億滋國際 (MDLZ) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Mondelez International First Quarter 2017 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez management and the question-and-answer session. (Operator Instructions)

I'd now like to turn the call over to Mr. Shep Dunlap, Vice President of Investor Relations for Mondelez. Please go ahead, sir.

Thank you and good afternoon, and thanks for joining us. With me today are Irene Rosenfeld, our Chairman and CEO; and Brian Gladden, our CFO. Shortly after market closed today, we sent out our earnings release and presentation slides, which are available on our website, mondelezinternational.com/investors.

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

Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

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

Thanks, Shep, and good afternoon. We're off to a solid start in 2017, having delivered another quarter of growth on both the top and bottom lines in a challenging environment. While we've hit some puts and takes so far, our business is playing out largely as we expected.

On the top line, we delivered organic growth of 0.6%, slightly ahead of our expectation, but there's still work to do. Our Power Brands continue to be a strong driver of overall performance, with organic growth of 2.5% once again outpacing category growth. A number of our key markets, including Russia, Germany, Southeast Asia and Mexico, delivered strong growth. In addition, India rebounded faster than expected from the impact of demonetization, delivering high single-digit growth. In fact, except for North America, all regions delivered solid results. I'll say a few more words about North America in just a few minutes.

On the bottom line, we continued to make significant progress and build on our strong track record of margin expansion. Adjusted OI margin increased by 90 basis points to 16.8%. Overhead savings and productivity drove the improvement as we continued to deliver operational efficiencies across the business. Adjusted EPS growth was solid, an increase of 6% at constant currency, driven mainly by operating earnings. And finally, we returned significant capital to our shareholders in the first quarter, with nearly $800 million in dividends and share repurchases.

Consistent with the three pillars of our growth strategy that we shared at CAGNY earlier this year, we continued to invest in our advantage platforms. First, we remain focused on contemporizing our core to ensure that our brands stay relevant to a very dynamic consumer. We're investing in our Power Brands and key markets where we see good returns.

For example, in EEMEA, Cadbury chocolate grew double digits in India, supported by solid innovations and strong marketing while our team worked with customers to manage through demonetization. South East Asia was up mid-single digits, which included solid performance in several countries across the market and the launch of belVita in Indonesia. In Europe, Russia was up double digits with strong volume growth behind Alpen Gold chocolate. And Germany was up mid-single digits, driven by strong performance of our chocobakery platform and Milka Chocolate as well as from expanded distribution of Oreo and TUC biscuits.

In Latin America, Brazil chocolate continues to recover and drove good revenue growth. In addition, Mexico, which remains a source of strength in the region, delivered solid growth with organic revenue up mid-single digits.

At the same time, we're taking actions to manage our non-power Brands. We expect to close 2 previously announced divestitures in Q2, our Australian Cheese and Grocery business and part of our French confectionery business, which, together, represent more than $500 million of revenue. These deals are not only financially attractive, but they'll also help us increase our Power Brands mix, improve our growth rate and expand margins as we eliminate the resulting stranded costs.

Our second growth strategy is to support expansion into new consumer need states, especially well-being as well as into geographic white spaces like chocolate in China and the U.S., and biscuits in Japan.

In the well-being space, we're pleased with the ongoing strength of belVita Biscuits, up mid-single digits globally, as well as with the strong launch of RITZ Crisp & Thins in the U.S. and the continued strength of GOOD THiNS crackers. The accelerating growth of well-being products is one of the biggest shifts facing our industry, and we're addressing this with urgency.

As we enter the back half of 2017, we have an unprecedented pipeline of innovation, including new items like Véa as well as renovation of existing products like Triscuit. In addition, we're actively filling geographic white spaces.

In the U.S., our Milka OREO chocolate bars are off to a strong start as we ramp up to full distribution. In China, Milka Chocolate continues to build strong brand awareness and trial. In fact, in Q1, Milka achieved a 2.4% market share and brand awareness reached 40%.

In Q2, we'll continue our investment in innovation and white spaces, setting the stage for a strong back half.

The third pillar of our growth strategy is to continue expanding our sales and distribution capabilities. We're pleased that our e-commerce business posted another quarter of exceptional growth, with net revenue up nearly 30%. We're partnering with key e-tailers such as Alibaba and Amazon as they expand their services in new markets. We're also working with our brick-and-mortar retail partners who remain the foundation of our business.

In addition, we continue to invest in our routes to market. In emerging markets, we're reaching more traditional trade outlets in second- and third-tier cities in China and across rural areas of India. We're also working to evolve our coverage in Brazil to deepen our presence in existing stores while enhancing our impulse portfolio to improve visibility in the hot zones.

