億滋國際 (MDLZ) 2014 Q2 法說會逐字稿

Good morning and welcome to Mondelez International second-quarter 2014 earnings conference call. Today's call is scheduled to last about one hour including remarks by Mondelez's 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 sent out our earnings release and today's slides, which are available on our website, MondelezInternational.com. As you know, during this call we will make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements.

Some of today's prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. With that, I will now turn the call over to Irene.

Thanks, Dexter, and good morning. Our second-quarter reflected the continued challenges of a difficult macro environment that again tempered category and revenue growth. In fact, the operating environment worsened in the quarter in a number of markets, especially in Europe. But we continue to expand operating income margins and again delivered strong, high-quality EPS growth in the face of these challenges. Adjusted OI margin was 12.6%. That's an increase of 120 basis points, driven by gains in North America and Europe. These operating gains drove a 19% increase in adjusted EPS on a constant currency basis.

On the top line, however, we delivered modest organic revenue growth of 1.2%. While that is below our expectations and below the overall growth of our categories, it reflects our decision to lead pricing to recover cost increases. Our pricing actions were the most significant influence on our revenue growth rate this quarter. As we have said in the past, our strategy is to increase prices to fully recover the impacts of input costs and currency over time.

Of course, that's the right thing to do for the long-term health of the business. And it's critical to driving sustainable, profitable growth. Specifically, it enables productivity savings to drive gross and operating margins as well as investments in innovation and brand equity.

This year we are experiencing significant inflation in many of our inputs, notably cocoa and dairy. This has been magnified by weakening currencies in many emerging markets. In fact, nearly half of our input cost increase has been due to currency.

This required us to take significant price increases, especially in chocolate. Given our share positions in most markets, we chose to lead those pricing actions. And while we anticipated that this would be disruptive in the short-term, it has been even more challenging than we expected. In a number of key countries and categories our competitors have been slow to implement price increases. As a result, we are seeing some negative effects on consumer take away as well as on our share performance.

Of course, our competitors face the same currency-related input cost pressures as we do. So, while this dynamic has tempered our revenue growth in the short-term, especially in emerging markets, we believe this impact will be temporary.

With that as a backdrop, growth in our emerging markets, although below our expectations, was up a relatively solid 4.7%. In developed markets it's a more complex story. Some customers, especially in Europe, most notably in France, have reacted quite severely to our price increases. In fact, a number have refused to accept our pricing, which has led to extended disputes and near-term distribution losses.

Given our leadership on pricing, we are taking the brunt of these punitive actions. But to be clear, this is affecting the broader industry, not just us. This issue, together with slower category growth in Europe, drove a 1.2% organic revenue decline in our developed markets.

Let's look more closely at our Q2 revenue by region. As expected, pricing had a positive contribution in four of our five regions. In Europe revenue was down 1.9%. Vol/mix declined primarily due to the pricing-related disruptions and slower category growth that I just talked about. The region's overall pricing was down modestly as lower coffee prices offset higher pricing in chocolate and cheese. While lower coffee revenues tempered the region's growth by 0.4 percentage points, we expect coffee will become a tailwind in the second half, reflecting the price increases that we begin implementing early in Q3.

North America increased 2.7% with balanced contributions from vol/mix and pricing. Biscuits had another strong quarter, in part driven by innovations like Oreo Reese's Peanut Butter Cups and belVita Soft Baked. Candy also posted solid growth.

EMEA grew more than 6%, also with balanced contributions from vol/mix and pricing. Russia grew mid-single digits including solid gains in biscuits, candy, and coffee, as we continue to invest in our Hot Zone support. Ukraine revenue was up slightly in the quarter, which was a tremendous accomplishment, given the current political and economic situation.

In Latin America, revenue grew nearly 12%. Pricing in the inflationary economies of Venezuela and Argentina drove much of the increase, although it also pressured vol/mix. At the same time, Brazil delivered high-single-digit growth including positive vol/mix despite aggressive pricing and increased competitive pressures. Growth was solid across all categories.

And finally, in Asia-Pacific revenue was down about eight due to continued weakness in China biscuits and a more intense pricing-related retail and competitive environment in Australia and New Zealand. India, however, delivered another quarter of double-digit growth.

As we look at our results by category, the same themes are evident. Global category growth for the first half was 3.8%, above our organic growth of 2%. In biscuits the entire 200-basis-point gap between category growth and our revenue growth was attributable to China. We expected a double-digit decline in China biscuits as we cycled last year's stepped-up investments to reinvigorate category growth including the launch of Golden Oreo.

In chocolate our decision to lead pricing has resulted in the temporary disruptions and customer disputes in Europe that I described earlier. Additionally, in some key markets like Brazil and South Africa, our competitors have been slow to increase prices. We believe they will eventually price, given the sharp rise in cocoa, including a nearly 20% increase year to date and the weakening of emerging market currencies.

