Kraft Foods' CEO Discusses 2011 Results - Earnings Call Transcript

Kraft Foods (KFT) 2011 Earnings Call February 21, 2012 10:30 AM ET

Executives

Christopher Jakubik -
Irene B. Rosenfeld - Chairman and Chief Executive Officer
W. Anthony Vernon - Executive Vice President and President of Kraft Foods North America
David A. Brearton - Chief Financial Officer and Executive Vice President

Analysts

Andrew Lazar - Barclays Capital, Research Division

Andrew Lazar - Barclays Capital, Research Division

All right, everybody, if we could find our seats, we'll move on to our next presenter. Thank you. Before we get started with our next presentation, Kraft Foods, please join me in thanking Kraft for generously sponsoring today's lunch.

Now in 2011, having had its fair share of doubters, Kraft stood out as one of the bright spots in the packaged food group, partly due to the separation announcement, but also due to the solid core business trends that we've seen. And with us today, we have both leaders of what will be the global snacks and North America grocery units, respectively. Thank you all for being here. First, let me turn it over to the Head of IR, Chris Jakubik, to lay out today's agenda. Over to you, Chris. Thanks.

Christopher Jakubik

Thanks, Andrew. Good morning, everyone, and thank you for joining us here at CAGNY. As you may have noticed, earlier today, we reported our Q4 and full year 2011 results, and they were right in line, if not a bit better on the bottom line than the guidance update we provided in mid-January. Along those lines, today, we'll be making a number of forward-looking statements about the company's performance. This Safe Harbor Statement here is designed to cover those statements. But I'll refrain from reading it for you because we have a full agenda. We have a full agenda today because 2012 will be another big year for Kraft.

We expect to deliver strong organic growth on both the top and bottom lines and launch 2 industry-leading companies by year end. So today, we're here to explain how we'll achieve both those goals. Our Chairman and CEO, Irene Rosenfeld, will begin by outlining how we've been delivering and how we will continue to deliver sustainable top-tier growth. Our President of North America and soon-to-be CEO of GroceryCo, Tony Vernon, will follow with how he's building on his team's success. Just as important, he'll tell us what he's doing this year to position both the North American grocery and snacks businesses for strong stand-alone growth into the future. Our CFO, Dave Brearton, will then provide some color on our 2012 guidance. And to wrap things up, Irene will come back to provide an update on our separation plans. After our presentation and the Q&A session in this room, please join us for lunch next door to enjoy the creations of our master chef, Nick Spinelli. At lunch, not only will today's presenters be available, but also joining us will be John Cahill, who will become the Chairman of the North American grocery company; and Tim McLevish, an oldie, but a goodie. Tim is our former CFO, and he's been the project team leader for the spinoff. He will also become the CFO of the North American grocery company at the time of the spin.

So without further ado, let me turn it over to Irene.

Irene B. Rosenfeld

Thanks, Chris, and good morning. It was good to see so many of you in the gym this morning. I think we lowered the average age by about 20 years down to about 72. At our last investor presentation 6 months ago, we reviewed the various actions we've taken over the past 4 years to fix our base business, transform our portfolio, and most importantly, create a virtuous cycle of growth in each of our regions. The plan is working. These actions have not only positioned us for sustainable top-tier growth but have enabled us to deliver best-in-class results. We delivered in 2011, and we will deliver again in 2012.

Why am I so confident? It's because our businesses in every region around the world are benefiting from a virtuous growth cycle, and as a consequence, our results are outpacing our peers. In 2011, our Power Brands grew 8%. This in turn drove organic net revenue growth of 6.6%. That's a significant improvement over top line performance in 2010. Then, organic revenue rose a little over 3%, fueled by Power Brand growth of more than 6%. And we delivered those results during an unprecedented environment of economic and political unrest, as well as skyrocketing input costs.

Growth was especially strong in our global snacks portfolio. It now represents about half of our sales. Biscuits were up 9% globally, and they were up double-digits in Developing Markets. Russia and China led the way, each up about 40%. Developed Markets delivered mid-single digit growth. It was led by strong performance of the LU brand in France and expansion of the Oreo and Velveeta platforms in several European markets. Core brands in North America, Oreo, Ritz, Wheat Thins and Newtons also delivered solid growth.