In developed markets like the U.S., we're expanding our presence in convenience stores as we roll out on-the-go products like belVita protein bars and smaller pack sizes of our [biggest] brands which are tailor-made for this channel.

Our investments in flexible packaging capabilities with our Lines of the Future are now enabling much broader price tab architecture across our key categories. For example, our new Ritz lines can now flex to produce from 2 to 18 slugs in one package and from 10 to 40 crackers per slug, with minimal changeover waste. This capability enables us to play in new channels and new occasions at competitive margins.

Net-net, our strategy is working, and we remain on track to deliver our full-year outlook, with improving top line performance as we move through the second half. We're optimistic about our 2017 innovation pipeline, including Véa, belVita protein and RITZ Crisp & Thins in the U.S.; new chocobakery products like Milka brownies, Milka Tender Breaks and Cadbury Roundies in Europe; and Cadbury dark milk chocolate in Australia, which provides high cocoa content without the bitterness.

These innovations, together with ongoing white space expansions, such as U.S. and China chocolate, will ramp up in the second half. In addition, we expect to capitalize on the opportunity to flex our direct store delivery muscle in the U.S. to accelerate share gains in the second half.

Before I turn it over to Brian, I'd like to provide some context on North America. Suffice it to say, we're not satisfied with our performance in this region. We've clearly made great progress on margins, but over the past few quarters, we haven't delivered the type of top line growth we expect. This is especially true in our U.S. biscuit business.

While the environment continues to be quite challenging, we're actively working to improve the trajectory of our U.S. business. We have made competitive advantages in North America: our iconic brands, DSD capabilities, now advantaged manufacturing assets and a robust pipeline of well-being innovation. All of these advantages position us to win over the long term, but we need to better leverage these assets.

As you know, 2 weeks ago, we announced a leadership change in the region. Tim Cofer is now serving as interim President of our North America region in addition to his critical role as Chief Growth Officer. Tim is one of our most experienced and proven commercial leaders and has successfully demonstrated his expertise in growing our businesses in both developed and emerging markets.

Although it's early days, Tim and the team are focused on fundamentals, fully leveraging our DSD capability, improving sales and marketing execution, delivering our ambitious 2017 innovation plans and expanding our channel presence. As these initiatives gain traction, we expect to see material improvement in revenue and share in the back half of the year, without losing focus on our margin commitments.

Now let me turn it over to Brian to discuss our performance in the quarter in more detail.

Thanks, Irene, and good afternoon. As Irene stated, it was a solid start to the year in a challenging environment. We're confident that our full year results will be in line with expectations.

Given the market conditions, we delivered solid top line growth, with organic net revenue up 0.6%. Easter timing was less of a headwind than we anticipated as customers ordered and we shipped late in the quarter to stage the holiday. This will have some impact on our Q2 dynamics, which I'll address in our outlook.

As we discussed in February, the first quarter did also have a minor effect from the 2016 leap year and the timing of Chinese New Year, but in total, the year-over-year impact of the calendar items ended up being pretty immaterial to the quarter.

Emerging markets grew 3.5% while developed markets declined nearly 1%. Our Europe business performed quite well and is off to a good start to the year, but this was more than offset by declines in North America.

Now let's take a closer look at our margin performance. We continued to deliver strong adjusted OI margin expansion, with overhead reductions being the primary driver. Adjusted gross margin decreased 20 basis points as solid net productivity improvements and better pricing were offset by unfavorable mix and higher input costs.

Adjusted OI margin was 16.8%, up 90 basis points. This improvement was driven by another quarter of overhead reductions from zero-based budgeting and global shared service initiatives. Similar to Q4, these results include the cost of investments in innovation and white space expansion that are largely in advance of revenue, which will become more meaningful in the back half of the year and into 2018. We expect to make even larger growth-related investments in the second quarter, and that will somewhat temper margin delivery in the quarter.

But overall, we're on track with our cost agenda and remain confident in our path to ongoing margin expansion, consistent with the targets we've given you.

Now let me provide some insight into our regional performance. One of the real strengths of our model is our broad geographic footprint, which allows us to balance weaker markets against stronger ones. In general, we're seeing positive trends in 3 of our 4 regions, and they're performing at or above our expectations. Several of our key markets are showing encouraging signs, so even with a few tough markets, we are, in aggregate, well positioned for good 2017 performance.

