Mondelez International, Inc. (MDLZ) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to Mondelez International’s fourth quarter 2012 year-end earnings conference call. [Operator instructions.] I’d now like to turn the call over to Mr. Dexter Congbalay, vice president, investor relations, for Mondelez International. Please go ahead sir.

Good afternoon, and thank you for joining us. We’re making are Irene Rosenfeld, our chairman and CEO, and Dave Brearton, our CFO. Earlier today, we sent out our earnings release. This release, and today’s slides are available on our website, www.mondelezinternational.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 statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. With that, I'll now turn the call over to Irene.

Thanks, Dexter. Good afternoon. As you know, 2012 was a transformational year for our company. During the first nine months, we intensely prepared for the spinoff of our North American grocery business. The separation into two world-class companies was a massive undertaking, culminating in the successful launch of both Mondelez International and Kraft Foods Group on October 1, and a significant increase in shareholder value. We executed the spin will delivering solid results on both the top and bottom lines. For the full year, organic revenue increased 4.4%. That’s lower than our long term target, reflecting second half coffee price declines and the temporary issues we discussed in the third quarter. And, as expected, fourth quarter trends improved significantly, setting us up to deliver 2013 revenue growth in line with our guidance. We also staged 2013 on the bottom line, delivering high-quality earnings growth and solid margin expansion. Specifically, we fully recovered higher input costs for pricing, we significantly increased the contribution of volume mix, and we delivered strong productivity. As a result, we expanded gross margin by 70 basis points. This provided the fuel for substantial increase in advertising and consumer support to drive strong growth in our power brands and to take advantage of white space opportunities. We held overhead flat on a constant currency basis, despite significant investments in sales. And even with these investments in A&C and sales, we increased adjusted operating income by more than 7% on a constant currency basis, and expanded our adjusted operating income margin by 70 basis points. That’s the virtuous cycle at work: focusing on our power brands and core categories to drive the top line, expanding gross margins, leveraging overheads, and reinvesting savings to drive future growth. Turning to the fourth quarter, organic revenue increased 3.7%. Revenue growth, while…

Thanks, Irene, and good afternoon. As Irene mentioned, we delivered solid top line growth for the year, up 4.4%. Q4 grew 3.7%. While below our long term target, this was largely in line with our expectation of mid single digit growth. Power brands continued to drive our top line, up 7% in the quarter and 8% on the full year. For the year, adjusted operating income increased more than 7% on a constant currency basis. Higher gross profit fueled the growth, and were partially offset by a high single-digits increase in A&C, largely in support of our power brands. For the year, A&C as a percentage of net revenue increased 60 basis points to 9.4%. Even with this sharp increase in A&C, we boosted adjusted OI margins by 70 basis points to 12.2%. For the year, operating EPS was $1.39, up about 5% on a constant currency basis. The increase was driven by a strong $0.16 improvement in operating earnings. This were partially offset by an increase in the tax rate from an unusually low base in 2011 as well as a number of one-time items. For the quarter, operating EPS was $0.36. That’s down about 5% on a constant currency basis. Similar to the full year results, the quarter included strong operating earnings growth of about 10%. But this was more than offset by a tax rate increase from the low 2011 base, as well as a number of one-time items incurred in 2012 or the prior year. Let’s now take a look at each region’s performance. In developing markets, revenue growth accelerated sequentially to 7.6% in Q4. As Irene mentioned, that’s in line with our recent guidance of high single-digits for the quarter. Vol mix was strong, contributing 4.4 points of growth, which was the best quarter of…

Thanks, Dave. As I said at the start of this call, 2012 was truly a transformational year for our company, and I’m excited to continue on our journey as a more focused growth company. As we enter 2013, we have all the ingredients in place for sustainable, profitable growth: a diversified geographic footprint with a significant presence in emerging markets, a focus on faster growing snacks categories, an unrivaled portfolio of beloved power brands and advantaged innovation platforms, and strong momentum from high-quality operating results. With that wind in our sails, we remain very bullish about the future of our business. Now we’d be happy to take your questions.

[Operator instructions.] Our first question comes from the line of Bryan Spillane of Bank of America.

