Mondelez International, Inc. (MDLZ) Q1 2010 Earnings Report, Transcript and Summary

Good day, and welcome to Kraft Foods First Quarter 2010 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Kraft's management and the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Mr. Chris Jakubik, Vice President Investor Relations for Kraft.

Good afternoon and thanks for joining us on our conference call. With me are Irene Rosenfeld, our Chairman and CEO; and Tim McLevish, our Chief Financial Officer. Our earnings release has been out earlier today and is available on our Web site, www.kraftfoodscompany.com. We've also made available on our Web site a set of slides that we will refer to during our prepared remarks. As you know, during this call, we will be making forward-looking statements about the company's performance. These statements are based on how we see things today so they contain an element of uncertainty. Actual results may differ materially due to risks and uncertainties so please refer to the cautionary statement and risk factors contained in the company's 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements. Also, some of today's prepared remarks will include non-GAAP financial measures. And you can find the GAAP to non-GAAP reconciliations within our news release. So with that out of the way, I'll hand it off to Irene.

Thanks, Chris, and good afternoon. We'd like to cover three things today. First, I'll provide a progress report for our integration with Cadbury, which is off to an excellent start. Then Tim will provide highlights from our first quarter results released earlier today. And finally, we'll discuss our earnings guidance for 2010. So let's begin. As I discussed in February at CAGNY, our turnaround over the past three years revitalized our base business and positioned us for future growth, with a more effective organizational structure, with stronger brand equities and with a streamlined cost base. Having positioned our base business to deliver consistent growth in line with peer averages, we then set our sights on top-tier performance on both the top and bottom lines. Combining with Cadbury was one of the best ways for us to get there. The new Kraft Foods will drive accelerated organic revenue growth through focused investments and higher growth, higher margin categories, higher growth developing markets and higher growth trade channels. We'll not only fund these investments but we'll also expand our profit margins. We'll accomplish this by reducing costs as we leverage our scale: our global scale in areas like procurement and overheads and our local scale in every major geography, as we take advantage of existing infrastructures to drive profitable volume growth. And by focusing our investments, we'll further enhance our margins by improving our portfolio mix. That's our formula for delivering sustainable top-tier growth. So how’s it going so far? As you know, it's been about 90 days since we came together with Cadbury. I'm delighted to report that our integration plans are progressing well. In terms of people, we quickly named the executive leadership team within our original 45-day target. I'm especially pleased that among these leaders, all 10 of Cadbury's top line managers and both of their global category managers are part of our new organization. In fact, about a third of our top 50 leaders are from Cadbury. At this point, almost all business unit, country and functional leaders have been named, literally hundreds of positions. In addition, we're making good progress in determining the right mix of office locations and R&D centers around the world. On the business front, we've confirmed our synergy targets. And we're consolidating both companies' legacy cost-saving plans with the synergy programs. Based on these consolidated plans, we're developing new annual targets and three-year strategic plans for each business unit and each corporate function. In these initial days, we've done a lot of work getting the right people in the right jobs and aligning our cost-savings targets. But I want to emphasize cost savings are not the big story here. This combination is about growth. And over the next few weeks and months, you'll begin to see more evidence of how our integration plans are laying a solid foundation for the future. Most important while all this work is going on, our businesses have continued to perform well. You've seen our press release and you'll hear more from Tim shortly. But we're quite pleased with our first quarter results, both for the Kraft Foods base business and for the Cadbury business. Everything we've seen so far has only reinforced our decision to acquire Cadbury. On the top line, our portfolio is now more heavily weighted towards faster-growing categories, geographies and trade channels. And we're developing a full pipeline of revenue synergies around the world. As a result, I remain confident that over the long term, this portfolio can deliver at least 5% organic revenue growth with about 2/3 of this growth coming from volume/mix. We expect organic revenue growth to accelerate over the next few years. In 2010, we’re targeting our combined organic net revenue growth to be at least 4%, as we integrate Cadbury, set a solid revenue base and begin to plant seeds for future growth. This will consist of approximately 4% organic net revenue growth for Kraft Foods base business and about 5% from Cadbury. In 2011 as the integration progresses and we begin to benefit from revenue synergies, we expect combined organic growth of at least 5%, in line with our long-term target. In fact, we've already begun to make investments to realize that growth. As a first step, we're restoring and in some cases accelerating advertising and consumer investments in Cadbury's businesses, particularly gum. And worldwide, we're ramping up our management of global categories beginning with chocolate, biscuits and gum, taking the best practices for both companies. Turning now to the bottom line, we have a strong pipeline of cost-savings initiatives to fund our investments and accelerate margin expansion. We're continuing to execute our existing programs, including Cadbury's Vision into Action and initiatives on the Kraft Foods base business in procurement, manufacturing and overhead that we shared with you last September. In fact, we've discovered that the focus areas and programs of the two companies are highly complementary. For instance, from an end-to-end productivity perspective in procurement, both companies expect to deliver savings by trimming their supplier lists and developing strategic partnerships. In manufacturing at our legacy Kraft plants, we're making good progress in using lean manufacturing and Six Sigma Tools to remove bottlenecks, reduce waste, optimize labor and streamline inventories. We'll soon begin rolling out these programs to Cadbury plants as well. In terms of overhead, both companies were already targeting zero overhead growth. Together, we'll continue to pursue those aggressive goals in each region. In North America, we're planning zero overhead growth before integration synergies. In Europe where we still have a high absolute level of overheads, we'll continue to target negative overhead growth. And in developing markets where we foresee a double-digit increase in revenue, we're targeting overhead growth at half that rate. We'll spend between $200 million and $250 million to capture these savings. But as we've committed, these expenses will be considered an ongoing cost of doing business and will be included in operating earnings. In addition to our base programs, we continue to target pretax cost savings of at least $675 million from integration. The savings will come from three areas: operational synergies of $300 million, as a result of further efficiencies and economies of scale in procurement, manufacturing, supply-chain and R&D; general and administrative synergies of $250 million; and marketing, media and selling synergies of $125 million. In terms of the flow of costs and benefits, we expect to spend approximately $1.3 billion to deliver the savings, with about half the spending occurring in 2010. We expect the savings to ramp up beginning next year with more than 90% benefiting our 2012 earnings. In fact, we expect to exit 2012 with a run rate of at least $675 million in savings. Each of these targets has a detailed plan behind it and a member of our Executive team responsible for delivering it. At the same time, as I said earlier, we're consolidating our legacy cost-saving plans with the synergy programs. And so the best way to track our progress in the integration will be by monitoring the operating margin of the combined company. Going forward, the formula is simple. We're focusing on brand investments to drive volume growth and improve our portfolio mix. We're driving productivity savings by taking advantage of our scale in procurement and manufacturing. We'll leverage our overhead costs to fuel further margin expansion. And we'll reinvest a portion of these savings to drive future growth. It’s a virtuous cycle. We'll simultaneously fund investments in quality, marketing and innovation for top line growth, while delivering healthy, sustainable bottom line margins. We’ve set our sights for mid-teens margins by 2011 and a long-term operating profit margin in the mid- to high teens as the integration is completed. In sum, our combination with Cadbury greatly improves our overall profile and positions us for sustainable profitable growth in the top tier of our industry. We'll drive high quality organic revenue growth and execute a strong pipeline of cost savings initiatives. At the same time, we'll increase investments in our brands, in our sales capabilities and in R&D. This will enable us to deliver the long-term targets we laid out several months ago: organic revenue growth of at least 5%, profit margins in the mid- to high teens and EPS growth of 9% to 11%. Now I'd like to turn the call over to Tim, who will take you through our first quarter results and earnings guidance.

