Mondelez International, Inc. (MDLZ) Q1 2011 Earnings Report, Transcript and Summary

Good day, and welcome to Kraft Foods First Quarter 2011 Earnings Conference Call. Today's call is scheduled to last about 1 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; Tim McLevish, our Chief Financial Officer; And David Brearton, who will succeed Tim as CFO beginning next week. Earlier today, we sent 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. Please refer to the cautionary statement 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. Good afternoon. I'm very pleased that we got off to a strong start in 2011. On the top line, organic revenues grew more than 4.5% despite the Easter shift into the second quarter. And on the bottom line, our operating EPS increased more than 6% despite a number of headwinds. These included the continuing rise in commodity cost, the Easter shift and the additional interest in higher share count from financing the Cadbury deal. These headline numbers are very encouraging, and as we look to the balance of the year, there are 3 reasons that give me great confidence that we're on track to deliver top tier results. First, it's clear that our continuing investments in marketing and innovation are delivering good returns. Around the world, higher levels of brand support are enabling us to take pricing to offset rising input costs. In the face of these price increases, I'm especially pleased that our strong brand equities have enabled us to maintain solid market shares. Second, the end-to-end cost management initiatives that Dave Brearton laid out at CAGNY are driving significant improvements in productivity and overheads. Underlying operating income margin rose by 60 basis points, reaching 13.9%. Margins improved despite the fact that our commodity costs were up about 7% to 8% over last year. In addition, we increased our investments in advertising and consumer support by more than 14% on a like-for-like basis. Third, we're seeing early benefits from executing as 1 company, following last year's Cadbury acquisition. This is most pronounced in our Developing Markets. Sanjay Khosla put it well when we reviewed his first quarter results last week. He said, "We saw the power of the $50 billion gorilla at work." Indeed, we saw it play out in our ability to deliver our results in the wake of the tragedy in Japan. Despite numerous obstacles, we leveraged our diverse supply chain to get our products to market. As a result, our sales in Japan were up 11% in the first quarter. And in India, our recent launch of Oreo provides a great example of what we can now accomplish by leveraging our extensive sales footprint. In March, we launched the world's favorite cookie through our chocolate sales network, and I can tell you Oreo is off to a very good start. In less than a month, we've reached more than 300,000 sales outlets across the country. In fact, Oreo's performance is on fire across our entire Developing Markets region. In the first quarter, sales of Oreo were up 56% versus prior year. This year, we expect Oreo to be a $700 million business in Developing Markets alone. That's up from about $175 million in 2006, more than a threefold increase. Now let me turn it over to Tim to provide more detail on our first quarter results.

