Mondelez International, Inc. (MDLZ) Q4 2010 Earnings Report, Transcript and Summary

Good day, and welcome to Kraft Foods Fourth Quarter 2010 and Year End Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Kraft 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. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me are Irene Rosenfeld, our Chairman and CEO; and Tim McLevish, our Chief Financial Officer. Earlier today, we put out our earnings release. The release along with today's slides are available on our website, kraftfoodscompany.com. As you know, 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. So 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. And you can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Let me now turn it over to Irene.

Thanks, Chris, and good afternoon. Tim and I will start today with the highlights of our fourth quarter results. I'll then provide our 2011 outlook, and we'll take your questions. Our Q4 results reflected a strong finish to 2010. From a total company perspective, we delivered high-quality top and bottom line results in a more difficult environment than any of us had anticipated. We delivered a good balance between volume/mix and pricing despite the significant pricing actions taken since August to offset input costs. In fact, in our base business, vol/mix drove more that 2/3 of our top line growth in both the fourth quarter and for the full year. At the same time, we continued to invest behind our Power Brands. Advertising and consumer spending in the quarter on our base business was in line with very strong levels in Q4 2009 and up double digit for the full year. And finally, we realized significant benefits for productivity improvements and overhead cost savings. Our Q4 momentum was broad-based, with contributions from every geography. In Developing Markets, we once again delivered double-digit revenue growth. Asia Pacific and Latin America led the region, while the trend in our CEEMA business improved with high single-digit growth. In Europe, we delivered another quarter of solid revenue gains with growth in each of our key categories. In addition, despite sharply higher input costs, Europe continued to expand operating margin. We were especially pleased that North America had a strong finish to the year, with revenue improving sequentially. In fact, top line growth was the strongest we've seen in some time. This was driven by significantly better volumes versus the prior year, as we stepped up merchandising activity and introduced several new marketing campaigns. Of course, one of our key goals in 2010 was the integration of Cadbury, and I'm pleased to report that it's progressing well. In fact, it's running ahead of our investment case. That said, in the fourth quarter and for the full year, Cadbury revenue growth was somewhat below our expectations. In addition to the inventory destocking we told you about several months ago, the Gum and Candy categories were disproportionally hurt by the weak consumer environment in a number of major markets. Chocolate, however, was ahead of plan, fueled by increased marketing support. Looking ahead, the inventory destocking is behind us. We'll build on our strong market shares, and we're investing in marketing and innovation to reinvigorate growth in the Gum and Candy categories. On the bottom line, the earnings dilution from the acquisition was $0.11, approximately $0.05 better than our expectations. This was driven by a combination of earlier delivery of cost synergies, as well as lower interest expense and share dilution. What's more, we significantly increased advertising and marketing support in key markets, which drove market share growth in all categories, including Gum and Candy. More importantly, we now expect the Cadbury acquisition will turn earnings accretive in 2011. That is accretive to operating EPS, not just to cash EPS, as we had previously guided. In terms of the balance sheet, our focus on working capital has already begun to pay dividends. Cash generated from the Cadbury business more than doubled versus the 2010 plan and was well in excess of their historical levels. This was a key contributor to the lower leverage on our year-end balance sheet. The infusion of Cadbury talent into our organization is also going well. I'm really pleased with the retention of top talent. And as I've noted before, about a third of our top 400 executives came to us from Cadbury. I'm very proud of how well our people have come together as a team with a shared commitment to a performance-driven, values-led company. Finally, a quick update on the Cadbury cost synergies. As I said earlier, we're running ahead of plan. In 2010, we realized about 25% of the $750 million in targeted cost synergies. That's better than our earlier estimate of 15%, and we remain on track to deliver about 70% of our synergies in 2011. On the cost side, we've spent about 40% of the estimated $1.5 billion in integration program costs. That's somewhat lower than our prior estimate of 50%, but that's mainly due to timing. Let me now turn it over to Tim to discuss our fourth quarter results in more detail.

