Mondelez International, Inc. (MDLZ) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Third Quarter 2012 Mondelez International Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Mondelez International's management and the question-and-answer session. [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 thanks for joining Mondelez International's First Quarterly Earnings Call following our successful spin-off of Kraft Foods Group. 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. Before I hand it off to Irene, let me first outline how we put the numbers together. Please note that the financial information in this presentation highlights standalone results of Mondelez International on an adjusted pro forma continuing operations basis, specifically, it reflects the spin-off and divestiture of Kraft Foods Group. It also includes the following items as if they occurred at the beginning of the periods presented: The impact of transferring certain North American benefit plan obligations to Kraft Foods Group at the spin-off date; and the reduction of debt related to the completion of the spin-off capitalization plans. These financials also exclude: Spin-off costs; the 2012 to 2014 restructuring program costs; and integration program costs. The basis of this presentation is consistent with the adjusted pro forma results in our Form 8-K filed on October 5, 2012. And it facilitates comparisons of the company's current and future operating performance. I'd also like to note that our Q4 reported results will show Mondelez International on a stand-alone basis. With that, I'll now turn the call over to Irene.

Thanks, Dexter, and good afternoon. Let me start by saying it's great to be here in our new headquarters and to see the energy and optimism of our team as we begin our journey together as a new global snacks company. Year-to-date, we delivered solid performance. Organic net revenue increased 4.6%, and operating income rose more than 9% on a constant currency basis. In the third quarter, as we expected, our revenue growth slowed, increasing only 1.5%. This was due to 3 factors: First, we were up against some tough comparisons. Indeed, we delivered exceptionally strong growth in the third quarter last year, when organic revenue was up nearly 9.5%. Second, pricing contributed less this quarter. Much of this was due to passing through the impact of lower Green Coffee costs. Arabica, for example, has dropped by nearly 1/3 in the past 12 months. We're also beginning to lap some of the significant price increases we took last year. And finally, we had some short-term executional issues in a few key markets like Brazil and Russia. We've already taken actions to address these missteps, such that their impact will be largely confined to the third quarter. As a result, we expect organic revenue growth to rebound to mid-single-digit levels in the fourth quarter. But despite the slower Q3 growth, I'm confident that we'll have a strong finish to the year, and that we'll be on track to deliver the 2013 guidance that we provided in September. We're continuing to invest heavily in our power brands, and they're responding well, with strong growth in each region. We're expanding our successful global innovation platforms, including bubbly aerated chocolates, our chocobakery line, belVita breakfast biscuits and teen gum brands like Stride ID in North America and Twist in Europe. Revenue growth in our 2 largest categories, Biscuits and Chocolate, continues to be strong, increasing mid- to high-single digits. And Gum & Candy revenue growth, while still challenged, should increase modestly next year. Let's take a closer look at each of our global categories, starting with Biscuits. Our Biscuits revenue is up 7%, with strong growth in both developed and Developing Markets. That's in line with the 7% increase for the category. In North America, Biscuits increased mid-single digits, and Europe is also posting solid growth. In Developing Markets, Biscuits grew low-double digits, led by China, Russia, the Middle East and Africa. Our Biscuits power brands rose 13% year-to-date, with Oreo continuing to grow in the mid-teens. Our belVita innovation platform has been another star, up more than 45% this year as we expand across markets in Europe and the Americas. In fact, belVita is on track to exceed $300 million in revenue this year. Global Chocolate revenue increased 6% year-to-date, about the same rate as the category. In Developed Markets, Chocolate grew mid-single digits behind successful innovation like our snacks, small bites platform and activities around the London Olympics. In Developing Markets, continued strength in India and Brazil drove growth of mid- to high-single digits. Our Chocolate power brands have increased 10% this year. Cadbury Dairy Milk, Milka and Lacta had each posted strong growth. Gum & Candy remains below our expectations. Revenues were down 1% despite the category growing about 4%. Candy delivered solid performance with Halls up low-single digits behind new marketing campaigns, and Eclairs up 20%, driven by strong growth in China, South Africa and India. But the key challenge remains Gum, especially Trident, whose revenue declined low-single digits. Although the brand grew in Developing Markets, it was more than offset by weakness in developed markets. To be frank, Gum has been disappointing for quite some time, and it's taking us longer to change the trajectory than we anticipated. We have, however, taken a number of steps to fix our performance, and we expect to see gradual improvement over the next year. In sum, our year-to-date results are solid, but our third quarter top line was disappointing. I want to assure you that the factors that affected us in the quarter are temporary. They're within our control and will largely be resolved by the end of the year. As a result, we fully expect our revenue growth in Q4 to rebound and to set the stage for a strong 2013. Now let me turn it over to Dave to discuss our third quarter in more detail.

