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Executives

Irene Rosenfeld - Chairman and Chief Executive Officer

David Brearton - Executive Vice President and Chief Financial Officer

Mark Clouse - Executive Vice President and President, North America

Analysts

Robert Moskow - Credit Suisse

Mondelēz International, Inc. (MDLZ) Consumer Analyst Group of New York Conference Call February 18, 2014 12:30 PM ET

Robert Moskow - Credit Suisse

Good afternoon. Could everyone find a seat, its 12:30, we're going to get started with our next speaker. Thank you. I want to thank Mondelēz International for coming today and for sponsoring our break after this. Thank you very much.

Here on the dais are Irene Rosenfeld, Chairman and CEO; David Brearton, Executive VP and CFO; and Mark Clouse, Executive VP and President of North America.

For those of you, who follow Mondelēz, I would say that it is never boring. In just four years, Irene and team have engineered a transformational acquisition, a transformational separation and attracted the attention of some well-known investors. Mondelēz is now a fast growing pure-play snack company with powerful brands like Oreo, Trident and Cadbury with a strong platform in emerging markets.

Here to tell us more about the dual strategy for growth and operational efficiency is Irene and her team.

Irene Rosenfeld

Thanks Rob. Good afternoon and thank you for joining us today. Before we begin, please take note of our Safe Harbor statement. As you know, some of today's statements include forward-looking remarks and non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations posted on our website.

So let's get started. As you know, we just completed our first full year as a focused global snacking powerhouse. We launched our company with great optimism and confidence that it had the potential to deliver top-tier financial returns and create significant value for our shareholders.

Today, I remain more convinced than ever that the future of our company is bright. Our portfolio of categories and brands as well as our growth potential are unrivalled. We continue to expand our market shares fueled by prudent investments behind our Power Brands, innovation platforms and route-to-market capabilities.

We've initiated significant cost reduction programs in both our supply chain and overheads to drive margin expansion. We've strengthened our balance sheet, improved our return on invested capital and boosted cash returns to shareholders. In short, we're making meaningful progress and we have solid plans in place to go even further.

So that's what we'll talk about today. First of all highlight our company's many competitive advantages and why we believe we have the best set of assets in our industry to create value for shareholders. I'll describe how changes in the macro environment, since our launch, have affected on near-term strategic priorities and long-term growth algorithm.

Then Dave Brearton will provide more detail on our capital allocations and margin improvement initiatives, some like our supply chain reinvention are well underway, while others like zero-based budgeting are just beginning. Lastly, Mark Clouse will discuss the strategy, performance and outlook for our North America region.

As we announced last week, we delivered solid 2013 results in a very challenging environment, but we know we can do better. The plans we're executing now, will enable us to deliver strong topline growth, significantly expand margins and continue to generate solid cash flow in the years ahead. We believe these efforts will deliver top tier shareholder returns.

Why am I so confident? Because we're a $35 billion global snacking powerhouse with many unique competitive advantages, including three quarters of our revenue from fast growing snacks, leadership in most of our categories, an unrivalled portfolio of iconic brands, proven innovation platforms and an enviable geographic footprint.

Let's take a closer look at each of these, starting with, why do we love snacks. First, it's a big opportunity. Snacking is a $1.2 trillion market worldwide with packaged snacks accounting for about half of that, and its growing fast, up 5% to 6% annually for the past three years. By snacking, we mean anything eaten between meals or as a meal replacement.

Snacking is a common behavior in most food cultures, and we know that people snack for three broad reasons. First, we have a physical need, to feed and recharge our bodies, so we snack to fuel. Second, we have an emotional need, to lift our moods, so we snack for a treat. And third, we have a mental need, to refresh our minds, so we snack for a boost.

Today, we are well represented in treats with brands like Oreo, Milka and Cadbury, but we still have tremendous headroom to grow in the fuel and boost need states. Around the world, snacks offer very attractive growth prospects. First, it aligns with many consumer trends, including the fuel, treat, boost need states that I just mentioned.

Second, consumption is expandable. Snacks are highly responsive to advertising and in-store merchandising, and therefore to generating incremental sales. They are easily packaged in various sizes and formats from single-serve to family-packs. As a result, they can be made available wherever and whenever consumers want them. This allows us to provide good value, while meeting demand for different targets and usage occasions throughout the day.

Third, snacks offer attractive growth, especially in emerging markets. As GDP rises in markets like Brazil, Russia, India and China, consumption of snacks increases as well. And fourth, snacks carry higher margins than many other food products. That's because in general private label has lower penetration in gum, chocolate and biscuits. In addition a greater percentage of sales come from higher margin immediate consumption channels and the hot zone near the cash register, where you typically find only leading brands.

Historically, our snacks categories have grown at rates of around 6% or more. Although our categories have slowed recently, due to macro economic headwinds, we expect that growth rate for snacks will return to historical levels. The trend toward snacking remains strong. Consumers continue to move away from meals at fixed times to more frequent, but smaller mini meals, providing numerous snacking occasions.

There is also a very strong correlation between GDP per capita and snacks consumption, as the macro economy recovers, snacks growth will improve, but we're not counting on a rebound in 2014. In fact, we've accelerated our margin expansion programs to ensure we can deliver strong results for shareholders even in a slower growth environment. As the clear global leader in our categories, we're well-positioned to take full advantage as they recover.