Thanks, Irene, and good afternoon. Let me start by saying that we're quite encouraged by what we saw in our fourth quarter performance. As I'll outline over the next few minutes, our results were in line with our expectations. We posted stronger operating gains from our base business, offset by rapidly rising input costs and a persistently weak consumer environment in many markets. Now let me provide some details, starting with our top line. Organic net revenue for the combined business grew 5.7%, as focused investments drove continued strong growth in our Power Brands in every region. In fact, these brands collectively grew 8% in the fourth quarter. In the Kraft base business, organic revenues increased 6.5%, driven by 4.6 points from vol/mix and 1.9 points from pricing. The strong vol/mix gains are encouraging, as we raised prices in many categories to offset sharply higher input costs. In the Cadbury business, organic revenues rose 2.2%, which was clearly lower than we would expect on an ongoing basis. Growth was tempered again this quarter by our decision to normalize trade inventories in certain markets. This reduced Cadbury's overall top line growth by about 60 basis points. In addition, the Gum and Candy categories were soft. This was a result of economic conditions leading to weaker consumption by teens who are the heaviest consumers. As Irene said, we have solid plans in place for 2011 to reinvigorate consumption in these important categories. Turning to profit, our operating income margin, excluding acquisition and integration program costs, was 11.6%. In our Kraft base business, operating income margin fell slightly to 11.1%. There were several factors at work here. On the positive side, we posted strong gains from our productivity programs, and we have significantly lower overhead costs versus the prior year. Offsetting these, we continued to increase investment behind our brands, but the biggest factor in the fourth quarter was the rapid escalation of input costs. This tempered both gross margin and OI margins in every region during the quarter. To give you some perspective, let's look at the trend in year-over-year changes for our Kraft base business. As you can see on Slide 8 in both the fourth quarter 2009 and first quarter 2010, these costs were favorable year-over-year. During these quarters, we benefited from the carryover effect of 2009 pricing actions. Pricing caught up with input cost levels, and hence, our gross margins were stronger in those quarters. In fact, our gross margins in Q4 2009 were the highest they have been since the first quarter of 2004. During the second quarter of 2010, the year-over-year effect of input costs was roughly flat, but the trend has continued to deteriorate since then. As we told you in our Q3 call, we had already started to take pricing across several categories. And we knew that margins would be under pressure in the near term. But even those actions were insufficient, as input costs continued to increase sharply during the fourth quarter. In fact, Q4 input costs in our base business were up nearly $0.5 billion, and our margin suffered accordingly. Our current expectation is that input costs will remain high throughout 2011. As a result, we're now in the process of implementing further pricing actions to reflect these higher input cost levels. We expect that pricing will continue to lag input costs in the first half of the year. This will pressure gross margins. However, they should recover in the back half of the year, as prices and costs become better aligned. Turning to EPS, let me walk you through the bridge for the quarter. Let's start with Q4 of 2009 when we earned $0.48, $0.04 of that came from the divested Pizza business. We also spent $0.03 on Cadbury acquisition-related costs and financing fees. So from a year-ago base of $0.47, our operating EPS was essentially flat at $0.46 and in line with our expectations. Our Kraft base business had another strong quarter, delivering $0.06 of operating gain versus the prior year. This was offset by a combination of losses on some small divestitures, unfavorable FX and asset impairments. Cadbury operating earnings contributed $0.15 to EPS, that's a little ahead of expectations mainly from the early delivery of cost synergies. Below the line, interest in shares were higher due to funding the Cadbury acquisition. This was offset, in part, from the proceeds from the Pizza sale. Interest expense also came in higher, due to costs related to the early retirement of debt. This was offset by the benefits of a lower-than-anticipated tax rate. For the full year, I'd like to highlight two key points. First, improved vol/mix, productivity and overhead savings drove $.22 of operating gains in our Kraft base business, and we did this while continuing to increase investments in our Power Brands across the portfolio. Second, we delivered on our commitments to earn at least $2 of operating EPS this year, and we did so in a high quality manner. I'll take a few minutes now to share highlights of our business results by geography. In North America, we made good progress within a weak consumer environment. On a combined basis, organic net revenues grew 3.3%, up from 1% in the third quarter. In addition, top line growth was broad-based, with revenue increasing in all business units but one. In fact, we grew share in more than half the businesses in Q4. We continued to invest behind our Power Brands, and they responded by growing 5%. There were many stars in the quarter. Here are just a view that grew mid-single to low double digits: Oreo, Ritz , Wheat Thins, Maxwell House, Planters and Macaroni & Cheese. In the Kraft base business, organic revenues grew 4.1%, which was the best top line performance in more than two years. Higher merchandising and the successful multibrand Huddle to Fight Hunger campaign fueled vol/mix gains of 2.4 percentage points. Pricing, net of promotion, drove an additional 1.7 points of growth. Cadbury organic net revenues, however, were disappointing, declining 6.1% in the quarter. This reflected two headwinds: Difficult comparisons in Gum against major Trident and Stride product launches in the prior year quarter, and tough comparisons with last year's strong shipments of Halls due to the H1N1 flu season. Both of these were anticipated in our plan. In addition, there was heavy promotional spending and a major new product launch by a gum competitor in 2010. Looking ahead, we expect the business to regain momentum in Q1, with the launch of Trident Vitality and Strides SPARK, as well as continued strong growth in Dentyne. Now let's look at profitability. On a combined basis, our operating income margin in North America was 14.2%. Our Cadbury business posted strong operating income margin of 22.8%, driven by productivity gains and improved product mix. In our Kraft base business, OI margin declined to 13.5%. This was largely driven by timing. First, the increase in input costs outpaced pricing and productivity gains. And second, our merchandising and promotional programming was significantly more skewed to the fourth quarter this year versus the prior year. Looking forward, in the face of substantial input cost inflation, we're in the process of implementing another round of price increases in our North American portfolio. While this will pressure margins in the near term, we'll use a combination of pricing, productivity and overhead savings to improve margins for the full year. In Europe, combined organic revenues increased 1.6%, fueled by our Power Brands, which collectively grew 6% across the region. In our Kraft base business, momentum continued as organic revenues grew 2.2%, overall, driven by two points from vol/mix gains. Moreover, revenue growth was broad-based with increases in each of our key categories. Chocolate grew low-single digits, driven by strong in-store marketing activities, promotional programs and new products. Toblerone and Milka each delivered high single-digit growth. Our Biscuit business grew, driven by the strength of our Power Brands, including double-digit gains by both Oreo and Belvita. Strong momentum in the chocobakery platform also drove vol/mix gains. Weak economic conditions, particularly in Benelux and Southern Europe, and lower pricing partially offset these gains. Coffee grew low single digits, driven by pricing in response to higher input costs. On-demand market expansion and more brewer sales drove mid-teens growth in Tassimo. Cheese grew high single digits, primarily reflecting a successful marketing campaign and new product launches of Philadelphia. In our Cadbury business, organic net revenues were essentially flat. Solid growth in the U.K. was offset by weak gum and candy markets in Southern Europe. Operating income margins in Europe rose to 11.1% on a combined basis. This reflected productivity, overhead savings and improved product mix. In our Kraft base business, OI margin improved by 160 basis points to 9.8%, while our Cadbury business also reported solid OI margin of 14.5% in the quarter. In Europe, as in North America, input costs are rising significantly, and we're pricing accordingly. In fact, we've already implemented or announced price increases in the large majority of our European portfolio. That said, in the fourth quarter, the contribution from pricing trailed input cost inflation, and we're in the process of implementing another round of price increases. Turning now to developing markets, combined organic net revenue increased 13.6%, fueled by 18% growth in our Power Brands. This was very strong growth even after adjusting for accounting calendar changes that added 3.7 percentage points. Increased market investments drove growth of 17.3% in the Kraft base business and strong share gains in priority markets and key categories. In Latin America, organic revenues rose by more than 20%, propelled by strong gains in Brazil and the Andean countries. Power Brands grew more than 25%, led by Oreo, Club Social, Lacta and Tang. In Asia Pacific, organic revenues grew 30% due to strong vol/mix gains in China, Indonesia and the Philippines. Power Brands, collectively, grew more than 50%, led by Oreo, Tiger Biskuat and Tang. And in CEEMA, key markets are improving, although market conditions remain weak. This region delivered organic revenue growth in the high single digits, led by gains in Ukraine, Russia and the Middle East. Power Brands collectively grew 8%, led by Tang and Milka. In our Cadbury business, organic revenues rose a solid 6.7%, including a negative impact of 1.4 percentage points from normalizing trade inventories. Growth came from gains across all categories. Our operating income margin in developing markets was 12.6%. In our Kraft base business, profit margins rose to 11.9%, while OI margins in our Cadbury business were also strong at 13.9%. Overall, overhead leverage and pricing offset sharply higher input costs. Finally, I'd like to update you on our deleveraging plan, which is firmly on track. Over the past 12 months, our net debt has decreased by about $4 billion to $26.2 billion. A key enabler of this has been strong free cash flow from operations. Adjusting for the sale of the Pizza business, we generated about $3.3 billion in free cash flow. This reflected solid progress in working capital efficiency in the Kraft base business and a significant reduction in working capital in the Cadbury business. As a result, we've been able to take several important actions this year to reduce debt. As we intended at the time of the deal, we paid back the acquisition bridge loan with proceeds from the sale of the North American Pizza business. We settled the $500 million August maturity with cash from operations, and we repurchased $1.5 billion in debt with cash from operations and short-term commercial paper. Looking forward, we're on track to achieve a debt-to-EBITDA ratio approaching 3x within the next 12 months. With that, I'd like to turn the call back to Irene, who will discuss our outlook for 2011.