But there's also some positive news in our category results. In gum we continued to see steady improvement both in the overall category, which was up about 1% and in our revenue, which declined only low-single digits after several quarters of steeper declines. I am especially encouraged by our performance in the US, where our focus on product assortment and shelf resets, our messaging on oral care, and advantaged innovations like Sour Patch Kids gum have led to three consecutive quarters of share growth.

We have also continued to deliver strong gum performance in China. In just two years we have captured a 9% share against a strong competitor. And we are on track to deliver $150 million in revenue this year.

Let's now take a look at market share. Overall year-to-date share performance remains solid with 57% of our revenues gaining or holding share. However, as expected, share softened a bit during the quarter as we priced ahead of competitors. This dislocation was most apparent in our emerging market shares as consumers adjust to the inflation-driven price increases. EMEA, Latin America, and Asia Pacific all saw market share performance below 40% on a year-to-date basis.

Looking forward, we expect that shares will continue to soften in the near-term, especially in Q3, until competitors implement pricing and we resolve the outstanding customer disputes.

So, as you can see, our revenue growth and share performance were softer than we expected. But we believe much of the pricing disruption on revenue and share is temporary and will revert in the coming months. That said, we knew the environment would be challenging and so over the past year we have been rigorously driving productivity, reducing overheads, and executing our supply chain reinvention initiatives. All of these actions have helped to protect our bottom line in 2014 and set the stage for profitable growth in 2015 and beyond.

With that, let me turn it over to Dave.

Thanks, Irene, and good morning. Over the next few slides I will walk you through our bottom-line results and our updated outlook before turning it back to Irene for a quick update on some of our strategic and operating initiatives. Adjusted gross profit dollars were down 1.6% for the quarter, entirely due to mark-to-market adjustments but up 0.4% for the first half on a constant currency basis.

Adjusted gross profit margin was down 90 basis points this quarter, again entirely due to mark-to-market adjustments on hedging contracts. In aggregate, we fully priced to recover commodity and ForEx impacts this quarter, in line with our strategy, although the impact differs by region.

Gross margins in North America and Europe were up sharply with aggressive productivity savings driving significant step-ups versus prior year. However, in AP and EMEA we weren't able to fully offset higher input costs, due to the impact of currency. The full benefit of our pricing actions will be realized over the course of Q3 and Q4 and will set us up well for 2015.

Productivity was again strong in the first half with gross productivity over 4% of cost of goods sold. Net productivity, which is our primary measure, was about 2.5% of COGS, exceeding our expectations. Adjusted operating income dollars grew nearly 12% for the quarter and nearly 14% in the first half on a constant currency basis. Adjusted OI margin expanded 120 basis points in the quarter despite the 90-basis-point impact from mark-to-market charges that I previously mentioned.

Margin expansion was high quality. We significantly reduced overheads as result of our ongoing cost management efforts. In addition, we continue to drive efficiencies in advertising and consumer support by consolidating media providers, reducing nonworking media costs, and shifting spending to lower-cost digital media outlets. For the first half A&C represented about 9% of net revenues, in line with our full-year expectations.

So to be clear, we are not reducing support of our brands or innovation platforms. We are maintaining our share of voice at least at historical levels, especially in the face of our significant pricing.

Taking a closer look at margins, we see that every region posted margin improvement for the first half. The biggest margin expansion was in our developed markets, which, as you know, is our near-term focus. In North America OI margin was up 310 basis points and Europe increased 200 points. Supply chain and SG&A cost reductions implemented earlier this year drove the improvements.

Turning to EPS, adjusted EPS was $0.40, up 19% on a constant currency basis for the second quarter, and was $0.79, up 15% on a constant currency basis for the half. Our first half growth was driven entirely by operating gains despite absorbing a negative $0.04 impact from mark-to-market charges. Below the line, unfavorability in taxes was offset by lower interest expense and share repurchases.

Let me now quickly update you on where we stand on capital allocation and cash flow. We continue to deploy capital to where we expect to deliver the best returns, whether it's reinvestment 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 target of $3.7 billion. In fact, at the end of Q2 we improved our cash conversion cycle by 21 days, driven by DSO and DPO, continuing the progress of the last two years. In the first half we returned $1.4 billion to our shareholders, $900 million of which was through share repurchases. For the full year we still expect to return $2 billion to $3 billion to our shareholders, including $1 billion to $2 billion in share buybacks. Finally, we have paid almost $500 million in dividends year-to-date and today announced a 7% increase in our quarterly dividend to $0.15 per common share.

Turning to our outlook, we expect our revenue growth rate in the back half to improve modestly as we pass through higher cost increases and cycle favorable prior-year comparisons, especially in China. However, we now anticipate revenue growth of 2% to 2.5% for the full year. That's down from our previous outlook of approximately 3%, reflecting continued slower category growth and near-term dislocations as customers, competitors, and consumers adopt and adjust to higher prices.

