Mondelēz International, Inc. (NASDAQ:MDLZ)
Citi 2013 Global Consumer Conference Call
May 29, 2013, 08:20 am ET
Irene Rosenfeld - Chairman & CEO
Thanks [Mike] and good morning to all of you. Before we begin, please take note of our disclaimer regarding 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 risk factors contained in our latest 10-K for more information. As you know, some of today’s remarks will also include non-GAAP financial measures and you can find the GAAP to non-GAAP reconciliations posted on our website.
Okay, let’s dive in. As you know, 2012 was a transformational year for our company. Since the spin-off of our North American Grocery operations we’ve created significant shareholder value and we are now squarely focused on sustainable, profitable growth. Indeed we issued long term targets last September that would place us firmly within the top tier of our peer group. On the topline, organic net revenue growth of 5% to 7% and on the bottomline double digit operating EPS growth. To hit these targets implies a high single digit increase in operating income in constant currency and an annual improvement in OI margins of approximately 20 to 30 basis points.
As a new company we naturally get many questions about how we will achieve these targets, so at our last two investor conferences we described our unique competitive advantages as a global snacks power-house and how we’ll drive top tier growth over the long term.
Recently, we have been asked about our bottomline aspirations, specifically given our low starting point, are we being aggressive enough in reaching peer average margins, so today, I'll spend the bulk of my time answering two questions; where are our biggest opportunities to enhance margin and how will we deploy these savings to drive top and bottomline growth.
As we outlined last September, Mondelēz International is a unique investment vehicle with all the elements in place for sustainable profitable growth. We have an advantage geographic footprint with a significant presence in emerging markets. We are focused on large, fast growing snacks categories. We have an unrivalled portfolio of beloved power brands and proving global innovation platforms. We have strong routes to market with significant barriers-to-entry, and we have world-class talent and capabilities. With these competitive advantages, we are confident we’ll deliver top-tier financial results.
At the CAGNY Conference in February, we showcased the long runway of growth opportunities ahead of us and how we intend to reach our growth target of 5% to 7%. We clearly outlined why this target is achievable; whether you look at it by category mix or by geography; pricing it by category will achieve our target by simply maintaining share and growing inline with our categories. Specifically, biscuits, chocolate and beverages which comprise about three quarters of our revenue where each grow mid to high single digits, while gum and candy and cheese and grocery will grow low to mid single-digits over the long-term.
Geographically, we will reach our target by growing our developed markets low to mid single-digits and emerging markets double-digits. Today, nearly 40% of our revenue is in emerging markets, growing this portfolio double-digits contributes at least four points of topline growth and is critical to delivering our overall growth aspiration. As we have highlighted many times, we consider our emerging markets to be highly attractive both now and over the long term for a number of reasons. Snacks categories in these markets are growing at high single-digits and in some cases double-digit rates. This reflects the favourable demographic and economic tailwinds in the market.
As GDP per capita grows it drives consumption of chocolates, biscuits and other snacks; that’s a great recipe for sustainably high growth rate. And one scale is achieved; healthy rates of return will follow. Of course, we are not the only company that has this perspective, I won’t lead you through the statements on the slide, but you can see that our competitors also consider emerging markets to be highly strategic.
So competition in these markets will intensify in the near-term. Recent history is full of examples, where shared positions have changed significantly in a very short time. So the race is on for us to secure and expand our presence in these fast growing markets and the window is rapidly closing. The key to success is to start from a strong base with an established profitable infrastructure in the markets that matter. And then to aggressively fortify our position over the next three to five years; that’s how the winners will be determined and we are confident that we have a winning hand. That’s why continuing to invest now to strengthen the strong emerging markets footprint we’ve established is crucial to delivering long-term shareholder value.
Of course, we plan to pay for these investments within the double digit EPS growth we’ve committed to. Our source for the funding is the significant margin expansion opportunity we have in developed markets. Since 2010 our adjusted operating income margin is up 110 basis points to 12.2%, that’s good progress, but we have roughly a 300 point gap between us and our global peers.