Thanks, Tim. As you've seen, we delivered solid financial results in 2010, and we entered 2011 with broad-based momentum for three key reasons. First, we're firmly committed to continuing to invest behind our Power Brands, our innovation pipeline and revenue synergies from the Cadbury integration. These investments are critical to protecting our share and delivering long-term growth. In fact, we've just begun to scratch the surface on the approximately $1 billion in revenue synergies enabled by Cadbury. As expected, these synergies were modest in 2010, but they'll ramp up over the next three years. Second, our Developing Market business continues to generate strong double-digit growth, and as a result of the Cadbury acquisition, it's an even greater part of our portfolio. So we're well-positioned to continue to capitalize on our larger footprint in this fast growing region. Third, we have strong cost savings programs. On our base business, productivity and overhead efficiencies will drive significant gains. These savings, along with the Cadbury synergies, will expand operating margin. At the same time, the operating environment continues to be challenging. Unemployment rates remain high. Consumer confidence is weak, and government austerity programs are planned in some markets. In the face of this consumer weakness, input costs continue to rise, and that will require additional pricing. That said, we remain cautiously optimistic, cautious about what we can't control, but optimistic about what we can. Cautious about the consumer environment, but highly optimistic about Kraft's market position and strong momentum. Specifically, in 2011, we expect to deliver organic net revenue growth of more than 5% or approximately 4%, excluding the year-over-year impact of calendar changes. However, we're taking a more measured view at this time of the drivers of this growth, namely more pricing and less vol/mix. On the bottom line, we're targeting operating EPS growth of 11% to 13%. This guidance is higher than our long-term goal of 9% to 11%, but slightly less bullish than our previous target, reflecting our more conservative view of vol/mix. In sum, our business fundamentals are strong, with share gains across most categories and most markets. Focused investments behind Power Brands in key categories are driving solid, sustainable growth. Cadbury is on track to be accretive in year 2. And in a challenging consumer environment, we're confident in our ability to deliver strong financial results in the top tier of our peer group. Now we'd be happy to take your questions.