Global Chocolate was up 6% led by double-digit growth in our Developing Markets. Two examples, Lacta grew more than 15% in Brazil. And in India, we continued to expand our leading market positions with Cadbury Dairy Milk, 5 Star and Perk, each gaining double digits. Gum & Candy was up about 1%, led by high-single digit growth in Developing Markets. Performance was especially strong in Brazil where Trident and Halls continued to shine. Trident, for example, grew more than 20%, leveraging successful new product launches and increased distribution in the rapidly growing north-northeast region.

As we previously discussed, the challenge remains in Europe and North America where Gum & Candy were down mid-single digits. But the fixes we outlined on our third quarter call are beginning to gain traction. So overall, we've got good momentum in our global categories. And I'm especially pleased that our revenue growth was near the top of our peer group. We've made steady improvement over the past 3 years, and we're well positioned for the future.

So how are we fueling this growth? We're doing it through cost savings that we find by looking at our entire supply chain comprehensively on an end-to-end basis. Last year, we delivered productivity of more than 4% of cost of goods sold. In addition, we continue to capitalize on significant overhead leverage. In the past, we’ve told you that we're setting aggressive overhead targets within each of our regions to enable 0 overhead growth for Kraft in total. I'm delighted to say that we're making great progress toward this objective. As a result, our overhead costs, as a percent of revenue, declined by 60 basis points. These actions are generating the savings needed to expand profits and to continue to invest in quality, marketing and innovation to fuel the virtuous cycle.

In 2011, our A&C spending was about 8% of revenue. That's up $250 million versus prior year. In addition, innovation continues to fuel our growth. Last year, new products accounted for 10% of our revenue, and that's up over 9% from the prior year. Over the past 3 years, we've gone from the back of the pack to the front, and innovation has been a key contributor to our success.

The virtuous cycle is also driving strong bottom line performance. As we announced earlier today, we delivered operating EPS of $2.29. That's up 13% or 10% on a constant-currency basis. This improvement was driven primarily by operating gains of $0.25. What's more, our earnings growth outpaced all of our peers. While we don't expect to be #1 every year, we do believe that we're now well positioned to be consistently in the hunt.

Looking ahead, our strong revenue growth and cost management initiatives in each of our geographies give us great confidence that we will deliver top-tier performance again in 2012. Let's take a closer look at our regional performance, starting with Developing Markets.

Four years ago, Sanjay Khosla, our Head of Developing Markets, shared his 5-10-10 plan with you, a plan that sharply focused his team on the 5 categories, 10 Power Brands and 10 key markets to create a sustainable, virtuous cycle. This approach is delivering spectacular results including exceptional top line growth in 2011. Our 10 Power Brands grew 17%. This in turn drove organic revenue growth of 11.2%. That's about 3 points better than what we delivered in 2010. Let me highlight some star performers.

Since combining with Cadbury, our category growth has accelerated, fueled by chocolate. Take India, for example. Here, we've expanded our reach into remote villages by doubling the distribution of Visi Coolers. These compact, refrigerated displays are highly visible, and they keep our chocolate at the right temperature in the hot Indian weather. As a result, Cadbury Dairy Milk was up about 30% last year.

Our biscuit business has also undergone an amazing transformation. Oreo, which is celebrating its 100th birthday this year, led the way with organic revenue of 50%. In fact, sales of Oreo in Developing Markets have increased 500% since 2006. That's an amazing record for a so-called mature product, or for any product for that matter.

Our Club Social and TUC brands in Developing Markets are also up 30%. In fact, Club Social sales have almost quadrupled since 2006. Our focus on 10 priority markets is also paying off with growth of about 12% last year. More specifically, the BRIC markets in aggregate grew nearly 19%. For example, Brazil was up more than 15%, exceeding $2 billion in revenue, and China grew even faster, up 30%-plus to more than $800 million.

On the cost side, productivity savings in Developing Markets was about 4% of cost of goods sold. And despite rapid growth and investments, Sanjay and his team are also doing an outstanding job of managing overheads. These costs declined as a percent of revenue, down 20 basis points versus last year. As a result, operating income gains have continued to provide the fuel needed to reinvest in growth. Last year, A&C spending was 10% of revenue. In addition, innovation continues to play a key role, as new products contributed 12% of revenue.

Looking ahead, we remain confident in our ability to continue to deliver industry-leading growth despite some signs of slower growth in a few markets. Our proven 5-10-10 strategy of relentless focus will continue with further distortion of our resources to growth platforms and priority brands. These gains will be further enhanced as we capture additional synergies from the Cadbury integration. We also expect continued margin expansion as we benefit from carryover pricing, further overhead leverage and stepped-up productivity.