As we said earlier, we believe the factors pressuring our revenue growth are temporary. Category growth rates should improve over time along with macroeconomic conditions and demographic and snacking trends remain in our favor. Pricing-related disputes with our customers are a cost of doing business, and all of our competitors face the same challenges from currency-related input cost increases. As Irene mentioned, we will continue pricing to recover cost impacts, allowing our productivity efforts to fuel the investments in innovation and brand equity that drive sustainable, profitable growth.

Turning to 2014 margin and EPS, we continue to expect adjusted OI margin for 2014 in the high 12% range and EPS guidance of $1.73 to $1.78 at constant currency. The pricing actions we are taking, along with the supply chain and overhead reduction initiatives we are driving, enable us to maintain our 2014 earnings targets despite a softer top line.

With that, let me turn it back to Irene to discuss the strategic and cost reduction initiatives we announced in May.

Thanks, Dave. The headline is we are on track. First, we continue to make good progress on taking the steps necessary to successfully close our coffee transaction in 2015. As you know, we intend to combine our coffee business with D.E Master Blenders to create the world's leading pure play coffee company. Both companies have been working closely to prepare for the combination, including identifying the key leaders and having discussions with works councils.

Second, we remain firmly committed to delivering best-in-class costs in both our supply chain and in overheads. Our supply chain reinvention is on track to deliver $3 billion of gross productivity savings and $1.5 billion of net savings by 2016. We have already begun to see the impact of these efforts in the margin improvement in both Europe and North America.

Our new biscuits facility in Salinas, Mexico is scheduled to open as planned in the fourth quarter. And we are on track to open new facilities next year in the Czech Republic and in India.

As Dave mentioned, we are exceeding our productivity objectives with gross productivity over 4% of cost of goods sold and net productivity at about 2.5% in the first half.

With respect to overheads we are also advancing our zero-based budgeting initiative. We have identified key areas of improvement in overhead cost, assigned accountability for achieving those cost reductions, and have already announced several policy changes to begin capturing some non-headcount-related savings. We will announce additional changes in the coming months to further drive savings.

Finally, we are simplifying and standardizing our ways of working across the Company. Last week we named Mark Clouse to a newly created position of Chief Growth Officer to ensure that growth remains at the forefront of our strategy and that we bring the same focus and discipline to driving sustainable, profitable growth as we are doing to improving our cost structure. In this role, Mark will be accountable for all of the key drivers of growth by overseeing the teams responsible for corporate strategy, global categories, marketing, sales, and R&D. This integrated approach will enable us to more efficiently allocate resources to accelerate expansion of global innovation platforms, Power Brands, and breakthrough technologies.

Also last week we announced that we are adopting a category-led model in all of our regions, beginning January 1, 2015. This region-based category-led approach is not new to us. Europe has been operating under this model for years and North America adopted at the beginning of 2014. So we will leverage the learning from these two regions as we implement this model in our other three.

The new operating model will accelerate growth of our Power Brands and innovation platforms; provide greater clarity of roles to drive growth, cost, and operating excellence; deliver standardized processes to reduce costs and improve capabilities; and, finally, ensure that we are making the right investments in long-term technologies. All of these actions underscore our determination to become a leaner, more focused and more nimble global snacking powerhouse that delivers top-tier performance over the long-term.

With that, let us open up for your questions.

(Operator Instructions) Chris Growe of Stifel.

I had just two questions, if I could, for you, Irene. The first -- just in relation to the softer category growth rates, I just want to get a better sense of how much you credit that to the pricing that's going through in this category. Are consumers shifting to other categories, as best you can tell?

And I guess related to that, have you seen any stabilization of that market share performance through the quarter? It sounded like it remained pretty soft through the quarter.

I would say, actually, I think our categories are holding up better than many. So in the world of food one of the reasons we continue to like participating in snacks is that it tends to have a better trajectory in most markets around the world. So yes, our categories have softened but I think they are still outperforming many other food categories.

With respect to our shares, it's a little bit of a mixed bag as you look at different countries around the world. Again, the biggest issue is whether, in fact, our price gaps have widened more than we would like them to be. And as we start to see those gaps close in various markets around the world, we see our share recovering. So I think that's what gives us great confidence that what we are seeing right now is a temporary dislocation. We do think, as the pricing gets out there and depending on reactions out in the marketplace, it will take us about another quarter or so to play that through, but we would expect that our shares will revert.

Okay. And just one quick follow-up-on to that. Then would you expect to see any increase in, say, advertising spending or promotional spending to try and ease the progression to higher prices? Is that one of the solutions to the issues you are having some of these markets?

Well, as Dave said, we have been very careful to protect our A&C spending, particularly in the challenging pricing environment. And we will continue to do so. Any of the changes we have made in A&C have all been in nonworking end in consumer-oriented activities. But our fundamental media spending is exactly where we need it to be to protect our market positions.

Okay, thank you.

Bryan Spillane of Bank of America.

I've got two questions. The first, just to follow up on Chris's question about organic sales growth -- is there anything different with the consumer in emerging markets today that's making it more difficult to raise prices and I guess above and beyond just the price gaps? And I guess my thinking was just, in the past, for Mondelez and really for most companies, a little bit of inflation at a local level is actually pretty good because it allows you to take maybe cost-plus type pricing. So is there just something different this time around that's making it more different in emerging markets to raise prices? And then I have a follow-up.