[Operator Instructions] Our first question comes from Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: First, I take it that, Tim, you're not going to frame the cost inflation for 2011? I know it's been a bit of a moving target, but you did give some numbers for 2010 in hindsight, can you better frame and see the percentages or dollars you expect in the coming year?

Well, I'm not going to give specific numbers, Chris. But as we said, we saw probably close to $0.5 billion worth of escalation in the fourth quarter this year, and that wasn't fully reflected to the current prices as we closed out January. So we expect considerable additional in 2011. I would expect to see that input costs are up high single digits relative to 2010 in '11. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I realize there can always be a bit of a lag between pricing and cost inflation, and that's our job, to try and figure that out, but I guess, just looking ahead, you have a lot of price increases already in place. It sounds like you have more coming. Can you talk about maybe the percentage of the portfolio that's been priced or where we should expect to see even more pricing than what you've already put in place?

I think we priced the better part of -- the large majority of the portfolio in Europe and well in excess of 50% in North America.

Your next question comes from Andrew Lazar of Barclays Capital.

I guess, first, a quick one is, I saw that the contribution of price mix this quarter decelerated from the third quarter. Even though I know you've been kind of taking pricing as the quarter went on, was that just the merchandising that was part of that in the fourth quarter?

Actually, Andrew, it's mostly a function of timing versus the prior year. If you recall, Q4 2009 was rather light in terms of merchandising and promotion. As you recall, we had some challenges with one of our key customers. Q4 2010 was much heavier. We had some shift of programming from Q3 to Q4. And then of course, we had the return of our support year-over-year from one of our key customers. So the combination of those two led to somewhat of the deceleration that you see.

And then I guess what I really like is if you could maybe compare and contrast a bit your efforts on managing the cost environment sort of this time around versus when you had to do it in 2008? I guess, we'd have weaker consumer I think, but you've invested a lot in your brands over the last couple of years. Are they in a better position in -- I guess, can you price more, less or the same of your cost increases you're facing versus '08? Or in other words, does more of your productivity in Cadbury saves sort of this time around need to be used to offset costs or less of them relative to last time?

I actually think we're in a stronger position to be able to price. I do think it's a weaker environment then, a weaker consumer environment, particularly, in a number of the developed markets around the world. But I think we are in a much stronger position. Certainly, the fact of the investments that we've made in our brand franchises put us in a much, much stronger position. And it really makes our brands traffic builders for most of our retail partners. And so it's a key benefit for us to be able to work with them to be able to develop programming together that can help us to not only continue to grow our brands in our category, but also to be able to drive traffic through their stores. So in that sense, I think we're in a much stronger position to be able to talk about pricing. That said, we're not blindly pricing. We are certainly looking to bridge the price value impact of the pricing actions that we're taking. We have programs like we described, the Huddle up for Hunger (sic) [Huddle to Fight Hunger] program that really allowed us to get strong merchandising support and offer consumer value for a very important cause, in that case, hunger. We're looking at packaging options on a number of our businesses that will help us to somewhat mitigate the impact of the pricing action. But net-net, I think it's a weaker environment, overall, but I think our portfolio is in a much stronger position than it was before at that time.

Your next question comes from Vincent Andrews of Morgan Stanley.

On the last call, there were two issues that came up from my perspective. One was you just started to take pricing at the time the competition hadn't really priced yet, and you lost a little share. And then it didn't seem like private label had matched yet either, so I'd love an update there, either sequentially from 3Q to 4Q or how you feel so far in 2011? Then the second issue which had to do with sort of your revenue expectations for the fourth quarter, and I guess it does have an impact for 2011 was one of your largest customers. There was an issue about how fast they were kind of going to get things going again with a particular part of their store, and I'm just curious where we are there as well?

Yes. Well, again, we took the pricing that we talked to you about in the third quarter. And as we told you at that time, we expected to see some dislocation between the pricing and the costs. And because we are the leaders in the vast majority of our categories, we found that we were leading pricing in most of those categories. But the reality is, we continue to see costs going up for everyone, and we expect that over the course of time, these price gaps will narrow. But we did not see any significant change in the fourth quarter in our price gaps versus key competition. So I feel very good about the strength of our brands and our ability to deliver value even in the face of a challenging economic environment. With respect to our key customer, our business is certainly improving. We feel very good about the performance, in general, and versus our competition. But I would tell you, it's still not where we needed to be, and we continue to work with them on marketing and merchandising ideas that would make sense for both of us. As an example, we're going to be running a Meal Solutions program in about two weeks that helps to drive traffic through their stores, enables them to merchandise a number of their center of aisle items. And so, I think it's coming back. We feel very good about the performance in the fourth quarter. We were up in the high single digits. But we still have, we believe, there's room for continued growth as we work together to not only deal with the consumer environment, but to help to drive store traffic.