Thanks, Irene, and good afternoon. Overall, we were quite encouraged by our first quarter performance. Actually, it was even stronger than we had anticipated. As Irene noted, our continued investments in marketing and innovation are strengthening our brands. This has enabled us to take necessary pricing actions to help offset higher input costs in all of our geographies. As a result, we delivered strong top line growth of 4.6% in the quarter. Our Power brands led the way, up 7%. We also delivered positive vol/mix despite higher pricing. This is proof of the power of our portfolio. In fact, vol/mix was positive even with the Easter shift, which tempered growth by about 1.5 points in the quarter. We're also pleased that vol/mix held up so well even though many of our competitors have not raised prices. Please note that we've simplified our definition of organic revenue growth to exclude Starbucks, as well as the favorable impact of accounting calendar changes. We've done this to provide a clean comparison on a like-for-like basis. Turning to margins, we continue to make progress. Our underlying operating income margin increased 60 basis points to 13.9%. Our pricing actions are catching up to higher input costs. And end-to-end cost management is making important contributions in procurement, in customer service and logistics and in manufacturing with Lean Six Sigma. These cost savings in turn funded a significant increase in A&C. This is our virtuous cycle in action, driving top-tier revenue growth through investments in marketing and innovation, while end-to-end cost management expands margins and generate savings to reinvest for future growth. Turning to EPS, as we outlined in February, we thought operating EPS would be down a few pennies from last year, but actually EPS grew from $0.49 to $0.52. This was driven by stronger operating earnings and from the timing of mark-to-market gains. Let me walk you through the specifics. Gains from operations added $0.03, while the impact of an extra month of profits from Cadbury added $0.04. The year over change in mark-to-market of our commodity hedge positions added $0.04. But that favorability will reverse in coming quarters. And finally, interest expense and the impact of more shares outstanding were $0.07 higher due to the Cadbury acquisition. Bottom line, we've posted a solid increase in operating EPS, and we did so in a high quality manner. This is despite the Easter shift and the negative $0.02 to $0.03 impact from Cadbury. All the regions contributed to the strong performance in the quarter. Here is the breakdown: North America's first quarter showed the virtuous cycle is taking hold. Organic net revenues were up 2.2%. As expected, pricing was the key driver, representing 3.3 percentage points of the growth. What's more, we priced earlier than many of our competitors. But despite this, vol/mix declined only modestly. In fact, absent of 1.5 point impact from the Easter shift, vol/mix would've been positive. As Tony Vernon outlined in CAGNY, we're continuing to invest behind our Power brands and new products in North America, and they're responding well. Power brands were up nearly 4% led by double-digit growth with Chips Ahoy!, Kraft Macaroni and Cheese and Halls. Several of our innovations also contributed. Our new MiO liquid beverages mix and Oscar Mayer Carving Board cold cuts are trending well in terms of consumption, velocity and consumer feedback. As Irene mentioned earlier, we're encouraged by our brands' ability to maintain market share in an inflationary environment. Early results indicate that our prior estimates around price elasticity of demand might have been a bit conservative. Nevertheless, we remain cautious. That's because the impact of our pricing is not likely to be fully reflected on store shelves until mid-year. Now let's take a look at profitability. Operating income margins have increased slightly in a difficult environment. As we said last quarter, in the face of substantial input cost inflation, we've implemented a series of price increases across our North American portfolio. Today, pricing is catching up to higher input costs, and so further actions are likely in a number of categories. But we're confident that the combination of pricing, productivity and overhead savings will enable us to increase A&C and deliver solid margin performance for the full year. Our European business remains on solid footing. In fact, Mike Clarke and his team posted their fifth consecutive quarter of both top and bottom line growth. That's despite sharp increases in commodities and a still fragile economy, most notably in Southern Europe. Organic revenues were 4.4% in the quarter, led by more than 6% growth in our Power brands. Growth was balanced, with nearly equal contributions from pricing and vol/mix. We're encouraged that our marketing and innovation investments are paying off here as well. With stronger brand equities than just a few years ago, we're now pricing to offset higher input costs. And despite these increases, our market share remains solid across the region. We've implemented a first round of pricing. Out of our current cost levels, further pricing may be necessary later in the year. I would also point out that Europe's solid vol/mix performance came despite the Easter shift, which negatively affected it by about 2.5 percentage points; the bulk of that was in chocolate. Top line growth was broad-based, with Coffee, Biscuits and Cheese leading the way. Coffee was up double digits, with pricing as the key factor. But we also realized significant gains in vol/mix driven by Tassimo growth of almost 30%. In addition, our new Kenco Millicano is off to a strong start in the U.K. Consumer feedback to this whole bean instant coffee has been very good. We expect more than 75% distribution by the end of the second quarter as we step up our marketing support. Biscuits in single digits behind our focus on growth platforms like Chocobakery. Milka Biscuits continue to perform well in Germany as did Cote d'Or in France and Benelux. We also realized robust double-digit growth in whitespace markets, with Oreo launches in France and Germany, and the Velveeta Breakfast Biscuits in the U.K. This helped drive overall Oreo growth of nearly 40%, while Velveeta nearly doubled. Our Cheese business delivered solid growth as well. Philadelphia grew double digits behind the versatility strategy to encourage it as a cooking ingredient. This has been so successful that we've now imported it to the U.S. as well. In addition, the launch in Germany of Philadelphia with Milka, a lower fat alternative to Nutella, exceeded our expectations. In fact, we reached our full year target in the first quarter. Operating income margins in Europe rose 30 basis points to 11.9%. Lower overheads drove the margin expansion. As I mentioned earlier, input costs have increased significantly. Our European business is pricing accordingly, but hasn't yet caught up. As we look at the balance of the year, we're confident that the combination of pricing, productivity and overhead savings will deliver another year of strong profit performance. In Developing Markets, solid execution of our 5-10-10 strategy are focused on 5 key categories, 10 priority markets and 10 Power brands continues to deliver quality growth. Organic revenues grew 9.6%, with a good balance between pricing and vol/mix. In fact, except for the Easter shift, this region would've posted another quarter of double-digit gains. Power brands grew 16%, lead by 56% growth of Oreo in the quarter. Several other Power brands also performed well. Toot and Club Social crackers grew more than 25%, while Tang and Cadbury Dairy Milk each rose nearly 20%. Within the region, Asia Pacific and Latin America continued to grow double digits. CEEMA revenues rose in the mid-single digits despite weak economic conditions and the Easter shift. Several markets stood out in the quarter. In India, our business grew more than 40%. And with our recent launches of both Oreo and Tang in this market, we're confident that robust growth will continue. China and Indonesia each grew more than 20%. Brazil continued to drive growth in Latin America, with revenues up mid-teens. And Ukraine was up double digits, leading the way in CEEMA. Operating income margin in Developing Markets declined to 12.2%, largely due to a substantial increase in A&C. Pricing, end-to-end cost management savings and favorable vol/mix more than offset higher input costs. As in Europe, pricing has not yet caught up to input cost, but we expect a better alignment of prices, price versus cost, as the year unfolds. Now before I turn it over to Dave, I'd like to take a moment to say how much I've enjoyed working with everyone here at Kraft Foods over the past 3 and a half years, including our analyst and share owners. I have great respect for the board, Irene and the rest of the leadership team. Together, I believe we've put Kraft in a solid path to deliver consistent, top-tier performance. And I’m turning over the CFO reins to a great colleague and a good friend, you'll be in very good hands. With that, I'll turn it over to Dave for an update on our guidance.