So we intend to drive steady improvement in the coming years. Over the near term however, our significant base margin expansion will be partially offset by two things. A significant step up in investments to fuel growth in emerging markets and ongoing restructuring efforts to improve our cost structure, this balancing of the top and bottom lines driving margin gains in the short term while making high return investments for the long term underpins our financial target.
We start with the clear objective to drive 60 to 90 basis points per year of what I’ll call base margin improvement to close the gap versus peers. In Latin America, Asia Pacific and EMEA we are already delivering top tier margins, that means North America and Europe will drive this significant improvement is that we’re targeting margins in both of these regions that are at or above peer averages.
In North America that means high-teens were about 500 basis points higher than where we are today. Given the size of this gap and the fact that it’s largely a gross margin issue we believe it will take at least five years to make up the difference.
In Europe, peer average is approximately mid-teens. We are targeting the upper end of that range or about 250 basis points higher than where we are today. We expect to reach that goal within three years.
As you can see the key to hitting our OI margin target is to expand gross margins. In 2012, our adjusted gross margin was 37.6%, that's at least 250 basis points below the average of our global peers. By closing that gross margin gap, we will close the OI margin gap as well.
To be clear however this is not due to our emerging markets businesses where gross margins are already high and well in line with peers, again our biggest opportunity to expand gross margin overall lies in North America and Europe. In North America we maintained OI margin over the last few years despite absorbing the synergies from the spin, but at just under 14% we are below the North American operations of our peers again largely due to gross margin.
In particular, we have a number of opportunities to reduce supply chain cost. Our network is showing its age as a result of nearly two decades of under investment. We now came back to the company in 2006 our first order of business was to get growing again by improving product quality, increasing brand support and jumpstarting innovations, that focused on revenue and share has certainly paid off.
Our U.S. biscuits business has delivered at least mid-single-digit growth in each of the last seven quarters and market share was up nearly a full point last quarter. After we got the fly we are turning on the top line, we focused on our cost structure. We started by driving our Power Brands which typically have gross margins that are 100 to 200 basis points higher than the rest of the line.
In addition, we're aggressively managing cost with the focus on both COGS and overhead, but first we needed to build up our skill base, so we hired and trained about 70 Lean Six Sigma experts to optimize our production line and we stepped up our procurement savings programs. These efforts have delivered gross productivity of more than 4% of COGS over the last two years and we're confident we can continue to deliver similar savings in the future.
We're attacking overhead costs as well. The direct store delivery system is by its nature a high gross margin, high overhead business, but even so our overheads are too high. Last year as part of a broader program, our North American snacks business significantly streamlined its overhead.
Unfortunately, dis-synergies from the spin muted the benefit of those reductions. Over the next two years, we expect to reduce or eliminate these costs while capturing additional synergies between the U.S. and Canada. We also have opportunities to eliminate redundant systems as we better leverage SAP, but these efforts alone won't close the gap. We need to reinvent our supply chain network.
What do I mean by reinvent? Well, it includes installing new production lines with leading edge technologies. We already employ state-of-the-art technology in many of our emerging markets that can be deployed back to North America. Let’s look at Oreo production for example. We worked with suppliers to develop a modular production line that can be deployed globally.
Upgrading to these lines in North America will significantly reduce our total cost of ownership including capital investments, maintenance and ongoing operating costs. What’s more these designs will allow us to bring new capacity on stream in about half the time. It also means that we can more quickly shift capacity from one factory to another based on demand. We will also repay creating production from coal manufacturers. We will do this as we install new lines and as productivity freeze up capacity.
Finally we are looking at opportunities to optimize our manufacturing network and we are closing our Lakeshore Bakery in Toronto later this year. This combination across management throughout the business and a reinvention of the North American supply chain will drive the majority of our 500 point margin expansion over the next few years.
Turning now to Europe, here we have made tremendous progress. In fact, OI margins are up a 120 basis points over the past two years and more than 300 points since 2009. At 13% we are competitive with our peers, but we are not satisfied with that. We are targeting margins at the upper end of the peer range. Here too we will expand gross margins by driving our Power Brands and by targeting gross productivity of more than 4% of cost of goods sold, but some of our biggest opportunities will come from streamlining our supply chain.
