Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Mondelez International, Inc. (NASDAQ:MDLZ)

Q4 2013 Earnings Conference Call

February 12, 2014 17:00 ET

Executives

Dexter Congbalay - Vice President, Investor Relations

Irene Rosenfeld - Chairman and Chief Executive Officer

Dave Brearton - Chief Financial Officer

Analysts

Andrew Lazar - Barclays

Chris Growe - Stifel

Bryan Spillane - Bank of America

Eric Katzman - Deutsche Bank

David Driscoll - Citi Research

Matthew Grainger - Morgan Stanley

Robert Moskow - Credit Suisse

Alexia Howard - Sanford Bernstein

John Bumgarner - Wells Fargo

Operator

Good day and welcome to Mondelez International Fourth Quarter 2013 Year End Earnings Conference Call. Today’s call is scheduled to last about one hour including remarks by Mondelez management and the question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Dexter Congbalay, Vice President of Investor Relations for Mondelez International. Please go ahead, sir.

Dexter Congbalay

Good afternoon and thanks for joining us. With me are Irene Rosenfeld, our Chairman and CEO and Dave Brearton, our CFO. Earlier today, we sent out our earnings release. This release and today’s slides are available on our website, mondelezinternational.com.

As you know, during this call, we will make forward-looking statements about the company’s performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today’s prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.

With that, I will now turn the call over to Irene.

Irene Rosenfeld

Thanks Dexter. As you know, 2013 was our first full year as a global snacking company. Frankly, we are very disappointed that our performance was below what we and our shareholders originally expected. But it turns out to be quite a challenging year as we faced slower category growth and volatility in some of our key markets. In the context of this macroeconomic environment, we delivered solid results.

For the full year, revenue increased 3.9% in line with the overall growth of our categories. Our revenue was high-quality driven by strong volume mix. This type of volume mix was the best in our industry. Our share performance was also strong with about 70% of our revenues gaining or holding share. In emerging markets, we grew 9% despite the fact that they were disproportionately affected by the category slowdown. As entered 2014, four of our five regions have strong underlying momentum with Asia-Pacific being the lone outlier. As you know, we have already taken a number of steps to regain momentum in Asia, including strengthening our management teams at the regional level and in China, India, and Australia. We have also improved our monitoring systems of leading indicators like trade stocks and short up our analytical capabilities. These changes will help us detect potential issues much earlier and make us a stronger operating company. Turning to profitability we delivered adjusted OI margin of 12% in line with our guidance. Our margin improved sequentially each quarter last year exiting with Q4 margins at nearly 14%. Finally our adjusted EPS was a $1.51 that’s up 13.5% on a constant currency basis consistent with a double digit guidance we gave throughout the year.

Our favorable tax rate allowed us to accelerate our growth investments in emerging markets while still delivering strong double digit growth on the bottom line. Before I turn the call over to Dave let me give a few more details on our revenue and share performance. Vol mix was the primary driver of our growth with all of our regions posting gains. Overall vol mix contributed 3.4 percentage points to our top line. Pricing was only a modest contributor mainly due to the impact from coffee as we passed through lower green coffees to our customers. In the final analysis coffee tampered organic revenue growth by 80 basis points for the year and 70 basis points in the quarter.

As I mentioned earlier our emerging markets performed well up nearly 9%. Our BRIC markets grew about 10%, Brazil, Russia and India each posted double digit growth while China was up low single-digits reflecting a significant slowdown in their biscuit category. Our developed markets increased 8/10ths of a percent with North America and Europe both posting solid growth. Our power brands which represent about 60% of our total revenue grew 6.5%. They continue to fuel both our growth and our margins as we distort our spending to these brands. Cadbury Dairy Milk, Lacta, Oreo, belVita, TUC, Club Social and Barni all posted double digit gains. From a category perspective in aggregate we grew in line with our categories. We used our strong share performance to offset volatility and market such as China, Egypt, and South East Asia.

The roll out of proven innovation platforms into new markets continues to be a key driver of our category growth. Biscuits and chocolate had a terrific year and despite continuing challenges in gum our snacks revenue was up nearly 5%. Let’s take a closer look at each category, biscuits continued to perform well. Revenue was up 7% clearly outpacing category growth of 5.5% and we grew or hold share in 70% of our revenue. Oreo led the way up double digits with annual revenue now approaching $2.5 billion. belVita which anchors our sustaining energy platform continued to grow rapidly up 25%. belVita now generates revenue of over $0.5 billion more than doubling in size since 2010.

Chocolate revenue growth was also strong up nearly 6% and share performance was outstanding with 80% of revenues gaining or holding share. Cadbury Dairy Milk had a stellar year growing low double digits overall including more than 20% in India. Mocha was up nearly 10% driven by strong growth in emerging markets. Gum remains the only soft spot in our snacks portfolio, gum and candy revenue declined 1.5% as the mid-single digit decreased in gum more than offset below single digit increase in candy. Despite continuing weakness we’re seeing improvement in gum as we implement a number of initiatives to rejuvenate the category. Over half of our revenues gained or held share last year and in the fourth quarter although gum revenue in developed markets was down mid-single digits that’s encouraging progress from the mid-teens decline we saw earlier in the year.

Outside of snacks beverages revenue increased about 1%. Coffee decreased low single-digits. That was in line with the category and a clear reflection of the pricing environment driven by lower green costs. The pass-through was especially pronounced in roast and ground coffee, which makes up roughly 40% of our business.