There’s been a heightened amount of focus, I guess, going into this quarter just about how you’d perform relative to expectations. So can you just talk a little bit about, as the quarter unfolded, just what came in line, what was in line or better than expectations and maybe kind of how things mapped out relative to what your original expectations were.

Most importantly, we delivered growth that was essentially in line with our mid-single digits guidance. It represented a significant sequential improvement as we had said, in Brazil and Russia. We’re quite happy with the quality of the results in each region. We saw solid contributions and significant step ups in the volume mix contribution. Very strong share performances, as Dave mentioned, around the world, and strong growth in our power brands. So net-net, we feel quite good about the overall performance of the quarter. Frankly, the top line was a little lighter than we had expected. We were expecting a growth rate to have a four in front of it. And as we said, the shortfall was largely attributed to the transition issues that we experienced in Canada as we separated what was the most integrated business in our company. But we feel very good about the quality of our revenue growth. We continue to make the necessary investments in A&C and sales, which will fuel the growth in 2013 and beyond. We feel very good about the overall momentum of the business, and so we’re quite confident that we’ll deliver our 2013 guidance on both the top and bottom lines.

If I could follow up, Dave, on SG&A in the quarter. It came in higher than what we were modeling. So I was just trying to get a sense for, did you end up with higher A&C spending than you originally thought in the quarter? And also, are there other moving parts especially related to the transition that affected SG&A?

We came in pretty much where we expected. Probably a bit higher than you modeled, because of a couple of things. Number one, in the fourth quarter we ended up, at the date of the spin, we had to revalue our pensions. So we actually took about a $0.02 hit on pension costs in the fourth quarter than we were expecting, but you probably wouldn’t have anticipated. We also had the synergies kicking in in the fourth quarter. So that was when they really started, and we had said last year that we expected the synergies to be about $235 million for 2013. One quarter of that hit quarter four. So those are probably the two numbers that might not have been in your model.

Your next question comes from Andrew Lazar of Barclays.

Just two things from me. I guess first would be you gave a number of reasons for why the organic top line growth would be somewhat tempered in the first half of ’13. I was hoping you could help us a little bit with maybe the magnitude of that, or helping us to quantify it. And the reason I’m going down this road is things are going to have to accelerate as you talked about, in the back half, to get to five for the year. And I’m trying to get a sense of how much of an acceleration in the back half you’re going to need to get to five to make it seem like that’s a reasonable expectation for us to have.

I don’t want to get into the habit of giving quarterly guidance, but we’ve guided you to the low end of the five to seven range. Clearly given coffee and some of the capacity constraints, you would expect us to be below that in the first half. So we will be below the low end of five to seven in the first half, which means we’re going to need to be higher than that in the back half. And in terms of should you be concerned about the kind of turnaround that requires, no, I don’t think so. Because if you actually look at our results this year, we were up around 6% in the first half of the year. So I think we’ve demonstrated we can grow at the kind of levels we’ll have to grow in the back half of the year. We just need to get through the coffee pricing headwinds and the capacity constraints in front of us right now.

And then in Europe, that was one area where I think you had said on the last call organic top line would be up at a low to mid single digit pace. And it was flattish in the quarter, and you talked about how the volume mix piece was something that you were pretty happy about. So was it that coffee pricing was down more severely than you thought, or volume didn’t rebound quite as strongly as you had hoped, as you lapped some of that pricing? Trying to get a sense, because that seemed to be the one area where the organic top line differed most clearly from what you had said last quarter.

Let me just give you a perspective on that, because the reality is the results in developing markets in Europe were pretty much where we thought. The number that you’re quoting we said was, North America and Europe, we said would be low single digits. If you look at the individual regions, our developing markets delivered essentially in line with the high single digit guidance we had given. As I said, they were up 7.6%. Europe delivered essentially in line with our expectation of modest growth. We grew about 0.5, 0.7 in third quarter, and we were essentially flat in this quarter on the top line, consistent with the expectations associated with the coffee price decline. The real issue and again, the variance versus our expectations, was in North America. We had expected that growth to accelerate from Q3 into Q4, given the strength that we were seeing, particularly on our biscuit business, but the impact of the Canadian transition tempered that growth somewhat, and that’s what led us to be a little bit below what we had expected.