Thanks, Irene, and good afternoon. As you can see, we delivered modest organic net revenue growth of 1.5% in the third quarter. Through the first 9 months of the year, our growth was 4.6%. As Irene mentioned, we expected revenue growth in the third quarter to be challenging for several reasons, including a tough prior year comparison and significantly lower contribution from pricing. Some executional missteps in a few key markets also affected the quarter. Encouragingly, despite the low overall growth, our power brands still grew 6% and are up 8% year-to-date. Turning to profits. Adjusted pro forma operating income increased 7.5% on a constant currency basis. The effective management of input costs and lower SG&A more than offset the impact of lower volume/mix. We continue to invest in our brands, with A&C spending increasing in line with revenue growth. A&C, as a percent of revenue, was about 9% through the first 9 months. Year-to-date, OI improved 9.3% on a constant currency basis, consistent with our long-term target of high single-digit growth. OI margin in the quarter increased 90 basis points to 13.1%. Year-to-date, OI margin also increased 90 basis points to 12.7%. Regarding earnings per share, for the quarter, diluted EPS was up 2.6% on a constant currency basis. Strong operating gains of $0.04 were tempered by a $0.03 increase in taxes. Year-to-date, EPS grew by 7.8% on a constant currency basis. The improvement was driven by operating income growth of more than 9%, offset by a nearly 4 point increase in the effective tax rate due to some significant onetime benefits last year. Let's now take a look at each region's performance. In Developing Markets, organic net revenue was up a modest 1.7% in the quarter, led by power brands' growth of 8%. Pricing drove 4.4 percentage points of the growth. However this was partly offset by vol/mix declines of 2.7 points. This compares to exceptional growth of 15.5% in the third quarter last year as customers stocked-up prior to price increases that became effective in Q4. This performance also reflects the executional challenges referenced earlier. Year-to-date, Developing Markets grew 6.8%. Results across each of our 4 Developing Markets' sub-regions were mixed. In quarter 3, Latin America was up mid-single digits and up high-single digits year-to-date. Growth in the quarter was tempered by executional missteps in Brazil. We were slow to react to the softening Gum category. This led to rising inventories at our distributors. As we work through these inventories, we're stepping up efforts to drive category growth through increased A&C support, promotions, innovation and better price/size architecture. Our Biscuits performance in Brazil was also weak, despite continued strong growth of the category. This was due to lower marketing support and innovation. To stimulate our growth, we've restored marketing and promotional support and are introducing new flavors of Club Social. In contrast to these 2 categories, we continued to generate robust growth in chocolate and powdered beverages. And in the North-Northeast region of the country, we also continued to grow rapidly by expanding distribution. Asia Pacific increased low-single digits in the quarter and was up mid- to high-single digits so far this year. India and China continued to post strong double-digit results, more than offsetting weakness in Indonesia, Australia and Japan. In India, our challenge is keeping up with demand for our chocolate. We've run into capacity constraints after posting extraordinary growth over the past couple of years. We're driving productivity and removing bottlenecks at existing plants to stretch current capacity. And we expect new production lines to come on stream by the middle of next year. In China, Biscuits continued to drive our strong performance. Oreo led the way, growing more than 30% year-to-date, while continuing to gain market share. As we mentioned at our Investor Day, we launched Stride Gum in August and so far, so good, although it's much too early to declare success. Overall, China continues to deliver. In fact, we expect this market to surpass $1 billion in revenue this year. Revenue in central-eastern Europe declined mid-single digits in the quarter, due largely to Russia. Year-to-date, the region is up low-single digits. In Russia, Q3 revenue fell due to both lower vol/mix and price. Coffee price reductions were clearly a major driver, accounting for 1/2 the decline. But lower vol/mix was largely our own doing. We were too slow to react to widening price gaps in coffee and chocolate, which negatively affected our shares. We've taken a number of corrective actions to regain momentum, including getting pricing back to competitive levels. We've also gotten back to basics on sales capabilities and increased marketing support. This has yielded significant improvements beginning in September. Finally, the Middle East and Africa was up significantly, low teens this quarter and low- to mid-teens year-to-date. The robust growth reflects strong results across the entire region including South Africa, the GCC countries and Egypt. As we look to the fourth quarter, top line growth in Developing Markets should recover and increase high-single digits. That's just below our double-digit growth target as we work through the final stages of the short-term executional issues I mentioned. Turning to profits in Developing Markets. Adjusted pro forma segment operating income declined 1% on a constant currency basis. The impact of lower vol/mix was largely offset by effective management of input costs. OI margin held constant at 15.2%. Our European business once again delivered solid results and has now posted 11 consecutive quarters of top line growth. This is especially impressive in light of the increasingly difficult economic environment. Organic revenues grew 0.7% in the quarter and 3.1% year-to-date. Power brands were up 2% in the quarter. Vol/mix has remained consistently positive through the year, delivering about 1.5 points of growth. In the third quarter, however, vol/mix gains were offset by lower prices especially in Coffee. Our share performance continued to be very strong, with about 2/3 of our revenues gaining or holding share. At a category level, Chocolate and Biscuits led the way. Chocolate increased high-single digits, reflecting continued strong performance of new products. Our power brands also performed well, with Milka up double digits; Cadbury Dairy Milk, up high single-digits; and Toblerone, up mid-single digits. Biscuits rose low-single digits, driven by solid results from Oreo, belVita and our chocobakery platform. But Coffee offset much of this growth, decreasing low-single digits. Strong vol/mix gains were more than offset by lower pricing. As we anticipated, coffee prices declined in the third quarter due to lower Green