Turning now to Europe. This region also made great strides in driving a virtuous cycle through focus and distortion of resources. Since Tim Cofer took the reins last year, momentum has continued unabated. In fact, this region just delivered its 8th consecutive quarter of both top and bottom line growth. That's despite the Eurozone crisis and deteriorating consumer confidence. I don't think you'll find many companies that can say that about their European business.

In 2011, Europe's 15 Power Brands grew 7%, fueling organic revenue growth of 4.6%. That's well above many of our European peers. We also improved our share performance. In fact, we grew or held share in categories representing 3/4 of our revenue. There were several star performers. Our chocobakery platform under the Milka, Cote d'Or and Freia, Marabou brands was up nearly 30% last year. Oreo grew more than 25% driven by continued rollouts in whitespace markets. Our Tassimo on-demand platform was also up 25%. And our Velveeta breakfast biscuits grew 18% driven by gains in the U.K., Spain and Italy. Remember, this is Europe we're talking about, not developing markets.

In terms of costs, Europe's productivity savings improved to more than 4% of cost of goods sold, driven by Lean Six Sigma gains in manufacturing. But where our European team really shone was in leveraging overhead costs. Overheads, as a percent of revenue, declined 150 basis points. The reason? A combination of cost management and synergies. That's a really impressive performance.

As a result, Europe continued to reinvest in growth, and that's why we outperformed our peers. Our A&C investments were about 8% of revenue, and we delivered several successful innovations including Philadelphia with Milka, which delivered strong growth in Germany, Austria, Italy and Switzerland. We rapidly captured market share in the small bites chocolate segment. This is a terrific example of revenue synergies. We took a highly successful Cadbury product idea and rolled it out on the continent under our favorite local brand names like Freia and Marabou. In total, new products represented about 12% of Europe's revenue. That's up significantly from 10% last year.

Looking ahead, we're confident in our ability to maintain solid growth and continue to expand margins in Europe. Why? Increased distortion of investments toward our Power Brands, stepped up innovation, excellent sales execution and ample whitespace opportunities enabled by both the LU and the Cadbury acquisitions. All of these levers will drive top line momentum.

And on the bottom line, we'll maintain our relentless focus on cost management to expand margins and enable continued investment in Power Brands. We see further opportunities for savings in 2 areas. First, through lower overheads as we implement ongoing integration plans; and second, through continued productivity savings across our supply chain. In short, despite an economic environment that will remain challenging, we're well positioned to continue delivering top-tier performance in Europe. So as you can see, our virtuous cycle is clearly playing out in Developing Markets and in Europe.

Let me now turn it over to Tony Vernon, who will describe how his North American team is capitalizing on these best practices to deliver best-in-class performance in North America.

W. Anthony Vernon

Well, thanks, Irene. I am thrilled to be here today to talk about Kraft Foods North America. To be clear, we're still one team with one dream, with great grocery and snacks brands. Today, I'll review our solid performance from last year and show how we'll build on that to set up our grocery and snacks portfolios for success as stand-alone businesses. The last time we were together, I told you our virtuous cycle was in its early stages. Well now it's in full swing. I also committed to sequential improvement on both top and bottom lines in North America. That was based on my firm belief that there is no such thing as a mature brand, just tired marketers. I said we revitalized the best portfolio of food and beverage brands in America through a step change in innovation and by bringing great marketing and sales excellence back to Kraft. These investments would be enabled by the savings generated from relentless End-to-End Cost Management.

So how did we do? Well, in my view, we made great progress. But we still have huge opportunity in front of us, especially when you think about the potential for even greater focus and better resource allocation when grocery and snacks are stand-alone businesses.

In 2011, our Power Brands grew 4.5% and our total organic growth was up 4.8%. Now that may seem counterintuitive that total revenue growth is higher than Power Brand growth, but this reflects how we price to recover unprecedented commodity costs in the rest of the portfolio. It also reflects the outstanding contribution of new products that weren't in those Power Brand numbers. And I'll detail that impact shortly.

So how did we stack up against the competition? Well, in terms of market share performance, we gained or held share in 36% of our categories in 2011. That's below the target of at least half that we'd like to see on an ongoing basis but for good reason. In categories including coffee, natural cheese, bacon and nuts, we took the lead on pricing to protect profitability. In these so-called pass-through categories, which represent 31% of our revenue, we chose to accept moderate share losses in the short term to protect profits. But unlike our center-of-store competitors, we grew both our top and bottom lines last year while also holding margins.