And one quick one, when you gave the 5% to 7% organic long term top line growth rate guidance, that I understand is obviously inclusive of everything, and that would be even the vagaries of coffee prices being up or down depending on what’s going on with green coffee costs. I’m trying to make sure, should we expect more volatility maybe to that 5-7% than maybe I’m thinking about, in the way you think about the algorithm based on coffee? Or is it just that there are a number of other things going on that you’ve talked about, whether it be the challenges broadly in Europe, or in gum, or what have you, that have just made getting to 5% difficult even including these changes in coffee prices?

First of all, our long term guidance is 5-7% inclusive. We feel quite comfortable that over time coffee pricing will not be a major factor. As you know, the volatility over this last year, we went from Arabica at about $2.40 a pound all the way down to trending about $1.40 today. So the volatility that we saw was really quite unusual, and really had a profound impact on the first half very strong the second half, which is why it leads to the trends that Dave described. But net-net, we feel quite comfortable that as we get beyond the spin, we get all of the pieces of the enterprise moving properly, we are quite confident that we will be able to deliver 5-7% growth on a consistent basis over the long term.

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

Wanted to ask just two questions related to input cost expectations in 2013. The first one would relate specifically to chocolate. Dave, can you talk about the input cost environment for the chocolate business? Should we expect reasonably significant deflation as one of the big positives, kind of the wind at the sails at the back of that particular operation? That’s the first question. Second question relates to coffee on commodity inputs for 2013. Some businesses in coffee are pass-through, and really you just don’t get the benefit. You guys have described a lot about the top line impacts. I care probably more about the profit impact. I think the Tassimo operation may in fact be much stickier in terms of holding price points while seeing green coffee costs come down, but maybe you can talk us through that a little bit.

I’ll start with the chocolate. I think chocolate’s like most of our products. There is no individual commodity that is a significant portion of the cost. And we tend to look at the total input cost bucket, which includes cocoa, obviously, and sugar, and various other ingredients. It also is impacted by currency rates, because cocoa is denominated in British pounds for us. Packaging, energy, labor costs, etc. The sort of amalgamation of all of those things we do not see a cost decline in any of our major businesses next year. We would probably say across the company we’d be in the low single digit inflation across all of those components. And our strategy has been, and continues to be, we’ll price to recover those input costs. And we’ll leverage our aggressive productivity programs to grow our gross margin. So that’s kind of implicit in the whole cycle, and chocolate will be no different. In terms of coffee, you’re right that a good portion of the coffee business is the roast and ground coffee business, which is a bit of a pass-through category. And we would expect to cover the price increases when costs go up, and we did last year and the year before, and to return a lot of that to the marketplace when costs go down. And again, assuming that has to cover forex and all the other items, that is also likely to be true over time. But it’s not going to be abrupt, and I think you should look at coffee really no different than the other categories. The on-demand stuff you’re talking about, Tassimo, soluble coffee, etc., that we talk about, it is growing at a higher percentage for our business, and clearly coffee is a lower percentage of those costs than it is on roast and grounds. So you’ll see less dramatic swings over time. But again, that will be in the pricing line. On the OI line, we price to recover costs, and the opportunity to make huge money on the way up or down really isn’t there in most of that business. We really view it as managing our margins as part of the overall strategy.

Two additional perspectives on that. One is that we are quite confident, as I said a few minutes ago, that we can manage our way through some of these issues over time, and as we made the commitment to 5% revenue growth, we’re quite confident that we can deliver that. But I’d also say, even coffee, you can’t look at the revenue per se as the only measure of how healthy that franchise is. In fact, our coffee revenue was essentially flat in the fourth quarter, despite the fact that we had a 7-point headwind in pricing. So very strong vol mix performance, as Dave mentioned, as we continue to improve the vol mix with focus on our on-demand offerings that will continue to strengthen. But as you look at coffee, you need to get underneath the actual revenue a little bit to get a better sense of the health of the franchise.

Your next question comes from Ken Goldman of JPMorgan.

I know you don’t want to give specific guidance on any quarter, but given the unpredictability of the organic top line rate the last couple of quarters, is there any kind of range you can think about, or help us think about, for the first quarter? It’s just such an issue for the stock right now, I’d say.