You know, Bryan, I think a little of it is just the magnitude. Again, I talked about cocoa being up about 20%. That together with the significant weakening of some of the local currencies has really put a lot of pressure on pricing. And so I think the magnitude is a big part of it. But again, we're taking a number of steps. Aside from making sure that we are continuing to support our franchises, we're working very carefully with respect to pricing and sizing to make sure that we are offering consumers a variety of options at different price points, all of which we hope will make this dislocation temporary and allow us to mitigate some of the impact.

Okay. And then just to follow up on the change into the category-led model, could you just clarify two things? One, does P&L responsibility at the division level change -- so is it still a regional P&L or is it a category P&L? And I guess similar, with Mark Clouse's new position and where he fits in the organization, does he have P&L responsibility?

So the category, the P&L's continue to reside at our region level and, within that, at the region category level. We really believe, for us, that is the best balance between capitalizing on local market knowledge and local market execution while at the same time leveraging our scale on a global basis. So that's how we are going to play this out.

Okay. So how does Mark -- does he have P&L responsibility himself?

Mark does not have direct P&L responsibility. Our global category teams will continue to steer the overall strategies of our categories out into the marketplace, but the P&L will reside closer to the market with our region category leaders and our region presidents.

Great. Thank you, Irene.

David Driscoll of Citi.

Wanted just to ask a little bit more about pricing volume elasticity and compared to historical price increases. Can you comment on how the current chocolate price in Europe is going versus those historical periods where you've had to do it? And separately, can you comment on maybe the early read on coffee pricing? And if you can tease out the difference between the two -- I have always felt like coffee was a much safer place to take pricing. But I'd like to hear you comment on those two pieces in Europe specifically.

Okay. In Europe we have obviously faced chocolate pricing in the past. This would be of a magnitude that's bigger than what we've done in the past because of the impact of cocoa going up. Actually, even the cocoa butter ratio within that went up. Dairy cost went up. So essentially, most of the raw materials that go into chocolate went up. And so, chocolate has been particularly hard hit and there has been fairly significant price increases.

I would not say the difference this time, though, is consumer price elasticity. The biggest difference is really the trades. The trade has pushed back very hard and it reflects the tough environment in Europe. And many of the retailers' margins themselves are under pressure. But I think the bigger difference this time has been the trade pushback. And you see that in our shares. Our shares remain quite strong in Europe, actually; the shipments not so strong. And that is really the difference between consumers, who I think are more or less in line with what we expected, versus retailers are pushing back much harder. (Multiple speakers).

Coffee, as you say, is much more -- it goes up and down with markets. I think it will be also a little tougher than in the past because of the retail environment. But it is an easier thing to get a coffee price increase through than a chocolate one, for sure.

One follow-up -- on the revenue outlook I think you made the comment that Europe was the single biggest driver of your reduced overall revenue outlook. But it also seems fair to say that emerging markets are also a bit weaker than expected. Do I have the sequence and magnitude correct between the two pieces of why the revenue guidance is a little bit lower?

Yes. The emerging markets for the quarter were up 4.7%, so less than we would have liked but still pretty respectable. And as we get into the back half we will continue to have a little bit of pricing challenges, but we are going to get past that China headwind. So I think emerging markets will still have pricing challenges. But I think with the China headwind offsetting that, that will be okay. It really is Europe where we expect to continue to have some retailer pressure and where the pricing really has to flow through completely in the third quarter. So that's the primary driver.

Thank you, I will pass it along.

David Palmer of RBC Capital Markets.

Two questions from me as well -- in the past, have you typically led pricing in all the categories you are implementing pricing today? Or is Mondelez taking relatively more of a leadership position during this inflation cycle? And, [relatedly], are the lags in pricing by competitors atypical this time around?

I think we have traditionally led pricing where we have market leadership positions. And that is the case in most of our category/country combinations. So we have normally led pricing and we did that this time as well.

And I can't speak for the competition. They all have their own unique situations, but they are facing the same cost increases. It is typical that you would have some lags in some countries because they all are looking at it through their own lens, based on whatever their specific facts and circumstances are. I think this time the impact is a little bit bigger than normal just because of the size of the pricing. So if we price and create a bigger price gap, that gap difference is bigger than it has been in the past because of just the sheer magnitude of the pricing that's happening. And again, it's particularly on chocolate.

And second, you mentioned in your remarks the creation of the Growth Officer position, the need to be nimble and focused and the need for innovation. And all that makes sense. Is there something in terms of your own execution, a particular area that you would want to improve more than others? Perhaps it's the innovation side that you would like to spark. Perhaps it's other marketing. Could you just speak to that? Thanks.