Our organization learned a lot, how our brands can bloom and grow despite record commodity costs and how we can manage an input cost tsunami of more than $1 billion while keeping consumers buying our brands. That said, in no way do we expect to give up share on a permanent basis in those categories, and we have plans to improve this performance.

Finally, in 3 of our categories where we command over 60% market shares, our marketing and innovations drove mid- to high-single digit category growth overall with some even growing double digits. Specifically, Philadelphia Cream Cheese grew 11%. Kraft Dinners grew 9%. Oscar Mayer Lunchables rose 6.5%. That kind of growth and the associated contribution to profits was worth a lot more than a 1 point share swing.

Overall, our market share performance was solid in an unprecedented environment. And I'm confident that as the cost environment normalizes, we're in the best position in over a decade to profitably grow our North American market shares in the majority of our businesses.

More importantly, we outpaced the industry in both dollar and unit growth. And if we were to break down numbers to show Grocery and Snacks as independent entities, each would be significantly outperforming the industry average. In fact, as we look across all center-of-store competitors, we are winning on both the top and the bottom lines. This brings me to the next part of our virtuous cycle.

I mentioned earlier our decision to take pricing to protect profitability. That was clearly the right decision because it enabled our End-to-End Cost Management efforts to benefit our businesses and our shareholders. Last year, we grew both our gross profit dollars and our operating income. That's despite having to cover $1.3 billion in higher raw material costs and the loss of the Starbucks business.

Now let's take a closer look at how we delivered record levels of productivity and how we achieved negative overhead growth. We're creating a lean End-to-End Cost Management culture, one where employees spend shareholder monies like it's their own. This includes training and deploying over 250 Six Sigma black belts across North America including our own Tim McLevish. Last year, procurement savings and Lean Six Sigma drove stepped-up productivity as a percent of COGS 4.4%, up from about 4% in 2010 and 3.5% in 2009.

But let me give you another statistic. In 2011, 28 of the 57 plants in North America increased conversion productivity at a double-digit rate through Lean Six Sigma. The good news is that half of our plants made great improvement. The even better news is we still have half to go, meaning lots of opportunity ahead to improve costs even more.

On the overhead front, we've made good progress in bringing down costs. Overheads as a percent of revenue fell to 11.4% in 2011, declining 60 basis points in each of the past 2 years. But there's more opportunity here as well. Last year, based solely on cost control measures we put in place, we delivered more than $100 million in overhead savings, and that was before the headcount reductions we announced last month.

Bottom line, we believe we are at a very encouraging early point on our cost improvement curve. The combination of pricing to cover costs and the significant gains from End-to-End Cost Management is fueling the step-up in our spending behind innovation and marketing, which keeps our virtuous cycle spinning. In fact, I believe we were one of the few in our industry to increase investments and marketing and innovation last year.

Overall, A&C as a percent of revenue was 6.3% in 2011. That's roughly flat on a percentage basis over the past 2 years due to the impact of pricing on the denominator. What you can't see when you're using this metric is that we have, in fact, continued to invest more dollars in A&C, about $335 million more over the past 2 years. That said, there is still significant room to increase our advertising support and drive our brands even harder. We know this because as you can see on the chart, each year, we continue to focus more of our advertising spending on the Power Brands; 7.2% of revenue last year. These brands drove market-leading profitable growth last year.

Here are several examples: Miracle Whip and Oscar Mayer grew 5%; Wheat Thins was up 6%; Planters Nuts and NUTrition, 7%; Chips Ahoy!, 8%; Capri Sun, 9%; Philly Cream Cheese, 11%; Oreo, up 12%; Velveeta Shells & Cheese, up 20%; and Newtons, up more than 40%. It just goes to show you there is no such thing as a mature brand because great marketing is back at Kraft. Now let's take a look.

[Presentation]

I've got a dozen more of those that Jakubik will not let me show you. The thing I am most proud of is the transformational change we've made in our new product pipeline. We've gone from worst to first in 2 years. Our innovation big bets are now best in industry, and that's not just my opinion. A special thank you to Sanford Bernstein for naming us their Consumer Staples Innovator of the Year. Thanks, Alexia. It's great to be recognized. These new products have unleashed our marketers, delighted our consumers and customers, and they are our best defense against private label no matter what the category.

Today, about 9% of our revenues come from new products. That's up from 6.5% just 2 years ago. In fact, new products added almost $600 million of revenue last year alone. As I said earlier, 2011 was a year of great progress, but we still have huge opportunity in front of us. So what does 2012 hold? As you can see on this slide, we believe the economic, consumer and customer environments will continue to be difficult. For the 40% of Americans that make less than $40,000, for the 20% that make less than $20,000, there is no real recovery.