We are number one in biscuits, chocolate and candy and a strong number two in gum. We are also number one in powdered beverages and number two in coffee. Our leadership is broad-based. We are number one or two in almost every category and every region in which we compete. And over the past few years, we've improved our share position.

In 2013, nearly 70% of our total revenue gained or held share with strong performance in our two biggest categories, chocolate and biscuits. In any given year, of course, some markets maybe volatile and our best defense against the slowdown or market specific events is to increase our shares. When volatility is not a significant factor, these share gains have the potential to deliver upside to our annual growth targets.

Within our portfolio, our Power Brands are our biggest, fastest growing and highest margin global and region trademarks. Today they represent nearly 60% of our revenue. They're growing at about twice the company rate and they typically carry significantly higher margins than our other brands.

We also continue to drive growth from our proven innovation platforms such as Bubbly and Marvellous Creations in chocolate, Barny soft cakes and biscuits and Halls soft chews in candy. In each of the past couple of years, about 13% of our revenue has come from new products.

We also have a large and growing emerging markets footprint. In 2013, emerging markets accounted for about 40% of our revenues and grew 9%. With continued strong growth, emerging markets are expected to comprise about 45% of our revenue by 2016.

Putting it altogether, we believe we are well-positioned for sustainable growth and strong value creation for our shareholders. Over the long-term, we'll leverage our category leadership, Power Brands, proven innovation platforms and strong emerging markets footprint to deliver organic net revenue growth that's at or above our categories.

In terms of profit, we expect significant actions we're taking to reduce cost and improve efficiency will drive increases in adjusted operating income in high-single digits on a constant currency basis. Of course, as adjusted OI grows faster than revenues, our OI margin will expand.

Last year, adjusted OI margin was 12%, and we continue to expect it to reach 14% to 16% by 2016. Margin expansion in developed markets will lead the way toward this goal as we restructure our supply chain and target fit-for-purpose overheads. These programs are fully within our control and are especially critical in a slower growth environment.

Lastly, adjusted EPS should grow double-digits over the long-term, driven by the strong growth in operating income. We would also expect modest increases in debt and interest expense as well as continued share repurchases.

Let me now turn it over to, Dave, who will update you on our margin improvement initiatives and capital allocation. Dave?

David Brearton

Thanks, Irene, and good afternoon. As Irene mentioned, we expect significant margin expansion over the next three years. Supply chain reinvention will be a key driver of this margin improvement. As Daniel Myers, the Head of our Integrated Supply Chain laid out in September, this effort centers around the five priorities outlined in this slide.

Through these initiatives, we expect to deliver benefits of approximately $3 billion in gross productivity savings, $1.5 billion in net savings and $1 billion in incremental cash over the next three years. We've made significant progress on each of these priorities in 2013.

First, we upgraded over a third of our key supply chain leadership roles by recruiting great talent from outside the company and promoting top talent from within the company. We've strengthened our Lean Six Sigma capabilities. We now have 45 Master Black Belts, 300 Black Belts and 1,900 Green Belts throughout the company.

Second, we've developed new global manufacturing platforms, our lines of the future for biscuits, chocolate and gum. Lead lines for Oreo and Gum are installed in undergoing qualification. The chocolate lead line will begin qualification in March.

Third, we have made tremendous progress on redesigning our network. To date, we've closed or sold nine plants and streamlined another 21 with more than half of those in Europe. Taken together, these actions have reduced our global headcount by more than 3,000. At the same time, we've broke down our leading-edge facilities in Mexico and India and announce major expansions in the Czech Republic, the U.K. and the U.S.

Fourth, we achieved record gross productivity of 4.5% of cost of goods sold, while net productivity after inflation in business investments was at a record 2.5%, double the levels of 2011.

Finally, we significantly reduced our cash conversion cycle by 14 days or nearly 50% to finish the year at 15 days. This was a key contributor to our strong cash flow. We are making good progress in our supply chain reinvention program. We expect gross margin book-to-bill in 2014 and these programs will sustain that momentum in the 2015 and beyond. In the near-term, savings from overheads will be the main driver for margin gains and provide the fuel for growth investments.

So what are we doing about overheads? Let me first give you a quick baseline on our SMG&A costs. In 2013, these costs were about 25% of revenue with advertising and consumer support at 9.2%.

As we said before, A&C spending will represent between 9% and 10% of revenue in any given quarter, depending on the timing of marketing initiatives and our entrance in the white-space market. We are focused on reducing the remaining 14% of SMG&A to ensure overheads our fit-for-purpose for the size and scope of our company.

Selling expenses represent nearly half of this and include the cost of DSD in North America and similar routes to market in many emerging markets. We're already making progress on several fronts.

Mark will talk about North American initiatives in a moment. And in Europe, we're simplifying and standardizing processes as we shift work to lower cost countries and leverage our investment in SAP. Last year, initiatives like these were critical conditioned, contributors to our OI margin improvement with Europe up 60 basis points and North America up a 110 basis points.

While our current overhead initiatives are bearing fruit, we know we can do much better. As a result, we are looking to accelerate our cost reduction efforts by adopting zero-based budgeting or ZBB. ZBB offers a disciplined process to identify and capture sustainable cost savings, with sustainable, being the key word.