I think the single biggest opportunity -- I think there's a number of benefits of the new model. I think the single biggest opportunities, though, will lie in growth and speed and very simply taking good ideas from one part of the world more rapidly to another will be a key enabler, I think, of accelerating growth. So I am quite optimistic about that ability of this new structure and this new position to be able to allow us to move ideas from one part of the world more rapidly to others.

Thank you.

Eric Katzman of Deutsche Bank.

Dave, I was wondering -- last quarter you mentioned how many basis points lower A&P spending helped in terms of origin expansion. Can you give a little more detail about that this quarter year-over-year?

Yes. I think through the first half, as we said, we are around 9% of revenue. That's actually right in line with what we said we would do in the full-year at the start of the year. The comparison year-over-year is actually impacted by timing last year. So last year we spent about half a point higher than that in the first half, and then we spent less than that in the back half. So year-over-year I don't think there will be a material change. But this year it's very smooth, first half/second half. Last year it was much more front weighted. And really, that comes down to some of the programs we talked about last year, led by China.

So, we are pretty comfortable that we are sustaining the [AMC] at the right level throughout the year this year and that we are supporting our brands. I think the key is the share of voice hasn't moved. And I think that's the important metric that we look at.

And then how long do you expect these EU disputes to go on?

I don't want to get into predicting negotiations. But I think the guidance we've given you gives us the flexibility to manage through that. I think it's important that we stick to our principles. And we've always priced to recover input cost increases. It's important we stick to that because if we don't do that, we don't have the funding to drive growth for ourselves and our customers.

So, we will continue to push that through. But the guidance we've given today gives us the flexibility to manage through that.

Okay. Last question and I will pass it on -- you put in the 10-Q about possibly having to change, I guess, how you account for the 49% interest you will have in the coffee JV. Is it possible at this point to run through what the implications of that are to the P&L, maybe not specifically but -- if you don't have that --

I can give you in principle what will happen. So when we get to a point where the deal is certain or it closes, we will treat it as a discontinued business or a business held for sale, depending on the situation next year, probably midyear. At that point we will strip it out as a discontinued operation, the same as we did when we've done other divestitures. So, all of our history will be restated to take it out.

In terms of the go forward, it would be handled on an equity method. So we own 49%. We would take 49% of the net income and that would be part of our EPS. But it would be recorded below OI. So it would not be within our OI. It would not be within our OI margin. It would be between OI and EPS, but it would be part of the EPS.

So that's how it will work starting at closing. And as I said, we think that by the first full year of operation, which should be 2016, that it should be EPS accretive.

So it's still accretive even if it's now kind of a discontinued op? Do you have to lower the earnings base because it's a discontinued op going backward?

Yes. When I say accretive, I mean to where we would have been if we hadn't done the deal. There's a lot of factors, obviously. We lose the OI on coffee when we take it out of the base. We pick up the 49% minority interest and we've got $5 billion of cash coming back, which helps us, obviously, on the share and the interest side. So that combination of things should be accretive in 2016.

Okay. All right, I'll pass it on. Thank you.

John Baumgartner of Wells Fargo.

Irene, just in China, wondering if you can speak to maybe to your execution there. It seems a few quarters ago you were optimistic that maybe shipping some of the brand spend it back to the secondary biscuit brands could stabilize the market share losses. But it sounds as though maybe it hasn't happened quite yet. So just how would you characterize the fundamentals there, maybe your strategy going forward?

We are not pleased with China's performance, I need to be clear. But there's actually no new news there. As we told you last year, we saw quite a dramatic slowdown in our biscuits category. We lost some share. We have taken a number of actions to try to address both of those issues. But the facts are the biscuit category has not yet recovered. In fact, it's growing only about 1% to 2%.

So the reality is it still a challenging situation. The good news is, as we said, the toughest comps, as we enter the second half of the year, the toughest comps will now be behind us. So we are not going to have the same kind of year-over-year headwind that we have had in the first half.

And again, we are quite pleased with the performance of gum in China, and that continues to be a really strong story for us. But net-net, the China situation is essentially as we had shared it with you. And we should start to lap those challenging -- we are starting to lap those challenging comps as we enter the back half of the year.

Thanks, Irene.

Ken Goldman of JPMorgan.

Irene, you talked about the grocers rejecting pricing and maybe taking some products off shelf as a cost of doing business. And that's fair, but I guess it doesn't happen that often. So I'm just curious to understand a bit how it took place. Did your marketing team maybe underappreciate some of the customers' will in this case? And more importantly, where does your confidence come from that this will get resolved? You said you expect your competitors to take pricing eventually. But why would they if they just saw what happened to the industry leader?

Look, pricing is always a difficult proposition. And we don't take it lightly, particularly in a tough macro environment. What gives us the confidence is that our brands are strong. They are traffic drivers for our customers. And after a certain point in time it's going to be important to our customers' overall growth to have these brands back on the shelf.

So, we didn't take those decisions lightly. We made them because it is critical, as Dave has said, for the long-term success and health of our franchises and our ability to continue to invest in them. It was critical to make sure that we are recovering the cost increases that we are experiencing. But we are optimistic, given the strength of our brand and the role that they play in driving traffic for our customers, that we will be able to successfully resolve this dispute. But we are also allowing in our guidance, as Dave said, for the fact that it's not necessarily happening tomorrow. And we want to acknowledge that.