costs. That alone depressed total year revenue in the quarter by about 1 percentage point. Tassimo continued its strong performance. It was up nearly 20% in the quarter due to significantly higher A&C support. Gum & Candy declined high-single digits. Candy was essentially flat, with Gum down sharply in key markets such as France, Spain and Greece. So how are we responding? We're driving innovation. In France and Spain, we're introducing 40 Minutes, a new gum that promises extra-long freshness. And in Greece, we're launching Twist, which is similar to Stride ID in the U.S. We're making it easier for consumers at the point of buying, including resetting our hot zones in nearly 30,000 outlets and expanding our offerings across a full range of price points. And finally, across several European markets, we're strengthening our brand equities through new marketing campaigns. We're confident that we're taking the right steps to stabilize the category in the near term and to drive modest growth in the long term. Looking ahead, we expect Europe's overall top line growth in the fourth quarter to be similar to Q3 as we continue to deliver solid performance in a tough environment and as we reflect the decline in coffee prices. Turning to profits. Europe continued to focus on productivity and drive overheads lower, using those savings to fund increases in A&C support behind our power brands. Adjusted pro forma segment operating income increased 7.4% on a constant currency basis. This increase, as well as the improvement in OI margin, includes the reversal of an accrual related to the Cadbury acquisition. Turning to North America. Strong performance in Biscuits drove solid top line growth in the region. Organic net revenue was up 2.2% in the quarter and 2.4% year-to-date. U.S. Biscuits increased mid-single digits with our Biscuit power brands up double digits. Cookies grew mid- to high-single digits, with strong growth in Oreo and Chips Ahoy!. Crackers were up mid-single digits, with strong growth from Honey Maid, Ritz and Triscuit. Biscuits' improved performance and market share gains are a direct result of the realignment of our U.S. sales force in April. We're now realizing the benefits of a direct store delivery system that's focused solely on biscuits. For example, we've increased feature and display conversion opportunities, with displays up 5% year-to-date. And we've gained additional facings on existing products, as well as drove new products into stores more quickly. So far this year, our total distribution points are up 6%. The performance of Gum & Candy in the U.S. improved versus recent trends. Gum revenue was nearly flat as the successful launch of Stride ID in August largely offset declines in other brands. And while it's still early, we've been pleased with the performance of ID to date. In Candy, Halls and other brands were up mid-teens, driven by innovation, as well as expanded distribution. Our business in Canada declined mid-single digits, but this was largely due to planned product pruning. Looking ahead, North America's top line growth in Q4 is expected to accelerate. We continue to build momentum in Biscuits with a more focused DSD sales force. And we've lapped the product pruning actions we took in Canada last year. Now let's take a look at profits in North America. Adjusted pro forma segment operating income increased 14.1%, while margin rose 180 basis points to 16.6%. These improvements reflect strong gains from pricing and productivity, but more than offset a significant increase in A&C support behind power brands. Before I get to our guidance, I'd now like to update you on our current estimates for transaction-related and restructuring costs. Please note that these costs are for Mondelez International only, and exclude any costs incurred by Kraft Foods Group. In the left column, you can see our year-to-date costs, while the right column shows what we expect in future costs. We've incurred around $400 million in spin-off costs to date, and expect another $150 million going forward, with the majority in Q4. This is consistent with the approximately $600 million in spin-off costs that we originally anticipated. Through September, we've also incurred about $100 million of restructuring and implementation costs and expect about $825 million going forward. This is consistent with the total of $925 million that we outlined in our recent 8-K filing. Although some of the restructuring costs will hit in Q4, the vast majority will be booked in 2013 and 2014. As I mentioned in September, in the near term, we'll use the restructuring savings to help offset the synergies next year. After 2013, we expect the remaining savings to support the bottom line or to fund ongoing programs. And finally, we've incurred about $600 million of costs associated with setting up the capital structures of both Mondelez International and Kraft Foods Group. This is consistent with the $600 million to $800 million range that we highlighted at our Investor Day. We incurred a $436 million expense this quarter related to a forward rate swap contract. These contracts were terminated in October, and we do not expect to incur further debt migration costs. Now let's turn to our outlook. We remain confident in our ability to deliver the guidance we outlined in September. Specifically, we're confirming 2013 guidance of organic net revenue growth at the low end of our long-term target of 5% to 7%. We expect good underlying momentum on our business as economic conditions are likely to remain challenging. We also anticipate only a modest contribution from pricing, largely due to coffee. On the bottom line, we're confirming our guidance of operating EPS of $1.50 to $1.55 on a constant currency basis. Please note that this range was based on average currency rates in August 2012. As most of you know, currency rates have been more favorable recently. In fact, if we were to use average rates from October 2012, our operating EPS guidance would increase by about $0.05. We'll review the impact of currency again when we report fourth quarter results in February next year. And since we give EPS guidance on a constant currency basis, we'll adjust our guidance to reflect the impact of currencies, either up or down, as appropriate. So to wrap up, our revenue growth hit a bit of a speed bump in the third quarter, but we fully expect it to rebound in Q4 to mid-single digits. Developing Markets should be up high-single digits, with Europe and North America increasing low- to mid-single digits. We continue to enjoy an advantaged geographic footprint. Growth in our categories remains robust. And our power brands and global innovation platforms will continue to drive top-tier growth. As a result, we remain confident in our ability to deliver our 2013 and long-term targets. With that, we're now happy to answer your questions.