Thanks, Tim. For those of you who've met Tim in person, I know you'll understand when I say I'll have very big shoes to fill; in more ways than one. But I look forward to building on his progress and the company's excellent financial foundation. Turning to our guidance. On the top line, we're confident we'll deliver organic net revenue growth of at least 4% in 2011. That excludes the impact of the loss of the Starbucks CPG business and the favorable impact of accounting calendar changes. As you've seen, we started the year strong and we remain cautiously optimistic with regard to the balance of the year. We're realizing better alignment between pricing and input cost and volumes to date have held up well. But we're cautious on near-term demand, as the impact of inflation on the consumer has not yet fully played through in the marketplace. At the same time, we believe we're well positioned as we continue to fuel the virtuous cycle we outlined at CAGNY. Our end-to-end cost management will drive productivity and overhead savings, and we'll continue to increase investments in marketing, innovation and other brand-building investments to drive top-tier growth. On the bottom line, we now expect operating EPS of at least $2.20 this year. We've adjusted our numbers to reflect a $0.05 to $0.07 impact from recent changes in our U.S. Premium Coffee segment. These include the loss of the Starbucks CPG business, some related traffic overhead costs and the launch of Gevalia Premium Coffee coming in August. Most important, our overall business momentum remains strong. Excluding the changes in U.S. Premium Coffee, our earnings outlook for the balance of our business remains consistent with the prior guidance of 11% to 13% growth. Now I'll turn the call back to Irene for some concluding remarks.

Thanks, Dave. Our strong start this year demonstrates the power of the virtuous cycle we've created around the world. This is due in no small part to the work that Tim has done over the past 3 ½ years. Tim has been a terrific partner since joining Kraft Foods in 2007, and I want to thank him for all he did to help me lead our organization through great change. We went from an operating division of Altria to a standalone public company, and now a leader in the food and beverage sector. Tim was also instrumental in several important transactions that have transformed our portfolio, especially the acquisition of Cadbury. We will certainly miss Tim's perspective and commitment, but we're fortunate to have an experienced and knowledgeable leader like Dave, ready to step in and seamlessly assume the role. I'm quite confident that we won't miss a beat on our path to sustainable top-tier growth. Now we'd be happy to take your questions.

[Operator Instructions]

I'd like to offer some guidance in order to direct traffic to any financial questions. With respect to any questions about the first quarter numbers, please direct your questions to Tim. And with respect to financial outlook, please direct your questions to Dave. With that, I'll ask the operator to put the first question through.

Your first question comes from the line of David Palmer from UBS.

I wanted to ask you about the Cadbury business in particular, and in Gum and progress in Gum, and also maybe a comment on Chocolate, in particular. I know we had some weakness, particularly in some of the developing Southern European markets there in Gum. How are things trending there as we head later into the year? Do you feel like things are trending the right direction?

Well, David, there's no question that Cadbury has transformed the business as we hoped it would in terms of our portfolio, our distribution capabilities and the geographic footprint. And it's certainly playing out in our results. We also feel very good about overall how the business is performing. As you are aware, it's exceeding our financial expectations. It's going to be EPS accretive this year, and our cash flow more than doubled last year, and we see further opportunities. So in aggregate, we feel quite good about it. And certainly, the Chocolate business in general is performing quite well. We had some short-term impact in the first quarter as we discussed due to the Easter effect, but we feel quite good about our Chocolate business. And especially in some of our Developing Markets, we saw our Cadbury Dairy Milk grow almost 20% versus historical growth of in the range of 7%. We feel quite good overall about Chocolate. Gum continues to be a challenge. It is very much an attractive category. We feel very confident that it has good long-term growth prospects. But we are seeing 2 very specific problems in the short-term. Certainly, the category is not as robust as it has been historically. In large measure, as we discussed, we believe that's due to macroeconomic conditions. And the other piece is that our U.S. business is not performing as well as we'd like. Both of the key competitors in the category have been investing to stimulate category growth. I think we're beginning to see macroeconomic recovery in a number of markets around the world, and I feel the category will come back over time. In the U.S., though, our challenge is really that our first half innovations have not lived up to our expectations. We launched Trident Vitality. It's been a solid single, but Trident Layers last year was a homerun. So it's a little bit below our expectations, but it's up against a tough comp. That's it. We're on the case, and I'm quite confident that we will see recovery in the back half of the year. I'd also say that elsewhere in the world, we're seeing some very strong growth in the Gum category. Markets like Russia, Turkey, South Africa, all up solidly over 30%. Japan, up 20%. So net-net, the overall business is doing well. Chocolate is on track; Gum continues to be a bit of a challenge particularly in the U.S., but I'm quite confidence confident that it will recover as the year progress.

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

Effectively one big question on Coffee and a couple of parts. Does the guidance assume that you will receive proceeds from the Starbucks CPG business? And does it assume use of proceeds? And I'll just tick off a couple more, and let you guys pick on how you want to answer them and in what order. And then the Coffee strategy, I'd like you to talk about the advertising budget. It is my perception that one reason why the U.S. Single Served Coffee business with Tassimo has not done so well is because that advertising budget was cut years ago. And it looks like you have to really replenish that to get it going again. And then finally, can you just comment on Gevalia in this premium strategy? What kind of backing will it get on its launch? And how long would you expect to sustain it?