Let me be clear. This is not a slash and burn effort. In fact, we'll make sure we retain the appropriate balance between our top and bottomline. Our goal is to improve the efficiency and effectiveness of our organization and to quickly identify and eliminate waste. To implement this approach, we've lined up our leaders, internal teams and external resources with James Kehoe at the helm.

James was our finance lead in Europe as we increased that region's margin by about 300 basis points since 2009, mostly through overhead reductions. And he was instrumental to the streamlining of Kraft North America prior to the spend. In addition, we've hired a center to help us rapidly take out cost, leveraging the tools and advisors to help 3G with their investments in AB InBev and Heinz.

And while we build the ZBB discipline across the organization, we're securing quick cost saving wins to build momentum as we create a more cost focused culture. Later this year, we'll update you on the scope and timing of potential cost savings.

So through a combination of topline growth, gross margin expansion, leveraging overheads we expect to drive high-single digit adjusted OI growth over the long-term. This will be the primary driver of double-digit adjusted EPS growth.

Our interest expense should rise only modestly with our debt as we remained committed to maintaining an investment-grade rating. And while our tax rate is likely to be approximately 20% for the next few years, we expect it will gradually increase to the mid-20s over time.

With respect to cash flow, as we described last week, we increased our combined 2013, 2014 free cash flow to at least $3.7 billion. This was up from our previous guidance, up $3 billion. So how we're going to use that cash? When we launched our new company, we outlined priorities and they haven't changed.

We will continue to prudently deploy capital in a manner that will generate the greatest return. This includes reinvesting the business to drive top-tier growth.

Over the next couple of years, we'll spend about 5% of revenue on CapEx as we invest in new state-of-the-art facilities and upgrade older production lines in Europe and North America.

We'll also continue to make foundational investment to expand roots to market in emerging markets as we continue to position ourselves for long-term growth. Of course, we'll continue to make prudent investments in A&C support in these markets.

We'll also explore opportunities for tack-on acquisitions with a focus on emerging markets where we can gain additional scale in our categories or enhance our distribution capabilities. We'll look to return capital to shareholders in the form of dividends and share buybacks.

Last year, we resumed dividend increases from $0.13 to $0.14 per quarter, up about 8%. Our dividend philosophy hasn't changed. We expect to pay a modest dividend and increase it overtime. Currently, we have a $7.7 billion share buyback authorization through 2016.

Last year, we bought back $2.7 billion of stock, including the accelerated share repurchase program we announced in December. That means we have about $5 billion remaining and we expect to repurchase $1 billion to $2 billion of stock annually through 2016.

And finally, we may use our cash to pay down debt to maintain financial flexibility. While, we don't target a specific leverage ratio, we remain committed to maintaining an investment-grade rating and access to Tier 2 commercial paper.

Let me reiterate the fundamentals of our long-term algorithm. We expect to grow organic net revenue at or above the growth of our categories. We expect adjusted OI to grow high-single digits on a constant currency basis over the long-term. Just to remind you, however, our 2014 adjusted OI guidance is for double-digit growth. We expect this combination of top and bottomline growth will drive significant margin expansion.

And finally, we expect to deliver double-digit adjusted EPS growth. We believe these objectives represent a powerful framework for delivering top-tier shareholder value.

Now I'd like to introduce Mark Clouse, President of our North American region. During his nearly 20 years with us, Mark has served in a variety of leadership positions around the world, including as Head of our Global Biscuits Category and as General Manager of our businesses in China and Brazil.

Since taking over the North American region in 2011, he has been instrumental in driving our strong biscuit revenue and share performance, transforming our supply chain network and expanding margins.

With that, I'll turn it over to Mark.

Mark Clouse

Thanks, Dave, and good afternoon. It's a real privilege to share with you today the strategic plans for Mondelēz North America as well as the progress we've made in staging business for sustainable top-tier performance.

Let's take a first look at the composition of our business. North America represents approximately 20% of the company's total sales with over $7 billion in revenue. We generate about $6 billion of that in the U.S. and about $1 billion in Canada.

In terms of our categories, more than three quarters come from biscuits. Together, gum and candy is about 17% of the business, split roughly equally between the two.

Finally, we have a small business on chocolate focused in Canada. Our market shares are strong. We're number one or two in the majority of our focus categories, both in the U.S. and Canada. This includes a very strong number one position across the regions in biscuits. Our biscuit share is 45% and roughly 2.5 times our nearest competitor.

Turning to our objectives. We've set clear targets for our region, both on the top and bottom lines. Our first objective is to deliver sustainable revenue growth and outpace our competitors. This means growing at or above the category. Last year, we delivered strong results despite a tough environment.

Our organic revenue grew 2.9% and this was high quality. Volume mix contributed 2.5 percentage points and share performance was strong, with 85% of our revenue growing or holding share. These results were fueled by our focus on Power Brands improving innovation platforms.

Our dedicated direct-store delivery operation and the stabilization of our U.S. gum business. In fact, our DSD operation has driven 10 consecutive quarters on U.S. biscuits of mid-single digit growth and also we have now grown share over the last three quarters of the year.