Europe delivered another quarter of solid margin expansion, with an increase in adjusted OI margin of 60 basis points. Margins now stand at 19.5%. The Q1 margin improvement was driven by strong net productivity as well as lower overheads, which offset some incremental A&C investments.

Organic net revenue was up 1% driven by volume. Strong programming in both biscuits and chocolate fueled the growth despite a continued deflationary environment. We also saw good overall performance in Germany and Russia chocolate, offset by weaker performance in the U.K. chocolate business as heavy promotional spending in the category continued to pressure short-term results. We believe our Europe performance is differentiated, with good growth and strong margins and provides a great example of our business strategy in action.

In AMEA, our team is managing well in a volatile set of markets. Adjusted OI margin declined 60 basis points to 14.6%, driven primarily by increased A&C support, which offset lower overhead costs and good productivity. Organic revenue increased 1.3%, led by solid growth in India and Southeast Asia.

Our China business declined due to the timing of Chinese New Year and softer results in biscuits. However, we delivered good growth in chocolate as our Milka brand continued to perform well and we continued to gain share in Gum. We expect the upcoming relaunch of Oreo this summer to provide positive momentum to the biscuit category for the balance of the year.

The Middle East continues to be challenging, but we'll face easier comps as we enter the second half of the year.

In Latin America, adjusted OI margin increased over 500 basis points to nearly 16%, primarily driven by improved overhead costs and lower A&C spending as we've adjusted our spending levels to the realities of the market in Brazil.

Organic net revenue increased nearly 4%. Mexico grew mid-single digits, driven by solid growth in Gum, candy and meals, while Argentina grew high teens through pricing to offset currency-driven inflation.

Brazil remains difficult due to persistent economic weakness. We posted another good quarter in chocolate but continued to experience pressure in biscuits due to price gaps and significant down trading. We expect Brazil will continue to be tough and have factored that into our forecast.

Finally, in North America, we again delivered solid margin expansion, as adjusted OI margin improved by 50 basis points, primarily driven by ongoing overhead savings. Adjusted OI margin for the quarter was 20.8%.

As Irene mentioned, our challenges in North America are top line related. Specifically, the region posted a decline of 1.9%, driven primarily by U.S. biscuits but also impacted by Gum. We're taking steps to stabilize the business, putting in place experienced operating leadership and investing more heavily in brands that have momentum. These actions give us confidence in our second half plans.

Despite disappointing top line results in aggregate, there were bright spots in North America, including belVita, which gained more than 1 point of share and the launch of RITZ Crips & Thins late in the quarter, which helped drive a 0.5 point of share improvement for the brand.

Gum decreased due to continued category consumption declines in the U.S., while candy was flat, driven primarily by the timing of Easter. We continue to see good share momentum and profit contribution from candy brands like Sour Patch Kids, which has become a consistent star.

Now let me spend a few minutes providing some highlights by category. Snacking category growth declined about 2.5%. A number of that was significantly impacted by the year-over-year calendar impact from Easter. We remain comfortable with our full-year view of category growth. In this environment, we're pleased that our shares improved with solid results in all categories.

Our Biscuits business posted a slight revenue decline as strong growth in countries like the U.K., Japan and Italy was offset by weakness in the U.S. Approximately 80% of our revenue grew or held share.

In chocolate, our business grew to more than 5%, driven by solid results in Germany, India and Brazil. In addition, we continue to see good momentum with our recent launches of chocolate in the U.S. and China. Approximately 65% of our revenue grew or held share in this category.

Gum & Candy declined over 5%, as the Gum category continues to experience significant weakness, especially in the U.S. We're planning for continued declines in the Gum category as we focus on growing our share and improving in-store execution. As you know, this is a highly profitable but relatively small business for us. We'll also continue to shift our focus to our strong, growing and highly profitable candy platforms. About half of our revenue in Gum & Candy gained or held share.

Turning to earnings per share. In Q1, we delivered adjusted EPS of $0.53, which was up 6% on a constant-currency basis. This growth was driven by our strong operating income results. We continue to expect to deliver double-digit EPS growth for the full year.

As Irene mentioned, during the quarter, we returned approximately $800 million of capital to shareholders through share repurchases and dividends. We continue to expect share repurchases of approximately $1.5 billion for the full year.

Now to the outlook. Overall, we're reaffirming our outlook. The first half is generally playing out as we expected, although we do see slightly different dynamics between the quarters. We delivered better growth and margins in Q1 than our forecast as the first quarter was less impacted by the Easter shift than anticipated. In Q2, the year-over-year compare will be more difficult, and we expect North America to remain challenged. Due to these factors, we expect Q2 revenue growth below Q1, with improving growth in the second half.