From a share standpoint, two-thirds of our revenue gained or held share led by on-demand and soluble coffee. Tassimo, in particular, continued to show strong growth with revenue increasing 30% to over $450 million. That’s on top of a gain of more than 20% in 2012. Powdered beverages primarily our $1 billion Tang brand had another robust year with high single-digit growth and strong market shares.

Finally, the remainder of our portfolio, cheese and grocery grew 1.3%. So for the full year, we delivered high-quality revenue growth in line with recent category trends. Strong share performance and sequentially improving margins consistent with our guidance. Looking ahead, we are committed to improving results in 2014 and beyond. We remained focused on increasing efficiency and aggressively reducing costs both in our supply chain and in overheads. Although near-term economic conditions will remain challenging, the plans we are executing give us great confidence in our potential to significantly expand margins and deliver strong top line growth.

With that, let me now hand it over to Dave.

Dave Brearton

Thanks Irene. 2013 was indeed a challenging year and no more so than our Asia-Pacific region. Organic revenue was up only slightly for the year 0.6%. Emerging markets were up mid-single-digits offsetting a mid-single-digit decline in developed markets. Revenues were notably weak in the second half of the year, including a 6% decrease in the fourth quarter. This was primarily due to the issues in China biscuits that we discussed in our third quarter earnings call. As expected, despite strong growth in gum, China was down double-digits in Q4 as our distributors reduced excess biscuits inventory. While the impact of destocking is now behind us, we expect biscuits growth in China will continue to be soft for the first half of the year consistent with recent category trends and this rely for strong year ago revenue comparison.

In the fourth quarter, Asia-Pacific’s revenue growth was also tempered by aggressive promotional spending in our developed markets, especially in Australia and New Zealand. This was the key factor driving our pricing down 4.4 percentage points in the quarter. On the positive side, India continued to perform well, up low teens for the year driven by strong chocolate growth. Our share performance across the region was also strong with over 60% of our revenues either gaining or holding share. And Power Brands significantly outperformed the rest of the portfolio, up 6.5%.

Now, let’s turn to the other regions. As Irene mentioned earlier, all of our four other regions exited the year with good underlying momentum and solid results. In EEMEA, organic revenue grew 9.2% driven by double-digit gains and volume mix. Pricing was a bit lower down 1.8 percentage points. This mostly reflects lower prices in coffee, particularly in Eastern Europe as well as chocolate in Russia. Importantly, we delivered growth across the region and in almost all our categories even with the pricing pressures in coffee and chocolate. Russia was up double-digits led by strong volume mix across much of its portfolio. These gains were due in part to the incremental A&C and route-to-market investments that we made earlier in the year while the standout performers included the Gulf States, West Africa and Egypt. Market share across the region was very strong with over three quarters of revenue gaining or holding. And Power Brands were up 14%. The Cadbury Dairy Milk, Milka, Barni, Jacobs and Tang, all posted strong double-digit gains.

Turning to Latin America, organic revenue grew 12.3% for the year, almost entirely due to pricing in the hyperinflationary economies in Venezuela and Argentina. Each of these businesses has revenues of about $800 million. After our $2 billion Brazilian business, this makes them our second and third largest markets in Latin America. Our teams in Venezuela and Argentina has done a good job responding to the challenging economic conditions all year. However given these markets volatility we continue to have a cautious outlook. In Brazil despite softening category trends as the year progressed revenue was up double digits with balanced contributions from both raw mix and pricing. Biscuits, chocolate and candy each grew double digits. Slow growth covered beverages was up high single-digits. Like Russia the incremental investments we have made in A&C and route to market expansion began to pay off especially in the fast growing north-north east region of the country. Market share performance of Latin America was mixed it's a little less than half of our revenues gaining or holding share. Overall shares of our power brands faired well especially in Brazil.

However in markets like Argentina and Venezuela the effects of high inflation have led some consumers to trade down to cheaper brands. Finally power brands were up 13% with Lacta, Oreo, Club Social, Halls and belVita all delivering double digit growth.

In Europe organic revenue was up 8/10ths of 1%, vol mix contributed over 3 points of growth on the year while pricing declines nearly 2.5 points mostly due to coffee. For the full year as well as in Q4, lower coffee revenue affected the region’s growth by about 2 percentage points.

Looking at performance by category, chocolate revenue was up mid-single digits driven almost entirely by vol mix; growth across the region was broad-based with double digit growth in Central Europe. Milka and Cadbury Dairy Milk each delivered strong growth while innovation platforms such as Marvellous Creations and Bubbles [ph] made strong contribution. Biscuits were also up mid-single digits with most of the gains coming from vol mix. Oreo, belVita, and our Choco-Bakery platforms owe much of the growth. belVita [ph] clients in single digits due to lower pricing more than offsetting solid vol mix. Our convenience coffee platforms notable Tassimo and Millicano continue to perform strongly.

Gum and candy revenues were down in single digits entirely due to gum. However gum revenue in the fourth quarter was only down to mid-single digits a significant improvement from earlier in the year. Candy was up modestly driven by strength in Cadbury Eclairs and Mocha coffees. Europe’s market share performance remained strong at about 2/3rds of revenue gained or held share and our power brands grew 4% with double digit gains in Oreo, Cadbury Dairy Milk, and Tassimo and Choco-Bakery.