In these core consumers, we found real elasticity issues in the face of pricing to commodities. At Kraft, we believe we have an obligation to these consumers and our customers to offer great brand value at entry-level price points to offer good, better, best choices and even to democratize our health and wellness offerings to make them more affordable. When we do these things, even in the face of a tough economy, we drive traffic, volume and brand loyalty, all the more reason that we stick to our formula for success: focus on breakthrough innovation, invest in great marketing and sales excellence, and all of this enabled by relentless End-to-End Cost Management.

Our 2012 priorities are designed to continue industry-leading growth by fueling the virtuous cycle and to position both North American snacks and North American grocery for success as they become independent entities.

First, we'll continue to strategically distort our portfolio, and that starts with breakthrough innovation. Our innovation pipeline is the strongest I've seen, and I'm extremely excited about the great new products we have planned for this year. You've already seen how new products contributed about 9% of revenues last year. Well, watch out because our line-up is even stronger in 2012. Now let's take a look at some of the examples of what's in store this year.

[Presentation]

You'll get a chance to sample some of these great new products today at lunch. We'll also continue to concentrate our A&C resources even more sharply behind 21 Power Brands. Now I realize 21 is an odd number, so you might be wondering what makes a Power Brand? It's simple. Each has to deliver what we call the 3 Ms: margin, materiality and momentum; margins that are accretive to the brand or category; materiality in that we can drive growth in large, vibrant categories; and momentum with great new product news. These Power Brands are bold and competitive.

Gevalia Coffee, for example, is entering the premium segment against some formidable and familiar foes. Velveeta Skillet dinners with better taste and higher price points is going head-to-head against those traditional meat helpers. MiO Energy is building on our successful launch in the liquid beverage mix category. I know that some of you doubted MiO last year, but our MiO platform reached $100 million in less than 9 months, and the velocity of our new energy SKUs is already quite strong.

Learning from our colleagues in Europe, we're creating a new energy and MiO bridge category in North America with Velveeta Biscuits. Our 135-year-old Philly Cream Cheese brand keeps growing strong with Philadelphia Indulgence, a creamy chocolate spread that's another great new product adjacency for this iconic brand. Our market-leading Capri Sun brand is introducing fortified fruit and vegetable juices. And we have a tremendous launch in the gum category that I'm not allowed to tell you about today, so look for that. But there are many, many more, as you can see.

Another real opportunity for us is selective product line pruning. About 40% of this work will occur in Foodservice with the rest spread out among the other business units. We expect this pruning to modestly temper organic revenue growth this year by about 2 points in North America and about 1 point for Kraft Foods overall. On the bottom line though, the impact to operating income will be minimal.

A couple of years ago, my colleagues in Europe went through a similar exercise and look at the benefits they've enjoyed from improved product mix they're seeing even today. But they did it at a point where their end-to-end cost savings were beginning to bear fruits. That way, they could effectively manage the cost side of the equation. North America is now at a similar point in our evolution.

Our second priority in 2012 is to continue to drive best-in-class costs. I've already talked about delivering gross productivity of more than 4%, how we'll leverage Lean Six Sigma to get there and how we delivered negative overhead growth in 2011. But the prospect of separating North American grocery from snacks offers a whole new set of opportunities on the cost front, and it was one of the key drivers for our decision to create 2 independent entities.

By taking a clean sheet of paper approach to each business, we've uncovered significant opportunities to reduce our costs even further. We're still finalizing several aspects of our overall plan, so I won't talk about everything today. But I can tell you that we have significant opportunities to streamline manufacturing and distribution networks and to reduce our overhead costs to ensure that both companies are set up to execute their respective strategies. And these savings will fuel further investments in our great brands for years to come.

I can also discuss what we announced in January, realigning our U.S. sales force, consolidating our U.S. management centers and streamlining our corporate and business unit organizations. These actions will result in the reduction of approximately 1,600 positions by year end.

Now let me spend some time on the U.S. sales force realignment. How we go to market and how we execute is vital to the health of our businesses. So it's important to understand these changes. The grocery and snacks businesses have distinct portfolios and routes to market. By realigning the U.S. sales structure to create more focused teams, each company can customize its approach to in-store sales and execution to maximize impact.