And in terms of margin, the second quarter will be affected by higher growth investments and the timing of some spending that shifted from Q1 to Q2.

For the total year, we continue to expect to deliver on our outlook. We continue to expect organic net revenue growth of at least 1%. We expect adjusted OI margin in the mid-16% range as well as double-digit adjusted EPS growth on a constant-currency basis. And with respect to free cash flow, we continue to expect to deliver approximately $2 billion for the year as we see lower CapEx, improved margins and good working capital efficiency.

With that, let me turn it back to Irene for a few closing comments before we take your questions.

Thanks, Brian.

So to wrap up, we're off to a solid start and expect to build momentum in the back half of the year as we benefit from white spaces, launch exciting on-trend innovations and leverage our U.S. DSD network. We remain confident in our ability to deliver our significant margin commitments this year and are on track to reach our adjusted OI margin target of 17% to 18% in 2018. We will continue to make disciplined investments to drive balanced growth on both the top and bottom lines. And we remain committed to compelling capital returns to our shareholders through both dividends and share repurchases.

With that, let's open up the line for your questions.

(Operator Instructions) Our first question comes from the line of Ken Goldman from JP Morgan.

I was pleasantly surprised by your organic sales growth this quarter. I mean, we've seen some data and you guys referred to it regarding your categories on a global basis. So you've talked about some of the holidays, some of the calendar shifts that affected you. I'm just curious, were there any other, maybe nonrecurring timing issues that either maybe helped or hurt this period? Because you've had so many new products in the market, I'm just wondering, were your shipments and your consumption more or less aligned this quarter or were they a little bit out of order? I'm just trying to get a better sense of that.

That's an -- I'd say, they're generally aligned. The biggest impact, of course, is the Easter timing. And so there's a lot of noise because of that shift. We shipped -- as Brian mentioned, we shipped much of our Easter volume in Q1, but we'll get the consumption coming when the holiday happened in Q2. If you were to adjust for Easter and non-measured channels, which is a smaller impact, like-for-like category growth would actually be about 1%, and our snacks revenue is up about 0.8%. So there's actually pretty close correspondence there. As we said, from a pacing standpoint, the first half is going to come in essentially where we expected it. We're going to see some shift from first quarter to -- from second quarter into first quarter. So first quarter, a little higher. Second quarter, a little lower. The first half will come in essentially where we thought. The second half will be a little bit higher, driven by some of the phenomena that I mentioned: the white spaces, the strong innovation pipeline and our investment in flexing our DSD muscle. So net-net, there's no change to our full-year forecast, but there's really no impact in this first quarter. The biggest impact is the Easter timing.

That's helpful. And then, a quick follow-up from me. I thought you said that the comparison in the organic sales growth number, and forgive me if I heard this wrong, was a little more difficult in the second quarter than the first. Maybe you were talking about total revenue growth because I see the comparison's a little bit easier actually in the second quarter. Were you taking earnings, maybe?

Yes. It's more of a top line comment, Ken, and it's -- specifically, North America's year-over-year compares are challenging. It doesn't quite look that way because even '15, there were some unusuals that made '15 good, too. So as we look like-for-like versus '16, it's a little bit of a tougher compare, and North America will be a drag for us in the second quarter.

And our next question comes from Andrew Lazar from Barclays.

Just 2 questions for me. I guess one would be, with North America results more challenging, you've said you're expecting obviously some benefit in the second half from a shift in the sort of competitor, sort of distribution model. It might be early, but I guess, have you seen anything yet that gives you more confidence in that thinking, whether it be information coming from your sales people on the street or your key retail partners, things of that nature?

It's a little early, Andrew. I'd say they're spending their -- they're spending pretty heavily on their way out right this minute, so I would say, right now is probably not a great example. And frankly, the big impact will be in the back half of the year when they've exited. So it's a little too early to tell, but we are certainly doing everything we can to make sure that our guys are staged with the support that they need and the focus that they need to get the -- to drive our share.

And given the timing, Andrew, it could be one of the issues we face in Q2 as they exit more aggressive behavior in Q2, that we might see play out.

Got it. Okay. And then, Brian, I know this was the toughest year-ago, certainly, gross margin comps that you're going to see all year, and obviously, you're still in negative [IMs] in the quarter, so that didn't help. I guess I'm trying to get a better sense of maybe what type of gross margin expansion we're seeing on a -- like an underlying basis? I'm trying to judge where it goes from here as the comps on gross margin start to ease, and volume, as you go through the year, presumably gets somewhat better. I didn't know if we're still likely to see, I guess, a lower year-over-year gross margin in 2Q, and then it starts to expand in the back half. Or could we start to see the gross margin trend improve year-over-year really in this quarter?