Our second objective is to transform margins through better cost management, supply chain reinvention and fit-for-purpose overheads. We expect to expand adjusted OI margin by 500 basis points from our 2012 base of around 14%. Delivering this will bring us in line with top-tier players.

Here again, we're putting points on the board. In 2013, our adjusted OI margin rose to 14.9%, up a 110 basis points. This progress truly reflects better management of our fundamentals, specifically stronger cost management, including net productivity of 2.5%, a 50 basis point reduction in overheads as a percentage of revenue, partially offsetting the synergies left from this spin-off.

The recent move to a category-based model, leveraging our strengths across both the U.S. and Canada will help sustain this momentum, and lastly, improved effectiveness of our A&C spending. The supply chain reinvention, I'll discuss in a moment will come on top of these foundations.

Our third objective is to have a world-class team in place to deliver sustainable revenue growth, while keeping cost low to contribute to our overall margin objectives. We'll focus on the following roadmap to deliver steady progress on growth and margins: first, leveraging our Power Brands and innovation platforms; next, driving sales execution excellence and DSD; third, reinventing our supply chain; and finally, creating a fit-for-purpose organization.

Let me briefly walk you through each of these. We start in a good place. In the U.S., we see growth rates are over two times faster the non-snacking food and beverages. So we're applying our fuel, treat, boost framework to help us select and position our Power Brands.

Today, these brands represent about two-thirds of our portfolio. They drive the majority of our growth and they carry gross margins that are more than 900 basis points higher than our other brands. This snacking framework also enables better focus and choices when it comes to A&C spend. For example, our Power Brands receive 85% of our total A&C spend.

Let me share a U.S. example around the snacking need for fuel, which is a $52 billion market, growing at a rate of nearly 6%. Fuel is about making snacks work harder and bringing more meaningful benefits. Simply put in today's world, a bag of chips just isn't going to cut it. Brands like belVita and Triscuit directly address this need and are well-positioned to take advantage of the trend.

BelVita delivers nutritious sustaining energy in the morning and Triscuit bring simple wholesome ingredient or more fulfilling snack. The fuel, treat, boost framework has not only helped us select Power Brands, it's also helped us choose better marketing messages and the most appropriate vehicles to drive increased relevance in growth. In 2013, we spent about a quarter of our media budget in digital and mobile, and our goal is to be over 50% by 2016.

Digital programming has proven to drive twice the ROI of traditional TV advertising. There is no better example than Oreo. It may seem impossible the century old brand could win the Grand Prix at the Cannes for the world's best cyber campaign. But that's exactly what Oreo did, setting a new standard for matching clear brand equity and voice with real-time activation.

Did you know that Oreo is the number one food brand on Facebook with over 35 million fans. Oreo followed up on its Dunk in the Dark Super Bowl Tweet with the first ever product giveaway on Twitter, using a one-time hashtag that was integrated into a new Oreo TV ad that aired during the Grammy's.

Now, you maybe wondering, does it really drive sales? Absolutely. Oreo has grown double-digits for two years in a row, generating over $1 billion in revenue in North America last year. So we're applying the Oreo learning's to more challenged brands, like Trident, and it's proving to be very successful.

In 2013, we transformed the Trident communication bundle. First, we activated functional messaging focused on fighting cavities to give consumers a reason to chew. In addition, we transformed the media mix, to shift our investment away from TV to more relevant and higher returning digital, mobile, in-store and out-of-home, with critical proximity to key retailers.

As a result, in the second half last year, Trident grew 2 share points and was key to stabilizing our gum share. The initiative will now be expanded and applied to other gum opportunities to support a more sustained turnaround. For example, the launch of our Sour Patch Gum is fully supported by digital. We're pairing our wining candy brand Sour Patch Kids with our Stride gum brand to help rejuvenate category growth in gum.

Our consumer framework has also helped informed innovation, another critical driver of our performance. In 2013, innovation generated an incremental $1.2 billion and represented more than 17% of net revenue. This is up nearly 250 basis points versus 2012 and it's nearly twice our historical averages. In addition, we're much more focused with 90% of our new items building on our key growth platforms, we've learned that fewer, bigger, better is also more profitable.

2013 saw successes like indulgent treat, Cadbury, Bubbly in Canada; boost generating halls intense; our belVita platform, a $100 million business in its first full year with six to seven times of repeat rates of our category average; the introduction of Triscuit Brown Rice, which had over $50 million in sales last year and brought nearly 4 million new homes to the Triscuit brand.

New packaging formats like go-cups and single-serve were also important. In fact, last year in U.S. biscuits, we had 14 of the top 20 new items launched in the category. More importantly, given the breakthrough nature of the products, we accounted for more than a 100% of the total category growth.

In 2014, we're going to continue to drive new platforms like, Wheat Thins Popped, the first pop format with 10 grams of whole grains; Chips Ahoy ice cream shop, new flavors inspired by ice cream shop flavors; Stride Sour Patch Gum and Trident Unwrapped, bringing a true Trident experience in a soft chew to the fast growing bottled segment.

Now, let's take a look at sales execution excellence. It's critical to note that over 80% of snack decisions are still made at the point-of-sale. That's why we've invested in building our sales capabilities and created a very important tool in our growth strategy, the perfect store. What makes a perfect store, many things, including stunning displays of our products at the point-of-sale, getting our products in a high number of shopper touch points across the store and ensuring that the right product range is available at the right price.