And to the clear, it has historically happened. And we did identify at the quarter one call that we expected some disruption, I think. So the tactics are actually the same that we have seen in prior times. The difference this time is it's quite broad, across many more retailers. And it's quite deep. So, it is a typical reaction to de-list SKUs in France or to stop shipments or stop buying for a period of time in France. It is more dramatic than we anticipated, but it's not a completely new tactic.

That is helpful. One quick one on the US -- at least according to Nielsen data, some traditional snacking categories -- all of them, right, cookies, crackers, chocolates, salty snacks -- they have all really decelerated. I am curious if you can talk about what his have been in your view there. We are seeing some strength in nuts, dried fruit, healthier snack things like that. So just any thoughts you would have on whether there's a share shift within snacking would be helpful. Thank you.

Our snacking business has performed quite well within, as you rightly point out, a challenging environment. So there's no question the categories are slowing. We have been outperforming the categories for quite some time and I think it's for a couple of reasons. I think we had a very strong marketing and innovation pipeline in North America. I think our DSD network is operating extremely effectively. And so we believe that we can continue to drive our growth at or above category rates. Our year-to-date biscuit share is up almost a point. And our biscuits' organic revenue was up about 4% in the first half. And it's because of the factors that I mentioned. So I think there is some slowdown in some of the categories, but we've been able to capture more than our fair share, and that has been driving our overall revenue performance.

Thank you.

Matthew Grainger of Morgan Stanley.

Just one regional question -- I was hoping to get a bit more color on the weaker sales this quarter in Asia. I know you faced an easier prior-year comparison. You have been working through your issues in China for several quarters now and we hopefully are past the worst, but top line did decelerate further, which I'm guessing is attributable mostly to this Australia and New Zealand issue you called out. So is that the case? And if so, can you characterize the impact that's having, what's going on and what we should expect there over the balance of the year?

Well, let me start with the fact that actually through the first half, as we've said, China was actually a massive headwind. We were up about 8% year ago in the first half in 2013 in China, and so that's a big headwind to us as we experienced some of the challenges that we've said. And that continues to be the biggest factor. But certainly in the quarter some of what happened in Australia and New Zealand is just essentially a consequence of some of the same pricing conversations that we've been having about our European customers. And again, it's something that we think will resolve itself as the year goes on. We did see some fairly significant destocking from some of our Australian customers, and that was what caused some of the dislocation in the second quarter.

Okay. But just to be clear, given some of your competitors over the years have had de-stocking issues that have been extremely difficult to resolve in that market, would you say you have an equivalent level of confidence that you would have in Europe going forward as far as getting those products back on shelf and resolving those quickly?

Well, the good news, again, these are brands that have very strong market positions. They do drive traffic. And quite frankly, as we look at some of the inventory positions, they are well below healthy levels. So reasonable confidence. Again, we are not necessarily predicting timing. But we do expect that in the guidance that we've given to you we would expect to see that resolve itself in the coming months and weeks.

Okay. Thank you, Irene.

Robert Moskow of Credit Suisse.

Irene, I think it was a year and a half ago at CAGNY that you established some pretty bold targets for points of distribution gains in emerging markets. And since then there has been some SG&A overhead cuts. I wanted to make sure that you are comfortable that you can still achieve those distribution gains, despite the overhead reductions. And have you kept track of those goals? And where do you think you are tracking on them? And then I had a quick follow-up.

Absolutely, Rob. We are not cutting our investments in the emerging markets. We have significantly -- as you know, last year we significantly stepped up our investments early in the year. Much of that was in route to market. And we are benefiting from those investments.

We are continuing to make the necessary investments. We are protecting sales to a large extent as we look at some of the overhead initiatives. But the end in mind is to make sure that we are making the necessary foundational investments in these key markets to capitalize on the opportunities that will emerge as the economies recover. So, we continue to feel good about the investments that we made in route to market in places like Russia, like Brazil, like India. And we will continue to see those investments and making sure that we are getting an adequate return. But this is not about cutting back on those investments. This, again, is -- the focus is on headcount elsewhere in the world and to a large extent as well as some non-people-related overhead cost.

Okay. And then the follow-up is you said that your share of voice is still at high levels. But you've shifted a lot of money into digital. And I'm sure your competitors have also. Are you comfortable that your ability to measure share of voice is still good? And are you able to measure digital in share of voice? And then also -- you know, you were in market research. Do you feel comfortable that the return you are getting on digital marketing is sufficient? Or is that still in its infancy in terms of measurement?

It's a fair question, Rob. I have to tell you we actually are quite able to measure the ROI of our digital investments and we are finding is paying back about twice the rate of our traditional media investments, not to mention the fact that we are seeing quite significant media inflation in a number of our emerging markets. And so the benefits of going to digital as that explodes in markets like China and Brazil is a positive because that's where our consumers are. So, I think that the evidence that we have is quite compelling and it gives us great confidence that as we continue to shift our spending into digital that we will get actually an even better return on many of these investments.