Thanks, Irene, and good afternoon. As Irene indicated earlier, our first quarter showed continued improvement both sequentially and compared with last year. And we're encouraged by the solid performance posted by the Cadbury business in February and March. On the top line, organic net revenue growth of the combined business was 3.9%. We grew 3.3% in our base business behind focused investments in our priority brands, categories and markets. This reflected the flow-through of the stepped-up advertising investment we made in the fourth quarter of last year. Our Cadbury business reported strong organic growth of 8.2% in the February/March period. New product introductions drove strong gum performance in the Americas. And we realized solid chocolate gains in the U.K. and in Asia. Overall, a solid contribution from both the existing and new parts of our portfolio. In fact, our vol/mix performance was up sharply from a year ago and has improved sequentially over the last several quarters. More important, our momentum is broad-based, with each region making good progress in what remains a difficult environment. In addition, our key consumer sectors are performing well on a global basis. As you can see, confectionery, snacks and beverages are driving our growth around the world. We are getting great traction in the priority brands that will drive our future top line growth. For example, we're seeing 30% growth from Tang in developing markets, strong performance of Milka and Cadbury in Europe and ongoing success of Oreo in North America and the rest of the world. Moving to the profit line, operating income margin for the combined company excluding acquisition integration costs, rose 13.3% in the first quarter. Vol/mix and productivity improvement drove the upside. For our base business, OI margin rose by 40 basis points to 13.5%. This reflected a 170 basis points of upside from operations, driven by vol/mix gains and productivity improvements. But this is partially offset by a negative impact of 130 basis points, due to a change in unrealized gains and losses from hedging activity versus the prior year. Much of this change in unrealized gains and losses reflects the approximately $87 million benefit that we recorded in the first quarter of 2009. Our Cadbury business also made a solid profit contribution in February and March. It was driven by good revenue growth and also benefited from the timing of advertising and new product launches. Let me also point out that we continue to expand our OI margin, even while we're integrating the Cadbury business. Turning to the EPS line, our first quarter earnings per share demonstrated that our financial momentum has continued during the integration. Starting at the top, we earned $0.45 in Q1 of 2009. $0.04 of that was attributable to the operating income of the pizza business. From a base of $0.41 in earnings from continuing operations, our operating EPS was up nearly 20% to $0.49 a share. This is primarily driven by $0.08 of operating gains from the Kraft Foods base business and $0.07 of additional operating earnings from Cadbury. The key offsets to this growth came from the change in unrealized hedging gains and losses, which had a negative impact of $0.05, as well as the additional interest from debt and dilution from shares issued for the Cadbury acquisition. Below the operating EPS line, we incurred about $0.02 of initial integration costs and about $0.24 in acquisition-related costs and financing fees. We also recognized a onetime adjustment to our deferred taxes related to the recently enacted U.S. health care legislation. In addition, the combination of a onetime gain on the sale and two months of earnings from the pizza business mounted to $1.01 in EPS in the quarter. As a result, our reported EPS was $1.16. Before we get into our earnings guidance, I'll take a few minutes to share some highlights of our business results by geography. North America organic net revenues grew by 1.3%. Our base business organic growth was 1.1%, driven by vol/mix growth of 1.5%. That's lower than our long-term targets. Consumer weakness remains a factor, as you have no doubt heard from other companies. Our growth was also tempered by weakness in natural cheese and a significant decline in merchandising at a key customer that impacted us disproportionately. This was most pronounced in our Snacks and Grocery businesses. Despite that, we're driving strong growth in several priority brands such as Oreo, Philadelphia and Oscar Mayer, with focused investments in marketing and innovation. In fact, we drove consumption growth in approximately 80% of our base business in the U.S. Our Cadbury business, we posted growth of 6.4% in February/March reflecting successful new gum products. Going forward, we expect the second quarter will continue to be challenging. But the second half will be better, as we lap the merchandising change and continue to benefit from further investments and brand equity. While this means North America will likely be below trend for the full year, this has been built into our guidance. In terms of profitability, our operating income margin in North America grew to 17.4%. In our base business, OI margin improved by 180 basis points, reflecting productivity savings and vol/mix gains, partially offset by incremental investments in A&C. Our Cadbury business also posted solid profit performance due to favorable product costs, overhead cost savings and a benefit from the timing of marketing spend. In Europe, combined organic net revenues increased 3.1%. In our base business, organic revenues grew by 2.5%. Vol/mix contributed 4.8 points of growth, with gains across all categories, aided in part by earlier shipments of Easter products. Pricing was down 2.3 points, as we better aligned pricing with product costs. It's important to note that in 2009, we were diligent in our efforts to price the higher input costs, increase our brand building activities and prune less profitable business. Today, we're seeing the benefits to our top line growth. For instance, in the face of a difficult economic environment, revenues rose in chocolate, coffee and cheese due to new products and increased brand support. And despite some supply problems related to a collapsed roof at a warehouse in France, our performance in biscuits was solid. Organic net revenues from our Cadbury business grew 5.3%. This reflected double-digit growth of Dairy Milk in Britain and Ireland, as well as a favorable impact from the Easter shift. Operating income margin in Europe rose to 11.6% on a combined basis. Our base business, OI margin improved by 300 basis points, reflecting strong vol/mix gains and increasing investment in advertising. Our Cadbury business also made a solid contribution in the February/March period, reflecting strong vol/mix. Turning now to developing markets, combined organic net revenue increased 10.8%. On our base business, organic revenues rose 10.7%, driven by 5.9 percentage points from vol/mix gains and 4.8 points from pricing. Collectively, our priority brands grew approximately 19%, as investments made in the fourth quarter of last year paid dividends. In Asia-Pacific, priority brands grew 30%, led by Oreo and Tang. In Latin America, priority brands grew 22%, led also by Tang. However in CEEMA [Central and Eastern Europe, Middle East And Africa] weak economic conditions and poor category trends tempered growth. But we did gain share in most key markets and priority brands also grew double-digits led by Jacobs. Organic revenues in our Cadbury business grew over 11%, reflecting strength in Latin America and Asia. New products and improved distribution of gum led to double-digit growth in Latin America. And gains in India and Australia drove growth in chocolate. Our OM margin in developing markets was 13.2%. Strong net revenue growth drove a 120-basis-point improvement in the profit margin of our base business. However, this margin upside was tempered by investments in marketing. Profit performance in our Cadbury business in February/March reflected better alignment of pricing and costs, as well as improved product mix in Latin America and Asia. Overall, the collective performance of our base business in the first quarter was strong and demonstrated solid momentum in every geography as we began the process of integrating Cadbury. Now I'll turn to our earnings guidance. But before we get into the numbers, I think it's instructive to review the key elements of our 2010 earnings profile: First, for our base business, we are targeting the high-end of our 7% to 9% EPS growth objective. And we expect to deliver against this target. Second, we began consolidating Cadbury's results on February 2. So our full year results will reflect 11 months of earnings, as well as all of the related transaction costs and impacts of asset step-ups. And the sale of our pizza business closed on March 1. As we’ve stated before, this will reduce our operating earnings this year. But as you saw in our first quarter results, we recognized a onetime gain on the sale as well as some earnings for the months of January and February. With those facts as a foundation, let me walk you through the buildup of our 2010 EPS guidance. We start with the fact that 2009 diluted EPS was $2.03. Base Kraft growth should deliver at least $0.18 of additional EPS. We then adjust for the $0.05 impact of the pizza divestiture. This reflects $0.14 of lost operating earnings, including the impact of retained allocated overheads plus a $0.09 benefit to reflect the use of the proceeds. This gets us to EPS from Kraft Foods base business of at least $2.16 for the year, consistent with our previous target. Next, let's look at the impact of the Cadbury acquisition. Obviously, our P&L will benefit from the additional income generated by the Cadbury business. But in 2010, this will be offset by three things: cost of financing; incremental amortization and depreciation from asset write-ups; and investments in marketing, as we restore our brand support to appropriate levels. All in, the impact of the Cadbury acquisition will reduce our earnings by about $0.16 this year. As a result, we're targeting operating EPS of at least $2. Of course, we'll work hard to deliver additional upside to these numbers, but given the broad range of growth opportunities, our preference would be to spend back any upside this year to stage the business for faster growth in the future. Below the operating EPS line will be several onetime costs associated with the acquisition and integration of Cadbury, as well as a deferred tax charge related to the recent changes in U.S. health care legislation. In total, we expect those to be around $0.60 per share. Finally, discontinued operations reflects the earnings of the pizza business through March 1 as well as a onetime gain on the sale. Combined, this will result in about $0.95 of additional EPS in 2010. I would point out that the $1.01 reported in disc ops in Q1 will amount to approximately $0.95 for the full year, due to a difference in average shares outstanding for the respective periods. This gets us to at least $2.35 per diluted share on a reported GAAP basis. That's the complete picture for our 2010 earnings guidance. There are a lot of moving parts, but our underlying plans have not changed. And we're even more confident today about our ability to deliver them. While 2010 is an unusual year, 2011 will better reflect the benefits of our transformation and our true earnings power. Our 2011 profile is consistent with the target we've given over the past several months: EPS growth is 7% to 9% for the base business and approximately $0.05 accretion from the Cadbury acquisition on a cash EPS basis. So in light of all the moving pieces in 2010 base, we've set a target of mid-teens growth of operating EPS for 2011. That's mid-teens growth of at least $2 of operating EPS we expect this year. Keep in mind, that's higher than our long-term target of 9% to 11%. This reflects the step-up in savings from integration synergies. The next slide puts our prospects into a broader perspective. While our base business was poised to deliver sustainable growth in the 7% to 9% range, the acquisition of Cadbury significantly improves our earnings trajectory. As we integrate Cadbury and drive the substantial synergies and growth opportunities now available to us, our combined operating EPS in 2012 will be greater than we could have achieved on our own. Our long-term earnings trajectory is significantly better. Bottom line, the addition of Cadbury will accelerate our long-term earnings growth. With that, I'll hand it back to Irene.