Perfect store is designed to provide our sales force with the tools and the focus they need to drive executional excellence in store. It also steps up our efficiency, as we match the right selling model portfolio and support at the store level to optimize cost and drive growth.

Within our sales model, I am frequently asked about the value of direct-store delivery. We firmly believe it's a distinct competitive advantage. DSD doesn't make sense in every circumstance, but given the category dynamics of biscuits, our portfolio, innovation and scale, it creates a compelling return for us.

In fact, about 85% of our U.S. biscuit business is sold through DSD. DSD unlocks the full potential of our business in many ways, from speed-to-shelf to trade efficiencies to executional muscle. However, as with any sales force, DSD is at its best, when there is a clear focus on great ideas and great leadership.

To that end, Don Quigley and his team have math every store type and defined each a clear list of objectives for the shelf and for merchandising. This has driven a 12% growth in display and an increase of 4 share points of total display.

In a category, its fueled by impulse purchase, big or small, our ability to grab consumer's attention and with relevant products and offers drive significant incremental growth, that makes DSD a critical component in our growth model and the results support this. As our biscuit business gained 1.6 share points in 2013 and our major new products were on shelf in DSD, 80% on shelf within the first two weeks in our DSD outlets.

Now, let's turn our attention to the reinvention of our supply chain. This will be the main driver of our margin improvement. First, let's take a look at our starting points. Our supply chain is complex with aging equipment. In fact, most of our lines are from the 1940s and the 1950s. We're operating with smaller bakeries, so we have an opportunity to modernize our footprints.

In addition, up until now, we were operating in a logistics network that had been optimized old crap foods, not for our biscuit focused business. Collectively, this put us in a disadvantage cost position, despite our scale and created barriers for improved margin and cash performance.

So our plan consists of these building blocks: first, to develop a new state-of-the-art growth plan for the Americas; next streamline and upgrade our existing network; and finally optimize our logistics. All of these steps will build on our improved processes and discipline across the entire supply chain.

Let's start by taking a look at our growth plan for the Americas. We're building a state-of-the-art integrated supply chain hub in Salinas, Mexico. This is part of our global efforts to manufacture our top products on advantaged assets at advantage cost. The facility is on track to open in the fourth quarter. It will be a fully-integrated site with new technology, collocation of suppliers, integrated logistics and the ability to support growth and expansion for our Power Brands in the Americas.

As you can see in the pictures here, we've made tremendous progress in the construction of the facility. When it opens, it's going to have five lines entirely focused on growth with a potential for up to 14 for further growth and expansion. The new plant will showcase our lines of the future. On average, those lines are 50% to 60% more efficient. It will also include a logistics hub to take advantage of our existing bakery in Monterey to scale shipments directly to our branches, bypassing Mexican centers.

Every package that ships from this hub will be on average 1,000 basis points higher in gross margin than our existing network. While construction is underway on that facility, we're continuing to optimize our existing network by consolidating facilities and upgrading assets to take advantage of the same breakthrough technology used in our Mexican bakery.

We've already made tough decisions regarding our existing footprints, including the closure of our Lakeshore Bakery in Toronto last September and the plant closure of our Philadelphia Bakery in early 2015. These decisions are never easy and we certainly don't take the impact lightly. But it is a critical enabler in taking advantage of our scale and making us more competitive, now, and in the future.

As we consolidate volume, we're also installing our new lines of the future. We are making our existing bakeries significantly more efficient and we're adding critical packaging capabilities and needed capacity. For example, we recently announced our decision to invest a $130 million in our plants in New Jersey and Virginia.

Across our North American asset base, we expect to install 16 new biscuit lines over the next five years. But we're going to also continue to focus on improving our fundamentals and driving both the old and new assets to optimal performance. We remained committed to delivering returns well in excess of capital cost for every dollar invested.

The last building block of our plan is to optimize our distribution model. At the time of the spin-off, we had warehouses that have been built for the old Kraft Foods. There were too many and they were positioned best to serve Kraft's geographic footprints. For example, we had more inventory than we needed in the Midwest, despite the fact that our business skews east, because that's where the warehouse space was. We've now exited three of those Midwest distribution centers and we have one more closure scheduled in Q3 this year.

In doing so we're moving our capacity closer to our business, while reducing warehouse cost by 5%. With a redesign distribution network, we can also ship our products faster to our customers by going directly to our branches. This enables us to be more responsive, to demand and eliminate a step in the process. These shifts have already generated a positive impact on service and on-time delivery.

Case fill rates have improved by 5 percentage points over the last two years, while on-time delivery rates improved by 10 percentage points. Going forward, these changes will significantly improve our ability to manage inventory and working capital to improve cash as we continue to keep pace with our manufacturing transformation.

The final piece of our strategy in North America is to apply the fit-for-purpose and zero-based budgeting principles that Dave described. This will build an organization that balances lower cost, while adding critical capabilities. In short, we are creating a lean executional machine. Our first step in this direction was to align to a category-led model as a key enabler to drive savings, but also to unlock simplification and eliminate redundancy.