Okay, thank you.

Alexia Howard of Sanford Bernstein.

Can I ask about the leadership changes that we've seen in China and India recently? I think recently you brought somebody in from the outside into China. We've seen some changes recently in India as well. What specifically were you looking for in terms of capabilities? How confident are you that you've got the right people in place now? Just any color that you can give us on that would be great. Thank you.

You know, I feel quite good about the leaders that we have placed in both of those countries and a number of our other key emerging markets. As I mentioned, India is performing well. It continues to grow at a double-digit rate. And Manu Anand has have a great deal of experience in operating within that country. And he has done a great job and continuing to drive the momentum in that market.

China -- we mentioned that we brought in Stephen Maher. He's about four weeks old, I would say, in his new role. But he's got 16 years of CPG experience. Most of that -- much of that, actually, is in China. And as a result he brings to the task a very great seasoning in a variety of the disciplines of general management as well as understanding the Chinese market. And so, I am quite confident that Stephen will be able to deliver on the ambitious agenda that we have in China.

And then just a quick follow-up -- can you give us a run rate or the current run rate of gum in China? I think the last time you talked about it, it was about $100 million kind of level. Where are we now?

We are forecasting about $150 million for the year, Alexia. We are feeling quite good. We've got about a 9% share and we are quite pleased with the performance of our gum business there.

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

(Operator Instructions) Jason English of Goldman Sachs.

There has been a lot of rhetoric about decelerating category growth on the call. You've given us some data in your slides, I guess it's slide 16, suggesting that your category growth, end market growth accelerated from 2.8% in the first quarter to around 3.8% for the full first half, suggesting in the quarter it may actually even have been approaching close to 5%. So is that the right way to think about it? If so, where is the disconnect with the data in the commentary? And also where are you seeing that acceleration from a market perspective?

I think the slide we showed for the first half was about 3.8%. You are right that the first quarter was lower than that. But it's basically Easter. So there was a big split between March and April -- huge, actually. And that's what's driving the second quarter to be a higher growth rate than the first quarter. The first half in aggregate is the best way to look at it, and it's about 3.8%.

And when we talked about the category slowdown, I think we saw that in North America. We saw that in a lot of the European markets. We saw it in a lot of the emerging markets as well, particularly in the May-June months. So I think we can't really look at only one quarter, given the Easter shifts. But clearly, I think we wanted to make sure that we reflected that in the outlook we give you.

That's helpful. Turning real quick to gum, I imagine you are not taking much price on gum, just given the cost basket there. Is that fair to say?

Yes, it is.

Yet in gum you are still lagging the market by a substantial chunk, down low-single digits. The market has turned up around 1% now through the first half. Why shouldn't we be concerned that there is something other than just price gaps and retailer pushback that is driving the market share weakness?

I think you need to look at that on a market-by-market basis, Jason. I talked about the performance in the US. We've had three quarters of solid share growth in our -- I've talked about what is going on in China. In our major gum markets we are continuing to make good progress behind the initiatives that I've laid out. And as I've said, we're still not pleased with our gum performance. It is still negative year-over-year, but the good news is it's less negative and we are starting to see it move in a better direction.

And I think the two places that are negative -- you know, we've talked about the positive -- are Europe, is still negative. And actually the other one will probably surprise you, is Venezuela because it's an important product and it's a struggle to get the currency. So the Venezuela volume is down quite a bit. So those are really the two that are offsetting the good numbers we're seeing in China and North America.

Okay. Thanks for the incremental color, guys. I'll pass it on.

Jonathan Feeney of Athlos Research.

Over the course of the quarter, would you say that volume, particularly in developing markets, improved month to month? And is that what gives you confidence in the second half that this deceleration won't be sustained? It looks like you're guiding to for the full year in organic net rev, what you have done year-to-date, despite the decel first and second quarter? Or is it more the pricing side, maybe, where you have a little bit more control; you know prices are going to be going up, and you know that the second half of the year -- I understand comps get a little bit easier in China. But they get a little bit tougher, particularly on a stacked basis, in the third and fourth quarter other places. So just parsing out those volume versus pricing in your net rev regime? I appreciate it.

Again, pricing is the big variable here because you are correct in saying that we do see that we will pick up some tailwinds in the back half as we lap China and as we cycle the coffee, as we see higher prices in coffee. That's going to be offset, as we look at the outlook, by the continuous flow category growth as well as the continued dislocation as our pricing makes its way through the system. And so those are the puts and takes. But the big impact offsetting the tailwinds is really the pricing continuing to play through.

And as we have said, we would expect even in Q3 that we would expect our share performance will continue to soften as we work our way through some of these customer disputes and more of our pricing impact hits the shelves. We do believe this is temporary, but it will have an impact, a continued impact, in Q3.