Yes. Look, I don't want to get into calling individual quarters on something like gross margin. I think the underlying dynamics for what we're driving here feel pretty good and net productivity execution continues to be very good. We delivered what we expected in the quarter. We are making some investments in, as you would expect, some product renovations and some of the quality initiatives we have that are affecting productivity, but it was still very good even on a net productivity as recorded. We had higher pricing, as you would see in the P&L, but most of that's driven by places like Argentina, Nigeria, Egypt, some of those highly inflationary markets. There are some places in Europe where we've made some pricing investments as you look at the annual retailer negotiations and how they've played out, and I think those were good decisions based on the trend we see in Europe right now. So I mean, there's some moving pieces as well with mix. So if you think about markets like the U.S. and the U.K. and the global Gum business, I'd put China in there as well, those are -- those tend to be higher-margin markets and those have been some of the markets that have struggled a little bit in terms of top line. So those are the moving pieces. I think the trajectory over a longer period of time, we continue to see gross margins expand as we move over the next year, but it's hard to call some of those individual dynamics. We'll continue to execute on the productivity. I know that. We've got pricing that's still moving through in those highly inflationary markets, but again, we're focused on the OI margin commitment, and the 90 basis points feels pretty good. So we're kind of controlling what we can control in a pretty volatile market.

And our next question is from Chris Growe from Stifel.

Just 2 questions for me as well. A bit of a follow-on to Andrew's question, in relation to gross margin. I've heard you talk about price pack architectures and capability that you have there. I'm just curious to the degree to which mix, and I guess, I'd put that into mix, should benefit the sales and gross margin, if you will, for the year. Is that something you could discuss in some broader detail?

Well, it's clearly a focus for us. And as you think about the investments we've made with Lines of the Future, that was one of the key elements, key assets that we've put in place with much more flexibility there. I think it's -- that element of mix is clearly one that's been moving in the right direction as we've done quite a bit of work there. I think it will accelerate, but again, it's within this context of other moving pieces within gross margin. We do think it's a real asset. It's a real incremental capability that we haven't necessarily had and allows us to manage through moving up margins where we can but not having to price on its face with customers. So I think it's a real asset, not really going to call out what the impact in gross margins is. I think it'll be increasing as we get those capabilities up and running everywhere.

Okay, just 1 other question, if I could ask, in relation to overhead, which was down -- a contributor, if you will, to lower SG&A. Could you cite where your overhead is or what sort of progress you're making on that front and how sustainable that is?

I think it's -- you've seen us continue to make progress really quarter after quarter here. It is still a focus and a big area of priority. We've shown you some of the progress we've made within some of the ZBB activities. And I think for the most part, the majority of those cost packages are either in top quartile or second quartile performance, and we feel pretty good about that. Shared services, we're, I would say, a little bit more than 75% of the way through, the implementations that we have in front of us, and there will be some additional benefits that play out during '17. But we feel very good about where our overheads are. And again, it's a little bit of a mixed bag because we are making some investments in route-to-market and some other parts of the business. So -- but that's one we have the -- probably the highest confidence in the whole P&L.

Can you say what level your overhead is today? (inaudible) ...

No. (inaudible) SG&A -- we've kind of shared with you where A&C spending is. And A&C spending has continued to be about the same. I mean, it's up a bit year-over-year in the first quarter, but you can kind of back into where it has gone.

Our next question comes from Bryan Spillane from Bank of America.

Two quick ones from me. Brian and maybe, I might have missed this, but did you give a CapEx forecast for this year?

We did. In CAGNY, we shared a framework that said about 4.5% of net revenue this year. And we showed that the trend will actually move down below 14 -- under -- or about 4% as we get to '18. So we're on that trend down as we've kind of worked our way through some of the bigger investments related to Lines of the Future. So 4.5% for this year is the current call. (inaudible) this quarter.

And then, I guess a follow-up on North America. One of the things that we've seen is there's been so much growth in small format and sort of maybe non-measured channels as well. And so for your Biscuit business, has that had an effect on the growth in that you need more sort of resources in some of these emerging channels and you're right now maybe a little bit too resourced on large format, the channels that aren't growing as fast?