If I can take those one at a time, our guidance does not include any proceeds from the arbitration. We feel quite confident in our position. We built a very solid business together, and we do expect to be compensated for that. But exactly what time and what the magnitude would be is uncertain at this point so we did not factor that in. With respect to Tassimo, we continue to see very strong performance particularly in our international markets. It's up about over 30%, about 35% globally. And North America business is up over 50%. It is true that we cut back on our mass market support of Tassimo simply because we discovered that it made more sense to target this offering to people that were coffee lovers. And so we continue to support the brand quite actively, and we feel very good about its performance in North America. In Canada, we're doubling the size of the business. We've got a strong #1 share in the U.S. The business, as I said, continues to grow. And in fact even our business, ex the Starbucks tick, was up a healthy over 20%. So we feel good about the performance of Tassimo, and we are continuing to support it. With respect to Gevalia, we've given it a nice launch. It's a very important part of our premium strategy, which we shared with you. And it's a strong business. It's a very good coffee. It's a leading brand in Europe, and what you might you may not realize is it's actually already over $200 million business in the U.S. that consumers already know, and we've got some very good brand awareness to be tapping into. So I feel very good about the launch of Gevalia. We've got a very robust plan to introduce it, and that's part of the investment in Coffee that Dave alluded to, the $0.05 to $0.07 that we talked about. And we're quite confident that we've got a very robust pipeline in our European business that we will be able to bring over to the U.S. now that we don't have the constraints of the contract.

Your next question comes from the line of Eric Katzman with Deutsche Bank.

I guess a couple of questions. First is just looking at the balance sheet, it looks like there's been really no progress on the debt. In fact, maybe it's the cost of inventories or stuff, but it looks like debt actually increased from the December to the March quarter end. Could you talk about that for a second?

Well, seasonally first quarter is usually a higher working capital quarter. If you looked at it historically, you'll see that our cash position in the first quarter usually is negative seasonally. This quarter, that was exacerbated a little bit with the Easter shift. So we were assembling inventories for the Easter selling season that sat there. A lot it sat there at the end of the first quarter. The year-end kind of runoff in FX and as the balance sheet was translated to U.S. dollars also pushed it up a little bit. And further, the higher input costs reflected higher inventories. So consequently, yes, the working capital was higher, which ultimately resulted in lower cash flows, and that's about, I think, it was a little over $1 billion higher than we would've anticipated. Also note that we made a $500 million pension contribution in January this year. So the combination of higher working capital and that pension contribution are in the net debt levels. But we do anticipate getting back on track or staying or remaining on track and bring the debt levels down to the levels we have identified consistent with our ratings targets by the year end.

And then I guess, Irene, it looks as if over the last 4 quarters, that U.S. Snack operating profits, excluding various charges, et cetera, has been down. Is that -- I'm kind of surprised because maybe that's a function of the Gum weakness. But is there anything else going on there? Or has it just become a pretty competitive category whether we look at Gum or Biscuits?

No, actually, Eric, I think Gum is a piece of it. But it's really primarily due to the fact that in that business, pricing hasn't yet caught up to rising input costs. We've been very sensitive to making sure that we get the right balance between protecting our shares and our underlying momentum. There's some impact on that business as well from the Easter shift because crackers tends to be more skewed, will be more skewed to the second quarter. But a big part of it is just they haven't fully been able to recover their input cost increases, as well as while we have continued to invest in a number of our core brands. And that's part of the reason that we're seeing very strong top line performance from a number of the Power brands. But that will equalize over time.

It looks as if, in the first quarter, if I read the table correctly, your Cadbury was $0.03 dilutive and yet you're saying that it's going to be accretive for the year even though the sales are not where you want them to be. So can you kind of bridge those 2? And is it more of a cost savings story now, at least for the moment? Is that how the accretion is going to ramp up so significantly here?

Well, Eric, I'll answer, I believe, the first part of it. The first quarter, actually we didn't give you quite enough information to determine the accretion dilution in the first quarter. There's pieces of it that are dealt with from last year. In fact, Cadbury was modestly dilutive, not the $0.03, but probably close to $0.02 dilutive in the first quarter. But that's right on track with what we expect to be for accretive this year. A lot of the increase is going to be the synergies. We've said that we'd be at 70% run rate of the 750 by year end, coming out of 25% last year. We added, I think, another 7% or 8% in the first quarter. So we're right on track on generating synergies, and although revenues in some of the Cadbury categories were a bit soft, we would anticipate that pick up in the back half of the year.

I would say, to correct the assumption, we feel quite good about the aggregate revenue so we're not concerned about that at all.

Your next question comes from the line of Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I wanted to ask you, if I could, in relation to pricing versus cost inflation. So in this quarter, was that a drag on the gross margin?