[Operator Instructions] You have a question from Alexia Howard of Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: The margins were down quite a bit in Developing Markets this time around. Clearly, some of that was due to these execution issues. Are you able to parse out how much of that decline might have been driven by those execution problems in Brazil and Russia?

Actually, Alexia, the margins were flat this year at 15.2%, which is actually slightly up from where it's been year-to-date. So I -- maybe we could bridge to you what you're looking at later. But as we look at our margins, we're actually quite pleased with where our Developing Market margins were in the quarter. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Great. And then just as a follow-up, the -- your margin expansion across the company has been very good over the last 9 months. I think you mentioned up 90 basis points on an adjusted basis year-to-date. It seems as though commodity costs are likely to be moderating going forward, and yet the outlook, it feels that you're being very muted in your expectation for margin expansion next year. I'm just wondering what you're thinking is the key risks in 2013 and why the margin expansion might not be better than you're expecting?

Well, I think the guidance we've given for next year is 5% to 7% top line growth and $1.50 to $1.55, which I think will be close to the or at the double-digit EPS growth number that we've discussed as a target. I think both of those will be top-tier. So I don't think we're being conservative. I think how that translates into margin growth, obviously, will depend on where input costs are, and that could depend on inflation in Developing Markets or commodities, as you mentioned. But for us, we're focused on delivering top-tier top and bottom line growth and the margins or the output of that as opposed to the input. So I think it will depend how we go, but we're really focused on making sure we deliver those results. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can you comment briefly on the input cost outlook from here? Everything I'm seeing with coffee and other inputs that you've got look as though it's going to get much easier. What are the main puts and takes there? Are there things that are getting harder, or do you see a general relief on input cost inflation over the next few quarters?

Well, I think as we talk costs going forward, we'll probably focus on input costs in total. And I think you're right. As it looks today, and it can all always change, it would be more for modest inflation. Our input cost today, as a snacking company, have a lower level of commodity impacts and a lot bigger impact from things like inflation in Developing Markets on some of the other factors. But as we sit here today, inflation's pretty muted amount around the globe. Coffee, as you indicated, is going down. A lot of commodities tend to be flat. Clearly, in the U.S. and some of the other countries, the grain complex is up. But we would say today that this quarter, it was relatively muted. Next quarter, there'd be no reason to change that. We don't like to give guidance going forward 15 months from now, but, at the moment, we would not see a significant input cost increase next year, which is why when we gave our guidance next year, we said we'd probably have a relatively low pricing contribution to our revenue growth. And so that's consistent with the outlook you're describing.

Your next question comes from Ken Goldman of JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: I did the same thing Alexia did. I realized you touched on this a bit. But could you provide a bit more color on exactly what happened in Russia and Brazil? And also, if you can, it would be helpful to understand, from a revenue and EBIT standpoint, which results -- or excuse me, to what degree results were affected by those execution issues?

Yes. So let me start by reiterating the factors that led to the missteps that I talked about are temporary and they're very much within our control. We've taken the necessary actions that we need to take to address them, and we anticipate that they will be largely resolved by the end of the year. The issues are a little bit different in each of the 2 big markets which really are at issue here. Again, we mentioned to you that we had foreshadowed the fact that our momentum, our growth in the third quarter was going to be a little bit lower than year-to-date because of the fact that we had -- there were a number of factors in terms of the difficult comps, as well as lower contribution and pricing. And that is the main -- those are the main contributors. The incremental impact of the missteps that occurred in Brazil and Russia, they were a little bit different in each of the 2 countries. In the case of Brazil, we've got 2 issues: Gum and Biscuits. Gum, as Dave mentioned, we were slow to react to a gradually weakening economy. That category had been growing in the high-single digits, and we continued to ship as the category growth slowed almost in 1/2 to about 4%. And as a result, we found ourselves in a dislocation between our distributor inventories and our consumption. So our consumption continued to be reasonably okay, but we had some short-term dislocations and we expect that the rebalancing that's in process right now will be completed by year-end. The bigger issue is why has the category growth slowed, and we've talked about the fact we have taken a number of actions to accelerate our growth. We have increased our marketing and our sales support. We focused very much on our execution at point-of-sale, particularly our assortment at point-of-sale. We've got increased merchandising support. We've got increased support behind our new advertising campaign. We're looking to continue to expand our distribution in the fast-growing north-northeast part of the country, and we have taken a number of steps to improve the offerings from a price/size standpoint as we have watched the GDP in Brazil, as well as we see in a number of countries, declining somewhat. So all that said, that was the issue within Gum. We feel we are very much on it and on track to address that. The bigger -- the other issue though, in Brazil, turned out to be Biscuits, which, quite frankly, became a knock on impact from Gum. It's about reduced marketing support. The category was growing fine. We just reduced our marketing support to offset some of the Gum weakness and it was a mistake. And we have since restored that marketing support and we're quite confident that, that business will rebound. As Dave mentioned, no issues with Chocolate in Brazil. Our powdered beverage growth was quite strong and continued strong growth in the North-Northeast. So that's the situation in Brazil. We've got our arms around it and we're taking the necessary actions. Russia is a little bit of a different situation. 1/2 of that decline was due to the significant drop in coffee cost, but the other 1/2 was volume/mix and it was driven by price gaps, excessive price gaps in both Chocolate and Coffee. We were slow to respond to the fact that competitors had dropped prices and we didn't. It resulted in share losses and that was the biggest issue that we had in Coffee and Chocolate. We've taken the necessary price reductions. Both categories, again, remain quite robust in Russia and we're quite confident that we will be able to correct that situation. The other piece of our issue in Russia was just our sales execution wasn't where we need it to be. We've stepped up the focus in that area. We've made some -- we've strengthened our leadership in a couple of places, particularly, in sales, and again, we feel quite comfortable that we will be able to resolve that. So net-net, these are temporary issues. They're issues that are entirely within our control, and we're quite confident that we will be able to see a rebound in the fourth quarter and into 2013. Kenneth Goldman - JP Morgan Chase & Co, Research Division: That's helpful. Go ahead. I'm sorry, Dave.