Thanks, Tim. Before taking your questions, I'd like to take a moment to reflect on our first three months together with Cadbury, as we proceed on our journey to build a global powerhouse. As I said at the outset today, our integration is progressing extremely well. Inevitably though, this process leads to some redundancies. But running an efficient enterprise is necessary to remain competitive for the long term. That philosophy has been part of both companies' cultures. In fact, a long-term leader of Cadbury once put it this way, “What destroys jobs certainly and permanently is the failure to remain competitive. The company's prime responsibility to everyone who has a stake in it is to retain its competitive edge, even if this means a reduction in jobs in the short run.” That statement is as true today as it was when it was written. We're making the tough choices now that are necessary for long-term success. I know that there are some concerns about our ability to maintain base business momentum while integrating Cadbury. But I suggest that our strong first quarter results clearly demonstrate that we can, in fact, walk and chew Trident at the same time. That's a real testament to the commitment and capabilities of our people. And I thank them for all they're doing to lay the foundation for top-tier performance. Now, we'd be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: My first question would be that regarding the base Cadbury business. Is there any degree of – well I should say this is really, I guess, a general question for Kraft too, but we heard a lot about incremental marketing and advertising for the business. I guess my first question for base Kraft would be that should be up a lot the way you were talking, I guess, for your business. And the second question would be relative to Cadbury, is there any kind of catch-up or kind of increased investment you want to do now that you own the business?