Actually, pricing was, overall, for Kraft was modestly ahead of the cost environment. Christopher Growe - Stifel, Nicolaus & Co., Inc.: And then I would ask, I guess, really from a broader standpoint, but Europe in general has been a difficult area to price in. This quarter, it did show some good pricing on your part, but I would suspect just given some of the categories, you need more. Are those price increases in place already and they'll start phasing in? Or is there more pricing still to take in Europe? And just if you could talk generally about the environment there if we're trying to get pricing realization?

Chris, we have taken pricing. It is playing through, and you are likely to see another round of pricing in response to some of the significant spikes in our input cost. But we feel pretty good about the way our volumes have held up so far. We've got good programming in place. We've used a number of promotional tactics to try to leverage our scale. So for example, the Delicious Difference days that we run in France with Carrefour has been a nice way of us helping to bridge the consumer as we've raised prices in a number of our core categories. But we feel pretty confident that we will be able to protect our margins. Not actually -- assuming our dollar margins, but there'll be a bit of a denominator effect as we significantly increase prices. But we feel pretty confident that we can protect our profit dollars in Europe as well as elsewhere.

Your next question comes from the line of Andrew Lazar with Barclays Capital.

First, it would be just you'd talk about how you're pretty happy with the progress in market shares and despite, obviously, the pricing in the tough environment. Maybe, however, you want to sort of define because I know there are different ways that you kind of track it internally. But is there a way to give us a sense, overall, of how that is tracking relative to what we've seen the past couple quarters?

Well, I certainly -- as we look around the world, our market shares in our core categories are holding their own despite the fact that in many of our categories, we were the first out in terms of pricing. I know there's always been a great deal of interest in North America, and we feel very good about how the focused strategy that Tony laid out is playing out behind our top 20 brands. And we've stepped up marketing investments, our shares are improving, and I guess, what's most telling is our account shares are quite significantly up versus prior years despite the fact that we have an Easter shift. So we feel very good about the extent to which our shares have held up around the world in the face of pricing. It certainly is reflective of the investments that we've made in our core equities as well as in our innovation pipeline.

Tim, you said inflation was 7% to 8% in the quarter. Is that still the estimation for the full year at this stage?

Yes, that's correct.

And then last one, you've said that foreign exchange was, as of the last call, going to be relatively neutral impact on the year. How does that shape up for you now?

Andrew, it's Dave. Currency on the quarter was about in line, frankly, with last year. We have a pretty broad basket of currencies. So the implications of any currency moves kind of gets muted somewhat. If I was honest looking at the currencies where they sit today, it would reflect an upside versus the guidance we've given today. But as you probably saw in the markets today, they move a lot in any given day, and I think it would be a bit early for us to bet on that and build that in. So we've looked at first quarter and said it's about flat to a year ago. And the guidance at this stage reflects how we were thinking of it back then. If there's any upside, if these rates hold longer, we'll come back to you.

Your next question comes from the line of Robert Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG: I wanted to know regarding inflation, we're getting a much higher number for inflation for Kraft, but we're using a lot of spot markets. And I was wondering if you feel like your hedging has helped you quite a bit this year. Do you feel like you're beating those spot markets? And then secondly, there has been management turnover at the Cadbury side. A couple other key people have left. And I was wondering, Irene, if you can comment on why these people are leaving and what kind of bench you have to backfill.

I can start with the commodities, and Irene will talk about management. I think our commodity cost increases are actually quite consistent with what you're seeing from other companies. They're going to be the high single digits. We have a pretty wide business across multiple geographies, so I think it would be hard, I think, for you to do model that precisely. But we're looking at high single-digit increases. We are pricing. We priced in the first quarter to cover that, and we believe we'll be pricing to cover those as the year unfolds. So we don't see any major issues on commodities. We just need to keep in front of it. We need to use the end-to-end cost management to make sure we have money to invest in the brands and innovations, which then would allow us to do that pricing. So I think we're pretty comfortable with the high single-digit numbers that we've given.

With respect to some of the management changes, there's no question I'm sorry to see some of our talent leave, but I feel that we've got a very strong pipeline. We've made great progress since I first laid out the rewiring strategy at CAGNY in 2007. We've got a nice pipeline for most of our key positions, and it enabled us to make some very quick announcements in the wake of the departure in Snacks, Jim Chambers' departure. For example, we've got Mark Clouse stepping in to run our Snacks business. Mark was the status architect of our global biscuit strategy, and he is well prepared to lead that important business. In turn, we backfilled Mark as the leader of our global biscuit category, with Lorna Davis, who is the General Manager of our China business. She actually came from the LU business initially. And she was the person, with our team, who grew our China business from $50 million to over at $500 million business over the last couple of years. So I feel very good about Lorna's experience in biscuit and her capability to add value in leading our global biscuit team. And then in turn, we backfilled Lorna Davis with Shawn Warren, who has been the architect in our Asia Pacific region of the Oreo growth that I alluded to in my remarks. And so we feel very good about the pipeline, and I think you see it playing out in these most recent announcement.

Your next question comes from the line of Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Can I ask about the distribution trends on some of your new products in North America? You obviously, had a lot -- I guess, for the first time in several years, you've got a decent lineup of new products, and those are ramping up. Have you got further benefits to come from additional distribution gains in the second quarter? Or is that largely now behind us from Q4, Q1?