Again, I don’t want to get into quarterly guidance. We gave some last quarter, really because it was our first quarter out of the gate, and we were trying to get people used to it. I really don’t want to go beyond what I said to Andrew earlier. It will be below that low end of 5-7 in Q1 to Q2. And I think we’re going to have many of the same factors impacting us that impacted us in Q4. But I can’t go beyond that.

Okay. And then forgive the bluntness of this question in advance, please, but your organic growth has now fallen short of Street expectations for two consecutive quarters, and these are the only two quarters you’ve had. The stock has been invested in, for many investors, because of that top line potential. So just saying “We are quite confident that we can deliver on our 5% plus next year,” I hope you can understand that may not be enough for some people. I know you’ve provided some, but any specifics you can provide besides just saying, “We’ve done it before” that can help people gain confidence that you will get back to that number. Because right now, there’s a lack of confidence that you guys will get to that 5% number, right or wrong.

The one thing I’d say, Ken, in response to your issue, 2012 was a transformational year for our company. We split a $54 billion enterprise. We created significant shareholder value in that process, while still delivering solid full year results. And very high quality full year results. And we’ve talked quite a bit about that. The top line rebounded in the fourth quarter as we said it would. The revenue growth was very much in line with the guidance, the mid single digit guidance that we gave you. We delivered high-quality results as we’ve discussed, in each of our regions. We’ve got very strong underlying performance of our power brands, very strong continued expansion of gross margins and operating margins. We’ve continued to make the necessary investments in our franchises, both in A&C as well as sales and distribution. And we delivered very solid income growth on a constant currency operating basis. And so you put all of that together, this enterprise is performing quite well. It’s not quite up to the long term targets. We understand that. But we have all the makings underneath. A very solid franchise, and the opportunity to deliver, as we said we would, on our 2013 guidance.

And I think the other thing is the reason to believe we can do it over time, is our categories are growing in that range. I think as we said when we had the investor day in September, the categories we’re participating in are growing that 5-7% range. So we do have some stuff we have to get out of the way in the short term, but I think directionally, it is essentially saying we’ll grow in line with some pretty high-growth categories. And that will deliver the results that we put out there.

Your next question comes from Ken Zaslow of Bank of Montreal.

I have two questions. One is, can you give us an update on Australia and Japan? I know those were somewhat weak, and I know that you said you corrected a lot of the issues last quarter. I just kind of want to follow up on Australia and Japan.

Australia had a good bounce back. I think they were up in sort of mid-single digits in the quarter, and really had some strong marketing campaigns and some good new products there, particularly in the chocolate business. Japan is gum. So the discussion we had on gum earlier, you can apply all of that to Japan. They continued to decline in the quarter.

And my follow up is, what type of progress should we be looking for to see how you’re… I know with the gum side, you said look, it will take two years. I get that. But what type of milestones of progress that we should be looking at to see the progress you’re making to see that’s actually turning around in that [unintelligible] period. I know it’s going to take longer. But could you give us milestones that we should be thinking about?

I think the key milestone to look at is our share. The category in aggregate is down about 2%. We’re down about 3%. So as we’ve said, there is a clear opportunity for us to improve our share performance. We’ve taken a number of steps to improve that in each of our key markets, and as I mentioned in my remarks, we’re starting to see that bear some fruit. So I would suggest that you look at our share performance in our key gum markets: Japan, U.S., Europe, France, Mexico, and Brazil. And I would say those will be the key metrics for you to look at.

Are there a greater number of launches that we should be seeing as well?

Well, we’ve got some new products. We launched Stride ID in the U.S. We have a similar version of that called Trident Twist in Europe, and so we’ve got some new products. But part of what we’ve suggested has to be improved in the category is that it’s a combination of some stronger innovation - I think we’re on that case - but it’s also about some improvement in tactical sales and marketing execution. So we’ve talked about the price sizing architecture. In a number of our markets, we’ve actually introduced an economy size to try to address the pack rate in an environment where our consumers are not going to a kiosk quite as often as they might have. We’ve restored A&C as we told you, to historical levels. We are working on simplifying brand architecture so the category is easier to shop. So all of those actions together should have a near term impact in our share performance, and as I said, that’s what we’re watching, and I would encourage you to look at that as well.