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

Tim, on the cost inflation for 2011, just how much of it is locked in and how much of it isn't?

Well if you know, we don't really talk about our hedge positions. But on balance, our policy is hedge until we can price and on balance there's -- there's typically about a quarter's worth of hedge positions. Now that varies across geography, because there are different dynamics with respect to the ability price. It also depends a fair amount on the commodity category. For instance, there's not a very deep market in Cheese, and therefore, we tend to be a little less hedged on Cheese. Meats, we tend to be a little bit shorter on. Some of the problem that we had in the fourth quarter is, some of the key ones that have less hedge positions ran up considerably in the quarter. But our hedged position is about typical what it usually is on an ongoing basis.

And then, Irene, the organic sales growth was very good in the fourth quarter, and that was with the consumer weakness and with the pricing that you began to take to try to catch up with the inflation. So I guess, one, would you agree with that? Were the elasticities better than you thought and does that give you some more confidence in terms of pricing? And then, if you could just some color in terms of maybe Europe, U.S. and developing markets in terms of the ability to price there and what some of the dynamics are?

Yes. We were very pleased with our fourth quarter results for a whole bunch of reasons. The aggregate results, we felt very good about. I feel particularly good about the composition of the revenue drivers. As we said, about 70% came from vol/mix, about 30% from pricing, so we feel very good about that balance. And as we look at what the drivers of that were, it was, again, I think, good management of our brands. And we talked a lot about our continued investment in the face of some of the economic challenges in a number of markets. We had a number of very strong programs, for example, in North America in the fourth quarter. We talked about this Huddle to Fight Hunger. We had new advertising on a number of our key franchises, Planters, Ritz, Triscuit, Chips Ahoy!, Mac & Cheese, a number of our Power Brands that really served us very, very well. And we have a nice roster of new products that we started to introduce in the fourth quarter, things like Oscar Mayer Carving Board, and we had some good new biscuit alternatives. So in general, we feel good about our ability, and that's really why I gave the answer I did to Andrew earlier, we feel good about our ability to take price in the face of some of these challenging economic conditions. As we think about Europe, I feel very good about the continued top line momentum, again, in the face of some of the challenging economic situation. And as you saw, we had some disproportionate results depending upon the various countries. But overall, we had a good balance of vol/mix and pricing. We've got broad-based business momentum. In our developing markets, we feel very good about our ability to continue to grow our Power Brands with the investments and despite the inflation. And so, overall, we feel quite good about the performance in the quarter, and we believe it bodes well for the momentum into 2011.

Your next question comes from Terry Bivens of JPMorgan. Terry Bivens - JP Morgan Chase & Co: Tim, just on the North American unit, did you quantify how much -- I see the operating earnings were down there. Did I miss how much they were actually down? Can we get some measure on that?

Yes, the earnings are down about $100 million versus last year in North America. I'll give you a rough rundown of that. We had favorable vol/mix of about -- contributed about $30 million to $35 million. We were unfavorable on the price-cost relationship to the tune of about $175 million. So our gross margins were depressed by the net of that. We spent a little bit more on A&C, as we continued to invest in our brands, but as I mentioned, we managed the overhead and it contributed about $50 million of favorability. So North America cost us about $0.04 in the quarter year-on-year. Terry Bivens - JP Morgan Chase & Co: And Irene, for you, clearly, it is a challenging year and, certainly, commodities have jumped ahead of where many people thought they would be. But in terms of the earnings guidance, as you indicated, it is short of kind of a more bullish posture. You attributed that, I guess, to the vol/mix, first of all. But if I could explore that just a little bit more, how about marketing? Where do you think marketing should be this year? Might you ramp that up? And perhaps, the commodity element out of it as well? I'm just trying to get a better sense of the caution there, I guess.

Yes, I feel very good about our 2011 programming, and I think you'll have an opportunity to get a lot more visibility today at CAGNY. But as I look across our innovation pipeline, it's a strong pipeline. We've got strong support behind our items, and I think that'll be an important driver. We've got some good momentum on our Power Brands, as we've said, and I really feel quite confident. As I said, the impact of lesser contributions from vol/mix will have some impact on our earnings, but I feel quite confident that we have a number of levers that are going to enable us to deliver the guidance that we've laid out. We started off with the fact that Cadbury turns accretive in 2011. We will have lower interest expense from the retirement of our debt, and we've got very strong cost savings program that began to kick in, in the fourth quarter that will continue into 2011, coming from both procurement and as well as overhead efficiencies that should help us to drive the business. So I feel quite comfortable with the guidance that we're giving. That said, obviously, Easter is going to be in the second quarter this year, and so it'll make the comps difficult in the first quarter. But I'm quite comfortable by the first half, we will be on the trend that we've laid out.

Your next question comes from Robert Moskow of Crédit Suisse. Robert Moskow - Crédit Suisse AG: Just a couple of numbers on the guidance, Tim, I have you finishing the year with a 27% tax rate. Is the guidance for a higher tax rate in 2011? And then secondly, I have interest expense down about $100 million for 2011, am I pretty close on those two things?