Finally in North America organic revenue increased 2.9%, this gets delivered another outstanding year. Revenue was up more than 5% largely through vol mix. Both Oreo and Chips Ahoy! grew double digits driven by strong flavor and packaging innovations highly successful marketing campaigns and increased in-store displays. belVita also had an excellent year, nearly doubling revenues and crossing the $100 million and we had a strong year behind double digits gains of Sour Patch Kids and Swedish Fish, but Halls grew mid-single digits.

In gum revenue declining in-line with the category down mid-single digits in the fourth quarter that’s an improvement from the first nine months of the year as we begun differ from the impact of the shelf reset.

Overall market share performance was outstanding with over 85% of the regions revenue gaining or holding share.

Turning to profits adjusted gross margin was essentially flat for the year, (indiscernible) significant improvement in our cost structure. Supported by the supply chain initiatives we described last September we generated gross productivity of well over 4% and record net productivity of 2.5%.

These savings however were offset by commodity inflation especially in emerging markets such as India and Brazil. As local currencies weakened the cost to purchasing raw materials traded in dollars, euros or sterling spiked. And while we usually have good commodity coverage it's significantly more difficult to cover these Forex impacts so it keep our cost of goods quickly.

Of course we fully expect to offset commodity inflation overtime including the impacts of currency but we’re unable to price quickly enough to protect gross margins in the back half of the year. Once these prices increases are fully implemented the methods for net productivity will flow through to improved gross margins. Adjusted OI margin was 12% on the year and 13.9% in the quarter consistent with our guidance. The full year result was essentially flat compared to the prior year, including a 10 basis point impact from the devaluation of the bolivar and a 30 basis point impact related to our decision to accelerate some investments in emerging markets. We offset much of these impacts through overhead leverage in developed markets. In Europe, margins rose 60 basis points to 13.6%. And in North America, margins increased 110 basis points to 14.9%. Clearly, we are already making progress towards our long-term margin goals for these regions.

Moving on to earnings per share, adjusted EPS for the year was $1.51. Currency was a negative $0.09 headwind, including $0.03 from the write-down of the net monetary assets related to the devaluation of the bolivar. On a constant currency basis, adjusted EPS grew 13.5%. Operations were favorable $0.04 from the year despite the investments we made in emerging markets. Much of the remaining increase on adjusted EPS was in the tax favorability related to discrete items. However, as we progressed through the year end closing process, we determined that some of these items should have been recorded in prior years. As we described in our earnings release, we have increased our 2013 taxes to reflect this revision resulting in a $0.02 reduction in adjusted EPS.

We have also made corresponding reductions to taxes for the years 2009 to 2012 and adjusted retained earnings for any items prior to 2009. All of these items are non-cash. Even with this revision as well as an unusually tax rate, high tax rate in Q4 due to a recent change in French law, our 2013 adjusted effective tax rate of around 15% was low due to many of the discrete items we discussed during the year. In 2014, we continue to expect our tax rate to be about 20% in line with our mid-term guidance.

Turning to cash, free cash flow was $2.3 billion after excluding the impact of the Starbucks arbitration. This is well above the midpoint of our previous guidance of $3 billion for 2013 and 2014 combined. The improvement in working capital was the key driver of the favorability. We took our cash conversion cycle by 14 days or nearly 50% to finish 2013 at 15 days. Cash flow was also aided by delays in capital and restructuring projects, which we expect to catch up in 2014. As a result, we are updating our expectations for the combined total free cash flow for 2013 and 2014 to at least $3.7 billion. This increase from the original target reflects the phasing of CapEx spending and stronger working capital performance.

Turning to our 2014 outlook, our goal is to grow our top line at or above the growth of our categories. In 2014, we anticipate organic net revenue growth will be approximately 4%. We expect adjusted OI to grow low double-digits on a constant currency basis. The combination of top and bottom line growth both adjusting and adjusted OI margin in the high 12% range. In terms of pacing, we expect year-over-year margin improvement each quarter. We continue to evaluate opportunities in both overheads and supply chain to accelerate margin expansion and we’ll update you of those opportunities per month.

Finally, we expect to deliver adjusted EPS of $1.73 to $1.78. As we did last year, we are providing this guidance on a constant currency basis. Based on spot rates as of January 31, currency would be $0.07 headwind to our current range. You can see the details of the spot rates used in the appendix of this presentation. We will continue to give updates on currencies each quarter based on the latest spot rates.

Let’s take a closer look at organic revenue and adjusted EPS guidance. Moving forward, we will frame our organic growth opportunity in relation to overall category performance. As we outlined in the third quarter and again today, our categories have slowed across the board. In 2013, our categories grew in aggregate about 3.8%, with fourth quarter growth at about 3.2%. And while that fourth quarter deceleration is not indicative of our 2014 expectations, it does show continuing volatility in the marketplace. Based on current trends, we expect the category growth rates to be about 4% in 2014. We will use market share gains to offset potential volatility and provide upside.

Before we move on to the EPS, I would like to highlight a couple of pacing considerations on our revenue growth this year. We expect the first quarter to grow between 2% and 3% due to a number of factors. Easter is coming three weeks later in 2014 as a result some holiday related shipments will ship from the first quarter last year to the second quarter this year. We expect coffee prices will be a headwind in Q1 and likely for the first half as we compare to 2013 periods when prices were still coming down. Obviously the recent spike in coffee prices is sustained could change our full year outlook but it won't affect Q1. In china we expect the biscuits category will reflect the same weakness at they have been in 2013.

While the impact of these factors behind us in the near term China biscuits will not be a significant source of growth. Lastly we’re increasing prices across most geographies this quarter in-line with our strategy to deploy recover commodity in Forex impacts. In the near term we may face temporary disruptions with customers and consumers as the market adapts to the new prices. We expect this impact will be most pronounced in Q1.