Well, Chris, we're continuing to make significant investments in the base Kraft business, as part of our overall effort to restore and continue to build our brand equities. And I think we're seeing the fruits of those labors around the world. With respect to Cadbury, there have been no surprises. The underlying health of the business is quite good, as you can see in the results that we just reported. We do understand though that they made some significant reductions. We had anticipated this in marketing and certainly in the back half of the year as they headed into their defense. And so it was our intention. And we are beginning to execute the increased investment in those businesses and, as I mentioned, particularly gum. Christopher Growe - Stifel, Nicolaus & Co., Inc.: My second question just related to productivity savings, I guess in relation to input cost inflation for the year, kind of looking at the gross margin. How do you think those are going to try -- I guess the question for Tim, savings coming through at a stronger rate this year. But can you talk about input cost inflation for the year as well?

Yes, I mean there's also all of the input. [Indiscernible] you've seen cocoa and some sugar is higher than normal. We do have a hedge position, both in our base business and in Cadbury. We aren't going to disclose specifics about that, but we're hedged as we'd normally expect. We would anticipate if the prices stay at current levels or perhaps go higher, there would be some pricing later in the year. From productivity -- we're expecting for the most part that our pricing will cover the input costs. There may be a little contribution from productivity to buffer some of the ups and downs over time. But on balance, we'd expect pricing to cover input cost inflation. And the majority of the productivity will cover some inflation of manufacturing costs. But the majority of it will expand the gross margin.

Your next question comes from Andrew Lazar, Barclays Capital.

First, I just want to make sure I have the guidance straight. The mid-teens EPS guidance for 2011, is that, I guess, on a cash basis? Or is that including or excluding the non-cash amortization?

It is on a GAAP basis, well, GAAP-adjusted for the integration costs. But it is after the effect of the additional amortization and depreciation.

Got it, because you have the $2, at least, number for 2010. You grow it at that base, I think you set it the upper end of 7% to 9%. And then you add $0.05. Did I get that straight?

That's correct.

Alright, I think, maybe I'm doing this wrong, but that gets me to maybe sort of 11% or 12% growth. So is that where the, I guess, at least $2 comes into play to get to mid-teens?

There's two ways to go about it. We kind of reconcile it from the past information we've provided. Take the Kraft base for 2010. And to that, grow it 7% to 9% consistent with what we’ve said. Add $0.05 worth of accretion for Cadbury. And then from that, you need to reduce the effect of the incremental amortization and depreciation. That will get you to the same as about the mid-teens growth from the base $2.

So it is inclusive of the amortization, as you said?

It is, that's correct.

Second thing would be, I don't think the concept of sort of market share came up over the course of the prepared remarks. And I don't know whether that was purposeful. Is that a metric? I know it's not ideal in the way you put it together. Is that something that you're sort of moving away from in some way? Or did it not necessarily warrant a lot of commentary? And if not, I'm curious as to why.