Tax rate, yes, Rob. We ended this year at 27.3%. You remember, we benefited by a change in the U.K. tax rate, and we had a settlement earlier in the year over the significant period of time back in 2002 to 2004 timeframe, and that drove our rate down. Next year, we would expect it to be right around 30%. And your number on interest is probably pretty close. Robert Moskow - Crédit Suisse AG: And also on Starbucks, are you guiding to significantly lower earnings in this? Is that part of your guidance here on Starbucks? Because you're not shipping it anymore. And when will we -- and obviously you can't figure out when the proceeds are coming, but how are you going to treat that? Will it be discontinued at some point?

Well, to start out, we still are shipping. We still have the business. Starbucks has notified us of their intent to take it back March 1. But as of right now, we're still fully shipping. We lost the first round of a preliminary injunction, but we have appealed that, and that will still be played out. We've asked for accelerated treatment so we will know before March 1, as to whether we will be granted that. We have not reflected any change to our guidance with any assumption that Starbucks businesses is willing to go away. Robert Moskow - Crédit Suisse AG: So this guidance assumes a full year of Starbucks sales?

Yes, it does. Robert Moskow - Crédit Suisse AG: Isn't that a little aggressive, Tim?

I mean quite frankly, at this point, nothing has really happened. We still have a contract with Starbucks. And I mean, they have notified their intent, and we would argue that we still have a contract in place. So at this point, I think it would be prudent to assume that they were going to continue. Should that change, certainly you'll know about it.

Your next question comes from Diane Geissler of CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc.: I just have a question on your top line guidance and if you've covered this, my apologies. But the 4% top line growth, you had two quarters now where you've had some pricing. Do you have a break on what your expectations are for 2011 on vol/mix versus pricing within the 4%?

Well, as we said, Diane, we exited this year about 2/3, about 70%, 30%. It will be likely the reverse, as we look at the environment in 2007 (sic) [2011]. So we expect about 2/3 of it coming from pricing, about 1/3 that will come from vol/mix. Diane Geissler - Credit Agricole Securities (USA) Inc.: But you do expect volume growth in 2011?

Yes, we do, and we believe we've got some very strong programming, as well as some very strong brands around the world, and we believe that, that together with our innovation pipeline and the revenue synergies that we will realize from the continued integration of Cadbury will drive that vol/mix performance. Diane Geissler - Credit Agricole Securities (USA) Inc.: And then I guess, just a follow-on question which touches on that topic. If you look at, in particular, some of these emerging markets where food inflation has been running at rates higher than the U.S. and other developed markets, what is the risk to your emerging market strategy, if there's some kind of continued government intervention to put the brake on growth there? I mean, is that something that concerns you? They'll just keep raising rates in China until growth slows and you have demand destruction? Is that something that concerns you?

Well, I think we've done our best to take into account what we can see on the horizon. We certainly are working with the relevant governments around the world to ensure that we can adequately distribute our products at a fair price. But we have been quite pleased with the performance in our developing markets, and we are counting on continued contribution from that, as we look forward. We are taking a fairly conservative view in the revenue guidance that we had given. We've taken a fairly conservative view on all of our markets around the world. We've given out long-term targets for each of the key regions. We're expecting performance probably at the lower end of those ranges in each of the geographies, including our developing markets for that reason. Diane Geissler - Credit Agricole Securities (USA) Inc.: Can you remind me what your guidance is for the emerging market growth?

10 to 12 is the number that we had laid out there.

Your next question comes from Alexia Howard of Sanford Bernstein.

A quick question on the U.S. Coffee business, we've seen, I guess, one of the major players step up its promotional activity quite substantially in the last month or so. Are you worried about the competitive dynamics in there? And clearly, volume growth is going to be important to you.

Actually, I feel quite good about the performance of our Coffee business, both in the quarter and on the year. We gained share in mainstream. I think we're making excellent progress in improving margins in that business. So we feel quite good about the health of the business, and I think we've got a good set of planned stage for 2011.

And then on the U.K. Gum business, it looks as though from our consumer takeaway data or so, that's come down quite a bit right now right now. I'm assuming that U.K. Chocolate is quite strong, but has there been a change of strategy about the U.K. Gum business at the moment or is it just slower paces of new product introduction?

Yes, I mean it's a relatively smaller business relative to most of our businesses in the key markets. The big strength of the U.K. this year, as you said, was Gum (sic) [Chocolate]. But a lot of that has to do with some of the overall economic factors. A lot of our strength in the U.K. has do with the strength of Chocolate. But we need to continue to take some actions to stimulate Gum in a number of key markets, but we did suffer some share erosion in the U.K.

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

I wanted to explore the gross margin just a little bit further in the United States, or I suppose, North America. Tim, when you talked about this, I think in some answers to some prior questions, you mentioned the fact that certain elements, cheese and in certain meats that you just weren't able to hedge. Are those two segments, does that really account for the bulk of why fourth quarter deviated from your expectations and the margin came in lower?