Actually, there is a surprisingly large opportunity to simplify the businesses between Canada and the U.S., while still recognizing the different consumer bases. Today, for example, we use 37 different trays for cookies across North America. We can go to 15, and still meet all channel needs across both markets. Changes like this can happen faster and more effectively in the category model.

In addition, we need to build cost management into our DNA to ensure that everybody in the organization is pulling in the same direction. We also have to drive the right cultural change, the mixed zero-based budgeting, a new way of operating, not simply a project. In the end to capture these savings, we need to also aggressively build our capabilities to strengthen execution. It can't simply be about just cutting.

So we have a clear roadmap with the right building blocks to deliver margins, at least to peer average, while still enabling investment for sustained growth. In 2013, we've already delivered the first 110 basis points of our 500 point expansion target. And with supply chain reinvention and zero-based budgeting of our overhead still in front us, we're confident in our ability to deliver this commitment, while also increasing investment in A&C to further strengthen our brands and drive sustainable profitable growth.

So to wrap up, in North America and across our global organization, our teams are focused on sustainable revenue growth and significant margin improvement. And as Irene and Dave laid out before me, we're leveraging our advantaged assets and executing disciplined programs to drive double-digit EPS growth and strong cash flow. As a result, we're confident in our ability to consistently deliver top-tier financial performance over the long-term.

With that, we'd be happy to take your questions.

Question-and-Answer Session

Unidentified Analyst

Irene, I was hoping you could expand a little bit on the zero-based budgeting program, meaning, I think in order for the organization to truly embrace it, senior management usually needs to exhibit kind of a nearly religious sort of zealotry for this. And I guess trying to get a sense whether the brand managers and the like, truly will be starting from a sort of a zero dollar point if you will each and every year and have to justify. And then just secondly, is the ZBB progress ultimately over and above the 14% to 16% margin go or should we expect you spend a lot of that back along the way?

Irene Rosenfeld

Let me answer the last part of the question first, Andrew. The results of zero-based budgeting will be important contributors to our 14% to 16% targets. And obviously as we continue to make progress, we'll keep you up to date on that. There is no question, it does require a maniacal focus from the top and it requires a lot of support throughout the organization. We're just in the process now. We have identified the leaders.

As Dave mentioned, James Kehoe, is leading the entire initiative for the full company. We have been through the drill with North American group and with our European group, which is really the first two areas of focus and we're quite excited about the opportunities that we see, not just in the short-term, but to really change the fabric of the organization.

Unidentified Analyst

Irene, just if you take a step back over the last six months, there has been you're getting a lot of advice from a lot of people. And if you could reflect on now, given the changes you've had in the environment, was this the right time to step back and think more flexibly or differently about maybe the way you're thinking about investing in developing and emerging markets, first? And then second, if you could talk just to how much of a distraction this has all been to your organization and what you are doing now to sort of eliminate that distraction and get people refocused?

Irene Rosenfeld

With a sub question that after our first full year as a Global Snacking Power House it was a good time for us to step back and especially because it was a challenging year. The macro economic trends had a profound impact on our categories and it really caused us to step back and think about the targets that we had laid out, the need to ensure that we had appropriate backstops to those targets, and particularly to enhance and increase our focus on margin expansion as a potential backstop to the category growth.

So I think it was, actually a fine time in our own evolution as well as just recognizing some of the macro trends that caused us to step back and lay out the algorithm that we've shared with you today. It is not radically different than the algorithm that was there before. I hope you feel that there are clearer programs underneath each of the aspects of our algorithm. And I hope you can see the confidence that we have in delivering against these targets.

There is no question we had lots of help over the last few months and lots of perspectives as to what we needed to do. I would say the most common feedback that we got though was the need to ensure that we were addressing the fact that our margins were lower than peers. We have taken that very seriously. We had taken that very seriously. And I hope you see the programs today designed to get us to that 14% to 16% range over the next couple of years.

Unidentified Analyst

Sticking with the margin topic, it looked as though on an adjusted basis the margins in emerging markets were down quite a bit in 2013. Could you tell us a little bit about what caused that? Was it the one-time factors in various BRIC countries? Was it stepped up investments in sales and marketing or was it tougher competitive dynamics with local players? And more specifically, when do you expect to return to margin expansion in those emerging markets?

David Brearton

We came out with our margin targets of 14% to 16% and within that we said emerging markets would be 12% to 14%, and I think in 2012 we were at the top end of that range. In 2013, we were at the bottom end of that range. So it dropped a couple of hundred points. It is all the factors you mentioned. There were some one-time items last year, as I think we have disclosed around assets sales and insurance proceeds. That was probably half a point of it. There was one-time this year with the Venezuelan devaluation, which was about 40 basis points as well.

But we did make decisions early in the year, this past year to invest about a $100 million of incremental advertising and route-to-market investments in the emerging markets and really bring forward some items that we had anticipated doing '14 into '13. So again, that was probably both 70 basis points, 80 basis points of that.

And lastly, at the end of the year, as I talked on the webcast last week, the currency rates moved against us in the back-half. That hit our cost of goods very quickly and the pricing to offset that is actually going in place as we sit here today. It's happening in quarter one, so that meant our gross margins in the back half of the year were not where we liked them to be.