No, I think we have benefits will come, yes, from distribution, although I feel actually quite good about the speed with which we got a number of these innovations to market. I think our innovation pipeline is one of the strongest we've had, possibly ever, but certainly in recent memory. And the focus on fewer, bigger, faster has really played out nicely. And so we're seeing very early wins on a number of the new items. But we do have some incremental distribution opportunity. But also for most of these products, the marketing support will just begin to kick in, in the second quarter. And so of course, we'll expect to see some pick up in velocities as well. So we feel quite good about the innovation pipeline in the U.S., as well as elsewhere in the world, and I think it's going to be an important contributor to our performance this year.

Your next question comes from the line of Bryan Spillane with Bank of America Merrill Lynch.

First, Tim, just want to wish you good luck, and there's been a lot of kind of moving parts in the time that you've had this job, and you've been very helpful in helping us sort of keep up with it. So I want to thank you for that, and wish you good luck in the future.

Thank you, Brian.

Just a couple of questions. First, in terms of the advertising and consumer spend in the quarter, looking at the first quarter, assuming that it was running ahead of plan, did you actually end up spending more in A&C in the quarter than you had originally anticipated?

Yes, well, modestly more than we had in our annual plan, but it was up about 14% from prior year. Most of them -- a large part of that was fully planned.

And then in the full year guidance as well, has that got a higher degree of A&C spending in it than you originally planned?

Not at this stage, Bryan. It's more or less in line with the guidance that we give you at the start of the year. It's more a question the overspend in quarter 1 was just a bit of phasing, but right now, we're still on track.

And then just in terms of a clarification on the organic sales growth guidance for the year, the calendar shift, I'm assuming that pulls out the extra week. Is that also normalized for some of the calendar, I guess, the calendarization changes in lieu from last year?

Yes. Yes, the quarter -- the organic revenue growth of 4 plus percent that we gave excludes any calendar changes either this year or last year. So we've tried to keep it as clean as we can, and we'll do that going forward just to make it clearer for people how we're doing on our business.

And then finally, just in terms of sort of how we're looking at phasing out the balance of the year. Some of, I guess, there's some tailwinds -- the second quarter will get some benefits for Easter. But it sounds like you're still going to be putting pricing in to cover inflation, so sort of the net benefit of that doesn't really kick in fully until the second half of the year. So as we're just trying to phase the rest of the year, could you just talk a little -- give us a little bit of color in terms of just how to think about the EPS growth or profit growth as it phases out through the balance of the year?

Sure. We don't normally issue quarterly guidance so I won't give you formal guidance. But I will say a couple of things. Firstly, you're right. Organic revenue growth in quarter 2 will benefit from the Easter shift. So we'll get the tailwind from the 1.5 points we talked about this quarter. But on the EPS side, I think Tim said in our last earnings call that we would have more normal seasonality of our EPS this year. Last year was a bit of an anomaly. Sort of if you look back over time, we've traditionally delivered a little less than half of our earnings in the first half, around 48% and about 52% from the back half, just because of the seasonality of some of our products. This year, we would expect to be in line with that historical trend. Whereas last year, for a lot of reasons, it was the reverse. We actually had a higher profit delivery in the first half last year than we did this year. So in terms of comparisons, our comparisons are going to be tougher in the first half than the back half. It's not because of anything this year, it's not because of pressures we're seeing. We're actually quite comfortable that 2011 will be a good earnings profile across the year. We're just comparing against an unusual 2010.

Irene, just in terms of pricing to inflation in developing markets, has it become more difficult to take price increases that cover or even more than cover inflation this year than maybe it's been the case last year or the year before?

I think we're seeing some sensitivity, and so there's no question that it is a little bit more difficult. But as you can see from our results, about half and half of revenue was about half and half vol/mix and pricing. And so we've been able to get to those price increases through, again, because of the investments that we've made in our core franchises.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

Did you -- maybe I missed it, but did you gave an organic sales number for Cadbury in the quarter?

No, we're not. At this point, the business is fully integrated. So we gave the organic number for the entire company.

And there are no comments you want to make under other than the Gum comments that you made earlier?

No, I think it's been in line with our expectations as I've said. There's nothing more to issue.

Last quarter, you brought back out the U.S. revenue metric that was gaining share, and it was a very impressive number. Do you have that number for this quarter as well?

Well, as I mentioned earlier, we feel very good about the fact that we're holding our growing share in the majority of our business despite the fact that we did take pricing and we’ve seen a shift in Easter. So we're certainly way up in where we would hope to be. And as I mentioned on a volume basis, we feel very good that we're in the 80% range. We feel quite good about that.

Your next question comes from the line of Terry Bivens from JP Morgan. Terry Bivens - JP Morgan Chase & Co: I just have 2, I think, relatively quick things. Irene, this kind of gets back to Alexia's question on distribution. At least in the syndicated data, it seems to be roughly equal with last year. I would've probably expected it to be up a little, but it kind of gets back to Wal-Mart in a way. So Action Alley hasn't really come back like we might have thought a year ago or so. Do you think that's a fair statement?