Yes, the three commodities that really ran up quite a lot in the quarter were Cheese, Meat and Coffee. And particularly, the first two. I mean, Cheese, we typically are much shorter on the hedges, just because of the availability of the hedge market. And again, Meat tends to be a pretty quick pass-through, but the quick pace that which it ran up, just left us always behind. So between Cheese and Meat, they were the big piece of the gross margin issue.

In the past, we've noticed that the Oscar Mayer business really is a tremendous operation for you, in that you can pass prices through. Would it stand to reason then that the difficulty in the fourth quarter doesn't translate into the first quarter that by the time or really now, we should see full pass-through of the higher meat prices? Is that a fair statement?

Yes, I would normally expect, unless we continue to see escalation. I mean we are caught up with the pricing, but if meat prices continue, they're a bit bouncy out there now. But if they continue back up, it would put us needing to price more.

One final question on pricing in North America, just Biscuits, can you talk about your announced pricing actions, thus far, on the Biscuit operations?

We don't want to get into specific categories, as you might imagine, David. But once again, we have taken a number of steps on our Biscuit business as well as a number of our other key franchises to address the price value and to ensure that we have the brand strength to be able to address the current commodity environment. We've got some innovative ideas like a fresh stack packaging format for Ritz, and Premium, for example, that allows us to sell fresher but smaller packages to help the out of pocket. We've gone some family sizes of Oreos and Chips Ahoy! So we're taking a number of actions in that business, as well as across the portfolio to help bridge the challenging price value environment. But we had a solid quarter in Biscuit, and I think we've got some good momentum on that business coming into the year.

Your next question comes from Robert Dickerson of Consumer Edge Research.

I guess, I know you said before that your plan for fiscal year '11 was to spend back or I guess, in general, was to spend back about 25% of the cost savings in marketing. Has that changed?

No, that's right. The synergies that we generate in 2011, we expect to spend back about 25%. That's correct. That has not changed.

If we saw 25% of the cost synergies then coming through in fiscal '10, there really shouldn't be any net negative effect for fiscal '11. It's just a matter of timing, that's still flowing through into '11.

Yes, that's correct. Our synergies will step up a little bit in '11 relative to '10. We're at 25% rate in 2010, and we expect to be at 70% in '11. If you were to quantify it, it's probably about $0.12 of growth synergies year-on-year improvement.

And then maybe just a little bit more of a strategic question, just kind of what's happening in the marketplace with respect to retailers. I know, obviously, you just said before that, as you kind of increase your pricing, and you have more power within the stores, especially with Cadbury now that you want to partner with a retailer to help drive traffic. I mean, there are a lot of food companies who are saying this. I'm just curious, do you think that you may have any type of additional competitive advantage just because of the level of marketing that you expect to put behind your products in 2011 relative to competition?

I believe so. I think, as we look at category after category, and the impact of our categories have on driving traffic, actually, in all of our markets around the world, I think it gives us a very strong position to have a conversation. Of course, you can imagine the retailers are no happier about driving costs than we are. But I think the opportunity for us, because we have a broad portfolio, we have very, very strong iconic brands for the consumer. It gives us the opportunity to have discussions with them about snacking solutions, about meal solutions, about Huddle for Hunger programs and those sorts of things, and I feel very good about continuing to leverage capabilities in the U.S. Our sales capabilities like wall-to-wall, which enable us then to merchandise a number of those products in stores. So I think we are bringing to our retailers preferred consumer brands. We have shown our ability to be able to help drive the category and drive traffic as a result of our marketing of those brands, and I think that will continue to be a strength of our selling force in the partnership.

Let's just assume, this is kind of a follow-up to Rob's question earlier, let's just assume that you do lose Starbucks. I think you've mentioned before that there is an agreement there, as long as you have Starbucks, you can't operate with any other global partner. If you were to lose Starbucks, would there be a different growth strategy that may potentially already kind of be in the works?

Well, Coffee is a $5 billion business for us globally. It's a core category of ours, and we are committed to it. Certainly, in the U.S., we continued to make significant investments in the business. As I mentioned a moment ago, we've seen good progress on our mainstream Coffee Business. We had a very strong year, and we remain committed to competing in the Premium segment. So clearly, we will continue to compete in the Premium segment, but we're not at liberty to discuss that any further as we sit here today.

Your next question comes from David Palmer of UBS.

First, a quick follow-up on that Starbucks thing. If that happens, I would guess maybe $0.04 of earnings loss for the year if it happens March 1? I mean, can you give a sense of how much it could mean?

Yes, there's a number of variables that will depend upon how it plays out. There is the direct loss of income. There is, with the proceeds that we've received and the timing thereof, and it would be dependent upon our alternative premium strategy. So Starbucks, that business today for us, your number is probably a little bit low in terms of the earnings of that business historically, but it's very dependent upon all of those factors.

And just a separate question on the Gum category, I think your language was that there is cyclical weakness that has hit that category globally? I would have thought that there's some element of the category cycling a pretty robust period of innovation. Some have described it as historically so. And then a majority of the issue is that, and you're coming back and somewhat almost passively acknowledging that, that was the issue by saying you're coming back here in first quarter with some more energy behind the category that suggests that this is going to be a better year and not just subject to some macro conditions. I know it's probably tough to tease it all out, but what are your thoughts about hope from improvement this year?