And volume in Asia-Pac and Latin America -- did that improve over the course of the quarter or can you say?

I think the volume in Asia-Pac is primarily a China item and a little bit Australia. And in Latin America the volume is really twofold. It's Venezuela and Argentina with the hyperinflation there. And that has been an ongoing trade-off on low-margin product as we've priced that away. And Mexico, to some degree, as we adjust to the VAT. I think the important thing in Latin America is Brazil, which is really our powerhouse, continues to grow vol/mix. And most of the other countries do as well. So it's kind of Mexico VAT and it's Venezuela/Argentina which are kind of anomalies.

Got you. That's helpful. But can you say whether it improved over the course of the quarter? I'm just talking month to month. Did we leave June on a high note, or did we leave just average?

We left it where we expected it to be. The China issues was really a question of comparisons to year ago. It wasn't so much about improvements this year. And I think last year we had a very strong June month. So we were down in China year-over-year. I would expect, with the absence of those tough comps going into Q3, we are pretty comfortable that the run rate in China is where it needs to be to hit the numbers we gave you today.

Thank you very much.

Ken Zaslow of Bank of Montreal.

Just talking more about the things that you could do in your control, I know as you go through ZBB, a lot of times as I think through the process companies tend to find a greater deal of cost savings through this process. Can you talk about have you seen greater opportunities than you initially thought? And at what point do you think there's a potential for an acceleration of even greater savings, because it seems like you guys have done, actually, a pretty good job on this front?

Look, I'd say we've said some fairly aggressive targets. We've laid out our targets of approximately 300 to 400 basis points over the next three years. And that's a fairly aggressive agenda. The good news is I would tell you as we continue to work our way through the specific initiatives, I have great confidence that we will deliver those targets. But I think we just need to continue to make progress quarter after quarter.

I am pleased, as I said, in the programs and the impact it has had in just -- even in our Q2 results. And I think we will still continue to see that play through.

And just a follow-up -- I know in parts of the business, are you actually adding infrastructure? I note you are adding a Growth Officer. Is there other levels that are somewhat being funded by this whole cost savings opportunity? Or was that always part of the plan of having maybe not another layer of management but another layer of infrastructure?

The simple answer is no, we are not adding a layer of infrastructure. And in fact, there's some puts and takes that go with the creation of the Chief Growth Officer role. But it is a fact that as we look at our opportunity within the context of the new operating model, we are continuing to invest in sales and route to market. So we are taking disproportionately -- we are taking some of our savings disproportionately from some of the other areas of the operation in favor of those key frontline investments. So you will see that play through. But we are not creating another layer with the creation of the Chief Growth Officer.

Great. I appreciate. Thank you very much.

David Hayes of Nomura.

Two questions, if I can, first a broad one and then a specific one on Europe. Just in terms of the broader question, obviously you've got some moving parts in terms of the disappointment in terms of sales growth through the year. But is there any anxiety at all internally that there's too much demand on the cost saving side, the margin delivery side in the organization and that is what is basically de-focusing the business from performing as well as maybe it could do more has done in terms of sales and market share delivery?

And then the second question just going back to the EU -- two things on this. Firstly, you mentioned France and then Europe interchangeably. Just to understand, is it just France that these issues are existing in, in terms of the retailers, or were there are other markets as well? And then just in terms of the dynamic, you made the point yourself that the consumer offtake is still good, that the shipments effectively are lagging now because of negotiations. To some extent you would have thought, with your brands being [mass stock] in many cases, to your point earlier, that you would just catch up the shipments and therefore the second half would bounce. So the question to some extent -- is that the dynamic? And is your guidance for the second half therefore very cautious in your view? And actually you could be better than the 2%, 2.5% as that dynamic plays out?

Let me answer your last two questions, and then I'll come back to the first. It is about France. You know, again, should these shipments catch up? The simple answer is, we hope so. But the speed with which we resolve some of these disputes is not something that I wanted to predict. So we believe in the guidance we have given to you. We have adequately reflected the reality that someday we will get ourselves through these conversations. But we are not counting on it necessarily happening tomorrow. And so I hope that gives you some perspective on that question.

With respect to the question of is there too much focus on margin and to what extent is that creating more pressure on our top line, there's no question we are doing a lot right now. But I really do believe that it's much better to move quickly and decisively rather than leaving a lot of uncertainty out in the organization. We are certainly going to -- experiencing some disruption. But our focus is to protect the long-term health of our business and our ability to invest in our franchises and in our people. And so, again, we believe that the dislocation that we are experiencing is temporary. We will work our way through it. But most importantly, we believe we are doing the right things for the long-term health of the business. And as I mentioned, our strategic initiatives are moving along on track consistent with what we had expected.

Great, thank you very much.

Okay. Operator, that's it for questions?

This does conclude our question-and-answer session. I will now turn the floor back over to Mr. Congbalay for any closing remarks.

Any follow-up questions, Nick and I will be around for the rest of the day. And we will be happy to take any calls or emails that you might have. Thanks, everyone, for joining us.

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