Your next question comes from Eric Katzman of Deutsche Bank.

I guess I’ll start with just some of the nonoperating items. Dave, can you give us some sense as to what you expect for 2013 interest expense, corporate expense? And on the tax rate, I thought you had said at the analyst day that you were looking at a mid-20s rate. The fourth quarter seems to have come in a lot lower than we thought, so this lower rate, that’s not a change for the outlook?

I’ll start with, on the corporate expense, there shouldn’t be anything “special” in 2013. So I mentioned a couple of items that we had exiting the year on total SG&A. But as we look forward, corporate will be a normal year in 2013. Interest, we talked about at the investor day that we had a $0.02 headwind in interest versus our sort of equilibrium capital structure. And we’ve said that our target was to get to about $18 billion of debt, and we would exit the year close to $20 billion. We exited at $19.5 billion. And that we were carrying excess cash. That will work itself out over the first half of the year as debt maturities come due in February, and again in May. So we’ll pay down those maturities. By the end of May, we should be at where we want to be. But during that time period, there’s some inefficiency built in. There’s a couple of pennies of interest headwind very strong what you would normally expect. So those are those two. On taxes, we gave long term guidance of mid-20s, and I would stick to that long term guidance of mid-20s. That is the sort of straight average of all the statutory tax rates around the world. We said there would be some fluctuations in any given year to discrete events. And I think in 2012, we finished at 20%, and the biggest discrete event in 2012 was actually a reduction in the U.K. corporate tax rate, which has an oversized impact, because we not only changed the statutory rate in the U.K., you also have to write down your deferred tax liability, so there’s a correction catch up on it. There is another U.K. tax rate reduction claimed in 2013 by the U.K. government, and that’s built into the low-20s guidance. So that is why you’re seeing that rate come in lower. It’s going to be flat year over year, but it is lower than our long term guidance of mid-20s, primarily due to those kind of items. Now, in terms of where that’s going, we basically have said we will continue to drive the virtuous cycle. So we’ll invest in A&C, we’ll invest in sales and distribution capabilities, we’ll continue to look at innovation platform rollouts, and we’ll cover things like the interest headwind. So that’s all part of getting to our double digit EPS growth.

And then just so I understand it correctly, the operating income that you’re using as a base to grow off of, is that about $4.41 billion?

I think it was in the schedules at the back. It’s in that range, yes. I think if you go to the back, you’ll see the operating income growth on the presentation chart.

So the high single digit growth rate that you’re quoting on page 15, how is FX going to impact that? Because obviously we have to model it in reported dollars. So you’re calling out an FX benefit on top of that?

No, I think what we’ve done with the guidance is we have restated to put everything at the average 2012 rates, with one exception. So essentially, there should be no FX impact with the exception of Venezuela. So that’s the only FX impact you would expect to see year over year. And that’s about $0.04. So effectively, our $1.52 to $1.57 guidance includes $0.04 of negative impacts from the Venezuela devaluation. But otherwise, there’s no forex impact year over year.

And then the last question, any mention on cash flow, what you generated as an operating cash flow number after capex in 2012, and what we should expect in 2013?

You will see the cash flow when we do the 10-K, which should be end of next week or early the following week. Unfortunately, it will be 9 months of KFG and 3 months of Mondelez. So we recognize that may not be helpful, because you value us on a discounted cash flow basis. But we’ll try to, as you get more quarters of Mondelez pure historically, help you work through that.

Your next question comes from Jason English of Goldman Sachs.

I wanted to circle back on Catherine’s question real quick, on the constant currency EPS guidance reiterated. You’ve lowered your tax rate guidance from, say, mid-20s to low 20s. A 5% change there is like a dime. So it’s a pretty big change. Can you help me understand, again, what’s driving the implicit cut in pretax guidance?