We are quite confident that we will see improvement in 2011. There's no question that Gum was hurt disproportionately, as I mentioned from the macroeconomic environment. It seems sort of a funny phenomenon, because it's a little pack of gum. But the facts are teenagers are the main users, and a lot of our sales come in convenience stores. And so it was hurt disproportionately, and particularly in markets like Southern Europe. It was a big factor in our results there. In addition, as you could imagine, there's a fair amount of spending came out of the category in the last 18 months or so, given some of the M&A activity. Cadbury, in the heat of battle, had pulled back. We talked a lot about that actually at that time. And so, we've been in the process of restoring the spending as well as ensuring that we have a strong innovation pipeline. And on both of those counts, I feel quite good about the program that we have in 2011. We've seen terrific results in a number of markets, even in Q4, as we started to reinvest behind the business in markets like Japan, where we were up double digits in the fourth quarter; markets like Brazil, where we had very strong performance; and even markets like South Africa, that were up double digits; and even markets like Russia, where we were still down, we were able to change the trend as a result of the investments. I feel quite confident that our investment in the category, together with what is a stronger pipeline at the start of the year, we've got Trident Vitality coming out. We've got Strides SPARK coming out, as well as we've got continued strength on brands like Dentyne in the U.S. and Clorets in Japan. So that's the reason we feel quite optimistic about the prospects in 2011, and we continue to see strong, long-term potential in the Gum and Candy categories.

The next question comes from Eric Serotta of Wells Fargo.

I wanted to touched briefly on the year-on-year comparison for the first quarter. You commented that gross margins would be under pressure in the first half, and you also commented on the Easter shift. I just want to make sure everyone is modeling this correctly. Are you expecting your earnings to be up or down or flat, as you look at the first quarter and the first half?

Yes, we would expect that year-on-year, remember we had a pretty strong quarter first quarter of last year, relatively, both the Easter shift and the margin pressures in the strong quarter last year. We'd expect probably EPS to be down a couple of cents. As we get that to the half and Easter normalizes, and we start to pick up a little margin, we would expect probably to be on a cent-per-share basis, about similar to what it was the first half.

So Eric, if I can kind of build on that, if you think about the earning seasonality across the quarters, 2010 was quite a bit different in that a large portion of our earnings and earnings growth was in the first half of the year as opposed to the second half of the year. As you roll forward, keep in mind, on Q1, not only do you have the Easter shift, but you're going to have the full impact of the interest and shares outstanding from the Cadbury deal impact Q1 as well. So you kind of put it all together, you'll probably see a much more normalized distribution of earnings across quarters this year. But because of the comparison, you may see we'll be down couple of pennies in the first quarter, but then you build from there.

In terms of the quarterly distribution, go back to kind of historical norms in that 2010 was the anomaly.

And it looks like you're reaching your deleveraging targets ahead of what we had anticipated, and I think ahead of your schedules as well. About getting to approximately 3x debt-to-EBITDA ratio a year from now, could you talk a bit about uses of cash once you get to that point? And are acquisitions potentially on the table? I know that back in September, Irene, you made the comment that large acquisitions were not on the table for the foreseeable future, given the Cadbury integration and the balance sheet. Could that perhaps have changed with the better-than-expected progress on both of those fronts?

I'll repeat that. We're very pleased with our cash flow from 2010 and optimistic about 2011. We were very disciplined within the Kraft base business and frankly saw a bigger opportunity than, perhaps, what we had initially anticipated at Cadbury, as we bring particularly their working capital back into line. So we had a very strong cash-generation year. It enabled us to deleverage a bit ahead of the schedule. So we're continued to be pleased with that. We had said that we would be approaching the 3x number, which is the number we kind of target to support our credit rating in the next 12 or so months. We may be a little bit ahead of that, perhaps. And we'll evaluate at that time, the use of cash. I would say, we still, while we're making very good progress on the integration, as Irene laid out in her presentation, but there's still a lot of work to be done. That's our primary focus. So exploring acquisitions right now is probably not the top of our priority list. And we'll explore share repurchases and dividends when we get our ratios in line.

Operator, if we could have one more question. That would be great.

Your final question comes from Judy Hong of Goldman Sachs.

First, in terms of your 2011 revenue growth guidance, is there any revenue synergy numbers that you're assuming?

Yes, as I mentioned, we're going to start ramping those synergies up. It's probably about 0.5 point in 2011, Judy.

And then for earnings guidance, the 11% to 13%, I've got a little bit of a currency benefit in our model. Is there any currency impact that you're building in there?

We're not anticipating any currency benefit in 2011.

And then the extra week that you're benefiting from a sales perspective in 2011, is there any profit impact?

No, we would expect that any profit that we generate, we would be spending back and investing in the future.

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

Thanks very much, everybody, for joining us. If any of the analysts have follow up questions, myself and Dexter Convoy [ph] will be around to take them. And for anybody from the media who has additional questions, Mike Mitchell will be available to take them. So thanks, everybody, and have a good evening.

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