In terms of impact, it depends what your base assumption was. So I'll let you make your own base assumption, but Brazil is about a $2.5 billion business and it was flat. So you can determine what you thought it was going to be. It was double-digit growth last year. And Russia is about a $1.5 billion business and it was down low double digits, and last year, it was not. So I'll let you establish your own base, but those are kind of the parameters that you could work with. Kenneth Goldman - JP Morgan Chase & Co, Research Division: You've been listening to too many politicians, Dave.

It's a big margin that they had in... Kenneth Goldman - JP Morgan Chase & Co, Research Division: And, guys, I'm sorry to -- one more my question, if that's okay. All the moving pieces you have, any insights you can provide into 4Q's interest expense and tax rate would be useful. And just to clarify, should we be comfortable with, roughly, the pension expense you saw in this quarter and the corporate expense you saw this quarter going forward in our models or maybe there's some puts and takes there we're not aware of going forward?

Yes, I think the -- if I start from the corporate expense. I think the geography may change between businesses et cetera, going forward, but I think in aggregate, it's directionally correct in the stuff we've provided. In terms of interest expense, similarly, we've tried to do pro forma adjustments that sort of assume the entire $10 billion of debt had been transferred across the Kraft Foods Group. So again, that should be roughly in line. Tax rates, we've given you guidance of mid-20s. I'm not going to give you specific guidance for quarter 4, but I will remind you that last year, we had a very, very low tax rate because we had a big one-timer. So you can expect what I'll call close to a normal tax rate probably in quarter 4 this year, but the comparison to last year will be quite different.

Your next question comes from Matthew Grainger of Morgan Stanley.

2 questions actually, for Dave. One, just very briefly, you mentioned a favorable onetime item in Europe. I believe it was the reversal of a Cadbury accrual. Can you quantify what the benefit of that was on an operating income basis?

Yes, I think it'll show up in the 10-Q, so I guess I can. It's just over $0.01, $0.015, in that range of impact for the quarter.

Okay. And as you continue to explore the options you have around allocating the excess cash on your balance sheet right now, have there been any changes or new developments in your thinking on how you're approaching the debt issuances you have maturing in early, mid next year or the potential for any other refinancing going forward?

Yes, I think there have. I mean, essentially what we've agreed is, as you know, we've got about $3.5 billion of debt maturing during the course of next year; about 1/2 of that in the first half and about 1/2 of that in the second half. And I'm sitting on about $2 billion of excess cash, plus or minus. But we have decided we will not -- that we will hold onto that cash and just pay down the debt as it matures in the first half of the year. And it's a little early to talk about cash utilization on the back half of the year. But that decision really is what triggered the expensing of the swap loss. So we're not going to be issuing any debt in the first part of the year and we're going to be sitting on our cash and just paying down those maturities as they come due.

Your next question comes from Chris Growe of Stifel, Nicolaus. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just had a question for you. When I look at the Gum & Candy category, it did -- it seems to have improved a bit in the quarter. I think you mentioned about 4% overall category growth. So I wanted to ask 2 questions around that. One would be that is that due to Candy growth and Gum remaining still soft? And then just to better understand the difference between your reported 1% decline in that category and then the underlying category improving, is the gap just those markets where you were misexecuting, if you will, or is there other areas or factors there to consider?

Yes. So within the 4% that I talked about, Chris, that's a combination of essentially, a flat Gum category and a 7% growth in the Candy category. So when I talk about why we are quite optimistic, both -- virtually, all of our categories are growing. Our issue is Gum and we did lose some share in Gum in a number of key markets. Actually Brazil, which we've talked a lot about some of the executional issues, we actually grew share in Brazil. But we do have some share opportunities in a number of markets. And a lot of the work that we're doing on price size architecture, on restoring spending will help also to -- as well as stepped up innovation, things like ID that we've just launched in the U.S. will help to step up our share performance. So they're going to help to not only stimulate the category, but also, in select cases, should help to improve our share performance as well. But the big issue is really the category and that's really what we've been focused on. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I had just one follow-up question. I think for Dave, just regarding -- you cited constant currency EPS growth this year, year-to-date at plus 8%. Is that a bit of apples and oranges? Is that including Kraft as well North America, or is that a good number to cite for Mondelez year-to-date?