We’ve taken it down from mid-20s. That was always going to be mid-20s as a range. But, fine. If it was 25% in your models, it would be $0.10. I’m not going to comment on what our internal expectations were. But essentially, it is covering things like A&C investment sales, investment distribution, other investments to drive the top line growth, as well as the interest expense we talked about, the headwind we had on that. And I think there’s going to be some operational challenges in a place like Venezuela that is not part of the currency we just talked about. We covered the operational issues, if consumers react negatively to price increases, ourselves, internally. So those are the kinds of things that will be included in that. I’d also remind you that the EPS growth on a constant currency basis, if you do the math of what we told you today, would be 12-15%, which I think is pretty healthy. So that’s where it’s going.

One more follow up. Coffee price headwind. You’re saying it abates as we lap the price reductions in the third quarter. Assuming most of the market [is fine on] a lagged cost curve, which history suggests it does, costs have continued to fall well past the last price reduction in the third quarter. Isn’t it prudent for us to assume that yet another price reduction will be necessary?

We don’t comment on our pricing strategy. I can’t really go into what might or might not happen in the future.

Your next question comes from David Palmer of UBS.

You mentioned in the slides and several times in the call that A&C spending was up in the fourth quarter, it’s going to be going up in 2013. Could you speak to where that investment is going, or went, and your hope for the payoff in revenue terms that you’re expecting, particularly in developing markets?

It’s going almost entirely behind our power brands. There’s a reason that our power brands are growing at twice the rate of revenue of the base business, and so we continue to invest disproportionately in the power brands, and in these global innovation platforms. And that’s what’s going to fuel our growth.

Are these reinvestment rates representing an acceleration, and therefore, at least internally, you’re hoping for and expecting an acceleration in these organic revenue growth rates?

No. Again, if you look at our results for this year, we ended the year up about 60 basis points as a percentage of revenue, in terms of our A&C investment. It is a driver of our core franchises, and as we look at the performance of each of our individual categories, as well as our share performance, we’re feeling quite good about that.

You mentioned a temporary drag from Canada. I don’t know if you mentioned how much of a drag that was, and if that was something you’re expecting to be corrected by the first quarter results?

I didn’t mention specifically what it was, but I did say it’s the major variance between the expectations that we had for the fourth quarter and the [37] that we delivered. So we are quite comfortable that we will see a rebound in Canada, in the first quarter, relative to the performance in the fourth quarter. Again, it is a fully integrated business, and unlike the U.S. sales force, where we had a separate DSD organization to begin with, in Canada, our selling organization was fully integrated. So we had a lot more complexity as we took it apart. But we’re quite comfortable. Most of those issues occurred early in the quarter, and we’re quite comfortable as we come out of the first quarter that we’ll see a rebound there.

Your next question comes from Chris Growe of Stifel.

Just had two questions for you. I wanted to ask about the developing market business overall, and if you expect that to achieve double digit revenue growth in 2013. Did you say that? Or is that something that you could speak to for this year?

Without a doubt, over the long term we expect that our developing markets will deliver a double digit rate of growth, and it continues to be a very exciting opportunity for us. We did say it would take us a couple of quarters to get the momentum back. We’re feeling quite good about where Brazil is performing. Russia will take a little longer. It certainly has improved quite nicely from Q3, but it’s going to take a little bit longer to get that business performing back up to its historical contribution. So net-net, our developing markets over the long term will certainly contribute at a double digit rate, and we should see that performance begin to play out in the course of 2013.

And then I know also we’ve talked before about the gum business, and the challenges there. As you think about your revenue growth guidance, not so much for this year, but the next few years, couple years, is gum continuing to decline? And then [unintelligible] getting above, say 5% of the lower end of the range? Is it that meaningful, and therefore that big of a potential drag that it could be more toward the lower end of your guidance range?

I guess the simple answer is no, gum is slightly under 9% of our revenue. So we are not counting, when we gave you the low end of 5-7%. That was driven primarily by the coffee and the capacity constraints. Gum, at that kind of level, costs us 20 or 30 basis points, but it’s not a significant drag on the total business. We’d like to see it get back to its historical growth rates, but it’s not a reason to be concerned about our long term guidance.

And if I could ask one more, which is you had some product pruning throughout 2012. Is there any expectation for that to continue, or any territories [where that will] continue in 2013?