It's come back. I would say that we certainly are seeing better trends. It's not quite yet where we'd like it to be, but we certainly are -- we did not find that we lost a lot of distribution as part of their change in strategy. So you wouldn't have expected that as an impact on our distribution numbers. But we are -- the numbers that we look at, we are gaining distribution in aggregates, partly related to the fact that we've got some very strong new products as I mentioned earlier. Terry Bivens - JP Morgan Chase & Co: Just in terms of the revenue synergies, I was certainly surprised to see how well Oreo is doing over in India. Are there -- I believe you set a goal for $1 billion, if I'm remembering correctly, I don't have that in front of me. But could you just talk for a minute about how the revenue synergies part of the Cadbury acquisition is going?

Well, we feel good, Terry. We set a target -- you're right, we set a target of about $1 billion, and we think we're on track to deliver that. We said about half a point of our growth in 2011 would come from our revenue synergies. But I think there's a whole host of examples. Certainly, India is one good example where we've been able to put both Oreo and Tang through the chocolate distribution network to terrific results. In Brazil, we're currently expanding our base legacy Kraft products into almost 700,000 outlets, up from less than 300,000. So we're seeing some -- and that's been an important contributor to our high double-digit growth in Brazil. Mexico, I talked about the fact that we've been able to put Oreo that was only in about the 100,000 outlets into Cadbury's 380,000 outlets that they had with the Gum business. Russia, we're seeing some opportunities to be able to put the total portfolio together, and even just some simple merchandising ideas. There was some small retail refrigerators that Cadbury used in India for their Chocolate business that we've now been able to take to use in Cheese in markets like Indonesia and for chocolate in markets like Brazil. So there's a whole host of examples, but as we shared with you most of the $1 billion of revenue synergies will come in 2012, 2013.

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Can you actually talk about the progress you're making in the alternative channels? I think, historically, most companies say they add about 2 percentage points on top of major channels. Is that still the case? Or is there a slowdown in the channels? And can you talk about the distribution between the different alternative channels?

No, we're having terrific performance in the alternative channels in mid- to high-teens growth rates and draw the mass in dollar. So we feel very, very good, particularly now with the stronger portfolio. We have a wider range of offerings for a number of these channels, and that's playing out quite well for us. It's an important part of our growth, and we like it a lot because typically, there's a lot less competition there, and we like the margins.

And then the second question I had is you talked about a couple of points around certain Power brands. Can you kind of round it out a little bit with a couple more comments about other Power brands that you didn't actually talk about in your notes? Just kind of seeing how everything else did.

Well, I think we gave you, by geography. As we told in North America, our Power brands grew about 4%, and, in fact, if you look at our top 20 brands, 15 of the top 20 grew more than 5%. So we feel very good about the performance in North America. As we talked about in Europe, we grew an aggregate 4%. Our Power brands grew over 6%. And in Developing Markets where we grew almost 10%, our Power brands grew 16%. And behind there, we've given you a couple of numbers. We talked about Oreo up 56%. I talked about Cadbury Dairy Milk up almost 20%. So we've got a number of very good stories behind each of those aggregate numbers, but it would be a little bit lengthy to go into all of them. I think we've given you a pretty good flavor for them.

Are there any ones that we should see that might be more advertising or new price innovation that might not have performed yet that might be coming online? I guess, that's really what I'm trying to get at.

I think certainly products like meals are just getting started. It's a beverage. We served it to you at CAGNY. It's a water enhancer, and people are just beginning to get it into their hands. We have high hopes for it. We're just getting started. But we've got a pretty good pipeline. Certainly as I mentioned, our innovations are out in the market for the most part, but they're just beginning to get consumer support. So we do expect that the performance of those products will accelerate as we move along. Tim mentioned the products in Europe. In the U.K., our Millicano coffee product, we have great hopes for that one, and it's off to a good start. Our chocolate Philadelphia with Milka is off to a very good start. We're actually selling more than we can make. So I think if we go around the world, we feel very good about the pipeline, and we do feel very good about the marketing support behind the pipeline. But I'll tell you, when I look at businesses like Tang, it took us 50 years to build Tang to a $500 million business, and in the last 3 years, we've essentially doubled that. And Tang is almost $1 billion brand in Developing Markets. So we've talked about brands like Oreo that are quite mature that are growing like teenagers. Many of these establish brands are responding quite well to the marketing support and to the innovation and the marketing as well as some of the new products that I talked about.

Your next question comes from the line of Diane Geissler for with CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc.: I guess my question really is about what are you seeing in the competitive set? Irene, you talked about your performance on a volume basis if we sort of account for the Easter shift which was fairly solid given the pricing that you've put into place. Are you seeing your competitors' price behind you now? And is it your expectation that continue to see the sort of volume traction? Could you just talk a little bit? Particularly in categories where you do have a significant private-label competition.

Well, I do feel that -- we've been able to take pricing, our shares are holding up well. As we've said, we have found, in most of our categories, that we have priced earlier than many of our competitors. And the reality, though, is as costs are going up for everyone and so we would expect over time that we will see prices increase across the board for our customers, as well as for our branded competitors. Diane Geissler - Credit Agricole Securities (USA) Inc.: And are you seeing that on the shelf now or do you think there's still a lag between -- because if you go back all the way to the third quarter of 2010 is when you really started to take the pricing. It seems to me that we should've seen from your other competitors pricing behind you. So I guess...