Today, we operate 72 factories across our European regions, but these factories run at dramatically different levels of efficiency. We give an A rating to about 15% of them. A-rated facilities are top tier in terms of scale and efficiency generating nearly $400 million of revenue per plant. With that in perspective, our peers generate about $200 million to $400 million per plant. The majority of our A rated plants are legacy Kraft facilities, but we’ve been able to upgrade some new plants as well. Our objective overtime is to ensure that our power brands and innovation platforms are produced on advantage assets like these. We’ll accomplish this by upgrading older production lines and by incorporating Lean Six Sigma techniques and other best practices. We know where the opportunities are.
For example, after many years of focus, conversion cost for our Milka Chocolate facilities are world class. In contrast, the conversion costs for Cadbury Dairy Milk are nearly three times higher due to the complexity of the legacy Cadbury network. By applying some of the Milka manufacturing practices, we aim to reduce the cost gap significantly overtime. But upgrades and productivity programs alone will improve the efficiency of all of these facilities. So we’re currently in discussions with the appropriate works council’s and unions to streamline our network. We’ll provide update as these discussions progress. We’ve already announced the intention to close three small plants including one in Austria and two in Spain.
While our manufacturing network provides the lion-share of the margin opportunity in Europe, we’ll continue to drive overhead efficiencies as well. Lowering overheads has been the primary driver of the 300 basis point improvement in OI margin since 2009 that I referenced earlier. There are a number of factors that work. First, we’ve been able to unlock scale advantages by moving from a decentralized country led model to a Pan-European category led model. This has allowed us to eliminate many duplicate operations. We have also successfully integrated the sales, marketing and back office activities of LU and Cadbury. This has enabled quick adoption of best practices and eliminated many redundancies with our legacy Kraft operations and we’ve now brought legacy Kraft, LU and Cadbury into one harmonized SAP instance which will deliver ongoing benefits.
With these many complex moves behind us we are now taking actions to further optimize our overhead structure. For example, we are integrating our Central European countries into our category led model and we are leveraging our scale by consolidating many transactional finance operations in our lower cost service center in Bratislava.
In sum, we have clear opportunities to expand gross margins in both North America and Europe. We will use some of those savings to continue investing in our emerging markets to sustain our growth for many years to come. These investments will offset approximately 20 to 30 basis points of base margin expansion.
What kind of investments are we talking about? Broadly, the opportunities fall into three buckets. First, we will continue to boost the marketing and trade supports behind our power brands and innovation platforms. This means increasing advertising behind brands such as OREO in China, (inaudible) in Brazil, Jacobs, in Russia, Cadbury Dairy Milk in India and South Africa and Tang in Asia and Middle East. This also includes investments to drive brand awareness as we expand into new cities and new markets such as OREO in Southern India, more Tier 3 and Tier 4 cities in China. Investments in brand equity and expanding innovation platforms typically have a relatively quick payback of about a year.
The second investment opportunity is adding routes to market and sales capabilities to expand coverage, particularly in traditional trade. At CAGNY, I gave a number of examples where our traditional trade coverage was low. In India for example, despite adding a 150,000 outlets to our coverage by the end of the year, we'll still only be covering one million out of the 7 million outlets that sell confectionary products. In China, we are continuing to gain distribution in traditional trade outlet in Tier-1 and Tier-2 cities. In Russia, we are expanding in to Siberia and other states and in Brazil, we are building distribution in the fast growing North Northeast region. These types of investments typically also have a quick payback of about one to two years.
The third type of investment is the capitalized on wide space opportunities by entering new markets with new snacks categories. The launch of Stride Gum in China last year is a perfect example. As you may recall, China is the second largest gum market in the world growing at a high double-digit rate. Given the necessary investments to build brand awareness, we're unlikely to make much money in the first couple of years. As a result, wide space investments have a longer payback timeframe, typically three to five years.