Turning to EPS we expect to deliver adjusted EPS of a $1.73 to a $1.78 up double digits on a constant currency basis. Consistent with our expectation of double digit operating income growth the majority of EPS growth will be delivered by operations. Taxes will be a significant headwind this year but will be more than offset by lower interest expense and shares outstanding. The figures on this chart are directional reflecting what we know today but they will provide a frame of reference for you to understand the expected EPS drivers.

So to wrap up 2013 was a challenging year but we delivered solid results. More importantly our emerging market investments and our early progress on cost reductions in both overheads and productivity set a stage for a strong 2014 especially as it relates to margin improvement. Of course 2014 will have some of the same category challenges we faced last year but we expect the top line to grow in line with our categories as when you share gains to offset market volatility. Furthermore strong growth in our operating income and margin will deliver double digit EPS growth which will put us at the top of our peer growth.

With that I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Andrew Lazar from Barclays.

Andrew Lazar - Barclays

Just two quick things from me I guess first of the 300 basis points in margin that you’re targeting through 2017 I think about 250 basis points was highlighted initially as coming from the gross margin side. I guess you’re now talking you know again more aggressively about potential overhead opportunity. I think you’ve even brought somebody board fairly recently to help look into this a bit more deeply and I guess what would you peg the overhead portion of margin through 2017 now if that’s change and does this increase the overall margin target and/or maybe just accelerated or just shift the composition of how you get there?

Dave Brearton

I think the way to think about overhead Andrew is it has been the single biggest driver of our market increase over the last few years. It was again the biggest driver of the margin increase in North America and Europe last year and we still believe we have some road ahead of us on that. You’re correct we brought James Kehoe back in at the end of last year as our top management person and a key part of his role is in fact overhead management and he is in the process now working with us to implement a zero based maturity [ph] approach going forward. So I would yes overheads will be an opportunity in 2014 and beyond. I think it's too early for us to quantify that but we will probably give you some more insight on how we’re thinking about overheads impact.

Andrew Lazar - Barclays

Right and then Irene as you have spoken about I think in your prepared remarks and even in the last quarter your category growth rates have slowed since the time of the split and certainly had the largest impact on your recent top line trends. I guess do you think it makes sense to move more towards sort of a long term top line target that is more market growth based? In other words you know market growth plus on factor for share gains you know Procter for example, Procter does the…

Irene Rosenfeld

I think we’re taking the first step in that direction with the guidance that we have given you for 2014 but without a doubt as we monitor these markets and we see how our categories are evolving it will be our intent to grow as we have said at or above those category growth rates and I think that’s the right way to think about it.

Andrew Lazar - Barclays

And just as part of that I mean in ’14 obviously you will grow in-line with the market because you got share gains offset by some volatility. I guess, over time, I would think you would expect to grow ultimately at market growth rates plus some factor, so, i.e., faster than your category growth rates over time. Is that the right way to look at it and it’s just now the market volatility that’s bringing it back down to in line with category growth?

Dave Brearton

I think it’s a question of just how we frame up the expectations. We have given guidance to be at or above category growth rates. And I think that’s the approximately 4%. Last year, we actually grew share in most of our markets and we were slightly above the category growth rates. And I think we strongly believe that the brands we have got are capable of growing faster than the category. I think as we think about it, we would rather keep that share upside for either covering any emerging market volatility like Venezuela or ideally to deliver upside to the guidance we are giving. And so that’s how we are thinking about it, but clearly, internally we are driving per share growth.

Andrew Lazar - Barclays

Thanks very much and see you all next week.

Irene Rosenfeld

Yes.

Operator

Our next question comes from the line of Chris Growe from Stifel.

Chris Growe - Stifel

Good evening. Can you hear me okay?

Dave Brearton

Yes.

Chris Growe - Stifel

Okay, thank you. I want to ask as you look at your growth profile for ‘14 and the 4% revenue growth, you had a pretty sluggish environment in the developed markets some of that’s coffee I realized, I am just trying to get a sense of emerging markets versus developed market growth in ‘14, if you can give anymore color on that?

Dave Brearton

Yes, I think we haven’t given any specific guidance for ‘14 by segment, but I think it’s fair to say that the categories last year in emerging markets grew in the sort of 8% to 9% range and our revenue growth in emerging markets last year was about 9%. So to the extent that we are saying we don’t see the category to get through is changing a lot, those are probably reasonable guidelines for next year. We still find emerging markets over time will return to double-digit growth, but that’s probably not in the next 12 months. Developed markets growth has to say, I mean, the categories have slowed a lot in emerging markets, but a big diver of that, particularly in Europe was in the coffee business. Again, we are not counting on a big recovery and that’s in the short-term, whether North American growth rates tend to be in the 2% to 3% range. In Europe, it’s a bit lower, because of coffee.

Chris Growe - Stifel

Okay. Just I had a quick follow-up if I could on your pricing versus cost inflation if you gave it I didn’t hear, but is there any range you are talking specifics but about the percentage increase in cost inflation or how much pricing you should expect across the year as a contributor to revenue growth?

Dave Brearton

We haven’t given a specific number here, but I think it’s actually not too much commodities, it’s more currency, which frankly makes it a little harder to tend down, because it’s more volatile and we have less coverage on it. But it is – it’s going to be a fairly significant driver of the revenue growth in the first half of the year, in particular and it will be more skewed to emerging markets. There is some significant pricing in Europe, but it’s going to be more skewed to emerging markets.