The snacks business will leverage our direct store delivery model, with most U.S. retail sales employees shifting to the North American region of the global snacks company. To capitalize on its warehouse distribution strength, the U.S. grocery business will reorganize. Local retail support will be contracted to 2 leading sales agencies with Kraft oversight and direction. Acosta Sales & Marketing will become the company's partner for the grocery store and mass retail channel execution. They'll provide a separate team that will handle exclusively Kraft products and certain Procter & Gamble categories. CROSSMARK will continue to support Kraft in the convenience store channel.

These changes offer several significant advantages, including greater reach and access to new technology. In addition, we will have the increased ability to flex resources up or down by category, by event, by season based on the needs of each business. These changes will enable the grocery sales team to concentrate on customer relationships at headquarters to drive growth for Kraft Foods and for our retail partners. We will have both U.S. sales organizations in place by April 1.

Our third priority this year is to reignite a winning culture in North America. Our goal simply is to be North America's favorite food company. That includes being a place where each employee is excited to come to work every day and being the company that every top recruit wants to join. One of the reasons we decided to consolidate management centers is to facilitate this cultural transformation. I want the North American grocery company to have the spirit of a start-up and the soul of a powerhouse. We believe that 5 co-located business units, accountable and all under one roof, will provide a cultural watershed for our new company, one where we easily share the best practice of nurturing greatness in each other and in our beloved brands, a culture where we combine New York chutzpah with solid Midwestern values to drive consumer and customer delight of the most beloved portfolio in the food and beverage industry.

To sum it up, we are making the virtuous cycle work in North America. This is a very different company than it was just a few years ago. It is the same great brands, but our team's focus, cost mentality and competitive culture are totally different. Our momentum is palpable and lasting. Because we are early on the cost curve, we have tremendous opportunities ahead to drive industry-leading results. And with the foundation we're laying now, both our grocery and snacks businesses in North America are well positioned for success following the spin. We're proving that becoming a lean, operationally efficient company is what it takes to make a step change investment in our great brands. That transformation will become even more impactful as you consider the potential for even greater focus and portfolio distortion when grocery and snacks are stand-alone businesses.

Now let me turn it over to Dave to discuss our 2012 guidance.

David A. Brearton

Thanks, Tony, and good morning. As you've already seen today, we delivered strong results in 2011 with good performance in each of our 3 geographies. This provides a solid foundation and great momentum for us heading into this year. So how do we see 2012 shaping up? Our results this year will be driven by multiple factors.

Our focus on Power Brands will continue to drive strong organic growth. Synergies from the Cadbury acquisition, both in terms of costs and revenue, will be in full swing. We'll see further gains from End-to-End Cost Management. And at the same time, we will incur certain onetime costs to enable the global snacks and the North American grocery businesses to achieve peak performance in the future, as well as financing costs to execute the upcoming separation and establish a capital structure for each company.

Let's look more closely at each of these factors. As we've already outlined this morning, organic revenue growth was strong across the board in 2011. Each of our regions delivered top-tier growth versus its industry peers through focused investments in our brands, great product innovation and an outstanding balance between pricing and vol/mix.

In 2012, we'll benefit from the tailwind of this top line momentum in each of our 3 operating regions. In addition, the Cadbury acquisition is delivering on its promise. We've already generated about $400 million in revenue synergies to date. In 2011, revenue synergies contributed more than $300 million or about 60 basis points to our top line growth.

Here are several examples. Last year, we launched Oreo and Tang in India where we leveraged Cadbury's deep distribution network to reach more than 300,000 outlets in less than 60 days. In Brazil, we expanded sales of Kraft products into 650,000 Cadbury outlets. That's more than double the points of sale 2 years ago. In Ukraine, we leveraged the Kraft network to make our Cadbury portfolio available in 75,000 retail outlets. As a result of these and many more examples, we remain on track to deliver our $1 billion revenue synergy target before the end of next year, with roughly 2/3 of this benefit coming from Developing Markets. And we expect these synergies to drive 50 to 100 basis points of top line growth in 2012.

But what about cost synergies? By the end of last year, we had captured more than 80% of the $750 million target. That exceeded our earlier estimate. Our teams have done a terrific job this year putting in place one organizational structure in all of our Developing Markets and in 13 of our 17 European markets. Given the progress to date, we now expect to deliver about $800 million in synergies by the end of this year. That exceeds our original savings targets, and it does it about a year ahead of schedule.

Last year at CAGNY, I talked about our End-to-End Cost Management program. In 2012, it will continue to drive gains after making great progress last year. Productivity from procurement, manufacturing and customer service and logistics continues to improve. We're now able to consistently deliver productivity of more than 4% of cost of goods sold year in, year out.

