億滋國際 (MDLZ) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Mondelez International fourth-quarter 2014 year-end 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'd 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 Brian Gladden, 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'll now turn the call over to Irene.

Thanks, Dexter, and good morning.

In 2014, we delivered solid results, even as we faced headwinds in the broader environment. We made good progress on our transformation agenda, especially in our supply chain and in overheads. Of course, we also announced our coffee joint venture, which we expect to close later this year.

As we enter 2015, we will continue to focus on what we can control -- reducing costs, pricing to protect profitability, and driving power brands and innovation platforms in key markets. In addition, we are taking some specific actions to exit lower-margin revenues to improve our mix. Overall, I'm quite confident in our ability to execute our plans, achieve our strategic objectives, and continue to deliver solid returns to our shareholders.

Turning to the specifics for 2014, we generated strong earnings growth and margin expansion in a challenging environment by driving record net productivity and aggressively reducing overheads. On the top line, we delivered organic net revenue consistent with our latest outlook, as we raised prices to recover higher input costs and protect profitability, while continuing to invest in our growth platforms.

Specifically, for the full year, organic net revenue was up 2.4%. Adjusted operating income margin increased 80 basis points to 12.9%. That was in line with our guidance of about 13%, despite absorbing a 50 basis point headwind from the timing of mark-to-market accounting. Adjusted EPS was $1.76 for the year, up 23% on a constant-currency basis, and the source of this growth was high quality, driven mostly by operating gains.

In light of the still-challenging macroeconomic environment, consumer confidence and spending weakened in many of our key markets, while competition among food retailers was intense, especially in Europe. We faced significantly higher prices for key commodities like cocoa and coffee, and this inflation was magnified by local currency devaluation, especially late in the year.

In response, we quickly priced across our portfolio to offset the input cost inflation and to protect profitability. As a result, pricing was the key driver of our revenue, contributing 4.5 percentage points for the year.

Looking more closely at the sources of growth last year, emerging markets were up 7%, with Brazil, Russia and India all increasing double digits. Developed markets were down modestly. This reflected the temporary effects of pricing-related customer disputes in Europe that we talked about last quarter, as well as increased trade investments in North America.

Let's take a more detailed look at full-year topline results in each of our regions. Latin America grew 15%, driven by pricing gains, especially in the inflationary economies of Venezuela and Argentina. Brazil was up double digits, including solid growth in all of our categories. EEMEA grew 6.5%, driven by higher pricing and modest growth in vol/mix. Russia increased double digits.

Vol/mix continued to improve, contributing more than a third of our growth there. I'm very pleased with the performance of our team in Russia, who have consistently delivered strong results over the past couple of years. However, given the recent currency devaluation, and deteriorating macroeconomic situation, we expect growth and profitability in Russia to be somewhat more challenging in 2015. I'd also like to acknowledge our team in Ukraine, who delivered organic revenue that was essentially flat, despite operating in a most difficult environment.

Continuing with our region performance, Asia-Pacific declined 2.8%, as higher pricing was more than offset by lower vol/mix. China was down mid-single digits for the full year, due to continued softness in biscuits, but we are now beginning to see some signs of recovery. India delivered another year of double-digit growth, but industrywide price increases in chocolate tempered category growth in the fourth quarter. In the near-term, we expect this trend to continue, until consumers adapt to the new pricing levels.

North America was up nearly 1% for the year, reflecting slower growth in biscuits as the category softened, as well as increased competition in the fourth quarter, especially in crackers. We've stepped up our brand and trade investments accordingly, and we're pleased to see signs of category recovery in the recent biscuit data. We expect growth to accelerate in early 2015.

In Europe, organic revenue was down 1% for the year. While pricing was up nearly 1.5 points, vol/mix fell as a result of a number of factors, including -- lower category growth, as consumer demand softened in the weaker macro environment; pricing-related elasticity; and pricing-related customer disruptions, especially in France.

Finally, in Europe, after more than a year of headwinds, coffee turned into a tailwind in the fourth quarter, contributing over 2 points of growth as we priced to offset higher green costs.

Turning now to our categories. For the full year, snacks grew just under 4% and our global categories grew about 3.5%. Importantly, growth rates softened somewhat in the back half and we anticipate this trend will continue in 2015. Biscuits remained the strongest of our snacks categories, up about 5% worldwide. And while the reset of our China business held our revenue growth below that of the total category, we made good progress on our biscuits portfolio.

Oreo led the way. Globally, it grew high-single digits and exceeded $2.5 billion in sales, driven by new product innovations such as Oreo Thins in China, as well as new package formats, such as family size in the US. After its first full year in Brazil, Oreo has already achieved more than a 2.5 share; while in Europe, it continued to grow at a double-digit rate, up more than 25%.

Like Oreo, our belVita Breakfast Biscuits platform also grew strongly, up nearly 30% -- topping $650 million in global revenues. Innovation here also played a key role. Our new soft-baked line drove over 50% growth for belVita in the US, while belVita Crunchy -- which we launched last spring in several European markets -- is off to a good start.

