've seen great paybacks there.

The one place we saw less of a return has been in China. And as we talked, we have pulled back quite a bit from some of those investments. So we continue to look at these markets on a pay-as-you-go basis.

We're monitoring whether or not were getting the return as we make investments in areas like route-to-market. But we have a strong desire to make sure that we are creating the necessary investments in our infrastructure to enable us to benefit as the markets recover. So I think we've got the right balance here, between continuing to make investments that deliver attractive returns while ensuring that were not over investing if the markets and not responding as well. So we keep a very close eye on that.

Okay. Thanks, Irene.

Rob Dickerson, Consumer Edge Research.

First question is -- I'm curious, I know JAB, I believe also owns Peet's and Caribou in the US. And I just can't remember -- when you split Mondelez and Kraft Foods, was there an agreement in place such that you can or can't operate in a Kraft market? I'm just asking, off-chance three years, four years down the road you decide that US is actually a very attractive coffee market. Are you allowed to sell coffee in the US?

We're not precluded from selling coffee in the US.

Okay, perfect. Thanks.

And then second, when JAB purchased D.E. Master Blenders -- D.E. Master Blenders was obviously spun from Sara Lee -- there's a great story behind it. As they sort of worked through their strategy up front before JAB bought them, they found themselves actually facing a bit of pressure. Mostly on the top line but then some of the margin estimates came under question et cetera. JAB did a fabulous job of being able to purchase the asset when considered potentially trough margins and earnings.

Now that you're working with JAB kind of post-purchasing the D.E. Master Blenders -- what have you -- and I'm not sure if you can provide any color on this. But have you seen that their strategy with the business before the JV with you and then after it is really more cost-saving focused? Or is this something we should be thinking as sort of another phase of growth co and cost co and is it more of a cost savings opportunity? Thanks.

As you can imagine, we're not in a position to be able to make a lot of statements about the combined company going forward. But I will tell you is I think our approaches to the business are quite well aligned. And that's why we see great opportunity an we are pleased to have a 49% of the combined company going forward.

Okay. Fair enough. Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Management.

Hello, this is Dexter. Nick and I will be around for the rest of the day to answer any questions you might have. Other than that, thank you all for joining the call and we'll talk to you later.

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