Let me assure you though that we are taking a very disciplined approach to these investments. We won’t invest unless we're confident that we can achieve worth returns that are well in excess of our cost of capital within a reasonable timeframe and that will deliver sustainable, profitable growth. But just to be clear, we are not starting from scratch, we already have strong scale and solid share positions in most of the markets that matter. The size of our investments will increase over the next few years and vary from quarter-to-quarter as we build the capabilities to execute against these opportunities.
We expect to spend about a $100 million this year, $200 million in 2014 and up to $300 million in 2015 and thereafter. In addition to investments to drive growth in emerging markets, we are using 20 to 30 basis points of our base margin expansion to build an ongoing restructuring capability to enable continuous improvement in manufacturing efficiency.
Once the restructuring program that we initiated in 2012 is completed next year, we intend to move to a Pay-As-You-Go model. Specifically we intend to incorporate restructuring costs within our annual guidance as an ongoing expense beginning with $100 million this year. In 2015, and beyond we expect to spend approximately $200 million to $300 million per year.
So to summarize, for the next three years, we expect to expand margins on the base business by 60 to 90 basis points per year. The improvement will largely come from North America and Europe as well as from the elimination of the synergies associated with the spin-off our North American Grocery business. We’ll reinvest a portion of these savings beginning this year to step up investments in emerging markets resulting in a 20 to 30 basis points headwind, and ongoing restructuring costs are expected to be another 20 to 30 basis points headwind again starting in 2013. As a result, we expect to expand OI margin overall, OI margin by about 20 to 30 basis points per year on average for the next few years. This will result in a margin of about 13% by 2015.
After 2015 with these incremental investments behind us, margin improvement will accelerate. Specifically we expect to expand base OI margins by 40 to 60 basis points on average per year. This largely reflects continued improvements in gross margins with the biggest remaining opportunities in North America. As a result, we expect to achieve a 14% to 16% overall margin in about five years.
Before I take your questions, let me highlight how we expect the rest of this year to play out. Keep in mind that 2013 is the first year for our new company and as with Q1 the year will have a number of anomalies, but it also sets the stage for the growth algorithm I have laid out. We continue to expect organic net revenue growth at the low end of our 5% to 7% range.
As we previously stated in the first half, lower coffee pricing and capacity constraints will temper growth by about 1.5 percentage points. We expect revenues in the second half to accelerate as these headwinds subside, as our emerging markets investments begin to payoff and frankly as our year-over-year comps become easier.
In terms of margins, our first quarter operating margin was negatively affected by slowing revenue growth, the impact of Venezuelan bolivar and the cycling of some prior year one-time items. This synergies and stepped-up investments in emerging markets also tempered results.
Our second quarter margins will also reflect some of the same headwinds I just mentioned, as well as the tough comparison to very high margins in the second quarter year ago. This will keep margins in the first half below year ago and below our long-term trends. In the second half however, margin expansion will accelerate with revenue growth and as the impact of our dis-synergies lessons. In fact, our back half OI margins will be quite strong and will position us well as we enter 2014.
Given the first half anomalies however, for the full year we expect margins to be roughly flat versus prior year. Despite that we still expect to deliver our 2013 operating EPS guidance, which equates to roughly 14% to 18% growth on a constant current basis, while stepping up investments in emerging markets and beginning to fund ongoing restructuring within our base earnings.
We are able to get a head start on these investments and set the stage for 2014 while still delivering strong EPS growth as a result of some tax favorabilities that we expect throughout the year.
So to wrap up, we provided long-term financial targets for our newly launched company back in September that will deliver significant shareholder value, organic net revenue growth of 5% to 7% per year and double-digit growth in operating EPS. The top line growth is clearly achievable based on our category and geographic mix. On the bottom line, we are able to deliver double-digit EPS growth while simultaneously stepping up emerging markets investments and paying for restructuring. We will fund these investments by meeting or exceeding peer average margins in each region where we compete and as you’ve seen we have clear [drill sites] and action plans to get us there.
2013 is the first year of our journey as a focused growth company. I am confident that we're well on our way to meeting our commitments in the near term and for many years to come. Thank you. And now I'll be happy to take your questions. We invite David up here to join me and Dexter.
Thank you, everyone. So for this session, we're going to do our hybrid of the presentation in fireside chat. We will save 10 minutes at the end of the session here for your questions. So we're going to go through some what we think are two topics and like I said there will be 10 minutes for you all to ask your questions.
So maybe I just start off by saying that I think the incremental pieces of information relative to what you previously laid out was the pacing of the margin targets and the detail specific to North America and Europe. For those of you in the audience who may not have had your model straight in front of you, the second quarter understanding that margins would be down slightly and the full year would be flattish was Oreo incorporated in to my numbers and I think that of consensus. So I think the first thing is to understand what's actually incremental from the presentation, there is a lot of detail in there and a lot to absorb.
I make clear there is no new information than what I just provided here. This is essentially the guidance as I said that we gave last September. The opportunity to go a little bit under the covers here and understand how the moving parts come together is what I had hoped to do in today’s presentation.
Very good. So speaking up on margins, so in reaching your 500 basis points North America and 250 basis points European goals, margins goals, are there opportunities to accelerate the timeline to reach these targets? And then conversely, I think probably many of us always wonder about what are the hindrances out there that might impact the ability for the company to hit these types of goals?
Well, let me be clear, we're moving as fast as we possibly can. What I try to help you to see is the big opportunity in reaching those aggregate targets in North America and in Europe, it’s about gross margin. And particularly within gross margin, it's about network restructuring and supply chain and overall supply chain efficiency. And those are actions that take some time. And so we have done in Europe -- as I discussed, we have done a lot of the lower-hanging fruit as we integrated, as we did our pan-European model and we integrated both LU and Cadbury.
We captured much of the easy overhead opportunities, we still see some additional opportunities, but the biggest opportunity there is in gross margin as driven by our network. Similarly in North America that opportunity is the biggest single one on the page and that we have to talk with our unions and our works councils. There are many steps that need to happen between here and there. So we have laid out what we believe to be a very realistic and the most likely timeframe, we will move as quickly as possible.
I mean following up on this, I often think about the difference between a Lean Six Sigma program that something you do every day in the plants versus a significant restructuring program where you have announced plant closures, there is different timelines and certainties around the different types of actions. You have a $925 million restructuring program that you have announced, is completed about a $125 million, there is about 800 million remaining for 2013 and 2014. Could you integrate into the presentation today the impact of that remaining $800 million in achieving the North American and European goals?
Well, as we have said, the bulk of that we are getting benefits from that spending in 2013 and 2014, it's just that it's getting offset by some of the incremental investments that I talked about. So we are seeing benefits already as we have brought these Lean Six Sigma Black Belts into our plants and we have begun to train our employees. The bigger opportunity though is the bigger network restructuring and the opportunity to look at our supply chain now that we stopped adding things to it, to look at on an end to end basis and help to improve some of the efficiency.
And when you see that reinventing the supply chain that is outside of the $800 million restructuring program, so it would be in addition on top of those pieces?
Yeah, remember, when we announce the 925 program, we had visibility to a set of activities that could be accomplished from an accounting perspective that would be completed by the end of 2013. And so those are the programs that we’re in there. We see the next generation of opportunities that I have described this morning it get us the next increment of opportunity and bring us closer to the peer margin.
Maybe taking a step back, you have been CEO since 2006 and maybe what this presentation kind of evokes in me is that there is a wonderful depth of understanding about the Mondelēz organization that’s very specific and perhaps much more detailed than I have seen before when it was the prior legacy Kraft organization. Can you comment the upon sort of the transition that as that big North American Kraft piece went off as the separate company and your ability to now focus on these particular opportunities, maybe the evolution of it, because I think a lot of people here have been following the legacy Kraft Corporation for a long time and there is lots of struggles that company went through leading up to the divest of the split part? So, maybe walk us through a little bit of that and how it changed your understanding of these opportunities?
Well, without a doubt we have taken out a number of product categories, as you know North America Grocery has meet and chosen a bunch of other product categories that are not snacks. So the ability to have a portfolio that is 75% a set of common categories with a set of common manufacturing challenges and a set of common opportunities is a big difference and it makes it a lot easier for me to manage it, but its also a lot easier to explain to you.
And I will also say the other, so without a doubt we understood when we split the company that one of the benefits was the opportunity to have a more homogenous portfolio in both companies that would enable the leaders of each company to focus on the particulars of that business.
The second benefit though that as we took as we split the company was to streamline our emerging market structure; we used to have a head of developing market, because again in a $54 billion company it was challenging to manage all of those different businesses and so I had a structure that kept our developing markets under one umbrella; when we split the company just after we split the company actually the head of our developing markets announced his retirement, I took that opportunity to essentially flatten the structure. So now the heads of each of our key regions reporting to me and that visibility and that dialogue and that opportunity took more rapidly share of best practices.
I’ll give you simple example, we have I think its 25 different diameters of OREO around the world and it was very difficult in a very decentralized structure to be able to harmonize those; the cost opportunities of fractions of an inch of diameter in OREO are quite significant. The opportunity now in our new structure because of the streamlined organizational structure as well as the focused on a few core power brands and global platforms has given us better visibility and it makes it much easier to rapidly disseminate best practices.
Given any new thoughts on how to eat my OREO’S?
Well, you still should decide whether you are a cookies or a cream person, but that diameter should not get in the way.
It’s a good point to kind of maybe delve in a little bit further, I get questions all the time about the split in maybe the last three quarters; you know, organic revenue growth is certainly not been what you have said you wanted it to be the aspirations of the company; you know, it's been 3.7%, 3.8% the last couple of quarters. Given some of the execution issues over these past few quarters, what steps have you and your management team taken to minimize the likelihood of additional issues; I know you just laid out this flattening of the managerial structure, but I think we all would love to hear just your ability to minimize these issues on a go-forward basis and your confidence level to achieve that?
Well, let me say, that no one is more frustrated than me, but I’ll doubt the fact that as we came out of the shoot, we did not hit the kind of revenue target that we laid out for the long-term. I’ve explained what some of the factors were and without a doubt, the missteps that we saw in Q3, Q4 of last year were, we were not pleased by those, but I would also tell you, we identified them and they are clearly, and we had three issues. It was Russia, it was Brazil, and it was Canada for different reasons and all three of those businesses are on their feet. Some of those issues were already happening and the Canada issue as I talked about was related to just the magnitude of the separation up there because it was a full integrated organization; Brazil and Russia were some issues that we would have spotted had we been closer to the business earlier on, but they are well behind us.
As we came into 2013, we were clear from the outset that we did have this coffee deceleration headwind that again I wish it weren’t there, but I mean coffee hit a 34-year high last year and then has plummeted to a five-year average and so the variability there is just something that we couldn't control. We have taken our prices down accordingly and that’s been that together with some of the capacity constraints have been the biggest headwinds that we are experiencing this first half.
I’ll remind you if you look under the covers, we reported 3.8% revenue growth in first quarter as we mentioned, but you look under the covers you take out the capacity, you take out the coffee impact we are growing well in the mid fives. The base portfolio we had very solid volume mix contribution about two-thirds of our revenue was fueled by volume mix very strong power brand growth almost 8%, strong recovery in our emerging markets up 9%, our BRIC markets up about 13%, so there is a very strong share position around the world. So the fundamentals of the business except for these exogenous issues that we mentioned are quite strong and that’s what gives us great confidence as we head into the back half.
Let’s start our Q&A process please, so if we could see a show of hands and we have microphones that will be coming around. A question appear in the front?
Just curious, sort of the breakdown on all these investments you are making especially trying to get all that incremental margin in North America, a lot of supply chain based, you talked about the capital improvement requirements here, how much CapEx; is there a change in the CapEx outlook in terms of...?
We had already outlined that for you; in September, we said, we are going to be spending about 5% of revenue in CapEx, so we had already reflected that step-up in CapEx; we have talked about the implication of that to our cash flow and that’s included in the guidance that we have given. So there will be a step-up in CapEx as we rapidly expand capacity, but that’s factored into the guidance that we provided.