So if you stand back through all of those, I'd say, yes, I would expect the margins in emerging markets to tickup again in 2014. I think 12% to 14% is still the right range. It will depend on do we enter a new white-space market, could bring it down at some points, but I think the fundamental strategy, we would expect those margins to grow over time as we price away commodities, get productivity and build scale. I think that that trend over time should be intact.

Unidentified Analyst

Let me push back for a second on the relative topline target. I could see why that's appropriate in a mature market like this, but as you pointed out you're either number one or a strong number two in almost every category, and therefore it is your job to grow those categories. So how do you motivate the brand manager who is the number one player in the space to, say, you know what, you just have to do better than average?

Irene Rosenfeld

I mean, we are incenting our managers to grow their shares. There is no question about that. We believe that we have an advantaged brand portfolio in just about very market in which we compete and that is our target. That said, I want to make sure that as we give our targets to you and we lay out our guidance that we're clear that there will be some volatility, particularly in some of these emerging markets, and we'd like to use some of that share just to backstop our overall performance and to backstop potential categories slowdowns. But our end in mind is to deliver strong share performance given the portfolio that we have.

Unidentified Analyst

Can I build on [ph] Eric's question for a second? How do you think about the risk in backing off the specific number? Obviously, there's some benefits, right. The 5% to 7% numbers seemed a little aggressive given current conditions, but at the same time you have a situation where, if you fight for share, let me put it that way, sometimes that's not always a healthy way to go, right.

And we've have seen some companies in the past fight for share and they have come to decisions that are short-term in nature versus long-term. How do you prevent that from happening? And again, I know you're just talking about your external numbers to us, but I am curious about how you think about that perhaps

Irene Rosenfeld

Well, basically, we're giving you our best forecast as we look out to our markets as to where we think our categories are going to be in 2014. We've told you we think that's approximately 4% and we will be at or above that growth rate. And I think that's the right target to set for ourselves, given the environment, as I said a moment ago, though, the focus of our individual managers within a country is to gain share. And as you've seen, we had a very strong share performance last year with 70% of our revenue gaining or holding shares. So that will continue to be an important focus, but we have given you a clear sense of the numerics associated with our growth targets.

Unidentified Analyst

You mentioned how your brand managers in the lower levels of your organization are incentivized. I think there has been some conversation at the higher levels, how you guys are incentivized on both the near and long-term basis. Can you talk about that thought process, how it's evolving?

Irene Rosenfeld

We continue to look at the metrics by which our top managers are evaluated and bonused and make sure that they are well aligned with our shareholders. Our long-term targets are predicated on performance relative to our performance peer companies. Our short-term targets are predicated on delivery against our internal targets on revenue, profit and cash flow. And that's how we look at our targets. We've had quite a bit of discussions with our comp committee about returned metrics for our top senior managers and that is likely something that will be part of this year's program.

Unidentified Analyst

Irene, a quarter of your business is outside of the snacks powerhouse as you described. How much does that impact your growth rates and what is the framework you use to decide whether you want to stay in those brands and those categories versus maybe do something strategic with them?

Irene Rosenfeld

Those businesses have been important contributors to our overall performance. And both, coffee and cheese and grocery, have actually been accretive to our overall performance over the last couple of years. Last year 2013 was quite an anomaly in the coffee business as we've talked many times because of the volatility, but we will continue to evaluate our total portfolio and the criteria we're using is return, and to make sure that these businesses are earning their keep. But we feel quite comfortable with the portfolio as we have it today, and we believe it's well-aligned to deliver the targets that we've laid out.

Unidentified Analyst

So you've done a very good job laying out the margin opportunity, a lot of detail on it. The emerging markets have slowed down. You've given us the 4% revenue growth forecast. What I'm maybe worried about is the white space opportunities and how hard you're pushing against the opportunities that were originally discussed when you bought Cadbury. You really did have some incredible opportunities by putting together the different geographies. Where do we stand on that? And if I could make it maybe simple, what are the top three white space opportunities that you see being impactful to revenues in the next one, two or three years?

Irene Rosenfeld

Let me remind you, we delivered about $1 billion of revenue through the Cadbury integration and we are quite comfortable that we have the opportunity to continue to build on that as we look ahead. Our strategic plan has not changed, as we think about our white space entries. I'm not going to share with you what's coming up next, because obviously that would be highly interesting to our competitors.

But I think what we've said to you and it remains the case, is if you look at a matrix of our categories against our countries, you can see where the clear white spaces are. And we believe we have the potential over time to basically offer a full portfolio of our categories in each of our key emerging markets, and that is not the case today, most of our markets today are single category markets. And so I've used the example of China and India as illustrative of what we intend to do as we look ahead.

Unidentified Analyst

One follow-up is just simply that the slowdown in the emerging markets has not delayed this focus on white space opportunities. True statement?

Irene Rosenfeld

True statement. I mean, in fact, when you look at China, we launched gum in China about a year ago. It's a $100 million business for us. There is no question China has slowed, the biscuit category has slowed. We are working on that. But we've been very pleased with the performance. And frankly, gum in China continues to grow at a nice double-digit rate. So that is not slowing us down in any way.