In chocolate, the impact of higher prices to offset rising cocoa and dairy costs, and the effect of weakening emerging-market currencies, tempered global category growth to below 4%. As we've discussed in prior earnings calls, our decision to increase prices globally resulted in soft volume and share performance, as some competitors either lagged -- predominantly in emerging markets -- or did not price at all, as was the case in parts of Europe.

We believe that all of our competitors will eventually raise prices, given that they are facing the same input cost pressures we are. Ultimately, as the price dislocation moderates, innovation is key to regaining momentum in the chocolate category, and we've built solid platforms to accomplish that.

For example, we continue to expand Marvelous Creations, our Chunky Chocolate filled with fun things like candy pieces and jellybeans, and we've expanded that into new markets like Canada and Russia, driving incremental growth. We also recently launched Cadbury Glow, a new premium gifting chocolate brand, in India, Singapore and Hong Kong. Initial results have been strong, already reaching 13% of the Indian chocolate gifting segment last quarter.

Finally, the gum and candy category grew about 2% for the year. Our revenue was down about 3% due to the implementation of a sugar tax in Mexico, where we have an 80% share, government restrictions on gum imports in Venezuela, and the customer disputes in France. However, we grew or held share in four of our top six gum markets, including the US, Japan, Brazil and China, driven by improved price pack architecture and a focus on freshness.

China is now the second-largest gum market in the world. And our growth continued to be robust, up nearly 50% last year, benefiting from the launch of Stride Bottles and Stride Layers.

So, as you can see, we are taking the necessary steps to ensure the long-term health of our business. We are pricing to protect profitability and aggressively reducing costs, so that we can continue to invest in our franchises to drive sustainable, top-tier returns for our shareholders.

With that, let me turn it over to Brian.

Thanks, Irene. Good morning, everyone. Over the next few slides, starting with slide 7, I'll walk you through our 2014 margin and EPS progress, as well as our outlook for 2015.

Adjusted gross margin decreased 60 basis points to 36.8%, with 50 points of the decline attributable to the timing of the mark-to-market accounting for commodity and currency hedges. Over the course of the year, we successfully executed pricing of $1.6 billion. While this high level of pricing was enough to fully offset significant commodity and currency-related cost inflation on a dollar basis, it wasn't enough to offset the impact of inflation on our margin percentage.

We were able to essentially maintain gross margins, excluding the mark-to-market impact, by delivering 2.8% net productivity, totaling more than $600 million. That's a record for the Company, and a testament to the strong work delivered by our integrated supply chain team.

As Irene noted, our adjusted OI margin increased 80 basis points to 12.9%, in line with our guidance of approximately 13%. Excluding the 50 basis point mark-to-market impact, our underlying margin improvement was actually 130 basis points. Lower overheads drove more than half of this improvement, as we aggressively reduced expenses by leveraging zero-based budgeting and other cost-saving tools.

In addition, we expanded margins by driving efficiencies in the nonworking elements of our media spend, including significantly consolidating suppliers. We also reduced production costs, as we shifted more advertising to digital outlets. To be clear -- we maintained our working media support and increased our overall ANC spending on our power brands and innovation platforms. As we move through 2015, securing additional cost reductions will be a key focus and an important backstop to our plan.

Looking at performance by region, you'll see that developed markets drove much of the margin expansion. In North America, adjusted OI margin increased 140 basis points, despite absorbing the startup costs of our newest greenfield biscuit plant in Salinas, Mexico. We'll begin to realize the margin benefits from that plant as we ramp up production later in the year.

In Europe, adjusted OI margin expanded 170 basis points, as our overhead reduction and supply chain reinvention programs continues to pay dividends. Also worth mentioning is the impact of Latin America, where margins grew 200 basis points. Our cost programs drove about half of this margin improvement, while the other half related to one-time items.

Turning to earnings-per-share on slide 10, operating gains were the primary driver of our EPS growth. Adjusted EPS for the full year was $1.76, up 23% on a constant-currency basis. Operating gains, excluding mark-to-market, accounted for $0.26 of this improvement. Our debt refinancing delivered $0.08 of EPS growth, and our lower share count contributed another $0.08. Even after accounting for the $0.14 negative impact of currency translation, adjusted EPS was up more than 14% for the year.

Cash flow has been another area of strong performance. Over the past two years, we delivered $4.8 billion of free cash flow, excluding items. That's nearly 30% higher than our two-year guidance of $3.7 billion.

Strong improvement in working capital has been the primary driver. We've shortened our cash-conversion cycle by 10 days, which comes on top of the 13-day improvement in the prior year. With our strong cash performance, we were able to return $2.9 billion in cash to shareholders last year. We repurchased $1.9 billion of shares, which is at the upper end of our $1 billion to $2 billion annual target. We also raised our dividend by 7%, for a total payout of $1 billion.

Turning to slide 12. I'm not going to cover this slide in detail, but it's safe to say that the external operating environment continues to be challenging and volatile, whether it's slow GDP growth, weak consumer demand or a difficult retail environment. And given our strong global footprint and uncontrollable variable, like the strengthening of the US dollar, is especially challenging. Of course, there are a number of positive factors that will partially offset these headwinds, both in 2015 and over the long term, including the continuing trend towards increased snacking and on-the-go consumer dynamics.