Chris Growe - Stifel

Okay, thanks for the time.

Operator

Our next question comes from the line of David Palmer from RBC Capital Markets.

Unidentified Analyst

Hi, good afternoon. This is actually Chris (indiscernible) for Dave. Just a quick question, just a follow-up on coffee, you mentioned it’s still a headwind in the first half, but can you provide any visibility on whether it will be a drag in the second half your view on the second half?

Dave Brearton

Yes, I think the reason we said it’s a headwind in the first quarter, specifically is last year at this time, coffee prices were still coming down, it’s about $1.45 last year at this time. And the pricing in the marketplace today is more in 110 to 120 range because that’s where green coffee has been for most of the last six months. If you ask me about the back half of the year, then I have to start projecting what green coffee costs are going to do. As you might have noticed, coffee costs spiked up about two weeks ago. We are up about 140 today. If it stays there, we would obviously adjust our prices upwards to reflect that, because coffee is an extra category that’s not built into our guidance, but I think it’s way too early to say whether that’s going to sick or not, regardless it wouldn’t affect quarter one. Quarter one will play out more or less based on where the pricing in the marketplace is today against that kind of 145 base last year.

Unidentified Analyst

Okay, great. Thank you.

Operator

Our next question comes from the line of Bryan Spillane from Bank of America.

Bryan Spillane - Bank of America

Hey, good afternoon everyone.

Dave Brearton

Hi Bryan.

Bryan Spillane - Bank of America

Just a question on I guess marketing investment in emerging markets, I think you had previously talked a bit about $100 million incremental investment in ‘13 and then I think an extra $100 million in 2014. So I guess first can you just – are those still good numbers for us to be working with? And then second kind of given the change in the environment, is there anything different you are doing with those dollars versus your original plan. I guess as the environment has sort of changed that you know perspective on marketing investments in emerging markets.

Dave Brearton

In terms of the numbers we had a plan to increase emerging market investments overtime. This year we made decision to accelerate about a $100 million for that investment from ’14 than the

’13 and I have (indiscernible) that’s part of our results this year so we did make that step up. We’re not pulling back on that but we will sustain that kind of spending as we go into next year so we’re not going to have another step change but we will try to sustain that level of spending as we did in the next year but in terms of how we think about the investments although Irene will address that.

Irene Rosenfeld

Yes we continued to see the opportunity to make foundational investments that we think will get a good return investments in route to market, investments in sales capabilities for example so that we’re well positioned as these markets recover and we certainly did see a good return on our investments in markets like Russia and India and Brazil last year. So we will continue to look at those investments. We’re going to pull that a little bit on some of the AMC investments as we see the categories continue A&C investments as we see the categories continue to grow at the rates that are out there today because we’re just not finding that we’re able to change the trajectory much with those investments. So that’s how we’re thinking about it but we will obviously continue to monitor the markets and make the adjustments accordingly.

Operator

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

Eric Katzman - Deutsche Bank

Okay couple of questions, first on well I guess you call it marketing, admin and research so the it looks like you’ve been running in that line roughly 2.1 billion to 2.2 billion a quarter is that like a decent run-rate because the comparison for whatever reason I’m not sure it would hurt you or it was so costly a year ago like so much margin expansion came from that line. You know your gross margins were actually down in the quarter so I’m just trying to get a sense as to what is the right level there and if you could also kind of say what advertising and promotion were you know up or where it was for the year in the quarter that will be helpful.

Dave Brearton

Sure. I mean that line we would have called selling, general and administrative expenses includes all of what we call our advertising and consumer promotions. It includes all of our overheads outside the manufacturing area. It also includes other income expense which has some of the sort of one-off items that would come from asset sales and stuff. So it is a broad bucket. I think the reduction year-over-year is partially Forex frankly but also partially overheads are down and particularly down in North America and in Europe where we have had pretty good programs all through the year and we have been building, saving as we went through the year.

Quarter Four a year ago was also relatively high particularly in North America because that was the first quarter after the spin and that’s really when the dissynergies hit sort of the before whack in the fourth quarter last year. So that’s kind of what’s in that bucket and what’s driving the reduction. In terms of the A&C spending we said that we spent just over 9% in 2012, what we finished last year about the same actually. We invested more in emerging markets but we have some good productivity programs in the developed market that allows us to get some efficiencies out of that. So again the same kind of reach.

Eric Katzman - Deutsche Bank

Okay and what are your plans for 2014 on that number?

Dave Brearton

We haven't given any guidance on that but I wouldn’t expect any material changes up or down. We will talk probably a little more about that soon.

Eric Katzman - Deutsche Bank

Okay and then in terms of your I guess so just so I understand it more clearly your reported revenue you’re like right now you’ve got up organic I guess 2 to 3 that you’ve got you ended the fourth quarter on line a negative 2.5 on currency but you’re saying that you’re implementing pricing so your hopeful that the pricing offsets the currency on top line so in dollar terms you hope for the year to still for your organic to basically include your reported?

Dave Brearton

When we talk about pricing to cover commodities and currency we’re talking about transaction. So the impact of currency on the cost of importing materials into a specific country. We don’t try to price to recover in the translation impact of currencies so that’s part of when we talk about we gave guidance on a constant currency basis, the approximately 4% just on a constant currency basis. If currencies stay where they are today, then it would come up a bit because of that. As we said, the EPS impact of the spot today is about $0.07, so you would expect that to come down a bit on reported basis, but I would expect those currencies to move around a bit as we go through the year.