No. We certainly anticipated this shift over -- we've watched this shift over the last couple of years, Bryan. So we actually have someone in our North American organization who's in charge of channels, and his focus for us is on the growth opportunities, particularly, in our case, is primarily about club and C stores. And then -- and we have a separate organization, actually, that is driving e-commerce. So we are resourced to address it, frankly. The holdup for us was the packaging capability to address these channels. And that's why I'm so pleased with the progress that we've made as we've got these Lines of the Future up and running because that's the flexibility that we need to be able to go from big pack sizes to small pack sizes. But a critical piece of our growth plan is our ability to be able to improve our share in some of the less-traditional channels that had been historically our bread and butter.

And our next question is from Matthew Grainger from Morgan Stanley.

And so I wanted to come back to North America again first and ask about some of the evidence of renewed private label growth in selected categories. This seems to be a particular issue in the cookie business right now. Just curious for your take on to what extent that's being driven by some shift at the consumer level or whether it's something that's more explicit retailer-led initiatives?

Yes. We're not seeing that as a macro issue. There's no question. We've actually found that the penetration of private label, even in our biscuit segments, has not changed dramatically over the last little while. So that hasn't been a factor. We think the bigger issue, without a doubt, has been the shift toward well-being. And that's been a key piece of our focus on renovating our base brands, like Triscuit or introducing products like GOOD THiNS as well as launch -- the launch of a product like Véa, which is a new whole-grain product that we will be introducing in July. So that's been more of a factor for us, and I think a lot of the steps that we're taking, particularly with the innovation pipeline I described, are designed to address that opportunity.

Okay. And Brian, you talked last quarter about the need to do a better job on trade optimization. I'm just curious whether in the current environment, this is something you're comfortable trying to address more actively. Or given the negative price mix we're seeing in developed markets, are you going to continue to tread more cautiously here and be a little bit more tactical?

Yes. Look, I think we're executing the program. We talked a bit about our investment in some resources and data, and we are finding opportunities where we're improving returns on promotional spending, and I think that's been on track. Now the reality is, we've had to spend some of that back. And we've seen the benefits. We could find that in the P&L, but then, we're also seeing areas where it's important that we spend some additional trade back. And that's sort of the dynamic that we've got playing out. So we're continuing to try and educate customers with the data analytics that'll -- that suggest that heavy promotional spending just doesn't really work to grow categories, and I think that's a real market-by-market sort of dynamic. But again, we're executing the net revenue management activities pretty well, we're finding benefits and opportunities there, but we're consciously spending some of that back, and it's -- as a result, it's not as big a benefit showing up in the P&L.

And our next question is from Rob Dickerson from Deutsche Bank.

So it's just kind of a general question on EPS gains for the year. I know you said that you put out 6% adjusted EPS growth in Q1, and [basically] for Q2, there's I guess a bit of sales come off a bit on a trend basis relative to what we saw in Q1. And maybe, there's a little higher investment, so the margin's not maybe as much -- on a year-over-year basis. So I'm just curious, I guess, one, if sales -- EPS-adjusted sales growth was 6% in Q1 and we're double-digit for Q2, should we see -- should we expect maybe EPS growth to be a bit lower in Q2 relative to what we saw in Q1 with really the upside for the year coming in the back half? Is that fair?

Yes. I mean, I'm not going to get into individual quarters. I would just say, I think with the 6% in Q1, I mean, we feel good about -- as you look at the compares through the rest of the year, we would expect to see some improvement as we move through the year. Obviously, the better back half with revenue picking up and the innovations that'll drive that and the things that we have confidence in will contribute to that. And we'll continue to execute on cost. So you would expect to see EPS continue to improve as we move through the year. That should be the general framework, and then you have to look at the compares from prior year.

Okay, great. And then just in emerging markets, it's -- it looks like you still put up the 3.5% organic sales growth in Q1. On a tier-stack basis, it does look like -- I mean, it's still impressive, but it does look like there was a bit of a deceleration. Is that mainly Brazil? Because it did sound -- I know you called out India and Russia and a number of markets that actually did well. What would be the main driver of a bit of a deceleration in emerging markets?

Yes, I would say both Brazil and, year-over-year, China would have been the other one. But we are very pleased with the performance of our emerging markets, and we continue to believe that as the macros in those markets recover, we will see our category recover in a corresponding fashion.

And China was really a -- Chinese New Year timing is a fair driver there. If you look at Q4 organic growth from emerging, it was 1.5% and it moved to 3.5%. I mean, the biggest driver there is demonetization in India, which is a much, much smaller impact this quarter.

And our next question comes from Alexia Howard from Bernstein.