Unidentified Analyst

I had one follow-up on one of the question, if I could. The first was to understand the zero-based budgeting, when you first implement that, is there a more immediate effect on margins or does it take time for the organization to learn that process and build up to that? And the second quick one I'd give you, which is, in some of your markets where you have some transaction affects the fact you're taking some pricing. I'm just worried about market share performances in those categories. Are there goals for market share now that you're trying to grow faster than your categories? Just curious how quickly you can move on that if you had to?

David Brearton

I guess on the zero-based budgeting, it really is sort of a multilevel exercise. So we hired them. We saw them in December, we hired a center in January to work with James Kehoe and his team, we're really just underway. So I don't want to get into specific targets, but it will look at all aspects of overheads from the bottom up. Clearly, as I said earlier, we are hoping to find some quick wins.

And I think as we look at this year, the guidance we've given you isn't dependent on that, but I would hope we can find some things to help us this year. But it's a bit early to give you an update on zero-based budgeting. But it will address organization approach and simplicity processes as well as some of the non-people cost that come up with just how you operate as a business.

On the pricing and emerging markets, yes, there is a lot of pricing going in this right as we speak here. When we talked last week, we actually said that the first quarter revenue would be below the full year growth rate and a chunk of that was because of exactly what you mentioned.

There will be some dislocation in the market for a couple of months that's typical. In Europe it tends to be customers to cause that, in the emerging markets it tends to be consumer reaction as they get used to the new price and the new pack size on the shelf. It's very rarely in emerging markets, a straight 5% or 10% price increase. It tends to be a reconfiguration of the product offering and there tends to be some short-term disruption. We went through this a couple of years ago and have significant pricing, and it played through pretty well for us.

I think the key is to make sure it's not just about price increase, it is price value, it is about reconfiguring the fact that the consumer sees. And it's really about execution all the way down to the kiosk, where the consumers are buying those products. But we've built into the first quarter guidance and expectation. There would be a short-term hit from that. We don't expect a hit on the full year though.

Unidentified Analyst

A question for Mark, I just want to know when the target was communicated internally in North America that margins need to expand 500 basis points. I kind of wanted to understand how the marketers responded to that, it must have been the challenge for them? And then secondly, as you've consolidated North America, I still noticed Canada has its own packaging, it has its own advertising, Mexico as well. Have you tried to think of more radical ways to consolidate all of that spread?

Mark Clouse

So I think, on the first question, what's helped immensely is we're fighting a battle with competitors that have significantly higher margins than we do today. And the understanding of what it's going to take to sustain the progress we've made and win in the future, means that we have to have a more competitive margin structure.

So I think when we grounded that with folks, they understood that this was also in the service of getting us to a position where we're able to make the investments we want to in the future. We've done a good job of growing the business, but sustaining that is going to use this margin benefit to help fuel that going forward.

So I think connecting to two things together, while also recognizing that a lot of the things that we're doing on the margin is actually going to make life easier in the marketplace by eliminating layers, reducing redundancies, we're able to make decisions quicker and move faster as a team, and that's part of how we're trying to embed into the culture as well. So a big number of aggressive targets, but relative to what it means for us to sustain the business. It was not that harder to sell.

I think on the Canada, U.S. question, you're absolutely right. And I think we just stood up the category-led model at the end of last year. And we're just now beginning to kind of put all of the opportunities kind of light them up and start working through. And I think what you're going to see is a lot better harmonization or a lot more thoughtful diversion, because there are still a few moments, where it will make sense that in the Canadian consumer base to have something that's a little different than what might be in the U.S. But that's only when it's really compelling, not because of we just wanted to be different. So I think you'll see that better in the future.

Unidentified Analyst

New products tend to have a lower operating margin, when you go through the process. Is there an opportunity to extend the margins of recently launched products? And how do you balance the growth associated with the new product versus all your operating margin targets now?

Mark Clouse

I could take it for North America, it's quite frankly it's pretty similar across the company. One of the rules of engagement that we put in place is when we're launching platforms there are series of things that have to be met. One of which is it has to be margin accretive to the business.

And so if you start with that and you design against those objectives, you find that you're seeing ideas and projects that fall into that category. Now, I'd also have to have a longer range pipeline of innovation behind it, so it's more platform instead of one-off and it's got to be able to have the absolute margin to support the investment to sustain it going forward. So that's one of the biggest tools we use.

Now, at some times it may make sense for us to test a new product with a co-manufacturer that might have a little bit lower margin and what we can do in-house, so we use it as a validation model. But in the end, the idea is that everything that we're rolling out is an added-value space that allows us to expand the margin position we have today.

Irene Rosenfeld

All these Power Brands and innovation platforms that we talk about are accretive to our margins, which is why we like them so much and why we're distorting our spending in that direction.

David Brearton

Again, as Mark said, expense whether there in co-man or in-house, they may or may not be higher margin out of the gates on the gross margin line, and often is launched across in the A&C line. So at OI they might be lower, but clearly the intension is ongoing, they have to be accretive.

Mark Clouse

The key is that gross margin, you want that to be a sustainable business model, so that even if you all go invest a little bit to get it started, you know you're going to be in a good position as you run it.

Robert Moskow - Credit Suisse

We're going to have to end it there. Thank you very much Mondelēz. Thank you for sponsoring the break. They will be in the breakout room, if you have more questions. Thank you.

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