Our overhead cost management efforts are also progressing well with negative overhead growth in North America and Europe and half overhead growth targets in Developing Markets. Last year, overheads as a percentage of revenue declined 60 basis points to 13.8%, and we expect similar results in 2012.

So what does this mean in terms of guidance? Despite all the additional activities to ready each business for independence, we're confident that the strong momentum of our base businesses will allow us to deliver another top-tier year. So for 2012, we expect organic revenue growth to be broadly consistent with our long-term guidance. On the plus side, we expect strong momentum from our Power Brands in each region.

The next wave of revenue synergy is from the Cadbury integration and a low- to mid-single digit benefit from carryover pricing. These benefits, however, will be tempered by 2 things: the challenging macroeconomic environment and a drag of up to 1 percentage point for the total company from the product line pruning in North America that Tony described earlier. As a result, we expect to deliver organic net revenue growth of approximately 5% in 2012.

On the bottom line, we expect operating EPS growth to be consistent with our long-term guidance of 9% to 11% in constant currency terms. Strong operating momentum, further gains from End-to-End Cost Management and Cadbury integration synergies will drive growth. However, we also expect a headwind of approximately 4 percentage points from higher pension costs, as well as a negative impact from an increase in our effective tax rate to approximately 28% this year. As a result, operating EPS is likely to grow at the lower end of the 9% to 11% range. So that's what we expect on an operating basis.

But as we prepare to separate into 2 companies this year, we'll be taking actions to position each company for future success. We'll be taking a clean sheet approach as we set up lean corporate structures, tailor support functions to the needs of each company, and streamline our manufacturing and distribution infrastructures. Each company will be ready to execute its unique strategy in the marketplace.

We'll also have some onetime transition and transaction costs to execute the actual separation. As a result of this work, we expect to incur $1.6 billion to $1.8 billion of onetime costs. Cash expenses will be about 2/3 of this total, and most of these costs are expected to be booked this year.

Also, let me preempt the likely questions about which entity, global snacks or North American grocery, will benefit from the savings associated with these activities. The answer will be both. Much of the cost will be borne by Kraft Foods, as we reported today, with benefits shared across the 2 entities as we set up each organization. These actions are necessary for separation but also for each company to achieve peak performance. As we get closer to the transaction date, the 2 management teams will be able to provide more detailed strategies and financial expectations. At that time, they will incorporate their starting cost structures, as well as their investment priorities going forward.

Between now and the transaction date, we'll also set up the capital structures for each company. It involves migrating debt to North American grocery, and we have a number of options available to achieve that. But it will involve varying levels of potential debt breakage and financing fees. We currently estimate that it will cost us between $400 million and $800 million to execute the debt migration, depending on market conditions and the tactics we choose to utilize. As a reminder, at the end of all this, our commitment remains to create 2 investment-grade companies with access to commercial paper.

Both companies will continue to benefit from a strong and consistent cash flow. I know there are some concerns on how our free cash flow was pacing during 2011. However, as we said during the year, it was more a function of working capital pressures as inventory costs ramped up early in the year, and the fact that we typically generate the bulk of our cash flow in the second half, especially in Quarter 4. As you can see on the chart, our cash generation did indeed come back into line. It was essentially flat with 2010 despite the high commodity environment.

This allowed us to successfully delever from the Cadbury acquisition. That puts us in an excellent position to provide for a healthy balance sheet at each new company. We ended 2011 with gross debt to underlying EBITDA of 3.1x. Total debt was down more than $4 billion from March 2010. And we're also taking actions to create flexibility to migrate debt down to the North American grocery company. In January of this year, we issued $800 million of floating rate notes that will be redeemed at the earlier of the time of the spin date or 18 months. And we'll communicate news as we execute our debt migration plans between now and the transaction date.

So to sum up our guidance for 2012, we continue to expect to deliver top-tier operating performance on both the top and bottom lines. We're taking actions to ensure we launch 2 successful companies, set up to deliver on each one's unique ability to do what it does best. And we're on track to launch 2 investment-grade entities with low-cost financing.

Now let me turn it back to Irene.

Irene B. Rosenfeld

Thanks, Dave. So as you've seen this morning, we finished 2011 with strong operating momentum in both our global snacks portfolio and in our North American grocery business. We've now reached the next logical step in our evolution. As we outlined last fall, we see the opportunity to accelerate our performance by operating these 2 companies independently. This will enable each industry-leading company to focus on its unique drivers of success. Each company will be best served by a different approach to investment and resource allocation. Both will compete from a position of strength in their respective markets, and both will be well positioned to outperform their peers and deliver attractive shareholder returns.