Eric Katzman - Deutsche Bank

Okay. And then I guess last question to Irene, Europe you talked about some margin improvement out of that market, it sounds like in some places, France, in particular is very important to you, but France is in some ways become more challenging in terms of their regulatory government approach to business. So some of the improvement that you are hoping for in that region, is that still feasible or is that kind of maybe being pushed out until the environment becomes a little more friendly for you to do so?

Irene Rosenfeld

No. OpEx has always been a challenging environment in which to do business. And we adjust our timing typically accordingly as a result of that, but I am very pleased with the performance of our European team this past year and that they improved their margins about 60 bps and it was primarily driven by lower SG&A across the board. So that’s the challenges in any individual country doesn’t affect our overall confidence and the ability to continue to drive margins in that region.

Eric Katzman - Deutsche Bank

Okay, thank you. See you next week.

Irene Rosenfeld

Okay.

Operator

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

David Driscoll - Citi Research

Yes. Can you hear me?

Dave Brearton

Yes.

David Driscoll - Citi Research

Super. First one, just a little one and then a bigger picture question, can you quantify the Easter effect in 1Q, is that about – is that worth about a point?

Dave Brearton

Yes, I would rather not quantify it, because truthfully, I think last time we had an Easter shift that shifted literally the entire Easter shipments this year three weeks, so maybe partial. So I think it’s going to depend frankly as we negotiate with each customer. So we have given you an aggregate of 2% to 3% and a number of factors below that, but I’d rather back in them specific from Easter.

David Driscoll - Citi Research

Okay. On gross margins, is it fair to say that the gross profit margin was strong or stronger in North America and Europe and hit pretty hard in the emerging market regions, would that explain the weak fourth quarter gross margin?

Dave Brearton

Yes, directionally that would be right. The biggest hits we got on the gross margin line were from currency, which as I said we don’t have coverage on currency in a lot of the emerging markets, whereas we can cover that pretty easily for Europe and North America. And so that demonstrates quickly, we are putting the pricing in place across the globe today, but in the back half of the year, there was a lag as we have the hit on the currency and we didn’t get pricing to resume Q1. So yes, the gross margin was more in the emerging markets less in the developed markets.

David Driscoll - Citi Research

Any way to quantify that number?

Dave Brearton

I think as you look at the some of the OI bridges, you can see by reason where the margin declines were, but gross margin was a decent component of that.

David Driscoll - Citi Research

Alright. Related to this then, so you are taking pricing in these emerging markets that it’s kind of FX based pricing, not really the underlying commodities, how is it being received, what’s the volume sensitivity here and frankly is this kind of the key risk to choose one and two in ‘14?

Dave Brearton

Yes, I think it’s correct, it is resolving the underlying costs trends. The issue on the currency is not the translation, which I would agree would be more (indiscernible) to U.S. companies, but if India buys cocoa, they are buying at British pounds and so the Indian rupee at the values they have got to pay more and pay us to get their cocoa. So if the local cost increase, all the competitors face the same thing. So we are not going to be able to step with the industry. The reaction we talked about and the sensitivity in emerging markets is likely to be more from consumers and it just takes a while to get the price back on a potential way to make sure that in every channel, there is a right path and the right size and right price point for every consumer and get that all the way through the system, it pays consumers a little bit, get used to that. And typically it’s a quarter in emerging markets. So that’s really what we talked about in the first quarter has been one of the headwinds, but I would say that – I would consider that normal when you take these kind of price increases.

David Driscoll - Citi Research

If I could sneak one final question in, Irene, just can you comment on the coffee operations, frankly it’s always sought that this was a scale provider in Europe and perhaps even in Russia, would you agree with that and is there any desire or sensitivity on your part that this would be an operation that you would consider selling?

Irene Rosenfeld

Well, I am not going to comment on any hypothetical stuff David. I think the reality is that it does provide an important scale role as you say in Europe and Eastern Europe and it has been historically it's gone contributor to our profitability in our cash flow. This cash year has been quite the anomaly given the tremendous volatility that we have seen in pricing and as we have mentioned it's been a disproportionate as having a disproportionate impact on the top line. We have been able to protect margin. So net-net it is a volatile category it has performed reasonably well and well in line with our portfolio over the last couple of years, but 2013 was a rather unique year.

Operator

Our next question comes from the line of (indiscernible) with Goldman Sachs.

Unidentified Analyst

So first real quick housekeeping question, I apologize if I missed this already. The SG&A drop in the quarter was much bigger than we expected. Can you help us decompose how much of that was advertising related versus we had sort of overhead efficiency.

Dave Brearton

I don’t want to get into breaking that every time I would say in the quarter the biggest contributor to the margin gains we found North America and Europe were overheads and I think a lot of the other stuff that’s in that line there is other income expense which has an asset sales. Last year we had some as well but they were in a different quarter and this year it's headed fourth quarter.

So there is a lot of numbers in there I think the takeaway you should have is we’re continuing to sort of support our business on the A&C side and the real underlying margin growth in North America and Europe is driven by overhead cost management particularly as we run through the back half of the year.

Unidentified Analyst

Okay. But don’t necessarily take this 23% of sales to the bank on a go forward?

Dave Brearton

I don’t want to get down in that level of detail but I think there is lot of things in that line so I wouldn’t try to worry trying to quantify number there.