Within this challenging environment, we are focusing on what we can control, and executing our transformation agenda. With respect to our portfolio, as Irene mentioned, we continue to expect the coffee deal to close this year. On a much smaller scale, we anticipate closing and integrating our recent acquisition of the Kim Do snacks business in Vietnam later this year.

We are also working to improve our revenue mix by moving away from some low-margin revenue. Specifically, we've made deliberate decisions to exit nonstrategic and margin-dilutive revenue, which will temper our organic revenue growth by about 100 basis points this year. Examples of these decisions include: exiting certain customers in Europe who've chosen not to accept our price increases; discontinuing certain low-margin products that were sold under short-term trademark licenses from Kraft Foods Group; and pruning some SKUs so we can simplify our supply chain and focus our investments on our growth platforms.

2015 is also a year of continued, intense focus on costs in both our supply chain and overheads, as we progress towards our margin-expansion goals. We'll also continue to invest in our power brands and routes to market for future growth. We are excited by the longer-term prospects of accelerated growth, faster decision-making, and cost savings, as we shift to a category-led model in all of our regions.

So let's talk about how all this translates to our outlook for 2015. We expect organic revenue to grow at least 2%. As mentioned earlier, we see overall category growth rates remaining consistent with, or even somewhat below, 2014. That is, we anticipate our global categories will grow at least 3% in aggregate. In 2015, we expect to continue to prioritize margin improvements, which will impact our net revenue growth and market share.

Now, although it's not part of organic growth, I'd like to provide some perspective on the potential impact of foreign currency translation on our revenue. Based on January 30th spot rates, we estimate currency would be about an 11% -- 11 percentage-point headwind to our revenue growth. Obviously, that's a big number, but remember that 80% of our revenue is based in markets where the currencies are not tied to the strengthening US dollar. So while we anticipate our reported revenue will decline due to the significant currency-translation impact, we expect to deliver solid organic growth in a challenging macroeconomic environment.

Let me now turn to our margin outlook. In 2015, we expect to deliver adjusted OI margin of approximately 14% -- another significant step towards our margin goal of 15% to 16% in 2016. The continued execution of both our supply chain reinvention and overhead-reduction initiatives will be key drivers of the margin expansion. We expect the savings from these programs to build throughout the year.

Moving on to EPS, we expect adjusted EPS to grow double digits on a constant-currency basis, which would be our third year in a row of double-digit EPS growth. Organic revenue growth and OI margin expansion will be the main drivers. In addition, we expect our adjusted interest expense to be about $825 million, given our current weighted average interest rate of about 4.5%, plus other financing costs.

We expect our adjusted tax rate to be in the high-teens for 2015, slightly higher than the 16% we saw in 2014. And finally, we expect to repurchase between $1 billion and $2 billion of shares.

Let me point out again that our EPS guidance is on a constant-currency basis, but since currency will be such a big headwind in our GAAP reported results at the end of the year, I'd like to provide a bit of detail on that now. As I mentioned previously, 80% of our revenue is derived from currencies not tied to the US dollar.

This exposure to growth markets is typically a strength of our business model, and I believe it will be over the long-term. However, most of these currencies have been devaluing versus the dollar over the last few months, resulting in a significant currency-translation headwind.

On slide 17, you can see the potential impact. We estimate adjusted EPS would be approximately $0.30 lower than our constant-currency results based on January 30th spot rates. While we do business in many currencies, the lion's share of the headwind comes from the euro, the British pound, the Russian ruble, and the Brazilian real.

So, to summarize our 2015 outlook, we expect organic net revenue to be at least 2%, including a 1-point headwind from our strategic decisions to exit low-margin revenue. We anticipate adjusted OI margin of approximately 14%, and double-digit growth in adjusted EPS on a constant-currency basis.

Please note that since we don't have a precise closing date for the coffee deal, our 2015 outlook includes the full-year results for the coffee business. We'll update our 2015 outlook for the impact of the coffee divestiture as we get more clarity on the closing date.

So, to wrap up, in 2014, we delivered strong earnings growth and margin expansion despite the challenging consumer and retail environment. While we expect the environment to remain difficult in 2015, we'll continue to prioritize margin improvements while delivering modest revenue growth; focus on executing the cost-reduction initiatives under our control; and make the necessary foundational investments in our brands, innovation platforms, routes to market, and supply chain, to stage the portfolio for the future.

We remain confident in our ability to execute our transformation agenda, so that we are well-positioned to deliver sustainable, profitable growth, and generate top-tier shareholder returns now and over the long-term. With that, let's open it up for questions.

The floor is now open for questions. (Operator Instructions) Chris Growe, Stifel.

Just if I could ask two questions of you, Irene? First off would be, as you've seen the softer growth in the developed markets, and particular in North America and Europe, does that have any -- is that having any effect on your margin outlook for those businesses? It looks like you've got a pretty strong margins still built in here in 2015, but does this slower growth rate have any effect on your future margin projections, if I could ask that?