As we said at CAGNY, we continue to trend in the right direction. And if we look at the metric, it would still be north of 50%. The reality is as you said -- and we'll talk more about this as we present our strategic plan in the fall -- it's a less relevant metric today given the portfolio. Three years ago, when we laid this out as a metric, North America was 60% of our revenue, and we had a lot of things that needed to be fixed, particularly in the United States. And so using an aggregate metric like that was a good surrogate for the overall health of the business. Increasingly as our portfolio is more global and very much outside the U.S., we're doing very well there, and we need to figure out a shorthand way to give you some better visibility there. And even within the U.S., things have changed quite a bit. If you look at the portfolio, we've exited pizza. We've added gum and candy. We've got much more business in non-measured channels. And also as we look at the number of our franchises, take Mac & Cheese, for example. Whereas once upon a time, we were focused on growing share, we're now bumping up to some high 70s and 80s shares. And so our focus in that category, for example, is category growth. So all in all, we continue to perform directionally well on the metric. We do think though that as we start to look now at this combined portfolio and its overall profile, that we will want to talk to you about some perhaps better and more useful performance metrics.

The operating margin in the E.U., I think it was 10.6%, which certainly I think that's as high as we've seen it in a bunch of years. Is the improvement there more structural in nature? In other words, does that represent a reasonably good base that you're going to kind of work from and improve from, from here? Or were there things in there that were more one-off?

Well, very definitely, it's the beginning of a structural change. If you recall in the fall, the Back to School Conference, Mike Clarke shared with you the plans that he had laid out for E.C., E.U. in terms of restoring the margin profile. And we're about executing that. He's got a lot of things that are working well. And at the same time, I'm particularly pleased that he was able to begin to restore top line growth as well. So the performance of the E.U. is very much on track. I think we’ve clearly got more work to do, as we make our way toward the margin targets that we've laid out. And I certainly think the combination of the base Kraft Foods business together with Cadbury will help to accelerate that even further.

Your next question comes from Ed Aaron of RBC Capital Markets.

I wanted to ask about the synergy ramp. For 2011, it actually looks a bit stronger than we were expecting. So if you do get 70% of the synergies by next year, it would actually seem that maybe a mid-teens earnings growth rate would be a bit conservative. Should we interpret from that, that maybe you're just going to step-up the marketing investments next year to offset some of those gains?

Yes, you saw the chart. We would expect the ramp-up. We're going aggressively after synergies. We'll benefit by a little bit of it this year, but a big chunk will come in next year. There will be a component, as we've said, that we would like to invest with the newer better portfolio. We have lots of good opportunities to invest for good return and continue to strengthen our business and our brands. And so we would expect that we would invest some of that back. I would think on balance to think probably three-quarters of it, we would let drop to the bottom line. But probably a quarter of it, we would look to reinvest.

Just as a follow-up, there was some confusion when you filed your 8-K a week or two ago about the pension expense that might come over from the Cadbury side. Can you just give us a sense of how much that might add?

We're working with the trustees of the UK pension plan and the Irish pension plan to determine how we may have to fund it. The expense base that was reflected, we've put pro forma numbers that -- we've put them together according to GAAP. But they, in some cases, really were not very helpful in anticipating what the future is going to bring. You saw probably $190 million worth of pension costs. And that was based upon asset values at the end of 2008. And it was higher than we would expect to have on a going-forward basis. And you also saw a fair amount of Vision into Action costs that then reflected in there. So I would use caution in trying to extrapolate off of the pro forma numbers reflected in that 8-K.

The next question comes from Alexia Howard of Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: The pricing trajectory from here, I think we came in at sort of slightly positive pricing this quarter. Is the expectation that going forward, that's going to remain fairly flat? Or do you expect it to trend upwards or downwards from here?

We'd say certainly in the short term given the economic conditions around the world, that we'd expect pricing to play a relatively smaller part in our overall revenue growth. Certainly over a long-term basis as we’ve said, we expect the bulk of the revenue to be fueled by volume/mix. The pricing should contribute as well. But in the near-term, we're expecting a modest contribution from pricing. Alexia Howard - Sanford C. Bernstein & Co., Inc.: And then on the cheese business, which has obviously been struggling on volumes for quite some time now, are you rethinking the adaptive pricing model in there at all? It seems as though the pricing trends, I guess, have driven people down into the private label area? Or was it more that you were cutting back on product range in the natural cheese area? Maybe you could just give us a little bit of color commentary on how you're thinking about that part of the business?

If we step back a little bit, Alexia, if you recall two years ago, we set out two priorities on cheese. One was to get the focus and the investment and the resources refocused on our advantage categories. And we've certainly done that. And we’re seeing good performance on slices, on cream cheese and Velveeta. And we then said we wanted to see less volatility in the earnings on natural cheese. And we wanted to move to more of an adaptive pricing model and price closer to market. We continue to believe that, that is the right way to manage the business. That said, it worked exceptionally well when prices were going up. As prices have come down, we’re seeing a number of retailers use natural cheese as a loss leader and so we've had a fairly significant hit to our business. But the good news is that our profits have been relatively stable which was the intention behind that tactic. So the good news is we have better profit performance. The bad news is that natural cheese is in the short-term, in the near-term, a drag on our top line. But most importantly, it's manageable within the total portfolio.

Your next question comes from Bryan Spillane of Banc of America - Merrill Lynch.

First, on your outlook for organic growth for Cadbury for this year, I think you said in the prepared remarks, 5% for the year. But it was up 8% in the first quarter or so. Can you just talk a little bit about why it slows sequentially?