So 2 questions. The first one, with the divestments or the JVs that you're pulling together, but $500 million of revenue is going, are you able to quantify the stranded costs? I know you haven't changed guidance for the year, and how quickly you expect to get rid of those stranded costs. And then my second question is around commodity costs. I was quite surprised to see your commodity costs up this quarter, especially with the major decline in cocoa prices that we've seen coming out of Europe and the U.S., frankly. Do you expect that to get easier going forward? And how do you expect the gross margin to develop?

You got it, Alexia. So stranded costs, I mean, there's obviously -- there's 2 pieces to each of these, which is one of the stranded costs locally that are controllable by the business that are actionable, and then there's the unallocated sort of corporate. And you'll see us over the course of the second half of the year really aggressively deal with the local costs that surround these businesses. I'm not going to provide a quantification of the stranded costs or dilution impact of these 2 transactions. We'll give you clarity on that at the end of the second quarter as we close them. One of them has already closed and the other will close towards the end of the quarter. So we'll give you more clarity, I think, when we get there. But we have good line of sight to make those stranded costs go away. Just as you know, it takes a little bit of time and some of that will likely be into the first part of next year. On commodities, I would just say a couple of things. One, as you think about cocoa, yes, I mean, clearly, there has been a fairly significant move in cocoa prices. You have to recognize, I think, that the hedge window for cocoa is longer than I think you would expect. And that's really driven by really, our pricing -- our ability and the frequency in which we can go after pricing in some of the key markets there. In some cases, you have annual renegotiations and you want to create certainty in terms of margins in those relationships, so you're going to go out and hedge a little bit further. So we are hedged longer than I think you would expect and, therefore, don't necessarily have access to the current pricing in this market at this time. The other thing I would note is that dairy for us is almost as big a buy. And as you look at what's going on today with dairy, dairy prices are up. We have much less ability. There's much less liquidity in that market to do hedging, so we are absorbing some of the pain associated with dairy. And again, it's not nearly as hedged. So those are the dynamics that are playing out. On the short term, we are seeing some input cost pressure. It's not huge. It's relatively small when you put all those things together. And then, cocoa, again, it will be a little bit outside the window of the next few quarters that we start getting some of the benefit of lower cocoa prices.

And our next question comes from David Driscoll from Citi.

I had one question but kind of 2 pieces on North America. And apologies, you guys have talked about the North American issue so much, but I got to be honest with you, I'm still not quite clear on really what's wrong. I know you said that sales are not growing at what you expect it to grow, but Irene, frankly, I think you've done a wonderful job with some of these healthier biscuit brands and so forth and it may be better -- much better than most of the other players in the category, so that doesn't feel like anything that's wrong. It feels like a positive. So I don't -- I know you said it's not growing the way you want it to grow, but I don't really know what's wrong with it, like why isn't it growing this way? And we do note in our data that we see some pretty heavy promotional activity for Mondelez, but maybe it's not getting the lift that you want it to get. But maybe you could spend a moment to talk about kind of the heart and soul of what's wrong in the business as you see it.

Yes. First of all, I'm very, very pleased with many of the things that the North American team has done, and these are tough times. So as we said, there are many things going the right way, but we have a very unique set of advantages in that market. It starts with our DSD selling organization, but we have incredible, iconic brands and we had very, very significant marketing support. And with all of that, I would expect us to be able to outgrow the category. So part of the challenge in North America has been that the category has been under such -- under some pressure. We own that category and we need to figure out how to drive that category more aggressively. So I would say that's the biggest issue in North America is our Biscuit business. I do think that the work that Tim Cofer and the North American leadership team are focused on in the near term is exactly the right work, which is just blocking and tackling in terms of sales and marketing execution, making sure that we can capture the DSD opportunity and making sure that we land that pipeline, and then -- as well as the channel, extending the channel presence that we talked about. So they're focused on the right things. We just -- I'd like to see them happen faster because we have been outgrow -- had been outgrowing the category for quite some time and it's been a while since that's been the case. And so that's what I'm looking to happen, and I think we've got the assets to enable that.

And if I could do just one follow-up on this. You've mentioned the DSD muscle like many times on the call. When you say this phrase, can you talk a little bit about how it will manifest itself in-store? Is it you would expect larger shelf space for your brands? Or is it more about the display activity that takes place within the store due to the DSD team?

It's both of those things, David. I mean, it starts with the fact that there will be some shelf space that will be vacated. One of the benefits of a DSD organization is that there's a broader assortment of inventory that is typically carried, and the opportunity now for us to get in some of our secondary brands, many of which actually have better velocity than some of the brands that were on the shelf is priority one. But there's also, because of the expandable consumption of Biscuits, the opportunity for us to get more product out on the floor is the other big opportunity. So it's -- actually, the focus will be on both of those things.