Yes, most of our categories -- given the extreme spike that we have seen in input cost, it is almost impossible not to price them. We're seeing that playing out. Some people, some businesses have done it at different rates than others. We're starting to see it play out in the marketplace, but as Dave said, it's one of the reasons that we are cautious about our guidance because we feel very good about where we are so far, but we do need to continue to see this play out. But I would say, in general, we are finding that our elasticities are holding up better than we might have thought. Diane Geissler - Credit Agricole Securities (USA) Inc.: Are there any particular categories you would highlight where you think there needs to be further pricing? I know it's broad-based commodity inflation, but particularly thinking of things like the meat category, dairy?

No, I'm not going to get into any specifics. But I think you can see where the largest spikes have been.

Your next question comes from the line of Judy Hong with Goldman Sachs.

A question about capital allocation and just kind of your thought about your portfolio. So on capital allocation size, we're seeing share count creep up a little bit as options get diluted. You're going to end this year with roughly 3x leveraged financing costs are pretty attractive. You get got potential proceeds from Starbucks. So can you just give us perspective on when you would feel comfortable maybe buying back stock? And then on the portfolio side, it looks like we're seeing increased deal activity in this space. So any thoughts in terms of the looking at your broader portfolio, how you could participate and looking at maybe some of the brands or non-core products that you could potentially sell?

Yes, I think right now, we're pretty focused on getting to the leverage targets that we've laid out through both EBITDA growth as well as the natural maturity of our existing debt. When we get to that point, we will obviously, consider all options, but that will be a discussion with our Board so I don't think we could go into that here. In terms of M&A, we never comment on M&A. So sorry, we won't be able to do that here, but we're pretty happy with the portfolio we've got right now. And our focus is really on driving top-tier growth, top line and bottom line with the portfolio we have today.

And your earlier comment about just focusing on debt reduction and getting to the leverage target, how has that focus changed if you did get sizable proceeds from Starbucks?

At this point, I don't want to get into a hypothetical discussion on any Starbucks proceeds. We need to let the process play though.

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

I wanted to just circle back to the discussion earlier about kind of the phasing of the year in terms of quarters. I think your comments implied maybe a mid-$0.50 type of number for the second quarter, which would put a pretty strong onus on the back half in terms of the year-over-year growth perspective to get to the numbers on a full year basis, kind of something in the range of 20% to 25% in the back half. And I guess, I know Q4, you had some margin pressure, but that doesn't hasn't strike me as having been anything so unique about last year from a comparison standpoint to cause such a big growth rate this year. So just hoping you could help me understand that a little better.

This year is going to be pretty normal. So I would not get hung up on the growth rate versus last year. Last year was the anomaly. So this year, we will have an earnings profile across the quarters. It's going to be pretty much in line with prior years with, as I said, 48% in the first half and roughly 52% in the second half would be our normal historical level. And there's some things that you just have to keep in mind as we go into quarter 2. There's the Easter shift, just that normal distribution. And as well we're going to see a mark-to-market reverse out. The mathematical calculation of what that means to growth in the back half, again, I think I would look at that as part of an ongoing historical profile rather than versus last year. We had an unusually high earnings level in the first half last year, and equally an unusually lower earnings level in the back half. So yes, it will mathematically look like a big step up, but we're pretty comfortable with the profile this year is more normal and it will reflect our ongoing business profile.

The profile last year was $54.46 and the normalized is more $48.52. So we're expecting to revert back to kind of normal.

And then one follow-up, if I could, just on the coffee change with Starbucks. It looks like there was an $87 million kind of divestiture in the quarter. And I guess, you only didn't have that business for 1 month out of the quarter and $87 million seems like a high number for 1 month. Am I missing something there?

I think the number you're looking on the chart was actually the take-out Starbucks revenue out of both years. So the $87 million was actually taking out January and February.

Your next question comes from the line of Eric Serotta with Wells Fargo.

Could you touch upon the U.S. Grocery segment? It seems that you had really some of the largest volume declines there. Was that a segment where competitors were late to follow?

Actually, the biggest impact on our Grocery segment is Easter. That is, of all of our businesses, we've got a lot of products in there that are very sensitive to Easter; Macaroni & Cheese, and soaked up a number of our products. Our Jell-O business, Cool Whip business, all of those are highly sensitive to Easter, and that was the major driver of the net revenue decline. I'm quite comfortable that we will see, over the first half, positive organic growth in that business unit.

And then did you give what the target is for A&C increase for this year?

No, as we've said, we have a longer-term target of getting ourselves in the 8% to 9% range. And I think we're well on track to continue to make good progress.

I think we can end it there. I appreciate everybody listening today. And for those of you who need to ask questions, Mike Mitchell will be available to take your calls. And for the analysts who have further follow-ups, Dexter Congbalay and myself will be available. Thanks very much, and have a good day.

Thank you. This concludes today's conference call. You may now disconnect.