Yes. You know if you think about it, Bryan, and you look at the comps over the course of the year, there was a fairly significant change in trajectory from the first half to the second half. And so that just reflects the reality that the front half, we're looking at a comp year ago of about 4%. The back half was up about 6%. The other reality is the first half, and the first quarter in particular, benefits from the Easter shift into the first quarter. So it's aided to some extent by the holiday shift. So for both of those reasons, we feel very good about the performance in the first quarter. We feel good about the momentum on the business. But it's a little bit overstated relative to what we would expect for the full year. And we feel pretty good that the 5% number on the full year is a good one.

And then, Tim, what was the adjustment for just the financing fee for the quarter, the deal financing fees? I guess what I'm trying to get at is it looks like on the acquisition adjustments on a pretax basis, were lower than on a post-tax basis?

No. We had to capitalize, and GAAP requires us to capitalize advisor fees. There's a big piece of it, and there’s a small piece of it where we don't benefit from a tax standpoint, on some of the integration costs as well. So you're seeing the non-deductibility of some of the acquisition-related costs, particularly of that piece.

And then the taxes -- if we look at the tax rate that would apply to the $0.49 operating EPS for the quarter. That tax rate looks like it's lower than it would normally be. What was that tax rate?

It's modestly under 30%. We would expect the full year rate on that comparable line in the P&L to be a little bit above 30%. But it's right in that range. So it's pretty normal.

Just one last thing, just getting back to the guidance. So it's at least $2 this year. And I guess the midpoint of that range, the mid-teens next year, is $2.30. Is that currency-neutral? Or is that making some accounting for what would happen with currencies?

Within that, we’re not anticipating currency gains nor losses from current levels. We have a broad portfolio, different currencies to which we're exposed. You saw that we took about $0.03 worth of benefit in the first quarter of this year. But our full year guidance reflects kind of the current currency balance that we see. So we're not anticipating any material plus or minus for currency in 2010. And I would say we extrapolated that into our guidance or target for 2011.

Your next question comes from Terry Bivens of J.P. Morgan. Terry Bivens - JP Morgan Chase & Co: Question on the revenue synergies part. Obviously, you weren't quite as specific there as you were on the cost savings. Could you give us a little more color, Irene, on what you see on that front?

Yes, Terry, the reason we haven't said a lot about revenue synergies at this point is first of all, our first focus is really to get this fundamental integration underway. There's nothing significant baked into our 2010 growth target. But we do, as I said, have robust plans in place in every market. We're actually in the process of vetting those right now and starting to prioritize them. And you will begin to see top line impact from those revenue synergies probably beginning in 2011. We're obviously going to go after some of the quicker wins as is appropriate. But most of the significant benefit to the bottom line will come after 2011, as we make the investments necessary to realize those synergies. Terry Bivens - JP Morgan Chase & Co: And just to be clear, does that guidance for 2011 include any revenue synergies?

We've given guidance kind of on the bottom line, as Irene just mentioned. We would expect that the cost associated with getting the revenue synergies will kind of neutralize the bottom line impact from the benefit we will receive from the incremental revenue.

But the 5%-plus target that I laid out in my remarks, Terry, assumes some revenue synergy in 2011 on the top line, some benefit from it on the top line, but not on the bottom line as I said. Terry Bivens - JP Morgan Chase & Co: You called out in the North American results, obviously, there was a merchandising shift at the ever-popular key U.S. retailer. Our information is that, that has resumed; Action Alley, I think, is back five out of the seven days I think. Is that consistent with what you understand? And if so, shouldn't that be a nice lift to our second half or a lift to some degree given that it was absent to a great degree last year?

Well, without a doubt certainly, as we lap the change in philosophy in the back half of the year, that will be helpful but I would tell you, what we are seeing so far is what I would call Action Alley White. I think we’re still working through the impact. And importantly, the implications of the change in philosophy. In the face of that though, we continue to invest in our brands. They continue to strengthen. They are must-have brands in our core categories and that ultimately will be what will drive our performance.

Your next question comes from Robert Moskow of Credit Suisse. Robert Moskow - Crédit Suisse First Boston, Inc.: Some investors that I talked to about the integration of Cadbury were concerned about integrating the systems and getting quick visibility into the numbers on revenues and costs since Cadbury is so spread out across many different businesses and different countries. Can you tell me what it was like rolling up the numbers during the quarter and whether it's going to get easier as the year goes on? What did you learn during that roll-up?

Clearly, we'll get better. I mean we feel very confident in the numbers as we’ve rolled them up. The approach we took for the first full half of this year is that we consolidated Cadbury up as they historically have and then we consolidated Kraft up as we historically have and then brought them together. We'll do that for also the second quarter. In the second half of the year, we will begin to consolidate at the regional level as we put the organization in place and assign responsibilities to the leader of the respective geography. So I think we have a good plan laid out. As you know, Cadbury has been largely on SAP system. We have largely an SAP system around the globe and so it will be an easier transition/integration of the systems than would be if we had on disparate systems. We also use Hyberian financial manager consolidation tool to help consolidate from the SAP the various SAP instances around the world so it went reasonably well. I mean we felt very good about the process here. It was well laid out and we'll get progressively better over the course of the year. You may note that some of the detailed information like some of the vol/mix, pricing, et cetera, we don't have as much detail on the Cadbury side as we do on the Kraft side but that will progressively get better over the course of the year. Robert Moskow - Crédit Suisse First Boston, Inc.: And then also, in your guidance, you say Cadbury is going to grow around 5% this year. Do you have a sense of operating income growth for Cadbury this year? If you strip out some of these acquisition-related costs and the integration costs, is it going to have to grow operating income up 10% or something? Or is it a little bit less because of the marketing investment?