The North American grocery company, with about $18 billion in revenue, will be a major force in the most profitable market in the world. Its competitive advantage will be the sheer scale of its leading center of the store brands, 80% of which hold the #1 position in their respective categories. As an independent company, the North American grocery business will gear its investments, infrastructure and supply chain to deliver revenue growth in line with its categories. It will continue to leverage great marketing and innovations like Tony just shared with you.

Tony and his team will distort investments even further behind Power Brands, and they'll take a more entrepreneurial approach with other brands. At the same time, North American grocery will expand its strong margins by capturing some significant cost savings. As Tony outlined a few minutes ago, we're driving productivity through Lean Six Sigma and further procurement savings, and we're continuing to deliver negative overhead growth.

As a result, this business will generate substantial cash flow. This cash can be returned to shareholders in the form of a highly competitive dividend payout and a growing dividend over time while continuing to fuel the virtuous cycle.

Turning now to global snacks. This $35 billion business will consist of the current Kraft Foods Europe and Kraft Foods Developing Markets portfolios, as well as the North American snacks and confectionery businesses. As an independent company, about 3/4 of its revenue will come from snacks, and it will have a strong growth profile in the top-tier of its global peer group. This company will be the truly preeminent player in snacking with strength in every major region of the world. At the time of the spin-off, our global snacks business will derive about 44% of its revenue from Developing Markets. That's one of the most significant x-factors to emerging markets of any of our CPG peers.

The footprint of global snacks within Developing Markets is also unique with a well-balanced presence among the Latin America, CEEMA and Asia Pacific regions. Indeed, this company will have significant reach and strong profitability in the BRICI markets, Brazil, Russia, India, China and Indonesia. About 37% of global snacks' revenue will come from Western Europe where we've been posting solid growth. And for the reasons I mentioned earlier, we're quite confident that this growth is sustainable.

Finally, global snacks will have about 19% of its revenue from North America. Here, we'll take advantage of global platforms, best practices from around the world in impulse merchandising and expansion into fast-growing, high-margin, instant consumption channels. From a return perspective, global snacks will target industry-leading top line growth by rapidly expanding global product platforms, capitalizing on significant scale in developing markets, increasing presence in instant consumption channels and aggressively entering whitespace markets.

To drive margin gains, global snacks will leverage its cost structure through volume growth, improved product mix and disciplined overhead management. And while the business will generate significant cash flow, the top priority for global snacks will be to redeploy capital to support future growth. Specifically, the company will invest in additional opportunities in sales, distribution and manufacturing in the key growth regions.

As a result, top-tier total shareholder return will be largely driven by consistent EPS growth and a modest dividend. So what happens next? First, we'll continue to report as one company until we spin. We have terrific momentum, and we remain firmly committed and focused on delivering our commitments in 2012.

Early in the second quarter, we expect to file the initial Form 10 with 3 years of historical carve-out financials. Around mid-year, we expect tax rulings from the IRS. As you know, we've already named the senior leadership teams for each company. They are 2 very strong teams with a great mix of experience from both inside and outside the company. What's more, we'll benefit from an exceptional level of continuity in our leadership. This will ensure that we maintain strong operating momentum. Our leaders are currently going through a very disciplined process to fill out the remaining roles on their teams. We expect organizational structures and personnel decisions for both companies to be finalized by mid-year.

Also by mid-year, we'll begin readiness testing. This will ensure that our systems and processes work independently. That way, we'll hit the ground running when we launch these 2 world-class companies toward the end of 2012. And finally, as we get closer to the spin date, we'll hold separate investor events for each company.

So to summarize, 2012 will be another exciting year. We have strong operating momentum. We're outperforming our peers. We're executing this spin-off from a position of strength, and we've got a virtuous cycle in place that puts us in excellent position to continue to deliver top-tier results. We're creating 2 industry-leading independent public companies, each with a clear operating mandate and investment thesis, and each with the ability to deliver attractive returns to its shareholders. I'm confident that the best is yet to come. With that, let me open it up to your questions.

Question-and-Answer Session

Christopher Jakubik

Okay, thanks. I think we'll end the webcast right there. And we'll stay in here, we'll do Q&A and then we'll adjourn to lunch. So for the questions, Andrew, go right ahead.

Andrew Lazar - Barclays Capital, Research Division

Tony, I'm curious. Do you...

[Audio Gap]