And our next question comes from David Palmer from RBC Capital.

Last quarter, you called out discounting, both retailer led, competitor led, I think especially in the U.S. and in the U.K. Could you describe how that environment is changing, perhaps, both on the competitive and retail or customer level versus last quarter?

We continue to see aggressive discounting in a number of places and those are the 2 biggest. The good news is, we are seeing -- in the U.K. in particular, we are starting to see our shares recover. And now, as I've said a number of times, the biggest opportunity is to redeploy some of that investment to more category-building spending. And what we're finding is, in cases where there's heavy promotional spending, it just simply does not grow the category. So we are still seeing here in the U.S. some aggressive promotional spending and still seeing it, to some extent, in the U.K. But I am hopeful that as we continue to come with strong innovation and a strong selling story that we can get the focus back on brand equity as well as putting products on the shelf that have strong velocities.

And just a follow-up to that. There was a feeling that post Brexit in the U.K., the retailers have taken another -- more aggressive stance and that warfare was supposedly tapering off. Has that not ended as quickly as you would've hoped? And in the U.S. obviously, you're hearing a lot of talk about retailers taking a tougher stance against brands. Is that part of the changed environment that you've seen carry over into this quarter?

Well, Brexit is not over yet. So I would say everyone is still waiting to figure out what the actual rules will be and it -- there's no question, it will put some pressure on both the manufacturers and the retailers. And I think that's a piece of the uncertainty there. Here in the U.S., I think it is -- it continues to be a challenging promotional environment, but I think we've been able to weather the storm reasonably well. I mean, as I mentioned, our share -- our biscuit share has been flat. The challenge is that, that's not good enough. We think we can do much better than that.

Which is better than it was, so we...

Yes, it's improved, but it's just not where we'd like to see it.

Our question comes from Steven Strycula from UBS.

First question for Irene, and then I have a follow-up for Brian. Irene, when you first guided organic sales for the year on February 7, you commented at least 1% organic sales, and that was a few days before your key competitor communicated a DSD transition. So I guess my question is, since then, we've heard front-of-store initiatives from CVS and obviously, the DSD transition from a competitor. Are both of these dynamics baked into your current organic sales guidance for the year? And specifically, are you guys thinking about budgeting share gains in the back half year? I'm just trying to assess what kind of upside that we see relative to before or is there any kind of conservatism baked into the full-year analysis?

Well, I would still say we feel very comfortable with the guidance that we've given, and the reality is, there are many moving pieces as we've shared with you today. So the -- we should pick-up share in the back half, as I've said, here in the U.S., but there are some offsets to that. And so we've got -- there'll be some puts and takes. We still feel very comfortable with our top line guidance of at least 1% and importantly, our bottom-line margin guidance. And in this environment, we think that's the most prudent planning step.

Okay. And then, Brian, for full-year gross margins, is there a scenario where there should -- we should expect this to be up slightly positive for the year? And Irene, on e-commerce, you guys have -- growing 30% quite nicely. What are the puts and takes of that channel growing longer term? I mean, in terms of clearly getting access to new customer, but from a margin mix perspective, is there anything that maybe is an offset to the opportunity on the revenue front, whether it's unfavorable margin mix for reason XYZ?

Yes, in gross margins, Steve -- and I wouldn't get into providing an outlook for gross margins for the year. I think we feel good with the long-term trajectory. We think gross margins are going to get better. We've articulated that. I think there will be puts and takes and moving pieces quarter-to-quarter. But again, the trajectory, I think, will continue to see improving gross margins as we move towards our 17% to 18% commitment. And then, on e-commerce, just margins, in general, the gross margin line are slightly below as you think about e-commerce as a channel. But when you think about it in total, in terms of cash margins that we deliver, we don't necessarily have the same distribution costs associated with serving that channel. So in total, we can get to similar margins, and that's basically what we're seeing in the current e-commerce business. You want to...

We also think we can address underserved occasions like gifting, for example, with many of our biscuit and chocolate items, for example. In the e-commerce channel that actually don't necessarily -- will not necessarily even appear in retail. So we -- our commitment, as we talk about the $1 billion business that we are targeting by 2020, our expectation is that, that will have margins that are as good, if not better, than our -- than the rest of our portfolio.

And ladies and gentlemen, we have reached our allotted time for today. We ask that you may disconnect your lines, and thank you for participating.