Well, I mean we’re looking at it as integrated within the consolidated portfolio and as reflected in the guidance we’ve provided. We'd be reluctant to give too much more specific information on that. You saw some growth in the first couple of months that were consolidated this year. We will step up as we've said. The Cadbury, as a standalone, lightened up on a little bit of their brand building in the second half of this year. We plan to restore. That will put a little pressure. But by the second half of the year, we will have the Cadbury pretty deeply embedded within the Kraft organization that will be very hard to pull it out to identify it. The discrete changes in their earnings levels. Robert Moskow - Crédit Suisse First Boston, Inc.: Tim, are you guys saying that second quarter EPS, is that going to be down sequentially from first because of the Easter shift? Or just intrinsically, do you have higher EPS in the second quarter?

We really haven't. I mean you can look at historical trends, we haven't given guidance for the quarter.

Your next question comes from the line of David Driscoll of Citi Investment Research.

Marketing spending. Irene, I believe that you had planned to reduce your trade spending in order to fund the increase in marketing spending with the target at old Kraft, legacy Kraft, of getting to 9% of sales. You've called out in the at least $2 guidance. And Tim, really, I guess it was you who said this, but you had the additional marketing spending as a key point as to what constrains the number and puts us at that at least $2 point. So can you reconcile for me the previous plan of taking trade dollars and moving them into the SG&A line for brand building on marketing versus what you said in the $2 guidance?

Yes, David, we're still very much on track to do that. And that’ll be a continuing conversation. We're obviously not making those changes in every category at once. We're being very thoughtful in terms of how we do that. But we do have a healthy increase planned for 2010. And that's implicit in the guidance that we've given. Long-term, that 8% to 9% target is still what we’re shooting for. In fact, I would suggest that with the addition of Cadbury, we are probably looking more at the upper end of that target given the category. So we feel very good about the profile of A&C for this year and as we look ahead. But we'll give you – we’ll continue to update that as the year progresses.

I just want to be clear though, the incremental increase in marketing is a negative to earnings. I suppose I had not exactly thought of it that way if the funding had been coming from the trade promotion line. Do you understand my question?

Yes. I think what we're talking though is incremental spending in addition to what we were doing on the base business. So a lot of that work on the base business is continuing and, to your point, it is not incremental but we see the opportunity as we continue to drive cost savings and we see increasing opportunities around the world to invest to accelerate growth. We're going to use some of that money to invest to further accelerate growth. So there is some base spending that will be shipping within the P&L from trade into advertising and consumer but there also will be some incremental spending that will come from the fact that we have some fairly significant cost savings opportunities.

Tim, in the way you guys present your numbers with the hedging gains and losses, other companies I believe just fundamentally do it differently where if they have a hedging gain or loss that really is going to get resolved in a future period such as General Mills, they call it out within their corporate expense and they just exclude it from the numbers. Is there a reason why you include the gains or losses and then we have to go through all this process of stripping these numbers out? It seems remarkably complicated. You had to go through that explanation of first quarter gains last year and the reversal of the loss. It just doesn't feel like we're matching the period numbers very well. Do you agree or disagree with that?

Well, I mean, the fortunate or unfortunate thing is we need to follow GAAP, and we do follow GAAP, and the GAAP requires that if there are -- maybe there's a difference in the effectiveness of the hedging programs. Some of our hedges are effective and they don't have to be separately bought or marked-to-market at the end of the quarter. We do have some what's called effective hedges and they do stay embedded but the ones that are not effective have to be marked-to-market at the end of the quarter. And that's what you saw at the first quarter of last year. Now we do pull those out from the individual segments and report them just at the corporate level. So consistent with what you suggested, we try to not distort all of the individual segment results by what they have in marked-to-market. We keep it at the corporate level until the hedge actually is settled and then it goes back into the operating unit.

I would simply suggest that the presentation of the non-GAAP numbers, such as your $0.49, you would just exclude those numbers going forward, because it just seems to be confusing.

I would just point out that there were several of the investors and analysts that suggested they don't like us to have x items reporting. So we're kind of careful to try to get us as close back to pure GAAP, a vanilla GAAP, as we can. But we’ll try to do our best to make it as clear as we can.

Your next question comes from Vincent Andrews of Morgan Stanley.

Just want to make sure I understand, Tim, that you said on foreign exchange for 2010 in your guidance the rates that you're assuming are basically, let’s say the rates as of yesterday. Is that about right?

I don’t know we’ll be quite as specific as yesterday but generally, the rates in the marketplace today is -- our full year guidance is predicated on those.

There’s obviously then a tremendous amount of volatility and could potentially be more. And then secondly, Irene, maybe you could just sort of tell us – and it might be too early but -- the things that you, now that you have control of Cadbury, now that you’re going through everything and meeting with everybody, the things you’re learning from them that are best practices that you think you can bring back to the Kraft organization?

Oh absolutely. I think we're learning. I think their management of global categories is a best practice and, as I mentioned, we are organizing our global categories essentially the way that they were organized in an effort to improve the speed of expanding our innovation pipeline and our ability to launch new products around the world. I think their gum, the way they've approached gum innovation, for example, has been a best practice and we're bringing that learning back to our biscuit and to the chocolate business. So that's been an area of great opportunity, I'd say. On the manufacturing side, I think we’ve got a number of best practices. I alluded to fixing Molene [ph] and the opportunity to bring some of those practices to the Cadbury plants, we believe, will be a key piece of their ability to step-up their productivity. So there's lots of good learning on both sides. I feel particularly good about the ability to capture that learning because we’ve got a significant representation among our top leaders. About a third of our top 50 leaders come from the Cadbury organization and we're very pleased to have them.

Your next question comes from Eric Katzman of Deutsche Bank.

I guess on Slide 17, Tim, just so I understand it, it seems to me, excluding the onetime stuff that, is the way to read this, that Cadbury was a $0.01 dilutive in the two months you owned it. But that's going to accelerate to $0.16 over the year?

Yes, you actually do read it right, Eric. Remember, we had Cadbury for two months. We had them for probably the richest part of the year, going into the Easter season in February-March. Only part of the financing costs were reflected in the quarter and over the back half of the year. I mean we’ll ramp up some of the investments as we've talked about. But you're exactly right, the $0.16 is our expectation for the full year versus the $0.01 for the quarter.

The second question is the tax rate – this gets to, I guess, Bryan Spillane’s question – but the tax rate applied to the onetime items, so you're saying that that’s applied at a less than 30% rate to get the corporate ongoing at, I guess you said, about 29%?

Yes. Yes, I think there's some big disclosure, I think, in the earnings release. But there's a couple of things. Don't forget, a big piece of the about $140 million worth of the tax impact was attributable to the change in legislation with regard to the health care change. But a piece of the transaction cost, meaning that much of the advisory fees for book purposes, expense, but for tax purposes, it’s capitalized, so consequently we don't get the benefit of the tax effect of that. So that kicks the rate a bit higher and there are some additional of the integration costs particularly when we are in a mix of lower tax jurisdictions where we won't get quite as much benefit of the 30% rate as you pointed out for the integration costs.

Just so I'm clear with the guidance, I mean maybe this is where your largest shareholder is getting to in terms of some public frustration that he said. But you generated about $3.3 billion of operating cash flow last year. With the restructuring charges and stuff, and based on your guidance of over $2 dollars of earnings, that's going to drop below $3 billion, then it should recover to about where you were in '09. But it really starts ramping up in 2012 when the cash restructuring charges end and the other factors kind of flow through. Is that a fair way to look at it?

I think that's pretty fair. I mean we do have a $1.3 billion of integration costs that we would expect to -- a very high percent, if not all of them, are going to be cash charges. And that's going to happen over say two and a half years. So we will see depressed cash flows over that time frame.

If I look at the results, I mean it seems -- based at least on our model -- most of the out-performance came out of Europe from both the Cadbury business and the Kraft heritage business and it seems like a lot of that was currency. And maybe there was a little Easter benefit there too but is it – I mean, how should we think about it, and obviously it's volatile, it's tough to forecast, but in terms of reported sales, is it your sense that given -- I don’t know whether Cadbury had any hedges on or something. I mean, with the euro and the pound doing what they're doing, I mean does that -- should we assume like less benefit from currency in those businesses as the year progresses?

I would say that we feel very good about the underlying health of the European business. A lot of that growth came out of vol/mix. It was high-quality growth. If you recall, certainly on the legacy Kraft business a year ago, we were still doing a fair amount of pruning. And we told you we needed to lap that so we’re starting to see some of that play through. We feel very good about the focus again on the base Kraft business, the focus on mix and making sure that we've got good growth and good investment in the categories and the brands and the countries where we have good margin. And I think Cadbury has some similar work going on together with the fact that there's some benefits beginning from some of the cost savings programs from both of the legacy companies. So I think that there's some fundamental structural changes that are driving the performance in Europe. We're very pleased by that performance and we expect that it will continue.

The strength of the Cadbury business in the U.S. in gum, and I guess mints, it may be two. Did you gain a lot of share because it sounds like Mars-Wrigley may be having some issues or maybe the category has been, I don’t know, a bit weaker, I think that's what Hershey said on their call regarding gum. Can you just kind of characterize the strength of that business a little bit more?

Well, we felt very good about the gum performance, particularly in the U.S. in the first quarter and it was very much share driven. Actually, we're seeing the category has been a little bit soft. It looks like one of those categories that is impacted by the recession because it's a little bit more discretionary. But we're very pleased with the performance. We had a very solid pipeline of innovation coming from Trident Layers and the prelaunch shipments of Stride Shift. The Shift’s coming out as well as Dentyne Pure so there's a very good pipeline of innovation that's contributing. But overall, I feel very good about the performance of our gum business in the first quarter. And we expect continued strength.

Your final question comes from Diane Geissler of CLSA.

You may have addressed this earlier in the call and I might have missed it. But can you give me an idea about what your expectations are regarding capital spend behind the combined businesses? Will you have to ramp up CapEx behind Cadbury?

I mean, clearly we'll step it up some to reflect a bigger part of the business. Historically, Kraft has kind of developed so that we think we can fund the growth and the necessary productivity, et cetera, and keep our equipment and facilities in good shape at about 3% of revenues. In recent years, Cadbury has been spending at an appreciably higher rate, somewhere in the 4% to 5% of revenue range. We think that with the combination, that we can bring it back closer to the 3%. There is some difference in the nature of the businesses and the manufacturing processes certainly. But as we combine the business, we think we can bring it much closer to the 3% range. For 2010, our expectation is it's going to be about $1.7 billion versus what we had anticipated, $1.3 billion for the base Kraft.

This concludes the question-and-answer session of today's call. I will now turn the conference back over to Mr. Chris Jakubik for any closing remarks.

Thanks, everybody, for joining us today. For those analysts who have additional follow-up questions, Dexter Conquey [ph] and I will be available to take them. And for those in the media that have additional questions, Mike Mitchell will be available to take your calls as well. So with that, thanks very much, and have a good evening.

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