No change there.
And secondly, on the gross margin target, the roughly 250 basis points of improvement, how do you think about the pricing part of that equation, in other words are you sort of looking at the pricing constant commodity constant outlook?
Alright, thank you.
The good news is, we feel quite comfortable given the investments that we have made in our franchises and the strength of our power brands, we feel quite comfortable that as cost move up or down we’re in a good position to price if we need to, but we’ve assumed constant pricing in this model.
Can you talk about what you’re seeing in M&A within your industry and then also Mondelez’s M&A strategy going forward? Thanks.
Well, I feel quite comfortable with the portfolio that we’ve got today, I like the categories. They’re growing at very healthy rates. We’ve got strong share positions within those categories in each of the key markets of interest. So I don’t see the need for any significant incremental M&A to achieve any of our targets. We do see opportunities for tuck-ins acquisitions in selected countries here or there, typically to provide access to -- greater access throughout the market and towards to strengthen one of our category positions. But these are tuck-ins and as we have described our use of cash other than we investing back in the business, the opportunity to do some of these small tuck-ins, a couple of billion dollars would be the way we would use our cash.
Could you discuss or do you have an update on the expected Starbucks payment, when you think the timing is? It seems like it will be quite sizeable, so what the use of, will it be for debt pay down or buyback stock? And if it doesn't happen in 2013, does that change any of your expectations?
None of this guidance factors in the Starbucks Award because who knows when it’s showing up, we remain quite confident in the merits of our case. We hope that it will be a big number as you’re suggesting, but that’s none of our guidance as predicated on the receipt of those proceeds. And when they come in, we’ll talk about how best to use them.
(Inaudible) I think of if there are the other questions. One thing that I have noticed is that in a lot of the discussions we’ve had, you are able to give some conversation about the emerging markets which is such a vital component of the long-term business model. It seems to me that China maybe the single most important opportunity that the company faces, although there is great opportunities in the other BRIC markets if for just a moment though we could focus in on China.
Two questions, the first is, this business just crossed over $1 billion in the size, it’s now a have a legitimate enormous market for Mondelez, where can it go to? And as a related question, do you expect to launch into new categories; new weight base opportunities like you have just done with gum in the Stride brand?
We just back up a little bit on your question David, because the BRIC markets are the biggest focus of our opportunity in the near term. We have sizable positions in each of those countries. As I mentioned before we grew our BRIC markets around 13% in the first quarter and we see terrific opportunity to continue to feel that growth.
So when I talk about those investments first place to put that money is into the BRIC markets. Now in the market like China what are we using the money for? Well, first and foremost is to shore up our base brands to continue to power our base brands, the essence of our $1 million business in China is a biscuits business with Oreo, with the Cornerstone and we just keep plowing money into Oreo. We had fabulous year last year with the 100 first day. We are just launching Golden Oreo in China and we see tremendous opportunity to continue to fuel that. So that’s a classic example of investing in brand equity with the funds that I described.
Second opportunity, geographic expansion most of our business in china today is tier 1, tier 2 cities. We see terrific opportunity to just take what we have into tier 3, tier 4 cities and that’s some of the investments that we begun to see as we expand our distribution and our channel and outlet coverage.
The third opportunity is wide space and china was a great market to launch gum. It’s the second largest gum market in the world as I mentioned, scrolling at a nice 16% rate and so we see the opportunity over time to continue to expand some of our additional product categories in to that market. We also have a very strong candy business in China. We don’t talk about it much, but it's a product called choc layers. It's a milk chocolate candy and it's couple hundred million dollars and we see tremendous continued growth in that franchise. So the opportunities in China look very similar to any of our other emerging markets. They are just a little farther ahead on the curve.
On the European opportunity, as it relates to the plant, where I think you had a slide which laid out like 15% of the plan is producing at ex level versus the average, how should we think about all the other plants portfolio? How many of those plants are, do you think you are able to bring up to a strong average relative to like you need to close additional plants, I mean you mentioned a couple of closures that you already announced?