Unidentified Analyst

Okay and I want to comeback real quick to one of the categories you highlighted as weak but a little bit less weak that being gum. Hershey’s that this ongoing campaign to try to crowd out the or shrink the gum sets at retailers, get more candy, get more breath fresheners. It seems like that push is about to accelerate on the back of this new product technology that is (indiscernible) I think it's Ice Breakers Ice Cubes product. What are you expecting or I should say where do we stand right now in terms of shelf resets and what are you expecting to happen to market most importantly, what are you certainly assuming in your underlying outlook here for gum in North America?

Irene Rosenfeld

Well as we said we’re not expecting any dramatic recovery in the category anytime soon. Obviously our emerging markets businesses continues to grow nicely. It's been the developed markets that have been a challenge and within that the U.S. We have made great progress from a shared standpoint and it's been driven by the steps that we took to address that, it's been about our shelf resets, our focus on some of the core benefits like freshness and oral care. It's been execution at point of buying and as well as the product assortment on shelf. So we’re going to continue to use that play book we have got a nice pipeline of innovations coming behind some of the focus on freshness for example and we have got a number of test in place to address the long term growth of the category that we’re hoping will start to improve. So we remain quite committed to the gum category, we do see our competitors taking a number of actions and we actually think that will be good for the category overtime.

Operator

Our next question comes from the line of Matthew Grainger from Morgan Stanley.

Matthew Grainger - Morgan Stanley

I wanted to just follow-up on your candy business specifically and maybe this is just a surrounding issue but my recollection was that the business through the nine months was grown closer to mid-single digits and today you cited more of the low single digit figure for your own sales despite the category being up 4.5%. Can you talk about any specific challenges you’re facing in that business and initiatives you might be investing behind next year to address them?

Irene Rosenfeld

We continue to see that as a nice growth engine for us. There have been some puts and takes on that business for example our Halls U.S. business has been a little weaker year-over-year because of the flu season up until the end of last year was not quite as robust as it has been a year ago. We have seen some challenges in China on our chocolate Eclairs business but net-net candy continues to be a quite an attractive category and we do expect that that will play an important role in our growth algorithm going forward.

Matthew Grainger - Morgan Stanley

Would you expect to be able to grow in-line with the category next year or is there a period of investing?

Irene Rosenfeld

There is nothing. We have got a nice pipeline of innovation and we would expect to grow in line with the category in 2014.

Matthew Grainger - Morgan Stanley

Okay, thanks. And then just one additional question on Europe, it seems like you have good momentum behind the Tassimo business, you have also been launching the compatibles and other things. Given that expectation for some pretty substantial margin expansion next year and they need to be very focused in where you are investing, is that a business where you would expect to continue increasing support next year?

Irene Rosenfeld

Yes. Well, within our European portfolio, the on-demand and convenient coffee has reflected in Millicano have been the key drivers not only of our revenue growth, but also of our margin improvement. So those are critical enablers in our European and our Eastern European businesses. So we will continue to invest behind them.

Matthew Grainger - Morgan Stanley

Okay, thanks Irene.

Irene Rosenfeld

Okay.

Operator

Our next question comes from the line of Robert Moskow with Credit Suisse.

Robert Moskow - Credit Suisse

Hi, thank you. Two questions. One is in fourth quarter, I thought I saw in the notes that there was $0.03 gain on sale this quarter from asset sales in India, UK, Italy, just very quickly is that last year or is that this year?

Dave Brearton

That’s this year. Last year, we had a very similar number, but it was in prior quarters and it was in Russia and Turkey last quarter. I think the simple way to think about is when we bought Cadbury in a little we have got a lot more facilities underneath them and we are just claiming that up, because it reduces our cost of maintaining these over time.

Robert Moskow - Credit Suisse

How much operating income did that contribute in fourth quarter?

Dave Brearton

I mean every $0.01 for us is about $25 million of OI, so…

Robert Moskow - Credit Suisse

Okay. So put a regular tax rate on it. So well that set up the tough comparison for next year, because you are leaving it in your adjusted base here for operating income gains, isn’t it?

Dave Brearton

Yes, it’s in the adjusted base as I said. We are still doing cleanup. I mean, I am not going to make a guidance number that will give every quarter, but I don’t view it as a material headwind for us, no.

Robert Moskow - Credit Suisse

Okay. And then the final question is of that $0.15 to $0.20, how much would you characterize as really good visibility like we know how much overhead we are cutting, we know that our marketing dollars are going to, if it sounds like the code here is that marketing dollars are going to be maybe flat, maybe even down in 2014?

Dave Brearton

No, I think as you look at the $0.15 to $0.20, it’s going to be the combination of a few things. Number one, we are growing revenue around 4%, so that’s the good start. We are fully pricing commodities in Forex and so while that’s not necessarily margin a increment, it gives us the opportunity to take more of that productivity to the bottom line. So we would expect gross margins to improve and we have got good momentum on the overhead programs that we started during the year – this year. We expect to see that continue into next year and that’s going to be a big driver. So the drivers of the $0.15 to $0.20 in operating gains are the double-digit OI growth. As we have talked about – in our view pretty much within our control and that’s why we are fairly confident.

Robert Moskow - Credit Suisse

So I completely understand, the 4% organic income – organic sales growth includes pricing to cover transactional currency, is that right or it does not?

Dave Brearton

Yes, it does. So I think that past year, all our revenue growth came from pretty much all of it came from volume mix. I think it will be more balanced in 2014, because we are putting in pretty material pricing in emerging markets and in the Chocolate Dairy categories to be covered by commodity.