It will just be normal pruning that any company does, frankly. There were a couple of big things. There was one in Canada this year that we have talked about, where it was essentially a co-man contract left over from a previous divestiture. So it was large. Most of the other stuff we would do is stuff any of the people you cover would do in the normal course of business.

Your next question comes from Robert Moskow with Credit Suisse. Robert Moskow - Crédit Suisse: I wanted to know if you have an outlook for us for cash flow for 2013. Kraft, in the past, used to give cash flow guidance and now both Kraft and Mondelez don’t give it as much anymore. And I wanted to know why the change, and at a minimum, maybe you can help us walk through the big building blocks for cash flow in ’13.

Yeah, I think the reason for the change is not because I don’t like cash flow, it’s just because it’s been really hard through the spin to delineate Kraft Foods Group versus Mondelez full year cash flow. So I know what my cash flow was in quarter four, obviously, and we are very pleased with that, but when you see our cash flow statement, it will be a combination of Mondelez for one quarter and KFG for three. And I think that’s the same reason you’ll get a little bit of reticence from our colleagues over at the Kraft Foods Group. Directionally, I think as part of the spinoff documentation we actually had information in there that would have allowed you to separate the cash flow between the old KFG companies. And for ’11 and ’10 you could more or less say half went to each company. Robert Moskow - Crédit Suisse: I’m really asking about guidance for ’13. You used to give cash flow guidance, and I don’t think you give it as much anymore.

That would be correct. At this stage, I’m not going to give guidance today. As we get a little more information to you on the balance sheet over time, you’ll get more guidance on that. But it won’t be today.

Your next question comes from Alexia Howard of Sanford Bernstein.

Can I ask about the growth margins? As I look at the GAAP numbers reported today, it looks as though they were up a couple of hundred basis points. I wondered whether that was as commodity cost pressures have moderated, you’re beginning to see some expansion there, or maybe there are other one-time factors in there that I’m not seeing. But as I look out through 2013, what do you think is the shape of the gross margin outlook? Can you quantify whether you expect it to be up, down, or sideways in 2013?

A lot of the gross margin gains for last year would have been to do with some of the integration costs, etc. associated with Cadbury. So if you strip all that kind of thing out, our gross margins, we would say, on the year were up sort of in the mid-50 basis points, let’s say. And we’re quite happy with that. We think that’s a good performance. And there’s nothing really one-time in nature in that. That legitimately is pricing to cover input costs and a very strong productivity program driving gross margin gains. So that’s what we did in 2012. We don’t give guidance going forward, but it clearly is part of our virtuous cycle strategy that we grow gross margin every year as a way to reinvest in A&C and sales.

And the 200 basis points in the fourth quarter, is that like-for-like, or is there too many moving pieces in that?

It’s too many moving parts. The P&Ls that get attached to the press release are the continuing operations P&L, so there’s a lot of moving pieces in there.

And then just as we look out to 2013, how much are you anticipating A&C spend being up next year?

Again, we won’t give guidance on individual parts of the P&L, but it’s part of our strategy that we’ll continue to invest in A&C.

We have time for one more question. Your final question comes from Matthew Grainger of Morgan Stanley.

I’m just going to try one last time, just with a slightly different question regarding cash flow. Specifically on network capital, if we look at the balance sheet historically, and perhaps there’s some degree of pro forma adjustments factoring into this, but it does look like your network capital relative to sales is fairly high when compared to the peer group. Can you sort of address that in a more general way, what the key opportunities might be for improving working capital efficiencies going forward?

I’d start by saying the biggest differentiation on us versus our peer group often comes down to geographic. Roughly 40% of our business is in Europe, and Europe tends to have very long receivables versus other markets. And most of our peers have much lower working capital in developing markets than North America, as we do. So I think that’s probably one of the big drivers. That said, we’d agree with you there’s opportunity in working capital, and we’re quite active at looking at benchmarks and what are the best practices out there, and what are the things we should aspire to, and we do see opportunity in working capital. So I can’t judge for you whether we’re better or worse than some of the peers you’re looking at, but I can tell you we do believe there’s opportunity, yes. Thank you everyone for joining the call. Any follow up questions, please address Nick or I. We’ll be standing by and ready to talk. Thanks. Bye.