Well, our first priority as I mentioned is to just bring that level up just simply using Lean Six Sigma providing all of our facilities with Lean Six Sigma tools. I talked about the opportunity I see in all of our Cadbury Dairy Milk plants for example to just bring some of the best practices from Milka to those businesses.
So without a doubt, we can bring the whole network to a higher level, that remaining 85% to a higher level than it's been. As I mentioned though, the opportunity to really get that additional 250 does assume that there will have to be some plant closures in addition to the three that we've already announced. Obviously, we need to have discussions with our works council and unions on that subject, and so I am not at liberty to provide anymore detail there, but we would expect that closures of some additional facilities will be part of the equation.
Yes, you have a number of things you are focused in terms of supply chain going back and the cost side takeout and to improve margins, do you have similarly other things you are doing from the managing side, from a revenue margin optimization in addition to the supply chain and constant currency?
Absolutely, I mean, we feel 5% to 7% growth that we are targeting comes from a number of actions that we are taking on our core franchises, it's about marketing investments, it's about expansion of these global platforms that are proven in one geographies. So things like bubbly chocolate with a smashing success in the UK, we rapidly took it to France, to Russia, to Brazil and now we are taking it to the balance of our strong chocolate markets. So there is a number of actions underneath.
Another key drive though of our revenue will also be the mix change as we continue to focus on these Power Brands, which have generally 100 to 200 basis point higher gross margins than the rest of the line. So there are many actions we are taking on the base in terms of marketing support, in terms of continued innovation and continued focus on product quality that will drive that 5% to 7%. But that’s all happening and I describe that in great detail in the last two conferences, and so I didn’t spend quite as much time on that today, I focused much more on the bottom line today.
We have time for I think one more question, please.
Questions for you, I understand obviously many businesses today are focusing on expansion when you think about the U.S. being very saturated to having to go overseas to BRIC countries etcetera. So my question is around, if you follow consumer trends and what's happening, everything come from the mall business. So everything is around the experience. Have your brands or have you thought about kind of I call it the retail opportunities, I know you are fulfilled technically, but have you thought about the retail opportunities to bring more license to the brand in a very different way, for example I noticed recently there has been a lot more varieties in Oreos? I have two young kids. And when I think about like M&M well for example, I mean I don't know if that’s something you guys have ever thought about or how do you incorporate and think about again the U.S. market being so saturated, how do you bring that excitement and experience into that, is that a very, I don't know if you want to call very, it's a trend anyway that's happened especially coming out of the recession and how people think about identifying (inaudible)?
Well, first of all, for us the U.S market is not so saturated. As I mentioned our biscuit business has been growing at a nice mid-single-digit rate over the last two years and we see continued headroom there, particularly as we bring on some of this incremental capacity and more efficient capacity into North America. But without a doubt the bigger opportunity is in the emerging markets and we’re looking at all tools to accomplish that, the possibility that we might, we are creating in many of our markets what I’d call a store within a store. So we use the shelf as our selling point and there is a number of chocolate brands that have been quite successful in that approach.
We think about it much more in terms of consumer cohorts and occasions, and that’s so for example gifting is an enormous occasion for most of the products in our portfolio. So our focus is just what is the package offering that would make it a gift, how do we make a number of our offerings, Oreo is an enormous seller in China at Chinese New Year and it’s because we’ve been able to package it in a way that makes the best of. So we’re looking at a number of elements.
So obviously the retail environment itself and the packaging it plays a critical part, but it’s the product offerings and a lot of the secondary displays that do contribute to that to accessing those opportunities. So simple answer is yes, we’re looking at all ways to do that. Another big focus of our has been digital. Obviously in these emerging markets, the cell phone, mobile phone penetration is enormously high and the opportunity to access our consumers and develop our relationship is a big deal to us. We are spending almost 10% of our AMC dollars in digital media and that’s been a big boom to us.
Great. Well, I think we had our time. I’m pleased everyone joined me and thanking Mondelez and Irene Rosenfeld and Dexter Congbalay for joining us today. Thank you.
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