No, that's a good number, as best as we can do for Mondelez year-to-date. We took out Kraft Foods Group as a discontinued operation. It's technically not discontinued until quarter 4, but we've done it on a pro forma basis for you. And we've tried to adjust interest and pensions to align with how our business will be going forward. So it's a good number. The reason it's 8% versus we would normally be expecting higher, is again, the tax rate. So last year, it was a very low tax rate. It's about 4 points higher this year than last year. It's about 22% year-to-date, last year it was about 18%. And that's why you're seeing some of the operating income growth get lost from the 9% of the OI level, down to 8% of the EPS level. But it's a pretty comparable number.

Your next question comes from Eric Katzman at Deutsche Bank.

A couple of questions. I guess when we were up in Boston and we went through the company kind of for the first time, there wasn't a whole lot of focus on the non-power brands and it seems as if, if I'm doing the comps correctly, that the non-power brands in most markets were down. Could you talk about that and what that means? And I understand that your -- if my math is right, your EBIT was up about 4%, so it didn't necessarily impact your EBIT, but how should we think about that?

Well, first of all, power brands represent almost 60% of our revenue on a year-to-date basis and as we continue to grow them disproportionately relative to the base business, they will become an increasingly large portion of the business. One of the reasons you don't see as much of an impact on the OI line is that typically, they're not power brands because they have lower margins and so that's why we are essentially de-emphasizing them. So for the most part, we are seeing a weaker performance on the brands that we are de-emphasizing, many of them are local brands. And again, our power brands will continue to be an increasingly large percentage of the portfolio, and that's what's going to fuel our top line growth.

And, Eric, just so you don't panic on the -- all other brands, in the quarter, it is true that the power brands grew and the non-power brands declined. If you look year-to-date, the power brands grew 8% and the non-power brands were about flat and that's -- so it's not like they're falling off a cliff. We are making ongoing strategic decisions on the portfolio, but we don't see this as a huge headwind. It's more a question of they're going to be growing a lot less, maybe flat some years, maybe growing slightly other years, but we don't see it as a huge decline. Quarter 3 really was a bit unusual, but you're right, they were down in quarter 3.

All right. And then so -- just so I'm -- again, I'm getting this right since we're all kind of getting to know the stand-alone company correctly. So the 60% that's power brands and the 40% that's non-power brands, that is of the snack and confection side of things and there's another 27% or so that is...

No, no, no. That -- No, the numbers I just quoted to you, Eric, that's for the total company.

So we have power brands in -- Tang is a power brand. When we talked at the investor roadshow, we really only talked to snacking because that is 3/4 of our business. In Coffee and in powdered beverages, which are also strategic categories for us, we also have power brands. So in Coffee, you've got Jacobs coffee in Europe, for example, they're huge and you've got Tang and powdered beverages, those are also power brands and they're equally significant, they're equally high margin and they're equally good growth.

Okay. And so the non-snack and confection side of things, it sounds like Coffee, given the competitive issues in Russia and the price pass-through that you took that, that was -- at least part of those non-snack and confection business that was part of the drop?

Not really. I think Coffee actually is up around the same as the rest of the business year-to-date. So we said we're up about -- we're up 4.6% year-to-date on our total organic growth. Coffee actually would be consistent with that. I think what you'll see on Coffee is as we lap the pricing we took last year and we adjust to lower pricing, the price portion of that revenue growth is getting much, much smaller and in the quarter, it was actually negative, you're right. But the vol/mix is getting much stronger. And so Coffee, for us, has been a pretty good growth driver this year. It's been about in line with the total company.

Next question comes from Bryan Spillane of Bank of America.

I guess just a question back on the building [ph] markets and it's I guess more particularly Russia. And if I remember it right, the second quarter organic sales in Russia was also soft. And it appears like especially ex-Russia, so the rest of the Central and Eastern Europe, is seeing some softness in the consumer. So I guess, as you look forward in Russia, beyond just fixing some price gap issues, were you at all concerned at this point that there's more of a macro headwind there? And I guess I would say the same thing for Brazil. It's been such a strong market for you and is there any concern there that the macro picture's a little bit different today than maybe what we were thinking about back in September?

I don't think so, Bryan. I mean, as we look at our peer performance in these markets, they continue to be strong. We certainly have seen GDP slowdown in both of the markets, Brazil to a greater extent perhaps than Russia. But the issues that we're facing, we believe were of our own making. As I said before, they're very much in our control and they're quite fixable. So we have every confidence that they will continue to be growth markets for us.

And, Irene, were you surprised that the -- that Biscuits in Brazil slowed as quickly as it did? It was as a response of a reactive to the reduction in the marketing support. It seems like a pretty quick linkage between reducing marketing support and seeing the volumes drop. Were you surprised by that?

Yes. But I mean there's a -- like we're doing a pretty deep dive on these 2 businesses as you would imagine and there's a lot of moving parts there. I'm trying to give you a best sense of the headlines there. But we did end up with a fairly significant loss of share of voice and we can trace that pretty directly to our share performance. So I believe that we have our -- we have a good sense of what the issue was there. It's not entirely marketing support, but it was predominantly that.

Okay. And are the competitors increasing their share of voice or do you have some competitors in Biscuits that are spending more now?

No. Again, it was just -- we did it to ourselves. We just basically reduced our levels. We've now restored our levels back and we've got a very strong Biscuit business in Brazil and we're quite confident that that'll -- that, that business will rebound.

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

Can you just talk about your opportunities and challenges in Japan and Australia? Those are part of your Developing Markets and I just wanted to kind of figure out how you see those calling out for the next year or so.

Yes. I think Australia, we've got a great Chocolate business and I think we've had some good new products lately. I think in quarter 3, it was a bit weak, but that was more of a phasing thing to do with a system go live that we had in a prior quarter. We always load prior to the system go live. So not material to the total company, but in Australia, it did result in it moving from a low single-digit growth to a low single-digit decline. So it wasn't dramatic, but it's a mature market with a great Chocolate business and we see it as continuing to chug along. Japan is a gum market and, therefore, it shares a lot of the challenges Irene's talked about on the Gum business.

Your next question comes from Ann Gurkin of Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I was just curious, Irene, now that you look at your global business, if you've done stress tests as to how many markets would have to miss expectations or even exceed expectations before you would change guidance. Like you've seen weakness this quarter in Russia and Brazil that affected the top line, can you just comment a little bit on kind of stress testing the global portfolio and what needs to change versus your expectations to make a major shift in expectations?

Yes, let me start by saying, Ann, we've had a terrific run in our developing markets these past few years by any measure. And, in fact, our first half, we were up 9.5%. So we had a speed bump in the third quarter and we're not happy about it and it's a fact, but we shouldn't overreact to 1 quarter. We actually believe that one of the benefits of the company is that we've got a fairly well-dispersed geographic footprint so that no 1 market is -- basically, we've got a pretty good footprint within -- around the world, so that we have the opportunity. If we see issues in 1 particular market, we have a good, good, good offsets elsewhere. It just so happens that Brazil and Russia are 2 very large markets and, simultaneously, they had some issues at a time that our capacity was constrained in some of our other growth engine markets. So it was kind of a little bit of a perfect storm there but net-net, we, of course, continue to look at the composite profile of our developing markets, particularly as it represents a significant part of our portfolio. But we're quite confident that those markets will rebound and will improve in the fourth quarter as we've said and return to double digits in 2013. Ann H. Gurkin - Davenport & Company, LLC, Research Division: That's very helpful. And then regarding projected productivity savings, is that still a 4% target?

Yes, that's still a -- we'll be 4% or higher on our gross productivity going forward. It's -- we achieved that this year and so far and we expect to do that going forward as well.

Your next question comes from David Driscoll of Citi.

I wanted to ask a little bit more about the restructuring program. So in the 8-K filing, Dave, I think it's $925 million. Irene, can you talk to us a little bit about the evolution? This is nearly $1 billion. This is an enormous restructuring program. I think there's a lot to say about blue biscuits and the opportunities that have yet to have been realized in restructuring that, maybe the legacy Kraft European operations and even some restructuring in North America. I'm not really all that clear on maybe more of the story behind the $925 million and then the benefits that we're going to get from it and I think it's an important part of the story going forward. So if you could, I would love for you to just explain about what's happening here.

Yes, I can take that, David. I mean, the restructuring program is $925 million, as you said, and there's really 3 components to it. The first would be overheads as we resize corporate headquarters for the smaller company we now are and as we resize North America snacks to reflect the fact that it is a stand-alone snacks business now. Second is manufacturing and as you rightly say, we need to streamline our manufacturing to reflect the fact that we're now a focused snacks business and that has some implications. I can't really give you a lot of details on it because, frankly, we have to run those projects through our Board and, as importantly, we have to run those projects through our unions and our works councils. So we're working through that process, but you probably saw in the last 2 or 3 weeks, we've announced a closure of a coffee factory in Austria and we announced the closure of a large snacks factory up in Canada. So we're working through these, they'll continue to go. And then the third piece is on the distribution network where North America is now a DSD-focused business and that's got some implications on distribution. So those are the 3 pieces. It is $925 million, it is a lot of money, I accept that. About 2/3 of it is cash, about 1/3 is noncash. The vast majority of the spending will be in 2013 and 2014 and, after that, we would see ourselves self-funding ongoing restructuring program within the guidance we've provided to you. In terms of savings, I think we've said that next year, we have a dis-synergy headwind and the restructuring savings next year will cover about 1/2 of that. So the savings will start to flow through next year and it'll cover about 1/2 of our dis-synergies. We would expect the savings in '14 to cover the rest of those dis-synergies and any incremental profit in '15 and beyond, we would look to either support the bottom line or reinvest in growth opportunities. But it's really '15 and beyond before we'll see a net benefit between dis-synergy and restructuring.

That's really helpful. 2 other quick questions. The first one is on the Starbucks arbitration proceedings and any update that you could give us on the timing of that decision?

Yes, the arbitration case actually closed in August. So the arbitrator is considering the arguments as we speak. We remain pretty confident in the merits of our case, but I regret to say, I don't have any updates to you on really anything beyond that.

Okay. So then that would mean that the decision is some time very soon, is that reasonable?

Some time. There is no time line on the arbitration. So it really is up to the arbitrator when he wants to come back with his decision.

Right. Final question on Brazil. Irene, I believe you had a leadership change down there. Does that have any implications to the problems that you cited in the quarter?

No. I mean, David, one challenging quarter does not cause us to make personnel changes. We did make some leadership changes in a couple of our markets, but those were things that were in the works for quite some time and I'm very pleased that we've got a deep bench of talent and we've got some very strong leaders in all of our key markets. So it's not related.

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

I just had a question really on strategy around Western European Coffee. Again, I know as you pointed out earlier in the investor presentation and both today in the slides and in the prepared remarks, most of the focus, obviously, is on snacks. But as you said that you're always looking to actually make strategic shifts within the portfolio and that Jacobs is still considered a power brand, I'm wondering if you could just add a little bit more specific color around what would be your strategy for the next year to really be still picking up share in the Coffee category in Western Europe?

Well, again, Rob, Coffee is an important part of our portfolio in our Western and Eastern Europe businesses. And as Dave mentioned before, we've had -- Europe has had a very strong performance on Coffee. The revenue decline is reflecting the fact that we took price declines in response to the lower Green, but our vol/mix continues to be quite solid. Our Tassimo business is growing in the upwards of 20%. We've continued to support it and we see it as a continued growth engine. We've been very pleased with our Millicano product; it's a whole bean instant coffee, which continues to perform well. So Coffee is an important part of our European portfolio and we will continue to invest in that franchise, and it will be an important source of growth and the category is growing. The challenge that I referenced in Eastern Europe, it's -- Coffee is an important business there as well, particularly in Russia and I referred -- referenced the fact that we did -- we were slow to respond to price gaps on Coffee and it cost us some share. And as I mentioned, we've taken action to address that and we should see that business rebound. So in both of those regions, we feel Coffee plays a very important role and it is growing.

Your next question comes from David Palmer of UBS.

I wanted just to ask a question about your -- the composition of your revenue growth. You may have addressed this earlier and if you did, I apologize. But with regard to volume versus price for 2013, if you are going to deliver at that 5%, is that half and half volume/mix and price?

We haven't given a specific target, but we have said pricing is going to be a modest -- more modest contributor next year than it's been recently. I mean, as an example, year-to-date, pricing is about 4 points, whereas in the third quarter, it's only 2 points. So it'll be a more modest contributor out of the 5% to 7% next year.

And do you -- one question that certainly comes up when we see this quarter is the issue of volatility. One of the things that we would expect from a global business is that you might have a little bit less volatility in that top line. Do you -- when you're looking ahead to 2013, as you see how the comps are laid out and the issues perhaps would -- economically and with Gum in particular, do you anticipate some quarters that -- do you anticipate volatility to continue is my question?

David, as I said earlier, we are -- we feel very good about our footprint and we believe we are much less susceptible to volatility as a result. We've got roughly equal-size businesses in Asia Pacific, in Latin America and in our combined CEEMA regions. We've got no single country in our Developing Markets portfolio that is contributing to more than 5% of our sales. And so we've got a pretty balanced profile. We just had a bit of a perfect storm in 2 of our largest countries at a time that we didn't have as much of an opportunity to offset it with -- in some of our other countries because of some of the capacity challenges. But year-to-date, we've certainly been able to offset any of our challenges by the strength that we've had in China, in India and in the Middle East and Africa, and we continue to see that profile playing out well for us.

Your final question comes from Robert Moskow of Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I thought the split ups were a good idea until I read we had to do these -- do 2 conference calls and 2 notes, I don't know. Maybe consolidation is the way to go. But just one last question; I believe the long-term plan has always been for emerging markets to increase overhead at a greater pace than sales. But now that you've had a couple of stumbles here in Brazil and Russia, it looks like the type of spending you're going to have to do there is going to be a little different, at least in the short run. How have these issues impacted your plan for infrastructure investment in those 2 markets for 2013?

Yes, I don't think we've ever said it was going to grow above revenue, certainly, sales. But sales is only one component of the overheads and we would expect to leverage scale on the rest of the overheads as we grow those businesses. So I would expect overheads in Developing Markets to grow at or less than the revenue rate over time. I think in Russia and Brazil, in particular, as we talk about these issues, I don't think these issues had an implication on the infrastructure in those countries. It's not like we have to stand back and add a bunch of new people and new capability. I don't think that's the issue. Will we continue to invest in overheads in those countries where we can expand distribution and gain more sales? Yes, we would, but I think it would be more on the opportunity upside than just correcting some of the things we talked about today. Robert Moskow - Crédit Suisse AG, Research Division: Great. Lastly, Dave, are you updating your interest expense guidance at all for 2013? It seems like the plan as to how you utilize your cash is different. I have $1.2 billion in my model. Is there any reason for me to change it?

We haven't -- I don't think we've ever given specific interest expense guidance. But I think you can probably work it out yourself pretty easily. Robert Moskow - Crédit Suisse AG, Research Division: Maybe it's time, Dave.

So we are going to end up starting the year with more debt than normal and as that matures, we're going to use our free cash to pay it down and the maturities are basically in March and May that we're talking about. So you could probably model that out fairly quickly. Unfortunately, the cash that I have on the balance sheet doesn't deliver much income. So it really is going to be excess interest cost in the first half and then to a more normal level in the back half.

This concludes the allotted time for today's Q&A session. I will now turn the floor back over to management for any closing marks.

Thank you, everyone, for joining us on the call. We'll be happy to take your questions later this evening or, of course, over the next few days. And we'll see you the next quarter. Thank you. Bye.

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