No, I actually think that, without a doubt, we are making some near-term prioritization in both of those geographies for margin, but I feel quite comfortable that with the guidance that we are giving to you, that we've made some reasonable expectations about where we expect the revenue to fall out. There's no question in Europe, in particular. We are experiencing some short-term headwinds, as consumers and customers adapt to the new prices.

I should -- I expect that that will improve as the year progresses, in both Europe -- and in North America, as I mentioned, we certainly are experiencing some category slowdown. We are taking a number of actions to improve that, both in terms of marketing as well as some trade investments. And we're starting to see the benefits of those investments. So, net/net, I'm quite confident that we will deliver the revenue that we need in both of those geographies, consistent with the margin expectations that we've set.

Okay. And then just if I could ask one other question on the ZBB and the implementation of that program. I'm just curious if you can give us the kind of the experience for 2014? And then perhaps the progress you've made against overhead in particular with that program, in 2014.

Yes, Chris, it's Brian. You know the -- it was really the start-up this year of ZBB, but as you look at the overhead reductions, you know, 90 basis point improvement year-over-year, it really was a big contributor. So, a lot of focus on key categories of costs and indirect spending, where we changed policies, moved to best practices that we learned in that process. And as we've built the plans for 2015, we really did use a ZBB-based process to build the operating plans.

So, I would say we're still in the early days. It will be a big contributor as we look at 2015 and into 2016 using that tool. But, good progress so far.

Okay. Thanks for the update.

Andrew Lazar, Barclays.

Two questions from me. First off, as we think about the margin cadence as we go through 2015, you said that it will be stronger in the back half. I'm trying to get a sense of how the first half -- you expect it to play out.

Do we see year-over-year margin improvement, just at a slower pace in the first half? Or, are there certain things that challenge margins in the first half that makes -- you know, the two halves have to be even stronger to get to that -- about 14% for the full year? I'm just trying to get a sense of how realistic that is and what you've kind of built in, in terms of visibility.

Yes, I mean, the goals that we are providing are for the full year. I would tell you, as we look at some really critical drivers -- supply chain improvements, the overhead reductions, and even the pricing, frankly -- you know, these are dynamics that will cause margins to accelerate through the year.

Those benefits are more backend-loaded, just given the execution and as we work through, for instance, the startup of the Mexico plant. You know, that will drive benefits significantly higher in the second half than in the first half. So, not getting into specifics around quarterly trajectory or margin targets by quarter, but it will be more backend-loaded.

Okay. And then you mentioned -- I think you did mention before, 2015 is a year of sort of maximum change for the organization. You've got the coffee JV, implementing ZBB in a bigger way, the category-led model in Europe, the ongoing issues around Western Europe and retailers and pricing and such. So, I'm trying to get a sense -- 2014 obviously shows a lot of progress towards your two-year margin goal, and I'm trying to get a sense of, you know, are you giving -- is the organization giving itself enough cover, if you will, for certain things that are inevitably likely to go awry just during the course of the year with all these big changes that you've got?

Yes, well, look, I think we as a team spent a lot of time on building the plan. As you point out, clearly some pieces moving around as you think about the year. But this is a reasonable plan that I think we've worked hard to build confidence and backstops around this commitment.

So, you know, yes, there's clearly some pieces moving around. It's a relatively volatile total environment. But as I said, there's things that we can control, and we're working extra hard on those things to make sure we have offsets and backstops to allow us to deliver this commitment.

Okay. Thanks very much.

Brian Spillane, Bank of America

I wanted to ask a follow-up, I guess, to Andrew's question. And it's just -- you know, I guess if you go through -- assuming the 14% margin goal for 2015, I guess two questions. One, in terms of FX effect on operating profit, the spread, there's been a bit of a spread between the effect on revenues and operating profit. Should we expect that to continue in 2015?

I think similar dynamics will continue to play out. As you think about transactional exposures, you know clearly, we work hard through programs -- through hedging programs as well as our efforts on pricing and cost reductions in the regions, to drive consistency of execution there. It is a volatile environment. We have a hedge program that's designed to provide some cushion to allow us to get prices in place, but we feel like that's what we've been doing. And we'll continue to execute that.

Okay. And just assuming that there's some modest spread, if you kind of back into a current -- what the 14% margin implies, currency-neutral, it's like a mid-teens currency-neutral EBIT growth against a 2% organic sales growth.

So I guess the question is just, in that bridge -- which is, I guess, roughly about $700 million of currency-neutral profit growth -- how much of it is hard savings, versus things that might be variable depending upon, I don't know, mix or volume leverage or those types of things? Just trying to get a sense for how much of that margin target is really tied to some fixed savings versus things that might be variable.

Yes, you know, not really going to parse that in detail. I would tell you that it's a -- this is a supply chain reinvention, ZBB, overhead reduction-driven plan. That's what you saw in 2014, and I think that's what you'll continue to see in 2015.

Yes, I just want to build on that, Brian. We are very focused on what we can control in this environment. And so we have high confidence that the commitments we are giving to you are some things that we have a clear line of sight to. And we've built our revenue, we think, in a reasonable fashion, given the realities of the market. And we've got clear visibility through the programming that will drive the margin expansion. So net/net, it is a challenging environment, but we are very focused on making sure that we've got in-hand what we can control to drive our commitments.