Robert Moskow - Credit Suisse

But it’s the only purpose of that pricing is to offset the higher costs, isn’t that; yes you say neutral to operating income growth?

Dave Brearton

It would be neutral to operating income growth other than make sure that our gross margin is protected, so the net productivity can drop or significantly more of the net productivity can drop through. So it’s more a question of yes, there will be some portion that is volume mix and that will drop through the OI, but probably more important than that, it gets us more of the net productivity dropping through when the gross margin bounces.

Robert Moskow - Credit Suisse

Okay, thank you David.

Operator

Our next question comes from the line of Alexia Howard from Sanford Bernstein.

Alexia Howard - Sanford Bernstein

Good evening everyone.

Irene Rosenfeld

Good evening.

Alexia Howard - Sanford Bernstein

Can we ask first of all about China, where quarter on now are you done with the trade inventory rationalization? Do you have any better visibility into when that business might start to stabilize?

Dave Brearton

Yes. I think the simple answer is yes, we are done with the inventory destocking that all came out – the end of that came out in the fourth quarter. And as we look at first, the start to the year, we would say the businesses are pretty stable putting already, but we are feeling good about the business already. What we warned about was more about how the comparisons look versus prior year. Last year, we had very strong growth rate in the first half. It’s only possible, more difficult than the first half. And obviously we didn’t have a terrific back half so we are costing in a much easier in the back half. But in absolute dollar shipments and time is going out the door, I think we are already in a pretty good run-rate month over month.

Alexia Howard - Sanford Bernstein

And then coming back to free cash flow guidance it looks as though I think you were talking about 1.4 billion at least in 2014 when you did the math on the numbers that you shared earlier. Why this slowdown? Is it just that you’re taking off the improvements in the cash conversion cycle this year and saying the underlying numbers are about that level?

Dave Brearton

The cash provided by operating activities which is a combination of our earnings and the cash conversion cycle essentially is the same and we said 4.1 plus because hopefully we will do better than that. So we’re not taking our foot off the gas on the cash conversion cycle, the reason it slows down at the bottom is because the CapEx we started spending about 4% of CapEx we said we were probably going to spend around five for the next 2, 3, 4 years and in 2013 we’re kind of half way between we got up to 4.5%. We will probably spend 5% of CapEx in 2014. So that’s the biggest reason you see the slowdown the other piece is the restructuring spending which is basically is more skewed to 2014 less skewed to 2013 so there is a bit of phase in there. But in aggregate across the two years we’re actually spending a little bit less CapEx and we’re spending the same amount of restructuring. So that’s phase in place.

Operator

Our next question comes from the line of John Bumgarner from Wells Fargo.

John Bumgarner - Wells Fargo

I read your data, as you look at the landscape in China, we have seen some recent news in terms of Hershey’s doing a deal, why we ain’t be involved with JVs. Is there anything in the country either with the change in leadership or otherwise or maybe you think the environment for opportunities strategically is changing or that you can have opportunities as well for kind of build more distribution in that market going forward?

Irene Rosenfeld

We do see a great opportunity there John and we’re continuing to invest. As we have talked about, we have got over a $1 billion business there to-date. We just watched gum about a year ago with a sizeable $100 million business for us and overtime you will see us continued to invest in the country. So I think the mechanism by which we choose to invest may vary from category to category and from company to company but it is a big growth opportunity for us and as we see the biscuit category we cover we’re quite confident that China will continue to be a growth engine for us.

Operator

Our final question comes from the line of (indiscernible).

Unidentified Analyst

Are you concerned that the inflation that some Latin American countries are experiencing is that ultimately consumers’ willingness to spend on the product that you sell and therefore limits your presence on this country?

Dave Brearton

Yeah I think that’s basically an Argentina, Venezuela thing and I think truthfully even last year as I talked about earlier the growth in those two countries that we got was basically for pricing and part of through vol mix. So yes consumers are trading down to lower priced brand and their having to monitor their cash carefully. So Argentina and Venezuela have been continued to be difficult markets. I think it's truthfully not a lot different today than it was a year two ago in Venezuela. Argentina may have gotten a little bit worse but we’re pretty experienced with the (indiscernible) those markets.

Unidentified Analyst

You really have not gone through that your pricing power might diminish eventually?

Dave Brearton

I think it's not as much of a consumers, but consumers and most companies are pretty used to having do business in these countries but maybe regulatory issues. Last Argentina put in price controls for a while and that hurt us a bit but then there was none afterwards. So are the kinds of things that tend to cause a little more short term issue but it tends to be temporary. It's just the way those countries operate.

Unidentified Analyst

Okay and then just an housekeeping question, can you share with us what you expect for interest expense and shares outstanding for our fiscal ’14?

Dave Brearton

Yeah I’m not going to give you a shares outstanding although you probably calculate it, we had $2.7 billion buyback last year and we said we will spend between 1 billion and 2 billion this year. I think our interest expense we said that between the interest in shares we would have $0.11 to $0.13 benefit and the benefit is roughly half and half between interest and shares. So interest will be lower mostly because we did, got a little bit less back and we did the debt (indiscernible) and refinancing last year which took down the cost of our long term debt. So that will come down. I think on slide 17 in the presentation, I’m sure we earlier, it identifies that.

Operator

I will turn the call back over for closing remarks.

Dexter Congbalay

Hi this is Dexter; if there is any follow-up questions obviously Nick and I will be available for the rest of the evening in fact for the rest of the week. Other than that thank you for joining us and we will see you at CAGNY.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mondelez International's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts