Mondelez International Earnings Call Nuggets: Operating Profit vs Top Line Growth, Tax Rate Outlook
Operating Profit vs Top Line Growth
Andrew Lazar – Barclays Capital: I guess my first question is, I realized you invested back much of the discrete tax benefit in the quarter to drive future top line growth and that accounted for some of the EBIT shortfall I guess versus where many investor models were. I guess my question is regarding the balance between operating profits and top line growth and whether I guess the two can coexist going forward given the street view that there is a significant margin opportunity to be had or perhaps they prove mutually exclusive just for some period of time until you get the top line moving to where you wanted to be?
Irene Rosenfeld – Chairman and CEO: There is a couple of questions in there, Andrew, let me start by saying the money that we have reinvested in our emerging markets is from operating earnings and it’s not from the tax benefits. We have not reinvested that money. As Dave mentioned, we’ve dropped half of it to the bottom line and we are holding the balance in reserve. It’s early in the year and we want to make sure that we keep our powder dry. But most importantly as you ask this question about the balance between margin and top line growth, I’d ask you first of all to not overreact to a single quarter, especially given the strong margin performance we had last year. If you recall, we grew about 70 basis points. We certainly can expand margin and drive top tier growth. We’ve done it in the past, and in fact our long-term guidance assumes that we’re going to do it in the future. But the race is clearly on for us and our competitors to fortify and expand our positions in these fast-growing and highly contested emerging markets, and so we’ve chosen to reinvest some of the upside that we’ve got in the EU and North America to strengthen our position in these emerging markets and stage our future sustainable growth. I want to remind you, though, that these investments are all built into our guidance and we’re still in that guidance calling for a double-digit increase in operating EPS. So, net-net, there does not need to be a tradeoff. There does need to be a balance, and I think we’re striking the appropriate balance.
Andrew Lazar – Barclays Capital: Just as a last one. The increased reinvestments that you’re doing, I assume that’s meant to be part of the ongoing base going forward as opposed to sort of a one-time increase in investment. I’m just thinking about next year as you lap some of this higher spending and then what I guess potentially could also be a higher tax rate, how that flows into ’14?
David Brearton – EVP and CFO: Yeah. It is part of the base. Again, I wouldn’t overreact to one quarter. We’ve given guidance on the year of $1.55 to $1.60. To get to that range, we are going to need to see significant progress in our OI. Obviously, quarter one isn’t typical of the year for a lot of reasons we talked about, but we’re on track with the guidance we gave for the year. Those investments were already assumed within that guidance. And I think the key really is you need to see the revenue growth pick up in the back half, so as we deliver that top line guidance in the back half and then that will drop to the bottom, but this isn’t a one-timer that you need to worry about as you look at 2014.
Tax Rate Outlook
Matthew Grainger – Morgan Stanley: I just wanted to follow up first on Andrew’s question regarding the tax rate going forward. Dave, can you just first give us an update on where we stand for full year tax rate guidance? And then given that the realization of one-time item seems to have set the bar fairly low this year, as we think forward to 2014, 2015 and what you would consider a normalized tax rate, how should we think about the risk that this could potentially impact your ability to meet constant currency EPS targets over the next year or two?
David Brearton – EVP and CFO: As we said, we were $0.09 favorable in the quarter, but $0.07 of that was from discrete items. The other $0.02 was the base tax and that was already built in the guidance. So that $0.07 is favorable on the year and that would drop our tax rate from around 20% to sort of the high side of mid-teens but in that mid-teens range, and we would expect as I sit here today for that to drop through the year. So you’re right, we’ll have a lower tax rate this year than we originally anticipated. As we look into next year, we’ve given you a long-term tax rate of 25% and that’s nothing more than the mathematical average of the statutory tax rates around the globe. That’s still the right long-term tax rate, but I think as we’re working through the impacts of those (things) and how our capital structure will evolve with that over time and we unwind some things, it’s going to take us two or three years to get there. So I think I’m looking as I sit here today at 2014 probably being closer to the 20% we were originally targeting this year. So there will be a headwind, but it’s not going to be as big as you’re probably worried about, and it’s probably going to be at that 20% range, plus or minus a point or two, for the next two or three years, before we start to see it migrate up to that 25%. So I hope that helps…
Matthew Grainger – Morgan Stanley: That does. And then just on the phasing of first half sales growth, can you help us think a little bit more about any discreet impacts that would weigh on second quarter organic sales growth, because your guidance seems to imply stronger organic sales in the first quarter versus the second quarter despite having a much tougher prior year comparison. Are there any other factors besides what you called out explicitly in the presentation?
Irene Rosenfeld – Chairman and CEO: No, we actually have easier comps in the back half, if you look at the year ago base but I think couple of ways to think about it. If you exclude the coffee and capacity constraints that we have talked about, we are already in the mid-5. So, we are quite comfortable that the underlying business and I talked a lot about the underlying quality of our results. We are quite comfortable that the underlying quality of our business is quite strong and we feel quite confident about the back half of the year. We got to solid underlying momentum driven by good share performance, solid volume/mix performance, strong performance of our Power Brands. Our categories continue to grow. We will be lapping the coffee pricing, our new production capacity will come on stream. And then as I mentioned of course we have got low comps in the back half of the year. So, net-net we are quite confident that the back half will accelerate and that we will deliver the guidance of – at the low end of the 5% to 7% range for the full-year.
Matthew Grainger – Morgan Stanley: One very quick clarification. For the first quarter was there any Easter timing benefit that would have resulted in, that they would have flattered the rate of organic sales growth?
David Brearton – EVP and CFO: Not really because Easter was really over the last year it was a little earlier this year, but given the time that we have to shift to our customers, it really didn’t move any volume into Q1. As I look into 2014 you will see a shift between quarter one and quarter two as it goes back to normal timing, but this year versus last year not really. We had a big plus last year, this year it’s kind of neutral.
A Closer Look: Mondelez International Earnings Cheat Sheet>>