Is the $500 million of annual COGS productivity that you outlined last year at CAGNY still part of the plan? Or is that changed?

Well, that productivity in 2014 was actually closer to $600 million. It was a record for the Company at 2.8%. And I would tell you, given all the activities around supply chain, that will continue to accelerate. That's a big part of what we're focused on.

All right, that's very helpful. Thank you.

David Driscoll, Citi Research.

Irene, if Mondelez grew organic revenues 2.4% in 2014, can you just go back over why you would expect 3% net organic growth in 2015? So I'm just looking at that chart, and excluding the 1 point that you'll take out from things you want to discontinue, the underlying number is 3, and that's an acceleration over the 2.4%. But I think what everyone hears on this call is just how difficult these emerging markets are, and even some difficulties in your developed markets -- Europe, for instance. Why does it accelerate?

Well, if you think about it, David, we saw an acceleration even in the course of last year. We took pricing early in the year -- as we shared with you, we led pricing in all of our categories. And so the impact of that pricing plays out differently in each of the regions and differently over the course of time. And so the good news is, in many of our emerging markets, we've now seen those price gaps start to narrow.

As I mentioned, Europe, remains -- particularly in chocolate -- one of the regions where those gaps are still bigger than we'd like them to be. But the reason for the acceleration and the underlying growth is simply that, as consumers adjust to these higher price points, as our customers -- particularly in Europe -- reflect these higher price points, we expect that the market will be -- it will move into more of a position of equilibrium.

And then, following up on your European chocolate questions, when we get our Nielsen data, the 12-week numbers show double-digit declines in Mondelez's European chocolate volumes. You mentioned a little bit of this in your prepared script, but can you talk more detail about what's going on right there? Why aren't these competitors following?

And it's been going on now for, like, six months. So, I'm a little concerned that you might be forced to retract your pricing, even through a list or a promotional event. Can you just talk about some of those issues and what you see happening in 2015?

Yes. No, again, it's -- there's no question that our gaps in Europe are wider than we'd like them to be. I do believe it's a question of timing. And so, again, we feel quite confident with the programming that we've got, we're starting to see some good recovery through more of a normal state in a number of our key markets. And we're going to stay the course.

We've got very strong brands, and we believe that they have the pricing power. And we just need to take some time for the gaps to narrow a little bit and for the competition to catch up. But we're quite confident that, given that they are facing the very same cost headwinds that we are, that the market will get back into more equilibrium in the foreseeable future. But again, it's one of the reasons that we're suggesting that our profile will improve as the year progresses.

Thank you for the color. I'll pass it along.

Ken Goldman, JPMorgan.

Thanks for the question. So, you're guiding to double-digit EPS growth, ex-currency, which is where you usually guide, but still leaves a pretty wide range of possibilities. And when you talk about a 14% approximate EBIT margin, I mean, one of the questions I'm getting is, does that mean it could possibly range between 13.5% and 14.5%? So, if possible, even if just on a qualitative level, could you help narrow the ranges down a little bit, both in terms of, I guess, organic EPS and reported EBIT margin?

Yes, look, I think it's -- what you're suggesting or -- is wider than we would expect. The reality is, there's -- it's a volatile environment, and we want to be a little bit careful and give ourselves a little bit of room here. But you know, those are sort of the numbers that I think we meant to say, and you can interpret them how you like.

But again, we know about what 2014 looks like and we know what a double-digit growth rate is. (laughter) So, you can trust us that we're not kidding.

No, I appreciate that. You can understand from our perspective, though, why it's just tougher to model. But I understand where you're coming from.

And then, Brian, at last year's CAGNY, Dave said we should model about a 20% tax rate for the next three to five years, then mid-20s after that. I realize you're guiding to a high-teen tax rate for 2015, but just longer-term, is that outlook in general still reasonable for us to use, in your view, as we look ahead?

Yes, look, I think over the midterm, the next couple years, 20% is a good number. To the extent we are somewhat below that for 2015, it's sort of acknowledging some expected discretes and some things that we know about in 2015. But 20% is about the right rate for the next two to three years.

And then you would agree that it maybe jumps up by a few percentage points after that?

That's likely, right, yes. I wouldn't say jump; probably creeps up after that.

Okay. Great, thanks very much.

Matthew Granger, Morgan Stanley.

Brian, I guess first, one of the sources of cost savings in 2014 was a focus on ANC efficiency and reductions in nonworking media. And just wondering, is this a source of savings that you would think can be a continued tailwind this year? And then in a broader sense, including working advertising, can you give us an idea of how you expect ANC to trend in 2015?

Yes. Look, I think the team's done a really good job in managing the spend. We made some great progress in driving productivity in the spend around nonworking, consolidating media accounts, and reducing the spending, and driving productivity, and then moving more to digital. So, all of these elements, I think, gave us some flexibility to take the spend down a bit, but also to continue to get value from the spend.

You know, we actually increased our spending on ANC around our power brands last year, and were able to reduce spending in other parts that allowed us to actually get some good momentum there. So I think you'll see us continue to focus the spend in the right places. And as we see progress throughout the year, we'd like to see that increase, actually. So, good progress in terms of getting productivity and allowing us to spend those dollars on real working media.

Okay, great. Thanks, Brian. And Irene, could you elaborate a little bit on your comments earlier on the sales outlook in North America? You talked about trade programs you have in place and a reacceleration, and we've seen this start to become more visible in scanner data as well. So, is your optimism really a function of improved share trends in an environment that's still highly competitive and challenging? Or are you seeing a moderation in the competitive intensity within your categories overall?

We're actually -- our share performance has actually been quite strong, and we expect that to continue. What actually is encouraging, we're starting to see the category recover a little bit.

So, we've had an incredible run in North America, particularly on our biscuit business -- we've been growing 4% to 5%; well in excess of the category trends over the last couple of years. As we saw in the back half of last year, we started to see a slowdown. And we're just basically going to continue to push the levers that have been so successful for us.

We have a strong innovation plan. We're continuing to leverage our DSC muscle. And we believe that that -- those together -- we started to see some recovery; you're seeing it in the numbers as well. And we believe that that will continue into 2015.

Okay, great. Thank you, both.

Robert Moscow, Credit Suisse.

I was hoping, like others on the call, to get a little more color on the behavior of your competition in Europe. Is most of your competition and share losses coming at the expense of multinationals who have not raised price yet in chocolate? Or is it local players who are staying low?

And then especially in the UK, you know, the UK numbers were really weak in fourth-quarter; I thought some of it was tough comps from a year ago. But that struck me as the market where you really do have the most pricing power. And I want to know if there's anything you can say specifically about the UK being the same or different from the other European markets?

Yes, I will say, the UK was different. We saw one of our competitors -- Mars, in particular -- promoting quite aggressively. And I'm pleased to say that we have responded to those actions and we're feeling comfortable that we are going to start to see a trajectory change there.

The reality is that a number of our multinational competitors have just lagged a little bit in their pricing response. And that's put some pressure on the business. But once again, it's one of the reasons we have protected our working ANC so carefully. It's one of the reasons we have really focused very much on looking market-by-market to ensure that we've got the right programming.

And we have great confidence that you will start to see that trajectory improve. But again, it isn't necessarily going to happen overnight, which is why we see the back half -- you know, it will build over the course of the year, and the back half will be stronger.

Irene, how are you determining which markets you want to respond to competitive activities and which you don't? It sounds like you responded to Mars in the UK; you responded to the biscuit competition in the US. What goes into that decision-making?

Well, a big focus is really which are the markets that matter most? And as we look at the world, we think about which are our key markets. And our focus remains in a -- particularly in a time where we want to make sure that our spending is having the greatest impact; we are focusing it disproportionately on our power brands and on those key markets that matter. And you'll see us do that in each of our core categories.

Okay, thank you very much.

Alexia Howard, Bernstein.

Okay, can we focus in, to begin with, on SG&A cost savings? As I remember when you set out the original 300 basis points of margin improvement goal over three years, most of that was COGS; I thought about 250 basis points was COGS and the remaining 50 was SG&A.

It seems as though you've gone a lot further along on the SG&A cost savings in 2014. Are those coming through better than expected? And what's the key driver of that? And then I have a follow-up.

Yes, I think when you look at cost-reduction programs and ZBB as a methodology, overheads are easier to get at; they are quicker to realize benefits. And we've done things like changing policies and tightening down controls on spending in key categories of spend. Those things are not dependent on capital projects to improve a plant, as you would have in a COGS-focused effort. So that's really the driver.

You know, I think we're, as you look at 2014, probably slightly ahead of expectations from what we were driving on overheads. And I think there's more to do there. And it's clearly going to continue to be a contributor to the margin improvement. And I think you'll see that into the 2015 results as well.

Very helpful --.

Just of the 300 points, it was disproportionately in our developed markets. And I think you're seeing those -- that strong performance play through in the margin progression in 2014, that you see in North America and in Europe. So we're very much on track to deliver the targets that we laid out.

Great. And then a quick follow-up. I know that the focus is not particularly on the top line at the moment, but on innovation, where are you on new products as a percent of sales? Where do you expect that to get to, over time? Has it come down in the last couple of years as your focus has played much more onto the margin front? Thank you. And I'll pass it on

Yes, and the innovation is still the lifeblood of our business; we remain very focused on that, Alexia. And it was about 13% -- it contributed about 13% -- it was about 13% of our revenue. And we expect to see that we will continue to perform in that range, which we're quite comfortable with. It's one of the reasons that our power brands grew about 4% last year. And we're quite comfortable that we've got a pipeline for 2015 that will basically drive the underlying growth that we've laid out in our commitments.

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

Jason English, Goldman Sachs.

Thank you for taking the question. I guess I'll start on a topic that's been vetted a couple of times in the call, and that's the European pricing environment -- chocolate, price gaps, et cetera.

I think I'm missing something here, because I think about the cost structure for a European-based chocolate company, I've got to be looking at cocoa prices that aren't really up very much; dairy prices that are down meaningfully; sweetener prices that are down meaningfully. All-in, from my vantage point, it looks like the COGS basket is actually deflationary. So, what am I missing in that cost picture?

Well, you know, Jason, if you look at the most recent cost, your point is correct. But if you look over the course of the year, there's no question these costs are all still up year-over-year. And that's really what we've been responding to.

So the facts are, that the market basket of inputs for our chocolate business are among the highest, and they were a key part of -- a key reason for -- a contributor to the $1.6 billion of pricing that we took this past year. So, it is still a headwind for us. We are taking the necessary steps to start by protecting profitability and making sure that we are pricing to recover those costs.

We're supporting our power brands in particular with the necessary spending to help to mitigate the impact. And I'm quite confident that, as the market adapts to these new price points, both from an absolute elasticity standpoint, as well as from a price gap standpoint, as competitors take pricing actions, I'm quite confident that we'll see the market recover.

All right. So, if spot prices hold, you probably don't see competitive price reaction in that environment; but what you lose on topline, you probably more than make up for on the bottom-line, if the spot holds? Is that a fair characterization?

No, I would say that even with the recent deflation, there's still a net -- there's a need to catch up to some of the earlier cost increases. And that's just undeniable.

Okay. Last question and I'll pass it on. Brian, for you -- I like the free cash flow chart you showed, but obviously, it's a bit fictitious to pretend that we don't have the restructuring costs. I think if we look across restructuring this past year, with both CapEx and cash from ops, it was around $1 billion.

So can you just give us the forward on how that cash leakage looks over the next two years? And I think, based on the comments in the release, what you said before, most, if not all of that, goes away in fiscal 2017. But can you just walk us through that detail?

Yes, look, I think -- you know, what I would focus on is the underlying working capital progress is actually really good. And we wanted to -- we want to talk about that. We'll talk more about that at CAGNY.

I would say, 2015 will be the high year in terms of cash used for restructuring and CapEx related to the program. So, in 2016, it will begin to decline. And then, as you say, 2017, it will be relatively small. So, I think the underlying cash flow performance, when you look at operating cash flow and free cash flow for the business, we're working hard to improve that. And as these -- the costs related to the restructuring, you know, as they go away, it's a pretty powerful cash flow story.

And I'm sorry if I missed this -- did you give CapEx guidance for 2015? And if not, can you?

We'll talk about that --

I think we'll provide that at CAGNY.

Okay. All right, thanks.

John Baumgartner, Wells Fargo.

Thanks for the question. Just wanted to ask about the operating margins across your developing markets in totality. You know, I think your initial longer-term vision was to hold margins more or less steady over time. Then you had the step-down in 2013 with the pressures in China and in Venezuela. You had some recovery this last year, but you're still about 200 basis points below 2012 level.

So, I mean, how are you thinking about the ability to get back to that 2012 level? Is it practical? Or is anything more structural changed in terms of reinvestment needs or the categories? Just your thoughts there.

No, we still feel comfortable over the reasonable horizon, John, we will be able to get our emerging markets' margins up to peer levels. As you saw, we had a very strong year in L.A. We are making progress in Europe. In EEMEA, it doesn't show as well because of the tremendous impact that pricing had on our overall business.

And AP remains a place, a little bit of a construction site for us as we see our China business recovering over time. So we will see those margins improve. A lot of the focus of our ZBB activities are designed to address overhead opportunities in those markets. And they will also benefit from some of the supply chain work that we're doing, particularly as we add more efficient lines with our capacity expansion.

So, we will see those margins come up in the very short-term. Because the currency has been so solid in those emerging markets, it's been a significant headwind in those geographies.

And then, Irene, just to follow up, in terms of the dislocation in Russia and your plans for the, I guess, the new facility there, has that changed your plan at all? Or is that still the green light?

Well, as we told you, we are making an investment there. We are still investing in the shell, building in Siberia. And we'll continue to monitor that situation to make sure that our assets are appropriately protected.

As I said on the call, I'm quite pleased with the performance of our team. They've done a very good job, even in the face of some of the sanctions. But certainly, as we think about making additional investments, we want to continue to keep our ear to the ground.

Okay. Thank you, Irene.

Eric Katzman, Deutsche Bank.

I guess a couple of questions, if I could. Brian, I'm a little confused. So you've got roughly -- included in dollar terms, let's call it flattish earnings-per-share, your sales are going to be down, if the forecast is correct, about 9%. Your tax rate is a headwind. So you're obviously implying pretty strong margins. Is the -- operating margins -- is the 14% -- does that include or exclude currency?

It includes currency --

As a percentage.

Yes, as a percent.

Yes, but -- so you're including currency; that's like a -- okay. And then, kind of more, I guess -- I was just really surprised, like Latin America margins at 20% in the quarter; EU margins at very high levels. I think you mentioned there was a one-time benefit to LatAm. But maybe you could explain a little bit more as to why those margins were just so high, given challenging fundamentals and I assume some currency headwinds even in the quarter.

Yes, I think specifically for LatAm, we talked about, about half of the improvement is driven by cost actions; the other half is a one-time benefit related to bad accruals in the region. And that contributed about 20 basis points in the fourth quarter. But the reality is, there's underlying improvement in cost structure, the pricing is working, we are improving margins.

Okay. And the -- any commentary on the European margins being so high?

No. I mean, again, as we've said, as we think about our margin opportunity as an enterprise, the two biggest opportunities lay in our developed markets. And I'm very pleased with the progress that we've made in Europe on basically all aspects of the P&L. So, I think we're well-positioned.

Yes, it's -- I mean, driven by improvements in lower SG&A and better gross margins. So, it's the right things.

Yes.

Okay. And then -- thank you for that -- and then, as a -- just kind of thinking, like, at least, in the fourth quarter, right, volume mix was down in every segment, and yet your -- and your market share, although this is an annual number, you know, you lost market share in a majority of the business. I'm looking on slide 6. I mean that's in dollar terms.

But I guess I'm not really sure how to judge, Irene, kind of organic topline performance. You know, price is now such a function of trying to offset the currency devaluations. If I look at vol/mix, it's down; your share is down; and your ANP budget is being cut. So kind of how do I think about that? I thought the goal was to gain share even with the categories struggling.

So, let me take those in a couple of pieces, Eric. There's no question that our long-term algorithm assumes a balance of volume, mix and pricing. And in the short-term, there's no question that we are leaning disproportionately on pricing, given the enormous increases that we are seeing in both our commodity increases as well as in the impact of the currency devaluation.

So it's been -- it was about 4.5 points of our 2.4 points of revenue growth. So it was a significant impact, which says that vol/mix was a negative. And there's no question, as I've talked about it a couple of times on the call, that in the short-term, the $1.6 billion of pricing that we took has had an impact in the marketplace.

We are monitoring that very carefully. We are thoughtful about which markets and which categories we are monitoring and protecting. And the end in mind is to get ourselves back onto a trajectory over the long-term, where we grow at or above the rates of our category growth. But in the near-term, the single biggest opportunity for us to ensure that we have adequate money to invest in our franchises is to make sure that we are pricing to protect our margins in the face of escalating costs.

So there's nothing about the numbers that's inconsistent with the approach that we're taking. Over the long-term, we would expect to see our business is growing at or above the rates of our categories. But in the near-term, while costs are as volatile as they are, we want to make sure that we are protecting our profitability, and that has a short-term dislocation impact.

Okay, thanks for that. I'll pass it on.

Hey, Eric, regarding ANC -- it's Dexter, sorry -- regarding ANC, you said that we are cutting ANC; I think Brian mentioned a few minutes ago, we actually increased our spending on our power brands. And the reduction in our ANC from a percentage standpoint is largely driven through gaining efficiencies and shifting a little bit more towards digital. So, I don't know what you were listening to earlier, but that's what Brian said a few minutes ago.

Well, I understand that, but your -- I guess as a, obviously, a very brand-oriented company long-term, advertising and promotion as a percentage of your -- or ANC as a percentage of sales, historically, that's been a very good measure of brand equity and brand health. You didn't even mention it anywhere. I mean, there's no comment as to what ANC spending is in the press release --

Eric, it was down a little bit on a percentage of revenue; we increased our spending on our power brands -- okay?

Okay. All right. Thank you.

And we have time for one more question. Your final question comes from David Palmer of RBC Capital Markets.

Just a quick one on coffee. You'd said that's included in your 2% organic growth. Does it feel like coffee will be less of a drag and perhaps significantly so this year than in 2014?

The simple answer is yes. I think as you saw in the fourth quarter, it contributed about 2 points to our overall growth. We had a strong fourth-quarter. We are well-staged for this year as we set up the JV. And as we said, we are confident that the deal will close sometime this year.

And then second, just if you were to summarize the emerging market demand expectations, excluding currency, how do you expect overall revenue and profit trends in the emerging markets to compare to 2014? I asked partly because you've highlighted some cross-currents, with Russia perhaps getting worse and China perhaps getting better. Thanks.

No, I mean, emerging markets continue to be an important source of our growth. So we expect to see some recovery as -- again, as the markets adjust to the pricing levels, as we close our price gaps, and as we continue to invest in the franchises. So we have great hopes for our emerging markets in aggregate.

I did call out Russia because I would suggest, given the events there, we would expect to see a somewhat different trend there next year, in 2015, than we have last year. But long-term, we continue to feel quite bullish about Russia and the rest of our emerging markets. But I mean, if you look at our performance in India and Brazil and China, it's starting to come back, they will be a critical piece of our performance in 2015.

Thank you.

Thanks, David.

This concludes the question-and-answer session of today's conference. I would now like to turn the floor back over to management for any additional or closing remarks.

Hi, it's Dexter. Thanks for everybody for joining the call. Nick and I will be available for the rest of the day and over the course of the next week. We will see everybody at CAGNY. Just so everybody knows, we will be presenting at 12:30 on Tuesday -- 12:30 Eastern Time. And we hope to see everybody there. Thank you.

Bye now.

Thank you. This does conclude today's conference call. Please disconnect your lines at this time. And have a wonderful day.